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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1997
REGISTRATION NO. 333-24557
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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ADAPTEC, INC.
(Exact name of Registrant as specified in its charter)
California 36798 94-2748530
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
691 S. MILPITAS BLVD.
MILPITAS, CALIFORNIA 95035
(408) 945-8600
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
---------------------
F. GRANT SAVIERS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ADAPTEC, INC.
691 S. MILPITAS BLVD.
MILPITAS, CALIFORNIA 95035
(408) 945-8600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
HENRY P. MASSEY, JR., ESQ.
DAVID C. DRUMMOND, ESQ.
PETER S. HEINECKE, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(415) 493-9300
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Approximate date of commencement of proposed sale to the public: FROM
TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [x]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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ADAPTEC, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1
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Items and Heading in Form S-1
Registration Statement Prospectus Location in Prospectus
----------------------------------------------------- --------------------------------------------------
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus . . . . . . . . . . Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges . . . . . . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . Prospectus Summary; Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . Not applicable
6. Dilution . . . . . . . . . . . . . . . . . . . . . Not applicable
7. Selling Security Holders . . . . . . . . . . . . . Principal and Selling Shareholders
8. Plan of Distribution . . . . . . . . . . . . . . . Outside and Inside Front Cover Pages; Plan of
Distribution
9. Description of Securities to be Registered . . . . Description of Capital Stock; Description of
Notes; Dividend Policy
10. Interests of Named Experts and Counsel . . . . . . Legal Matters; Experts
11. Information with Respect to the Registrant . . . . Outside and Inside Front Cover Pages; Prospectus
Summary; Risk Factors; Price Range of Common
Stock; Dividend Policy; Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Relationships and Related Transactions; Principal
Shareholders; Description of Capital Stock;
Consolidated Financial Statements; Outside Back
Cover Page
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities . . Not applicable
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PROSPECTUS
Adaptec, Inc.
U.S. $230,000,000
4 3/4% Convertible Subordinated Notes due February 1, 2004
and
Shares of Common Stock Issuable Upon Conversion Thereof
---------------------
This Prospectus relates to $230,000,000 aggregate principal amount of
4 3/4% Convertible Subordinated Notes due February 1, 2004 (the "Notes") of
Adaptec, Inc. (the "Company") under the Securities Act of 1933, as amended (the
"Securities Act"), and the shares of Common Stock, $.001 par value of the
Company, ("Common Stock") issuable upon the conversion of the Notes (the
"Conversion Shares"). The Notes registered hereby were issued and sold on
February 3, 1997 (the "Original Offering") in transactions exempt from the
registration requirements of the Securities Act, to persons reasonably believed
by Bear, Stearns & Co. Inc., Lehman Brothers, Robertson Stephens & Company LLC,
and Unterberg Harris, as the initial purchasers (the "Initial Purchasers") of
the Notes, to be "qualified institutional buyers" (as defined by Rule 144A
under the Securities Act) or other institutional "accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under Regulation D of the Securities
Act) or in compliance with the provisions of Regulation S under the Securities
Act. The Notes and the Common Stock issuable upon conversion thereof may be
offered and sold from time to time by the holders named herein or by their
transferees, pledgees, donees or their successors (collectively, the "Selling
Securityholders") pursuant to this Prospectus. The Registration Statement of
which this Prospectus is a part has been filed with the Securities and Exchange
Commission pursuant to a registration rights agreement dated as of February 3,
1997 (the "Registration Agreement") between the Company and the Initial
Purchasers, entered into in connection with the Original Offering.
The Notes are convertible at the option of the holder into shares of
Common Stock of the Company (at any time on or after May 5, 1997 and prior to
redemption or maturity, at a conversion rate of 19.3573 shares per $1,000
principal amount of Notes), subject to adjustment under certain circumstances.
Interest on the Notes is payable semi-annually in arrears on February 1 and
August 1 of each year, commencing on August 1, 1997. On June 18, 1997, the
closing price of the Common Stock, which is quoted on the Nasdaq National
Market under the symbol "ADPT," was $37.00 per share.
---------------------
THE NOTES AND THE COMMON STOCK OFFERED HEREBY
INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 8.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JUNE 24, 1997
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The Notes are unsecured general obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined in the Indenture). See "Description of Notes--Subordination." The
Notes will mature on February 1, 2004, and may be redeemed, at the option of
the Company, in whole or in part, at any time on or after February 3, 2000 at
the redemption prices set forth herein plus accrued interest. Each holder of
Notes will have the right to cause the Company to repurchase all of such
holder's Notes, payable in cash or, at the Company's option, in Common Stock,
in the event the Common Stock is no longer publicly traded or in certain
circumstances involving a Change of Control (as defined in the Indenture).
The Notes and the Conversion Shares may be offered by the Selling
Securityholders from time to time in transactions (which may include block
transactions in the case of the Conversion Shares) on any exchange or market on
which such securities are listed or quoted, as applicable, in negotiated
transactions, through a combination of such methods of sale, or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at negotiated prices.
The Selling Securityholders may effect such transactions by selling the Notes
or Conversion Shares directly or to or through broker-dealers, who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders and/or the purchasers of the Notes or Conversion Shares
for whom such broker-dealers may act as agents or to whom they may sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). The Company will not receive any of
the proceeds from the sale of the Notes or Conversion Shares by the Selling
Securityholders. The Company has agreed to pay all expenses incident to the
offer and sale of the Notes and Conversion Shares offered by the Selling
Securityholders hereby, except that the Selling Securityholders will pay all
underwriting discounts and selling commissions, if any. See "Plan of
Distribution."
The Notes have been designated for trading on the PORTAL Market.
Notes sold pursuant to this Prospectus are not eligible for trading on the
PORTAL Market.
The Selling Securityholders will receive all of the net proceeds from
the sale of the Notes and the Common Stock issuable upon conversion of the
Notes and will pay all underwriting discounts and selling commissions, if any,
applicable to the sale of the Notes and the Common Stock issuable upon
conversion of the Notes. The Company is responsible for payment of all other
expenses incident to the offer and sale of the Notes and the Common Stock
issuable upon conversion of the Notes.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements, and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy and information statements, and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as the regional offices of the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such reports, proxy statements and other information can also be
inspected at the offices of the National Association of Securities Dealers,
Inc. at 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains
a World Wide Web site that contains reports, proxy and
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information statements, and other information that are filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval System. This
Web site can be accessed at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on
Form S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Notes and Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company, the
Notes and the Common Stock, reference is made to the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily complete
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. Copies of the Registration
Statement, including all exhibits thereto, may be obtained from the
Commission's principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission, or may be examined without charge at the offices
of the Commission described above.
Adaptec, EZ-SCSI and SCSIselect are registered trademarks of Adaptec,
Inc. This Prospectus also uses trademarks and registered trademarks of
companies other than the Company and its subsidiaries.
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the
detailed information and financial information appearing elsewhere in this
Prospectus. This Prospectus contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. When used in this Prospectus, the words "believes," "intends,"
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Such risks and uncertainties include the timing and acceptance of new product
introductions, the actions of the Company's competitors and business partners,
and those discussed under the caption "Risk Factors." Share and per share data
in this Prospectus have been adjusted to reflect a two-for-one split of the
outstanding Common Stock of the Company which was effected in November 1996.
Unless the context requires otherwise, all references herein to the "Company"
or "Adaptec" mean Adaptec, Inc. and its wholly-owned subsidiaries.
THE OFFERING
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ISSUER . . . . . . . . . . . . . . . . . . Adaptec, Inc. (the "Company")
SECURITIES OFFERED . . . . . . . . . . . . $230,000,000 of 4 3/4% Convertible Subordinated Notes Due 2004
issued under an indenture (the "Indenture") between the Company
and State Street Bank and Trust Company, as trustee (the
"Trustee").
INTEREST PAYMENT
DATES . . . . . . . . . . . . . . . . . . . February 1 and August 1 of each year, commencing August 1, 1997.
MATURITY . . . . . . . . . . . . . . . . . February 1, 2004
CONVERSION . . . . . . . . . . . . . . . . Convertible at the option of the holder at any time on or after
May 5, 1997 through the close of business on February 1, 2004,
subject to prior redemption and repurchase, into Common Stock of
the Company at $51.66 per share, subject to adjustment as set
forth herein. See "Description of Notes -- Conversion of Notes."
REDEMPTION . . . . . . . . . . . . . . . . The Notes are redeemable, in whole or in part, at the option of
the Company, at any time on or after February 3, 2000, at the
declining redemption prices set forth herein plus accrued interest
to the date of redemption. See "Description of Notes -- Optional
Redemption by the Company."
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REPURCHASE AT OPTION OF
HOLDERS UPON A CHANGE OF
CONTROL . . . . . . . . . . . . . . . . . . In the event of a Change of Control (as defined), holders of Notes
will have the right to require that the Company repurchase the
Notes in whole or in part at a repurchase price of 101% of the
principal amount thereof plus accrued interest to the date of
repurchase. See "Description of Notes -- Repurchase at Option of
Holders."
RANKING . . . . . . . . . . . . . . . . . . The Notes constitute general unsecured obligations of the Company
and are subordinated in right of payment to all existing and
future Senior Indebtedness (as defined) of the Company. As of
March 31, 1997, the Company had approximately $4.3 million of
outstanding indebtedness that would have constituted Senior
Indebtedness (excluding accrued interest and Senior Indebtedness
constituting liabilities of a type not required to be reflected as
a liability on the balance sheet of the Company in accordance with
generally accepted accounting principles). In addition, because
certain of the Company's operations are conducted through
operating subsidiaries, claims of holders of indebtedness of such
subsidiaries, as well as claims of regulators and creditors of
such subsidiaries, will have priority with respect to the assets
and earnings of such subsidiaries over the claims of creditors of
the Company, including holders of the Notes. As of March 31,
1997, the aggregate liabilities of such subsidiaries were
approximately $38.7 million (excluding intercompany liabilities
and liabilities of a type not required to be reflected on the
balance sheets of such subsidiaries in accordance with generally
accepted accounting principles). The Indenture does not limit the
amount of additional indebtedness which the Company can create,
incur, assume or guarantee, nor will the Indenture limit the
amount of indebtedness which any subsidiary can create, incur,
assume or guarantee. See "Description of Notes -- Subordination."
TRADING . . . . . . . . . . . . . . . . . . The Notes have been designated for trading in The PORTAL Market.
Notes sold pursuant to this Prospectus are not eligible for
trading on the PORTAL Market. The Company's Common Stock is
traded on the Nasdaq National Market under the symbol "ADPT".
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THE COMPANY
Adaptec is a leading supplier of bandwidth management solutions that
significantly enhance total system performance by increasing data transfer
rates between PCs, servers, peripherals and networks. The Company's products
include host adapters, which are primarily based on the SCSI standard,
peripheral technology solutions, which are primarily ASIC controllers for hard
disk and CD-ROM drives, and network products, which include ATM and Fast
Ethernet adapters. Adaptec provides its customers complete solutions,
consisting of hardware, software and firmware, which are incorporated into the
products of substantially all of the major Intel-based PC and server
manufacturers worldwide.
A number of trends are driving the need to increase effective
input-output ("I/O") bandwidth between PCs, servers, peripherals and networks:
(i) the introduction of increasingly powerful CPUs, which require more rapidly
accessed and intelligently managed data to function at their optimal
performance level, (ii) new advanced operating systems, such as Windows 95 and
Windows NT that allow for faster I/O and multitasking, (iii) the growth of
data-intensive software applications, such as graphics and video, which require
significantly more bandwidth, (iv) the proliferation of client/server networks,
the Internet and corporate intranets, which is in turn driving growth in the
number and processing power of servers, and (v) growth in high performance
peripherals, such as high capacity hard disk drives, scanners, CD-ROMs, and new
CD-R and DVD drives. These factors have created a rapid increase in the
transfer of data between the desktop, servers, peripherals and networks,
resulting in substantial I/O and network bottlenecks.
The majority of the Company's products are based on the SCSI standard,
which was pioneered by Adaptec. SCSI has been widely adopted as the industry
standard I/O bus specification for high performance PCs, servers and
peripherals. SCSI allows the "intelligent" transfer of data between computers,
peripherals and networks by enabling multitasking and by off-loading the CPU
from I/O management, and provides a high performance, system-independent
interface that supports multiple peripherals. SCSI adapters are used in
servers, where the Company believes that virtually every system now has at
least one SCSI adapter and more recently, in high performance desktop PCs.
Through succeeding generations, SCSI has evolved from its original standard,
which supported data transfer rates of 5 mbps, to the most recent UltraSCSI
standard which is capable of data transfer rates of 40 mbps. Adaptec has been
the leading supplier of SCSI-based solutions for each generation of SCSI
technology.
In addition to its SCSI host adapters, the Company offers a broad line
of integrated circuit ("IC") solutions for the mass storage market and a line
of network adapters based on the ATM and Fast Ethernet standards. The Company
has introduced products for emerging high performance I/O technologies such as
Firewire, which is used primarily for consumer products; a RAID solution, which
includes a proprietary ASIC controller and software; and a software-only
product which enables users to master CDs using a CD-R drive. The Company is
also developing an adapter for Fibre Channel, an emerging I/O standard which is
primarily intended for very high performance data-intensive applications.
The Company believes it has successfully positioned itself as a
leading supplier of a full range of I/O solutions providing bandwidth
management. The Company sells its products through a direct sales force to
substantially all major server and PC manufacturers, as well as most of the
major distributors worldwide. Customers include Acer, Compaq, Digital
Equipment Corporation, Dell Computer, Fujitsu, Gateway 2000, Hewlett-Packard,
IBM, Intel, IOmega, Maxtor, NEC, Samsung, Siemons Nixdorf and Toshiba.
The Company was incorporated in California in May 1981. Its principal
executive offices are located at 691 South Milpitas Boulevard, Milpitas,
California 95035, and its telephone number is 408-945-8600.
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
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Year Ended March 31,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
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STATEMENT OF OPERATIONS DATA:
Net revenues . . . . . . . . . $311,339 $372,245 $466,194 $659,347 $933,868
Income from operations . . . . 62,743 77,135 117,784 126,135 161,228
Net income . . . . . . . . . . 49,390 58,950 93,402 103,375 107,561
Net income per share . . . . . $ 0.48 $ 0.55 $ 0.88 $ 0.95 $ 0.93
Weighted average shares 103,304 107,204 106,714 109,138 115,062
outstanding . . . . . . . . .
Adjusted income from
operations(1) . . . . . . . . $ 62,743 $ 77,135 $117,784 $178,448 $253,390
Adjusted net income(1) . . . . 49,390 61,359 93,402 142,826 197,957
Adjusted net income per
share(1) . . . . . . . . . . $ 0.48 $ 0.57 $ 0.88 $ 1.31 $ 1.72
Ratio of earnings to fixed
charges(2) . . . . . . . . . . 46.5x 43.6x 64.4x 67.8x 38.1x
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March 31, 1997
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BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . $ 693,629
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043,494
Long-term debt, net of current portion . . . . . . . . . . . . . . 230,850
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 688,325
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(1) Adjusted for one-time charges primarily related to the write-off of
acquired in-process technology. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations."
(2) For the purpose of calculating the ratio of earnings to fixed charges, (i)
earnings consist of consolidated pre-tax income plus fixed charges and (ii)
fixed charges consist of interest expense incurred, and the portion of
rental expense under leases deemed by the Company to be representative of
the interest factor.
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks
and uncertainties. The statements contained in this Prospectus that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus. In evaluating the
Company's business, prospective investors should consider carefully the
following factors in addition to the other information set forth in this
Prospectus.
Future Operating Results Subject to Fluctuation. The Company's
operating results may fluctuate in the future as a result of a number of
factors, including cancellations or postponements of orders, shifts in the mix
of the Company's products and sales channels, changes in pricing policies by
the Company's suppliers, interruption in the supply of custom integrated
circuits, the market acceptance of new and enhanced versions of the Company's
products, and the timing of acquisitions of other business products and
technologies and any associated charges to earnings. The volume and timing of
orders received during a quarter are difficult to forecast. The Company's
customers from time to time encounter uncertain and changing demand for their
products. Customers generally order based on their forecasts. If demand falls
below such forecasts or if customers do not control inventories effectively,
they may cancel or reschedule shipments previously ordered from the Company.
Additionally, the Company has historically operated with a relatively small
backlog, especially relating to orders of its board-based I/O solutions.
Further, the Company's expense levels are based in part on expectations of
future revenues, and the Company has been significantly increasing and intends
to continue to increase operating expenditures and working capital balances as
it expands its operations. As a result of the difficulty of forecasting
revenues and the Company's planned growth in spending, operating expenses could
be disproportionately high for a given quarter, and the Company's operating
results for that quarter, and potentially future quarters, would be adversely
affected. Operating results in any particular quarter which do not meet the
expectations of securities analysts could cause volatility in the price of the
Company's Common Stock.
Dependence on the High-Performance Microcomputer Market. The
Company's board-based I/O solutions are used primarily in high performance
computer systems designed to support bandwidth-intensive applications and
operating systems. Historically, the Company's growth has been supported by
increasing demand for systems that support client/server and Internet/intranet
applications, computer-aided engineering, desktop publishing, multimedia, and
video. Should the growth of demand for such systems slow, the Company's
business or operating results could be materially adversely affected by a
decline in demand for the Company's products.
Certain Risks Associated with the Computer Peripherals Market. As a
supplier of controller circuits to manufacturers of computer peripherals such
as disk drives and other storage devices, a portion of the Company's business
is dependent on the overall market for computer peripherals. This market,
which itself is dependent on the market for personal computers, has
historically been characterized by periods of rapid growth followed by periods
of oversupply and contraction. As a result, suppliers to the computer
peripherals industry from time to time experience large and sudden fluctuations
in demand for their products as their customers adjust to changing conditions
in their markets. If these fluctuations are not accurately anticipated, such
suppliers, including the Company, could produce excessive or insufficient
inventories of various components which could
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materially and adversely affect the Company's business and operating results.
The computer peripherals industry is also characterized by intense
price-competition, which in turn creates pricing pressures on the suppliers to
that industry. If the Company is unable to correspondingly decrease its
manufacturing or component costs, such pricing pressures could have a material
adverse effect on the Company's business or operating results.
Reliance on Industry Standards, Technological Change, Dependence on
New Products. The computer industry is characterized by various standards and
protocols that evolve with time. The Company's current products are designed
to conform to certain industry standards and protocols such as SCSI, UltraSCSI,
PCI, RAID, ATM, and Fast Ethernet. In particular, a majority of the Company's
revenues are currently derived from products based on the SCSI standard. If
consumer acceptance of these standards was to decline, or if they were replaced
with new standards, and if the Company did not anticipate these changes and
develop new products, the Company's business or operating results could be
materially adversely affected.
The markets for the Company's products are characterized by rapidly
changing technology, frequent new product introductions, and declining average
selling prices over product life cycles. The Company's future success is
therefore highly dependent upon the timely completion and introduction of new
products at competitive price/performance levels. The success of new product
introductions is dependent on several factors, including proper new product
definition, product costs, timely completion and introduction of new product
designs, quality of new products, differentiation of new products from those of
the Company's competitors, and market acceptance of the Company's and its
customers' products. As a result, the Company believes that continued
significant expenditures for research and development will be required in the
future. There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely manner, that products or technologies developed by others will not
render the Company's products or technologies obsolete or noncompetitive, or
that the Company's products will be selected for design into the products of
its targeted customers. The failure of any of the Company's new product
development efforts could have a material adverse effect on the Company's
business or operating results. In addition, the Company's revenues and
operating results could be adversely impacted if its customers shifted their
demand to a significant extent away from board-based I/O solutions to
application-specific ICs.
Dependence on Wafer Suppliers and Other Subcontractors. All of the
finished silicon wafers used for the Company's products are currently
manufactured to the Company's specifications by independent foundries. The
Company currently purchases a substantial majority of its wafers through a
supply agreement with TSMC. The Company also purchases wafers from SGS-Thomson
Microelectronics and Seiko Epson. The manufacture of semiconductor devices is
sensitive to a wide variety of factors, including the availability of raw
materials, the level of contaminants in the manufacturing environment,
impurities in the materials used, and the performance of personnel and
equipment. While the quality, yield, and timeliness of wafer deliveries to
date have been acceptable, there can be no assurance that manufacturing yield
problems will not occur in the future. In addition, although the Company has
various supply agreements with its suppliers, a shortage of raw materials or
production capacity could lead any of the Company's wafer suppliers to allocate
available capacity to customers other than the Company, or to internal uses.
Any prolonged inability to obtain wafers with competitive performance and cost
attributes, adequate yields, or timely deliveries from its foundries would
delay production and product shipments and could have a material adverse effect
on the Company's business or operating results. The Company expects that it
will in the future seek to convert its fabrication process arrangements to
smaller geometries and to more advanced process technologies. Such conversions
entail inherent technological risks that can affect yields and delivery times.
If for any reason the Company's current suppliers were unable or unwilling to
satisfy the Company's wafer needs, the Company would be required to identify
and qualify additional foundries. There can be no assurance that any
additional wafer foundries would become available, that such
-9-
<PAGE> 13
foundries would be successfully qualified, or that such foundries would be able
to satisfy the Company's requirements on a timely basis.
The Company's future growth will depend in large part on increasing
its wafer capacity allocation from current foundries, adding additional
foundries, and gaining access to advanced process technologies. There can be
no assurance that the Company will be able to satisfy its future wafer needs
from current or alternative sources. Any increase in general demand for wafers
within the industry or any reduction of existing wafer supply from any of the
Company's foundry sources, could materially adversely affect the Company's
business, financial condition, or operating results.
In order to secure wafer capacity, the Company from time to time has
entered into "take or pay" contracts that committed the Company to purchase
specified wafer quantities over extended periods, and has made prepayments to
foundries. In the future, the Company may enter into similar transactions or
other transactions, including, without limitation, non-refundable deposits with
or loans to foundries, or equity investments in, joint ventures with or other
partnership relationships with foundries. Any such transaction could require
the Company to seek additional equity or debt financing to fund such
activities. There can be no assurance that the Company will be able to obtain
any required financing on terms acceptable to the Company.
Additionally, the Company relies on subcontractors for the assembly
and packaging of the ICs included in its products. The Company has no
long-term agreements with its assembly and packaging subcontractors. There can
be no assurance that such subcontractors will continue to be able and willing
to meet the Company's requirements for such components or services. Any
significant disruption in supplies from, or degradation in the quality of
components or services supplied by, such subcontractors could delay shipments
and result in the loss of customers or revenues or otherwise have a material
adverse effect on the Company's business or operating results.
Certain Risks Associated With Acquisitions. Since the beginning of
fiscal 1996, the Company has acquired eleven complementary companies and
businesses. As part of its overall strategy, the Company plans to continue to
acquire or invest in complementary companies, products, or technologies and to
enter into joint ventures and strategic alliances with other companies. Risks
commonly encountered in such transactions include the difficulty of
assimilating the operations and personnel of the combined companies, the
potential disruption of the Company's ongoing business, the inability to retain
key technical and managerial personnel, the inability of management to maximize
the financial and strategic position of the Company through the successful
integration of acquired businesses, additional expenses associated with
amortization of acquired intangible assets, dilution of existing equity
holders, the maintenance of uniform standards, controls, procedures, and
policies, and the impairment of relationships with employees and customers as a
result of any integration of new personnel. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered in connection with such business combinations, investments, or
joint ventures, or that such transactions will not materially adversely affect
the Company's business, financial condition, or operating results.
Certain Risks Associated with Implementation of New Information
Systems. The Company is in the process of implementing new information systems
to enhance its current and future business processes worldwide. The Company
will implement these systems during fiscal 1998. There can be no assurance
that the Company will successfully implement this new system efficiently and in
a timely manner. Any significant period of delay to this project could have a
material adverse effect on the Company's business or operating results.
Competition. The markets for the Company's products are intensely
competitive and are characterized by rapid technological advances, frequent new
product introductions, evolving industry standards, and price
-10-
<PAGE> 14
erosion. In the host adapter market, the Company competes with a number of
smaller host adapter manufacturers. The Company's principal competitors in the
mass storage market are captive suppliers and Cirrus Logic, Inc. As the
Company has continued to broaden its bandwidth management product offerings
into the desktop, server, and networking environments, it has experienced, and
expects to experience in the future, significantly increased competition both
from existing competitors and from additional companies that may enter its
markets. Some of these companies have greater technical, marketing,
manufacturing, and financial resources than the Company. There can be no
assurance that the Company will be able to make timely introduction of new
leading-edge solutions in response to competitive threats, that the Company
will be able to compete successfully in the future against existing or
potential competitors or that the Company's business or operating results will
not be materially adversely affected by price competition.
Certain Issues Related to Distributors. The Company's distributors
generally offer a diverse array of products from several different
manufacturers. Accordingly, there is a risk that these distributors may give
higher priority to selling products from other suppliers, thus reducing their
efforts to sell the Company's products. A reduction in sales efforts by the
Company's current distributors could have a materially adverse effect on its
business or operating results. The Company's distributors may on occasion
build inventories in anticipation of substantial growth in sales, and if such
growth does not occur as rapidly as anticipated, distributors may decrease the
amount of product ordered from the Company in subsequent quarters. Such a
slowdown in orders could reduce the Company's revenues in any given quarter and
give rise to fluctuation in the Company's operating results.
Dependence on Key Personnel. The Company's future success depends in
large part on the continued service of its key technical, marketing, and
management personnel, and on its ability to continue to attract and retain
qualified employees, particularly those highly skilled design, process, and
test engineers involved in the manufacture of existing products and the
development of new products and processes. The competition for such personnel
is intense, and the loss of key employees could have a material adverse effect
on the Company's business or operating results.
Certain Risks Associated with International Operations. The Company's
manufacturing facility and various subcontractors it utilizes from time to time
are located primarily in Asia. Additionally, the Company has various sales
offices and customers throughout Europe, Japan, and other countries. The
Company's international operations and sales are subject to political and
economic risks, including political instability, currency controls, exchange
rate fluctuations, and changes in import/export regulations, tariffs, and
freight rates. In addition, because the Company's principal wafer supplier,
TSMC, is located in Taiwan, the Company is subject to the risk of political
instability in Taiwan, including the potential for conflict between Taiwan and
the People's Republic of China.
Intellectual Property Protection and Disputes. The Company has
historically devoted significant resources to research and development and
believes that the intellectual property derived from such research and
development is a valuable asset that has been and will continue to be important
to the success of the Company's business. Although the Company actively
maintains and defends its intellectual property rights, no assurance can be
given that the steps taken by the Company will be adequate to protect its
proprietary rights. In addition, the laws of certain territories in which the
Company's products are or may be developed, manufactured, or sold, including
Asia and Europe, may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States. The
Company has from time to time discovered counterfeit copies of its products
being manufactured or sold by others. Although the Company maintains an active
program to detect and deter the counterfeiting of its products, should
counterfeit products become available in the market to any significant degree
it could materially adversely affect the business or operating results of the
Company.
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<PAGE> 15
From time to time, third parties may assert exclusive patent,
copyright, and other intellectual property rights to technologies that are
important to the Company. There can be no assurance that third parties will
not assert infringement claims against the Company in the future, that
assertions by third parties will not result in costly litigation or that the
Company would prevail in such litigation or be able to license any valid and
infringed patents from third parties on commercially reasonable terms.
Litigation, regardless of its outcome, could result in substantial cost and
diversion of resources of the Company. Any infringement claim or other
litigation against or by the Company could materially adversely affect the
Company's business or operating results.
Need for Interoperability. The Company's products must be designed
to interoperate effectively with a variety of hardware and software products
supplied by other manufacturers, including microprocessors, peripherals, and
operating system software. The Company depends on significant cooperation with
these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading system, peripheral, and
microprocessor suppliers, there can be no assurance that such suppliers will
not from time to time make it more difficult for the Company to design its
products for successful interoperability or decide to compete with the Company.
Volatility of Stock Price. The stock market in general, and the
market for shares of technology companies in particular, have from time to time
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors, or its customers may have a significant impact on the market price
of the Company's Common Stock. Furthermore, quarter-to-quarter fluctuations in
the Company's results of operations caused by changes in customer demand,
changes in the microcomputer and peripherals markets, or other factors, may
have a significant impact on the market price of the Company's Common Stock.
These conditions, as well as factors that generally affect the market for
stocks of high technology companies, could cause the price of the Company's
Common Stock to fluctuate substantially over short periods.
Subordination. The Notes are unsecured and subordinated in right of
payment in full to all existing and future Senior Indebtedness of the Company.
As a result of such subordination, in the event of bankruptcy, liquidation or
reorganization of the Company, or upon the acceleration of any Senior
Indebtedness, the assets of the Company will be available to pay obligations on
the Notes only after all Senior Indebtedness has been paid in full, and there
may not be sufficient assets remaining to pay amounts due on any or all of the
Notes then outstanding. The Company expects from time to time to incur
indebtedness constituting Senior Indebtedness. The Indenture does not prohibit
or limit the incurrence of additional indebtedness by the Company or its
subsidiaries and the incurrence of additional indebtedness by the Company or
its subsidiaries could adversely affect the Company's ability to pay its
obligations on the Notes. As of March 31, 1997, the Company had $4.3 million of
indebtedness outstanding that would have constituted Senior Indebtedness
(excluding accrued interest and Senior Indebtedness constituting liabilities of
a type not required to be reflected as a liability on the balance sheet of the
Company in accordance with generally accepted accounting principles). In
addition, the Notes are structurally subordinated to the liabilities, including
trade payables, of the Company's subsidiaries. As of March 31, 1997,
subsidiaries of the Company had outstanding $38.7 million of aggregate
liabilities (excluding intercompany liabilities and liabilities of a type not
required to be reflected as a liability on the balance sheets of such
subsidiaries in accordance with generally accepted accounting principles). See
"Description of Notes -- Subordination."
Limitations on Repurchase of Notes. Upon a Change of Control (as
defined), each Holder of Notes will have certain rights, at the Holder's
option, to require the Company to repurchase all or a portion of such
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<PAGE> 16
Holder's Notes. If a Change of Control were to occur, there can be no
assurance that the Company would have sufficient funds to pay the purchase
price for all Notes tendered by the Holders thereof. In addition, the terms of
the Company's existing primary bank facility prohibit the Company from
repurchasing any Notes and also provide that under certain circumstances a
Change of Control would constitute an event of default thereunder. Any future
credit agreements or other agreements relating to other indebtedness (including
other Senior Indebtedness) to which the Company becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs
at a time when the Company is prohibited from purchasing Notes by the terms of
any indebtedness, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from repurchasing Notes. In
such case, the Company's failure to repurchase tendered Notes would constitute
an Event of Default under the Indenture, which would, in turn, constitute a
further default under the Company's existing bank facility and may constitute a
default under the terms of other indebtedness that the Company may enter into
from time to time. In such circumstances, the subordination provisions in the
Indenture would restrict payments to the Holders of Notes. See "Description of
Notes -- Repurchase at Option of Holders."
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<PAGE> 17
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Notes
or the Common Stock issuable upon conversion thereof by the Selling
Securityholders.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "ADPT." The following table shows for the periods indicated
the high and low sale prices for the Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
---------- --------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1995
First quarter . . . . . . . . . . . . . . . . . . . $ 9 3/4 $ 7
Second quarter . . . . . . . . . . . . . . . . . . 10 5/8 8 1/8
Third quarter . . . . . . . . . . . . . . . . . . . 12 3/8 8 5/8
Fourth quarter . . . . . . . . . . . . . . . . . . 18 1/2 10 7/8
FISCAL YEAR ENDED MARCH 31, 1996
First quarter . . . . . . . . . . . . . . . . . . . 19 15/16 14 5/8
Second quarter . . . . . . . . . . . . . . . . . . 23 5/8 17 1/4
Third quarter . . . . . . . . . . . . . . . . . . . 24 3/16 17 13/16
Fourth quarter . . . . . . . . . . . . . . . . . . 28 3/16 17 9/16
FISCAL YEAR ENDED MARCH 31, 1997
First quarter . . . . . . . . . . . . . . . . . . . 30 3/4 22 15/16
Second Quarter . . . . . . . . . . . . . . . . . . 29 13/16 17 1/2
Third Quarter . . . . . . . . . . . . . . . . . . . 41 1/8 28 5/8
Fourth Quarter . . . . . . . . . . . . . . . . . . 46 7/8 32 1/8
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter (through June 18, 1997) . . . . . . . 40 5/8 30 1/8
</TABLE>
On June 18, 1997, the last reported sale price of the Common Stock
as reported by the Nasdaq National Market was $37.00 per share. As of May
31, 1997, there were approximately 818 holders of record of the Company's
Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock to
date. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends in the foreseeable future.
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<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of
Adaptec, Inc., insofar as it relates to each of the fiscal years ended March
31, 1993 through March 31, 1997, has been derived from the audited consolidated
financial statements of Adaptec, including the consolidated balance sheets at
March 31, 1996 and 1997 and the related consolidated statements of operations
and of cash flows for each of the three fiscal years in the period ended March
31, 1997 and the related notes thereto included herein. The data should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included herein.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(in thousands, except ratio and per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . $ 311,339 $ 372,245 $ 466,194 $ 659,347 $ 933,868
Cost of revenues . . . . . . . . . . . 174,179 189,526 205,596 275,939 388,969
---------- ---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . 137,160 182,719 260,598 383,408 544,899
---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development . . . . . . 26,324 39,993 60,848 87,628 128,530
Selling, marketing and administrative 48,093 65,591 81,966 117,332 162,979
Write-off of acquired in-process -- -- -- 52,313 92,162
technology and other . . . . . .
---------- ---------- ---------- ---------- ----------
Total operating expenses . . . . 74,417 105,584 142,814 257,273 383,671
---------- ---------- ---------- ---------- ----------
Income from operations . . . . . . . 62,743 77,135 117,784 126,135 161,228
---------- ---------- ---------- ---------- ----------
Shareholder settlement . . . . . . . . -- (2,409) -- -- --
Interest income . . . . . . . . . . . . 4,078 5,183 7,932 12,694 13,297
Interest expense . . . . . . . . . . . (967) (1,306) (1,179) (840) (2,744)
---------- ---------- ---------- ---------- ----------
Interest income, net . . . . . . . . . 3,111 1,468 6,753 11,854 10,553
---------- ---------- ---------- ---------- ----------
Income before income taxes . . . . . 65,854 78,603 124,537 137,989 171,781
Provision for income taxes . . . . . . 16,464 19,653 31,135 34,614 64,220
---------- ---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . $ 49,390 $ 58,950 $ 93,402 $ 103,375 $ 107,561
========== ========== ========== ========== =========
Net income per share . . . . . . . . . . $ 0.48 $ 0.55 $ 0.88 $ 0.95 $ 0.93
========== ========== ========== ========== =========
Weighted average shares outstanding . . . 103,304 107,204 106,714 109,138 115,062
========== ========== ========== ========== =========
Ratio of earnings to fixed charges(1) . . 46.5x 43.6x 64.4x 67.8x 38.1x
</TABLE>
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . $ 191,693 $ 243,451 $ 294,058 $ 334,989 $ 693,629
Total assets . . . . . . . . . . . . . . . . 282,896 358,475 435,708 646,486 1,043,494
Long-term debt, net of current portion . . . 14,450 11,050 7,650 4,250 230,850
Shareholders' equity 225,155 297,616 371,644 511,945 688,325
</TABLE>
- -----------------------
(1) For the purpose of calculating the ratio of earnings to fixed charges, (i)
earnings consist of consolidated pre-tax income plus fixed charges and (ii)
fixed charges consist of interest expense incurred and the portion of
rental expense under leases deemed by the Company to be representative of
the interest factor.
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<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks
and uncertainties. The statements contained in this Prospectus that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth below,
under "Risk Factors" and elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The Company continued its worldwide growth as net revenues increased
42% to $934 million in fiscal 1997 and 41% to $659 million in fiscal 1996. The
increase in net revenues has been driven primarily by industry dynamics,
including the proliferation of client/server networks, the Internet and
corporate intranets, the growth of data intensive software applications such as
graphics and video, the ongoing deployment of sophisticated operating systems
such as Windows NT, and the adoption of various high performance peripherals
such as high capacity hard drives, scanners, and optical drives including
CD-ROM and CD-R. These trends, combined with the Company's market leadership
in providing SCSI solutions, resulted in increased host adapter net revenues in
both the OEM and distributor channels worldwide. Over the last two years net
revenues from sales of the Company's application specific ICs have also
increased, primarily as a result of design wins with major OEMs for higher
capacity disk drives that are required for advanced applications.
Gross margin in fiscal 1997 was 58% compared to 58% and 56% in the
1996 and 1995 fiscal years, respectively. Over the last two years the
Company's focus on designing its application specific ICs to improve yield has
led to increased efficiency in the manufacturing process. Gross margin in
fiscal 1997 remained unchanged from fiscal 1996 due to decreased costs of
purchased components that were offset by the mix of products shipped.
In fiscal 1997 and 1996, the Company maintained its research and
development commitment to invest in its core products as well as newer hardware
and software solutions including 1394/Firewire, Fibre Channel, and optical
technologies. Research and development expenditures in fiscal 1997 increased
slightly as a percentage of revenues to 14% compared with 13% in both the 1996
and 1995 fiscal years. Spending for the three fiscal years was $129 million,
$88 million, and $61 million, respectively. The Company believes these
expenditures, consisting primarily of increased staffing levels, have allowed
it to maintain its position in technical leadership and product innovation.
Because of the industry dynamics driving the need for increased system
bandwidth, the Company believes it is essential to continue its investment in
research and development and anticipates that actual spending in fiscal 1998
will increase.
Selling, marketing, and administrative expenses in fiscal 1997
decreased slightly as a percentage of revenues to 17% compared with 18% in both
the 1996 and 1995 fiscal years. Spending for the three fiscal years was $163
million, $117 million, and $82 million, respectively. These increases in
actual spending were primarily a result of advertising and promotional programs
aimed at leveraging the Company's brand image and generating demand for its
products. Additionally, the Company increased staffing levels to support its
worldwide growth.
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<PAGE> 20
The Company believes it will increase these expenditures in fiscal 1998
primarily due to expanded worldwide marketing activities.
During fiscal years 1997 and 1996, the Company acquired various
complementary businesses and technologies recorded under the purchase method of
accounting, resulting in write-offs of acquired in-process technology of $90
million and $52 million, respectively. Excluding the write-offs, the Company's
results of operations for fiscal years 1997 and 1996 were not materially
affected by these acquisitions. Additionally, the Company acquired one
business, Cogent Data Technologies (Cogent), recorded under the
pooling-of-interests method of accounting. The Company incurred $2 million in
professional fees in connection with this acquisition, which have been included
in "write-off of acquired in-process technology and other." Cogent's historical
operations, net assets, and cash flows were not material to the Company's
consolidated financial statements and, therefore, have not been reflected in the
Company's consolidated financial results prior to the acquisition. Beginning at
the date of acquisition, the book value of the acquired assets and assumed
liabilities as well as the results of Cogent's operations and cash flows, all of
which are not material to the Company have been combined with those of the
Company.
Interest income, net of interest expense for fiscal 1997, decreased
from the prior fiscal year primarily due to lower cash and investment balances
in the first half of the year and interest expense incurred in connection with
$230 million of Convertible Subordinated Notes that the Company issued in
February 1997. The interest rate associated with these notes is 4 3/4%.
Interest income, net of interest expense, for both the 1997 and 1996 fiscal
years is higher than fiscal 1995 due to higher average cash and investment
balances.
The Company's effective tax rate for fiscal years 1997, 1996, and 1995
was 37%, 25%, and 25%, respectively. The higher fiscal 1997 rate resulted from
write-offs of acquired in-process technology for which the Company will receive
no corresponding tax benefit. Excluding the effect of the write-offs of
acquired in-process technology in fiscal 1997, the Company's effective tax rate
was 25%. The accounting for write- offs of acquired in-process technology
changed in fiscal 1997 due to an interpretation of SFAS 109 that the Company
adopted upon its issuance. In fiscal 1996, the Company was allowed to gross-up
the acquired in-process technology and record a dollar-for-dollar credit
against its tax provision, allowing the Company to maintain its 25% effective
rate. The difference between the Company's 25% effective tax rate and the U.S.
statutory rate is primarily due to income earned in Singapore where the Company
is subject to a significantly lower effective tax rate resulting from a tax
holiday relating to certain of its products. The terms of the tax holiday
provide that profits derived from certain products will be exempt from tax
through 2006, subject to certain conditions. In addition, profits derived from
the Company's remaining products will be taxed at a rate of 15%, which is lower
than the Singapore statutory rate of 26%, through fiscal 1998.
While the Company has experienced significant growth in revenues and
profitability, various factors could adversely affect its results of operations
in the future including its dependence on the high-performance microcomputer,
server, and peripherals markets, changes in product mix, competitive pricing
pressures, changes in technological standards, dependence on wafer suppliers
and other subcontractors, changes in product costs, certain risks associated
with acquisitions of other companies or businesses that the Company may make
from time to time, issues related to distributors, dependence on key
personnel, risks associated with international operations, risks associated
with implementation of new systems, and risks associated with intellectual
property or general economic downturns.
-17-
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Net cash generated from operating activities
during fiscal 1997 was $223 million compared to the $106 million generated in
fiscal 1996. The increase in fiscal 1997 is reflected in the increase in the
Company's net income excluding non-cash charges compared to the prior year. The
increase in cash generated from operations from fiscal 1996 was primarily a
result of the overall growth of the Company's operations. Offsetting favorable
operating cash flows in fiscal 1997 was an increase in accounts receivable of
$42 million reflecting the Company's growth.
Investing Activities. The Company made payments of $107 million, net
of cash acquired, in connection with the acquisitions of Western Digital's
Connectivity Solutions Group (CSG), CD-Recordable (CD-R) software technology
from Corel, Inc., Data Kinesis Inc. (DKI), Sigmax Technologies Inc. (Sigmax),
Toast CD-R technology for the Macintosh platform, and certain assets of
Skipstone, Inc. (Skipstone). Additionally, the Company acquired Cogent in a
transaction accounted for as a pooling of interest through the issuance of 2.6
million shares of its common stock. During fiscal 1996, the Company also
acquired various complementary businesses and technologies resulting in a $31
million cash payout.
In fiscal 1997, the Company continued to invest in equipment for
product development and manufacturing to support increased demand for its
products and future business requirements. Also included in the $88 million
invested in property and equipment during the current fiscal year was an
investment of $13 million toward a new facility for one of the Company's
research and development centers located in Boulder, Colorado, and an
investment of $15 million toward the implementation of new information systems
for the Company. The Company will begin utilizing the facility in Boulder
during the first quarter of fiscal 1998 and its new information systems in the
second quarter of fiscal 1998. During the 1998 fiscal year, the Company
anticipates it will invest approximately $90 million in property and equipment,
primarily consisting of equipment for future product innovation as well as
facilities to support its growth.
During fiscal years 1997, 1996, and 1995 the Company continued to
invest significant amounts of funds in marketable securities consisting mostly
of highly rated municipal instruments.
During fiscal year 1997, the Company entered into an agreement with
Lucent Technologies, Inc. ("Lucent") to sell $21 million of equipment that it
had previously purchased in connection with a separate agreement that ensured
availability of certain levels of wafer capacity from Lucent. This new
agreement cancels the initial capacity agreement and requires Lucent to purchase
the equipment from the Company payable in two installments in fiscal 1998.
Financing Activities. In February 1997, the Company issued $230
million of 4 3/4% Convertible Subordinated Notes due February 1, 2004, for
which the Company received net proceeds of $224 million. The notes provide for
semi-annual interest payments each February 1 and August 1, commencing on
August 1, 1997. The holders of the notes will be entitled at any time on or
after May 5, 1997 through maturity to convert the notes into common stock at a
conversion price of $51.66 per share. The notes are redeemable, in whole or in
part, at the option of the Company, at any time on or after February 3, 2000 at
declining premiums to par. Debt issuance costs are being amortized ratably
over the term of the notes.
In June 1996, the Company paid a $46 million short-term note issued to
TSMC in connection with an agreement to ensure increased wafer capacity through
the year 2001. Subsequent to March 31, 1997, the Company entered into an
agreement with TSMC whereby the Company will make advance payments totaling $35
million to secure additional wafer capacity for future technology through 2001.
The Company signed a
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<PAGE> 22
promissory note for $35 million for the advance payments, which become due in
two equal installments on January 31, 1998 and June 30, 1998.
During fiscal years 1997, 1996, and 1995, the Company received
proceeds from the issuance of common stock under its Stock Option and Employee
Stock Purchase Plans totaling $50 million, $27 million, and $17 million,
respectively. During fiscal 1997, the Company's Board of Directors terminated
the Company's stock repurchase program.
The Company has an unsecured $17 million revolving line of credit
under which there were no outstanding borrowings as of March 31, 1997. The
Company's liquidity is affected by various factors, some based on continuing
operations of the business and others related to the industry and global
economies. Although the Company's cash position will fluctuate based on the
timing of these factors, the Company believes that existing working capital
combined with expected cash generated from operations and available sources of
bank and equipment financing will be sufficient to meet its cash requirements
throughout fiscal 1998.
BUSINESS
Adaptec is a leading supplier of bandwidth management solutions that
significantly enhance total system performance by increasing the data transfer
rates between personal computers ("PCs"), servers, peripherals, and networks.
The Company's products include host adapters, which are primarily based on the
small computer system interface ("SCSI") standard, peripheral technology
solutions, consisting primarily of application specific integrated circuit
("ASIC") controllers for hard disk and CD-ROM drives, and network products,
which include asynchronous transfer mode ("ATM") and Fast Ethernet adapters.
Adaptec provides its customers with complete solutions, consisting of hardware,
software, and firmware, which are incorporated into the products of
substantially all of the major Intel-based PC and server manufacturers
worldwide.
INDUSTRY BACKGROUND
A number of trends are driving the need to increase effective
input/output ("I/O") bandwidth between PCs, servers, peripherals and networks:
(i) the introduction of increasingly powerful central processing units
("CPUs"), which require more rapidly accessed and intelligently managed data to
function at their optimal performance level, (ii) new advanced operating
systems, such as Windows NT and Windows 95 that allow for faster I/O and
multitasking, (iii) the growth of data-intensive software applications, such as
graphics and video, which require significantly more bandwidth, (iv) the
proliferation of client/server networks, the Internet and corporate intranets,
which is in turn driving growth in the number and processing power of servers,
and (v) growth in high-performance peripherals, such as high-capacity hard disk
drives, scanners, CD-ROMs, and new CD-R and DVD drives. These factors have
created a rapid increase in the transfer of data between desktop PCs, servers,
peripherals, and networks, resulting in substantial I/O and network
bottlenecks.
Industry standards have been developed to enable I/O to keep up with
these trends, of which the most important for high-performance applications is
SCSI. SCSI has become the industry standard I/O bus specification for
high-performance systems. SCSI allows the "intelligent" transfer of data
between computers, peripherals, and networks by enabling multitasking and by
offloading the system CPU from I/O management.
SCSI solutions include a proprietary ASIC and firmware and software
for operating system drivers, peripheral drivers, and I/O utilities. Nearly
all servers utilize SCSI, and as many as 10% of desktop PCs now
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<PAGE> 23
incorporate SCSI, with this percentage expected to increase as microprocessors
become more powerful and as more complex, data-intensive applications are
performed on the desktop.
The increase in the usage of data is also creating demand for
increasing amounts of data storage as well as new high-capacity peripheral
devices. Virtually every microcomputer is shipped with mass storage
peripherals such as hard disk drives and CD-ROMs. Each peripheral requires an
ASIC controller to manage the operations of that peripheral and to interface
with the system bus. Recently, new peripherals, such as CD-ROMs and removable
storage devices, have been increasingly used alongside hard disks to provide
additional storage capacity. Such devices frequently have SCSI interfaces. In
addition, the increasing need for mass storage is also driving the need for
controller solutions that can support multi-gigabyte drives in both desktop and
server systems.
Another I/O-related market that is benefiting from the need for
increased bandwidth is the market for network interface cards that reside on
servers and PCs and use such standards as ATM and Fast Ethernet. Server
bandwidth is moving to the forefront of concern of information system
organizations as more Internet and intranet servers are rapidly coming on line.
The Company, with its networking solutions, provides both the bandwidth to and
from the server as well as augmenting the server's resiliency to unexpected
events, such as network infrastructure failures and disk drive crashes, through
innovative software features.
In addition to SCSI, other high-performance, standards-based host
adapter solutions, such as 1394/Firewire and Fibre Channel, are emerging in
support of new applications. 1394/Firewire is an industry standard interface
used in both personal computers and consumer electronics equipment. In 1997,
1394/Firewire interface will be incorporated in products such as PCs for
desktop publishing and video editing, still image cameras, printers, scanners,
optical drives, and as many as 50% of all digital camcorders. The popularity of
1394/Firewire is expected to grow due to its high speed and easy-to-use
cabling. Fibre Channel is a bus technology targeted for applications with very
high-capacity I/O demands, which offers unique capabilities in the clustering
and high end multi-processor server environments.
PRODUCTS
The Company's products are designed and manufactured using a core set
of technologies and resources. The Company's semiconductor technology design
centers develop products for all markets the Company serves. The Company
continues to utilize a process called concurrent engineering, in which
manufacturing, marketing, and engineering work together early in the
development cycle to meet the demands of emerging technologies as well as
decrease the "time to volume" of product shipments. The Company maintains an
Internet Web site to provide its customers with detailed company and product
information.
Board-based I/O Solutions
The Company's board-based I/O solutions, which include SCSI host
adapters, ATM and Fast Ethernet network interface cards, and related firmware
and software, meet the demanding I/O and connectivity requirements of
enterprise servers, high-performance desktop and portable computers, and
technical workstations across all important microprocessor-based platforms.
The Company's board-based I/O products, which incorporate the
Company's proprietary single chip architectures and an extensive array of
related software products, provide customers the most comprehensive board-based
I/O solutions available in the markets it serves. The Company provides bus
mastering, SCSI host adapters that manage all I/O processing activity, thereby
freeing the CPU to perform other operations. The
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<PAGE> 24
Company offers these host adapters across all ranges of bus architectures
including PCI, ISA, EISA, and PCMCIA. The Company also provides non-bus
mastering host adapters that provide standardized SCSI connectivity between the
CPU and its peripherals. Additionally, demand is increasing for the Company's
board-based I/O solutions where SCSI is utilized in nearly all servers. To
expand further the market for its products, the Company continues to develop
and market I/O solutions meeting specific original equipment manufacturer
("OEM") requirements and turnkey kits for the distributor channels. These kits
include a SCSI host adapter and related software that enable end-users to more
readily connect SCSI peripherals to their microcomputer.
The Company has undertaken numerous initiatives to increase the
accessibility, ease of use, and versatility of the SCSI standard. Advanced
SCSI programming interface ("ASPI"), an industry standard developed by the
Company, enables users to integrate high-performance SCSI peripherals with
microcomputers using popular operating systems, such as Windows 95, Windows NT,
NetWare, OS/2, and UNIX. In addition, the Company is engaged in strategic
relationships with leading operating system vendors, such as IBM, Microsoft,
and Novell, resulting in joint development projects to embed the Company's
software within their operating systems. The Company has several software
utilities such as Adaptec EZ-SCSI and SCSIselect products, which simplify
connecting a SCSI host adapter and peripherals to a microcomputer system. The
Company has developed and continues to develop products for emerging standards
such as 1394/Firewire and Fibre Channel.
The proliferation of client server architectures, the Internet, and
corporate intranets have caused both the expansion and upgrading of corporate
networks, thereby creating demand for more powerful bandwidth management
solutions for networked environments. The Company offers its family of ATM
network interface cards ("NICs"), which provide a robust solution for managing
mixed data types such as graphics, video, and voice. As a result of the
acquisition of Cogent in fiscal 1997, the Company has expanded its product
offerings to include a family of Fast Ethernet NICs, which provide a
high-performance solution to the installed base of servers used in Ethernet
networks.
Integrated Circuits
The Company develops proprietary integrated circuits ("ICs") for use
in microcomputer systems, mass storage devices, various other peripherals, and
for use in its own board-based SCSI host adapters and NICs. Adaptec's
proprietary ICs provide innovative solutions for managing complex I/O functions
in high-performance microcomputer and storage applications. Working closely
with customers, the Company provides complete solutions that include
sophisticated ICs, firmware, and software that optimize overall subsystem
design.
The Company's current IC products include SCSI and enhanced integrated
device electronic ("EIDE") programmable storage controllers, single-chip SCSI
host adapters, and single-chip redundant array of inexpensive disks
("RAID")-on-the-motherboard solutions. All of the Company's IC products are
developed using advanced design technologies to meet market requirements for
higher levels of physical integration, increased functionality, and
performance. The Company's programmable SCSI and EIDE storage controllers are
typically configured to address specific customer requirements in the mass
storage market and are used primarily in high-capacity hard disk drives as well
as non-hard disk drives. The Company's SCSI host adapter ICs incorporate
similar technology and are used by system manufacturers to embed SCSI on the
system motherboard. The Company's RAID-on-the-motherboard solutions provide a
cost-effective array solution that maintains motherboard designs and protects
the investment in embedded SCSI.
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RESEARCH AND DEVELOPMENT
The Company believes research and development is fundamental to its
success, especially in integrated circuit design, software development, and I/O
solutions that encompass emerging technologies. The development of proprietary
integrated circuits that support multiple architectures and peripheral devices
requires a combination of engineering disciplines. In addition, extensive
knowledge of computer and subsystem architectures, expertise in the design of
high-speed digital ICs circuits, and knowledge of operating system software is
essential. The Company's research and development efforts continue to focus on
the development of complete solutions that include proprietary ASICs, firmware,
and software that support multiple architectures and peripheral devices. These
I/O solutions facilitate high-speed data transfer rates, which are essential to
the enhanced performance of client/server networking environments, applications
requiring high-performance I/O, and the adoption of various peripheral devices.
The Company continues to leverage its technical expertise and product
innovation capabilities to address I/O solutions across a broad range of users
and platforms. The Company also continues to invest significant resources to
develop its core products as well as newer hardware and software solutions
including CD-R, 1394/Firewire, Fibre Channel, and optical technologies.
Approximately 28% of the Company's employees are engaged in research
and development, of which approximately 50% are engaged in software
development. In fiscal 1997, 1996, and 1995, the Company spent approximately
$129 million (14% of net revenues), $88 million (13% of net revenues), and $61
million (13% of net revenues), respectively, for research and development.
MARKETING AND CUSTOMERS
The Company believes it has successfully positioned itself as a
leading supplier of a full range of I/O solutions providing bandwidth
management. The Company sells its products through a direct sales force to
substantially all major server and PC manufacturers, as well as most of the
major electronic distributors worldwide. The Company works closely with its
OEM customers on the design of current and next generation products to meet the
specific requirements of system integrators and end-users. The Company
provides its OEM customers with extensive applications and system design
support. The Company also sells board-based products to end-users through
major computer product distributors and provides technical support to its
customers worldwide.
The Company's OEM customers include Acer, Compaq, Digital Equipment
Corporation, Dell Computer Corporation, Fujitsu, Gateway 2000, Hewlett-Packard
Company, IBM Corporation, Intel Corporation, Iomega, Maxtor Corporation, NEC
Technologies, Samsung, Siemens Nixdorf, and Toshiba America. The Company's
major distributors include Actebis, Computer 2000, Gates/Arrow, Ingram Micro,
Merisel, Nissho, and Tech Data. In fiscal 1997 and 1995, no customer accounted
for more than 10% of the Company's net revenues. In fiscal 1996, sales to one
distributor represented 10% of the Company's net revenues.
The Company emphasizes solution-oriented customer support as a key
element of its marketing strategy and maintains technical applications groups
in the field as well as at the Company's headquarters. Support provided by
these groups includes assisting current and prospective customers in the use of
the Company's products, writing application notes, and conducting seminars for
system designers. The systems-level expertise and software experience of the
Company's engineering staff are also available to customers with particularly
difficult I/O design problems. A high level of customer support is also
maintained through technical support hotlines, electronic bulletin boards, and
dial-in-fax capability.
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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.
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BACKLOG
The Company's backlog was approximately $154 million and $111
million at March 31, 1997 and March 31, 1996, respectively. These backlog
figures include only orders scheduled for shipment within six months, of which
the majority are scheduled for delivery within 90 days. The Company's
customers may cancel or delay purchase orders for a variety of reasons,
including rescheduling of new product introductions and changes in inventory
policies and forecasted demand. Accordingly, the Company's backlog as of any
particular date may not be indicative of the Company's actual sales for any
succeeding fiscal period.
MANUFACTURING
The Company's Singapore manufacturing facility produces and tests
high volume host adapter products. The Singapore facility has earned ISO 9001
certification, a stringent quality standard that has become a requirement for
doing business globally. Since establishing this facility in Singapore in
1988, the Company has experienced lower costs, shorter manufacturing cycle
times, and improved service to customers. The Company's products make
extensive use of standard logic, printed circuit boards, and random access
memory from several outside suppliers in addition to the Company's custom
designed integrated circuits. Additionally, during fiscal 1997, to ensure
availability of low cost manufacturing capacity for certain product lines, the
Company's Singapore plant expanded its relationship with major local
subcontracting manufacturers by consigning certain production equipment to the
subcontractors.
All semiconductor wafers used in manufacturing the Company's
products are processed to its specifications by outside suppliers and
internally tested by the Company. The Company believes that its current wafer
volume and manufacturing technology requirements are best met with foundry
relationships. In fiscal 1996, the Company secured capacity through an
agreement with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") that
ensures availability of a portion of the Company's wafer capacity for both
current and future technologies for which the Company made advance payments
totaling $66 million. Subsequent to March 31, 1997, the Company entered into
an agreement with TSMC whereby the Company will make advance payments totaling
$35 million to secure additional wafer capacity for future technology through
2001. The Company signed a promissory note for $35 million for the advance
payments, which becomes due in two equal installments on January 31, 1998 and
June 30, 1998.
EMPLOYEES
At March 31, 1997, the Company had 2,794 employees, including 773 in
engineering, 1,184 in manufacturing (including 1,077 at its Singapore
facility), 130 in customer technical support, 204 in marketing, 206 in sales,
and 297 in finance and administration. The Company's continued success will
depend in large measure on its ability to attract and retain highly skilled
employees who are in great demand. None of the Company's employees are
represented by a labor union.
PATENTS AND LICENSES
The Company believes that patents are of less significance in its
industry than such factors as innovative skills, technological expertise and
marketing abilities. However, the Company encourages its engineers to document
patentable inventions and has applied for and continues to apply for patents
both in the United States and in foreign countries when it deems it to be
advantageous to do so. There can be no assurance that patents will be issued
or that any patent issued will provide significant protection or could be
successfully defended.
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As is the case with many companies in the electronics industry, it
may be desirable in the future for the Company to obtain technology licenses
from other companies. The Company has occasionally received notices of claimed
infringement of intellectual property rights and may receive additional such
claims in the future. The Company evaluates all such claims and, if necessary,
will seek to obtain appropriate licenses. There can be no assurance that any
such licenses, if required, will be available on acceptable terms.
PROPERTIES
The Company owns six buildings (approximately 375,000 square feet)
in Milpitas, California which are primarily used by the Company for corporate
offices, research, manufacturing, marketing and sales, and one building
(approximately 200,000 square feet) in Longmont, Colorado, for research,
technical support, marketing, sales and administrative support. The Company
leases two buildings (approximately 63,000 square feet) in Milpitas, which are
mainly occupied to support administrative and sales functions, and other
facilities in Irvine, California (82,000 square feet); Bellevue, Washington
(9,000 square feet); Friday Harbor, Washington (85,000 square feet); and
Nashua, New Hampshire (17,000 square feet) to support technical design efforts
and sales.
Adaptec Manufacturing Singapore is located in two leased facilities
(approximately 150,000 square feet). The two buildings are used by the Company
for research, manufacturing and sales. The Company also leases eleven sales
offices in the United States, and one sales office each in Waterloo, Belgium;
Munich, Germany; Bretonneux, France; Camberley, England; Singapore; Seoul,
Korea; Taipei, Taiwan; and Tokyo, Japan. The Tokyo office also provides
technical design efforts and technical support with the Belgian office
providing technical support to Europe. The Company believes its existing
facilities and equipment are well maintained and in good operating condition
and believes its manufacturing facilities, together with the use of independent
manufacturers where required or desirable, will be sufficient to meet its
anticipated manufacturing needs through fiscal 1998.
During fiscal 1996, the Company acquired a parcel of land in
Fremont, California for approximately $12 million cash to support anticipated
future growth. The Company's future facilities requirements will depend upon
the Company's business and, the Company believes additional space, if required,
may be obtained on reasonable terms.
LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings
incidental to the conduct of its business. The Company believes that the
litigation, individually or in the aggregate, to which it is currently a party
is not likely to have a material adverse effect on the Company's results of
operations or financial condition.
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<PAGE> 29
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the Directors and executive officers of Adaptec, Inc.,
their ages as of March 31, 1997 and certain information about them are set
forth below.
<TABLE>
<CAPTION>
NAME OF DIRECTORS AND EXECUTIVE OFFICERS AGE PRINCIPAL OCCUPATION
----------------------------------------- --- ---------------------------------------------------------------------------
<S> <C> <C>
John G. Adler . . . . . . . . . . . . . . 60 Chairman of the Board of Directors
F. Grant Saviers . . . . . . . . . . . . 52 President and Chief Executive Officer of the Company
Robert N. Stephens . . . . . . . . . . . 51 Chief Operating Officer
Andrew J. Brown . . . . . . . . . . . . . 37 Vice President, Corporate Controller and Principal Accounting Officer
Richard J. Clayton . . . . . . . . . . . 56 Vice President and General Manager
Michael G. Fisher . . . . . . . . . . . . 38 Vice President and General Manager
Richard S. Gourley . . . . . . . . . . . 44 Vice President, Worldwide Sales
Paul G. Hansen . . . . . . . . . . . . . 49 Vice President of Finance, Chief Financial Officer and Assistant Secretary
Drew S. Hoffman . . . . . . . . . . . . . 40 Vice President and General Manager
E.J. Tim Harris . . . . . . . . . . . . . 49 Vice President of Administration
Sam Kazarian . . . . . . . . . . . . . . 54 Vice President of Operations
Christopher G. O'Meara . . . . . . . . . 39 Vice President and Treasurer
Subramanian Sundaresh . . . . . . . . . . 40 Vice President and General Manager
Henry P. Massey, Jr. . . . . . . . . . . 57 Secretary
Laurence B. Boucher . . . . . . . . . . . 54 Director
Carl J. Conti . . . . . . . . . . . . . . 59 Director
John East . . . . . . . . . . . . . . . . 52 Director
Robert J. Loarie . . . . . . . . . . . . 54 Director
B.J. Moore . . . . . . . . . . . . . . . 61 Director
W. Ferrell Sanders . . . . . . . . . . . 60 Director
Phillip E. White . . . . . . . . . . . . 54 Director
</TABLE>
Except as set forth below, each of the Directors and executive
officers has been engaged in his principal occupation described above during
the past five years. These is no family relationship between any director or
executive officer of Adaptec.
Mr. Adler served as President of Adaptec from May 1985 to August
1992, as Chief Executive Officer from December 1986 to July 1995, as a director
since February 1986 and as Chairman of the Board of Directors since May 1990.
Mr. Saviers has served as President and Chief Executive Officer of
Adaptec since August 1992 and July 1995 respectively, and was Chief Operating
Officer from August 1992 to July 1995. Prior to joining Adaptec, Mr. Saviers
was employed with Digital Equipment Corporation for more than five years, last
serving as Vice President of its personal computer systems and peripherals
operation.
Mr. Stephens has served as Chief Operating Officer since November
1995. From 1993 to 1995, he founded, and served as Chairman for Power I/O
Corporation. From 1990 to 1993, Mr. Stephens held the position of President
and CEO of Emulex Corporation.
Mr. Brown has served as Vice President since 1996, and as Corporate
Controller and Principal Accounting Officer since May 1994. From July of 1988
to April of 1994 he served in various financial roles with the Company.
Mr. Clayton has served as Vice President and General Manager since
May 1996. From October 1995 until February 1996 he served as Vice President of
AVID Technology Corp. and from January 1984 until February 1996 he served as
Vice President of Thinking Machines Corp.
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<PAGE> 30
Mr. Fisher has served as Vice President and General Manager since
November 1994. Between May 1994 and October 1994 he held the position of
General Manager, Mass Storage Electronics Product Group. Before then, Mr.
Fisher held the position of Director of Hard Disk Drive Products at Exar
Corporation from November 1990 until April 1994.
Mr. Gourley has served as Vice President, Worldwide Sales since
April 1996. From September 1994 to April 1996 he was a Senior Director at
Oracle. From January 1982 to August 1994, Mr. Gourley served in a number of
sales and marketing management positions at IBM.
Mr. Hansen, a certified public accountant, has served as Vice
President of Finance and Chief Financial Officer since January 1988. From March
1984 to December 1987 he served in various financial roles with the Company.
Mr. Harris has served as Vice President of Administration since
December 1996. From January 1984 to November 1996, he served in various
positions at Novell, Inc. most recently as Senior Vice President, Human
Resources.
Mr. Hoffman has served as Vice President and General Manager since
August 1995. Mr. Hoffman served as Vice President, Engineering of Eschelon
Systems Corp. from 1991 to 1995.
Mr. Kazarian has served as Vice President of Operations since May
1990.
Mr. O'Meara has served as a Vice President since July 1992 and as
Treasurer since April 1989.
Mr. Sundaresh has served as Vice President and General Manager since
February 1994. From March of 1993 until January of 1994 he served as Director
of Marketing. From 1991 to 1993 he served as Director of PC Marketing at
Hyundai Electronics America.
Mr. Massey has served as Secretary since November 1989. For more
than the last five years, Mr. Massey has been a practicing lawyer and a member
of Wilson Sonsini Goodrich & Rosati, Professional Corporation, a law firm and
general outside counsel to the Company.
Mr. Boucher has, since March 1997, served as President of
Alacritech, Inc., a company recently formed to develop and manufacture computer
components. Mr. Boucher served as President from December 1987 to June 1995,
as Chief Executive Officer from December 1987 to March 1996, as Chairman of the
Board of Directors from February 1994 to June 1996, and as a director from
December 1987 to March 1997 of Auspex Systems, Inc., a manufacturer of computer
systems. He is a founder of the Company and served as Chairman of the Board of
Directors from May 1981 to May 1990 and as Chief Executive Officer from May
1981 to December 1986.
Mr. Conti is an independent management consultant. From 1959 to
1991, he held a variety of technical and managerial positions with
International Business Machines Corporation, a manufacturer of computer
hardware and software, concluding with four years as a Senior Vice President.
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<PAGE> 31
Mr. East has, since December 1988, served as a director, President
and Chief Executive Officer of Actel Corporation, a manufacturer of field
programmable gate arrays.
Mr. Loarie has, since August 1992, served as a principal of Morgan
Stanley & Co. Incorporated, a diversified investment firm, and as a general
partner of certain venture capital investment partnerships affiliated with
Morgan Stanley. Prior to that time and for more than the previous five years,
Mr. Loarie was a general partner of Weiss, Peck & Greer, an investment
management firm, and of several venture capital partnerships affiliated with
Weiss Peck & Greer. Mr. Loarie is also a director of Telcom Semiconductor,
Inc. and Aurum Software, Inc.
Mr. Moore is an independent management consultant. Mr. Moore served
as President of Outlook Technology, Inc., a company engaged in the development,
manufacture and marketing of digital test instrumentation, from February 1986
to July 1991. Mr. Moore is also a director of Dionex Inc.
Mr. Sanders has served as a general partner of Asset Management Co.
since February 1989 and served as a senior associate of Asset Management Co.
from March 1987 to February 1989. Mr. Sanders is also a director of Solectron
Corporation.
Mr. White has served as President, Chief Executive Officer,
director, and Chairman of the Board of Informix Software, Inc., a software
company, since January 1989. Prior to that time and for more than the last
five years, Mr. White was President of Wyse Technology, Inc., a manufacturer of
computers and computer terminals. Mr. White is also a director of Legato
Systems, Inc.
COMPENSATION OF DIRECTORS
Cash Compensation
Non-employee directors receive $3,000 per fiscal quarter and $2,000
for each meeting of the Board of Directors attended other than telephonic
meetings and are reimbursed for their expenses incurred in attending meetings
of the Board of Directors. Directors do not receive compensation for committee
or telephonic meetings. Employee directors do not receive additional
compensation for attendance at Board Meetings.
1990 Directors' Option Plan
Non-employee directors also receive stock options under the
Company's 1990 Directors' Option Plan (the "Directors' Plan"). The Directors'
Plan was adopted and approved by the shareholders of the Company in 1990. A
total of 2,200,000 shares of Common Stock have been reserved for issuance under
the Directors' Plan, as it has been subsequently amended. The Directors' Plan
provides for the grant of non-statutory stock options to non-employee
directors of the Company. All eligible directors are granted an option to
purchase 40,000 shares of Common Stock on the date on which such person first
becomes a director, whether through election by the shareholders or appointment
by the Board to fill a vacancy (the "Initial Option"). On March 31 of each
year, each non-employee director is granted an additional option to purchase
10,000 shares of Common Stock (the "Annual Option"). All Annual Options granted
prior to August 22, 1996 and all Initial Options become exercisable for 25% of
the shares subject to the option on the first anniversary of the date of grant
and for 6.25% of the shares subject to the option for each full calendar
quarter thereafter that the optionee remains a director. All Annual Options
granted subsequent to August 22, 1996 become exercisable for 25% of the Shares
subject to the grant for each full calendar quarter that the optionee remains a
director. The per share exercise price of options is established at the fair
market value of the Company's Common Stock on the date the option is granted.
All
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options granted under the Directors' Plan prior to August 22, 1996 have a term
of five years. Options granted subsequent to that date have a term of ten
years.
Pursuant to the Directors' Plan, Directors Boucher, Conti, East,
Loarie, Moore, Sanders and White were granted options to purchase 10,000 shares
of Common Stock each on March 31, 1997 at an exercise price of $37.25 per
share.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of seven meetings
during the fiscal year ended March 31, 1997. The Board of Directors has an
Audit Committee, a Compensation Committee and a Nominating Committee.
The Audit Committee of the Board of Directors consists of Messrs.
Conti, Loarie and Sanders and held seven meetings during the last fiscal year.
The Audit Committee recommends engagement of the Company's independent
accountants and is primarily responsible for approving the services performed
by the Company's independent accountants and for reviewing and evaluating the
Company's accounting principles and its system of internal accounting controls.
The Compensation Committee of the Board of Directors consists of
Messrs. East, Moore and White and held five meetings during the last fiscal
year. The Compensation Committee establishes the Company's executive
compensation policy, determines the salary and bonuses of the Company's
executive officers and recommends to the Board of Directors stock option grants
for executive officers.
The Nominating Committee consists of Messrs. Moore and Sanders. The
Nominating Committee is responsible for reviewing qualifications for possible
Board membership and recommending candidates for election to the Board of
Directors. The Nominating Committee will consider nominees recommended by
management and shareholders. Such recommendations may be delivered in writing
to the attention of the Nominating Committee in care of the Secretary at the
Company's principal executive offices. The Nominating Committee held no
meetings during the prior fiscal year.
No director attended fewer than 75% of the sum of the total number
of meetings of the Board of Directors or the total number of meetings of all
committees of the Board of Directors on which that director served.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither B. J. Moore, John East nor Phillip E. White, the members of
the Company's Compensation Committee, is an executive officer of any entity for
which any executive officer of the Company serves as a director or a member of
the Compensation Committee.
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<PAGE> 33
EXECUTIVE COMPENSATION
The table below sets forth information for the three most recently
completed fiscal years concerning the compensation of the Chief Executive
Officer of the Company and the four other most highly compensated executive
officers of the Company in the fiscal year ended March 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------------------
RESTRICTED SECURITIES
FISCAL SALARY BONUS STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) AWARD ($) OPTIONS(#) COMPENSATION($)(2)
- ----------------------------------------- ------ ---------- -------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
F. Grant Saviers . . . . . . . . . . . . 1997 $524,423 $560,000 -- 265,719 $1,170
President and Chief Executive Officer 1996 468,462 533,000 -- 279,200 2,520
1995 350,000 475,000 -- 400,000 2,780
Paul G. Hansen . . . . . . . . . . . . . 1997 259,423 221,500 -- 72,000 644
Vice President, Finance and Chief 1996 229,615 259,500 -- 107,600 1,380
Financial Officer 1995 222,115 291,058 -- 100,000 1,260
Sam Kazarian . . . . . . . . . . . . . . 1997 239,519 230,000 -- 64,000 1,170
Vice President, Operations 1996 214,712 243,500 -- 105,800 2,520
1995 200,000 270,000 -- 120,000 2,280
Robert N. Stephens . . . . . . . . . . . 1997 373,077 337,500 -- 128,000 703
Chief Operating Officer 1996 105,769 -- $103,122(4) 253,750 400
Subramanian Sundaresh . . . . . . . . . . 1997 229,423 236,750 -- 80,000 291
Vice President and General Manager 1996 199,327 221,250 19,992(3) 48,000 332
1995 165,000 140,000 -- 100,000 475
</TABLE>
(1) In each case, the fiscal year 1995 bonus amounts include an amount equal
to one-half of the individual's base salary for fiscal year 1995 that was
accrued but not paid by the Company in fiscal year 1995. Payment of such
amounts was conditioned on the individuals continued employment with the
Company for a two year period. Half of such amounts were paid to the
individuals at the end of fiscal 1996 and at the end of fiscal 1997.
(2) Represents life insurance premiums.
(3) Represents the grant of 784 Incentive Stock Units pursuant to the
Company's 1990 Stock Plan. On the first anniversary of the grant the
Company redeemed one-half of the Incentive Stock Units by giving Mr.
Sundaresh 392 shares of Common Stock of the Company. On the second
anniversary of the date of grant, if Mr. Sundaresh is still in the employ
of the Company, the Company will redeem the remaining Incentive Stock
Units by giving Mr. Sundaresh either 392 shares of Common Stock of the
Company or the fair market value of such shares at the Company's
discretion. The value of the grant is based on the fair market value of
784 shares of the Company's Common Stock on the date of grant. As of the
March 31, 1997, Mr. Sundaresh held 392 Incentive Stock Units with a value
of $14,014 (based on the fair market value of the Company's Common Stock
on that date).
(4) Represents the grant of 4,044 Incentive Stock Units pursuant to the
Company's 1990 Stock Plan. On the first anniversary of the grant the
Company redeemed one-half of the Incentive Stock Units by giving Mr.
Stephens 2,022 shares of Common Stock of the Company. On the second
anniversary of the date of grant, if Mr. Stephens is still in the employ
of the Company, the Company will redeem the remaining Incentive Stock
Units by giving Mr. Stephens either 2,022 shares of Common Stock of the
Company or the fair market value of such shares at the Company's
discretion. The value of the grant is based on the fair market value of
2,022 shares of the Company's Common Stock on the date of grant. As of the
March 31, 1997, Mr. Stephens held 2,022 Incentive Stock Units with a value
of $72,286 (based on the fair market value of the Company's Common Stock
on that date).
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<PAGE> 34
The table below provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year
ended March 31, 1997 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------- Potential Realizable
Number of Value at Assumed
Securities % of Total Annual Rates of Stock
Underlying Options Exercise Price Appreciation
Options Granted to or for Option Term(3)(4)
Granted Employees in Base Price Expiration ----------------------------------
Name (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ------------------------- ------------ ------------- ---------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
F. Grant Saviers . . . . 250,000(1) 3.43% $24.88 6/20/06 $ 3,669,170 $ 9,526,110
15,719(2) 0.22 36.78 3/20/01 135,962 282,010
Paul G. Hansen . . . . . 72,000(1) 0.99 24.88 6/20/06 1,056,721 2,743,520
Sam Kazarian . . . . . . 64,000(1) 0.88 24.88 6/20/06 939,307 2,438,684
Robert N. Stephens . . . 128,000(1) 1.76 24.88 6/20/06 1,878,615 4,877,368
Subramanian Sundaresh . . 80,000(1) 1.10 24.88 6/20/06 1,174,134 3,048,355
All Shareholders . . . . NA NA NA NA 1,192,043,447 3,020,870,421
</TABLE>
(1) These options were granted pursuant to the Company's 1990 Stock Plan. The
option exercise prices were at the fair market value of the Company's
Common Stock on the date of grant. All options expire 10 years from the
date of grant, are not transferable by the optionee (other than by will or
the laws of descent and distribution), and are exercisable during the
optionee's lifetime only by the optionee. The options become exercisable at
the rate of 12.5% of the shares subject to the option six months after the
date of grant and at the rate of 6.25% of the shares subject to the option
at the end of each of the next 14 quarters. To the extent exercisable at
the time of employment termination, options may be exercised for an
additional three months unless termination is the result of total and
permanent disability, in which case the options may be exercised within six
months following termination, or unless termination is the result of death,
in which case unvested options become exercisable to a maximum of 50,000
shares per individual and may be exercised within six months following
death by the individual's estate or other successor.
(2) These options were granted pursuant to the Company's 1990 Stock Plan. The
option exercise prices were at 110% of the fair market value of the
Company's Common Stock on the date of grant. All options expire 4 years
from the date of grant, are not transferable by the optionee (other than by
will or the laws of descent and distribution), and are exercisable during
the optionee's lifetime only by the optionee. 50% of the options subject
to the grant become exercisable one year after the date of the grant with
the remaining 50% becoming exercisable two years after the date of grant.
To the extent exercisable at the time of employment termination, options
may be exercised for an additional three months unless termination is the
result of total and permanent disability, in which case the options may be
exercised within six months following termination, or unless termination is
the result of death, in which case unvested options become exercisable to a
maximum of 50,000 shares per individual and may be exercised within six
months following death by the individual's estate or other successor.
(3) Potential gains are net of exercise price, but before taxes associated with
exercise. The amounts represent certain assumed rates of appreciation only,
based on the Securities and Exchange Commission rules. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the Common Stock, overall market conditions and the option holders'
continued employment through the vesting period. The amounts reflected in
this table may not necessarily be achieved and do not reflect the Company's
estimate of future stock price growth.
(4) In the case of all shareholders, indicates the potential shareholder return
over a ten-year period at the respective rate determined from the closing
sales price on the Nasdaq National Market of $35.75 on March 31, 1997. On
March 31, 1997, there were 111,540,464 shares of Common Stock issued and
outstanding.
-31-
<PAGE> 35
The table below provides the specified information concerning the
exercise of options to purchase the Company's Common Stock in the fiscal year
ended March 31, 1997 and the unexercised options held as of March 31, 1997 by
the persons named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#): FY-END ($):
SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) ($)(1) UNEXERCISABLE UNEXERCISABLE(2)
- ------------------------------- ---------------- --------------- --------------- ----------------------
<S> <C> <C> <C> <C>
F. Grant Saviers . . . . . . . 330,914 $8,215,958 541,475/563,444 $11,963,847/$8,928,695
Paul G. Hansen . . . . . . . . 70,000 1,490,003 154,800/174,800 3,261,105/2,807,356
Sam Kazarian . . . . . . . . . 16,768 532,013 229,900/174,900 5,455,158/2,924,693
Robert N. Stephens . . . . . . 33,024 530,809 72,851/275,875 875,710/3,391,156
Subramanian Sundaresh . . . . . 40,000 705,125 171,500/164,500 4,039,718/2,915,094
</TABLE>
(1) Market value of underlying securities on date of exercise, minus the
exercise or base price.
(2) Market value of underlying securities at fiscal year end, minus the
exercise or base price.
CHANGE IN CONTROL ARRANGEMENTS
The Company's 1990 Stock Plan authorizes the acceleration or payment
of awards and related shares in the event of a Change in Control as defined in
the Plan. Such acceleration or payment may cause part or all of the
consideration involved to be treated as a "parachute payment" under the
Internal Revenue Code of 1986 as amended (the "Code"), which may subject the
recipient thereof to a 20% excise tax and which may not be deductible by the
participant's employer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1997, the Company purchased approximately $1,044,527 of
computer equipment in the ordinary course of business from Auspex Systems,
Inc., a supplier of computer network file servers. Mr. Boucher is the Chairman
of the Board of Directors and a shareholder of Auspex Systems, Inc.
-32-
<PAGE> 36
PRINCIPAL SHAREHOLDERS
The table below sets forth as of May 31, 1997 certain information with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than five percent (5%) of
the outstanding shares of Common Stock; (ii) each director of the Company,
(iii) each executive officer named in the Summary Compensation Table, and (iv)
all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares Approximate
Beneficially Percent
Name of Person or Identity of Group Owned(1) Owned
- ----------------------------------------------------------- -------------- -----------
<S> <C> <C>
FMR Corp.(2) . . . . . . . . . . . . . . . . . . . . . . . 14,645,160 13%
82 Devonshire Street
Boston, MA 02109-3614
John G. Adler . . . . . . . . . . . . . . . . . . . . . . . 162,838 *
Laurence B. Boucher . . . . . . . . . . . . . . . . . . . . 15,040 *
Carl J. Conti . . . . . . . . . . . . . . . . . . . . . . . 39,750 *
John East . . . . . . . . . . . . . . . . . . . . . . . . . 38,750 *
Paul G. Hansen . . . . . . . . . . . . . . . . . . . . . . 162,647 *
Sam Kazarian . . . . . . . . . . . . . . . . . . . . . . . 258,341 *
Robert J. Loarie . . . . . . . . . . . . . . . . . . . . . 115,354 *
B.J. Moore . . . . . . . . . . . . . . . . . . . . . . . . 99,520 *
W. Ferrell Sanders . . . . . . . . . . . . . . . . . . . . 132,250 *
F. Grant Saviers . . . . . . . . . . . . . . . . . . . . . 711,420 *
Robert N. Stephens . . . . . . . . . . . . . . . . . . . . 49,643 *
Subramanian Sundaresh . . . . . . . . . . . . . . . . . . . 217,600 *
Phillip E. White . . . . . . . . . . . . . . . . . . . . . 36,250 *
All current directors and officers as a group (21 persons) 2,330,608 2.1
</TABLE>
* Less than 1%
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares of Common Stock beneficially owned. Amounts shown include the
following number of shares, options for which are presently exercisable
or will become exercisable within 60 days of May 31, 1997: Mr. Adler,
55,000; Mr. Boucher, 15,000; Mr. Conti, 38,750; Mr. East, 33,750; Mr.
Hansen, 160,300; Mr. Kazarian, 256,400; Mr. Loarie, 56,250; Mr. Moore,
56,250; Mr. Sanders, 56,250; Mr. Saviers, 614,600; Mr. Stephens, 40,852;
Mr. Sundaresh, 182,750; Mr. White, 36,250; and all current officers and
directors as a group, 1,885,264.
(2) Includes 12,583,940 shares beneficially owned by Fidelity Management &
Research Company as a result of serving as investment advisor to various
registered investment companies and 2,061,220 shares beneficially owned
by Fidelity Management Trust Company as a result of serving as trustee or
managing agent for various private investment accounts. FMR Corp. has
sole voting power with respect to 920,610 shares and sole dispositive
power with respect to 14,645,160 shares.
-33-
<PAGE> 37
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 400,000,000
shares of Common Stock, $.001 par value, and 1,000,000 shares of Preferred
Stock, $.001 par value, of which 250,000 shares are designated Series A
Participating Preferred Stock, $.001 par value (the "Series A Preferred").
COMMON STOCK
As of May 31, 1997, there were 112,244,000 shares of Common Stock
outstanding held of record by 818 registered shareholders.
Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. The Company has not paid any cash dividends on its Common
Stock. Each holder of Common Stock is entitled to one vote for each share held
of record on all matters submitted to a vote in the election of directors. In
the event of a liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities and there are no
redemption provisions with respect to such shares. All of the outstanding
shares of Common Stock are, and the shares of Common Stock issuable upon
conversion of the Notes will be, fully paid and non-assessable.
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
PREFERRED STOCK
As of March 31, 1997, there were no shares of Preferred Stock
outstanding. The Preferred Stock may be issued from time to time in one or more
series. The Company's Board of Directors has authority to fix the designation,
powers, preferences and rights of each such series and the qualifications,
limitations and restrictions thereon and to increase or decrease the number of
shares of such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the shareholders. Except in
accordance with the Rights Plan (described below), the Company has no present
plans to issue any shares of Preferred Stock.
Preferred Share Rights Plan
On April 25, 1989, the Board of Directors of the Company declared a
dividend of one common share purchase right (a "Right" or "Rights"
collectively) for each outstanding share of Common Stock, $.001 par value (the
"Common Shares"), of the Company. The dividend was paid on May 9, 1989 to
shareholders of record at the close of business on that date, and Rights have
been issued in connection with all Common Shares issued since that date. On
December 5, 1996, the Company and ChaseMellon Shareholder Services, LLC (the
"Rights Agent") entered into the Second Amended and Restated Rights Agreement
(the "1996 Rights Agreement") which, under the circumstances described below,
entitles the registered holder of a Right to purchase from the Company one
one-thousandth of a share of Series A Preferred at a price of $180.00 (the
"Exercise Price"), subject to adjustment.
The Rights will not be exercisable until the Distribution Date
(defined below). Certificates for the Rights ("Rights Certificates") will not
be sent to shareholders and the Rights will attach to and trade only together
with the Common Shares. Accordingly, Common Share certificates outstanding on
the Record Date will evidence the Rights related thereto, and Common Share
certificates issued after the Record Date will contain a notation incorporating
the Rights Agreement by reference. Until the Distribution Date (or earlier
redemption or expiration of the Rights), the surrender or transfer of any
certificates for Common Shares, outstanding as of the Record Date, even without
notation or a copy of the Summary of Rights being attached thereto, will also
constitute the transfer of the Rights associated with the Common Shares
represented by such certificate.
-34-
<PAGE> 38
The Rights will separate from the Common Shares, Rights Certificates
will be issued and the Rights will become exercisable upon the earlier of: (i)
the tenth day (or such later date as may be determined by a majority of the
Board of Directors, excluding directors affiliated with the Acquiring Person,
as defined below (the "Continuing Directors")) following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired, or obtained the right to acquire, beneficial ownership
of 20% or more of the outstanding Common Shares, or (ii) 10 days (or such later
date as may be determined by a majority of the Continuing Directors) following
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding Common Shares.
The earlier of such dates is referred to as the "Distribution Date."
As soon as practicable following the Distribution Date, separate
Rights Certificates will be mailed to holders of record of the Common Shares as
of the close of business on the Distribution Date and such separate Rights
Certificates alone will evidence the Rights from and after the Distribution
Date. All Common Shares issued prior to the Distribution Date will be issued
with Rights. Common Shares issued after the Distribution Date may be issued
with Rights if such shares are issued (i) upon the conversion of outstanding
convertible debentures or any other convertible securities issued after
adoption of the Rights Agreement or (ii) pursuant to the exercise of stock
options or under employee benefit plans or arrangements, unless any such
issuance would result in (or create a risk that) such options, plans or
arrangements would not qualify for otherwise available special tax treatment.
Except as otherwise determined by the Board of Directors, no other Common
Shares issued after the Distribution Date will be issued with Rights. The
Rights will expire on the earliest of (i) December 5, 2006 (the "Final
Expiration Date"), (ii) redemption or exchange of the Rights as described
below, or (iii) consummation of an acquisition of the Company satisfying
certain conditions by a person who acquired shares pursuant to a Permitted
Offer as described below.
Following the Distribution Date, and until one of the further events
described below, holders of the Rights will be entitled to receive, upon
exercise and the payment of $180.00 per Right, one one-thousandth of a share of
the Series A Preferred. In the event that the Company does not have sufficient
Series A Preferred available for all Rights to be exercised, or the Board
decides that such action is necessary and not contrary to the interests of
Rights holders, the Company may instead substitute cash, assets or other
securities for the Series A Preferred for which the Rights would have been
exercisable under this provision or as described below.
Unless the Rights are earlier redeemed, in the event that an Acquiring
Person becomes the beneficial owner of 20% or more of the Company's Common
Shares then outstanding (other than pursuant to a Permitted Offer), then proper
provision will be made so that each holder of a Right which has not theretofore
been exercised (other than Rights beneficially owned by the Acquiring Person,
which will thereafter be void) will thereafter have the right to receive, upon
exercise, Common Shares (or, in certain circumstances as determined by the
Board of Directors, cash, other property or other securities) having a market
value equal to two times the Exercise Price. Rights are not exercisable
following the occurrence of an event as described above until such time as the
Rights are no longer redeemable by the Company as set forth below.
Similarly, unless the Rights are earlier redeemed, in the event that,
after the Shares Acquisition Date (as defined below), (i) the Company is
acquired in a merger or other business combination transaction, or (ii) 50% or
more of the Company's consolidated assets or earning power are sold (other than
in transactions in the ordinary course of business), proper provision must be
made so that each holder of a Right which has not theretofore been exercised
(other than Rights beneficially owned by the Acquiring Person, which will
thereafter be void) will thereafter have the right to receive, upon exercise,
shares of common stock of the acquiring company having a value equal to two
times the Exercise Price (unless the transaction satisfies certain conditions
and is consummated with a person who acquired shares pursuant to a Permitted
Offer, in which case the Rights will expire).
A Permitted Offer means a tender offer for all outstanding Common
Shares that has been made in the manner prescribed by Section 14(d) of the
Securities and Exchange Act of 1934, as amended, and determined by a majority
of the Continuing Directors to be fair and otherwise in the best interests of
the Company and its stockholders. Where the Board of Directors has determined
that a tender offer constitutes a Permitted Offer, the
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<PAGE> 39
Rights will not become exercisable to purchase Common Shares or shares of the
acquiring company (as the case may be) at the discounted price described above.
At any time after the acquisition by an Acquiring Person of 20% or
more of the Company's outstanding Common Shares and prior to the acquisition by
such Acquiring Person of 50% or more of the Company's outstanding Common
Shares, the Board of Directors of the Company may exchange the Rights (other
than Rights owned by the Acquiring Person), in whole or in part, at an exchange
ratio of one Common Share per Right. At any time on or prior to the close of
business on the earlier of (i) the tenth day following the acquisition by an
Acquiring Person of 20% or more of the Company's outstanding Common Shares (the
"Shares Acquisition Date") or such later date as may be determined by a
majority of the Continuing Directors and publicly announced by the Company, or
(ii) the Final Expiration Date of the Rights, the Company may redeem the Rights
in whole, but not in part, at a price of $.01 per Right.
The Purchase Price payable, the number of Rights, and the number of
Series A Preferred or Common Shares or other securities or property issuable
upon exercise of the Rights are subject to adjustment from time to time in
connection with the dilutive issuances by the Company as set forth in the
Rights Agreement. No fractional portion less than integral multiples of one
Common Share will be issued upon exercise of a Right and in lieu thereof, an
adjustment in cash will be made based on the market price of the Common Shares
on the last trading date prior to the date of exercise. Until a Right is
exercised, the holder thereof, as such, will have no rights as a stockholder of
the Company (other than any rights resulting from such holder's ownership of
Common Shares), including, without limitation, the right to vote or to receive
dividends.
The Series A Preferred purchasable upon exercise of the Rights will
not be redeemable. Each share of Series A Preferred will be entitled to an
aggregate dividend of 1,000 times the dividend declared per Common Share. In
the event of liquidation, the holders of the Series A Preferred will be
entitled to a preferential liquidation payment equal to 1,000 times the per
share amount to be distributed to the holders of the Common Shares. Each share
of Series A Preferred will have 1,000 votes, voting together with the Common
Shares. In the event of any merger, consolidation or other transaction in
which the Common Shares are changed or exchanged, each share of Series A
Preferred will be entitled to receive 1,000 times the amount received per
Common Share. These rights are protected by customary anti-dilution provisions.
The description above is qualified in its entirety by the 1996 Rights
Agreement which is included as an exhibit to the Registration Statement of
which this Prospectus is a part.
-36-
<PAGE> 40
DESCRIPTION OF NOTES
The Notes were issued under an Indenture dated as of February 3, 1997
(the "Indenture") between the Company and State Street Bank and Trust Company,
as trustee (the "Trustee"). The terms of the Indenture are also governed by
certain provisions contained in the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). The following summaries of certain provisions of
the Notes and the Indenture do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all the provisions of the
Notes and the Indenture, including the definitions therein of certain terms
which are not otherwise defined in this Prospectus and those terms made a part
of the Indenture by reference to the Trust Indenture Act as in effect on the
date of the Indenture. Wherever particular provisions or defined terms of the
Indenture (or of the forms of Notes which are a part thereof) are referred to,
such provisions or defined terms are incorporated herein by reference in their
entirety. As used in this "Description of Notes," the "Company" refers to
Adaptec, Inc., a California corporation, and does not, unless the context
otherwise indicates, include its subsidiaries.
GENERAL
The Notes represent general unsecured subordinated obligations of the
Company and are convertible into Common Stock as described below under
"--Conversion of Notes." The Notes will mature on February 1, 2004, unless
earlier redeemed at the option of the Company or repurchased at the option of
the holders upon a Change of Control.
The Indenture does not contain any financial covenants or any
restrictions on the payment of dividends, the repurchase of securities of the
Company or the incurrence of debt by the Company or any of its subsidiaries.
The Indenture contains no covenants or other provisions to afford protection to
holders of Notes in the event of a highly leveraged transaction or a change in
control of the Company except to the extent described under "--Repurchase at
Option of Holders" below.
The Notes bear interest from the date of original issue at the annual
rate set forth on the cover page hereof, payable semi-annually on February 1
and August 1, commencing on August 1, 1997, to Holders of record at the close
of business on the preceding January 15 and July 15, respectively. Interest
will be computed on the basis of a 360-day year composed of twelve 30-day
months.
Unless other arrangements are made, interest will be paid by check
mailed to holders entitled thereto, provided that with respect to any holder of
Notes with an aggregate principal amount equal to or in excess of $5,000,000,
at the request (such request to include appropriate wire instructions) of such
holder in writing to the Trustee on or before the record date preceding any
interest payment date, interest on such holder's Notes shall be paid by wire
transfer in immediately available funds. Principal will be payable, and the
Notes may be presented for conversion, registration of transfer and exchange,
without service charge, at the office of the Trustee or its agent in New York,
New York.
CONVERSION OF NOTES
The holders of Notes are entitled at any time on or after May 5, 1997
through the close of business on February 1, 2004, subject to prior redemption
and repurchase, to convert any Notes or portions thereof (in denominations of
$1,000 in principal amount or multiples thereof) into Common Stock at a
conversion price of $51.66 per share, subject to adjustment as described below;
provided that in the case of Notes called for redemption, conversion rights
will expire immediately prior to the close of business on the last business day
before the date fixed for redemption, unless the Company defaults in payment of
the redemption price. A Note (or portion thereof) in respect of which a holder
is exercising its option to require repurchase upon a Change of Control may be
converted only if such holder withdraws its election to exercise such
repurchase option in accordance with the terms of the Indenture.
Except as described below, no adjustment will be made on conversion of
any Notes for interest accrued thereon or for dividends paid on any Common
Stock issued. Holders of Notes at the close of business on a record date will
be entitled to receive the interest payable on such Note on the corresponding
interest payment date. However, Notes surrendered for conversion after the
close of business on a record date and before the opening of business on the
corresponding interest payment date must be accompanied by funds equal to the
interest payable on such succeeding interest payment date on the principal
amount so converted (unless such Note is
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subject to redemption on a redemption date between such record date and the
close of business on the business day following the corresponding interest
payment date). The interest payment with respect to a Note called for
redemption on a date during the period from the close of business on or after
any record date to the close of business on the business day following the
corresponding payment date will be payable on the corresponding interest
payment date to the registered holder at the close of business on that record
date (notwithstanding the conversion of such Note before the corresponding
interest payment date) and a holder of Notes who elects to convert need not
include funds equal to the interest paid. The Company is not required to issue
fractional shares of Common Stock upon conversion of Notes and, in lieu
thereof, will pay a cash adjustment based upon the closing price of the Common
Stock on the last business day prior to the date of conversion.
The conversion price is subject to adjustment by the Company (under
formulae set forth in the Indenture) upon the occurrence of certain events,
including: (i) the issuance of Common Stock as a dividend or distribution on
the outstanding Common Stock, (ii) the issuance to all holders of Common Stock
of certain rights, options or warrants to purchase Common Stock at less than
the current market price, (iii) certain subdivisions, combinations and
reclassifications of Common Stock, (iv) distributions to all holders of Common
Stock of capital stock of the Company (other than Common Stock) or evidences of
indebtedness of the Company or assets (including securities, but excluding
those dividends, rights, options, warrants and distributions referred to above
and dividends and distributions in connection with the liquidation, dissolution
or winding up of the Company and dividends and distributions paid exclusively
in cash), (v) distributions consisting exclusively of cash (excluding any cash
portion of distributions referred to in clause (iv) or in connection with a
consolidation, merger or sale of assets of the Company as referred to in clause
(ii) of the third paragraph below) to all holders of Common Stock in an
aggregate amount that, together with (x) all other such all-cash distributions
made within the preceding 12 months in respect of which no adjustment has been
made and (y) any cash and the fair market value of other consideration payable
in respect of any tender offers by the Company or any of its subsidiaries for
Common Stock concluded within the preceding 12 months in respect of which no
adjustment has been made, exceeds 20% of the Company's market capitalization
(being the product of the then current market price of the Common Stock times
the number of shares of Common Stock then outstanding) on the record date for
such distribution and (vi) the purchase of Common Stock pursuant to a tender
offer made by the Company or any of its subsidiaries which involves an
aggregate consideration that, together with (x) any cash and the fair market
value of any other consideration payable in any other tender offer by the
Company or any of its subsidiaries for Common Stock expiring within the 12
months preceding such tender offer in respect of which no adjustment has been
made and (y) the aggregate amount of any such all-cash distributions referred
to in clause (v) above to all holders of Common Stock within the 12 months
preceding the expiration of such tender offer in respect of which no
adjustments have been made, exceeds 20% of the Company's market capitalization
on the expiration of such tender offer. No adjustment of the conversion price
will be made for shares issued pursuant to a plan for reinvestment of dividends
or interest. Except as stated above, the conversion price will not be adjusted
for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase any of the
foregoing. No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then
in effect; provided that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
No adjustment will be made pursuant to clause (iv) of the preceding
paragraph if the Company makes proper provision for each holder of Notes who
converts a Note to receive, in addition to the Common Stock issuable upon such
conversion, the kind and amount of assets (including securities) that the
holder would have been entitled to receive if such holder had been a holder of
the Common Stock at the time of the distribution of such assets or securities.
Rights, options or warrants distributed by the Company to all holders of the
Common Stock that entitle the holders thereof to purchase shares of the
Company's capital stock and that, until the occurrence of an event (a
"Triggering Event"), (i) are deemed to be transferred with the Common Stock,
(ii) are not exercisable and (iii) are also issued in respect of future
issuances of Common Stock, shall not be deemed to be distributed until the
occurrence of the Triggering Event.
Under the provisions of the Company's 1996 Rights Agreement, upon
conversion of the Notes, the holders will receive, in addition to the Common
Stock issuable upon such conversion, the Rights (whether or not the Rights have
separated from the Common Stock at the time of the conversion). See
"Description of Capital Stock -- Preferred Stock -- Preferred Share Rights
Plan." In addition, the Indenture will provide that, if the Company implements
a new shareholder rights plan, such rights plan must provide that upon
conversion of the
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Notes the holders will receive, in addition to the Common Stock issuable upon
such conversion, such rights (whether or not such rights have separated from
the Common Stock at the time of such conversion).
In the case of (i) any reclassification or change of the Common Stock
(other than changes in par value or from par value to no par value or resulting
from a subdivision or a combination) or (ii) a consolidation or merger
involving the Company or a sale or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as an
entirety (determined on a consolidated basis), in each case as a result of
which holders of Common Stock shall be entitled to receive stock, other
securities, other property or assets (including cash) with respect to or in
exchange for such Common Stock, the holders of the Notes then outstanding will
be entitled thereafter to convert such Notes into the kind and amount of shares
of stock, other securities or other property or assets which they would have
owned or been entitled to receive upon such reclassification, change,
consolidation, merger, sale or conveyance had such Notes been converted into
Common Stock immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance, after giving effect to any adjustment event,
assuming that a holder of Notes would not have exercised any rights of election
as to the stock, other securities or other property or assets receivable in
connection therewith and received per share the kind and amount received per
share by a plurality of non-electing shareholders.
In the event of a taxable distribution to holders of Common Stock (or
other transaction) which results in any adjustment of the conversion price, the
holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to the United States income tax as a dividend; in certain
other circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain Tax Considerations --
U.S. Holders -- Adjustments to Conversion Price."
The Company from time to time may to the extent permitted by law
reduce the conversion price by any amount for any period of at least 20 days,
in which case the Company shall give at least 15 days' notice of such decrease,
if the Board of Directors has made a determination that such decrease would be
in the best interests of the Company, which determination shall be conclusive.
The Company may, at its option, make such reductions in the conversion price,
in addition to those set forth above, as the Company deems advisable to avoid
or diminish any income tax to its shareholders resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes. See "Certain Tax Considerations."
SUBORDINATION
The payment of principal of, premium, if any, and interest on the
Notes is, to the extent set forth in the Indenture, subordinated in right of
payment to the prior payment in full of all Senior Indebtedness. Upon any
distribution to creditors of the Company in a liquidation or dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding related to the Company or its property, in an assignment for the
benefit of creditors or any marshaling of the Company's assets and liabilities,
the holders of all Senior Indebtedness will first be entitled to receive
payment in full of all amounts due or to become due thereon before the holders
of the Notes will be entitled to receive any payment in respect of the
principal of, premium, if any, or interest on the Notes (except that holders of
Notes may receive securities that are subordinated at least to the same extent
as the Notes to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness).
In the event of any acceleration of the Notes because of an Event of
Default, the holders of any Senior Indebtedness then outstanding would be
entitled to payment in full of all obligations in respect of such Senior
Indebtedness before the holders of the Notes are entitled to receive any
payment or distribution in respect thereof (except that holders of Notes may
receive securities that are subordinated at least to the same extent as the
Notes are subordinated to Senior Indebtedness and any securities issued in
exchange for Senior Indebtedness). The Indenture will further require that the
Company promptly notify holders of Senior Indebtedness if payment of the Notes
is accelerated because of an Event of Default.
The Company also may not make any payment upon or in respect of the
Notes (except that holders of Notes may receive securities that are
subordinated at least to the same extent as the Notes are subordinated to
Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness) if (a) a default in the payment of the principal of, premium, if
any, interest, rent under or other obligations in respect of Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(b) any other default occurs and is continuing with respect to Designated
Senior Indebtedness that permits holders of the Designated Senior Indebtedness
as
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to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from a person
entitled to give such notice under the Indenture. Payments on the Notes may and
shall be resumed (i) in the case of a payment default, upon the date on which
such default is cured or waived, and (ii) in the case of a non-payment default,
179 days after the date on which the applicable Payment Blockage Notice is
received (or sooner, if such default is cured or waived), unless the maturity
of any Senior Indebtedness has been accelerated. No new period of payment
blockage based on a non-payment default may be commenced within 365 days after
the receipt by the Trustee of any prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice.
"Senior Indebtedness" means the principal of, premium, if any, and
interest on, rent under, and any other amounts payable on or in or in respect
of the Company's existing credit agreement and any other Indebtedness of the
Company (including, without limitation, any interest accruing after the filing
of a petition by or against the Company under any bankruptcy law, whether or
not allowed as a claim after such filing in any proceeding under such
bankruptcy law), whether outstanding on the date of the Indenture or thereafter
created, incurred, assumed, guaranteed or in effect guaranteed by the Company
(including all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to the foregoing); provided, however, that Senior
Indebtedness does not include (v) Indebtedness evidenced by the Notes, (w) any
liability for federal, state, local or other taxes owed or owing by the
Company, (x) Indebtedness of the Company to any subsidiary of the Company
except to the extent such Indebtedness may have been pledged, assigned or
otherwise transferred to a third party, (y) any indebtedness for the purchase
of services, goods or materials if such indebtedness is a trade payable of the
Company incurred in the ordinary course of business, except to the extent such
indebtedness may have been pledged, assigned or otherwise transferred to a
third party, and (z) any Indebtedness in which the instrument creating or
evidencing the same or the assumption or guarantee thereof (or related
agreements or documents to which the Company is a party) expressly provides
that such Indebtedness shall not be senior in right of payment to, or is pari
passu with, or is subordinated or junior to, the Notes.
"Indebtedness" means, with respect to any person, all obligations,
whether or not contingent, of such person (i) (a) for borrowed money
(including, but not limited to, any indebtedness secured by a security
interest, mortgage or other lien on the assets of the Company that is (1) given
to secure all or part of the purchase price of property subject thereto,
whether given to the vendor of such property or to another, or (2) existing on
property at the time of acquisition thereof), (b) evidenced by a note,
debenture, bond or other written instrument, (c) under a lease required to be
capitalized on the balance sheet of the lessee under generally accepted
accounting principles or entered into as part of a sale and buy back
transaction, whether or not required to be capitalized, or under any lease or
related document (including a purchase agreement) that provides that the
Company is contractually obligated to purchase or cause a third party to
purchase and thereby guarantee a minimum residual value of the lease property
to the lessor and the obligations of the Company under such lease or related
document to purchase or to cause a third party to purchase such leased
property, (d) in respect of letters of credit, bank guarantees or bankers'
acceptances (including reimbursement obligations with respect to any of the
foregoing), (e) with respect to indebtedness secured by a mortgage, pledge,
lien, encumbrance, charge or adverse claim affecting title or resulting in an
encumbrance to which the property or assets of such person are subject, whether
or not the obligation secured thereby shall have been assumed by or shall
otherwise be such person's legal liability, (f) in respect of the balance of
deferred and unpaid purchase price of any property or assets, (g) under
interest rate or currency swap agreements, cap, floor and collar agreements,
spot and forward contracts and similar agreements and arrangements; (ii) with
respect to any obligation of others of the type described in the preceding
clause (i) or under clause (iii) below assumed by or guaranteed in any manner
by such person or in effect guaranteed by such person through an agreement to
purchase (including, without limitation, "take or pay" and similar
arrangements), contingent or otherwise (and the obligations of such person
under any such assumptions, guarantees or other such arrangements); and (iii)
any and all Indebtedness constituting deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements to,
any of the foregoing.
"Designated Senior Indebtedness" means any particular Senior
Indebtedness in which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to which
the Company is a party) expressly provides that such Indebtedness shall be
"Designated Senior Indebtedness" for purposes of the Indenture (provided that
such instrument, agreement or other document may place limitations and
conditions on the right of such Senior Indebtedness to exercise the rights of
Designated Senior Indebtedness).
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<PAGE> 44
By reason of the subordination provisions described above, in the
event of the Company's liquidation or insolvency, holders of Senior
Indebtedness may receive more, ratably, and holders of the Notes may receive
less, ratably, than the other creditors of the Company. Such subordination will
not prevent the occurrences of any Event of Default under the Indenture.
In the event that the Trustee (or paying agent if other than the
Trustee) or any holder receives any payment of principal or interest with
respect to the Notes at a time when such payment is prohibited under the
Indenture, such payment shall be held in trust for the benefit of, and shall be
paid over and delivered to, the holders of Senior Indebtedness or their
representative as their respective interests may appear. After all Senior
Indebtedness is paid in full and until the Notes are paid in full, holders
shall be subrogated (equally and ratably with all other Indebtedness pari passu
with the Notes) to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness to the extent that
distributions otherwise payable to the holders have been applied to the payment
of Senior Indebtedness.
The Notes are obligations exclusively of the Company. Since the
operations of the Company are partially conducted through its subsidiaries, the
cash flow and the consequent ability to service debt, including the Notes, of
the Company, is partially dependent upon the earnings of the Company's
subsidiaries and the distribution of those earnings to, or upon loans or other
payments of funds by those subsidiaries to, the Company. The payment of
dividends and the making of loans and advances to the Company by its
subsidiaries may be subject to statutory or contractual restrictions, are
dependent upon the earnings of those subsidiaries and are subject to various
business considerations.
Any right of the Company to receive assets of any of its subsidiaries
upon their liquidation or reorganization (and the consequent right of the
holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would
still be subordinate to any security interests in the assets of such subsidiary
and any indebtedness of such subsidiary senior to that held by the Company.
As of March 31, 1997, the Company had approximately $4.3 million of
indebtedness outstanding that would have constituted Senior Indebtedness
(excluding accrued interest and Senior Indebtedness constituting liabilities of
a type not required to be reflected as a liability on the balance sheet of the
Company in accordance with generally accepted accounting principles). As of
March 31, 1997, there was also outstanding approximately $38.7 million of
aggregate liabilities of subsidiaries of the Company (excluding intercompany
liabilities and liabilities of a type not required to be reflected as a
liability on the balance sheets of such subsidiaries in accordance with
generally accepted accounting principles) as to which the Notes would have been
structurally subordinated. The Indenture does not limit the amount of
additional indebtedness, including Senior Indebtedness, that the Company can
create, incur, assume or guarantee, nor will the Indenture limit the amount of
indebtedness and other liabilities that any subsidiary can create, incur,
assume or guarantee.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not redeemable at the option of the Company prior to
February 3, 2000. At any time on or after that date, the Notes may be redeemed
at the Company's option on at least 15 but not more than 60 days' notice, in
whole at any time or in part from time to time, at the following prices
(expressed in percentages of the
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principal amount), together with accrued interest to the date fixed for
redemption if redeemed during the 12-month period beginning February 1
(beginning February 3, 2000 and ending January 31, 2001, in the case of the
first such period):
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2000 . . . . . . . . . . . . . . . . . . . . . . . . 102.71%
2001 . . . . . . . . . . . . . . . . . . . . . . . . 102.04
2002 . . . . . . . . . . . . . . . . . . . . . . . . 101.36
2003 . . . . . . . . . . . . . . . . . . . . . . . . 100.68
</TABLE>
and 100% at February 1, 2004.
If fewer than all the Notes are to be redeemed, the Trustee will
select the Notes to be redeemed in principal amounts of $1,000 or integral
multiples thereof by lot or, in its discretion, on a pro rata basis. If any
Note is to be redeemed in part only, a new Note or Notes in principal amount
equal to the unredeemed principal portion thereof will be issued. If a portion
of a holder's Notes is selected for partial redemption and such holder converts
a portion of such Notes, such converted portion shall be deemed to be taken
from the portion selected for redemption.
No sinking fund is provided for the Notes.
REPURCHASE AT OPTION OF HOLDERS
Upon the occurrence of a Change of Control, each holder of Notes shall
have the right, at the holder's option, to require that the Company repurchase
such holder's Notes in whole or in part in integral multiples of $1,000, at a
purchase price in cash in an amount equal to 101% of the principal amount
thereof, together with accrued and unpaid interest to the date of repurchase,
pursuant to an offer (the "Change of Control Offer") made in accordance with
the procedures described below and the other provisions of the Indenture.
A "Change of Control" means an event or series of events as a result
of which (i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) acquires "beneficial ownership" (as determined
in accordance with Rule 13d-3 under the Exchange Act), directly or indirectly,
of more than 50% of the combined voting power of the then outstanding
securities entitled to vote generally in elections of directors of the Company
(the "Voting Stock"), (ii) the Company consolidates with or merges into any
other corporation, or conveys, transfers or leases all or substantially all of
its assets to any person, or any other corporation merges into the Company,
and, in the case of any such transaction, the outstanding Common Stock of the
Company is changed or exchanged as a result, unless the shareholders of the
Company immediately before such transaction own, directly or indirectly, at
least 51% of the combined voting power of the outstanding voting securities of
the corporation resulting from such transaction in substantially the same
proportion as their ownership of the Voting Stock immediately before such
transaction, or (iii) Continuing Directors do not constitute a majority of the
Board of Directors of the Company (or, if applicable, a successor corporation
to the Company); provided that a Change of Control shall not be deemed to have
occurred if either (i) the closing price per share of the Common Stock for any
5 trading days within the period of 10 consecutive trading days ending
immediately after the announcement of such Change of Control shall equal or
exceed 105% of the conversion price of the Notes in effect on such trading day
or (ii) at least 90% of the consideration in the transaction or transactions
constituting the Change of Control transaction consists of shares of common
stock traded on a national securities exchange or quoted on the Nasdaq National
Market (or which will be so traded or quoted immediately following the Change
of Control) and, as a result of such transaction or transactions, the Notes
become convertible solely into such common stock (and any rights attached
thereto).
"Continuing Directors" shall mean, as of any date of determination,
any member of the Board of Directors of the Company who (i) was a member of
such Board of Directors on the date of the Indenture or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board at the time of such
nomination or election.
Within 30 days following any Change of Control, the Company shall send
by first-class mail, postage prepaid, to the Trustee and to each holder of
Notes, at such holder's address appearing in the security register,
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<PAGE> 46
a notice stating, among other things, that a Change of Control has occurred,
the purchase price, the purchase date, which shall be a business day no earlier
than 30 days nor later than 60 days from the date such notice is mailed, and
certain other procedures that a holder of Notes must follow to accept a Change
of Control Offer or to withdraw such acceptance.
No quantitative or other established meaning has been given to the
phrase "all or substantially all" (which appears in the definition of Change of
Control) by courts which have interpreted this phrase in various contexts under
the laws of the State of New York. To the extent the meaning of such phrase is
uncertain, uncertainty will exist as to whether or not a Change of Control may
have occurred (and, accordingly, as to whether or not the holders of Notes will
have the right to require the Company to repurchase their Notes).
Rule 13e-4 under the Exchange Act requires, among other things, the
dissemination of certain information to security holders in the event of an
issuer tender offer and may apply in the event that the repurchase option
becomes available to holders of the Notes. The Company will comply with this
rule to the extent applicable at that time. In the event any of the provisions
governing a Change of Control Offer conflict with the federal securities laws
of the United States, such securities laws shall control.
The right to require the Company to repurchase Notes as a result of a
Change of Control could have the effect of delaying, deferring or preventing a
change of control or other attempts to acquire control of the Company unless
arrangements have been made to enable the Company to repurchase all the Notes
on the applicable purchase date. Consequently, this right may render more
difficult or discourage a merger, consolidation or tender offer (even if such
transaction is supported by the Company's Board of Directors or is favorable to
the shareholders), the assumption of control by a holder of a large block of
the Company's shares and the removal of incumbent management.
The foregoing provisions would not necessarily afford holders of the
Notes protection in the event of highly leveraged or other transactions
involving the Company that may adversely affect holders. Moreover, certain
transactions and events that would constitute an actual change of control may
not be a Change of Control for purposes of the Indenture. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar restructuring. Subject to the limitation on mergers and consolidations
described below, the Company, its management or its subsidiaries could in the
future enter into certain transactions, including refinancings, certain
recapitalizations, acquisitions, the sale of all or substantially all of its
assets, the liquidation of the Company or similar transactions, that would not
constitute a Change of Control under the Indenture, but that would increase the
amount of Senior Indebtedness (or any other indebtedness) outstanding at such
time or substantially reduce or eliminate the Company's assets. There are no
restrictions in the Indenture on the creation of Senior Indebtedness (or any
other indebtedness) and, under certain circumstances, the incurrence of
significant amounts of additional indebtedness could have an adverse effect on
the Company's ability to service its indebtedness, including the Notes.
The Company's ability to repurchase Notes upon the occurrence of a
Change of Control is subject to limitations. There can be no assurance that the
Company would have the financial resources, or would be able to arrange
financing, to pay the purchase price for all the Notes that might be delivered
by holders of Notes seeking to exercise the repurchase right. Moreover, the
terms of the Company's existing primary bank facility prohibit the repurchase
of Notes by the Company or its subsidiaries, and the Company's ability to
repurchase Notes may be limited or prohibited by the terms of any future
borrowing arrangements, including Senior Indebtedness existing at the time of a
Change of Control. The Company's ability to repurchase Notes with cash may also
be limited by the terms of its subsidiaries' borrowing arrangements due to
dividend restrictions. Any failure by the Company to repurchase the Notes when
required following a Change of Control would result in an Event of Default
under the Indenture whether or not such repurchase is prohibited by the
subordination provisions of the Indenture. Any such default may, in turn, cause
a default under Senior Indebtedness or other indebtedness of the Company.
Moreover, the occurrence of a Change of Control could result in an event of
default under the Company's existing primary bank facility and may cause an
event of default under terms of other indebtedness (including Senior
Indebtedness) of the Company. As a result, in each case, any repurchase of the
Notes would, absent a waiver, be prohibited under the subordination provisions
of the Indenture until the Senior Indebtedness is paid in full. See "--
Subordination."
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<PAGE> 47
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company shall not consolidate with or merge with or into, or
convey, transfer or lease all or substantially all its assets (determined on a
consolidated basis), whether in a single transaction or a series of related
transactions, to, any person unless: (i) either the Company is the resulting,
surviving or transferee person (the "Successor Company") or the Successor
Company is a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia, and the Successor
Company (if not the Company) expressly assumes by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Indenture and the Notes, including the
conversion rights described above under "-- Conversion of Notes," (ii)
immediately after giving effect to such transaction no default or Event of
Default has occurred and is continuing and (iii) the Company delivers to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture comply
with the Indenture.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being: default in
payment of the principal of or premium, if any, on the Notes when due at
maturity, upon redemption or otherwise, including failure by the Company to
purchase the Notes when required as described under "--Change of Control"
(whether or not such payment shall be prohibited by the subordination
provisions of the Indenture); default for 30 days in payment of any installment
of interest on the Notes (whether or not such payment shall be prohibited by
the subordination provisions of the Indenture); default by the Company for 90
days after notice in the observance or performance of any other covenants in
the Indenture; or certain events involving bankruptcy, insolvency or
reorganization of the Company. The Indenture provides that the Trustee may
withhold notice to the Holders of Notes of any default (except in payment of
principal, premium, if any, or interest with respect to the Notes) if the
Trustee considers it in the interest of the Holders of Notes to do so.
The Indenture provides that if any Event of Default shall have
occurred and be continuing, the Trustee or the Holders of not less than 25% in
principal amount of the Notes then outstanding may declare the principal of and
premium, if any, on the Notes to be due and payable immediately, but if the
Company shall cure all defaults (except the nonpayment of interest on, premium,
if any, and principal of any Notes which shall have become due by acceleration)
and certain other conditions are met, such declaration may be canceled and past
defaults may be waived by the Holders of a majority in principal amount of
Notes then outstanding.
The Holders of a majority in principal amount of the Notes then
outstanding shall have the right to direct the time, method and place of
conducting any proceedings for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture. The Indenture provides that,
subject to the duty of the Trustee following an Event of Default to act with
the required standard of care, the Trustee will not be under an obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless the Trustee receives satisfactory
indemnity against any associated loss, liability or expense.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders of
Notes to receive payments of principal of, premium, if any, and interest on,
the Notes, (iv) rights of Holders of Notes to convert to Common Stock, (v)
rights, obligations and immunities of the Trustee under the Indenture and (vi)
rights of the Holders of Notes as beneficiaries of the Indenture with respect
to the property so deposited with the Trustee payable to all or any of them),
if (A) the Company will have paid or caused to be paid the principal of,
premium, if any, and interest on the Notes as and when the same will have
become due and payable or (B) all outstanding Notes (except lost, stolen or
destroyed Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation or (C) (x) the Notes not previously delivered to the
Trustee for cancellation will have become due and payable or are by their terms
to become due and payable within one year or are to be called for redemption
within one year under arrangements satisfactory to the Trustee upon delivery of
notice and (y) the Company will have irrevocably deposited with the Trustee, as
trust funds, cash, in an amount sufficient to pay principal of and interest on
the outstanding Notes, to maturity or redemption, as the case may be. Such
trust may only be established if such deposit will not result in a breach or
violation of, or constitute a default under, any agreement
-44-
<PAGE> 48
or instrument pursuant to which the Company is a party or by which it is bound
and the Company has delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions related to such defeasance
have been complied with.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the Holders of not less than a majority in
principal amount of the Notes at the time outstanding, to modify the Indenture
or any supplemental indenture or the rights of the Holders of Notes, except
that no such modification shall (i) extend the fixed maturity of any Note,
reduce the rate or extend the time of payment of interest thereon, reduce the
principal amount thereof or premium, if any, thereon, reduce any amount payable
upon redemption thereof, change the obligation of the Company to repurchase
Notes upon the happening of a Change of Control, impair or affect the right of
a Holder to institute suit for the payment thereof, change the currency in
which the Notes are payable, modify the subordination provisions of the
Indenture in a manner adverse to the Holders of Notes or impair the right to
convert the Notes into Common Stock subject to the terms set forth in the
Indenture, without the consent of the Holder of each Note so affected, or (ii)
reduce the aforesaid percentage of Notes, without the consent of the Holders of
all of the Notes then outstanding.
The Indenture also provides that the Company and the Trustee may amend
the Indenture without the consent of any holder of the Notes under certain
circumstances, (i) to cure any ambiguity, omission, defect or inconsistency,
(ii) to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, (iii) to provide for
uncertificated Notes in addition to or in place of certificated Notes or vice
versa, (iv) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the Company,
(v) to comply with any requirements of the Commission in connection with
qualifying the Indenture under the Trust Indenture Act, or (vi) to make any
change that does not adversely affect the rights of any Holder of the Notes.
GOVERNING LAW
The Indenture will provide that the Notes will be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to applicable principles of conflicts of law.
CONCERNING THE TRUSTEE
State Street Bank and Trust Company, the Trustee under the Indenture,
has been appointed by the Company as the paying agent, conversion agent,
registrar and custodian with regard to the Notes. The Trustee and/or its
affiliates may in the future provide banking and other services to the Company
in the ordinary course of their respective businesses.
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<PAGE> 49
CERTAIN TAX CONSIDERATIONS
GENERAL
THE FOLLOWING IS A DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX AND
ESTATE TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES
AS OF THE DATE HEREOF. FOR PURPOSES OF THIS DISCUSSION, A "U.S. HOLDER" IS A
HOLDER THAT IS AN INDIVIDUAL WHO IS A CITIZEN OR RESIDENT OF THE UNITED STATES,
A CORPORATION OR A PARTNERSHIP THAT IS ORGANIZED UNDER THE LAWS OF THE UNITED
STATES OR ANY STATE THEREOF OR AN ESTATE OR TRUST WHOSE INCOME IS INCLUDIBLE IN
GROSS INCOME REGARDLESS OF ITS SOURCE. A "NON-U.S. HOLDER" IS A HOLDER THAT IS
NOT A U.S. HOLDER. THIS SUMMARY APPLIES ONLY TO NOTES AND COMMON STOCK HELD AS
CAPITAL ASSETS WITHIN THE MEANING OF SECTION 1221 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED (THE "CODE"). IT DOES NOT DISCUSS ALL OF THE TAX
CONSEQUENCES THAT MAY BE RELEVANT TO A HOLDER IN LIGHT OF ITS PARTICULAR
CIRCUMSTANCES OR TO HOLDERS SUBJECT TO SPECIAL RULES, SUCH AS FORMER CITIZENS
OR LONG-TERM RESIDENTS OF THE UNITED STATES, DEALERS IN SECURITIES OR FOREIGN
CURRENCIES, FINANCIAL INSTITUTIONS, LIFE INSURANCE COMPANIES, OR REGULATED
INVESTMENT COMPANIES, OR TO HOLDERS WHOSE FUNCTIONAL CURRENCY IS NOT THE UNITED
STATES DOLLAR OR WHO HOLD THE NOTES OR THE COMMON STOCK AS PART OF A SYNTHETIC
SECURITY, CONVERSION TRANSACTION, OR CERTAIN "STRADDLE" OR HEDGING
TRANSACTIONS.
THE U.S. FEDERAL INCOME TAX AND ESTATE TAX CONSIDERATIONS SET FORTH
BELOW ARE BASED UPON THE CODE AND REGULATIONS AND RULINGS AND JUDICIAL
DECISIONS THEREUNDER AS OF THE DATE HEREOF. SUCH AUTHORITIES MAY BE REPEALED,
REVOKED OR MODIFIED, POSSIBLY WITH RETROACTIVE EFFECT, SO AS TO RESULT IN U.S.
FEDERAL INCOME TAX CONSEQUENCES DIFFERENT FROM THOSE PRESENTED BELOW.
U.S. HOLDERS
Interest. Interest on a Note should be taxable to a U.S. Holder as
ordinary interest income in accordance with the U.S. Holder's method of
accounting for U.S. federal income tax purposes.
Sale, Exchange or Retirement of a Note. A U.S. Holder should
recognize gain or loss, if any, on the sale, retirement or other taxable
disposition of a Note in an amount equal to the difference, if any, between the
U.S. Holder's adjusted tax basis in the Note and the amount received therefor
(other than amounts attributable to accrued and unpaid interest on the Notes,
which should be treated as interest for U.S. federal income tax purposes).
Subject to the market discount rules noted under "U.S. Holders -- Market
Discount and Bond Premium" below, gain or loss, if any, recognized on the sale,
retirement or other taxable disposition of a Note generally should be long-term
capital gain or loss if the Note was held for more than one year as of the date
of disposition.
Market Discount and Bond Premium. If a U.S. Holder acquires a Note
subsequent to its original issuance and the Note's stated redemption price at
maturity exceeds the U.S. Holder's initial tax basis in the Note by more than a
de minimis amount, the U.S. Holder should generally be treated as having
acquired the Note at a "market discount" equal to such excess. In addition, if
a U.S. Holder's initial tax basis in a Note exceeds the stated redemption price
at maturity of the Note, the U.S. Holder should generally be treated as having
acquired the Note with "bond premium" in an amount equal to such excess. U.S.
Holders should consult their tax advisers regarding the existence, if any, and
tax consequences of market discount and bond premium.
Conversion of the Notes. A U.S. Holder should not recognize gain or
loss upon conversion of the Notes into Common Stock. The U.S. Holder's tax
basis in shares of Common Stock received upon conversion should be the same as
the U.S. Holder's adjusted tax basis of the Notes converted (reduced by the
portion of such basis allocable to any fractional Common Stock interest for
which the U.S. Holder receives a cash payment from the Company). The holding
period of the Common Stock received in the conversion should include the
holding period of the Notes that were converted. A U.S. Holder generally should
recognize gain (or loss) upon a conversion to the extent that any cash paid in
lieu of a fractional share of Common Stock exceeds (or is less than) its tax
basis allocable to such fractional share.
Dividends. Dividends paid on Common Stock received upon conversion
will be taxable to a U.S. Holder as ordinary income, to the extent paid out of
the Company's current or accumulated earnings and profits. Subject to certain
restrictions, dividends received by a corporate U.S. Holder generally should
be eligible for the 70% dividends received deduction.
-46-
<PAGE> 50
Sale of Common Stock. A U.S. Holder of Common Stock received on
conversion who sells or otherwise disposes of such stock in a taxable
transaction will recognize capital gain or loss equal to the difference between
the cash and the fair market value of any property received on such sale and
the U.S. Holder's tax basis in such stock. Such gain or loss will be long term
gain or loss if the holding period for such Common Stock was more than one
year.
Adjustments to Conversion Price. Pursuant to Treasury Regulations
promulgated under Section 305 of the Code, a U.S. Holder of a Note should be
treated as having received a constructive distribution from the Company upon an
adjustment in the conversion price of the Notes if (i) as a result of such
adjustment, the proportionate interest of such U.S. Holder in the assets or
earnings and profits of the Company is increased and (ii) the adjustment is not
made pursuant to a bona fide, reasonable, anti-dilution formula. An adjustment
in the conversion price would not be considered made pursuant to such a formula
if the adjustment were made to compensate for certain taxable distributions
with respect to the Common Stock into which the Notes are convertible. Thus,
under certain circumstances, a decrease in the conversion price of the Notes
may be taxable to a U.S. Holder of a Note as a dividend to the extent of the
current or accumulated earnings and profits of the Company. In addition, the
failure to adjust fully the conversion price of the Notes to reflect
distributions of stock dividends with respect to the Common Stock may result in
a taxable dividend to the U.S. Holders of the Common Stock.
Backup Withholding and Information Reporting. A U.S. Holder of a
Note, or of Common Stock issued upon conversion of a Note, may be subject to
information reporting and possible backup withholding. If applicable, backup
withholding would apply at a rate of 31% with respect to dividends or interest
on, or the proceeds of a sale, exchange, redemption, retirement, or other
disposition of, such Note or Common Stock, as the case may be, unless (i) such
U.S. Holder is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (ii) provides a taxpayer
identification number, certifies that the U.S. Holder is not subject to backup
withholding, and otherwise complies with applicable backup withholding rules.
NON-U.S. HOLDERS
The Notes. The payment of interest on a Note should generally not be
subject to U.S. federal income tax, if (1) the interest is not effectively
connected with the conduct of a trade or business within the United States, (2)
the Non-U.S. Holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (3) the Non-U.S. Holder is not a controlled foreign corporation that is
related to the Company actually or constructively through stock ownership and
(4) either (i) the beneficial owner of the Note certifies to the Company or its
agent, under penalties of perjury, that it is not a U.S. Holder and provides
its name and address on U.S. Treasury Form W-8 (or on a suitable substitute
form) or (ii) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "financial institution") and holds the Note certifies
under penalties of perjury that such a Form W-8 (or suitable substitute form)
has been received from the beneficial owner by it or by a financial institution
between it and the beneficial owner and furnishes the payer with a copy
thereof.
A Non-U.S. Holder generally should not be subject to U.S. federal
income tax on any gain or income realized in connection with (1) the conversion
of a Note into Common Stock or (2) the sale, exchange, retirement, or other
disposition of a Note unless (i) the Non-U.S. Holder is an individual who is
present in the United States for 183 days or more in the taxable year of the
disposition, and certain other conditions are met, or (ii) the gain from the
disposition is effectively connected to the conduct of a trade or business by
the Non-U.S. Holder in the United States.
A Note held directly by an individual who, at the time of death, is
not a citizen or resident of the United States should not be includible in such
individual's gross estate for U.S. estate tax purposes as a result of such
individual's death if the individual does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote and, at the time of the individual's death, if
payments with respect to such Note would not have been effectively connected
with the conduct by such individual of a trade or business in the United
States. Even if the Note was includible in the gross estate under the foregoing
rules, the Note may be excluded under the provisions of an applicable estate
tax treaty.
The Common Stock. In general, dividends (including any amounts that
are treated as dividends as described above) paid to a Non-U.S. Holder of the
Common Stock should be subject to U.S. federal income tax
-47-
<PAGE> 51
withholding at a 30% rate unless such rate is reduced by an applicable income
tax treaty. Dividends that are effectively connected with such Non-U.S.
Holder's conduct of a trade or business in the United States or, if a tax
treaty applies, attributable to a permanent establishment, or, in the case of
an individual, a "fixed base," in the United States ("U.S. trade or business
income") are generally subject to U.S. federal income tax at regular rates, but
are not generally subject to the 30% withholding tax if the Non-U.S. Holder
files the appropriate form with the payer. Any U.S. trade or business income
received by a Non-U.S. Holder that is a corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as may be applicable under an income tax treaty.
Dividends paid to an address in a foreign country are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding tax discussed above and, under the current
interpretation of Treasury Regulations, for purposes of determining the
applicability of a tax treaty rate. Under proposed Treasury Regulations not
currently in effect, however, a Non-U.S. Holder of the Common Stock who wishes
to claim the benefit of an applicable tax treaty rate would be required to
satisfy applicable certification requirements. It is not certain whether, or in
what form, the proposed Treasury Regulations will be adopted as final
regulations.
A Non-U.S. Holder of the Common Stock that is eligible for a reduced
rate of U.S. federal withholding tax pursuant to an income tax treaty may
obtain a refund of any excess amounts withheld by filing an appropriate claim
for refund with the IRS.
A Non-U.S. Holder of the Common Stock should generally not be subject
to U.S. income or withholding tax on gain realized on the sale or exchange of
such stock, unless the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more in the taxable year of the disposition, and
certain other conditions are met, or (ii) the gain from the disposition is
effectively connected to the conduct of a trade or business by the Non-U.S.
Holder in the United States.
Common Stock held directly by an individual who at the time of death
is not a citizen or resident of the United States will generally be includible
in the gross estate of such individual for U.S. estate tax purposes, subject to
contrary provisions of an applicable estate tax treaty.
Backup Withholding and Information Reporting. Payments on the Notes
made by the Company or any paying agent of the Company and payments of
dividends on the Common Stock to certain noncorporate Non-U.S. Holders
generally should be subject to information reporting and possibly to "backup
withholding" at a rate of 31%. Information reporting and backup withholding do
not apply, however, to payments made outside the United States by the Company
or a paying agent on a Note or to payments of dividends on the Common Stock if
the certification described under "Non-U.S. Holders -- The Notes" above is
received, provided in each case that the payer does not have actual knowledge
that the Holder is a U.S. Holder.
Payment of proceeds from a sale of a Note or the Common Stock to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the Non-U.S. Holder certifies as to its non U.S.
status or otherwise establishes an exemption from information reporting and
backup withholding. Payment outside the United States of the proceeds of the
sale of a Note or the Common Stock to or through a foreign office of a "broker"
(as defined in applicable U.S. Treasury Regulations) should not be subject to
information reporting or backup withholding, except that if the broker is a
U.S. person, a controlled foreign corporation for U.S. federal income tax
purposes or a foreign person 50% or more of whose gross income is from a U.S.
trade or business, information reporting should apply to such payment unless
the broker has documentary evidence in its records that the beneficial owner is
not a U.S. Holder and certain other conditions are not met or the beneficial
owner otherwise establishes an exemption.
THE U.S. FEDERAL INCOME TAX AND ESTATE TAX DISCUSSION SET FORTH ABOVE
IS INTENDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A
PARTICULAR HOLDER'S SITUATION. PERSONS CONSIDERING A PURCHASE OF THE NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES
OF PURCHASING, OWNING AND DISPOSING OF THE NOTES AND THE COMMON STOCK,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN LAWS AND OTHER TAX
LAWS AND THE POSSIBLE EFFECTS OF CHANGES (POSSIBLY INCLUDING RETROACTIVE,
CHANGES) IN U.S. FEDERAL AND OTHER TAX LAWS.
-48-
<PAGE> 52
[THIS PAGE BLANK]
-49-
<PAGE> 53
SELLING SECURITYHOLDERS
The Notes offered hereby were originally issued by the Company and
sold by the Initial Purchasers, in a transaction exempt from the registration
requirements of the Securities Act, to persons reasonably believed by such
initial purchaser to be "qualified institutional buyers" (as defined in Rule
144A under the Securities Act), or other institutional "accredited investors"
(as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act or in
compliance with the provisions of Regulation S under the Securities Act. The
Selling Securityholders (which term includes their transferees, pledgees,
donees or their successors) may from time to time offer and sell pursuant to
this Prospectus any or all of the Notes and Common Stock issued upon conversion
of the Notes.
The following table sets forth information with respect to the Selling
Securityholders and the respective principal amounts of Notes beneficially
owned by each Selling Securityholder that may be offered pursuant to this
Prospectus. Such information has been obtained from the Selling
Securityholders. None of the Selling Securityholders has, or within the past
three years has had, any position, office or other material relationship with
the Company or any of its predecessors or affiliates, except as noted below.
Because the Selling Securityholders may offer all or some portion of the Notes
or the Common Stock issuable upon conversion thereof pursuant to this
Prospectus, no estimate can be given as to the amount of the Notes or the
Common Stock issuable upon conversion thereof that will be held by the Selling
Holders upon termination of any such sales. In addition, the Selling
Securityholders identified below may have sold, transferred or otherwise
disposed of all or a portion of their Notes since the date on which they
provided the information regarding their Notes in transactions exempt from the
registration requirements of the Securities Act.
From time to time, Bear, Stearns & Co. has provided, and it continues
to provide, investment banking services to the Company, for which it received
or will receive customer fees. None of the other Selling Securityholders has
had any position, office or other materials relationship with the Company or
its affiliates within the last three years.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
PRINCIPAL AMOUNT OF NOTES STOCK BENEFICIALLY OWNED
BENEFICIALLY OWNED AND OFFERED
SELLING SECURITYHOLDER AND OFFERED HEREBY HEREBY (1)(2)
------------------------------------------------------------ --------------------------- ---------------------------
<S> <C> <C>
Dreyfus Growth & Income Fund . . . . . . . . . . . . . . . 12,000,000 232,288
BZW Securities Limited . . . . . . . . . . . . . . . . . . 10,500,000 203,252
General Motors Employees Domestic Group Trust . . . . . . . 9,750,000 188,734
The TCW Group, Inc. . . . . . . . . . . . . . . . . . . . . 7,775,000 150,503
General Motors Retirement Program for Salaried
Employees/General Motors Hourly Rate Employees Pension Plan 6,000,000 116,144
State of Oregon/Oregon Equity Fund . . . . . . . . . . . . 5,500,000 106,465
Societe Generale Securities Corporation . . . . . . . . . . 5,250,000 101,626
JP Morgan Securities, Inc. . . . . . . . . . . . . . . . . 5,095,000 98,625
State of Oregon/SAIF Corporation . . . . . . . . . . . . . 4,000,000 77,429
Robertson Stephens & C. L.L.P. . . . . . . . . . . . . . . 3,935,000 76,171
Pacific Horizon Capital Income Fund . . . . . . . . . . . . 3,275,000 63,395
Transamerica Occidental Life Insurance Company . . . . . . 3,000,000 58,072
Equitable Life Assurance Separate Account Convertibles . . 2,875,000 55,652
Delaware State Employees Retirement Fund . . . . . . . . . 2,700,000 52,264
The Chase Manhattan Bank ttee for IBM Corporation
Retirement Plan Trust Dtd 12/18/45 . . . . . . . . . . . . 2,165,000 41,908
Pension Reserves Investment Management Board . . . . . . . 1,615,000 31,262
Aim Balanced Fund . . . . . . . . . . . . . . . . . . . . . 1,465,000 28,358
Bankers Trust ttee for Chrysler Corporation Employee #1 1,270,000 24,583
Pension Plan . . . . . . . . . . . . . . . . . . . . . . .
Employers Reinsurance Corporation . . . . . . . . . . . . . 1,250,000 24,196
Hudson River Trust Balanced Account . . . . . . . . . . . . 1,150,000 22,260
</TABLE>
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<PAGE> 54
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
PRINCIPAL AMOUNT OF NOTES STOCK BENEFICIALLY OWNED
BENEFICIALLY OWNED AND OFFERED
SELLING SECURITYHOLDER AND OFFERED HEREBY HEREBY (1)(2)
------------------------------------------------------------ --------------------------- ---------------------------
<S> <C> <C>
Memphis Light, Water, Gas Retirement Fund . . . . . . . . . $ 1,140,000 22,067
State Street Bank Custodian for GE Pension Plan . . . . . . 1,065,000 20,615
State of Delaware Retirement . . . . . . . . . . . . . . . 1,050,000 20,325
Arkansas PERS . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 19,357
Ariston Capital Management Corporation(3) . . . . . . . . . 1,000,000 19,357
Motors Insurance Corporation . . . . . . . . . . . . . . . 1,000,000 19,357
Hudson River Trust Growth Investors . . . . . . . . . . . . 920,000 17,808
American Investors Life Insurance Co. . . . . . . . . . . . 875,000 16,937
Columbia/HCA Money Purchase Plan . . . . . . . . . . . . . 860,000 16,647
Hudson River Trust Growth & Income Fund . . . . . . . . . . 855,000 16,550
Declaration Trust for the Defined Benefit Plan of ICI 820,000 15,873
American Holdings, Inc. . . . . . . . . . . . . . . . . . .
Ingelsa Ltd. . . . . . . . . . . . . . . . . . . . . . . . 750,000 14,518
Thermo Electron Balanced Investment Fund . . . . . . . . . 725,000 14,034
Bear Stearns Securities Corporation . . . . . . . . . . . . 675,000 13,066
The J.W. McConnell Family Foundation . . . . . . . . . . . 600,000 11,614
Declaration of Trust for Defined Benefit Plan of ZENECA 580,000 11,227
Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . .
Mega Life & Health Insurance . . . . . . . . . . . . . . . 500,000 9,678
Smith Barney Convertible Securities Portfolio . . . . . . . 500,000 9,678
ICI American Holdings Pension Trust . . . . . . . . . . . . 425,000 8,226
Zeneca Holdings Pension Trust . . . . . . . . . . . . . . . 425,000 8,226
Starvest Discretionary . . . . . . . . . . . . . . . . . . 400,000 7,742
The Hotel Union & Industry of Hawaii . . . . . . . . . . . 375,000 7,259
The Frist Foundation . . . . . . . . . . . . . . . . . . . 295,000 5,710
Southern Farm Bureau Life Insurance Co. . . . . . . . . . . 250,000 4,839
Bank of America Convertible Securities Fund . . . . . . . . 250,000 4,839
Hillside Capital Incorporated Corporate Account . . . . . . 250,000 4,839
First Church of Christ Scientist - Endowment . . . . . . . 250,000 4,839
Christian Science Trustees for Gifts & Endowments . . . . . 225,000 4,355
Salomon Brothers Total Return Fund . . . . . . . . . . . . 200,000 3,871
Equitable Life Assurance Separate Account Balanced . . . . 195,000 3,774
NALCO Chemical Co. Retirement Trust . . . . . . . . . . . . 165,000 3,193
Kapiolani Medical Center for Women and Children . . . . . . 150,000 2,903
Employee Benefit Convertible Fund . . . . . . . . . . . . . 125,000 2,419
David Lipscomb University . . . . . . . . . . . . . . . . . 105,000 2,032
The Hotel Industry - ILWU Pension Trust . . . . . . . . . . 130,000 2,516
Island Insurance Convertible Account . . . . . . . . . . . 140,000 2,710
Summer Hill Global Partners, L.P. . . . . . . . . . . . . . 100,000 1,935
Retirement Plan for Pilots of Hawaiian Airlines . . . . . . 100,000 1,935
Hawaii Airlines Employees Pension Plan - IAM . . . . . . . 70,000 1,355
Pacific Innovation Trust Capital Income Fund . . . . . . . 55,000 1,064
Hawaiian Airlines Pension Plan for Salaried Employees . . . 20,000 387
Any other holder of Notes or future transferrees from any
such holder(4)(5) . . . . . . . . . . . . . . . . . . . . . 119,815,000 2,319,324
------------ ---------
Total: $230,000,000 4,452,187
============ =========
</TABLE>
(1) Includes shares of Common Stock issuable upon conversion of the Notes.
(2) Assumes a conversion price of $51.66 per share, and a cash payment in
lieu of any fractional share interest; such conversion price is
subject to adjustment as described under "Description of Notes --
Conversion." Accordingly the number of shares of Common Stock
issuable upon
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<PAGE> 55
conversion of the Notes may increase or decrease from time to time.
Under the terms of Indenture, fractional shares will not be issued
upon conversion of the Notes; cash will be paid in lieu of fractional
shares, if any.
(3) Shares indicated as owned by Ariston Capital Management Corporation
are owned by various private investment accounts for which Ariston
Capital Management Corporation serves as trustee or managing agent.
(4) Information concerning other Selling Securityholders will be set forth
in Prospectus Supplements from time to time, if required.
(5) Assumes that any other holders of Notes or any future transferee from
any such holder does not beneficially own any Common Stock other than
the Common Stock issuable upon conversion of the Notes at the initial
conversion rate.
The Selling Securityholders identified above may have sold,
transferred or otherwise disposed of, in transactions exempt from the
registration requirements of the Securities Act, all or a portion of their
Notes since the date on which the information in the preceding table is
presented. Information concerning the Selling Securityholders may change from
time to time and any such changed information will be set forth in supplements
to this Prospectus if and when necessary. Because the Selling Securityholders
may offer all or some of the Notes that they hold and/or Conversion Shares
pursuant to the offering contemplated by this Prospectus, no estimate can be
given as to the amount of the Notes or Conversion Shares that will be held by
the Selling Securityholders upon the termination of this offering. See "Plan
of Distribution."
Information concerning the Selling Securityholders may change from
time to time and any such changed information will be set forth in supplements
to this Prospectus if and when necessary. In addition, the per share
conversion price, and therefore the number of shares issuable upon conversion
of the Notes, is subject to adjustment under certain circumstances.
Accordingly, the aggregate principal amount of Notes and the number of shares
of Common Stock issuable upon conversion thereof offered hereby may increase or
decrease.
-52-
<PAGE> 56
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds of the sale of the
Securities offered hereby. The Securities may be sold from time to time to
purchasers directly by the Selling Securityholders. Alternatively, the Selling
Securityholders may from time to time offer the Securities through brokers,
dealers or agents who may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Securities for whom they may act as agent. The Selling
Securityholders and any such brokers, dealers or agents who participate in the
distribution of the Securities may be deemed to be "underwriters," and any
profits on the sale of the Securities by them and any discounts, commissions or
concessions received by any such brokers, dealers or agents might be deemed to
be underwriting discounts and commissions under the Securities Act. To the
extent the Selling Securityholders may be deemed to be underwriters, the
Selling Securityholders may be subject to certain statutory liabilities of,
including, but not limited to, Sections 11, 12 and 17 of the Securities Act and
Rule 10b-5 under the Exchange Act.
The Securities offered hereby may be sold from time to time in one or
more transactions at fixed prices, at prevailing market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
The Securities may be sold by one or more of the following methods, without
limitation: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the Securities as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; (d) an exchange
distribution in accordance with the rules of such exchange; (e) face-to-face
transactions between sellers and purchasers without a broker-dealer; (f)
through the writing of options; and (g) other. At any time a particular offer
of the Securities is made, a revised Prospectus or Prospectus Supplement, if
required, will be distributed which will set forth the aggregate amount and
type of Securities being offered and the terms of the offering, including the
name or names of any underwriters, dealers or agents, any discounts,
commissions, concessions and other items constituting compensation from the
Selling Securityholders and any discounts, commissions or concessions allowed
or reallowed or paid to dealers. Such Prospectus Supplement and, if necessary,
a post-effective amendment to the Registration Statement of which this
Prospectus is a part, will be filed with the Commission to reflect the
disclosure of additional information with respect to the distribution of the
Securities. In addition, the Securities covered by this Prospectus may be sold
in private transactions or under Rule 144 rather than pursuant to this
Prospectus.
To the best knowledge of the Company, there are currently no plans,
arrangement or understandings between any Selling Securityholders and any
broker, dealer, agent or underwriter regarding the sale of the Securities by
the Selling Securityholders. There is no assurance that any Selling
Securityholder will sell any or all of the Securities offered by it hereunder
or that any such Selling Securityholder will not transfer, devise or gift such
Securities by other means not described herein.
The Selling Securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M which may limit the timing of purchases and sales of any of the Securities by
the Selling Securityholders and any other such person. Furthermore, Regulation
M of the Exchange Act may restrict the ability of any person engaged in the
distribution of the Securities to engage in market-making activities with
respect to the particular Securities being distributed for a period of up to
five business days prior to the commencement of such distribution. All of the
foregoing may affect the marketability of the Securities and the ability of any
person or entity to engage in market-making activities with respect to the
Securities.
Pursuant to the Registration Rights Agreement entered into in
connection with the offer and sale of the Notes by the Company, each of the
Company and the Selling Securityholders will be indemnified by the other
against certain liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith.
-53-
<PAGE> 57
The Company has agreed to pay substantially all of the expenses
incidental to the registration, offering and sale of the Securities to the
public other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.
LEGAL MATTERS
The validity of the Notes and the Common Stock being offered hereby
will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements as of March 31, 1997 and 1996 and
for each of the three fiscal years in the period ended March 31, 1997 included
in this Registration Statement have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
-54-
<PAGE> 58
ADAPTEC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements:
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the three years ended March 31, 1997 . . . . . . . . . F-4
Consolidated Statements of Changes in Shareholders' Equity for the three years ended
March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the three years ended March 31, 1997 . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Adaptec, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of Adaptec, Inc. and its subsidiaries at March 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
San Jose, California
April 25, 1997
F-2
<PAGE> 60
ADAPTEC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS,EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF MARCH 31
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 318,075 $ 91,211
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . 230,366 204,283
Accounts receivable, net of allowance for doubtful accounts of
$5,098 in 1997 and $4,220 in 1996 . . . . . . . . . . . . . . . . 132,571 89,487
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,184 55,028
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . 83,752 25,271
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . 817,948 465,280
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 141,599 95,004
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,947 86,202
----------- -----------
$ 1,043,494 $ 646,486
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt . . . . . . . . . . . . . . . . . $ 3,400 $ 3,400
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 46,200
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 52,400 23,974
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 68,519 56,717
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . 124,319 130,291
----------- -----------
Long-term debt, net of current portion . . . . . . . . . . . . . . . 850 4,250
----------- -----------
Convertible subordinated notes 230,000 --
----------- -----------
Commitments (Note 7)
Shareholders' equity:
Preferred stock; $.001 par value
Authorized shares, 1,000
Outstanding shares, none . . . . . . . . . . . . . . . . . . . . -- --
Common stock; $.001 par value
Authorized shares, 400,000
Outstanding shares, 111,540 in 1997 and 106,040 in 1996 . . . . . 251,834 182,932
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 436,491 329,013
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . 688,325 511,945
----------- -----------
$ 1,043,494 $ 646,486
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 61
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<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-4
<PAGE> 62
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- ---------- ---------- ----------
<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-5
<PAGE> 63
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<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-6
<PAGE> 64
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries after elimination
of intercompany transactions and balances. Certain prior year amounts have been
reclassified to conform to the current year presentation. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. In November 1996, the Company effected a
two-for-one split of its common stock. The accompanying consolidated financial
statements have been retroactively restated to reflect this stock split.
Foreign Currency Translation. The Company uses the U.S. dollar as its
functional currency. Foreign currency transaction gains and losses are
included in income as they occur. The effect of foreign currency exchange rate
fluctuations on cash and cash equivalents denominated in foreign currencies was
not material.
Fair Value of Financial Instruments. The Company measures its
financial assets and liabilities in accordance with generally accepted
accounting principles. The estimated fair value of the Company's convertible
subordinated notes was $268 million at March 31, 1997. The estimated fair
value of all other debt and financial instruments at March 31, 1997 and 1996
was not materially different from the values presented in the consolidated
balance sheets.
Cash and Cash Equivalents. Cash and cash equivalents consist of funds
in checking accounts, money market funds, and marketable securities with
original maturities of three months or less.
Marketable Securities. At March 31, 1997, the Company's marketable
securities are classified as available for sale and are reported at fair market
value which approximates cost. Marketable securities with maturities after one
through three years totaled $147 million with all remaining securities maturing
less than one year. Realized gains and losses are based on the book value of
the specific securities sold and have been immaterial.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and cash equivalents, marketable securites, and trade
accounts receivable. The Company places its marketable securities primarily in
municipal securities. The Company, by policy, limits the amount of credit
exposure through diversification and investment in highly rated securities.
Sales to customers are primarily denominated in U.S. dollars. As a result, the
Company believes its foreign currency risk is minimal.
The Company sells its products to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for
uncollectable accounts receivable based upon the expected collectibility of all
accounts receivable. There were no significant amounts charged to this
allowance during the past three years.
Product Development Costs. The Company's policy is to capitalize
internal software development costs incurred after technological feasibility
has been demonstrated. Such internal software development costs have not been
capitalized to date since they were immaterial.
Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market.
F-7
<PAGE> 65
Property and Equipment. Property and equipment are stated at cost and
depreciated or amortized using the straight-line method over the estimated
useful lives of the assets. The Company capitalizes substantially all costs
related to the purchase and implementation of software projects used for
internal business operations. Capitalized internal-use software costs
primarily include license fees, consulting fees, and any associated direct
labor and are amortized over the estimated useful life of the project,
typically a three to five year period. The Company's property and equipment as
of March 31, 1997 and 1996 included $22 million and $5 million, respectively,
of capitalized software costs, net of amortization. Software amortization
totaling $3 million, $1 million, and $1 million was included in the Company's
consolidated statements of operations during 1997, 1996, and 1995,
respectively.
Other Assets. The Company's other assets as of March 31, 1997 and 1996
included $23 million and $6 million, respectively, of goodwill, net of
amortization. Goodwill amortization totaling $8 million and $2 million was
included in the Company's consolidated statements of operations during 1997 and
1996, respectively. The Company assesses impairment of other assets including
goodwill based on the future estimated cash flows of the acquired technology.
Revenue Recognition. The Company recognizes revenue generally at the
time of shipment or upon satisfaction of contractual obligations. The Company
records provisions for estimated returns at the time of sale.
Stock-Based Compensation. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company's policy is to grant options with an exercise price equal to the
quoted market price of the Company's stock on the grant date. Accordingly, no
compensation cost has been recognized in the Company's consolidated statements
of operations. The Company has provided additional pro forma disclosures as
required under Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation."
Net Income Per Share. Net income per share is computed under the
treasury stock method using the weighted average number of common and common
equivalent shares from dilutive options outstanding during the respective
periods.
NOTE 2: SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
INVENTORIES
(IN THOUSANDS)
1997 1996
------- -------
<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
======= =======
PROPERTY AND EQUIPMENT
(IN THOUSANDS)
LIFE 1997 1996
------------- -------- ---------
<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>
F-8
<PAGE> 66
<TABLE>
<CAPTION>
ACCRUED LIABILITIES
(IN THOUSANDS)
1997 1996
-------- --------
<S> <C> <C>
Accrued compensation and related taxes . . . . . . . . $ 25,514 $ 22,440
Acquisition . . . . . . . . . . . . . . . . . . . . . 12,751 2,597
Sales and marketing related . . . . . . . . . . . . . . 12,464 7,443
Tax related . . . . . . . . . . . . . . . . . . . . . . 8,038 16,218
Other . . . . . . . . . . . . . . . . . . . . . . . . . 9,752 8,019
-------- --------
$ 68,519 $ 56,717
======== ========
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
(IN THOUSANDS)
1997 1996 1995
---------- --------- -------
<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.
NOTE 4: LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES
The Company entered into a $17 million term loan agreement in June
1992 bearing interest at 7.65%, with principal and interest payable in
quarterly installments of $850,000. All outstanding principal and accrued but
unpaid interest is due and payable in June 1998. Under the arrangement, the
Company is restricted from paying dividends in excess of 25% of the prior
fiscal year's net income, and the Company is required to maintain certain
financial ratios among other restrictive covenants. The Company was in
compliance with all such covenants as of March 31, 1997.
In February 1997, the Company issued $230 million of 4 3/4%
convertible subordinated notes due on February 1, 2004. The Company received
net proceeds of $224 million. The notes provide for semi-annual interest
payments each February 1 and August 1, commencing on August 1, 1997. The
holders of the notes will be entitled at any time on or after May 5, 1997
through February 1, 2004 to convert the notes into common stock at a conversion
price of $51.66 per share. The notes are redeemable, in whole or in part, at
the option of the Company, at any time on or after February 3, 2000 at
declining premiums to par. Debt issuance costs are being amortized over the
term of the notes.
NOTE 5: ACQUISITIONS
During fiscal 1997, the Company acquired complementary businesses and
technologies consisting of Western Digital's Connectivity Solutions Group, CD-R
software technology from Corel, Inc., Data Kinesis, Inc., Sigmax Technology,
Inc., Toast CD-R technology, and certain assets from Skipstone, Inc. for $109
million and $15 million in cash and stock, respectively. These companies
design and develop silicon solutions for the SCSI disk drive market, CD
creator for the CD-R software market, software for improving system
performance in file
F-9
<PAGE> 67
management and RAID applications, CD-ROM controllers for ATAPI CD-ROM drivers,
CD-R technology for Macintosh platforms, and 1394/Firewire products. During
fiscal 1996, the Company acquired all of the outstanding capital stock of
Future Domain Corporation, Power I/O, Inc., Trillium Research, Inc., and Incat
Systems Software USA, Inc. for $35 million and $17 million in cash and stock,
respectively.
The Company accounted for these acquisitions using the purchase method
of accounting, and excluding the aggregate $90 million and $52 million
write-offs of acquired in-process technology from these acquisitions for fiscal
1997 and 1996, respectively, the aggregate impact on the Company's consolidated
statements of operations from the acquisition date was not material. The
accounting for the write-off changed in fiscal 1997 due to an interpretation of
SFAS 109 that the Company adopted upon its issuance. In fiscal 1996, the
Company was allowed to gross- up the acquired in-process technology and record
a dollar-for-dollar credit through its tax provision.
The allocation of the Company's aggregate purchase price to the
tangible and identifiable intangible assets acquired and liabilities assumed
was based primarily on independent appraisals and estimates of fair value and
is summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
-----------------------
1997 1996
---------- ----------
<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>
The tangible assets acquired were primarily comprised of inventory and
fixed assets. Acquired in-process technology was written off in the periods in
which the acquisitions were completed, and the goodwill is being amortized over
respective benefit periods ranging from two to five years.
On August 12, 1996, the Company completed its acquisition of Cogent
Data Technologies, Inc. (Cogent). The Company acquired all of the outstanding
capital stock of Cogent in exchange for 2.6 million shares of its common stock.
Additionally, the Company incurred $1.7 million in professional fees related to
this acquisition, which have been included in "write-off of acquired in-process
technology and other." The Company has recorded this acquisition using the
pooling of interests method of accounting. Cogent's historical operations, net
assets, and cash flows were not material to the Company's consolidated
financial statements and, therefore, have not been reflected in the Company's
consolidated financial results prior to the acquisition. Beginning at the date
of acquisition, the book value of the acquired assets and assumed liabilities
as well as the results of Cogent's operations and cash flows, all of which are
not material to the Company, have been combined with those of the Company.
NOTE 6: STOCK PLANS
1986 EMPLOYEE STOCK PURCHASE PLAN. The Company has authorized
5,600,000 shares of common stock for issuance under the 1986 Employee Stock
Purchase Plan (1986 Plan). Qualified employees may elect to have a certain
percentage (not to exceed 10%) of their salary withheld pursuant to the 1986
Plan. The salary withheld is then used to purchase shares of the Company's
common stock at a price equal to 85% of the market value of the stock at the
beginning or ending of a three-month offering period, whichever is lower.
Under this Plan, 285,336 and 278,550 shares were issued during fiscal 1997 and
1996 respectively, representing approximately $6.9 million and $4.6 million in
employee contributions.
F-10
<PAGE> 68
1990 STOCK PLAN. The Company's 1990 Stock Plan allows the Board of
Directors to grant to employees, officers, and consultants options to purchase
common stock or other stock rights at exercise prices not less than 50% of the
fair market value of the underlying common stock on the date of grant. The
expiration of options or other stock rights is not to exceed ten years after
the date of grant. To date, the Company has issued substantially all incentive
and non-statutory stock options under this Plan at exercise prices of 100% of
fair market value of the underlying common stock on the respective dates of
grant. Generally, options vest and become exercisable over a four year period
and in some cases over a three year period.
Option activity under the 1990 Stock Plan is as follows:
<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>
F-11
<PAGE> 69
The following table summarizes information about 1990 Stock Plan at March 31,
1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 3/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/97 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- ---------------
<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.
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>
F-12
<PAGE> 70
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>
Employee Stock Purchase Plan 1990 Stock Plan 1990 Directors' Option 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 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.
F-13
<PAGE> 71
RIGHTS PLAN. The Company has reserved 250,000 shares of Series A
Preferred Stock for issuance under the 1996 Rights Agreement which was amended
and restated as of December 5, 1996. Under this plan, shareholders have
received one Preferred Stock Purchase Right ("Right") for each outstanding
share of the Company's common stock. Each Right will entitle shareholders to
buy one one-thousandth of a share of Series A Preferred Stock at an exercise
price of $180.00 per right. The Rights trade automatically with shares of the
Company's common stock. The Rights are not exercisable until ten days after a
person or group announces acquisition of 20% or more of the Company's
outstanding common stock or the commencement of a tender offer that would
result in ownership by a person or group of 20% or more of the then outstanding
common stock.
The Company is entitled to redeem the Rights at $.01 per Right anytime
on or before the tenth day following such an acquisition or tender offer. This
redemption period may be extended by the Company in some cases. If, prior to
such redemption, the Company is acquired in a merger or other business
combination, a party acquires 20% or more of the Company's common stock, a 20%
shareholder engages in certain self-dealing transactions, or the Company sells
50% or more of its assets, each right will entitle the holder to purchase from
the surviving corporation, for $180.00 per share, common stock having a then
current market value of $360.00 per share.
At March 31, 1997, the Company has reserved the following shares of
authorized but unissued common stock:
<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>
NOTE 7. COMMITMENTS
The Company leases certain office facilities, vehicles, and certain
equipment under operating lease agreements that expire at various dates through
fiscal 2009. As of March 31, 1997, the minimum future payments on existing
leases totaled $17.4 million. Rent expense was approximately $5.7 million,
$3.7 million, and $2.4 million during fiscal 1997, 1996, and 1995,
respectively.
During fiscal 1996, the Company signed an agreement with TSMC to
ensure availability of a portion of the Company's silicon wafer requirement for
both current and future technologies. The agreement runs through 2001
providing the Company with a guarantee of increased capacity for wafer
fabrication in return for advance payments totaling $66 million. The advanced
payments are classified in prepaid expenses, and other assets and will be
realized by the Company at specified amounts over the agreement period.
In addition to this agreement, the Company has an existing deposit and
supply agreement with TSMC to secure supply of silicon wafers. Under the
deposit and supply agreement, the Company has made deposits aggregating $14.7
million, which are repayable at the expiration of the agreement in June 1997.
The supplier has provided an irrevocable standby letter of credit to the
Company in an equal amount to guarantee the repayment of deposits made by the
Company. The advance payment is included in current assets in the fiscal 1997
consolidated balance sheet.
Subsequent to March 31, 1997, the Company entered into an agreement
with TSMC whereby the Company will make advance payments totaling $35 million
to secure additional wafer capacity for future technology through 2001. The
Company signed a promissory note for $35 million for the advance payments,
which becomes due in two equal installments on January 31, 1998 and June 30,
1998.
F-14
<PAGE> 72
During fiscal 1997, the Company entered into an agreement with Lucent
Technologies Inc. ("Lucent") to sell $21 million of equipment that it had
previously purchased in connection with a separate agreement that ensured
availability of certain levels of wafer capacity from Lucent. This new
agreement cancels the initial capacity agreement and requires Lucent to
purchase the equipment from the Company payable in two installments in fiscal
1998.
NOTE 8. INCOME TAXES
The components of income before income taxes for the years ended March 31 are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996 1995
<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.
The components of the provision for income taxes for the years ended
March 31 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996 1995
----------- ----------- ------------
<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>
(IN THOUSANDS)
-----------------------
1997 1996
------- -------
<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>
F-15
<PAGE> 73
The provision for income taxes differs from the amount computed by
applying the federal statutory tax rate to income before taxes for the years
ended March 31 as follows:
<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 rate . . . (11.9) (11.8) (9.9)
Tax-exempt interest income, net . . . . . . . . . . . . . . . . (1.2) (2.1) (1.7)
Book write-off of in-process technology . . . . . . . . . . . . 12.4 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 1.3 (0.6)
------ ----- -----
Effective income tax rate . . . . . . . . . . . . . . . . . . . 37.4% 25.1% 25.0%
====== ===== =====
</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 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 ......... $ 786,833 $ 697,073 $ 12,039 $ -- $ (562,127) $ 933,868
============ ============ ============ ============ ============ ============
Income from operations ........ 157,936 95,473 (19) (92,162) -- 161,228
Identifiable assets ........... 352,312 295,333 3,242 589,716 (197,109) 1,043,494
</TABLE>
F-16
<PAGE> 74
<TABLE>
<CAPTION>
SINGAPORE, ADJUSTMENTS
UNITED FAR EAST, AND CONSOLIDATED
STATES OTHER EUROPE CORPORATE ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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>
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>
F-17
<PAGE> 75
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-18
<PAGE> 76
================================================================================
No dealer, salesman or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus, in connection with the offer made by this Prospectus, and, if
given or made, such information or representations must not be relied upon as
having been authorized by the corporation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has been no change in the affairs of the corporation
since the date hereof. This Prospectus does not constitute an offer or
solicitation by anyone in any jurisdiction in which such offer or solicitation
is not authorized or in which the person making such offer or solicitation is
not authorized to do so or to anyone to whom it is unlawful to make such offer
or solicitation in such jurisdiction.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Price Range of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 16
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Description of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Certain Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Selling Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
U.S. $230,000,000
ADAPTEC, INC.
4 3/4% CONVERTIBLE SUBORDINATED NOTES DUE
FEBRUARY 1, 2004
AND
COMMON STOCK ISSUABLE
UPON CONVERSION THEREOF
PROSPECTUS
JUNE 24, 1997
================================================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered hereby. Normal commission expenses and brokerage fees are payable
individually by the Selling Securityholders. All amounts are estimated except
the Securities and Exchange Commission registration fee.
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
SEC registration fee . . . . . . . . . . . . . . . . . . . $ 69,697
Accounting fees and expenses . . . . . . . . . . . . . . . 15,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . 20,000
Printing expenses . . . . . . . . . . . . . . . . . . . . . 10,000
Trustee's Fees and Expenses . . . . . . . . . . . . . . . . 10,000
Miscellaneous fees and expenses . . . . . . . . . . . . . . 25,303
------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 150,000
============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California General Corporation Law authorizes a
court to award, or a corporation's Board of Directors to grant, indemnity to
directors and officers who are parties or are threatened to be made parties to
any proceeding (with certain exceptions) by reason of the fact that the person
is or was an agent of the corporation, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with the proceeding if that person acted in good faith and in a manner the
person reasonably believed to be in the best interests of the corporation.
This limitation on liability has no effect on a director's liability (i) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, (iii) relating
to any transaction from which a director derived an improper personal benefit,
(iv) for acts or omissions that show a reckless disregard for the director's
duty to the corporation or its shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of a serious injury to the
corporation or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation or its shareholders, (vi) under Section 310
of the California General Corporation Law (concerning contracts or transactions
between the corporation and a director) or (vii) under Section 316 of the
California General Corporation Law (directors' liability for improper
dividends, loans and guarantees). The provision does not extend to acts or
omissions of a director in his capacity as an officer. Further, the provision
has no effect on claims arising under federal or state securities laws and does
not affect the availability of injunctions and other equitable remedies
available to the Company's shareholders for any violation of a director's
fiduciary duty to the Company or its shareholders. Although the validity and
scope of the legislation underlying the provision have not yet been interpreted
to any significant extent by the California courts, the provision may relieve
directors of monetary liability to the Company for grossly negligent conduct,
including conduct in situations involving attempted takeovers of the Company.
In accordance with Section 317, the Restated Articles of
Incorporation, as amended (the "Articles"), of the Company limits the liability
of a director to the Company or its shareholders for monetary damages to the
fullest extent permissible under California law, and authorizes the Company to
provide indemnification to its agents (including officers and directors),
subject to the limitations set forth above. The Company's By-Laws further
provide for indemnification of corporate agents to the maximum extent permitted
by the California General Corporation Law.
Pursuant to the authority provided in the Articles, the Company has
entered into indemnification agreements with each of its officers and
directors, indemnifying them against certain potential liabilities that may
arise as a result of their service to the Company, and providing for certain
other protection.
The Company also maintains insurance policies which insure its
officers and directors against certain liabilities.
The foregoing summaries are necessarily subject to the complete text
of the statute, the Articles, the By-Laws and the agreements referred to above
and are qualified in their entirety by reference thereto.
II-1
<PAGE> 78
Reference is made to the Underwriting Agreements included herein as
exhibits to the Registration Statement for provisions regarding indemnification
of the Company's officers, directors and controlling persons against
liabilities, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During February 1997, the Company completed an offering of $230
million of convertible subordinated notes. The notes bear interest at 4 3/4
percent, mature in February 2004, and are convertible into shares of the
Company's common stock at $51.66 per share. The notes were sold by the Company
to Bear, Stearns & Co. Inc., Lehman Brothers, Robertson, Stephens & Company,
and Unterberg Harris (the "Initial Purchasers"). The Initial Purchasers resold
$221,250,000 of the Notes, in a transaction exempt from the registration
requirements of the Securities Act, to persons reasonably believed by such
initial purchaser to be "qualified institutional buyers" (as defined in Rule
144A under the Securities Act), or other institutional "accredited investors"
(as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. An
additional $8,750,000 aggregate principal amount of Notes were issued in the
Original Offering by the Company and sold by the Initial Purchasers in
compliance with the provisions of Regulation S under the Securities Act.
Aggregate discounts to the Initial Purchasers totaled $223,905,000. The net
proceeds of the Offering to the Company, after deducting the discounts and
offering expenses, were $223,405,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
2.1(a) Stock Purchase Agreement by and among Adaptec, Inc., Future Domain Corporation,
Jack A. Allweiss, Patricia A. Allweiss and Certain Shareholders of Future Domain
Corporation dated July 13, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
2.1(b) Stock Purchase Agreement by and between Adaptec, Inc. and Certain Shareholders of
Future Domain Corporation dated July 13, 1995 . . . . . . . . . . . . . . . . . . . . (2)
2.2 Agreement and Plan of Reorganization by and among Adaptec, Inc., Incat Systems
Software USA, Inc., ISS Acquisition Corporation and Certain Shareholders of Incat
Systems Software USA, Inc. dated August 23, 1995 . . . . . . . . . . . . . . . . . . (2)
2.3 Agreement for Purchase and Sale of Stock by and among Western Digital Corporation,
Western Digital CSG Corporation, and Adaptec, Inc. dated April 9, 1996 . . . . . . . (14)
2.4 Agreement and Plan of Reorganization by and among Adaptec, Inc., Cogent Data
Technologies, Inc., CDT Acquisition Corp., and Certain Shareholders of Cogent Data
Technologies, Inc. dated May 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . (15)
2.5 Agreement and Plan of Reorganization by and among Adaptec, Inc., Adaptec Acquisition
Corporation, and Data Kinesis, Inc. dated August 6, 1996. . . . . . . . . . . . . . . (15)
3.1 Eighth Amended and Restate Articles of Incorporation of Registrant filed with
California Secretary of State on November 1, 1996 . . . . . . . . . . . . . . . . . . (16)
3.2 Bylaws of Registrant, as restated on February 9, 1996 . . . . . . . . . . . . . . . . (13)
3.3 Certificate of determination of rights, preferences and privileges of Series A
participating preferred stock filed with the California Secretary of State on December
31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16)
4.1 First Amended and Restated Common Shares Rights Agreement dated June 30, 1992, between
Registrant and Chemical Trust Company of California as Rights Agents . . . . . . . . (6)
4.2** Indenture dated as of February 3, 1997 between Registrant and State Street Bank and
Trust Company
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation . . . . . . . .
10.1 Registrant's 1986 Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . . . (4)
10.2 Technology License Agreement dated January 1, 1985 between the Registrant and
International Business Machines Corporation . . . . . . . . . . . . . . . . . . . . . (8)
10.3 Registrant's Savings and Retirement Plan . . . . . . . . . . . . . . . . . . . . . . (7)
10.4 1990 Stock Plan, as amended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
10.5 Forms of Stock Option Agreement, Tandem Stock Option/SAR Agreement, Restricted Stock
Purchase Agreement, Stock Appreciating Rights Agreement, and Incentive Stock Rights
Agreement for use in connection with the 1990 Stock Plan, as amended . . . . . . . . (5)
</TABLE>
II-2
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
10.6 1990 Directors' Option Plan and forms of Stock Option Agreement . . . . . . . . . . . (4)
10.7 Revolving Loan Agreement dated June 3, 1992 between Registrant and Plaza Bank of
Commerce (incorporated by reference to Exhibit 10.26 filed with Registrant's Annual
Report on form 10-K for fiscal year ended March 31, 1992) and Amendment Number Three
to the Revolving Credit Loan Agreement dated April 29, 1994 between the Registrant and
Comerica Bank -- California (formerly Plaza Bank of Commerce) expiring August 31, 1997 (4)
10.8 Amendments Four, Five and Six to the Revolving Credit Loan Agreement dated
April 29, 1994 between the Registrant and Comerica Bank -- California expiring
August 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)
10.9* Option Agreement I Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan
Semiconductor Manufacturing Co., Ltd. dated October 23, 1995 . . . . . . . . . . . . (3)
10.10* Option Agreement II Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan
Semiconductor Manufacturing Co., Ltd. dated October 23, 1995 . . . . . . . . . . . . (3)
10.11 Consignment Agreement between Adaptec, Inc. and AT&T Corp. dated January 10, 1996 . . (13)
10.12 Form of Indemnification Agreement entered into with directors and officers of the (9)
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.13 Term Loan Agreement dated June 24, 1992 between the Registrant and Plaza Bank of
Commerce expiring June 30, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . (9)
10.14* Deposit and Supply Agreement between Taiwan Semiconductor Manufacturing Co., Ltd. and
Adaptec Manufacturing Pte. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)
10.15 Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town
Corporation, as Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.16 Amendments Seven, Eight and Nine to the Revolving Credit Loan Agreement dated
April 29, 1994 between the Registrant and Comerica Bank -- California expiring
August 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.17 Amendments One, Two, Three and Four to the Term Loan Agreement dated June 24, 1992
between the Registrant and Comerica Bank -- California (formerly the Plaza Bank of
Commerce) expiring June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
12.1 Computation of Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . .
21.1** Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.1 Consent of Independent Accountants, Price Waterhouse LLP
23.2** Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in
Exhibit 5.1)
24.1 Power of Attorney. (See Page II-7).
25.1** Statement of Eligibility and Qualification Under the Trust Indenture Act of 1939 of a
Corporation disgnated to act as Trustee on Form T-1.
</TABLE>
-------------------------
(1) Incorporated by reference to exhibits filed with Registrant's
Annual report on Form 10-K for the year ended March 31, 1995.
(2) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
29, 1995.
(3) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 29,
1995.
(4) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended March 31, 1994.
(5) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended March 31, 1993.
(6) Incorporated by reference to Exhibit A filed with the
Registrant's Registration Statement Number 0-15071 on Form 8-A
on May 11, 1989 and to Exhibit 1.1 to Form 8 Amendment No. 1,
No. 2 and No. 3 thereto as filed June 5, 1990, April 8, 1992 and
July 20, 1992, respectively.
(7) Incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1987.
II-3
<PAGE> 80
(8) Incorporated by reference to Exhibit 10.15 filed in response to
Item 16(a) "Exhibits", of the Registrant's Registration
Statement on Form S-1 and Amendment No. 1 and Amendment No. 2
thereto (filed No. 33-5519), which became effective on June 11,
1986.
(9) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31,
1992.
(10) Incorporated by reference to Exhibit 4.2 to Form S-8 as filed
February 7, 1996.
(11) Incorporated by reference to Exhibit 16 to Form 8-K/A-2 dated
July 11, 1994.
(12) Incorporated by reference from the information under the caption
"Corporate Information" included in the Annual Report to
Shareholders for the fiscal year ended March 31, 1996.
(13) Incorporated by reference to exhibits filed with Registrant's
Annual Report on Form 10-K for the year ended March 31, 1996.
(14) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 28,
1996.
(15) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
27, 1996.
(16) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 27,
1996.
* Confidential treatment has been granted for portions of this
agreement.
** Previously filed.
(b) Financial Statement Schedules
All schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to the
Registration Statement:
(i) To include any prospectus required
by Section 10(a)(3) of the Act;
(ii) To reflect in the prospectus any
facts or events arising after the
effective date of this Registration
Statement (or the most recent
post-effective amendment thereof)
which, individually or in the
aggregate, represent a fundamental
change in the information set forth
in the Registration Statement (or
the most recent post-effective
amendment thereof) which,
individually or in the aggregate,
represent a fundamental change in
the information set forth in the
Registration Statement.
Notwithstanding the foregoing, any
increase or decrease in volume of
securities offered (if the total
dollar value of securities offered
would not exceed that which was
registered) and any deviation from
the low or high and of the estimated
maximum offering range may be
reflected in the form of prospectus
filed with the Commission pursuant
to Rule 424(b) if, in the aggregate,
the changes in volume and price
represent no more than 20 percent
change in the maximum aggregate
offering price, set forth in the
"Calculation of Registration Fee"
table in the effective registration
statement; and
II-4
<PAGE> 81
(iii) To include any material information
with respect to the plan of
distribution not previously
disclosed in the Registration
Statement or any material change to
such information in the Registration
Statement.
(2) That, for the purpose of determining any liability
under the Act, each such post-effective amendment
that contains a form of prospectus shall be deemed to
be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a
post-offering amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that such a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Milpitas, State of California, on the 23rd day
of June, 1997.
ADAPTEC, INC.
By: /s/ F. GRANT SAVIERS
------------------------------------------
F. Grant Saviers
President, Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---------------------------------------- ----------------------------------------------- -------------
<S> <C> <C>
/s/ F. Grant Saviers
----------------------------------------
F. Grant Saviers President, Chief Executive Officer and Director June 23, 1997
/s/ Paul G. Hansen* Vice President, Finance, Chief Financial
---------------------------------------- Officer, (Principal Financial Officer) June 23, 1997
Paul G. Hansen
/s/ Andrew J. Brown* Vice President, Corporate Controller (Principal
---------------------------------------- Accounting Officer) June 23, 1997
Andrew J. Brown
Director
----------------------------------------
John G. Adler
/s/ Laurence B. Boucher* Director
----------------------------------------
Laurence B. Boucher June 23, 1997
Director
----------------------------------------
Carl J. Conti
Director
----------------------------------------
John C. East
/s/ Robert J. Loarie* Director
----------------------------------------
Robert J. Loarie June 23, 1997
/s/ B.J. Moore* Director
----------------------------------------
B.J. Moore June 23, 1997
/s/ W. Ferrel Sanders* Director
----------------------------------------
W. Ferrel Sanders June 23, 1997
Director
----------------------------------------
Phillip E. White
*By: /s/ F. Grant Saviers
-----------------------------------
Attorney-in-fact
</TABLE>
II-6
<PAGE> 1
EXHIBIT 12.1
ADAPTEC, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Pre-tax income from continuing operations $ 65,854 $ 78,603 $ 124,537 $ 137,989 $ 171,781
--------- --------- ---------- ---------- ----------
Fixed charges:
Interest expense 967 1,306 1,179 840 2,744
Rentals - 33% 480 541 784 1,226 1,881
--------- --------- ---------- ---------- ----------
Total fixed charges 1,447 1,847 1,963 2,066 4,625
--------- --------- ---------- ---------- ----------
Earnings before income taxes and fixed charges $ 67,301 $ 80,450 $ 126,500 $ 140,055 $ 176,406
========= ========= ========== ========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 46.5 43.6 64.4 67.8 38.1
========= ========= ========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 25 1997, relating
to the consolidated financial statements of Adaptec, Inc., which appears in
such prospectus. We also consent to the reference to us under the heading
"Experts."
/s/ PRICE WATERHOUSE LLP
San Jose, California
June 18, 1997
