<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NO. 333-76937
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENESIS MICROCHIP INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NOVA SCOTIA, CANADA 5065 NONE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
200 TOWN CENTRE BOULEVARD, SUITE 400
MARKHAM, ONTARIO CANADA L3R 8G5
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PAUL M. RUSSO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
GENESIS MICROCHIP INCORPORATED
1871 LANDINGS DRIVE
MOUNTAIN VIEW, CA 94043
(650) 934-4261
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C> <C>
FRANCIS S. CURRIE, ESQ. I. ERIC ERDMAN ANDREI M. MANOLIU, ESQ.
ANTON T. COMMISSARIS, ESQ. VICE PRESIDENT, FINANCE AND ADMINISTRATION JAMES R. JONES, ESQ.
WILSON SONSINI GOODRICH & ROSATI CHIEF FINANCIAL OFFICER AND SECRETARY COOLEY GODWARD LLP
PROFESSIONAL CORPORATION GENESIS MICROCHIP INCORPORATED 5 PALO ALTO SQUARE
650 PAGE MILL ROAD 200 TOWN CENTRE BOULEVARD, SUITE 400 3000 EL CAMINO REAL
PALO ALTO, CA 94304 MARKHAM, ONTARIO, CANADA L3R 8G5 PALO ALTO, CA 94306
(650) 493-9300 (905) 470-2742 (650) 233-4500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon completion of the merger described in this registration statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED PROPOSED MAXIMUM
OF SECURITIES TO AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED(1) PRICE PER SHARE PRICE(2) REGISTRATION FEE(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Shares...................... 4,500,000 $0.34178 $1,538,017 $427.57
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of common shares of the registrant which may be issued
to former stockholders of Paradise Electronics, Inc. pursuant to the merger
described in this registration statement.
(2) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, the
registration fee has been calculated based on the book value of Paradise as
of December 31, 1998, assuming conversion of the outstanding preferred stock
of Paradise.
(3) The amount of the registration fee includes $307.61 previously paid with
Schedule 14A filed on February 26, 1999 in connection with the proposed
merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
GENESIS MICROCHIP INCORPORATED
200 TOWN CENTRE BOULEVARD, SUITE 400
MARKHAM, ONTARIO, CANADA L3R 8G5
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1999
To the shareholders of Genesis Microchip Incorporated:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Genesis
Microchip Incorporated, will be held on , 1999, at 11:30 a.m., local
time, at Genesis' headquarters at 200 Town Centre Boulevard, Suite 400, Markham,
Ontario, Canada L3R 8G5.
At the Genesis special meeting you will be asked to consider and vote upon
the following matters:
1. The issuance of Genesis common shares to the stockholders of Paradise
Electronics, Inc., pursuant to an agreement and plan of reorganization,
among Genesis, Paradise, and Rainbow Acquisition Corporation, providing
for the merger of Paradise and Rainbow, including the issuance of
Genesis common shares pursuant to currently outstanding options,
warrants and other rights to purchase Paradise common stock that will be
assumed by Genesis. Upon completion of the merger, Paradise will be a
wholly-owned subsidiary of Genesis.
2. Any other matters that are properly brought before the special meeting.
THIS PROPOSAL IS DESCRIBED MORE FULLY IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS.
GENESIS SHAREHOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON APRIL 30, 1999,
ARE ENTITLED TO NOTICE OF AND TO VOTE AT THE GENESIS SPECIAL MEETING AND ANY
ADJOURNMENTS OR POSTPONEMENTS OF THE SPECIAL MEETING AND ARE CORDIALLY INVITED
TO ATTEND THE GENESIS SPECIAL MEETING IN PERSON.
BY ORDER OF THE BOARD OF DIRECTORS
Paul M. Russo
Chairman of the Board
Markham, Ontario, Canada
, 1999
WHETHER OR NOT YOU EXPECT TO ATTEND THE GENESIS SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO BE SURE THAT YOUR VOTE COUNTS. NO POSTAGE IS
NEEDED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE> 3
PARADISE ELECTRONICS, INC.
1999 CONCOURSE DRIVE
SAN JOSE, CALIFORNIA 95131
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
To the stockholders of Paradise Electronics, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Paradise
Electronics, Inc., will be held on , 1999 at 11:30 a.m., local time,
at 1999 Concourse Drive, San Jose, California 95131.
At the Paradise special meeting you will be asked to consider and vote on
the following matters:
1. To approve and adopt an agreement and plan of reorganization by and
among Paradise, Genesis Microchip Incorporated, and Rainbow Acquisition
Corporation, and the merger of Paradise with Rainbow.
2. Any other matters that are properly brought before the special meeting.
THIS PROPOSAL IS MORE FULLY DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS.
PARADISE STOCKHOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON MARCH 31, 1999
ARE ENTITLED TO NOTICE OF AND TO VOTE AT THE PARADISE SPECIAL MEETING AND ANY
ADJOURNMENTS OR POSTPONEMENTS OF THE SPECIAL MEETING AND ARE CORDIALLY INVITED
TO ATTEND THE PARADISE SPECIAL MEETING IN PERSON.
BY ORDER OF THE BOARD OF DIRECTORS
Alexander S. Lushtak
Chairman of the Board
San Jose, California
, 1999
WHETHER OR NOT YOU EXPECT TO ATTEND THE PARADISE SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO BE SURE THAT YOUR VOTE COUNTS. NO POSTAGE IS
NEEDED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE> 4
The information in this proxy statement/prospectus is not complete and may be
changed. Genesis may not issue its common shares in the merger until the
Registration Statement containing this proxy statement/ prospectus is declared
effective by the Securities and Exchange Commission. This proxy statement/
prospectus is not an offer to sell these securities and it is not a solicitation
of an offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION DATED APRIL 30, 1999
<TABLE>
<S> <C>
PROSPECTUS AND PROXY STATEMENT PROXY STATEMENT
OF GENESIS MICROCHIP INCORPORATED OF PARADISE ELECTRONICS, INC.
</TABLE>
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of Genesis Microchip Incorporated and Paradise
Electronics, Inc. have approved a merger agreement that would merge Paradise
with a subsidiary of Genesis. Upon completion of the merger, it is anticipated
that each Paradise stockholder will receive 0.1726 Genesis common shares for
each share of Paradise common stock held. Upon release from an escrow fund, each
Paradise stockholder may receive up to 0.0192 additional Genesis common shares
for each share of Paradise common stock held.
A total of 4,500,000 Genesis common shares are reserved for issuance in the
merger. It is anticipated that 3,975,168 shares will be issued on the closing of
the merger. It is anticipated that 397,517 shares will be placed into an escrow
fund. It is anticipated that 524,832 shares will be reserved for issuance upon
exercise of outstanding Paradise options. All outstanding warrants of Paradise
are expected to be exercised prior to the merger.
The Genesis board of directors has called a special meeting of the Genesis
shareholders to vote on the issuance of Genesis common shares in the merger on:
--------------------, 1999, at 11:30 a.m.
at Genesis' corporate offices, 200 Town Centre Blvd., Suite 400, Markham,
Ontario, Canada L3R 8G5
The Paradise board of directors has called a special meeting of the
Paradise stockholders to vote on the merger and the merger agreement on:
--------------------, 1999, at 11:30 a.m.
at Paradise's corporate offices, 1999 Concourse Drive, San Jose, CA 95131
Whether or not you plan to attend your company's special meeting, please
complete, sign and mail the attached Paradise proxy card to Paradise, or the
attached Genesis proxy card to Genesis. Only stockholders who held shares of
Paradise capital stock on March 31, 1999, or shareholders who held Genesis
common shares at the close of business on April 30, 1999, will be entitled to
vote.
YOU ARE URGED TO READ THIS ENTIRE PROXY STATEMENT/PROSPECTUS CAREFULLY,
INCLUDING THE "RISK FACTORS" SECTION BEGINNING ON PAGE 9. THE "RISK FACTORS"
SECTION DESCRIBES RISKS THAT YOU SHOULD CONSIDER BEFORE VOTING.
Genesis' common shares trade on the Nasdaq National Market under the symbol
GNSS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THE GENESIS COMMON SHARES TO BE ISSUED IN
THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated , 1999, and
was first sent to Genesis shareholders and Paradise stockholders on or about
, 1999.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary of the Proxy Statement/Prospectus................... 1
Selected Historical Condensed Financial Information and
Comparative Per Share Data................................ 5
Selected Unaudited Pro Forma Combined Condensed Financial
Information............................................... 7
Comparative Per Share Data.................................. 8
Risk Factors................................................ 9
Market Price Information.................................... 14
Where You Can Find More Information......................... 15
Statements Regarding Forward-Looking Information............ 15
Trademarks.................................................. 16
Genesis' Solicitation for Shareholder Approval at Special
Meeting................................................... 17
Paradise's Solicitation for Stockholder Approval at Special
Meeting................................................... 19
The Merger.................................................. 21
Terms of the Merger......................................... 40
Other Agreements in Connection with the Merger.............. 49
Genesis Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 50
Genesis Business............................................ 56
Genesis Management.......................................... 61
Share Ownership of Management, Directors and Principal
Shareholders of Genesis................................... 65
Transactions Between Genesis and its Directors, Officers or
Principal Shareholders.................................... 67
Paradise Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 69
Paradise Business........................................... 73
Security Ownership of Management, Directors and Principal
Stockholders of Paradise.................................. 74
Paradise Management......................................... 77
Dissenters' Rights.......................................... 79
Description of Genesis Share Capital........................ 82
Comparison of Rights of Holders of Genesis Common Shares and
Paradise Common Stock..................................... 85
Unaudited Pro Forma Combined Financial Statements........... 93
Legal Matters............................................... 98
Experts..................................................... 98
Shareholder Proposals....................................... 98
Index to Financial Statements............................... F-1
Annex A -- The Agreement and Plan of Reorganization......... A-1
Annex B -- Appraisal Rights Delaware General Corporation Law
Section 262............................................... B-1
Annex C -- Dissenter's Rights California Corporation Code
Chapter 13................................................ C-1
Annex D -- Genesis Voting Agreement......................... D-1
Annex E -- Paradise Voting Agreement........................ E-1
Annex F -- Opinion of NationsBanc Montgomery Securities
LLC....................................................... Annex F-1
</TABLE>
-i-
<PAGE> 6
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the proposed merger fully and for a more
complete description of the terms of the proposed merger, you should carefully
read the entire proxy statement/prospectus and the documents to which we have
referred you. See "Where You Can Find More Information" on page 14. The merger
agreement is attached as Annex A to this proxy statement/ prospectus. We
encourage you to read the merger agreement. It is the legal document that
governs the proposed merger.
THE COMPANIES
GENESIS MICROCHIP INCORPORATED
200 Town Centre Boulevard, Suite 400
Markham, Ontario, Canada L3R 8G5
Telephone: 905-470-2742
Genesis designs, develops and markets integrated circuits or chips that
process digital video and graphic images. Genesis' integrated circuits are used
primarily in flat panel computer monitors and other digital display
applications.
PARADISE ELECTRONICS, INC.
1999 Concourse Drive
San Jose, CA 95131
Telephone: 408-325-8790
Paradise designs, develops and markets analog and digital mixed-signal
integrated circuits for controlling flat panel monitors.
QUESTIONS AND ANSWERS ABOUT THE PROPOSED MERGER
Q: WHY ARE WE PROPOSING TO MERGE? (PAGE 21)
A: Genesis and Paradise want to merge to create a combined company that can
deliver low-cost integrated circuits that process both analog and digital images
for digital display applications. By combining Paradise's analog and digital
mixed-signal capabilities and its ability to integrate them on a single chip,
with Genesis' strengths in high-quality digital image processing, the combined
company intends to offer cost-effective and technologically advanced integrated
circuits.
Q: WHAT WILL PARADISE STOCKHOLDERS RECEIVE IN THE MERGER? (PAGE 40)
A: Upon completion of the merger, we anticipate that Paradise stockholders will
receive 0.1726 Genesis common shares for each share of Paradise common stock
they held. Upon release from an escrow fund, each Paradise stockholder may
receive up to 0.0192 additional Genesis common shares for each share of Paradise
common stock held.
Following the merger, former Paradise stockholders will own approximately
21.5% of Genesis' common shares.
1
<PAGE> 7
SUMMARY OF THE PROPOSED MERGER
STRUCTURE OF THE MERGER (PAGE 40)
Genesis, Paradise and a subsidiary of Genesis, have entered into a merger
agreement which provides that Paradise will become a wholly-owned subsidiary of
Genesis. Following the merger, Paradise stockholders will have an equity stake
in Genesis.
BOARD RECOMMENDATION TO PARADISE STOCKHOLDERS (PAGE 24)
After careful consideration, Paradise's board of directors unanimously
determined the merger to be fair to you and in your best interests and approved
the merger. Paradise's board of directors unanimously recommends that you vote
for the merger.
PARADISE STOCKHOLDERS' MEETING (PAGE 19)
The Paradise board of directors has called a special meeting of the
Paradise stockholders to vote on the merger. Paradise is soliciting proxies from
its stockholders prior to the meeting. Each holder of Paradise capital stock is
entitled to one vote per share owned on March 31, 1999, the record date.
PARADISE STOCKHOLDER VOTE REQUIRED TO APPROVE THE MERGER (PAGE 19)
The vote of Paradise stockholders holding at least one share more than 90%
of the outstanding shares of Paradise capital stock at the special meeting is
required to approve the merger, unless Genesis otherwise agrees. Directors,
executive officers and principal stockholders of Paradise beneficially owning
57.9% of the outstanding shares of Paradise common stock and 85.5% of the
outstanding shares of Paradise preferred stock, as of the record date, have
signed voting agreements and irrevocable proxies obligating them to vote for the
merger.
REVOCABILITY OF PARADISE PROXIES (PAGE 20)
You may revoke your proxies at any time prior to the Paradise stockholders'
meeting by signing a new proxy or by attending the meeting in person and voting.
Merely attending the meeting will not revoke a proxy.
THE ESCROW FUND (PAGE 46)
At the time of the merger, Genesis will place 10% of the Genesis common
shares to be issued at the closing of the merger into the escrow fund for up to
one year.
The escrow fund is similar to a security deposit. Paradise has made
representations to Genesis in the merger agreement. If any of these
representations turn out to be incorrect, Genesis may be compensated from the
escrow fund.
The Genesis common shares in the escrow fund will be distributed to
Paradise stockholders when the escrow fund expires.
RESALE OF THE GENESIS COMMON SHARES RECEIVED IN THE MERGER (PAGE 39)
All of Paradise's stockholders, other than Paradise's executive officers,
directors and stockholders who own more than 10% of Paradise's outstanding
capital stock, will be able to resell the Genesis common shares they receive in
the merger. Paradise's executive officers, directors and principal stockholders
will be able to resell their common shares only if they comply with securities
laws, and with requirements relating to the accounting treatment of the merger.
LISTING OF GENESIS' COMMON SHARES (PAGE 39)
The Genesis common shares issued in the merger will be listed on the Nasdaq
National Market.
PROCEDURE FOR EXCHANGING PARADISE STOCK CERTIFICATES (PAGE 41)
After the merger, Genesis' exchange agent will deliver a letter of
transmittal to each Paradise stockholder with instructions regarding the
surrender of Paradise stock certificates. You should not surrender your stock
certificates until you receive the letter of transmittal from Genesis' exchange
agent.
DISSENTERS' RIGHTS (PAGE 80)
As a Paradise stockholder, you need not vote for the merger, and you have
the right to dissent
2
<PAGE> 8
to the merger and request an appraisal of the value of your Paradise capital
stock.
IMPORTANT FEDERAL INCOME TAX CONSEQUENCES (PAGE 28)
The merger will be tax-free to Paradise stockholders for United States and
Canadian federal income tax purposes. It is a condition to the merger that legal
opinions be given to this effect.
THE INTERESTS OF PARADISE OFFICERS AND DIRECTORS IN THE MERGER MAY BE DIFFERENT
FROM THE INTERESTS OF PARADISE STOCKHOLDERS (PAGE 26)
When considering the recommendation of Paradise's board of directors, you
should be aware that, Paradise's officers and directors have interests in the
merger that are different from, or in addition to, your interests.
In particular:
- Alexander S. Lushtak and Lawrence G. Finch, current Paradise directors,
will become directors of Genesis,
- Jeffrey Diamond, Paradise's Chief Executive Officer, will become an
Executive Vice President of Genesis,
- Sanjeev Renjen and Wendy Beneviste, each Paradise officers, will become
vice presidents of Genesis, and
- one-half of the unvested shares under the stock option and purchase
agreements of Sanjeev Renjen will vest.
As a result, Paradise's directors and officers may have been more likely to
recommend and approve the merger than you would be.
BOARD RECOMMENDATIONS TO GENESIS SHAREHOLDERS (PAGE 23)
After careful consideration, Genesis' board of directors unanimously
determined the merger to be fair to you and in your best interests and approved
the merger. Genesis' board of directors unanimously recommends that you vote for
the issuance of Genesis common shares in the merger.
OPINION OF GENESIS' FINANCIAL ADVISOR (PAGE 32)
Genesis' financial advisor, NationsBanc Montgomery Securities LLC,
performed a detailed financial analysis of the merger and on January 21, 1999
gave its oral opinion, subsequently confirmed in writing, that the exchange
ratio in the merger was fair to Genesis from a financial point of view as of
that date.
GENESIS SHAREHOLDERS' MEETING (PAGE 17)
The Genesis board of directors has called a special meeting of Genesis
shareholders to vote on the merger. Genesis is soliciting proxies from its
shareholders prior to the shareholders' meeting. Each holder of Genesis common
shares is entitled to one vote per share owned on April 30, 1999, the record
date.
GENESIS SHAREHOLDER VOTE REQUIRED TO APPROVE THE ISSUANCE OF GENESIS COMMON
SHARES IN THE MERGER (PAGE 17)
The vote of Genesis shareholders holding a majority of votes cast on the
proposal is required to approve the merger. Directors, executive officers and a
principal shareholder of Genesis beneficially owning 16.5% of the outstanding
Genesis common shares on March 31, 1999 have signed voting agreements obligating
them to vote for the merger.
REVOCABILITY OF GENESIS PROXIES (PAGE 18)
You may revoke your proxies at any time prior to the Genesis shareholders'
meeting by executing a new proxy or by attending the meeting in person and
voting. Merely attending the meeting will not revoke a proxy.
COMPLETION OF THE MERGER (PAGE 40)
We expect to complete the merger soon after the Genesis shareholders and
Paradise stockholders approve the merger and the other conditions to the merger
have been met. We hope to complete the merger before the end of Genesis' fiscal
year end on May 31, 1999.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 44)
The merger will not be completed unless the closing conditions contained in
the merger agree-
3
<PAGE> 9
ment are met. Genesis and Paradise may each waive any closing condition that is
for its benefit. If either Genesis or Paradise waives the condition that it
receives a legal opinion about a tax-free reorganization or a letter from its
auditors that the merger can be accounted for as a pooling of interests, it will
resolicit stockholder approval for the merger.
NO OTHER NEGOTIATIONS FOR A MERGER ARE PERMITTED (PAGE 43)
Genesis and Paradise have each agreed not to be involved in discussions
regarding a business combination with any other party.
TERMINATION OF THE MERGER AGREEMENT (PAGE 45)
Genesis and Paradise may agree to terminate the merger whether or not the
Genesis shareholders or the Paradise stockholders have approved it. In addition,
either company may terminate the merger if it is not completed before June 30,
1999, or if events specified in the merger agreement occur before that date.
BREAK-UP FEES IF THE MERGER IS NOT COMPLETED (PAGE 47)
Genesis and Paradise may be obligated to pay the other $5,000,000 if the
merger is not completed.
ACCOUNTING TREATMENT OF THE MERGER (PAGE 39)
Genesis and Paradise intend the merger to be treated as a "pooling of
interests" for accounting and financial reporting purposes. Pooling of interests
means that the two companies are to be treated as if they had always been
combined.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you are a Paradise stockholder and you have questions about the merger
you should contact:
Jeffrey Diamond
President and
Chief Executive Officer
Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
408-325-8790
If you are a Genesis shareholder and you have questions about the merger
you should contact:
I. Eric Erdman
Vice President, Finance and Administration
Chief Financial Officer and Secretary
Genesis Microchip Incorporated
200 Town Centre Boulevard, Suite 400
Markham, Ontario Canada L3R 8G5
(905) 470-2742
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 15)
Genesis and Paradise have each made forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking statements
include expectations concerning matters that are not historical facts. Words
such as "projects," "believes," "anticipates," "plans," "expects," "intends" or
similar words or expressions are intended to identify forward-looking
statements. For more information about factors that could cause Genesis' and
Paradise's actual results to differ from these expectations, you should read the
"Risk Factors" section beginning on page 9.
4
<PAGE> 10
SELECTED HISTORICAL CONDENSED FINANCIAL
INFORMATION AND COMPARATIVE PER SHARE DATA
The tables on the following pages present selected historical condensed
financial information and comparative per share data for Genesis and Paradise.
This information has been derived from their respective consolidated financial
statements and notes, certain of which are included in this proxy
statement/prospectus, beginning on page F-1.
The financial information of Genesis, except for the interim financial
information dated February 28, 1999 and 1998, has been derived from audited
consolidated financial statements. The financial information of Paradise has
been derived from audited consolidated financial statements.
All unaudited financial information presented has been derived from
unaudited consolidated financial statements, and in the opinion of Genesis' and
Paradise's management reflects all normal recurring adjustments necessary for a
fair presentation.
GENESIS SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Products............................................. $ 84 $ 283 $ 1,381 $ 4,164 $14,941 $ 9,440 $25,078
Design services and other............................ 304 241 143 363 806 766 1,363
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 388 524 1,524 4,527 15,747 10,206 26,441
Cost of revenues....................................... 118 107 434 2,983 4,819 2,936 10,654
------- ------- ------- ------- ------- ------- -------
Gross profit........................................... 270 417 1,090 1,544 10,928 7,270 15,787
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............................. 1,279 1,119 2,097 2,644 3,648 2,522 4,008
Selling, general and administrative.................. 696 1,511 2,665 4,245 4,842 3,451 6,232
------- ------- ------- ------- ------- ------- -------
Total operating expenses....................... 1,975 2,630 4,762 6,889 8,490 5,973 10,240
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.......................... (1,705) (2,213) (3,672) (5,345) 2,438 1,297 5,547
Interest income (expense).............................. (50) (101) (143) 147 675 188 1,409
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes...................... (1,755) (2,314) (3,815) (5,198) 3,113 1,485 6,956
Provision for income taxes............................. -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)...................................... $(1,755) $(2,314) $(3,815) $(5,198) $ 3,113 $ 1,485 $ 6,956
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per share:
Basic................................................ $ (0.41) $ (0.48) $ (0.63) $ (0.70) $ 0.33 $ 0.18 $ 0.49
Diluted.............................................. $ (0.41) $ (0.48) $ (0.63) $ (0.70) $ 0.26 $ 0.13 $ 0.46
Weighted average number of common shares outstanding:
Basic................................................ 4,270 4,824 6,071 7,463 9,559 8,168 14,131
Diluted.............................................. 4,270 4,824 6,071 7,463 12,204 11,367 15,040
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
------------------------------------------- FEBRUARY 28,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $1,332 $ 893 $1,533 $3,687 $35,904 $36,096
Working capital............................................. 1,579 1,708 1,689 6,903 41,004 49,283
Total assets................................................ 2,388 2,543 5,200 9,613 47,446 57,712
Total long-term debt, net of current portion................ 1,843 2,214 1,406 794 655 597
Shareholders' equity........................................ 68 (91) 1,322 7,621 44,151 53,065
</TABLE>
5
<PAGE> 11
PARADISE SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JUNE 17, 1996 DECEMBER 31,
(INCEPTION) ------------------
TO DECEMBER 31, 1996 1997 1998
-------------------- ------- -------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.............................................. $ -- $ 2 $ 3,803
Cost of revenues...................................... -- -- 1,048
------ ------- -------
Gross profit.......................................... -- 2 2,755
------ ------- -------
Operating expenses:
Research and development............................ 265 1,311 3,946
Selling, general and administrative................. 76 817 2,467
------ ------- -------
Total operating expenses.................... 341 2,128 6,413
------ ------- -------
Operating loss........................................ (341) (2,126) (3,658)
Interest income....................................... 13 60 3
------ ------- -------
Net loss.............................................. $ (328) $(2,066) $(3,655)
====== ======= =======
Basic and diluted net loss per share.................. $(0.03) $ (0.20) $ (0.32)
Shares used in computing basic and diluted net loss
per share........................................... 9,809 10,283 11,472
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,523 $ 1,615
Working capital............................................. 4,243 834
Total assets................................................ 5,286 4,478
Total long-term debt, net of current portion................ -- 373
Redeemable convertible preferred stock...................... 6,669 6,669
Stockholders' equity (net capital deficiency)............... (1,692) (5,131)
</TABLE>
6
<PAGE> 12
SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
The selected unaudited pro forma financial information should be read in
conjunction with the audited consolidated financial statements of Genesis and of
Paradise, beginning on page F-1 of this proxy statement/prospectus and the
unaudited pro forma combined financial statements beginning on page 93.
Information for the year ended May 31, 1996 has not been presented since
Paradise commenced operations on June 17, 1996.
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
------------------- -----------------
1997 1998 1998 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Products.............................................. $ 4,164 $15,182 $ 9,452 $31,696
Design services and other............................. 363 806 766 1,363
------- ------- ------- -------
Total revenues................................ 4,527 15,988 10,218 33,059
Cost of revenues........................................ 2,983 4,869 2,936 12,302
------- ------- ------- -------
Gross profit............................................ 1,544 11,119 7,282 20,757
------- ------- ------- -------
Operating expenses:
Research and development.............................. 2,888 6,210 4,017 7,592
Selling, general and administrative................... 4,833 6,137 4,307 8,465
------- ------- ------- -------
Total operating expenses...................... 7,721 12,347 8,324 16,057
------- ------- ------- -------
Income (loss) from operations........................... (6,177) (1,228) (1,042) 4,700
Interest income......................................... 184 773 116 1,337
------- ------- ------- -------
Income (loss) before income taxes....................... (5,993) (455) (926) 6,037
Provision for income taxes.............................. -- -- -- --
------- ------- ------- -------
Net income (loss)....................................... $(5,993) $ (455) $ (926) $ 6,037
======= ======= ======= =======
Earnings (loss) per share:
Basic................................................. $ (0.63) $ (0.04) $ (0.09) $ 0.34
Diluted............................................... (0.63) (0.04) (0.09) 0.31
Weighted average number of common shares outstanding:
Basic................................................. 9,447 11,634 10,271 17,984
Diluted............................................... 9,447 11,634 10,271 19,239
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
1999
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $38,000
Working capital............................................. 47,101
Total assets................................................ 62,695
Total long-term debt, net of current portion................ 946
Shareholders' equity........................................ 51,694
</TABLE>
7
<PAGE> 13
COMPARATIVE PER SHARE DATA
Set out below are the historical earnings (loss) per share and book value
per share data of Genesis, the historical loss per share and book value per
share data of Paradise, the unaudited pro forma combined per share data of
Genesis and the unaudited pro forma equivalent per share data of Paradise. This
data should be read in conjunction with the Genesis and Paradise audited
consolidated financial statements, the unaudited interim consolidated financial
statements and the unaudited pro forma combined financial statements, including
the related notes, that are included in this proxy statement/prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OR AS OF
OR AS OF MAY 31, FEBRUARY 28,
-------------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Historical -- Genesis:
Basic earnings (loss) per share............. $(0.63) $(0.70) $ 0.33 $ 0.18 $ 0.49
Diluted earnings (loss) per share........... (0.63) (0.70) 0.26 0.13 0.46
Book value per share (at period end)........ 3.20 3.68
Historical -- Paradise(1):
Basic loss per share........................ -- $(0.08) $(0.33) $(0.21) $(0.08)
Diluted loss per share...................... -- (0.08) (0.33) (0.21) (0.08)
Book value per share (at period end)........ 0.16 0.12
Pro forma combined basic earnings (loss) per
share:
Pro forma combined basic earnings (loss) per
Genesis share............................ $(0.63) $(0.63) $(0.04) $(0.09) $ 0.34
Equivalent pro forma basic earnings (loss)
per Paradise share(2).................... $(0.12) $(0.12) $(0.01) $(0.02) $ 0.07
Pro forma combined diluted earnings (loss) per
share:
Pro forma combined diluted earnings (loss)
per Genesis share........................ $(0.63) $(0.63) $(0.04) $(0.09) $ 0.31
Equivalent pro forma diluted earnings (loss)
per Paradise share(2).................... $(0.12) $(0.12) $(0.01) $(0.02) $ 0.06
Pro forma combined book value per share:
Pro forma book value per Genesis share...... $ 2.69 $ 2.82
Equivalent pro forma book value per Paradise
share(2)................................. $ 0.52 $ 0.54
</TABLE>
- ---------------
(1) The historical per share information of Paradise included under the heading
"Year Ended or As of May 31, 1997" is for the period June 17, 1996
(inception) to May 31, 1997.
(2) The equivalent Paradise pro forma share amounts are calculated by
multiplying the combined pro forma per share amounts by the estimated
exchange ratio of 0.1918 Genesis common share for each share of Paradise
common stock. This ratio assumes that, prior to the merger, all Paradise
warrants are exercised, and all Paradise preferred stock is converted into
Paradise common stock.
8
<PAGE> 14
RISK FACTORS
In deciding on the proposals in this joint proxy statement/prospectus, you
should carefully consider the risks described below, elsewhere in this joint
proxy statement/prospectus and in the documents that Genesis has incorporated by
reference in this joint proxy statement/prospectus. This joint proxy
statement/prospectus contains forward-looking statements that involve known and
unknown risks and uncertainties. See "Forward-Looking Statements." The matters
described below are cautionary statements identifying important factors
regarding such forward-looking statements, including risks and uncertainties
that could cause actual results to differ materially and adversely from those in
such forward-looking statements.
DECREASES IN THE TRADING PRICE OF GENESIS' COMMON SHARES WILL REDUCE THE VALUE
RECEIVED BY PARADISE STOCKHOLDERS IN THE MERGER
Upon completion of the merger, it is expected that each share of Paradise
common stock will be exchanged for 0.1918 Genesis common shares. The exchange
ratio will not change if the price of Genesis common shares changes after the
date of this proxy statement/prospectus. Any decrease in the market price of
Genesis common shares after the date of this proxy statement/prospectus will
reduce the dollar value to be received by Paradise stockholders in the merger.
Paradise cannot terminate the merger solely because of changes in the market
price of Genesis common shares. The market price of Genesis common shares has in
the past fluctuated greatly and will likely continue to fluctuate in the future.
THE INTENDED BENEFITS OF THE MERGER WILL NOT BE REALIZED IF PARADISE AND GENESIS
ARE UNABLE TO INTEGRATE KEY COMPLEMENTARY TECHNOLOGIES
The merger will not be successful unless Genesis effectively combines its
operations with those of Paradise and quickly integrates the two companies'
technologies. The combined company may be unable to effectively integrate the
advanced image processing technologies developed by Genesis with the single-
chip integrated circuit architecture developed by Paradise and still achieve the
required low-cost, high-volume manufacture of integrated image processing
solutions.
THE MANUFACTURING CHALLENGES FACED BY THE COMBINED COMPANY'S RELIANCE ON OUTSIDE
MANUFACTURERS MAY BE MADE MORE DIFFICULT BY THE DIFFERENT OUTSIDE MANUFACTURING
RELATIONSHIPS GENESIS AND PARADISE ESTABLISHED PRIOR TO THE MERGER
Neither Genesis nor Paradise has its own fabrication facilities, assembly
or testing operations. Instead, each relies on others to manufacture all of its
products. Genesis has its products manufactured by IBM, United Semiconductor
Corporation, Chip Express Corporation and Samsung Semiconductor, Inc. Paradise
has its products manufactured by Taiwan Semiconductor Manufacturing Company.
Each of these manufacturers use different production processes that may not be
readily adaptable to the designs developed by the combined company. Genesis and
Paradise will continue to rely upon their outside suppliers to fabricate,
assemble and test all of their products. No single product is sourced from more
than one supplier. There are many risks associated with the combined company's
dependence upon outside manufacturing, assembly and testing operations
including:
- reduced control over manufacturing and delivery schedules of products,
- reduced control over quality assurance,
- difficulty of management of manufacturing costs and quantities,
- potential lack of adequate capacity during periods of excess demand, and
- potential unauthorized use of intellectual property.
Genesis and Paradise each depends upon outside manufacturers to fabricate
silicon wafers on which their integrated circuits are imprinted. These wafers
must be of acceptable quality and in sufficient quantity be delivered to
assembly and testing subcontractors on time for packaging into final products.
Genesis has at times experienced delivery delays and long manufacturing lead
times. We can not assure
9
<PAGE> 15
you that the combined company's manufacturers will devote adequate resources to
the production of the combined company's products or deliver sufficient
quantities of finished products on time or at an acceptable cost. The lead time
necessary to establish a strategic relationship with a new manufacturing partner
is considerable and the combined company would be unable to readily obtain an
alternative source of supply for any of its products if this proves necessary.
The occurrence of these manufacturing difficulties could have a material and
adverse effect on the combined company's business, financial condition and
results of operations.
As a result of the merger the combined company will develop new products
that combine its technologies on a single integrated circuit. Any new products
will need to be made by one of its manufacturers and will need to work within
that manufacturer's design process. Because these new products will combine both
companies' technological strengths on a single chip, they will be inherently
more complex. We cannot assure you that any of these new products will be
readily adaptable to a particular manufacturing process. This could result in
delays and increased costs in the manufacture of these products. These costs and
delays could significantly diminish the intended benefits of the merger and have
a material adverse affect on the combined company's business, financial
condition and results of operation.
THE COMBINED COMPANY FACES INTENSE COMPETITION FROM LARGE COMPANIES WITH GREATER
RESOURCES AND FROM START-UP COMPANIES FOCUSED ON THE COMBINED COMPANY'S MARKETS
Genesis and Paradise compete with both large companies and start-up
companies, including Macronix International Co., Ltd., Philips Semiconductors, a
division of Philips Electronics N.V., Silicon Image, Inc., Arithmos, Inc.,
Pixelworks Inc., and Sage Inc. Each of Genesis and Paradise anticipate that as
the markets for their products develop, competition from diversified electronic
and semiconductor companies and from venture backed start-up companies focused
on these markets will intensify. Competitors are likely to include companies
with greater financial and other resources than the combined company. Increased
competition could have a material and adverse effect on the combined company's
business, financial condition and results of operations by, for example,
increasing pressure on its profit margins or causing it to lose customers.
THE COMBINED COMPANY'S SUCCESS WILL DEPEND ON THE GROWTH OF THE FLAT PANEL
COMPUTER MONITOR MARKET AND OTHER CONSUMER ELECTRONICS MARKETS
The combined company's ability to generate increased revenues will depend
on the growth of the flat panel computer monitor market. This market is at an
early stage of development. The combined company's continued growth will also
depend upon emerging consumer electronics markets, such as home theater, DVD,
flat screen and digital television, and HDTV. The potential size of these
markets and the timing of their development is uncertain and will depend in
particular upon:
- a significant reduction in the costs of products in the respective
markets,
- the availability of components required by such products, and
- the emergence of competing technologies.
For the nine months ended February 28, 1999, 61% of Genesis' revenues and
all of Paradise's revenues were derived from sales to customers in the flat
panel computer monitor market. This and other potential markets may not develop
as expected, which would have a material and adverse effect on the combined
company's business, financial condition and results of operations.
THE COMBINED COMPANY MUST CONTINUE TO ADD FEATURES TO ITS SINGLE-CHIP PRODUCTS
WHICH WILL REQUIRE IT TO RAPIDLY DEVELOP NEW TECHNOLOGIES TO SATISFY ITS
CUSTOMERS OR LOSE THEIR BUSINESS
The combined company must develop new products and enhance its existing
products with improved technologies to meet rapidly evolving customer
requirements and industry standards. The combined company will need to design
products for customers that continually require higher functionality at lower
10
<PAGE> 16
costs. This will require the combined company to continue to add features to its
products and to include all of these on a single chip. For example, in the flat
panel computer market, Genesis provides a scaling chip to change the size of the
image shown on the display which was used in conjunction with other companies'
analog to digital converter chip. One of the intended benefits of the merger is
to integrate these functions onto a single chip solution while maintaining high
image quality. The development process for these advances is lengthy and will
require the combined company to accurately anticipate technological innovations
and market trends. The combined company may be unable to successfully develop
new products or product enhancements with continually evolving features. Any new
products or product enhancements may not be accepted in new or existing markets.
If the combined company fails to develop and introduce new products or product
enhancements with added functionality on a single chip, that failure will have a
material and adverse effect on the combined company's business, financial
condition and results of operations.
THE COMBINED COMPANY'S PRODUCTS MAY NOT BE ACCEPTED IN THE FLAT PANEL COMPUTER
MONITOR MARKET AND OTHER CONSUMER ELECTRONICS MARKETS
The combined company's success in the flat panel computer monitor market,
as well as the markets for home theater, DVD, flat panel and digital television,
and HDTV, will depend upon the extent to which manufacturers of those products
incorporate the combined company's integrated circuits into their products.
Genesis and Paradise have only recently begun shipping their products in
quantity to manufacturers of flat panel computer monitors. Genesis has only
recently begun shipping limited commercial quantities of products to
manufacturers in the other developing consumer electronics markets. Paradise has
not yet shipped any products in these consumer electronics markets. The combined
company's ability to sell products in these markets will depend upon demand for
the functionality provided by the combined company's products. For example, if,
as has been proposed by some computer industry participants, the image
processing functions performed by the combined company's products are
incorporated within the computer rather than the flat panel computer monitor,
the combined company would be subject to direct competition from graphics
integrated circuit suppliers, many of which have resources greater than those of
the combined company. The failure of the combined company's products to be
accepted in the flat panel computer monitor market in particular would have a
material and adverse effect on the combined company's business, financial
condition and results of operations.
A LARGE PERCENTAGE OF GENESIS' AND PARADISE'S REVENUES COME FROM SALES TO A
SMALL NUMBER OF CUSTOMERS AND ANY CUSTOMER CAN STOP PURCHASING PRODUCTS AT ANY
TIME
The markets for the combined company's products are highly concentrated.
Genesis' and Paradise's sales are made to a limited number of customers. In
particular, sales by Genesis to Samsung Electronics Co., Ltd. accounted for 20%
and sales to Philips Electronics Industries (Taiwan) Ltd. accounted for 10% of
Genesis' total revenues for the nine months ended February 28, 1999. Sales by
Paradise to Fujitsu America, Inc. accounted for 66% of its total revenues for
the year ended December 31, 1998. Genesis and Paradise each expect that a small
number of customers will continue to account for a large amount of the combined
company's total revenues. All of Genesis' and Paradise's sales are made on the
basis of purchase orders rather than long-term agreements so that any customer
could cease purchasing products at any time without penalty. For example, In
Focus Systems, Inc., Genesis' largest customer in its second largest market
segment, projection monitors, stopped placing orders in May 1998 in order to
reduce its inventory levels. This would have had a significant impact on the
first quarter of fiscal 1999 without the offsetting growth in the flat panel
computer monitor market. The decision by any customer to decrease or cease using
the combined company's products would have a material and adverse effect on the
combined company's business, financial condition and results of operations.
PARADISE IS AN EARLY STAGE COMPANY AND MAY NOT BE PROFITABLE IN THE NEAR FUTURE
Paradise is an early stage company founded in 1996 and its prospects must
be considered in light of the risks, costs and difficulties frequently
encountered by such companies. Paradise has a limited operating
11
<PAGE> 17
history. Paradise shipped its first products in May 1998. Although Paradise has
achieved revenue growth from May 1998 to date, this growth may not continue.
Paradise has increased its operating expenses in connection with its growth in
revenues. Through the end of calendar year 1998, Paradise has not yet had a
profitable year. Paradise has incurred significant net losses since it began
business. While Paradise first achieved profitability in the fourth quarter of
1998, it may not continue to achieve profitability in the future. As of December
31, 1998, Paradise had an accumulated deficit of approximately $6.0 million.
Paradise's limited operating history makes it difficult to predict its future
results.
THE MERGER MAY RESULT IN THE LOSS OF KEY PARADISE EMPLOYEES
The combined company might lose some of Paradise's key employees following
the merger. Genesis and Paradise have different corporate cultures and Paradise
employees may not want to work for a larger, publicly-traded company instead of
a smaller, start-up company. Competition for qualified management, engineering
and technical employees among competitors is intense. Competitors may recruit
employees prior to the merger and during integration, as is common in high
technology mergers. As a result, employees of Paradise or the combined company
could leave with little or no prior notice. Genesis and Paradise cannot assure
you that the combined company will be able to retain and integrate Paradise
employees to develop and use the combined company's technology following the
merger.
If the combined company is unable to retain and integrate Paradise key
employees, its business, financial condition and results of operations would be
materially and adversely affected.
IT MAY BE DIFFICULT FOR SHAREHOLDERS TO ENFORCE CIVIL LIABILITIES UNDER THE
UNITED STATES FEDERAL SECURITIES LAWS BECAUSE GENESIS IS INCORPORATED IN CANADA
The enforcement by shareholders of civil liabilities under the federal
securities laws of the United States may be adversely affected because:
- Genesis is incorporated under the laws of Nova Scotia, Canada,
- Some of its directors and officers are residents of Canada,
- Some of the experts named in the registration statement are residents of
Canada, and
- A substantial portion of Genesis' assets are located outside the United
States.
As a result, it may be difficult for holders of Genesis common shares to
serve a legal claim within the United States upon directors and officers of
Genesis or experts named in the registration statement of which this proxy
statement/prospectus is a part, who are not residents of the United States. It
may also be difficult to satisfy any judgments of courts of the United States
based upon civil liabilities under the federal securities laws of the United
States.
GENESIS' ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER A POTENTIAL ACQUISITION OF
GENESIS WHICH SHAREHOLDERS MAY REGARD AS FAVORABLE TO THEM
The authorized capital of Genesis consists of 1,000,000,000 common shares
and 1,000,000,000 special shares issuable in one or more series. As of March 31,
1999, 14,478,536 common shares and no special shares were issued and
outstanding. Genesis' board of directors has the authority to issue special
shares and to determine the price, designation, rights, preferences, privileges,
restrictions and conditions, including voting and dividend rights of these
shares without any further vote or action by the shareholders. The rights of the
holders of Genesis common shares will be subject to, and may be adversely
affected by, the rights of holders of any special shares that may be issued in
the future. The issuance of special shares could make it more difficult for a
third party to acquire a majority of the outstanding voting shares of Genesis.
Genesis has no present plans to issue any special shares. Genesis has adopted a
shareholder rights plan with respect to its common shares which is specifically
designed to make an unsolicited, non-negotiated takeover attempt more difficult.
Genesis also has a board of directors with three-year staggered terms, which may
make an unsolicited, non-negotiated takeover attempt more difficult.
12
<PAGE> 18
IF PARADISE DOES NOT PREVAIL IN THE DEFENSE OF ITS LITIGATION WITH ARITHMOS,
INC., THE COMBINED COMPANY MAY BE REQUIRED TO PAY SUBSTANTIAL COMPENSATION TO
ARITHMOS
In September 1998, Arithmos, Inc., which had been engaged in merger
discussions with Paradise, filed an action against Paradise claiming
misappropriation of trade secrets, unfair business practices, trade libel,
negligent misrepresentation, and breach of contract of three separate agreements
stemming from the failed merger discussions between the two companies. The
action is currently in the discovery stage. If Paradise does not prevail in the
Arithmos litigation the combined company may be required to pay substantial
compensation to Arithmos.
THE WAIVER OF ONE OR MORE CLOSING CONDITIONS FOR THE BENEFIT OF GENESIS OR
PARADISE COULD ADVERSELY AFFECT THE VALUE OF GENESIS COMMON SHARES UPON
COMPLETION OF THE MERGER
A waiver of a closing condition could mean that a desired attribute of the
transaction will be foregone in order to complete the merger. The loss of a
desired attribute could result in a decline in the value of Genesis common
shares either for former Paradise stockholders or for all Genesis shareholders.
A DECISION BY PARADISE OR GENESIS NOT TO WAIVE A CLOSING CONDITION FOR ITS
BENEFIT COULD RESULT IN A DELAY IN COMPLETING THE MERGER AND A DELAY IN
COMPLETING THE MERGER COULD ADVERSELY AFFECT THE VALUE OF GENESIS COMMON SHARES
If Genesis or Paradise decides not to waive a condition to closing and the
merger is delayed, then the value of Genesis common shares could decline in the
interim. For example, a decline could occur because of changing market
conditions or the performance of Genesis or Paradise. A delay could also
increase uncertainty regarding whether the merger will close and increased
uncertainty could lead to a reduction in the value of Genesis common shares. In
particular, if Paradise does not obtain the favorable vote of the holders of 95%
of its shares, Genesis may delay the closing until sufficient time has passed,
which could be up to 40 days, so that holders of no more than 5% of the Paradise
capital stock may exercise dissenters' rights under California law.
13
<PAGE> 19
MARKET PRICE INFORMATION
Genesis' common shares traded on the Nasdaq National Market under the
symbol "GNSSF" from February 24, 1998 until February 5, 1999, and have traded
under the symbol "GNSS" since February 8, 1999. The following table sets forth
the high and low closing prices for Genesis common shares as reported by the
Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998 CALENDAR YEAR
First Quarter (From February 24, 1998).................... $16.875 $12.000
Second Quarter............................................ $14.813 $ 7.938
Third Quarter............................................. $ 9.438 $ 6.125
Fourth Quarter............................................ $24.250 $ 8.250
1999 CALENDAR YEAR
First Quarter............................................. $35.000 $22.000
</TABLE>
There is no established trading market for Paradise capital stock.
As of March 31, 1999, Genesis estimates that there were approximately 220
holders of record of Genesis common shares and a substantially greater number of
beneficial owners. As of March 31, 1999, there were 59 holders of record of
Paradise capital stock.
To date, Genesis has not declared or paid dividends on its common shares.
The board of directors of Genesis presently intends to retain all earnings for
use in Genesis' business and therefore does not anticipate declaring or paying
any cash dividends in the foreseeable future. In addition, Genesis' loan
facility restricts the payment of dividends when borrowings are outstanding. To
date, Paradise has not declared or paid dividends on it capital stock. The board
of directors of Paradise presently intends to retain all earnings for use in
Paradise's business and therefore does not anticipate declaring or paying any
cash dividends in the foreseeable future.
The table below sets forth the high and low sales prices per share of
Genesis common shares on the Nasdaq National Market on January 21, 1999, the
last full trading day prior to the signing of the merger agreement and also the
last full trading day prior to the public announcement of the signing of the
merger agreement. Also set forth is the implied equivalent value of one share of
Paradise common stock on each date assuming an exchange ratio of 0.1918 shares
of Genesis common shares for each share of Paradise common stock and the
conversion of all Paradise preferred stock into Paradise common stock.
<TABLE>
<CAPTION>
APPROXIMATE
GENESIS COMMON PARADISE
SHARES EQUIVALENT
----------------- ---------------
HIGH LOW HIGH LOW
------- ------- ------ ------
<S> <C> <C> <C> <C>
January 21, 1999............................................ $33.188 $28.625 $6.365 $5.490
March 31, 1999.............................................. $25.000 $23.750 $4.795 $4.555
</TABLE>
As the table above indicates, fluctuations in the market price of Genesis
common shares affect the value of the Paradise shares for which they are
exchanged. Between January 21, 1999 and March 31, 1999, the value of a share of
Paradise common stock had it been exchanged for Genesis common shares at the
exchange ratio listed above, would have fluctuated between $6.868 and $4.005.
The table shows only historical comparisons. These comparisons may not
provide meaningful information to you in determining whether to approve the
merger and the merger agreement. Because the number of shares of Genesis to be
issued to the holders of Paradise common stock is fixed, changes in the market
price of Genesis common shares will affect the dollar value of Genesis common
shares to be received by stockholders and holders of options and warrants of
Paradise in the merger. Stockholders are urged to obtain current market
quotations for Genesis common shares, and to review carefully the other
information contained in this proxy statement/prospectus, prior to considering
whether to approve the merger and the merger agreement.
14
<PAGE> 20
WHERE YOU CAN FIND MORE INFORMATION
Genesis files annual, quarterly and current reports and other information
with the Securities and Exchange Commission. Copies of annual, quarterly and
current reports and other information filed by Genesis may be inspected and
copied at the public reference facilities maintained by the SEC at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, NY 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Annual, quarterly and current reports and other information concerning
Genesis may be inspected at:
The National Association of Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a Website that contains reports and other information regarding
Genesis. The address of the SEC Website is http://www.sec.gov.
Genesis filed a registration statement on Form S-4 to register the Genesis
common shares to be issued to Paradise stockholders in the merger with the
Securities and Exchange Commission. This proxy statement/prospectus is a part of
that registration statement. As allowed by the Securities and Exchange
Commission's rules, this proxy statement/prospectus does not contain all of the
information you can find in the registration statement or the exhibits to the
registration statement. This proxy statement/prospectus summarizes some of the
documents that are exhibits to the registration statement, and you should refer
to the exhibits for a more complete description of the matters covered by those
documents.
Genesis began filing periodic reports on Forms 10-Q and 10-K pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as amended, after the end
of its third fiscal quarter ended February 28, 1999.
Genesis has supplied all information contained in this proxy
statement/prospectus relating to Genesis, and Paradise has supplied all
information relating to Paradise.
Neither Genesis nor Paradise has authorized anyone to give any information
regarding the solicitation of proxies or the offering of Genesis common shares
that is different from what is contained in this proxy statement/prospectus.
This is not an offer to sell or a solicitation of anyone to whom it would be
unlawful to make an offer or solicitation. You should not assume that the
information contained in this proxy statement/prospectus is accurate as of any
time after the date of this proxy statement/prospectus, and neither the delivery
of this proxy statement/prospectus to Paradise stockholders or to Genesis
shareholders, nor the issuance of Genesis common shares in the merger should
create any implication to the contrary.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This proxy statement/prospectus contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These laws do
not apply to Paradise. The forward-looking statements relate to expectations
concerning matters that are not historical facts. Words such as "projects,"
"believes," "anticipates," "plans," "expects," "intends," and similar words and
expressions are intended to identify forward-looking statements. Although each
of Genesis and Paradise believes that the expectations reflected in such
forward-looking statements are reasonable, neither can give any assurance that
such expectations will prove to be correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed herein,
including, without limitation, in the "Risk Factors" beginning on page 9. All
forward-looking statements are expressly qualified in their entirety by these
factors and all related
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cautionary statements. Neither Genesis nor Paradise undertakes any obligation to
update any forward-looking statements.
TRADEMARKS
Genesis with its logo(R) is a registered trademark of Genesis, and AIM(TM),
DICE(TM), GenScale(TM) and ImEngine(TM) are trademarks of Genesis. This proxy
statement/prospectus also refers to other trademarks of Genesis and trademarks
of other companies.
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GENESIS' SOLICITATION FOR SHAREHOLDER APPROVAL AT SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
A special meeting of the shareholders of Genesis will be held at the
principal executive offices of Genesis, 200 Town Centre Blvd., Suite 400,
Markham, Ontario, L3R 8G5 Canada on , 1999, at 11:30 a.m., local
time.
PURPOSE OF THE SPECIAL MEETING
Holders of Genesis common shares on the record date are being asked to
consider and vote upon the approval of the issuance of Genesis common shares in
the merger.
VOTING BY PROXY
The proxy card accompanying this proxy statement/prospectus is solicited on
behalf of the board of directors of Genesis. Please complete, date and sign the
proxy card and promptly return it to Genesis in the enclosed envelope. All
proxies that are properly executed and returned, and that are not revoked, will
be voted at the special meeting in accordance with the instructions indicated on
the proxies. If no direction is indicated on the proxy card, your shares will be
voted FOR the issuance of Genesis common shares in the merger. You are urged to
mark the box on the proxy to indicate how to vote your shares.
Genesis' management is not aware of any matters to be voted on at the
special meeting other than the issuance of Genesis common shares in the merger.
If other matters properly come before the special meeting, the proxyholders will
vote on them in accordance with their judgment.
SHAREHOLDER RECORD DATE AND QUORUM FOR THE SPECIAL MEETING
Only holders of record of Genesis common shares at the close of business on
April 30, 1999, the record date, are entitled to notice of the special meeting
and to vote at the special meeting. On March 31, 1999, there were 14,478,536
Genesis common shares issued and outstanding. On that date, such shares were
held by approximately 220 holders of record.
Two persons, being shareholders, proxyholders or representatives of
corporate shareholders, present and entitled to vote and holding or representing
not less than a majority of the total number of Genesis common shares issued and
outstanding as of the record date, will constitute a quorum for the transaction
of business at the special meeting.
VOTE REQUIRED FOR APPROVAL OF ISSUANCE OF GENESIS COMMON SHARES IN THE MERGER
Because the number of Genesis common shares to be issued in the merger will
exceed 20% of the number of Genesis common shares outstanding prior to the
merger, approval by Genesis' shareholders of the issuance of Genesis common
shares is required under the Nasdaq National Market rules. Under these rules,
the proposal to issue Genesis common shares pursuant to the merger agreement
must be approved by a majority of the total votes cast at the special meeting at
which a quorum is present. If a properly executed proxy is returned and the
shareholder has abstained from voting on adoption of the merger agreement, the
Genesis common shares represented by the proxy will be considered present at the
special meeting for purposes of determining a quorum, but will not be considered
to have been voted on the issuance of Genesis common shares. Similarly, if an
executed proxy is returned by a broker holding Genesis common shares in street
name which indicates that the broker does not have discretionary authority to
vote on the issuance of Genesis common shares, the shares will be considered
present at the meeting for purposes of determining the presence of a quorum, but
will not be considered to have been voted on the issuance of Genesis common
shares. Your broker will vote your shares only if you provide instructions on
how to vote by following the information provided to you by your broker.
Because adoption of the issuance of Genesis common shares requires the
affirmative vote of at least a majority of total votes cast on the proposal at
the special meeting, abstentions, failures to vote and broker
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non-votes will not count as a vote on the proposal. Each Genesis shareholder on
the record date is entitled to cast one vote per share.
On March 31, 1999, directors and executive officers of Genesis beneficially
owned and were entitled to vote 1,062,765 Genesis common shares. These shares
represented approximately 7.4% of the outstanding voting shares on that date.
Each director and executive officer of Genesis has agreed to vote the shares
owned by him for the issuance of Genesis common shares in the merger.
Additionally the holders of 1,273,313 Genesis common shares have also agreed to
vote their shares for the issuance of Genesis common shares in the merger. These
shares represented approximately 8.8% of the outstanding voting shares on March
31, 1999.
REVOCABILITY OF PROXIES
You may revoke your proxy at any time prior to the shareholders' meeting by
executing a new proxy or by attending the meeting in person and voting. Merely
attending the meeting will not revoke your proxy. Genesis hopes to close the
merger prior to its fiscal year end of May 31, 1999.
EXPENSES RELATED TO SOLICITATION OF SHAREHOLDER APPROVAL
All expenses of Genesis' solicitation of shareholder approval, including
the cost of mailing this proxy statement/prospectus to you, will be borne by
Genesis. In addition to solicitation by use of the mails, proxies may be
solicited from you by directors, officers and employees of Genesis or Paradise
in person or by telephone, facsimile or other means of communication. Genesis or
Paradise directors, officers and employees will not receive additional
compensation for their solicitation, but they may be reimbursed for reasonable
out-of-pocket expenses.
RECOMMENDATION OF GENESIS BOARD OF DIRECTORS
The Genesis board of directors has unanimously approved the merger, the
merger agreement and the issuance of Genesis common shares in the merger and has
determined that the merger, the merger agreement and the issuance of Genesis
common shares in the merger are fair to, and in the best interests of, Genesis
and its shareholders. THE GENESIS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE IN FAVOR OF THE ISSUANCE OF GENESIS COMMON SHARES IN THE MERGER.
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PARADISE'S SOLICITATION FOR STOCKHOLDER APPROVAL AT SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
A special meeting of the stockholders of Paradise will be held at the
principal executive offices of Paradise Electronics, Inc., 1999 Concourse Drive,
San Jose, CA 95131 on , 1999, at 11:30 a.m. local time.
PURPOSE OF THE SPECIAL MEETING
Holders of shares of Paradise common stock and preferred stock are being
asked to consider and vote upon the adoption and approval of the merger and the
merger agreement.
VOTING BY PROXY
The proxy card accompanying this proxy statement/prospectus is solicited on
behalf of the board of directors of Paradise. Please complete, date and sign the
proxy card and promptly return it to Paradise in the enclosed envelope. All
proxies that are properly executed and returned, and that are not revoked, will
be voted at the special meeting of the stockholders in accordance with the
instructions indicated on the proxies. If no direction is indicated on the proxy
card, your shares will be voted FOR the merger and the merger agreement.
At the special meeting, only shares affirmatively voted in favor of the
merger and the merger agreement will be counted as favorable votes. The failure
to vote in person or by proxy or the abstention from voting on the merger and
the merger agreement will have the same effect as a vote against such matters.
Paradise's management is not aware of any matters to be voted on at the
special meeting other than the merger and the merger agreement. If other matters
should properly come before the special meeting, the proxyholders will vote in
accordance with their judgment.
STOCKHOLDER RECORD DATE AND QUORUM FOR THE SPECIAL MEETING
Only holders of record of shares of Paradise common or preferred stock at
the close of business on March 31, 1999, the record date, are entitled to notice
of the special meeting and to vote at the special meeting.
On the record date, there were 12,252,755 shares of Paradise common stock
issued and outstanding and entitled to vote at the special meeting, held by 47
holders of record.
On the record date, there were 8,256,522 shares of Paradise preferred stock
issued and outstanding and entitled to vote at the special meeting, held by 17
holders of record.
The required quorum for the transaction of business at the special meeting
is a majority of the shares of capital stock issued and outstanding as of the
record date, which shares may be present in person or represented by proxy.
VOTE REQUIRED FOR APPROVAL OF THE MERGER AND THE MERGER AGREEMENT
As a matter of law, adoption and approval of the merger and merger
agreement at the special meeting will require the affirmative vote of a majority
of the outstanding shares of common stock and a majority of the outstanding
shares of preferred stock. It is a condition to Genesis' obligation to complete
the merger that at least one share more than 90% of the outstanding shares of
capital stock vote in favor of the merger and the merger agreement. The common
stock and preferred stock will effectively have one vote per share on the merger
and merger agreement.
As of March 31, 1999, directors and executive officers and stockholders
represented by directors and executive officers of Paradise beneficially owned
and were entitled to vote 7,085,835 shares of Paradise
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common stock and 4,537,743 shares of Paradise preferred stock. These shares
represented approximately 57.8% of the outstanding shares of Paradise common
stock and 55% of the outstanding shares of Paradise preferred stock on the
record date. Each director, executive officer and stockholder represented by a
director or executive officer has agreed to vote the common and preferred stock
owned by him or it for the adoption and approval of the merger and the merger
agreement.
REVOCABILITY OF PROXIES
You may revoke your proxies at any time prior to the Paradise stockholders
meeting by executing a new proxy or by attending the meeting in person and
voting. Merely attending the meeting will not revoke a proxy.
EXPENSES RELATED TO SOLICITATION OF STOCKHOLDER APPROVAL
All expenses of Paradise's solicitation of stockholder approval, including
the cost of mailing this proxy statement/prospectus to you, will be borne by
Paradise. In addition to solicitation by use of the mails, written consents and
proxies may be solicited from you by directors, officers and employees of
Paradise or Genesis in person or by telephone, facsimile or other means of
communication. Paradise or Genesis directors, officers and employees will not
receive additional compensation for their solicitation, but they may be
reimbursed for reasonable out-of-pocket expenses.
RECOMMENDATION OF PARADISE BOARD OF DIRECTORS
The Paradise board of directors has unanimously approved the merger and the
merger agreement, and has determined that the merger and the merger agreement
are fair to, and in the best interests of, Paradise and its stockholders. THE
PARADISE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THE MERGER
AND THE MERGER AGREEMENT.
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THE MERGER
This section of the proxy statement-prospectus describes material aspects
of the proposed merger, including the merger agreement. While we believe that
the description covers the material terms of the merger and the related
transactions, this summary may not contain all of the information that is
important to you. You should read this entire document and the other documents
we refer to carefully for a more complete understanding of the merger.
BACKGROUND OF THE MERGER
The primary market for Genesis' products is the flat panel computer monitor
market. Flat panel computer monitors are replacing the cathode ray tube or CRT
monitors because of their advantages in space, power consumption, emissions and
image quality. CRTs, like TVs, are based on analog technology. Flat panel
monitors are based on digital technology. For a computer user to be able to
unplug a CRT, plug in a flat panel monitor and have it work, the analog signal
being sent to the monitor must be converted to a digital signal required by the
flat panel monitor. These analog to digital converters are known as ADCs. Also,
virtually all CRTs sold today are "multisync." This means the CRT has
electronics built in to allow any application being run by the user to be
displayed on the full screen of the monitor. For example, if the computer is
running a VGA (640-by-480 pixels) application for a monitor that can display XGA
(1024-by-768 pixels) resolution, the monitor can automatically display the VGA
picture on a full XGA screen. Flat panel monitors are built differently. They do
not have built in electronics to perform the multisync function. Therefore,
using the same example, where the computer is running a VGA application for an
XGA flat panel monitor, a scaling function is required to scale the VGA
application to fill up an XGA screen. Genesis provides a chip to the market that
performs the scaling function. The quality of the Genesis scaling is considered
to be the best in the industry. Genesis does not provide the ADC, so a Genesis
based solution requires two chips, the Genesis scaling chip and another vendor's
ADC. Paradise has a single-chip solution including both the scaling function and
the ADC but with a lower scaling quality than that of Genesis' chips. By
combining Genesis and Paradise, the combined company will get the best of both
technologies and can provide superior products to its customers.
Paul M. Russo, Genesis' chairman and chief executive officer, first
contacted Alexander S. Lushtak, Paradise's chairman, on November 25, 1998 to
determine Mr. Lushtak's interest in pursuing merger discussions. Mr. Russo and
Mr. Lushtak met in San Francisco for lunch on November 30, 1998. Discussions
were positive and it was decided to arrange a meeting with Sigma Partners, a
major Paradise venture capital stockholder.
Mr. Russo and Mr. Lushtak met with Lawrence G. Finch, a director of
Paradise and a member of Sigma Partners in the offices of Sigma Partners on
December 4, 1998. Considerable time was spent discussing the value of Genesis'
image manipulation technologies and how the combined company would be greater
than the sum of the two separate companies.
Mr. Russo presented the Paradise merger opportunity at the December 11,
1998, meeting of the Genesis board of directors held in Markham, Ontario. The
Genesis board of directors authorized Mr. Russo to continue discussions with
Paradise.
On December 28, 1998, Mr. Russo, Stephen Solari and Hamid Farzaneh, each
executive officers of Genesis, and representatives of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Genesis' legal counsel, met with Mr. Lushtak,
Mr. Diamond, the chief executive officer of Paradise and Robert Tillman, a
director of Paradise, at the offices of Wilson Sonsini Goodrich & Rosati, in
Palo Alto, California. The meeting was held to further discuss the possibility
of a business combination between the two companies. At this meeting
representatives of each company executed a mutual confidentiality and
non-disclosure agreement.
On January 4, 1999, the Genesis board of directors convened by telephonic
conference call to discuss the overall strategy of combining the two companies
and an appropriate valuation of Paradise.
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On January 5, 1999, Mr. Russo, Mr. Solari, Mr. Farzaneh, William A.
Welling, a director of Genesis, representatives of Genesis' legal counsel,
Wilson Sonsini Goodrich & Rosati, and representatives of Genesis' financial
adviser, NationsBanc Montgomery Securities LLC, met with Mr. Lushtak, Mr.
Diamond and Mr. Tillman of Paradise and representatives of its legal counsel,
Cooley Godward LLP. The meeting was designed to address issues related to the
merger, including an appropriate valuation of Paradise. At the meeting, Genesis
proposed to issue 4,250,000 Genesis common shares for all outstanding Paradise
capital stock, options and warrants. Paradise indicated that an offer of
4,250,000 shares was not acceptable and suggested that 4,500,000 shares would be
acceptable. Genesis management agreed to consider 4,500,000 shares and to
respond at a later date.
On January 8, 1999, the Genesis board of directors convened again by
telephonic conference call. After further presentations from Genesis' legal and
financial advisors, including a review of the board's fiduciary duties in
evaluating the transaction, the board of directors authorized Genesis'
management to continue its discussions with Paradise on the basis of the terms
outlined in the various meetings between the parties. It was decided to offer
4,500,000 Genesis common shares for all outstanding Paradise capital stock,
options and warrants.
On January 12, 1999, Genesis' executive management together with Paradise's
executive management and their respective legal and financial advisors met at
the offices of Wilson Sonsini Goodrich & Rosati for an extensive legal and
financial due diligence meeting. At the meeting the parties agreed on a
valuation of Genesis and Paradise which would result in Genesis issuing
4,500,000 common shares in the merger as consideration for all of Paradise's
outstanding capital stock, options and warrants. The parties also agreed to
other principal terms of the merger, including:
- that the merger be accounted for as a "pooling of interests",
- mutual non-solicitation,
- break-up fees,
- a 10% escrow of Genesis' shares to be issued to Paradise stockholders,
and
- voting agreements.
The process by which the two companies determined the appropriate valuation
of Paradise was as follows:
- The Genesis and Paradise management teams compared the actual and
forecasted sales for the two companies for the period from December 1,
1998 through February 28, 1999, a period corresponding to the current
Genesis quarter at the time of the negotiations. Despite the fact that
the negotiations took place in early January 1999, both management teams
felt that the forecasted revenues through February 28, 1999 would be very
close to final results, since these forecasted revenues were
substantially based upon firm customer orders on hand. Given the rapid
growth of both companies and the uncertainties of the market, neither
management team felt that it was appropriate to look further back or
further forward in time than the current quarter.
- The Genesis and Paradise management teams then determined a number of
shares that would be issued to Paradise stockholders for them to receive
a share of the combined company proportional to Paradise's revenue
contribution to the combined company.
- The Genesis and Paradise management teams then discounted this number of
shares to a modest extent based on the following factors:
-- Approximately $36 million in cash on Genesis' balance sheet versus a
minimal cash balance on Paradise's balance sheet,
-- Genesis' greater size,
-- Genesis' position as a public company versus Paradise's position as a
private company.
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- The two management teams considered comparable valuations in other
mergers but concluded that such comparable valuations were only
marginally relevant. Both management teams felt that the two companies
were highly similar in their businesses and that basing the valuation of
Paradise on its revenue contribution to the combined company was the most
fair approach.
- The two management teams considered comparable valuations of other public
companies but concluded that the only public company truly comparable to
Paradise was Genesis itself because it was in the same business. Both
management teams observed that had Paradise attempted an initial public
offering, the investment community would likely have priced such an
offering off the market performance of Genesis' common shares.
On January 15, 1999, the Genesis board of directors convened by telephonic
conference call with their legal and financial advisors to go over the proposed
terms of the merger. The board of directors' deliberations included discussion
of the legal and financial terms of the merger as well as the proposed
management of the combined company. Genesis' management and its legal and
financial advisors reported on the results of their due diligence investigation
conducted to date, and responded to questions asked by the board of directors
about the merger, interpretation issues, management of the combined company
following the merger, and due diligence. Genesis' legal advisors reviewed the
board of directors' fiduciary duties in evaluating the proposed transaction.
Representatives of NationsBanc Montgomery gave a presentation concerning the
financial terms of the merger. At the conclusion of the discussions, the Genesis
board of directors agreed that management should continue to proceed with
negotiation of the proposed combination and to prepare definitive agreements.
From January 12, 1999, through January 22, 1999, Genesis conducted due
diligence of Paradise, which included examining financial reports, personnel
records, and customer contracts. During this time, each company's legal and
financial advisors exchanged due diligence documents and drafts of definitive
agreements and met to conduct due diligence on the business of the other
company.
On January 19, 1999, the Paradise board of directors met. Management and
legal counsel made oral due diligence presentations of Genesis and the proposed
terms of the merger. Management and legal counsel responded to questions
regarding the proposed transaction. The board of directors deliberated on the
terms of the proposed transaction, including the amount of the consideration and
the integration and management of the combined company.
On January 21, 1999, the Paradise board of directors convened by telephonic
conference call to consider and vote upon the merger and the merger agreement.
Management and legal counsel responded to questions regarding the proposed
merger. After discussion, the Paradise board of directors unanimously approved
and adopted the merger and the merger agreement.
On January 21, 1999, the Genesis board of directors convened by telephonic
conference call with their legal and financial advisors to consider and vote
upon the proposed merger and related transactions. At this meeting, Genesis'
management reported on the results of its due diligence investigation and the
terms of the proposed merger. Management responded to questions on the terms of
the proposed merger. Genesis' financial and legal advisors reviewed the terms of
the merger agreement and related documents. NationsBanc Montgomery made a
presentation on the financial terms of the merger and delivered its oral
opinion, subsequently delivered in writing, that the exchange ratio was fair
from a financial point of view to Genesis as of that date. A copy of this
opinion is annexed to this proxy statement/prospectus, and shareholders are
urged to carefully review the opinion. After discussion, the Genesis board of
directors unanimously approved the merger agreement, and the related
transactions.
On January 22, 1999, the definitive merger agreement was signed and Genesis
and Paradise publicly announced their intent to merge.
RECOMMENDATION OF GENESIS' BOARD OF DIRECTORS AND REASONS FOR THE MERGER
On December 11, 1998, January 4, 1999, January 8, 1999, January 15, 1999,
and January 21, 1999, the Genesis board of directors held meetings in which all
directors participated. At each meeting, the
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board of directors weighed the relative merits of the proposed merger with
Paradise and concluded that the merger with Paradise was in the best interests
of Genesis and its shareholders. By unanimous vote, the Genesis board of
directors approved the issuance of Genesis common shares in the merger, the
merger, and the merger agreement on January 21, 1999, and authorized Genesis'
officers to solicit Genesis shareholders' approval of the issuance of Genesis
common shares in the merger.
In approving the merger and the merger agreement, the Genesis board of
directors determined that the combined company, would have the potential to
realize long-term improved operating and financial results and a stronger
competitive position. The Genesis board of directors identified additional
potential benefits of the merger, as follows:
- Combining Paradise's mixed-signal analog to digital technologies and its
ability to integrate these on a single chip with Genesis' strengths in
high-quality image scaling,
- Applying Paradise's low-cost integration technologies to allow the
combined company to offer cost-effective products in price sensitive
markets, including the flat panel computer monitor market and other
consumer electronics markets as they emerge,
- The depth of management strength of the combined company,
- The positive effect of the merger on Genesis employees and existing
customers, and
- The proposed terms of the merger, including that 4,500,000 Genesis common
shares would be issued to Paradise stockholders, option holders and
warrant holders in the merger.
The Genesis board of directors identified and considered a number of
potentially negative factors in its deliberations concerning the merger, as
follows:
- The possibility of management disruption associated with the merger and
the risk that key technical and management personnel of Genesis or
Paradise might not choose to remain employed by the combined company
after the merger,
- The risk that the merger might have a negative impact on Genesis'
earnings per share,
- The risk that the potential benefits sought in the merger might not be
fully realized,
- The possibility that the merger would not be consummated,
- The difficulty of managing separate operations at different geographic
locations, and
- The other risks described under "Risk Factors" on page 9 of this proxy
statement/prospectus.
The Genesis board of directors believes that these negative factors are
outweighed by the potential benefits of the merger. These negative factors and
potential benefits of the merger were all the material factors that the Genesis
board of directors considered.
In reaching its decision to approve the merger, the Genesis board of
directors did not assign any relative or specific weights to the factors
considered, and individual directors may have given different weights to
different factors. Genesis' board of directors based its position and
recommendation upon the information as a whole presented to it.
RECOMMENDATION OF PARADISE'S BOARD OF DIRECTORS AND REASONS FOR THE MERGER
On January 21, 1999, Paradise's board of directors held a meeting with all
directors participating. The Paradise board of directors weighed the relative
merits of the proposed merger with Genesis and concluded that the sale of
Paradise to Genesis was in the best interests of Paradise and its stockholders.
By unanimous vote, the Paradise board of directors approved the merger
agreement, and authorized Paradise's officers to solicit Paradise stockholders'
approval of the merger agreement.
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The following are reasons why the Paradise board of directors believes the
merger will be beneficial to Paradise and its stockholders:
- The combination of the technologies and product development resources of
Paradise and Genesis should enable Paradise to respond more effectively
to the rapid technological change in mixed-signal integrated circuits for
controlling flat panel displays in both flat panel computer monitor and
television applications, and the technical know-how and design
capabilities of the designers who design for Paradise will allow Genesis
to develop a new line of mixed-signal integrated circuits,
- Paradise stockholders will receive shares traded in an active trading
market, the Nasdaq National Market, permitting the stockholders to obtain
liquidity for their investments, in contrast to the illiquid nature of
their present holdings of Paradise capital stock,
- Genesis' financial resources should fund Paradise's continued operations
without the additional equity or debt financing that could be needed if
Paradise remained independent; equity financing could be dilutive to the
current stockholder and debt financing could result in burdensome
interest and principal repayment requirements,
- The merger is expected to provide Paradise with an expanded customer base
and product development resources to support its current marketing, sales
and distribution efforts; an expanded customer base could facilitate the
sale of Paradise products to persons that had not previously purchased
any; more product development resources could mean more rapid development
or additional new products, many of Genesis' products are marketed,
distributed and sold in applications and market segments not currently
served by Paradise,
- The merger will provide Paradise with a publicly traded security to serve
as a currency for strategic transactions, including acquisitions and
strategic partnerships; with the ability to use Genesis common stock as a
currency, acquisitions can be accomplished without the use of limited
cash as the purchase price, and
- The merger will result in Paradise having access to an expanded base of
intellectual property; with expanded intellectual property, it may be
possible to use Genesis intellectual property with Paradise intellectual
property to create new products neither could create alone.
In addition to the reasons set forth above, the Paradise board of directors
consulted with Paradise's management, legal counsel and accountants and reviewed
additional factors relevant to the merger, as follows:
- Information concerning the business, assets, operations, properties,
management, financial condition, operating results, competitive position
and prospects of Paradise and Genesis,
- The historical price and volume trading data for the Genesis common
shares as well as the composition of Genesis' shareholder base,
- Other alternatives available to Paradise in the short and long-term to
achieve Paradise's funding, liquidity and other strategic objectives,
including the availability of public and private financing and business
combinations; these alternatives were not viewed as probable or more
attractive than the merger,
- Paradise's belief that the management styles and corporate cultures of
the two companies would be complementary,
- The expectation that the merger will be treated as a tax-free
reorganization for U.S. federal income tax purposes to Paradise's
stockholders; a tax-free reorganization would enable the stockholders of
Paradise to defer an obligation to pay taxes until the time when their
shares were sold in the market for cash,
- Oral presentations from management and legal counsel concerning the
specific terms of the merger agreement and related documents, including
the obligations of Paradise and Genesis not to solicit or
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encourage other acquisition proposals, the circumstances under which
either Genesis or Paradise can terminate the merger agreement and the
closing conditions to the merger,
- The fact that the consideration to be paid to Paradise stockholders
represents a significant premium over the price paid by investors between
May 21, 1997, and November 21, 1997, for the purchase of Paradise
preferred stock, and
- The business and financial prospects for Paradise if it were to remain
independent, taking into account Paradise's continued losses from
operations, its current position in the market and its size and resources
as compared to its competitors; these items indicated that it was
possible that Paradise might have difficulty in achieving the growth in
revenue and the profitability that would lead to increasing value for the
capital stock of Paradise.
The Paradise board of directors identified and considered potentially
negative factors in its deliberations concerning the merger, as follows:
- The possibility of management disruption associated with the merger and
the risk that key technical and management personnel of Genesis or
Paradise might not choose to remain employed by Genesis or Paradise after
the merger; disruption or loss of employees could adversely affect the
combined company's ability to bring new products to the market or to
generate substantial revenues from existing or new products,
- The possibility that the merger might adversely affect Genesis' or
Paradise's relationship with certain of their respective customers,
- The risk that the potential benefits of the merger might not be realized,
- The possibility that the merger might preclude other potential strategic
transactions by Paradise; since Paradise would be under the control of
Genesis and would not be able to make independent decisions and since
some persons might not be inclined to engage in a transaction with
Paradise once it became a part of Genesis,
- The possibility that the merger would not be consummated, and
- The other risks described above under "Risk Factors."
The Paradise board of directors believes that these factors are outweighed
by the potential benefits of the merger. These negative factors and the
potential benefits of the merger were all the material factors that the Paradise
board of directors considered.
In reaching its decision to approve the merger agreement, the Paradise
board of directors did not assign any relative or specific weights to the
various factors considered, and individual directors may have given differing
weights to different factors. Rather, the Paradise board of directors based its
position and recommendations upon the information as a whole presented to it.
INTERESTS OF PARADISE DIRECTORS AND OFFICERS IN THE MERGER
In considering the recommendation of the Paradise board of directors to
vote for the merger and merger agreement, the Paradise stockholders should be
aware that some directors and officers of Paradise will become directors and
officers of Genesis. Messrs. Finch and Lushtak, directors of Paradise, will
become directors of Genesis, appointed for terms ending at the third annual
meeting following their appointment. Jeffrey Diamond, President and Chief
Executive Officer, Wendy Benveniste, Vice President of Operations, and Sanjeev
Renjen, Vice President of IC Design, of Paradise will become officers of Genesis
after the merger. Mr. Diamond will serve as Executive Vice President. Ms.
Benveniste will be Vice President of Operations, and Dr. Renjen will be Vice
President of Engineering. As a consequence of the merger, one-half of the
unvested shares under the stock option and stock purchase agreements of Dr.
Renjen will vest in accordance with the original terms of his employment with
Paradise. Assuming the merger closes on March 31, 1999, 200,000 shares of common
stock will vest under Mr. Renjen's option. These arrangements present the
Paradise directors and officers with potential conflicts of interest.
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<PAGE> 32
As of March 31, 1999, the directors and officers of Paradise and their
affiliates owned and were entitled to vote 6,843,317 shares of Paradise common
stock and 4,537,743 shares of Paradise preferred stock. These shares represented
approximately 55.9% of the outstanding Paradise common stock and 55.0% of the
outstanding Paradise preferred stock on March 31, 1999. The directors and
officers of Paradise have agreed to vote in favor of the approval and adoption
of the merger agreement and the merger.
MATERIAL TAX CONSIDERATIONS
The following discussion summarizes the material U.S. and Canadian federal
income tax considerations of the merger that are applicable to U.S. resident
holders of Paradise capital stock exchanging their Paradise capital stock for
Genesis common shares, as well as material U.S. federal income tax and Canadian
tax consequences of ownership of Genesis common shares. It does not purport to
be a complete description of all potential tax consequences affecting the
decision whether to vote to approve the merger.
Stockholders of Paradise should be aware that the following U.S. discussion
does not deal with all tax considerations that may be relevant to Paradise
stockholders in light of their particular circumstances, such as stockholders
who:
- are dealers in securities,
- are foreign persons who are banks, and insurance companies or tax exempt
organizations,
- are subject to alternative minimum tax,
- hold their shares as a hedge or as part of a hedging, straddle,
conversion or other risk reduction transaction, or
- acquired their Paradise capital stock through stock option or stock
purchase programs or in other compensatory transactions.
The following discussion does not address the tax consequences relevant for
those Paradise stockholders who:
- receive in the merger more than 50% of both the total voting power and
total value of Genesis common shares who either are officers or directors
of Paradise, or
- own 5% or more of either the total voting power or total value of
Paradise capital stock immediately prior to the merger; or
- own, actually or constructively, 5% or more of either the total voting
power or total value of all capital stock of Genesis before or
immediately after the merger.
The following Canadian tax discussion only addresses Paradise stockholders
who:
- for purposes of the Income Tax Act (Canada) (the "ITA"):
- are not, have not been and will not be or be deemed to be resident in
Canada at any time while they held or hold Paradise capital stock or
Genesis common shares,
- deal at arm's length with Genesis,
- will hold their Genesis common shares as capital property,
- do not hold their Paradise capital stock or Genesis common shares in or
in the course of carrying on a business in Canada, and
- do not fall within the definition of a "financial institution" for the
purposes of the mark-to-market rules, and
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<PAGE> 33
- for purposes of the Convention Between the United States of America and
Canada with Respect to Taxes on Income and on Capital (the "1980
Convention"):
- are residents of the United States and not residents of Canada, and
- do not hold their Paradise capital stock or Genesis common shares as part
of the business property of a permanent establishment in Canada or in
connection with a fixed base in Canada.
In addition, the following discussion does not address the tax consequences
of the merger under foreign, other than Canadian, state, local, provincial or
territorial tax laws. The following discussion of U.S. tax consequences only
applies to Paradise stockholders who hold shares of Paradise capital stock as
capital assets. Finally, the following discussion of U.S. tax consequences does
not address the tax consequences of transactions occurring prior to or after the
merger whether or not such transactions are in connection with the merger
including, for example, the exercise of options or rights to purchase Paradise
capital stock in anticipation of the merger. ACCORDINGLY, PARADISE STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES AND ANY INFORMATION REPORTING REQUIREMENTS ASSOCIATED
WITH THE MERGER.
The following is based on the current provisions of the Canadian ITA, the
current published administrative and assessing practices of Revenue Canada, and
the 1980 Convention and amendments thereto. It is also based on the Internal
Revenue Code of 1986, as amended, applicable Treasury Regulations, judicial
authority and administrative rulings and practice, all of which are subject to
change. The Internal Revenue Service (the "IRS") or Revenue Canada could still
adopt contrary positions. In addition, future legislative, judicial or
administrative changes or interpretations could adversely affect the accuracy of
the statements and conclusions in this discussion. Any of these changes or
interpretations could be applied retroactively and could affect the tax
consequences of the merger as described in this discussions.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS OF THE MERGER
Neither Genesis nor Paradise has requested a ruling from the IRS in
connection with the merger. Genesis and Paradise have each received opinions
from their respective counsel that the merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code. The tax
opinions neither bind the IRS nor preclude the IRS from adopting a contrary
position. The tax opinions are subject to assumptions and qualifications and are
based in part on the truth and accuracy of representations of Genesis, Rainbow
Sub and Paradise, including representations in certificates delivered to counsel
by the respective companies' management. It is a condition to the completion of
the merger that Genesis and Paradise will receive closing tax opinions
consistent with the opinions already received. The merger will qualify as a
reorganization under Section 368(a) of the Internal Revenue Code with each of
Genesis, Rainbow Sub and Paradise qualifying as a "party to the reorganization"
under Section 368(b) of the Internal Revenue Code, in which case the following
U.S. Federal income tax consequences will result, subject to the limitations and
qualifications referred to in this discussion and in the tax opinions:
- The holders of Paradise capital stock will recognize no gain or loss upon
the receipt of Genesis common shares solely in exchange for their
Paradise capital stock in the merger except to the extent, if any, of
cash received instead of fractional shares,
- The aggregate tax basis of the Genesis common shares received by the
Paradise stockholders, including any fractional shares of the Genesis
common shares not actually received, in the merger will be the same as
the aggregate tax basis of the Paradise capital stock surrendered in
exchange,
- The holding period of the Genesis common shares received by each Paradise
stockholder in the merger will include the holding period of the Paradise
capital stock surrendered in exchange,
- Cash payments received by Paradise stockholders instead of a fractional
share will be treated as if a fractional share of Paradise capital stock
had been issued in the merger and then redeemed by Paradise. A Paradise
stockholder receiving cash instead of a fractional share will recognize
gain or
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<PAGE> 34
loss upon such payment, measured by the difference, if any, between the
amount of cash received and the basis in the fractional share. The gain
or loss will be capital gain or loss,
- A Paradise stockholder who exercises dissenters' rights with respect to a
share of Paradise capital stock and receives payments for the stock in
cash will generally recognize gain or loss, measured by the difference
between the stockholder's basis in the stock and the amount of cash
received, provided that the payment is neither essentially equivalent to
a dividend within the meaning of Section 302 of the Internal Revenue
Code, nor has the effect of a distribution of a dividend within the
meaning of Section 356(a)(2) of the Internal Revenue Code (collectively,
a "Dividend Equivalent Transaction"). The gain or loss will be capital
gain or loss. A sale of Paradise capital stock pursuant to an exercise of
dissenters' rights will not be a Dividend Equivalent Transaction if, as a
result of the exercise, the shareholder exercising dissenters' rights
owns no Genesis common shares or Paradise capital stock, either actually
or constructively within the meaning of Section 318 of the Internal
Revenue Code, and
- None of Genesis, Rainbow Sub or Paradise will recognize gain or loss
solely as a result of the merger.
For U.S. federal income tax purposes, holders of Paradise capital stock
will be treated as having received the escrow shares upon the completion of the
merger. Accordingly, until the escrow shares are released, the interim basis of
the Genesis common shares received by holders of Paradise capital stock will be
determined as though the maximum number of Genesis common shares were received
by Paradise stockholders. Because the number of escrow shares to be released to
Paradise or any other beneficiary is based upon the value of the Genesis common
shares at the time of the merger, Paradise stockholders will not recognize gain
or loss upon the release of escrow shares to Genesis or any other beneficiary.
The basis of any forfeited shares will be added to the adjusted basis of the
remaining Genesis common shares received in the merger by Paradise stockholders.
No gain or loss will be recognized and no amount will be included in the income
of the Paradise stockholders by reason of any release of escrow shares to the
Paradise stockholders.
A successful IRS challenge to the reorganization status of the merger would
result in significant adverse tax consequences to the Paradise stockholders. A
Paradise stockholder would recognize gain or loss equal to the difference
between the stockholder's basis in each share and the fair market value, as of
the time of the merger, of the Genesis common shares received in exchange. In
that case, a Paradise stockholder's aggregate basis in the Genesis common shares
so received would equal its fair market value, and the stockholder's holding
period for the shares would begin the day after the merger.
Paradise stockholders will not be subject to tax under the ITA on the
exchange of Paradise capital stock for Genesis common shares.
Any Paradise stockholder that receives Genesis common shares in exchange
for shares of Paradise capital stock in the merger may be required to file a
notice providing information relating to the merger on IRS Form 926 with its
U.S. federal income tax return for the taxable year of the merger. Each Paradise
stockholder is advised to consult its tax adviser with respect to the
requirements of the notice. Failure by a Paradise stockholder to file such
notice when required may result in the merger being a taxable event for the
Paradise stockholder.
Even if the merger qualifies as a tax-free reorganization, a Paradise
stockholder receiving shares of Genesis common shares would recognize gain to
the extent that the shares were received in exchange for services or property
other than solely Paradise capital stock. All or a portion of the gain may be
taxable as ordinary income. Gain would also have to be recognized to the extent
that a Paradise stockholder was treated as receiving consideration other than
Genesis common shares in exchange for Paradise capital stock.
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<PAGE> 35
U.S. TAXATION OF GENESIS
Under the 1980 Convention, Genesis will not be subject to U.S. income tax
unless it engages in a trade or business in the United States through a
permanent establishment. Genesis currently does not directly have operations in
the United States. Genesis expects to be able to conduct its business activities
in a manner that will not result in it being considered to be engaged in a trade
or business or to have a permanent establishment in the United States. Genesis
does have a wholly-owned U.S. subsidiary, Genesis Microchip Corp., which is
engaged in a U.S. trade or business and is, therefore, subject to U.S. taxation.
U.S. TAXATION OF HOLDERS OF GENESIS COMMON SHARES
TAXATION OF DIVIDENDS. For U.S. federal income tax purposes, the gross
amount of any dividend paid, to the extent of the current or accumulated
earnings and profits of Genesis, will be included in gross income and treated as
foreign source dividend income. Dividends paid in excess of the earnings and
profits will be applied against and will reduce the shareholders' basis in the
Genesis common shares and, to the extent in excess of the basis, will be treated
as gain from the sale or exchange of the Genesis common shares. The dividend
will not be eligible for the dividends-received deduction available for certain
deductions received from U.S. corporations. The amount includible in income will
be the U.S. dollar value of the payment on the date of payment regardless of
whether the payment is, in fact, converted into U.S. dollars. Generally, gain or
loss, if any, resulting from currency fluctuations during the period beginning
on the date any dividend is paid and ending on the date the payment is converted
into U.S. dollars will be treated as ordinary income or loss.
A shareholder will have the option of claiming any amount of Canadian tax
withheld at source on the distribution of dividends on the Genesis common shares
as either a deduction from adjusted gross income, or as a dollar-for-dollar
credit against the shareholder's U.S. federal income tax liability. If the
shareholder elects to claim a credit for the Canadian tax, the election will be
binding for all foreign taxes paid or accrued by the shareholder for the taxable
year. Shareholders should consult with their own tax advisers with regard to the
availability of a U.S. foreign tax credit and the application of the U.S.
foreign tax credit limitations to their particular situations.
TAXATION OF CAPITAL GAINS. Subject to the discussion below under the
heading, "Passive Foreign Investment Company Considerations," a shareholder will
be liable for U.S. federal income tax on gains related to Genesis common shares
to the same extent as any other gains from sales or disposition of shares. That
is, a shareholder will recognize taxable gain or loss on any sale, exchange or
other disposition of Genesis common shares in an amount equal to the difference
between the U.S. dollar value of the amount realized on the sale, exchange or
other disposition and the shareholder's adjusted tax basis in the shares. The
tax basis of a share of Genesis common shares will equal its initial cost to the
shareholder, as reduced by any dividends on the Genesis capital stock treated as
a return of capital. The gain or loss will be capital gain or loss. Capital
gains of individuals derived with respect to capital assets held for more than
twelve months are eligible for reduced rates of taxation. The deductibility of
capital losses is subject to limitations.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
The following section was prepared and reviewed by Wilson Sonsini Goodrich
& Rosati, Professional Corporation.
Genesis will be classified as a passive foreign investment company ("PFIC")
for U.S. federal income tax purposes if it satisfies either of the following two
tests:
- 75% or more of its gross income is passive income, or
- on average for the taxable year, 50% or more of its assets by value or,
if Genesis so elects, by adjusted basis produce or are held for the
production of passive income.
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<PAGE> 36
Genesis does not believe that it satisfies (or, after the completion of
this merger, will satisfy) either of the tests for PFIC status. If Genesis is a
PFIC for any taxable year, Genesis shareholders would be required to either:
- pay an interest charge together with tax calculated at maximum ordinary
income rates on certain "excess distributions", defined to include gain
on a sale or other disposition of Genesis common shares, or
- if a qualified electing fund election is made by a Genesis shareholder,
to include in their taxable income certain undistributed amounts of
Genesis' income.
Each Genesis shareholder should consult its own tax adviser regarding the
advisability of making the qualified electing fund election.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Noncorporate Paradise stockholders may be subject to information reporting,
backup withholding requirements at a rate of 31% on cash payments received
instead of a fractional share interest in Genesis common shares. Backup
withholding will not apply to a stockholder who, before payment:
- furnishes Form W-9 with a correct taxpayer identification number to
Genesis certifying that it is not subject to backup withholding,
- provides a certificate of foreign status to Genesis on Form W-8, or
- is otherwise exempt from backup withholding. A stockholder who fails to
provide the correct taxpayer identification number on Form W-9 may be
subject to a $50 penalty imposed by the IRS. Amounts withheld under these
rules will be creditable against the holder's U.S. federal income tax
liability, provided the correct information is provided to the IRS.
Paradise stockholders will also be required to retain records and file
with their federal income tax returns a statement setting forth facts
relating to the merger.
GENERAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
Paradise stockholders will not be subject to tax under the ITA on the
exchange of Paradise capital stock for Genesis common shares.
CANADIAN TAXATION OF GENESIS
Canadian corporations are taxed on their world-wide income. They are
subject to a Canadian federal income tax of 29%. In addition, Canadian
corporations are subject to tax by each Canadian province in which the
corporation has a permanent establishment, at an approximate provincial tax rate
of 16%. The result is that a corporation resident in Canada will pay a combined
federal and provincial rate of approximately 45%. Dividends received from
foreign affiliates engaged in an active business in a treaty country such as the
United States are not taxed in Canada. These dividends may be subject to the
withholding tax applied by the foreign country, at a rate which may vary
according to the 1980 Convention.
CANADIAN TAXATION OF HOLDERS OF GENESIS COMMON SHARES
TAXATION OF DIVIDENDS. Amounts paid or credited as, on account of, instead
of payment of, or in satisfaction of, dividends to a shareholder will be subject
to Canadian non-resident withholding tax. Withholding tax will also apply to
amounts which are deemed to be paid or credited as dividends. The withholding
tax is levied at a rate of 25%, which may be reduced pursuant to the terms of
the 1980 Convention. Under the 1980 Convention, the rate of Canadian
non-resident withholding tax on the gross amount of dividends beneficially owned
by a Genesis shareholder is 15%. Where the beneficial owner of such dividends is
a company which owns at least 10% of the voting shares of Genesis, the rate of
such withholding is 5%.
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TAXATION OF CAPITAL GAINS. A shareholder will not be subject to tax under
the ITA in respect of any disposition of Genesis common shares unless, at the
time of such disposition, such Genesis common shares constitutes "taxable
Canadian property" of the shareholder for purposes of the ITA. The Genesis
common shares will not constitute "taxable Canadian property" if the shares are
listed on a prescribed stock exchange for the purposes of the ITA at the time
the shares are disposed of by a shareholder. The Genesis common shares will
constitute "taxable Canadian property" if, at any time during the five year
period immediately preceding a disposition of the shares, 25% or more of the
issued shares of any class or series of Genesis, or an interest therein or an
option in respect thereof, were owned by:
- the shareholder,
- persons with whom the shareholder did not deal at arm's length, or
- the shareholder and persons with whom the shareholder did not deal at
arm's length.
The Genesis common shares are currently listed on a prescribed stock exchange
for the purposes of the ITA.
Under the 1980 Convention, gains derived by the shareholder from the
disposition of Genesis common shares that constitute "taxable Canadian property"
will not be taxable in Canada unless the value of the Genesis common shares is
derived principally from real property situated in Canada.
OPINION OF GENESIS' FINANCIAL ADVISOR
In January 1999, the board of directors of Genesis retained NationsBanc
Montgomery to deliver a fairness opinion in connection with the acquisition of
Paradise. NationsBanc Montgomery is a nationally recognized investment banking
firm. It is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. Genesis
selected NationsBanc Montgomery to deliver a fairness opinion on the basis of
NationsBanc Montgomery's experience and expertise in transactions similar to the
merger and its reputation in the semiconductor device industry and investment
community and its historical investment banking relationship with Genesis.
On January 21, 1999, NationsBanc Montgomery delivered to the Genesis board
of directors an oral opinion, subsequently confirmed in writing as of the same
date, that the exchange ratio was fair to Genesis from a financial point of view
as of that date. The exchange ratio was determined pursuant to negotiations
between Genesis and Paradise and not pursuant to recommendations from
NationsBanc Montgomery. No limitations were imposed by the Genesis board of
directors on NationsBanc Montgomery with respect to the investigations made or
procedures followed in rendering its opinion. NationsBanc Montgomery was not
requested to, nor did it advise Genesis with respect to alternatives to the
merger or Genesis' underlying decision to proceed with or effect the merger.
THE FULL TEXT OF NATIONSBANC MONTGOMERY'S WRITTEN OPINION TO THE GENESIS
BOARD OF DIRECTORS IS ATTACHED HERETO AS ANNEX F. IT SHOULD BE READ CAREFULLY
AND IN ITS ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT/PROSPECTUS. THE
FOLLOWING SUMMARY OF NATIONSBANC MONTGOMERY'S OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. NATIONSBANC MONTGOMERY'S
OPINION IS DIRECTED TO THE GENESIS BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH
RESPECT TO THE MERGER. NATIONSBANC MONTGOMERY'S OPINION ADDRESSES THE FAIRNESS
OF THE EXCHANGE RATIO TO GENESIS ONLY FROM A FINANCIAL POINT OF VIEW AND DOES
NOT ADDRESS THE RELATIVE MERITS OF THE MERGER OR ANY ALTERNATIVES TO THE MERGER,
THE UNDERLYING DECISION OF THE GENESIS BOARD OF DIRECTORS TO PROCEED WITH OR
EFFECT THE MERGER OR ANY OTHER ASPECT OF THE MERGER. IN FURNISHING ITS OPINION,
NATIONSBANC MONTGOMERY DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF
THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, NOR DID IT ADMIT THAT ITS
OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF THE SECURITIES
ACT, AND STATEMENTS TO SUCH EFFECT ARE INCLUDED IN THE NATIONSBANC MONTGOMERY
OPINION.
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NationsBanc Montgomery:
- reviewed financial and other data with respect to Paradise, including the
financial statements for calendar year 1998 and financial and operating
data relating to Paradise made available to NationsBanc Montgomery from
published sources and from the internal records of Paradise;
- reviewed the financial terms and conditions of the January 20, 1999 draft
of the Agreement and Plan of Reorganization;
- reviewed publicly available information concerning the trading of, and
the trading market for, Genesis common shares, and analyzed the
capitalization of Paradise;
- compared Paradise from a financial point of view with publicly traded
semiconductor device companies which NationsBanc Montgomery deemed to be
relevant;
- considered the financial terms, to the extent publicly available, of
selected recent business combinations involving semiconductor device
companies which NationsBanc Montgomery deemed to be comparable, in whole
or in part, to the merger;
- reviewed Paradise's and Genesis' relative contributions to the combined
company under selected financial measures, based on their respective
historical results and forecasts, in the case of the financial forecasts
for Genesis, by NationsBanc Montgomery's research analysts;
- considered the valuation of Paradise based on discounted cash flow
analyses;
- reviewed pro forma effects of the merger on Genesis, including the impact
of the merger on earnings per share estimates of Genesis provided by
NationsBanc Montgomery's research analysts;
- reviewed and discussed with representatives of the management of Paradise
and Genesis information of a business and financial nature, including
financial forecasts and related assumptions, regarding Paradise and
Genesis, furnished to NationsBanc Montgomery by them, or, in the case of
the financial forecasts for Genesis, by NationsBanc Montgomery's research
analysts; and
- made inquiries regarding and discussed the merger, the January 20, 1999
draft merger agreement and other matters related thereto with Genesis'
counsel.
NationsBanc Montgomery reviewed the January 20, 1999 draft of the merger
agreement in its preparation of its opinion. While Genesis and Paradise had the
opportunity to agree to materially add, delete or alter material terms of the
merger agreement prior to its execution, the final merger agreement was
substantially similar to the January 20, 1999 draft of the merger agreement.
NationsBanc Montgomery did not independently verify the above information
and relied on its being accurate and complete in all material respects. With
respect to the financial forecasts for Genesis obtained by NationsBanc
Montgomery from its research analysts and the financial forecasts for Paradise,
NationsBanc Montgomery assumed that they were reasonably prepared on bases
reflecting the best available estimates and judgments of their respective
managements at the time of preparation and that they provided a reasonable basis
upon which NationsBanc Montgomery could form its opinion. With Genesis' consent,
NationsBanc Montgomery further assumed that resolution of any litigation between
Paradise and Arithmos, Inc., would not result in any material adverse effect on
the value of Genesis' common shares or Paradise. The forecasts were not prepared
with a view toward public disclosure. In addition, the forecasts were based upon
numerous variables and assumptions that are inherently uncertain, including,
without limitation, factors related to general economic and competitive
conditions. Accordingly, actual results could vary significantly from those
forecasts. NationsBanc Montgomery assumed that there were no material changes in
Paradise's or Genesis' assets, financial condition, results of operations,
business or prospects since the respective dates of their last financial
statements made available to NationsBanc Montgomery. NationsBanc Montgomery
relied on advice of counsel and independent accountants to Genesis as to all
legal and financial reporting matters with respect to Genesis, the merger and
the January 20, 1999 draft merger agreement. NationsBanc Montgomery assumed that
the merger will be consummated in a manner that complies in all respects with
the applicable provisions of the Securities
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<PAGE> 39
Act, the Exchange Act and all other applicable Canadian federal, Canadian
provincial, U.S. federal and U.S. state statutes, rules and regulations. In
addition, NationsBanc Montgomery did not assume responsibility for making an
independent evaluation, appraisal or physical inspection of any of the assets or
liabilities, whether contingent or otherwise, of Paradise or Genesis.
NationsBanc Montgomery had not been furnished with any appraisals regarding any
of the assets or liabilities of Paradise or Genesis. Genesis informed
NationsBanc Montgomery, and NationsBanc Montgomery assumed, that the merger will
be recorded as a pooling of interests transaction under generally accepted
accounting principles. NationsBanc Montgomery's opinion was based on economic,
monetary and market and other conditions as in effect on, and the information
made available to NationsBanc Montgomery as of the date of its opinion.
Accordingly, although subsequent developments may affect NationsBanc
Montgomery's opinion, NationsBanc Montgomery did not assume any obligation to
update, revise or reaffirm its opinion. NationsBanc Montgomery further assumed
that the merger will be consummated in accordance with the terms described in
the January 20, 1999 draft merger agreement, without any further amendments and
without waiver by Genesis of any of the conditions to its obligations.
While Paradise is an early growth stage company, NationsBanc Montgomery
assumed that Paradise could experience significant growth within the next
several years based on a number of factors, including:
- the sizeable market opportunity presented by flat panel displays;
- the relatively small number of companies with competing solutions;
- Paradise's strong technological capabilities;
- Paradise's intellectual property portfolio;
- Paradise's ability to get two products into volume production;
- Paradise's trend of improving financial results over recent periods; and
- the experience and track record of Paradise's management with respect to
managing start-up companies through periods of rapid growth.
Using the financial forecasts of Paradise provided by Paradise's management
and further developed by NationsBanc Montgomery with the consent and assistance
of Paradise management, NationsBanc Montgomery assumed that Paradise would
achieve profitability by the end of the first calendar quarter of 1999. Paradise
informed NationsBanc Montgomery that Paradise did achieve profitability by the
end of the first calendar quarter of 1999.
NationsBanc Montgomery noted, however, that its assumptions with respect to
Paradise were not wholly contingent on Paradise's ability to achieve
profitability.
The following is a brief summary of the report presented by NationsBanc
Montgomery to the Genesis board of directors on January 21, 1999 in connection
with its opinion. Some of the summaries of financial analyses performed by
NationsBanc Montgomery include information presented in tabular format. In order
to fully understand the financial analyses performed by NationsBanc Montgomery,
the tables must be read together with the text of each summary. The tables alone
do not constitute a complete description of the financial analyses. Considering
the data set forth in the tables without considering the full narrative
description of the financial analyses, including the methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of the financial analyses performed by NationsBanc Montgomery.
COMPARABLE COMPANY ANALYSIS. Based on public and other available
information, NationsBanc Montgomery calculated multiples of aggregate value.
NationsBanc Montgomery defined these as:
- equity value plus debt less cash and cash equivalents to estimated
calendar year 1999 revenues, and
- earnings before interest and taxes and equity value to estimated calendar
year 1999 net income.
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<PAGE> 40
These multiples were calculated for eleven companies in the semiconductor
device industry whose securities are publicly traded and that NationsBanc
Montgomery believes have operations and market valuations similar to what might
be expected for Paradise:
- Altera Corporation;
- ATI Technologies Inc.;
- Broadcom Corporation;
- Galileo Technology Ltd.;
- Genesis;
- Level One Communications Inc.;
- MMC Networks Inc.;
- NeoMagic Corporation;
- PMC-Sierra Inc.;
- TransSwitch Corporation; and
- Xilinx Inc.
This analysis indicated the following multiples:
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Aggregate value to: Range of multiples Mean Median
- ----------------------------------------------------------------------------------------------------------
Estimated calendar year 1999 revenues 1.1x to 19.8x 8.3x 8.4x
- ----------------------------------------------------------------------------------------------------------
Estimated calendar year 1999 earnings before 8.0x to 93.9x 33.4x 29.0x
interest
and taxes
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Equity value to: Range of multiples Mean Median
- ----------------------------------------------------------------------------------------------------------
Estimated calendar year 1999 net income 13.7x to 141.3x 47.6x 37.3x
- ----------------------------------------------------------------------------------------------------------
</TABLE>
While the comparable company analysis compared Paradise to eleven companies
in the semiconductor device industry, NationsBanc Montgomery did not include
every company that could be considered to be a participant in the same industry.
Paradise is an early growth stage company with a narrow product focus, and
consequently, larger, established companies with significantly greater assets
and revenues were determined by NationsBanc Montgomery to be inappropriate as a
basis for comparison.
NationsBanc Montgomery noted that the consideration to be paid by Genesis
in connection with the merger implied multiples of 6.0x estimated calendar year
1999 revenues, 31.0x estimated calendar year 1999 earnings before interest and
taxes, and 31.1x estimated calendar year 1999 net income for Paradise.
COMPARABLE TRANSACTIONS ANALYSIS. Based on public and other available
information, NationsBanc Montgomery calculated the multiples of aggregate value
to last twelve months revenues and last quarter annualized revenues for the
target company implied in ten comparable acquisitions of companies in the
semiconductor device industry announced between October 20, 1995 and November 9,
1998 and which represented either acquisitions of early growth stage companies
by established companies or strategic acquisitions for the primary purpose of
acquiring access to a particular technology or product or both:
- the acquisition of Jato Technologies Inc. by Level One Communications
Inc., announced on November 9, 1998;
- the acquisition of Chromatic Research Inc. by ATI Technologies Inc.,
announced on October 21, 1998;
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<PAGE> 41
- the acquisition of Acclaim Communications Inc. by Level One
Communications Inc., announced on June 25, 1998;
- the acquisition of Rendition Inc. by Micron Technology Inc., announced on
June 22, 1998;
- the acquisition of ComCore Semiconductor Inc. by National Semiconductor
Corporation, announced on April 24, 1998;
- the acquisition of Integrated Telecom Technology Inc. by PMC-Sierra Inc.,
announced on April 16, 1998;
- the acquisition of CommQuest Technologies by IBM Corporation, announced
on February 11, 1998;
- the acquisition of Amati Communications by Texas Instruments Inc.,
announced on November 19, 1997;
- the acquisition of Mediamatics Inc. by National Semiconductor
Corporation, announced on March 10, 1997; and
- the acquisition of NexGen Microsystems by Advanced Micro Devices Inc.,
announced on October 20, 1995.
This analysis yielded the following multiples, after excluding the Acclaim
Communications Inc./Level One Communications Inc. transaction, which was so far
outside the range of other transactions that it was deemed to be inappropriate
for inclusion:
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Aggregate value to: Range of multiples Mean Median
- ----------------------------------------------------------------------------------------------------------
Last twelve months revenues 4.6x to 30.5x 17.7x 17.8x
- ----------------------------------------------------------------------------------------------------------
Last quarter annualized revenues 4.6x to 21.4x 12.1x 10.3x
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The consideration to be paid by Genesis is connection with the merger
implied multiples of 38.3x last twelve months revenues and 13.5x last quarter
annualized revenues for Paradise.
No company or transaction used in the comparable company or comparable
transactions analyses is identical to Genesis, Paradise or the merger.
Accordingly, an analysis of the results of the foregoing is not mathematical;
rather, it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other factors
that could affect the public trading value or purchase price of the companies
which Genesis, Paradise and the merger are being compared. While the comparable
transactions analysis was performed with respect to the acquisition of Paradise
by Genesis, Paradise is an early growth stage company. Consequently, comparisons
made between the acquisition of Paradise and acquisitions of established
companies by significantly larger acquirors in the same industry were determined
by NationsBanc Montgomery to be not meaningful on a last twelve months revenues
basis and significantly less meaningful on a last quarter annualized revenues
basis.
CONTRIBUTION ANALYSIS. Using the financial forecasts for Genesis developed
by NationsBanc Montgomery research analysts and the financial forecasts of
Paradise provided by Paradise's management and further developed by NationsBanc
Montgomery with the consent and assistance of Paradise management, NationsBanc
Montgomery reviewed the estimated contribution of each of Genesis and Paradise
to the total revenues, operating income and net income on a last quarter
annualized basis and for each of the estimated calendar years 1999 and 2000 of
the combined company. NationsBanc Montgomery then compared the estimated
contributions of Genesis and Paradise to the pro forma share ownership of the
combined company to be owned by the stockholders of each of Genesis and
Paradise, assuming consummation of the merger as described in the January 20,
1999 draft merger agreement. This analysis
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<PAGE> 42
indicated that Genesis's stockholders would own approximately 76.6% of the
combined company. This analysis also indicated that Genesis and Paradise would
each contribute:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
Genesis Paradise
- -----------------------------------------------------------------------------------------------------
Last quarter annualized revenues 76.3% 23.7%
- -----------------------------------------------------------------------------------------------------
Last quarter annualized operating income 100% 0%
- -----------------------------------------------------------------------------------------------------
Last quarter annualized net income 100% 0%
- -----------------------------------------------------------------------------------------------------
Estimated calendar year 1999 revenues 66.6% 33.4%
- -----------------------------------------------------------------------------------------------------
Estimated calendar year 1999 operating income 72.3% 27.7%
- -----------------------------------------------------------------------------------------------------
Estimated calendar year 1999 net income 65.7% 34.3%
- -----------------------------------------------------------------------------------------------------
Estimated calendar year 2000 revenues 64.2% 35.8%
- -----------------------------------------------------------------------------------------------------
Estimated calendar year 2000 operating income 69.4% 30.6%
- -----------------------------------------------------------------------------------------------------
Estimated calendar year 2000 net income 70.3% 29.7%
- -----------------------------------------------------------------------------------------------------
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS. NationsBanc Montgomery applied a discounted
cash flow analysis to the financial cash flow forecasts for Paradise for
calendar years 1999 through 2003, as estimated by Paradise management and
further developed by NationsBanc Montgomery with the consent and assistance of
Paradise management. NationsBanc Montgomery first calculated the present values
of the forecasted free cash flows. Second, NationsBanc Montgomery estimated the
present value of the terminal value, calculated by applying current market
valuation multiples to Paradise's estimated calendar year 2003 revenue and net
income. NationsBanc Montgomery then calculated the implied equity values for
Paradise using a terminal value based on multiples of estimated calendar year
2003 revenues:
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Terminal multiple of Terminal multiple of Terminal multiple of
7.6x estimated 8.4x estimated 9.2x estimated
Discount calendar year 2003 calendar year 2003 calendar year 2003
Rate revenues revenues revenues
- -----------------------------------------------------------------------------------------------
20.0% $331.3 million $365.7 million $400.2 million
- -----------------------------------------------------------------------------------------------
25.0% 262.5 million 289.6 million 316.7 million
- -----------------------------------------------------------------------------------------------
30.0% 210.3 million 231.7 million 253.2 million
- -----------------------------------------------------------------------------------------------
</TABLE>
NationsBanc Montgomery also calculated the implied equity values for
Paradise using a terminal value based on multiples of estimated calendar year
2003 net income:
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Terminal multiple of Terminal multiple of Terminal multiple of
37.3x estimated 42.5x estimated 47.6x estimated
Discount calendar year 2003 net calendar year 2003 net calendar year 2003 net
Rate income income income
- -----------------------------------------------------------------------------------------------
20.0% $214.8 million $241.6 million $268.5 million
- -----------------------------------------------------------------------------------------------
25.0% 170.9 million 192.0 million 213.0 million
- -----------------------------------------------------------------------------------------------
30.0% 137.4 million 154.1 million 170.9 million
- -----------------------------------------------------------------------------------------------
</TABLE>
The range of discount rates of 20.0% to 30.0% was selected by NationsBanc
Montgomery based on its prior experience with respect to the valuation of
investment opportunities, with consideration given to the risk inherent in an
early growth stage company such as Paradise. NationsBanc Montgomery established
the range of multiples for calculating the implied equity values derived from
estimated calendar year 2003 revenues by taking the median multiple of aggregate
value to estimated calendar year 1999 revenues indicated in the comparable
company analysis and establishing the range between 10% below the median
multiple and 10% above the median multiple. NationsBanc Montgomery established
the range of multiples
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<PAGE> 43
for calculating the implied equity values derived from estimated calendar year
2003 net income by establishing the range between the mean and median equity
value to estimated calendar year 1999 net income multiples indicated in the
comparable company analysis.
NationsBanc Montgomery noted that the equity value of Paradise implied by
the merger was $146.3 million.
ACCRETION/DILUTION ANALYSIS. Using the financial forecasts for Genesis
developed by NationsBanc Montgomery research analyses and the financial
forecasts of Paradise provided by Paradise's management and further developed by
NationsBanc Montgomery with the consent and assistance of Paradise management,
NationsBanc Montgomery compared estimated earnings per share on a stand-alone
basis for Genesis to the estimated earnings per share of the combined company
for calendar years 1999 and 2000. Based on those forecasts and assuming
consummation of the merger on the terms set forth in the January 20, 1999 draft
merger agreement, NationsBanc Montgomery noted that the merger would be
accretive to earnings per share in calendar years 1999 and 2000.
While the foregoing summary describes all analyses and examinations that
NationsBanc Montgomery considered to be material to its opinion, it is not a
comprehensive description of all analyses and examinations actually conducted by
NationsBanc Montgomery. The preparation of a fairness opinion is not susceptible
to partial analysis or summary description. NationsBanc Montgomery believes that
its analyses and the above summary must be considered as a whole and that
selecting portions of its analyses or the factors considered, without
considering all analyses and factors, would create an incomplete view of the
process underlying the analyses in its presentation to the Genesis board of
directors. NationsBanc Montgomery did not assign any specific weight to any of
the analyses described above. The fact that any specific analysis has been
referred to in the summary above is not meant to indicate that it was given
greater weight than any other analysis. Accordingly, the ranges of valuations
resulting from any particular analysis described above should not be taken to be
NationsBanc Montgomery's view of the actual value of Paradise.
In performing its analyses, NationsBanc Montgomery made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Genesis or
Paradise. The analyses performed by NationsBanc Montgomery are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than those suggested by these analyses. These analyses
were prepared solely as part of NationsBanc Montgomery's analysis of the
financial fairness of the exchange ratio to Genesis and were provided to the
Genesis board of directors in connection with the delivery of NationsBanc
Montgomery's opinion. The analyses are not meant to be appraisals or to reflect
the prices at which a company might actually be sold or the prices at which any
securities may trade at any time in the future.
NationsBanc Montgomery's opinion and presentation to the Genesis board of
directors were among the many factors taken into consideration by the Genesis
board of directors in making its determination to approve the merger.
In the NationsBanc Montgomery engagement letter, Genesis agreed to pay
NationsBanc Montgomery a fixed fee upon delivery of its opinion letter. The
Genesis board of directors was aware of this fee structure and took it into
account in considering NationsBanc Montgomery's opinion and in approving the
merger. The NationsBanc Montgomery engagement letter also calls for Genesis to
reimburse NationsBanc Montgomery for its reasonable out-of-pocket expenses.
Genesis has also agreed to indemnify NationsBanc Montgomery, its affiliates, and
their respective partners, directors, officers, agents, consultants, employees
and controlling persons against certain liabilities, including liabilities under
the federal securities laws.
In the ordinary course of its business, NationsBanc Montgomery actively
trades the equity securities of Genesis for its own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
Genesis' securities. NationsBanc Montgomery also acted as underwriter in
connection with public offerings of Genesis' securities and has performed
investment banking services for Genesis.
38
<PAGE> 44
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF PARADISE AND GENESIS
The Genesis common shares to be issued in the merger will be registered
under the Securities Act of 1933 and will be freely transferable under the
Securities Act, except for Genesis common shares issued to any person who is an
"affiliate" of either Genesis or Paradise at the time of the special meeting.
Persons who may be affiliates include individuals or entities that control, are
controlled by, or are under common control of either Genesis or Paradise and may
include some officers and directors, as well as principal shareholders.
Affiliates may not sell their Genesis common shares acquired in the merger
except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares,
- an exemption under paragraph (d) of Rule 145 under the Securities Act, or
- any other applicable exemption under the Securities Act.
Genesis' registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of Genesis common
shares to be received by affiliates in the merger.
ACCOUNTING TREATMENT OF THE MERGER
We intend to account for the merger as a "pooling of interests" business
combination. It is a condition of the merger that Genesis be advised by its
independent auditors that they concur with Genesis' conclusion that the
transactions contemplated by the merger agreement can properly be accounted for
as a "pooling of interests" business combination. Under the "pooling of
interests" method of accounting, each company's historical recorded assets and
liabilities will be carried forward to the combined company at their recorded
amounts. In addition, the operating results of the combined company will include
each company's operating results for the entire fiscal year in which the merger
is completed. The historical reported operating results will be combined and
restated as the operating results of the combined company.
LISTING ON NASDAQ NATIONAL MARKET OF GENESIS' COMMON SHARES TO BE ISSUED IN THE
MERGER
Genesis intends that the common shares to be issued in the merger will be
approved for listing on the Nasdaq National Market.
39
<PAGE> 45
TERMS OF THE MERGER
The description of the terms of the merger in this part of the proxy
statement/prospectus is a summary of the material terms of the merger agreement.
A copy of the merger agreement is attached as Annex A to this proxy
statement/prospectus and is incorporated in this document by reference. You are
encouraged to read the entire merger agreement for a more detailed description
of the merger.
THE MERGER
Paradise will become a wholly-owned subsidiary of Genesis in the merger.
The closing of the merger will take place promptly following approval of the
issuance of Genesis common shares in the merger by Genesis' shareholders, the
approval of the merger and the merger agreement by Paradise's stockholders and
the satisfaction or waiver of the other conditions in the merger agreement. The
closing of the merger should occur prior to Genesis' fiscal year end of May 31,
1999.
MERGER CONSIDERATION
The total number of Genesis common shares to be issued in the merger to
Paradise stockholders and option holders will be 4,500,000 Genesis common
shares. The exchange ratio, which determines the amount of shares each Paradise
stockholder will receive in the merger, is expected to be 0.1918 Genesis common
shares for each share of Paradise capital stock. Of the 0.1918 shares, about
0.1726 shares will be issued at completion of the merger and about 0.0192 shares
will be deposited in an escrow fund. The actual exchange ratio may be reduced if
Paradise grants more options or warrants or issues more shares of its capital
stock prior to the merger, or may increase, if shares are repurchased or
warrants or options lapse unexercised prior to the merger. If the exchange ratio
is reduced to more than .1899 Paradise will resolicit its stockholders' approval
of the merger.
DIRECTORS AND OFFICERS OF PARADISE AFTER THE MERGER
Upon the closing of the merger, the current directors and officers of
Rainbow Acquisition Corporation, who are each current directors or officers of
Genesis, will become the directors and officers of Paradise.
CERTIFICATE OF INCORPORATION AND BYLAWS OF PARADISE AFTER THE MERGER
The Certificate of Incorporation and Bylaws of Rainbow Sub as in effect
immediately prior to the merger will become the Certificate of Incorporation and
Bylaws of Paradise upon the closing of the merger.
PARADISE STOCK OPTIONS
In the merger, each outstanding option or right to purchase shares of
Paradise common stock will be assumed by Genesis and remain outstanding. Each
Paradise option will be exercisable for Genesis common shares. The number of
Genesis common shares issuable upon exercise of a Paradise option and the
exercise price of a Paradise option will be adjusted to reflect the exchange
ratio of Genesis common shares for Paradise common stock in the merger.
CONVERSION OF PARADISE CAPITAL STOCK AS A RESULT OF THE MERGER
Each share of Paradise capital stock outstanding immediately prior to the
merger (other than any shares held by a holder who has demanded and perfected
dissenters' rights for such shares) will be canceled and be converted
automatically into the right to receive a number of Genesis common shares. No
fractional Genesis common shares will be issued in the merger. Instead, any
Paradise stockholder who would have been entitled to receive a fractional common
share, after aggregating all fractional shares of Genesis common shares, will be
entitled to receive cash instead of that fractional share based on the market
value of Genesis common shares.
40
<PAGE> 46
Holders of Paradise preferred stock are expected to elect to convert their
shares of preferred stock into Paradise common stock prior to the merger and
will receive Genesis common shares for each share of Paradise common stock they
hold. While not a condition of the merger, Paradise preferred stockholders who
have signed voting agreements have agreed to vote in favor of the conversion of
their preferred stock into common stock of Paradise. With the consent of the
holders of a majority of the preferred stock, all holders will have their
preferred stock automatically converted into common stock. Absent automatic
conversion, each preferred stockholder of Paradise who does not convert its
preferred stock will receive a number of Genesis common shares based on the
original price per share that it paid for its preferred stock, plus an amount
equal to any declared but unpaid dividends on the preferred stock. Because the
original Paradise preferred stock price per share is in each case lower than the
dollar value amount expected to be received by holders of Paradise common stock
in the merger, it is likely that all holders of Paradise preferred stock will in
any event convert their shares into common stock.
PROCEDURE FOR CONVERTING PARADISE CAPITAL STOCK INTO GENESIS COMMON SHARES
Promptly after the closing of the merger, Paradise stockholders will
receive a letter of transmittal from Genesis' exchange agent containing
instructions about how Paradise stock certificates are to be surrendered. Upon
surrender of Paradise stock certificates, Genesis will issue certificates
representing the appropriate number of Genesis common shares, subject to the
escrow provisions of the merger agreement.
Exchange Agent
Promptly after the merger, Genesis will deposit with ChaseMellon
Shareholder Services, LLC as the exchange agent, for the benefit of Paradise
stockholders, Genesis common share certificates to be issued in the merger.
Exchange Procedures
Once a Paradise stockholder has returned his Paradise stock certificate to
ChaseMellon, together with all of the other documents required, the Paradise
stockholder will receive a share certificate representing Genesis common shares,
less the ten percent portion placed in the escrow fund.
No dividends or other distributions on Genesis common shares that are
declared or made after the merger will be paid on unsurrendered Paradise stock
certificates until they are surrendered to the exchange agent.
The exchange agent will provide instructions for exchanging Paradise
certificates that have been lost, stolen or destroyed. The exchange agent will
also provide instructions for registering the Genesis common shares to be
received in a different name than the surrendered Paradise stock certificate.
PARADISE STOCKHOLDERS SHOULD NOT FORWARD THEIR CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED A TRANSMITTAL LETTER. PARADISE STOCKHOLDERS
SHOULD NOT RETURN THEIR CERTIFICATES WITH THEIR PROXY.
FORM S-8 FILING TO REGISTER PARADISE OPTIONS ASSUMED BY GENESIS
Genesis has agreed to file with the Securities and Exchange Commission,
promptly after the merger closes, a registration statement on Form S-8 to
register the Genesis common shares issuable as a result of the exercise of
Paradise options assumed by Genesis in the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties made
by Paradise in favor of Genesis. These representations and warranties relate to
Paradise's business, including:
- Organization and good standing as a corporation,
- Capital structure,
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<PAGE> 47
- Ownership of subsidiaries,
- Authorization, signature, delivery and enforceability of the merger
agreement and related agreements,
- Absence of conflict with, default under or violation of agreements and
laws by reason of the execution or performance of the merger agreement,
- Absence of need for waivers or consents from any governmental entity or
third party prior to the signature or delivery of the merger agreement,
- Accuracy of financial statements,
- Absence of undisclosed liabilities,
- Absence of certain changes in the business,
- Tax matters,
- Absence of certain restrictions on business activities,
- Title to property and absence of liens and encumbrances,
- Ownership of intellectual property and related matters,
- Absence of certain types of agreements, contracts and commitments,
- Interested party transactions,
- Compliance with laws,
- Litigation matters,
- Insurance,
- Minute books,
- Environmental matters,
- Absence of brokers' or finders' fees in connection with the merger,
- Employee matters and benefit plans,
- Governmental authorizations and licenses,
- Pooling of interests,
- Absence of material misstatements or omissions in connection with the
merger, and
- Board of directors approvals for the merger.
No claim on the representations and warranties of Paradise may be made by
Genesis after the first to occur of the date of the first audit of the financial
statements reflecting any combined operations of Genesis and Paradise after the
closing of the merger or the date which is one year after the closing of the
merger. Paradise stockholders have an indemnification obligation to Genesis for
breaches of the representations and warranties.
The merger agreement also contains customary representations and warranties
made by Genesis and Rainbow. These representations and warranties relate to
Genesis' business, including:
- Organization and good standing as a company,
- Authorization, execution, delivery and enforceability of the merger
agreement and related agreements,
- Absence of conflict with, default under or violation of agreements and
laws by reason of the execution or performance of the merger agreement,
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<PAGE> 48
- Absence of need for waivers or consents from any governmental entity or
third party prior to signature and delivery of the merger agreement,
- Capital structure,
- Accuracy of SEC documents and financial statements,
- Absence of material changes in Genesis' business,
- Litigation matters,
- Employee matters and benefit plans,
- Tax matters,
- Absence of material restrictions on business activities,
- Ownership of Intellectual Property and related matters,
- Nova Scotia continuance,
- Financial advisor's fairness opinion,
- Pooling of interests,
- Absence of brokers' fees or finders' fees in connection with the merger,
- Absence of material misstatements or omissions in connection with the
merger,
- Board of directors approvals for the merger, and
- Environmental matters.
The representations and warranties of Genesis and Rainbow end on the
closing of the merger.
CONDUCT OF PARADISE'S AND GENESIS' BUSINESS PENDING THE MERGER
Each of Paradise and Genesis has agreed to carry on its business in its
usual manner until the closing of the merger. Each of Paradise and Genesis has
committed to use all commercially reasonable efforts consistent with past
practices:
- To preserve intact its present business organization,
- To keep available the services of its present officers and key employees,
and
- To preserve its relationships with customers, suppliers, distributors,
licensors, licensees and others.
Each of Paradise and Genesis has also agreed not to take, without the
other's prior consent, actions that could adversely affect their business prior
to the closing. A complete list of these actions is set out in Section 4.1 and
4.2 of the merger agreement, which is included as Annex A to this proxy
statement/ prospectus.
NO SOLICITATION BY PARADISE OR GENESIS OF OTHER OFFERS
Each of Genesis and Paradise has agreed not to solicit, initiate
discussions, encourage or engage in negotiations with, disclose any non-public
information or otherwise assist any person relating to a possible acquisition of
either party. If the board of directors of either party receives an unsolicited
proposal, that it believes would result in a transaction more favorable to its
securityholders from a financial point of view than the merger, then the board
of directors of the party receiving the proposal may take other actions as are
consistent with its fiduciary obligations.
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<PAGE> 49
CONDITIONS TO COMPLETION OF THE MERGER
There are numerous conditions that have to be satisfied or waived before
the merger can be completed. These conditions are divided into three categories,
and are summarized below.
The Obligations of Each Party to Complete the Merger are Subject to the
Following Conditions:
- The Paradise stockholders and the Genesis shareholders will have approved
the necessary resolutions in connection with the merger,
- No court order or other legal restraint or prohibition preventing the
completion of the merger will be in effect,
- Paradise and Genesis will each have received written opinions from their
tax counsel that the merger will be a tax-free reorganization,
- Genesis will have received a letter from its independent auditors
agreeing that the merger can be accounted for as a pooling of interests,
and
- The Genesis common shares to be issued in the merger will have been
authorized for listing on the Nasdaq National Market.
Any of the above conditions may be waived by Paradise or Genesis.
The Obligations of Paradise to Complete the Merger are Subject to the
Following Conditions:
- The representations and warranties of Genesis and Rainbow in the merger
agreement will be true and correct in all material respects, except where
any breach of such representations and warranties would not result in a
material adverse effect on Genesis,
- Genesis and Rainbow will have performed and complied in all material
respects with all agreements and covenants required to be performed by
them prior to the merger,
- All consents, waivers, or orders required to be obtained by Genesis or
Rainbow to complete the merger will have been obtained except where
failure to obtain them would not have a material adverse effect,
- Paradise will have received a legal opinion from each of Ontario, Nova
Scotia and United States legal counsel to Genesis,
- No event will have had or would reasonably be expected to have a material
adverse effect on Genesis and its subsidiaries taken as a whole,
- Genesis' board of directors will consist of seven members, including
Alexander S. Lushtak and Lawrence G. Finch of Paradise, following the
resignation of two current Genesis directors, and
- Genesis will have given Paradise an officer's certificate of Genesis
stating that, as of the date of the merger, all representations and
warranties made by Genesis and Rainbow in the merger agreement are true
and correct in all material respects and all covenants and obligations of
the merger agreement to be performed by Genesis on or prior to the merger
have been so performed in all material respects.
Any of the above conditions may be waived by Paradise.
The Obligations of Genesis and Rainbow to Complete the Merger are Subject
to the Following Conditions:
- The representations and warranties of Paradise in the merger agreement
will be true and correct in all material respects, except where any
breach of the representations and warranties would not result in a
material adverse effect on Paradise,
- Paradise will have performed and complied in all material respects with
all covenants and obligations of the merger agreement required to be
performed by it prior to the merger,
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<PAGE> 50
- All consents, waivers, assignments and approvals required to be obtained
by Paradise to complete the merger will have been obtained except where
failure to obtain them would not have a material adverse effect,
- Genesis will have received a legal opinion from legal counsel to
Paradise,
- Affiliates of Paradise will have entered into an affiliate agreement with
Genesis,
- Key employees of Paradise will have entered into a non-competition
agreement with Genesis,
- The directors of Paradise in office prior to the closing of the merger
will have resigned as directors of Paradise at such time,
- Holders of no more than 5% of the outstanding shares of Paradise capital
stock will have exercised dissenters' rights under applicable law in
connection with the merger,
- Paradise stockholders holding at least one share more than 90% of
Paradise's capital stock will have approved the merger and merger
agreement,
- No event will have had or would reasonably be expected to have a material
adverse effect on Paradise, and
- Paradise will have provided Genesis with an officer's certificate stating
that, as of the date of the merger, all representations and warranties
made by Paradise in the merger agreement are true and correct in all
material respects and all covenants and obligations of the merger
agreement to be performed by Paradise on or before that date have been so
performed in all material respects.
Any of the above conditions may be waived by Genesis.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated:
- By Genesis and Paradise, if they mutually agree,
- By Genesis if any governmental entity prohibits Genesis' or Paradise's
ownership or operation of all or any portion of the business of Paradise,
or requires Genesis or Paradise to dispose of or hold separately all or a
portion of the business or assets of Paradise or Genesis as a result of
the merger, or
- By Genesis or Paradise if:
-- The merger has not occurred by June 30, 1999, unless the party seeking
to terminate the merger agreement has acted or failed to act in such a
manner as to result in the failure of the merger to occur on or before
such date but only so long as the other party is prepared to consummate
the merger immediately,
-- There is a final nonappealable order of a Federal or state court in
effect preventing the merger,
-- There is any statute, rule, regulation or order enacted, promulgated,
issued or deemed applicable to the merger by any governmental entity
that would make completion of the merger illegal,
-- The party seeking to terminate is not in material breach of its
obligations under the merger agreement and there has been a material
breach of any representation, warranty, covenant or agreement contained
in the merger agreement on the part of the other party and such breach
has not been cured within 15 business days after written notice to the
other party and as a result of such breach there occurs or would result
in a failure to satisfy certain closing conditions,
-- If an event having a material adverse effect on the party which is not
seeking to terminate will have occurred after the date of the merger
agreement,
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<PAGE> 51
-- The Genesis shareholders or the Paradise stockholders do not vote for
the required approvals for the merger, or
-- The board of directors of the party which is not seeking to terminate
recommends that its stockholders accept another, superior proposal for
the acquisition of their company or if the board of directors withholds,
withdraws or modifies in an unfavorable manner to the other party its
recommendation in favor of adoption and approval of the merger.
ESCROW FUND AND INDEMNIFICATION
The Genesis common shares to be held in escrow will automatically be
contributed to the escrow fund on behalf of each holder of Paradise capital
stock at the time of the merger. The number of escrow shares will approximately
equal 10% of the aggregate number of Genesis common shares to be issued at the
closing of the merger. Each former Paradise stockholder will contribute
proportionately to the escrow fund based on share ownership. The escrow fund
will be available to compensate Genesis and its affiliates for losses incurred
by them, including any claim made by a third party or for which Genesis would
otherwise be liable as a result of any breach of a representation, warranty or
covenant of Paradise contained in the merger agreement. Each former Paradise
stockholder will contribute proportionately to any shares delivered from the
escrow fund to Genesis based on share ownership.
Genesis may not receive any shares from the escrow fund unless and until,
and then only to the extent that losses exceed in the aggregate $500,000. The
escrow shares may not be used to satisfy any liabilities that may result from
the Arithmos litigation.
Former Paradise stockholders with Genesis common shares in escrow will have
voting rights with respect to the escrow shares while in escrow, and will
receive dividends, if any, attributable to the escrow shares.
The escrow fund and the indemnity will terminate at the earlier of one year
after the closing date of the merger or the issuance of the first independent
auditors' report on the financial statements of the combined company. After the
merger, the escrow shares and the indemnity will be Genesis' exclusive remedy to
recover any losses it suffers by reason of the breach of any representation,
warranty or covenant of Paradise. Genesis' remedy will not be limited in the
case of fraud by Paradise.
By approving the merger agreement, Paradise stockholders will have
consented to the appointment of Robert R. Tillman, a director of Paradise, to
act as the stockholder representative on behalf of Paradise stockholders, to:
- authorize or direct delivery of escrow shares in satisfaction of claims
brought by Genesis, and
- to agree to, to negotiate and to enter into settlements and compromises
with respect to claims on the escrow fund.
Paradise stockholders are encouraged to read Article VII of the merger
agreement for a more detailed explanation of the indemnity and escrow fund and
their rights and obligations with respect to the escrow shares.
EMPLOYMENT MATTERS
Each employee of Paradise who remains an employee of the combined company
after the merger will be eligible to receive salary and benefits consistent with
Genesis' standard human resource policies.
FEES AND EXPENSES
Regardless of whether the merger is completed, all fees and expenses
incurred by a party in connection with the merger will be payable by the party
incurring such fees and expenses.
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BREAK-UP FEES
Under circumstances specified in the merger agreement, if the merger
agreement is terminated, then either Genesis or Paradise may be required to pay
break-up fees to the other party. Specifically, if, in the absence of a material
adverse effect on Paradise, the merger agreement is terminated and the Genesis
board of directors has either:
- withheld, withdrawn or modified in a manner adverse to Paradise its
recommendation that Genesis shareholders approve the issuance of the
Genesis common shares to be issued in the merger,
- recommended that its shareholders approve a superior proposal with
respect to Genesis, or
- failed to hold a shareholder meeting by June 30, 1999,
then Genesis must pay Paradise $5,000,000 within one business day of the earlier
of a termination of the merger agreement or a negative vote by the shareholders
of Genesis. Further, if, other than in a case described by the immediately
preceding sentence,
- there is a competing acquisition bid with respect to Genesis that is
publicly disclosed and not withdrawn,
- the shareholders of Genesis vote down the issuance of the Genesis common
shares to be issued in connection with the merger (a "Genesis Negative
Vote"), and
- within 12 months of such Genesis Negative Vote, Genesis consummates or
agrees to an acquisition with the party that made such competing
acquisition bid, or within six months of such Genesis Negative Vote,
Genesis consummates, or agrees to an acquisition with any other party,
and there has been no material adverse effect on Genesis prior to such
Genesis Negative Vote,
then Genesis must pay to Paradise $5,000,000 within one business day.
Similarly, if, in the absence of a material adverse effect on Genesis, the
merger agreement is terminated and the Paradise board of directors has either:
- withheld, withdrawn or modified in a manner adverse to Genesis its
recommendation that the Paradise stockholders approve the merger and the
merger agreement,
- recommended that its stockholders approve a superior proposal with
respect to Paradise, or
- failed to hold a stockholder meeting by June 30, 1999,
then Paradise must pay Genesis $5,000,000 within one business day of the earlier
of a termination of the merger agreement or a negative vote by the stockholders
of Paradise. Further, if other than in a case described by the immediately
preceding sentence,
- there is a competing acquisition bid with respect to Paradise that is
publicly disclosed and not withdrawn,
- the stockholders of Paradise vote down the merger (a "Paradise Negative
Vote"), and
- within 12 months of such Paradise Negative Vote, Paradise consummates or
agrees to an acquisition with the party that made such competing
acquisition bid, or within six months of such Paradise Negative Vote,
Paradise consummates or agrees to an acquisition with any other party,
and there has been no material adverse affect on Paradise prior to the
Paradise Negative Vote,
then Paradise must pay to Genesis $5,000,000 within one business day.
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OTHER COVENANTS OF THE MERGER
The merger agreement contains covenants and agreements that are customary
in transactions of this nature. The principal covenants and agreements are as
follows:
- Genesis and Paradise have agreed to prepare and file with the Securities
and Exchange Commission this proxy statement/prospectus for the
solicitation and approval of the shareholders of Genesis and the
stockholders of Paradise, to approve and vote on the required resolutions
in connection with the merger,
- Genesis and Paradise have agreed to comply with applicable laws and the
rules and regulations of the Securities and Exchange Commission, to
respond promptly to any comments of the Securities and Exchange
Commission and to have the registration statement on Form S-4 declared
effective under the Securities Act promptly after it is filed,
- Genesis and Paradise have agreed to use all commercially reasonable
efforts to cause this proxy statement/prospectus to be mailed to Genesis'
shareholders and Paradise's stockholders promptly after the registration
statement on Form S-4 is declared effective under the Securities Act,
- Genesis agreed to hold a shareholders' meeting for Genesis and Paradise
agreed to hold a stockholders' meeting for Paradise to vote on the merger
agreement and related transactions promptly after the Registration
Statement on Form S-4 is declared effective,
- If any event related to Genesis or Paradise occurs or if Genesis or
Paradise becomes aware of any information that should be disclosed in an
amendment to the registration statement or the proxy
statement/prospectus, then Genesis or Paradise, as applicable, will
inform the other and will cooperate with each other in filing an
amendment with the Securities and Exchange Commission and, if
appropriate, in mailing such amendment to the shareholders of Genesis or
to the stockholders of Paradise,
- Genesis and Paradise have agreed to consult with each other before
issuing any press release or public statement concerning the merger,
- After the merger, Genesis will take action to allow eligible employees of
Paradise who become employees of the combined company to participate in
the combined company's customary benefit programs at customary levels,
and
- Paradise and Genesis have each agreed to use its best efforts to ensure
that the merger will be accounted for as a pooling of interests.
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT.
We may amend the merger agreement before completion of the merger.
Either of us may extend the other's time for the performance of any of the
obligations or other acts under the merger agreement, waive any inaccuracies in
the other's representations and warranties and waive compliance by the other
with any of the agreements or conditions contained in the merger agreement. If
either Genesis or Paradise waives a closing condition relating to the receipt of
an opinion about the merger being a tax-free reorganization or a letter from the
auditors that the merger can be accounted for as a pooling of interests, the
party which waives such closing condition will resolicit the approval of its
stockholders to the merger. If any of either of our other conditions or other
obligations are waived, we will consider the facts and circumstances at that
time and make a determination as to whether a resolicitation of proxies is
appropriate.
GOVERNMENTAL APPROVALS FOR THE MERGER.
All required governmental approvals to complete the merger have been
obtained except for the filing of a certificate of merger with the Secretary of
State of Delaware.
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OTHER AGREEMENTS IN CONNECTION WITH THE MERGER
NON-COMPETITION AGREEMENTS OF KEY PARADISE EMPLOYEES
Key employees of Paradise have entered into non-competition agreements with
Genesis which will restrict their ability to compete with Genesis if they
voluntarily leave the combined company's employ.
AFFILIATE AGREEMENTS
Each director, each executive officer and one Genesis shareholder have
entered into agreements restricting sales and other transactions reducing their
risk of investment in the Genesis common shares held by them to help ensure that
the merger will be treated as a pooling of interests for accounting and
financial reporting purposes.
Each director, each executive officer and Paradise affiliate stockholders
have entered into similar agreements for the Genesis common shares to be
received by them in the merger to comply with federal securities and tax laws
and to help ensure that the merger will be treated as a pooling of interests for
accounting and financial reporting purposes.
VOTING AGREEMENTS
Each director, each executive officer and one Genesis shareholder have
entered into voting agreements with Genesis and Paradise that obligate them to
vote in favor of the issuance of Genesis common shares in the merger.
Each director, each executive officer and Paradise principal stockholders
have entered into a voting agreement with Genesis and Paradise that obligate
them to vote in favor of the merger and the merger agreement.
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GENESIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENESIS OVERVIEW
Genesis designs, develops and markets integrated circuits that process
digital video and graphic images. Genesis also supplies reference boards and
designs that incorporate its proprietary integrated circuits. Genesis is focused
on the development and marketing of image processing solutions targeted at the
flat panel computer monitor market and at other potential mass markets. Genesis
markets and sells its products through authorized distributors and directly to
customers with the support of regional sales representatives. Average selling
prices to distributors are typically less than average selling prices to direct
customers. Average selling prices and product margins of Genesis' products are
typically highest during the initial months following product introduction and
decline over time. Genesis recognizes revenues from product sales when they are
shipped. Product returns and allowances are estimated and provided for at the
time of sale. To date, Genesis has not experienced any significant product
returns.
In addition to product sales, Genesis derives revenues from providing
design services. These services are aimed at assisting Genesis' customers to
develop products that include Genesis' products in their designs. Genesis may
also receive revenues from license fees and royalties, although to date these
amounts have been immaterial. Genesis intends to explore opportunities for
licensing its technology to other integrated circuit suppliers outside of
Genesis' target markets.
Genesis' costs of finished products from its semiconductor suppliers have
historically been negotiated at fixed prices on an annual basis, and have not
been dependent on the suppliers' manufacturing yields. If Genesis cancels a
purchase order to a supplier, it must pay cancellation penalties based on the
status of the work in process. Genesis has a limited ability to reschedule its
purchase orders and, therefore, Genesis must place purchase orders for products
before it receives purchase orders from its own customers. This restricts
Genesis' ability to react to fluctuations in demand for its products and may
cause Genesis to have either too much or not enough of a particular product. For
example, in the fiscal year ended May 31, 1997, Genesis recorded provisions
totaling $1.3 million for declines in inventory value and for write downs of
excess inventory. Genesis has recently signed agreements with suppliers in Asia.
Under the terms of those agreements, Genesis has shorter lead time requirements
for the placing of its orders with the suppliers, although Genesis is now
dependent on the manufacturers' yields.
Genesis earns investment tax credits under the provisions of the Income Tax
Act (Canada) because it carries out qualifying research and development
activities in Canada. These tax credits are earned at a rate of 20% of those
qualifying expenditures. The tax credits earned may only be applied to reduce
income taxes payable.
Genesis has losses and deductions available to reduce future years' taxable
income in both Canada and the United States. Most of these aggregate losses and
deductions have no time limitation on them. Genesis does not anticipate paying
any income taxes until the benefit of these losses and deductions has been fully
utilized. Details of these losses and deductions can be found in Note 9 to
Genesis' Consolidated Financial Statements included in this proxy
statement/prospectus.
Genesis carries out a significant portion of its operations in Canada.
Although virtually all revenues and costs of sales are denominated in U.S.
dollars, a portion of Genesis' operating expenses are denominated in Canadian
dollars. Accordingly, Genesis' operating results are affected by changes in the
exchange rate between the Canadian and U.S. dollars. Any future strengthening of
the Canadian dollar against the U.S. dollar could negatively impact Genesis'
operating results by increasing its operating expenses. Genesis does not
presently engage in any hedging or other transactions intended to manage the
risks relating to foreign currency exchange rate fluctuations, other than
natural hedges that occur as a result of holding both Canadian dollar
denominated assets and Canadian dollar denominated liabilities. Genesis may in
the future undertake hedging or other such transactions if management determines
that it is necessary to offset exchange rate risks. To date, net exchange gains
and losses on Canadian dollar denominated assets and liabilities have not been
material.
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Effective June 1, 1998, Genesis changed its functional currency from the
Canadian dollar to the U.S. dollar. This was done based on management's review
and weighting of numerous factors influencing the determination of the currency
of the primary economic environment in which Genesis operates. A key factor
considered by management was the increased significance of U.S. dollar
denominated revenues and expenditures in relation to Genesis' Canadian dollar
denominated transactions. In addition, commencing with Genesis' IPO financing in
February of 1998, Genesis' financing is now denominated primarily in U.S.
dollars.
RESULTS OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
1998
Total Revenues. Total revenues for the nine months ended February 28, 1999
increased to $26.4 million from $10.2 million in the same period of 1998, an
increase of 159.1%. The increase in total revenues is primarily due to increased
demand for Genesis' products in the flat panel computer monitor market.
Revenues from the flat panel monitor market segment increased to $16.2
million or 61.2% of total revenues in the nine months ended February 28, 1999
from $3.1 million or 30.0% of total revenues in the nine months ended February
28, 1998. This increase was a result of both increasing share in that market as
well as overall growth of the market segment, partially offset by declining
average selling prices. As the share of any market increases, the ability to
grow in that market segment will be limited by the overall growth rate of the
market segment.
The overall growth of the flat panel monitor market segment has been
positively impacted by significant reductions in retail selling prices of the
end products, which have declined from approximately $2,500 in early calendar
1998 to under $1,000 in early calendar 1999. This decline was primarily as a
result of reductions in the cost of LCD panels used in flat panel monitors,
caused by improved manufacturing yields for the panels and by the devaluation of
currencies in the countries, principally in Asia, where LCD panels are
manufactured. It is unlikely that this rate of decline in retail selling prices
will continue. There have been reports of a lack of current capacity to
manufacture a sufficient number of LCD panels to meet the demand for flat panel
computer monitors. A lack of supply of LCD panels could reduce the rate of
growth of the flat panel monitor market by limiting product availability, or by
causing the retail price of flat panel monitors to increase such that demand
would be reduced.
Genesis began shipping resale products called analog to digital converters,
or ADC's, in fiscal 1999. These products were sold to flat panel monitor
customers who had difficulty in sourcing them directly from the manufacturer.
Genesis arranged to procure and supply these ADC's in order to assist its
customers into production so that they would also purchase Genesis' proprietary
parts. Genesis intends to discontinue the sales of these ADC's. For the nine
months ended February 28, 1999, total revenue from sales of ADC's was $610,000.
Genesis has also indicated that other proprietary products will be discontinued.
These discontinued proprietary products are being replaced by new proprietary
products, and no material impact on revenues is expected as a result of this
replacement.
Revenues from Genesis' second largest market segment, the projection
systems market, decreased to $5.5 million or 21.0% of total revenues in the nine
months ended February 28, 1999, from $5.7 million or 55.4% of total revenues in
the nine months ended February 28, 1998. This decline in revenue was primarily a
result of lower unit shipments by Genesis into that market. Genesis' customers
reduced their requirements because their own customers in turn reduced their
inventory levels due to increased price competition among the various projection
systems manufacturers. The reduction in shipments occurred primarily in the
first quarter of Genesis' fiscal year, with unit shipments increasing
sequentially in each of the second and third quarters of fiscal 1999.
As a result of the factors described above, Genesis does not expect to
sustain the past rate of revenue growth in future periods.
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Gross Profit. Gross profit for the nine months ended February 28, 1999
increased to $15.8 million from $7.3 million in the same period in 1998,
representing 59.7% of total revenues in the 1999 period and 71.2% of total
revenues in the 1998 period. The decrease in gross profit percentage was
attributable both to higher sales volumes coupled with lower average selling
prices, and to a less favorable mix of products sold. The reduction in average
selling prices resulted in a decline in the gross profit percentage of 6.4% and
the change in product mix resulted in a decline of 5.1%.
In the nine months ended February 28, 1999, Genesis began increasing
shipments of its gmFC1 product. This product has a lower gross profit percentage
than Genesis' other products. Genesis also began to sell lower margin resale ADC
products in the 1999 fiscal year. As a result, Genesis' overall gross profit
percentage declined in the nine months ended February 28, 1999. Genesis expects
to discontinue sales of the resale ADC products.
As unit shipments into the flat panel monitor market continue to grow,
Genesis expects a continued decline in its average selling prices. In order to
maintain its gross margins, Genesis intends to continue to introduce new, lower
cost versions of its products. For example, Genesis recently introduced the gmZ2
as a replacement for the gmZ1, and the gmFC1A as a replacement for the gmFC1.
These chips are sold primarily into the flat panel monitor market. In addition,
Genesis intends to introduce additional features into subsequent generations of
its products to increase their value to customers.
As a result of these factors, Genesis believes that overall gross margins
will not continue the same rate of decline in the future.
Research and Development. Research and development expenses include costs
associated with research and development personnel, development tools and
prototyping costs, less investment tax credits and government assistance.
Research and development expenses for the nine months ended February 28, 1999
increased to $4.0 million from $2.5 million in the same period in the previous
year. These expenses represented 15.2% of total revenues in the 1999 period and
24.7% of total revenues in the 1998 period. The increase in absolute dollars in
the nine months ended February 28, 1999 over the same period in 1998 reflects
greater personnel costs associated with an expansion in Genesis' research and
development activities and increased prototype and pre-production expenses of
new products. Genesis expects to continue to make substantial investments in its
research and development activities and anticipates that research and
development expenses will continue to increase in absolute dollars. The decline
in research and development expenses as a percentage of total revenues resulted
from the rate of growth in total revenues exceeding the rate of growth of
research and development expenses.
Selling, General and Administrative. Selling, general and administrative
expenses consist of personnel and related overhead costs for selling, marketing,
customer support, finance, human resources and general management functions and
of commissions paid to regional sales representatives. Selling, general and
administrative expenses were $6.2 million in the nine months ended February 28,
1999 and $3.5 million in the same period in the previous year. These expenses
represented 23.6% of total revenues in the 1999 period and 33.8% of total
revenues in the 1998 period. The dollar increase in selling, general and
administrative expenses reflects increased personnel costs related to increased
selling, administrative and customer support activities and to increased
commissions associated with higher sales volumes. Genesis expects selling,
general and administrative expenses to increase in absolute dollars due to the
addition of administrative, marketing, selling and customer support personnel
and due to continued expansion of Genesis' international operations. The decline
in selling, general and administrative expenses as a percentage of total
revenues resulted from the rate of growth in total revenues exceeding the rate
of growth of selling, general and administrative expenses.
Interest Income. Interest income in the nine months ended February 28, 1999
was $1.4 million, compared with $188,000 in the same period in the previous
year. The increase in interest income was primarily due to the additional
balances of cash and cash equivalents held by Genesis because of its initial
public offering in February 1998. Future interest income will depend on the
amount of funds available to invest and on future interest rates.
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Provision for Income Taxes. There was no provision for income taxes in the
nine month periods ended February 28, 1999 or 1998 because Genesis had
investment tax credits, non-capital losses or unclaimed research and development
expenditures available to reduce taxes payable or taxable income.
FISCAL YEARS ENDED MAY 31, 1998, 1997 AND 1996
Total Revenues. Total revenues for the year ended May 31, 1998 increased to
$15.7 million from $4.5 million in the previous year, an increase of 247.8%.
Total revenues for fiscal 1997 increased by 197.0% over total revenues of $1.5
million in fiscal 1996. The increase in total revenues in fiscal 1998 over
fiscal 1997 is primarily due to the introduction and market acceptance of new
products, principally the gmVLD8 and gmZ1 products that were introduced in
fiscal 1997, as well as the gmFC1 product that was introduced in the third
quarter of fiscal 1998. These products were principally sold into the projection
system market and into the flat panel monitor market. Total revenues in fiscal
1998 were also positively impacted by an increase in design services activities.
The increase in total revenues in fiscal 1997 over fiscal 1996 resulted
primarily from greater market acceptance of Genesis' GenScale products and to a
lesser extent from the introduction of Genesis' gmVLD8 and gmZ1 products in
fiscal 1997. Genesis does not expect to sustain this rate of revenue growth in
future periods.
Gross Profit. Gross profit for fiscal 1998 increased to $10.9 million from
$1.5 million in fiscal 1997 and from $1.1 million in fiscal 1996. This
represented 69.4% of total revenues in fiscal 1998, 34.1% of total revenues in
fiscal 1997 and 71.5% of total revenues in fiscal 1996. The increase in gross
profit was attributable to higher sales volumes and a more favorable mix of
products sold. Gross profit was positively impacted in fiscal 1998 by higher
gross margins of Genesis' AIM product line and, to a lesser extent, by lower
average component costs. Inventory write downs of $1.3 million in the 1997
fiscal year resulted in a decline in gross margins for that year, and were
related to older products that had been replaced by newer products and to
surplus inventory levels of other products. Gross margins may decline in future
periods as Genesis enters higher volume markets. This is expected to occur as a
result of customers seeking volume discounts on purchases from Genesis, and as a
result of potentially increased competition in these higher volume markets.
Research and Development. Research and development expenses for the year
ended May 31, 1998 increased to $3.6 million from $2.6 million in the previous
fiscal year and from $2.1 million in fiscal 1996. This represented 23.2% of
total revenues in fiscal 1998, 58.4% of total revenues in fiscal 1997 and 137.6%
of total revenues in fiscal 1996. The increases in absolute dollars in fiscal
years 1998 and 1997 reflect greater personnel costs associated with an expansion
in Genesis' research and development activities and increased prototype and
pre-production expenses of new products. Genesis expects to continue to make
substantial investments in its research and development activities and
anticipates that research and development expenses will continue to increase in
absolute dollars. The decline in research and development expenses as a
percentage of total revenues resulted from the rate of growth in total revenues
exceeding the rate of growth of research and development expenses.
Selling, General and Administrative. Selling, general and administrative
expenses were $4.8 million in fiscal 1998, $4.2 million in fiscal 1997 and $2.7
million in fiscal 1996. This represented 30.7% of total revenues in fiscal 1998,
93.8% of total revenues in fiscal 1997 and 174.9% of total revenues in fiscal
1996. The dollar increases in selling, general and administrative expenses
reflect increased personnel costs related to increased selling, customer support
and administrative activities and reflect increased commissions associated with
higher sales volumes. Genesis expects selling, general and administrative
expenses to increase in absolute dollars due to the addition of marketing,
selling, customer support and administrative personnel and to continued
expansion of its international operations. The decline in selling and marketing
expenses as a percentage of total revenue resulted from the increase in total
revenues for the period. The decline in selling, general and administrative
expenses as a percentage of total revenues resulted from the rate of growth in
total revenues exceeding the rate of growth of selling, general and
administrative expenses.
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Interest Income (Expense). Interest income in fiscal 1998 was $675,000
compared with $147,000 in fiscal 1997 and with interest expense of $143,000 in
fiscal 1996. The increase in interest income in fiscal 1998 was primarily due to
the additional balances of cash and cash equivalents held by Genesis because of
its initial public offering in February 1998. The increase in interest income in
fiscal 1997 over fiscal 1996 was primarily due to raising additional funds in a
private equity financing in July 1996. Future interest income will depend on the
amount of funds available to invest and on future interest rates.
Provision for Income Taxes. There was no provision for income taxes in the
year ended May 31, 1998 because Genesis had investment tax credits, non-capital
losses or unclaimed research and development expenditures available to reduce
taxes payable or taxable income. There was no provision for income taxes in
fiscal 1997 or 1996 because Genesis had a net loss in each year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $36.1 million at February 28, 1999, $35.9
million at May 31, 1998, $3.7 million at May 31, 1997 and $1.5 million at May
31, 1996. Net cash used in operations was $470,000 for the nine months ended
February 28,1999. Genesis generated net cash from operations of $2.1 million in
fiscal 1998. Net cash used in operations was $5.7 million in fiscal 1997 and
$4.0 million in fiscal 1996. Net cash used in operations in the nine months
ended February 28, 1999 was primarily a result of cash invested in accounts
receivable and inventory exceeding cash generated from the net income and from
increases in accounts payable and accrued liabilities. Net cash generated from
operations in fiscal 1998 consisted primarily of net income plus increases in
accounts payable and accrued liabilities, partially offset by increases in
accounts receivable and inventory. In fiscal 1997 and 1996, net cash used in
operations was primarily a result of the net loss and cash invested in accounts
receivable and inventory exceeding cash generated from increases in accounts
payable and accrued liabilities. Increases in accounts receivable and inventory
are generally a result of growth in the business. Increased revenue results in a
need to grant larger amounts of credit to customers and therefore to carry
larger accounts receivable. It also results in a need to stock additional
quantities of products to meet increased customer demands. Increases in accounts
payable and accrued liabilities are a result of increases in operating expenses
and increased purchases from manufacturers of Genesis' products.
Net cash used in investing activities was approximately $1.3 million in the
nine months ended February 28, 1999, $1.4 million in fiscal 1998, $1.0 million
in fiscal 1997 and $303,000 in fiscal 1996, for the purchase of capital assets.
Continued expansion of Genesis' business may require higher levels of capital
equipment purchases. Genesis has no significant capital spending or purchase
commitments other than purchase commitments made in the ordinary course of
business.
Net cash provided by financing activities was $1.9 million in the nine
months ended February 28, 1999. This was primarily the result of funds received
for the purchase of shares under Genesis' share purchase and stock option plans.
Net cash provided by financing activities was $31.5 million in fiscal 1998,
primarily a result of raising $31.7 million in net proceeds from Genesis'
initial public offering of its Common Shares in February 1998. Net cash provided
by financing activities was $8.8 million in fiscal 1997 and $4.9 million in
fiscal 1996, which included $10.9 million in fiscal 1997 and $5.0 million in
fiscal 1996 of net proceeds from private equity financing. Genesis had no net
repayments of debt financing in the nine months ended February 28, 1999, and had
net repayments of debt financing of $62,000 in fiscal 1998, $2.0 million in
fiscal 1997 and $64,000 in fiscal 1996.
Since inception, Genesis has satisfied its liquidity needs primarily
through sales of equity securities and, to a lesser extent, through long-term
debt and bank indebtedness for working capital purposes. Genesis believes that
its existing cash balances together with any cash generated from its operations
will be sufficient to meet Genesis' capital requirements on a short-term basis.
On a long-term basis, Genesis may be required to raise additional capital
to fund investments in operating assets such as accounts receivable or inventory
to assist in the growth of the business, or for capital assets such as land,
buildings or equipment. Because Genesis does not have its own semiconductor
manufacturing facility, it may be required to make deposits to secure supply in
the event there is a
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shortage of manufacturing capacity in the future. Although Genesis currently has
no plans to raise additional funds for such uses, Genesis could be required, or
could elect, to seek to raise additional capital in the future. In addition,
from time to time Genesis evaluates acquisitions of businesses, products or
technologies that complement Genesis' business. Any such transactions, if
consummated, may use a portion of Genesis' working capital or require the
issuance of equity securities that may result in further dilution to Genesis'
shareholders.
YEAR 2000 COMPLIANCE
Many businesses face issues relating to the inability of some computer
systems to correctly recognize dates starting January 1, 2000. Genesis has
evaluated its products and believes that they will function in the year 2000.
Although Genesis' management does not expect year 2000 compliance to have a
material impact on its business or future results of operations, Genesis cannot
be sure that there will not be interruptions of operations or other limitations
of system functionality. Genesis cannot be sure that it or the combined company
will not incur significant costs to avoid such interruptions or limitations. In
addition, Genesis currently does not have complete information about the year
2000 compliance status of all of its suppliers and customers. In the event that
any of Genesis' significant suppliers or customers do not successfully achieve
year 2000 compliance in a timely way, its or the combined company's business,
financial condition or results of operations could be adversely affected.
Genesis uses a number of computer software programs, including operating
systems, financial and administrative systems and other information technology
or IT systems, as well as a number of non-IT systems, typically embedded
technologies, in its internal operations. To the extent that Genesis' IT and
non-IT systems are unable to appropriately interpret the upcoming calendar year
2000, modification or replacement of such systems will be necessary. Genesis has
established a committee to identify the IT and non-IT systems that are not Year
2000 compliant. The committee will also review the IT and non-IT systems of
Genesis' suppliers and major customers to determine whether or not their systems
are Year 2000 compliant. Genesis has been communicating with its suppliers and
major customers regarding this issue. The committee is currently reviewing
potential Year 2000 issues and their impact, as well as investigating possible
methods of remediation. Genesis intends to implement remediation programs by the
middle of 1999 and to be fully Year 2000 compliant shortly thereafter. The Year
2000 Committee intends to incorporate the review and potential remediation of
Paradise's Year 2000 issues into its plans and schedules. Genesis' costs to date
related to Year 2000 compliance have not been material, and while the total
estimated costs of remediation have not yet been determined, Genesis anticipates
that any future costs will not be material. Genesis is not yet certain as to
what a reasonably likely worst case Year 2000 scenario will be. This issue will
be reviewed by Genesis' Year 2000 committee. Consequently, Genesis has not yet
established a contingency plan to handle such a scenario, although it plans to
by mid-1999.
Given the information known at this time about Genesis' systems, coupled
with Genesis' ongoing efforts to upgrade or replace critical business systems as
necessary, it is currently anticipated that known Year 2000 compliance costs
will not have a material adverse impact on Genesis' business, financial
condition and results of operations. However, Genesis is still analyzing its IT
and non-IT systems, as well as those of its suppliers and major customers and,
to the extent they are not fully Year 2000 compliant, there can be no assurance
that the costs necessary to update or replace such systems or the potential
systems or business interruptions that could occur would not have a material
adverse effect on Genesis' business, financial condition and results of
operations.
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GENESIS BUSINESS
OVERVIEW
Genesis designs, develops and markets integrated circuits that process
digital video and graphic images. Genesis' integrated circuits process images so
that they can be viewed on specific displays, with a particular focus on digital
display systems such as flat panel computer monitors or flat panel televisions.
The transition from analog display systems, such as televisions and
computer monitors that use cathode ray tubes to digital display systems that use
a fixed matrix of pixels to represent an image, requires sophisticated digital
image processing solutions. Genesis' products solve resolution, format and frame
refresh rate conversion problems while maintaining critical image information
and improving perceived image quality. Genesis' products utilize patented
algorithms and integrated circuit architectures as well as advanced integrated
circuit design and system design expertise. Genesis' technologies include shrink
(reducing the number of pixels), zoom (increasing the number of pixels),
de-interlace (converting the display format), synchronize (coordinating
different pixel rates or image frame refresh rates) and warp (creating image
special effects).
Genesis began developing its image processing technologies and products in
order to serve specialized markets such as medical imaging applications and
avionics, where there is a requirement for high-quality images. As larger
markets for display products have developed, such as projection systems and flat
panel computer monitors, Genesis has leveraged its image processing technologies
and expertise to develop products targeting those markets.
MARKETS, APPLICATIONS AND CUSTOMERS
Genesis' target markets include the following:
- Flat Panel Computer Monitors. Flat panel computer monitors are
increasingly replacing monitors that use cathode ray tubes. Genesis
commenced commercial shipments of its products to the flat panel computer
monitor market in the fourth quarter of calendar 1997. For the nine month
period ended February 28, 1999 the flat panel computer monitor market
represented 61% of Genesis' total revenues. Companies whose flat panel
computer monitors incorporate Genesis' products include: IBM, Dell,
Apple, Sony, Philips, Samsung and ViewSonic.
- Digital Projection Systems. Genesis' products give digital projection
systems the flexibility to display a variety of images from personal
computer and video sources while maintaining image quality. Genesis has
established itself as a principal supplier to leaders in this market.
Digital projection system manufacturers using Genesis' products include:
In Focus Systems, Sharp, Hitachi, and Texas Instruments.
- Advanced Image Processing. Genesis' products continue to address niche
imaging markets that require a high level of performance and image
quality and are not necessarily cost sensitive. These markets include
aerospace, broadcasting, document management, medical imaging, scan
converters, surveillance, video compression, video conferencing, video
editing, video walls and workstations. Some of Genesis' customers in
these markets include Silicon Graphics, Sonic Solutions, Avid Technology
and Scitex Corporation.
- Potential Consumer Electronics Markets. Genesis intends to leverage its
technologies to create products for consumer electronics markets as they
develop. These potential markets include home theater, DVD, flat panel
and digital television, and HDTV. Genesis has secured a number of design
wins with leading manufacturers in these markets.
56
<PAGE> 62
PRODUCTS
The following are Genesis' current integrated circuit products:
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PRODUCTION
APPLICATIONS PRODUCT PRODUCT FEATURES MARKETS RELEASE(1)
- --------------------------------------------------------------------------------------------------------------------
GENSCALE SERIES
- --------------------------------------------------------------------------------------------------------------------
Digital Image Manipulation gm865x1 High-quality, single-channel, Aerospace, broadcast, Q4 1995
(Still, Video & Computer real-time digital image document management,
Graphics) shrink and zoom medical imaging
- --------------------------------------------------------------------------------------------------------------------
Digital Image Manipulation gm833x2* High-quality, two-channel Surveillance, digital Q4 1995
(Still & Video) real- time digital image projection systems,
shrink and zoom video editing, video
walls, workstations
- --------------------------------------------------------------------------------------------------------------------
Digital Image Manipulation gm833x3* High-quality, three-channel, Digital television, Q4 1995
(Still & Computer Graphics) real- time digital image scan converters,
shrink and zoom workstations, digital
projection systems,
aerospace, medical
imaging
gm833x3F High speed version of gm833x3 Q1 1996
- --------------------------------------------------------------------------------------------------------------------
HALF-BAND FILTER SERIES
- --------------------------------------------------------------------------------------------------------------------
Digital Half-Band Filter gm2242 High-quality, single-channel, Broadcast, video Q3 1995
digital filter editing
- --------------------------------------------------------------------------------------------------------------------
VIDEO DE-INTERLACING SERIES
- --------------------------------------------------------------------------------------------------------------------
Digital Video De-Interlacing gmVLD8* High-quality, real-time DVDs, home theater, Q3 1996
gmVLD10* digital video de-interlacer Digital television, Q3 1996
scan converters,
digital projection
systems, video walls,
broadcast, video
editing
- --------------------------------------------------------------------------------------------------------------------
Digital Video De-Interlacing gmVLX1A High-quality real-time Q1 1997
digital video de-interlacer
with shrink and zoom
- --------------------------------------------------------------------------------------------------------------------
ADVANCED IMAGE MANIPULATION
SERIES
- --------------------------------------------------------------------------------------------------------------------
Digital Video and Graphics gmZ1* Integrated high-quality three Digital projection Q3 1997
Manipulation channel, real-time digita1 systems, flat panel
image zoom and digital video monitors, digital
de-interlacing with display televisions, home
synchronization capability, theatre
resolutions up to XGA
gmZ2 Replacement for gmZ1, Q4 1998
enhanced mode detect,
resolutions up to XGA
gmZ3 Replacement for gmZ1 enhanced Q1 1999
mode detect, resolutions up
to SXGA
- --------------------------------------------------------------------------------------------------------------------
FRAME REFRESH RATE CONVERSION
SERIES
- --------------------------------------------------------------------------------------------------------------------
Digital Video and Graphics gmFC1* High speed DRAM based frame Digital projection Q2 1998
Frame Refresh Rate Converter rate converter with direct systems, flat panel
interface to the gmZ1 video monitors, digital
de-interlacer televisions, video
walls, home theater
gmFC1A Replacement for gmFC1 Q1 1999
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calendar quarters.
* Customers have been notified that production of these parts will be
discontinued.
57
<PAGE> 63
RESEARCH AND DEVELOPMENT
Genesis' research and development efforts are performed within the
following three specialized groups:
- Algorithm Development Group: focuses on developing silicon-efficient and
high-quality image processing technologies.
- Product Development Group: focuses on reducing its customers'
time-to-market, achieving first time silicon success and reducing the
development time of Genesis' products.
- System Engineering Group: concentrates on producing evaluation boards
and manufacture-ready reference designs which facilitate the integration
of Genesis' products into the products of its customers.
Genesis works closely with industry leaders to design products with
improved performance and functionality. For example, Genesis' gmZ1 product was
designed in cooperation with Apple Computer and In Focus Systems.
As of March 31, 1999, Genesis had 66 full-time employees engaged in
research and development. Expenditures for research and development for the nine
months ended February 28, 1999, net of investment tax credits and government
assistance, were $4.0 million, for the fiscal year ended May 31, 1998 were $3.6
million, and for the fiscal year ended May 31, 1997, were $2.6 million.
SALES AND MARKETING
Genesis sells and markets its products primarily through authorized
regional sales representatives and through authorized distributors. Genesis'
sales and marketing personnel work closely with customers, industry leaders,
sales representatives and authorized distributors to define product features,
performance, price and market timing of new products. In North America, Taiwan
and Korea, Genesis sells its products to customers primarily through
technically-trained sales representatives. In Europe and Japan, Genesis sells
its products through authorized distributors. Genesis provides technical support
and design assistance directly to customers who are themselves equipment
manufacturers, regardless of the sales channels used. Genesis focuses on
developing long-term customer relationships with both system manufacturers and
equipment manufacturers.
Genesis provides direct service and support to its customers through its
offices in Canada and the United States. Genesis' sales representatives in
Taiwan and Korea also provide service to customers. In addition, Genesis'
distributors provide ongoing support and service functions. In particular,
Genesis' Japanese distributor, Kanematsu Semiconductor Corporation, has a
dedicated team, including field application engineering, focused on selling and
supporting Genesis' products. Genesis provides support through both on-site
customer service and remote support from various facilities. Genesis generally
provides a one year warranty for all of its products.
Genesis' sales are derived from a limited number of customers, with the top
five customers accounting for 51% of total revenues during the nine months ended
February 28, 1999, 56% during fiscal 1998, and 35% during fiscal 1997. In
particular, sales to Samsung Electronics Co., Ltd. accounted for 20% of total
revenues and sales to Philips Electronics Industries (Taiwan) Ltd. accounted for
10% of total revenues during the nine months ended February 28, 1999.
As of March 31, 1999, Genesis employed a sales and marketing force of 33
people. This sales and marketing organization includes 13 field applications
engineers who assist customers to incorporate Genesis' integrated circuits into
their products.
MANUFACTURING
Genesis' products are manufactured by third parties with state-of-the-art
fabrication equipment and technology. This approach enables Genesis to focus on
product design and development, minimizes capital
58
<PAGE> 64
expenditures and provides Genesis access to advanced manufacturing facilities.
Currently, Genesis' products are being fabricated, assembled and tested by IBM,
USC, Chip Express and Samsung.
As semiconductor manufacturing technologies advance, manufacturers
typically retire their older manufacturing processes in favor of newer
processes. When this occurs, the manufacturer generally provides notice to its
customers of its intent to discontinue a process, and its customers will either
retire the affected part or design a newer version of the part which can be
manufactured on the more advanced process. Consequently, Genesis' products may
become unavailable from their current manufacturers if the processes on which
they are produced are discontinued. This has occurred in the past year, when IBM
retired its 0.8 micron manufacturing process so that parts manufactured on that
process are no longer available. Genesis must manage the transition to new parts
from the older parts. Genesis has commitments from its suppliers to provide two
years notice of any discontinuances of their manufacturing processes in order to
assist in managing these types of product transitions.
No individual product is procured from more than one supplier. In the past,
IBM supplied most of Genesis' products. With the recent introduction of new
products such as the gmZ2 and the gmFC1A, each of which are being procured from
different sources in Asia, IBM will cease to be the dominant supplier of
Genesis' products.
INTELLECTUAL PROPERTY AND LICENSES
Genesis seeks to protect its technology through a combination of patents,
copyrights, trade secret laws, trademark registrations, confidentiality
procedures and licensing arrangements. Genesis has been issued nine patents in
the United States and two in Europe, each covering aspects of algorithms, design
or architectures. These patents expire from 2011 to 2014. In addition, Genesis
has six patent applications pending in the United States Patent and Trademark
Office, two pending Canadian patent applications, nine pending Japanese patent
applications, nine pending Korean patent applications, and seven pending
European patent applications. To supplement its proprietary technology, Genesis
has licensed perpetual, assignable, exclusive, worldwide rights to use several
patents held by third parties.
COMPETITION
The markets in which Genesis operates are intensely competitive and are
characterized by rapid technological change, evolving industry standards and
declining average selling prices. Genesis faces competition from both large
companies and start-up companies, including Macronix International Co., Ltd.,
Philips Semiconductors, a division of Philips Electronics NV, Silicon Image
Inc., Arithmos Inc., Pixelworks Inc. and Sage Inc. Genesis believes that the
principal competitive factors in its markets are:
- product design and performance,
- price of products,
- functionality and features of products,
- time to market of products, and
- quality and speed of customer support provided to customers.
BACKLOG
Genesis' customers typically order products by way of purchase orders that
may be canceled without significant penalty. These purchase orders are subject
to price negotiations and to changes in quantities of products and delivery
schedules in order to reflect changes in customer requirements and manufacturing
availability. A large portion of Genesis' sales are made pursuant to short lead
time orders. In addition, Genesis' actual shipments depend on the manufacturing
capability of Genesis' suppliers and the availability of products from such
suppliers. As a result of the foregoing factors, Genesis does not believe the
backlog at any given time is a meaningful indicator of future revenues.
59
<PAGE> 65
EMPLOYEES
As of March 31, 1999, Genesis employed a total of 131 full-time employees,
including 66 in research and development, 33 in sales and marketing, 15 in
manufacturing operations and 17 in finance and administration. Genesis employs a
number of temporary and part-time employees as well as consultants on a contract
basis. Genesis' employees are not represented by a collective bargaining
organization. Genesis believes that its relations with its employees are
satisfactory.
FACILITIES
Genesis leases its corporate headquarters, which are located in Markham,
Ontario, Canada. Genesis also leases a sales, marketing and customer support
office in Mountain View, California. Genesis believes its existing facilities
are adequate to meet its needs in Canada for the immediate future and that
future growth can be accomplished by leasing additional or alternative space on
commercially reasonable terms. In the United States, following the merger,
Genesis and Paradise intend to relocate to a combined facility in the Santa
Clara County, California area.
LEGAL PROCEEDINGS
As of the date of this prospectus/proxy statement, Genesis is not a party
to any material legal proceeding.
60
<PAGE> 66
GENESIS MANAGEMENT
The following table lists Genesis' current executive officers and
directors. Messrs. Ferguson and Rohrer intend to resign upon closing of the
merger.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul M. Russo................ 56 Chairman of the Board and Chief Executive Officer
Stephen J. Solari............ 42 President and Chief Operating Officer
Peter Dakin.................. 57 Vice President, Manufacturing Operations
I. Eric Erdman............... 41 Vice President, Finance and Administration, Chief
Financial Officer and Secretary
Hamid Farzaneh............... 50 Vice President, Worldwide Sales
Brian S. Campbell(1)......... 37 Director
James E. Donegan............. 53 Director
George A. Duguay(1)(2)....... 46 Director
A. David Ferguson(2)......... 39 Director
Ronald A. Rohrer............. 59 Director
William H. Welling(2)........ 65 Director
</TABLE>
- ---------------
(1) Member of the compensation committee
(2) Member of the audit committee
Paul M. Russo is a co-founder of Genesis and has served as Chief Executive
Officer and as a director since its inception in January 1987. Mr. Russo has
served as Chairman of the Board of Genesis since November 1995, and served as
President of Genesis from its inception to November 1995. Mr. Russo served as
General Manager of General Electric Corporation's Microelectronics Center from
October 1983 to December 1985 and as Senior Manager in their Industrial
Electronics Group from 1980 to September 1983. Mr. Russo was Manager of RCA's
Microsystems Research Group from 1976 to 1980 and was a member of the technical
staff at RCA's David Sarnoff Research Center from 1970 to 1976. Mr. Russo holds
a B.Eng. degree in Engineering Physics from McGill University and M.S. and Ph.D.
degrees in Electrical Engineering and Computer Science from the University of
California at Berkeley.
Stephen J. Solari joined Genesis in January 1997 as Vice President,
Marketing and Business Development. Mr. Solari has served as President since
December 1998, and as Chief Operating Officer since August 1998. Mr. Solari
served as Director of Marketing for Video CD at C-Cube Microsystems, a
semiconductor company, from January 1996 to November 1996. Mr. Solari served as
Marketing Manager at Phillips Semiconductors, B.V., a semiconductor company,
from August 1990 to January 1996. Mr. Solari holds a B.S. degree in Electrical
Engineering and an M.B.A. degree from the University of California at Berkeley.
Peter Dakin is a co-founder of Genesis and has served as Vice President,
Manufacturing Operations of Genesis since May 1994. Mr. Dakin served as the
Director of Procurement and Sourcing for the Semiconductor Division at Mitel
Corporation, a telecommunications company, from May 1991 to May 1994. Mr. Dakin
holds a B.S. degree in Physics from Carleton University.
I. Eric Erdman joined Genesis in July 1995 as Director, Finance and
Administration. He has served as Vice President, Finance and Administration
since July 1996, Chief Financial Officer since December 1997 and as Secretary
since October 1995. Mr. Erdman served as a Director of Genesis from October 1995
to September 1996. Mr. Erdman was Controller of Vistar Telecommunications Inc.,
a telecommunications company, from August 1993 to July 1995. He served as
Controller of COM DEV Ltd., a satellite communications devices company, from
October 1991 to August 1993. Mr. Erdman holds a B. Math. degree from the
University of Waterloo, and is a member of both the Canadian Institute of
Chartered Accountants and of the American Institute of Certified Public
Accountants.
61
<PAGE> 67
Hamid Farzaneh joined Genesis in September 1994 and has served as Vice
President, Worldwide Sales of Genesis since January 1997 and from September 1994
to June 1995. Mr. Farzaneh served as Vice President, Sales and Marketing from
June 1995 to January 1997. Mr. Farzaneh served as Vice President, Sales and
Marketing of ASAT Corporation, an IC subcontract assembly company, from February
1990 to September 1994. Mr. Farzaneh holds a B.S. degree in Mechanical
Engineering and an M.S. degree in Industrial Engineering from the Institut
National des Sciences Appliquees in Lyon, France and an M.B.A. degree from
Golden Gate University.
Brian S. Campbell has served as a Director of Genesis since July 1996. Mr.
Campbell has served as a Director of Yorkton Securities Inc., a Canadian
investment banking firm, since February 1996. Mr. Campbell served as a Vice
President of Midland Walwyn Capital Inc., a Canadian investment banking firm,
from May 1992 to February 1996. Mr. Campbell also serves as a member on the
board of directors of Linmor Technologies Inc., a network management software
company. Mr. Campbell holds a Bachelor of Electrical Engineering degree from the
University of Waterloo and an M.B.A. degree from the University of Western
Ontario.
James E. Donegan has served as a Director of Genesis since September 1997.
Mr. Donegan has served as the Chairman of the Board, President and Chief
Executive Officer of Sipex Corporation, a semiconductor company, since 1985. Mr.
Donegan holds a B.A. degree from Villanova University.
George A. Duguay has served as a Director of Genesis since May 1993. Mr.
Duguay has served as the President and partner of Duguay and Ringler Corporate
Services, which provides bookkeeping and corporate secretarial services, since
May 1985.
A. David Ferguson has served as a Director of Genesis since September 1996.
Mr. Ferguson serves as a Vice President and Director of The VenGrowth Investment
Fund Inc., a Canadian venture capital fund. Mr. Ferguson served as a Managing
Director of Cohen & Ferguson Translink Inc., a corporate merger and acquisition
firm, from January 1990 to August 1994. Mr. Ferguson also serves on the board of
directors of Andaurex Industries Inc., an engineering firm. Mr. Ferguson holds a
Bachelor of Commerce degree from the University of Manitoba and an M.B.A. degree
from the University of Western Ontario.
Ronald A. Rohrer has served as a Director of Genesis since November 1994.
Mr. Rohrer is a semiconductor industry consultant. Mr. Rohrer served as a
professor at Carnegie Mellon University from September 1985 to August 1996. Mr.
Rohrer holds a B.S. degree in Electrical Engineering from the Massachusetts
Institute of Technology and M.S. and Ph.D. degrees in Electrical Engineering
from the University of California at Berkeley.
William H. Welling has served as a Director of Genesis since November 1993.
Mr. Welling has served as Managing Partner of Venture Growth Associates, an
investment firm since 1983. Mr. Welling serves as Chief Executive Officer and
Chairman of the Board of Xiox Corp., a telecommunications company, and as a
director of Western Micro Technology, Inc., a distributor of computer systems
and products. Mr. Welling holds a B.S. degree in Mechanical Engineering from
Marquette University.
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<PAGE> 68
GENESIS EXECUTIVE COMPENSATION
The following table contains information for the last three fiscal years
about compensation paid to Genesis' Chief Executive Officer and to its four
other most highly compensated executive officers as of May 31, 1998, the end of
Genesis' last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
--------------------------- ------ -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Paul M. Russo.......................... 1998 $163,627 $90,000 51,000 $--
Chief Executive Officer 1997 153,108 -- 30,000 --
1996 146,117 -- -- --
Stephen J. Solari...................... 1998 130,500 50,000 26,000 --
President and Chief Operating Officer 1997 53,333 -- 50,000 --
1996 -- -- -- --
Hamid Farzaneh......................... 1998 144,500 55,000 20,000 --
Vice President, Worldwide Sales 1997 130,167 -- 32,500 --
1996 124,250 -- 5,000 --
Lance Greggain(1)...................... 1998 99,636 28,220 17,000 --
Vice-President Research and 1997 83,313 -- 15,000 --
Chief Technology Officer 1996 79,086 2,202 -- --
Peter Dakin............................ 1998 91,933 34,000 22,000 --
Vice-President, Manufacturing
Operations 1997 89,159 -- 10,000 --
1996 85,548 -- -- --
</TABLE>
- ---------------
(1) Mr. Greggain ceased employment with Genesis on June 4, 1998.
GENESIS OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning stock option grants
made during fiscal 1998 to Genesis' Chief Executive Officer and to its four
other most highly compensated executive officers as of May 31, 1998, the end of
Genesis' last fiscal year. No stock appreciation rights were granted to these
individuals during the fiscal year.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM(1)(2)
UNDERLYING EMPLOYEES EXERCISE ------------------------
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED(#) YEAR ($/SHARE)(1) DATE 5%($) 10%($)
---- ---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul M. Russo................. 16,000 3.9% $6.48 6/2/04 $ 42,208 $ 98,363
35,000 8.5 9.00 12/1/07 198,102 502,029
Stephen J. Solari............. 20,000 4.9 6.48 6/2/04 52,760 122,954
6,000 1.5 9.00 12/1/07 33,960 86,062
Hamid Farzaneh................ 8,000 2.0 6.48 6/2/04 21,104 49,181
12,000 2.9 9.00 12/1/07 67,921 172,124
Lance Greggain(3)............. 10,000 2.4 6.48 6/2/04 26,380 61,477
7,000 1.7 9.00 12/1/07 39,620 100,406
Peter Dakin................... 13,500 3.3 6.48 6/2/04 35,613 82,994
8,500 2.1 9.00 12/1/07 48,110 121,921
</TABLE>
- ---------------
(1) All the options that expire on June 2, 2004 were granted on June 2, 1997
under Genesis' 1987 Stock Option Plan with the exercise price payable in
Canadian dollars. The above exercise prices represent the equivalent US$
exercise prices on the date of the grant. Those options have a maximum term
of
63
<PAGE> 69
seven years, subject to earlier termination upon the executive's cessation
of service with Genesis. All the options that expire on December 1, 2007
were granted on December 1, 1997 under Genesis' 1997 Employee Stock Option
Plan with the exercise price payable in U.S. dollars. Those options have a
maximum term of ten years, subject to earlier termination upon the
executive's cessation of service with Genesis. Prior to Genesis' IPO, the
board of directors considered numerous factors in determining the fair
market value of Genesis common shares underlying the grant of stock options.
These factors included the pricing of equity securities issued by Genesis to
outside investors in arm's length transactions, the financial and operating
performance of Genesis and the progress made by Genesis in establishing
itself in the semiconductor industry, the assessment of future business
risks, and the likelihood of achieving a liquidity event, such as an initial
public offering.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There is no
assurance that the actual stock price appreciation over the option terms
will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the common shares appreciates over the option
term, no value will be realized from the option grants made to the executive
officers.
(3) Mr. Greggain ceased employment with Genesis on June 4, 1998.
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table contains information about option exercises and option
holdings during fiscal 1998 for Genesis' Chief Executive Officer and its four
other most highly compensated executive officers as of May 31, 1998, the end of
Genesis' last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS/SARS
ACQUIRED AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
UPON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul M. Russo................. 40,000 $201,544 109,375 66,625 $1,040,044 $344,548
Stephen J. Solari............. -- -- 16,666 59,334 145,927 431,214
Hamid Farzaneh................ -- -- 69,079 38,421 604,856 247,631
Lance Greggain(2)............. 30,000 158,356 37,187 24,813 394,239 150,831
Peter Dakin................... -- -- 39,791 27,209 348,410 153,850
</TABLE>
- ---------------
(1) The value of an "in-the-money" stock option represents the difference
between the aggregate estimated fair market value of the underlying stock
and the aggregate exercise price of the stock option. The estimated fair
market value of Genesis' common shares is based on the reported closing
price of $12 3/16 per share on the Nasdaq National Market on May 29, 1998,
the last day of trading before the end of Genesis' 1998 fiscal year.
(2) Mr. Greggain ceased employment with Genesis on June 4, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee of the Genesis board of
directors was, at any time since the formation of Genesis, an officer or
employee of Genesis. No interlocking relationship exists between Genesis' board
of directors or compensation committee and the board of directors or
compensation committee of any other company, nor did any such interlocking
relationship exist during the past fiscal year.
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<PAGE> 70
SHARE OWNERSHIP OF MANAGEMENT, DIRECTORS
AND PRINCIPAL SHAREHOLDERS OF GENESIS
The following table contains information regarding the beneficial ownership
of Genesis' common stock as of March 31, 1999, for:
- each director of Genesis,
- Genesis' Chief Executive Officer and each of its four other most highly
compensated executive officers during the fiscal year ended May 31, 1998,
- all directors and executive officers of Genesis as a group, and
- all persons known by Genesis to be beneficial owners of more than five
percent of the outstanding shares of Genesis common stock.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities and Exchange Act of 1934 and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under Rule 13d-3 beneficial ownership includes any shares as to which
the individual or entity has voting power or investment power and any shares
that the individual has the right to acquire within 60 days of March 31, 1999
through the exercise of any stock option or other right. Unless otherwise
indicated in the footnotes or table, each person or entity has sole voting and
investment power or shares such powers with his or her spouse, over the shares
shown as beneficially owned.
The number of exercisable options is shown in the first column of the
table, and is included in the number of common shares beneficially owned shown
in the second column.
The number and percentage of shares beneficially owned is computed on the
basis of 14,478,536 Genesis common shares outstanding on March 31, 1999 and on
the basis of 3,975,168 Genesis common shares to be issued on completion of the
merger.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF PERCENTAGE OF
COMMON NUMBER OF OUTSTANDING OUTSTANDING
SHARES COMMON COMMON COMMON
ISSUABLE SHARES SHARES SHARES
PURSUANT TO BENEFICIALLY OWNED PRIOR TO OWNED AFTER
BENEFICIAL OWNER OPTIONS OWNED MERGER MERGER
---------------- ----------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Fidelity Management & Research -- 1,413,600 9.8% 7.7%
Company...........................
82 Devonshire Street
Boston, MA 02109
Rocco A. Schiralli(1)............... -- 1,273,313 8.8% 6.9%
121 Harrington Sound Road
Smith's Parish
Bermuda
Resolve Limited..................... -- 1,041,501 7.2% 5.6%
c/o CIBC Trust Company
(Channel Islands) Limited
St. Peter Port, Guernsey
Channel Islands
Driehaus Capital Management, Inc.... -- 789,409 5.5% 4.3%
25 East Erie Street
Chicago, IL 60611
Knight, Bain, Seath & Holbrook -- 757,100 5.2% 4.1%
Capital Management Inc............
1 Toronto Street, Suite 708
Toronto, Ontario
M5C 2V6
</TABLE>
65
<PAGE> 71
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF PERCENTAGE OF
COMMON NUMBER OF OUTSTANDING OUTSTANDING
SHARES COMMON COMMON COMMON
ISSUABLE SHARES SHARES SHARES
PURSUANT TO BENEFICIALLY OWNED PRIOR TO OWNED AFTER
BENEFICIAL OWNER OPTIONS OWNED MERGER MERGER
---------------- ----------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS(A):
Paul M. Russo(2).................... 21,978 576,555 4.0% 3.1%
Brian S. Campbell................... 14,937 14,937 * *
James E. Donegan.................... 5,833 5,833 * *
George A. Duguay.................... 5,416 5,416 * *
A. David Ferguson(3)................ 14,937 423,937 2.9% 2.3%
Ronald A. Rohrer.................... 1,625 1,625 * *
William H. Welling.................. 43,500 83,820 * *
Stephen J. Solari................... 40,874 49,896 * *
Hamid Farzaneh(4)................... 70,843 109,103 * *
Peter Dakin(5)...................... 16,956 32,042 * *
All directors and executive officers 248,607 1,326,872 9.0% 7.1%
as a group (11 persons)...........
</TABLE>
- ---------------
* Less than one percent
(a) Excludes Mr. Lance Greggain, who ceased employment with Genesis on June 4,
1998.
(1) Includes (i) 1,228,313 common shares held by companies which are wholly
owned by various trusts established for the benefit of Mr. Schiralli and his
family, including 1,041,501 shares held by Resolve Limited and (ii) 45,000
common shares held by Mr. Schiralli's spouse. Mr. Schiralli does not
exercise dispository or voting control over the various trusts, however Mr.
Schiralli can appoint a new trustee for these trusts at any time.
(2) Includes 56,300 common shares held by Mr. Russo's spouse and children.
(3) Includes 409,000 common shares held by The VenGrowth Investment Fund Inc. of
which Mr. Ferguson is an officer.
(4) Includes 21,473 common shares held by Mr. Farzaneh's spouse and children.
(5) Includes 187 common shares issuable pursuant to options exerciseable within
60 days after March 31, 1999 and 5,086 common shares held by Mr. Dakin's
spouse.
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<PAGE> 72
TRANSACTIONS BETWEEN GENESIS AND ITS DIRECTORS, OFFICERS OR PRINCIPAL
SHAREHOLDERS
TRANSACTIONS WITH YORKTON
On July 31, 1996, Genesis completed a private placement of 17,800,000
warrant units of Genesis at a price of CDN$0.90 per unit for total gross
proceeds of CDN$16.0 million. The sale of the units was arranged by Yorkton
Securities Inc. as underwriter. Brian S. Campbell, a director of Yorkton, became
a director of Genesis subsequent to this transaction. As consideration for
services, Genesis paid Yorkton an underwriting fee of CDN$1,041,000 and granted
to Yorkton a non-assignable option to purchase 213,600 common shares at an
exercise price of CDN$9.00 (US$6.18) per common share. These options were
exercised in full in June 1998.
On February 24, 1998, Genesis common shares commenced trading on the Nasdaq
National Market following Genesis' initial public offering. A wholly-owned
subsidiary of Yorkton acted as one of the lead underwriters in the offering. The
underwriters, including Yorkton, received $2,654,795 in commissions and fees for
Genesis' initial public offering.
LOAN FROM THE ROYAL BANK OF CANADA TO PAUL RUSSO AND GENESIS GUARANTEE OF THE
LOAN
On October 31, 1997, Mr. Russo arranged to borrow up to approximately
CDN$1.4 million from the Royal Bank of Canada for the purpose of repaying his
debt to Rocco A. Schiralli, a principal Genesis shareholder. This obligation was
evidenced by a promissory note. Interest was payable monthly, and the principal
became due on demand. The loan was guaranteed by Genesis and reduced Genesis'
ability to borrow under its credit facility with the Royal Bank of Canada to the
extent of Mr. Russo's outstanding loan balance. In exchange for Genesis'
guarantee of his loan, Mr. Russo pledged to Genesis 100,000 common shares. On
December 16, 1998, the Royal Bank of Canada released Genesis from its guarantee
and Genesis released Mr. Russo from his pledge agreement.
LOANS BY GENESIS TO OFFICERS
On October 25, 1996, Genesis loaned CDN$150,000 to Mr. Russo for personal
financial purposes. This obligation was evidenced by a promissory note. No
interest was payable on the loan and Genesis could not demand payment of the
principal amount of the loan until the occurrence of certain events. Once this
amount became payable on demand, interest accrued on the principal amount at 1%
above the prime rate of the Royal Bank of Canada. Mr. Russo, Genesis and Weir &
Foulds, Ontario legal counsel to Genesis, entered into a pledge agreement dated
October 25, 1996 whereby Mr. Russo pledged 25,000 common shares as security for
his obligation.
On July 25, 1997, Mr. Russo borrowed an additional CDN$80,000 from Genesis
in order to purchase shares of Genesis. This obligation was evidenced by a
promissory note. No interest was payable on this loan and the principal amount
of the loan became due in accordance with its terms. Mr. Russo entered into a
pledge agreement with Weir & Foulds and Genesis dated July 25, 1997 pursuant to
which he pledged 40,000 common shares of Genesis as security for his obligation.
On October 28, 1998, the above two loans were repaid and Mr. Russo's shares
were released from escrow.
On July 25, 1997, Lance Greggain borrowed CDN$50,000 from Genesis in order
to purchase shares of Genesis. This obligation was evidenced by a promissory
note. No interest was payable on this loan and the principal amount of the loan
became due in accordance with its terms. Mr. Greggain entered into a pledge
agreement with Weir & Foulds and Genesis dated July 25, 1997 pursuant to which
he pledged 30,000 common shares of Genesis as security for his obligation. On
September 18, 1998, the loan was repaid and Mr. Greggain's shares were released
from escrow.
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<PAGE> 73
CONSULTING ARRANGEMENTS WITH DIRECTORS
Genesis has contracted with Messrs. Rohrer and Welling, both directors of
Genesis, to provide consulting services for a fourteen month term commencing
September 1998. Under the terms of the agreements, each of Mr. Rohrer and Mr.
Welling will provide up to three days of service each month at a flat rate of
$7,500 per month plus expenses. Genesis may request additional services which
are to be charged at a rate of $2,500 per day. As of March 31, 1999, Genesis had
paid each of Messrs. Rohrer and Welling consulting fees of $77,500 under these
agreements.
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<PAGE> 74
PARADISE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements as a
result of, among other things, the factors set forth in "Risk Factors" beginning
on page 9 of this proxy statement/prospectus.
OVERVIEW
Paradise develops and markets analog and digital mixed signal integrated
circuits for controlling flat panel displays or monitors. Paradise was founded
in June 1996 and from that time until May 1998, Paradise devoted most of its
effort to developing its initial products for the flat panel display market. Its
first product, the Bridge 80, was introduced in May 1998 and its second product,
the Bridge 120, was introduced in September 1998.
The market for flat panel displays is in an early stage of its development,
both for use with computers as a replacement for the current cathode ray tube or
CRT monitor, similar to the picture tubes contained in current televisions, and
for use in the future in thin profile televisions. Flat panel displays are, in
part, replacing the traditional CRT desktop monitors and televisions. Flat panel
displays occupy less space than CRTs and lower both power consumption and
radiation emission. Flat panel displays are digital devices and desktop CRT
monitors are analog devices. For a desktop personal computer user to unplug a
CRT monitor and plug in a flat panel monitors, sophisticated interface
electronics are required in the flat panel monitors. In the past, manufacturers
have solved this problem by using multiple components. Each of Paradise's
products is a single integrated circuit that serves as the controller and
interface, eliminating the need for multiple components.
Paradise markets and sells its products directly to customers with the
support of regional sales representatives. Paradise recognizes revenues from
product sales when they are shipped. Product returns and allowances are
estimated and provided for at the time of sale. To date, Paradise has not
experienced any significant product returns.
Paradise's costs of finished products from its semiconductor suppliers have
historically been negotiated at fixed prices per wafer on a quarterly basis,
where Paradise has borne the risk of manufacturing yields. Under agreements with
its foundry, Taiwan Semiconductor Manufacturing Company, Paradise is obligated
to provide rolling six-month forecasts of anticipated monthly purchases and to
place purchase orders which become binding approximately two months prior to
shipment. If Paradise cancels a purchase order, it must pay cancellation
penalties based on the status of the work in process. Paradise has a limited
ability to make adjustments to its forecasts and, therefore, Paradise must make
forecasts and place purchase orders for products several months before it
receives purchase orders from its own customers. This restricts Paradise's
ability to react to fluctuations in demand for its products and may cause
Paradise to have either too much or not enough of a particular product. However,
to date Paradise has not experienced any significant write downs of inventory.
Paradise has net operating loss carryforwards available to reduce future
years' taxable income in the United States. Paradise does not anticipate paying
any income taxes until the benefit of these losses has been fully utilized.
Details of these losses can be found in Note 6 to Paradise's Consolidated
Financial Statements included in this proxy statement/prospectus.
RESULTS OF OPERATIONS
Revenues. Revenues for the year ended December 31, 1998 increased to $3.8
million from $2,000 in the previous year. For fiscal 1996, which commenced with
Paradise's inception on June 17, 1996, there were no revenues. The increase in
total revenues in fiscal 1998 over fiscal 1997 is primarily due to the
introduction and market acceptance of Paradise's first products, the Bridge 80
and Bridge 120. Paradise does not expect to maintain the rate of revenue growth
that occurred from fiscal 1997 to fiscal 1998.
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<PAGE> 75
Gross Profit. Gross profit for fiscal 1998 increased to $2.8 million from
$2,000 in fiscal 1997 and zero in fiscal 1996. Gross profit represented 72.4% of
revenues in fiscal 1998. Paradise expects its gross profit percentages to
decline somewhat over time. The gross profit in fiscal 1998 resulted from the
introduction and shipment of Bridge 80 and Bridge 120 devices.
Research and Development. Research and development expenses for fiscal 1998
increased to $3.9 million from $1.3 million in the previous fiscal year and from
$265,000 in fiscal 1996. Paradise is an early stage company, and its research
and development expenses exceeded its revenues in each fiscal year since its
inception. The increases in absolute dollars in fiscal years 1998 and 1997
reflect greater personnel costs associated with an expansion in Paradise's
research and development activities and increased prototype and pre-production
expenses of new products. Paradise expects to continue to make substantial
investments in its research and development activities and anticipates that
research and development expenses will continue to increase in absolute dollars.
If revenue growth continues, research and development expense will decline as a
percentage of revenue.
General and Administrative. General and administrative expenses were $1.5
million in fiscal 1998, $641,000 in fiscal 1997 and $71,000 in fiscal 1996. The
increases in general and administrative expenses in 1998 and 1997 reflect
increased personnel costs related to increased administrative activities and
increased legal and accounting expenses. Paradise expects general and
administrative expenses to increase in absolute dollars due to the addition of
administrative personnel. In fiscal 1998, general and administrative expenses
represented 40.4% of revenues, where in fiscal 1997 and 1996 they exceeded
revenues. Paradise expects general and administrative expenses to decline as a
percentage of revenues if revenue growth continues.
Sales and Marketing. Sales and marketing expenses were $931,000 in fiscal
1998, as compared to $176,000 in fiscal 1997 and $5,000 in fiscal 1996. The
increase in sales and marketing expenses in fiscal 1998 as compared to fiscal
1997 related to increased personnel costs and to the commencement of sales
commissions and other sales expenses directly related to revenues. The increase
in sales and marketing expenses in fiscal 1997 as compared to fiscal 1996
reflected increased personnel costs with the establishment of a sales and
marketing department. In fiscal 1998, sales and marketing expenses represented
24.5% of revenues, where in fiscal 1997 and 1996 they exceeded revenues.
Paradise expects sales and marketing expenses to decline as a percentage of
revenues if revenue growth continues.
Interest Income and Expense. Interest income in fiscal 1998 was $112,000
compared with $60,000 in fiscal 1997 and $13,000 in fiscal 1996. The increases
in interest income are primarily due to the higher average balances of cash and
cash equivalents held in succeeding years. Interest expense in fiscal 1998
consisted of interest incurred on Paradise's October 1998 issuance of $1.0
million of convertible notes payable and on amounts borrowed under Paradise's
lease line of credit. No such borrowings occurred during 1997 or 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through December 31, 1998, Paradise met its liquidity
needs primarily through private sales of equity securities (including redeemable
convertible preferred stock) for aggregate proceeds of $7.5 million, before
deduction of issuance costs, convertible notes payable aggregating $1.0 million
and $518,000 of borrowings under its $800,000 equipment term loan.
Paradise established an $800,000 equipment term loan with Silicon Valley
Bank, dated November 13, 1997. This agreement allowed Paradise to borrow at an
interest rate of 8% per annum until November 13, 1998. Repayment of the
borrowings began when the drawdown amount exceeded $400,000. The amounts
borrowed are to be repaid over 48 months. Borrowings are secured by Paradise's
assets. At March 15, 1999, $481,523 was outstanding on the loan.
In October 1998, Paradise entered into a $1.0 million convertible note
payable agreement with several of its stockholders. Principal and interest are
due in April 1999. As of December 31, 1998, total principal and interest due
were $1,000,000 and $14,118, respectively. Interest accrues at a rate of 8% per
year. Paradise expects that the principal and accrued interest will be paid at
the closing of the merger.
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In October 1998, Paradise entered into an agreement with Silicon Valley
Financial Services whereby the Paradise can sell its receivables for 80% of the
face amount of each receivable, up to $1,500,000 at any one time. As of December
31, 1998, there were no purchased accounts receivable outstanding and Paradise
has not sold any receivable under this arrangement to date.
Paradise has used cash in operating activities of $5.8 million since its
inception through December 31, 1998. Cash used in operating activities in 1998,
1997 and 1996 was $3.9 million, $1.8 million and $192,000, respectively. In
1998, 1997 and 1996, cash used in investing activities was $653,000, $503,000
and $388,000, respectively. Investment activities in 1998, 1997 and 1996
consisted primarily of the purchase of property, plant and equipment. Cash
provided by financing activities in 1998, 1997 and 1996 was $1.6 million, $5.2
million and $2.1 million, respectively. Cash provided by financing activities
consisted primarily of proceeds from borrowings from equity investors in 1998
and private sales of preferred stock and units in 1996 and 1997.
At December 31, 1998, Paradise had approximately $1.6 million in cash and
cash equivalents.
Paradise's cash equivalents are subject to market risk, primarily interest
rate and credit risk. Paradise's investments are managed by outside professional
managers within guidelines established by Paradise. The guidelines, which
include security type, credit quality and maturity, are intended to limit market
risk by restricting Paradise's investments to high quality debt instruments with
short-term maturities. Due to the relatively short-term duration of Paradise's
investments at December 31, 1998, a 1% (100 basis point) increase in short-term
interest rates would not have a significant impact on the market value of
Paradise's cash equivalents. At December 31, 1998 cash equivalents consisted
principally of short-term money market funds and commercial paper and were
stated at cost which approximates fair value.
In addition, as of December 31, 1998, Paradise has not declared any
dividends on its outstanding preferred stock.
Paradise believes that its cash balances will be sufficient to satisfy its
cash requirements at least through December 1999. Paradise can not offer any
assurance, however, that it will not require additional financing prior to such
time. Paradise would seek any additional funds through the sale of public or
private equity or debt financing or from other sources. The sale of any
additional equity or debt securities could result in additional dilution to
Paradise stockholders. Additional financing may not be available to Paradise on
acceptable terms, or at all, when required by Paradise.
YEAR 2000
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year (the "Year 2000 Issue").
Computer programs that have such date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.
Paradise is heavily dependent upon the proper functioning of its own
computer or data-dependent systems. This includes, but is not limited to, its
systems in information, business, finance and operations. Any failure or
malfunctioning on the part of these or other systems could adversely affect
Paradise in ways that are not currently known, discernible, quantifiable or
otherwise anticipated by Paradise.
Paradise has not to date formally analyzed the Year 2000 Issue with respect
to its systems, its suppliers or customers, and does not expect to do so prior
to the merger, as many of its systems may be replaced following the merger.
Paradise believes, without investigation, that a number of its systems are Year
2000 compliant, as they were acquired since Paradise's inception in 1996.
Paradise believes that its products do not contain any Year 2000 Issues, as
its products do not contain any date registers.
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<PAGE> 77
To date, Paradise has not incurred significant costs associated with its
efforts to become Year 2000 compliant. Furthermore, Paradise believes that
future costs associated with its Year 2000 compliance efforts will not be
material.
Paradise is currently working with its suppliers of products and services
to determine the extent to which the suppliers' operations and the products and
services they provide are Year 2000 capable. Paradise has made inquiries of its
major suppliers and has received responses to its initial inquiries. Paradise
expects to monitor its suppliers regarding Year 2000 issues. Paradise has not
done anything to ensure Year 2000 compliance from its customers. The operations
of Paradise's key suppliers and customers could be adversely affected in the
event they do not successfully and timely achieve Year 2000 compliance.
Paradise's business and results of operations could experience material adverse
effects if its key suppliers were to experience Year 2000 issues that caused
them to delay manufacturing or shipment of key components to Paradise. In
addition, Paradise's results of operations could be materially adversely
affected if any of Paradise's key customers encounter Year 2000 issues that
cause them to delay or cancel substantial purchase orders or delivery of
Paradise's product.
There can be no assurance that Paradise will be able to address the Year
2000 Issue in a timely manner or to upgrade any or all of its major systems, if
necessary. In addition, there can be no assurance that any such upgrades will
effectively address the Year 2000 Issue. If required upgrades are not completed
timely or are not successful, Paradise may be unable to conduct its business,
which would have a material impact on the operations of Paradise. Furthermore,
there can be no guarantee that the systems of other companies on which
Paradise's systems rely will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with Paradise's
systems, would not have a material adverse effect on Paradise.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. FAS 133 is effective for fiscal years beginning after June
15, 1999 and Paradise believes that the adoption of FAS 133 will not have a
significant impact on Paradise's financial position, operating results, or cash
flows.
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PARADISE BUSINESS
Paradise was founded in June 1996. Paradise develops and markets analog and
digital mixed signal integrated circuits for controlling flat panel monitors.
The market for flat panel monitors is in an early stage of its development, both
for use with computers as a replacement for the current CRT monitor, and for use
in the future in thin profile televisions.
Flat panel monitors are, in part, replacing the traditional CRT desktop
monitors and televisions. Flat panel displays occupy less space than CRTs and
lower both power consumption and radiation emission. Flat panel monitors are
digital devices and desktop CRT monitors are analog devices. For a desktop
personal computer user to unplug a CRT monitor and plug in a flat panel monitor,
sophisticated interface electronics are required in the flat panel monitors. In
the past, manufacturers have solved this problem by using multiple components.
Paradise believes it has developed a better solution to this problem -- a
single integrated circuit that makes a flat panel monitor behave like a
traditional CRT. The controller chip, when mated with a liquid crystal display
panel, allows a personal computer or workstation user to unplug the standard CRT
monitor and replace it with a flat panel monitor. No changes to the computer
system's hardware or software are required. The new monitor works like a CRT
monitor, while retaining the benefits of flat liquid crystal display size,
weight, and visual quality.
Paradise intends to take advantage of the sales potential of both flat
panel monitors being retrofitted to the current computer systems installed base
and flat panel displays being bundled with new computer systems. Paradise's
first product offering, the Bridge series, is a controller family which converts
the analog output of a computer system graphics device to the digital signals
which are appropriate for flat panel monitors. Paradise's current products are
not useful in televisions.
Paradise believes that it has achieved one of the highest levels of
integration in its market segment. Paradise has integrated all of the flat panel
monitor interface electronics into a single chip solution. Paradise's
intellectual property portfolio includes three patents and 16 patent
applications.
Paradise's current products, the Bridge 80 and Bridge 120, are in volume
production. These chips provide flat panel display manufacturers with a low cost
method for obtaining compatibility with existing graphics card and chip output.
Paradise does not operate a wafer fabrication facility. Its products are
manufactured using industry standard fabrication technology by an unrelated
silicon wafer foundry. Paradise currently uses Taiwan Semiconductor
Manufacturing Company as its foundry. After wafers are processed by the foundry,
Paradise manages the wafer sorting, packaging, final test and shipment to the
customer. At present, Paradise outsources the bulk of this work to minimize
capital expenditures and headcount.
Paradise focuses its sales and marketing efforts on liquid crystal display
manufacturers, large monitor manufacturers and major personal computer
manufacturers. Paradise sells its products through a direct sales force which
concentrates on the personal computer manufacturers, and a network of
independent sales representatives in the Pacific Rim. Paradise centers a large
part of its marketing activities around industry trade shows and scientific
conferences on flat panel displays. In fiscal year 1998, one customer, Fujitsu
America Inc., accounted for 66% of net sales.
In September 1998, Arithmos, Inc., a potential merger partner of Paradise,
filed an action against Paradise claiming misappropriation of trade secrets,
unfair business practices, trade libel, negligent misrepresentation, and breach
of contract of three separate agreements stemming from a failed merger between
the two companies. The action is currently in the discovery stage. There can be
no assurance that Paradise would prevail in such litigation or any damages
payable by Paradise will not have a material adverse effect on the Paradise
business, financial condition or results of operations.
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<PAGE> 79
SECURITY OWNERSHIP OF MANAGEMENT, DIRECTORS AND
PRINCIPAL STOCKHOLDERS OF PARADISE
The following table contains information regarding the beneficial ownership
of Paradise's capital stock as of March 31, 1999 for
- each director of Paradise,
- each executive officer of Paradise,
- all directors and executive officers of Paradise as a group, and
- all persons (or groups of affiliated persons) known by Paradise to be
beneficial owners of more than five percent of the outstanding shares of
a class of Paradise capital stock.
The number and percentage of shares beneficially owned is completed on the
basis of:
- 12,252,755 shares of Paradise common stock outstanding on March 31, 1999
(not including common stock warrants and shares of common stock subject
to options currently exercisable, or exercisable within 60 days after
February 1, 1999),
- 8,256,522 shares of Paradise preferred stock outstanding on March 31,
1999,
- an exchange ratio of 0.1918 Genesis common shares for each share of
Paradise capital stock, and
- 18,453,704 Genesis common shares outstanding after the merger
<TABLE>
<CAPTION>
SHARES OF PARADISE CAPITAL STOCK BENEFICIALLY OWNED GENESIS
---------------------------------------------------------- COMMON SHARES
PERCENT BENEFICIALLY OWNED
COMMON STOCK PREFERRED STOCK OF ALL AFTER THE MERGER
---------------------- ---------------------- PARADISE -------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF CAPITAL NUMBER OF
BENEFICIAL HOLDER SHARES CLASS SHARES CLASS STOCK SHARES PERCENT
- ----------------------------------- --------- ---------- --------- ---------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Alta V Limited Partnership......... 296,880 2.4% 2,315,619 28.1% 12.7% 501,077 2.7%
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Garret Gruener(1).................. 300,000 2.4% 2,339,955 28.3% 12.9% 506,343 2.7%
c/o Alta Partners
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Robin S. Han....................... 2,233,333 18.2% -- -- 10.9% 428,353 2.3%
13575 Lomond Court
Saratoga, CA 94957
Lawrence G. Finch(2)............... 150,000 1.2% 2,047,788 24.8% 10.8% 421,535 2.3%
c/o Sigma Partners
2884 Sand Hill Road, #121
Menlo Park, CA 94025
Alexander S. Lushtak............... 1,683,333 13.8% 150,000 1.8% 8.9% 351,633 1.9%
c/o Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
Sigma Partners III, L.P.(3)........ -- -- 1,747,788 21.2% 8.5% 335,225 1.8%
2884 Sand Hill Road
Suite 121
Menlo Park, CA 94025
August Capital L.P.(4)............. -- -- 1,627,434 19.7% 7.9% 342,141 1.7%
2480 Sand Hill Road
Suite 101
Menlo Park, CA 94025
Alexander J. Eglit................. 1,600,000 13.0% -- -- 7.8% 306,880 1.7%
647 Highland Avenue
Half Moon Bay, CA 94019
Robert R. Tillman(5)............... 1,533,334 12.5% -- -- 7.4% 294,093 1.6%
14 Sunshine Road
Sausalito, CA 94965
</TABLE>
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<PAGE> 80
<TABLE>
<CAPTION>
SHARES OF PARADISE CAPITAL STOCK BENEFICIALLY OWNED GENESIS
---------------------------------------------------------- COMMON SHARES
PERCENT BENEFICIALLY OWNED
COMMON STOCK PREFERRED STOCK OF ALL AFTER THE MERGER
---------------------- ---------------------- PARADISE -------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF CAPITAL NUMBER OF
BENEFICIAL HOLDER SHARES CLASS SHARES CLASS STOCK SHARES PERCENT
- ----------------------------------- --------- ---------- --------- ---------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeffrey Diamond(6)................. 1,283,334 10.2% -- -- 6.2% 246,143 1.3%
c/o Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
Technology Venture Investors IV.... -- -- 894,000 10.8% 4.4% 171,469 *
2480 Sand Hill Road
Suite 101
Menlo Park, CA 94025
John D. Lattanzi................... 616,000 5.0% -- -- 3.0% 118,148 *
c/o Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
Venture Tek Management, L.L.C. .... -- -- 442,477 5.4% 2.2% 84,867 *
Yuyu Bldg. 358-9
Shindang-dong
Jung-gu
Seoul 100-450
Republic of Korea
Wendy L. Benveniste(7)............. 300,000 2.4% -- -- 1.5% 57,560 *
Tzo Yao Chan(8).................... 270,000 2.2% -- -- 1.3% 51,786 *
Chieh Chang(9)..................... 233,334 1.9% -- -- * 44,753 *
Alex Daly.......................... 100,000 * -- -- * 19,180 *
Patrick Delaney(10)................ 240,000 1.9% -- -- 1.8% 46,032 *
Sanjeev Renjen(11)................. 400,000 3.2% -- -- 1.9% 76,720 *
All directors and executive % % % %
officers 8,093,335 66.0 4,537,743 62.8 58.7 2,422,640 13.1
as a group (12 persons)(12)........
</TABLE>
- ---------------
* Less than 1%
(1) Consists of 296,880 shares of Paradise common stock and 2,315,619 shares of
Paradise preferred stock held by Alta V Limited Partnership and 3,120
shares of Paradise common stock and 24,336 shares of Paradise preferred
stock held by Customs House Partners. Mr. Gruener is a general partner of
Alta V Limited Partnership and Customs House Partners. Mr. Gruener
disclaims beneficial ownership of these shares except to the extent of his
proportional partnership interest therein.
(2) Includes 1,370,790 shares of Paradise preferred stock held by Sigma
Partners III, L.P., 339,246 shares of Paradise preferred stock held by
Sigma Associates III, L.P. and 37,752 shares of Paradise preferred stock
held by Sigma Investors III, L.P. Mr. Finch is a general partner of the
general partner of all three aforementioned Sigma entities. Mr. Finch
disclaims beneficial ownership of these shares except to the extent of his
proportional partnership interest therein.
(3) Consists of 1,370,790 shares of Paradise preferred stock held by Sigma
Partners III, L.P., 339,246 shares of Paradise preferred stock held by
Sigma Associates III, L.P. and 37,752 shares of Paradise preferred stock
held by Sigma Investors III, L.P. Sigma Partners III, L.P., Sigma
Associates III, L.P. and Sigma Investors III, L.P. are under common
ownership and control.
(4) August Capital Management LLC, the sole general partner of August Capital
L.P., and John R. Johnston, David F. Marquardt and Andrew S. Rappaport, the
members of August Capital Management LLC, may also be considered the
beneficial owners of these shares. Each disclaims beneficial ownership of
these shares except to the extent of his or its proportional equity
interest therein.
(5) Consists of 1,350,000 shares of Paradise common stock held by Mr. Tillman
as Trustee of the Alexander S. Lushtak Irrevocable Gift Trust DTD 11/20/92
and 183,334 shares of Paradise common stock held by Mr. Tillman as Trustee
of the Robert R. Tillman Living Trust dated
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<PAGE> 81
September 23, 1991. Mr. Tillman disclaims beneficial ownership of 1,350,000
shares held as Trustee of the Alexander S. Lushtak Irrevocable Gift Trust
DTD 11/20/92.
(6) Includes 350,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(7) Includes 112,500 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(8) Includes 150,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(9) Includes 150,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(10) Includes 45,000 shares issuable upon exercise of options exercisable within
60 days of March 31, 1999.
(11) Includes 200,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(12) Includes 1,007,500 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
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PARADISE MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of March 31, 1999,
with respect to each executive officer and director of Paradise who will serve
as an executive officer or director of Genesis following the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GENESIS
---- --- ---------------------
<S> <C> <C>
Lawrence G. Finch..................... 64 Director
Alexander S. Lushtak.................. 60 Director
Wendy Benveniste...................... 47 Vice President of Operations
Jeffrey Diamond....................... 46 Executive Vice President
Sanjeev Renjen........................ 44 Vice President of Engineering
</TABLE>
Lawrence G. Finch has been a venture capitalist and general partner of the
general partner of various Sigma Partners funds since 1987. Mr. Finch is a
director of Splash Technology Holdings and International Network Services.
Alexander S. Lushtak is a founder of Paradise and has been the Chairman of
the Board of Directors of Paradise since 1996. From 1993 to 1996 he was the
founder and Chairman of the Board of Directors of Accent Inc., a voice
recognition chip company.
Wendy Benveniste has served as Vice President of Operations of Paradise
since 1998. From 1994 to 1998, she was the Vice President of Business Operations
of the Graphics Business Unit at Cirrus Logic.
Jeffrey Diamond has served as President and Chief Executive Officer of
Paradise since 1998. From 1996 to 1998, he was a director of and advisor to
Paradise and its predecessor. From 1992 to 1996, he was Vice President of
Business Development for the Graphics Business Unit at Cirrus Logic.
Sanjeev Renjen has served as Vice President of Engineering of Paradise
since 1998. Dr. Renjen was formerly Vice President of Engineering at C-Cube
Microsystems from 1995 to 1998 and Vice President of System Products at Alliance
Semiconductor from 1993 to 1995.
DIRECTOR COMPENSATION
Directors at Paradise do not receive any cash compensation for their
service as members of the board of directors and are not reimbursed for expenses
incurred for any board of directors meeting attended.
CERTAIN TRANSACTIONS
On October 27, 1998, Paradise completed a financing in which it sold and
issued a total of $1.0 million worth of convertible promissory notes, and
warrants to purchase up to 221,239 shares of Paradise common stock to existing
stockholders of Paradise. The notes bear interest at a rate of 8% per annum and
become fully due and payable after 180 days, unless Paradise sells shares of its
Series D preferred stock with total proceeds of at least $2,000,000 on or prior
to that time, in which case the notes automatically convert into shares of
Series D preferred stock at a conversion rate equal to the per share price of
the Series D preferred stock. Each warrant has an exercise price of $0.25 per
share and can be exercised at any time within 5 years. Paradise expects that the
notes will remain unpaid and continue to accrue interest until the merger occurs
at which time Genesis will pay the notes the full. The notes do not contain any
acceleration or conversion clauses that would be triggered by the merger.
Mr. Finch, a director of Paradise, is a general partner of the general
partner of Sigma Partners III, L.P. and its affiliates, which purchased notes
and warrants from Paradise. Sigma Partners III, L.P. and its affiliates
purchased an aggregate of $308,869 worth of notes and warrants to purchase up to
68,334 shares of Paradise common stock in the financing.
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Paradise will provide notice to each of the warrant holders that, prior to
the merger, the warrant holders must exercise their rights under the warrants or
the warrants will expire. Because the warrants have economic value, Paradise
expects that the warrants will be exercised prior to the merger.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding executive
compensation paid by Paradise for the fiscal year ended December 31, 1998 to
Messrs. Diamond and Renjen and Ms. Benveniste.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- ------- ------- -----------
<S> <C> <C> <C>
Jeffrey B. Diamond(1)....................................... $50,760 -- 400,000
President and Chief Executive Officer
Sanjeev Renjen(2)........................................... 52,500 $25,000 400,000
Vice President of Engineering
Wendy Benveniste(3)......................................... 89,648 -- 225,000
Vice President of Operations
</TABLE>
- ---------------
(1) Mr. Diamond became an employee and President and Chief Executive Officer of
Paradise in September 1998.
(2) Dr. Renjen became an employee and Vice President of Engineering of Paradise
in August 1998.
(3) Ms. Benveniste became an employee and Vice President of Operations of
Paradise in February 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains certain information concerning the grant of
options to purchase Paradise Common Stock to the above listed individuals during
the fiscal year ended December 31, 1998:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
NUMBER OF % OF ANNUAL RATES OF
SECURITIES TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------
NAME (#) FISCAL YEAR(1) ($/SH)(5) DATE 5%($) 10%($)
---- ---------- -------------- --------- ---------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey B. Diamond................... 50,000(2) 2.0 0.15 07/13/2008 4,717 11,953
50,000(2) 2.0 0.15 09/14/2008 4,717 11,953
300,000(2) 11.8 0.15 10/20/2008 28,300 71,718
Sanjeev Renjen....................... 400,000(3) 15.7 0.15 09/14/2008 37,734 95,625
Wendy Benveniste..................... 225,000(4) 8.8 0.15 02/09/2008 21,225 53,789
</TABLE>
- ---------------
(1) Based on an aggregate of 2,545,000 shares granted to employees and directors
of and consultants to Paradise in 1998.
(2) Twenty five percent of 50,000 options granted on July 14, 1998 vested on
February 1, 1999 and the remainder thereafter vests in equal monthly
installments over a three-year period. Twenty five percent of 50,000 options
granted on September 15, 1998 vests on July 1, 1999 and the remainder
thereafter vests in equal monthly installments over a three-year period.
Twenty five percent of 300,000 options granted on October 20, 1998 vests on
September 1, 1999 and the remainder thereafter vests in equal monthly
installments over a three-year period.
(3) Twenty five percent of the option shares vests on August 3, 1999 (the first
anniversary from the vesting commencement date) and the remainder vests
thereafter in equal monthly installments over a
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three-year period. One-half of the unvested shares will vest upon the
closing of the Merger in accordance with the original terms of Dr. Renjen's
employment with Paradise.
(4) Fifty percent of the option shares vests on February 2, 1999 and the
remainder vests on February 2, 2000.
(5) Exercise prices were determined by the Paradise board of directors. Factors
considered in establishing exercise prices included the timing of Paradise's
first product releases, its results of operations, prior and anticipated
sales of preferred stock to investors, the preferential rights of preferred
stock, and valuation of comparable companies.
AGGREGATE OPTION EXERCISES IN
1998 AND DECEMBER 31, 1998 YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of
options to purchase Paradise Common Stock during the fiscal year ended December
31, 1998, and the number and value of securities underlying unexercised options
held by Jeffrey B. Diamond, Sanjeev Renjen and Wendy Benveniste at December 31,
1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS/SARS
SHARES AT FISCAL YEAR END(#) AT FY-END($)(1)
ACQUIRED UPON VALUE ---------------------- --------------------
EXERCISE REALIZED VESTED UNVESTED VESTED UNVESTED
------------- -------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey B. Diamond................. 350,000 $157,501 0 350,000 0 122,500
President and Chief Executive
Officer
Sanjeev Renjen..................... -- -- 0 400,000 0 140,000
Vice President, Engineering
Wendy Benveniste................... 112,500 39,375 0 112,500 0 39,750
Vice President, Operations
</TABLE>
- ---------------
(1) The value of an "in-the-money" stock option represents the difference
between the aggregate estimated fair value of the underlying stock and the
aggregate exercise price of the stock option. The estimated fair value of
the Paradise common stock on December 31, 1998 was $0.50, determined by the
board of directors in consideration of the factors described in (5) above
and taking into account the fact that by December 31, 1998, Paradise's
monthly revenues had increased significantly.
DISSENTERS' RIGHTS
Stockholders of record of Paradise on the record date have the right to
dissent from the merger and to obtain an appraisal by a court of the value of
their shares. If the dissenting stockholder complies with applicable statutory
provisions and the merger is consummated, the stockholder will be entitled to
receive cash compensation equal to the fair market value of their shares. The
fair market value of the shares will be determined as of the day before the
announcement of the merger, excluding any appreciation or depreciation as a
result of the merger. Any stockholder of Paradise must follow the procedures set
forth in Chapter 13 of the California Corporations Code or Section 262 of the
Delaware General Corporation Law in order to perfect its rights. A brief summary
of the procedures to perfect rights under Chapter 13 and Section 262 is set
forth below.
CALIFORNIA LAW
To exercise dissenters' rights under California law, a Paradise stockholder
must:
- not vote any of the shares in favor of the merger,
- make written demand upon Paradise or its transfer agent within 30 days
after the date on which the notice of approval of the merger by Paradise
stockholders was mailed, setting forth in the demand
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<PAGE> 85
the number and class of shares that Paradise must purchase and a
statement by such stockholder as to what he believes the fair market
value of such shares to have been, and
- submit for endorsement, within 30 days after the date on which the notice
of approval of the merger by the Paradise stockholders is mailed, at the
principal office of Paradise or at the office of the transfer agent, the
stock certificates with a statement regarding which of the shares are
dissenting shares.
Within ten days after the date of the approval of the merger, Paradise will
mail a notice of the approval of the merger to each Paradise stockholder who has
not voted to approve the merger. A brief description of the procedure to be
followed if the stockholder wishes to exercise dissenters rights and a statement
of the price determined to represent the fair market value of the dissenting
shares will be mailed with the notice. If the stockholder and Paradise agree
upon the price and that the shares qualify as dissenting shares, the dissenting
stockholder will be entitled to the agreed upon price plus the legal rate of
interest on judgments from the date of such agreement. If the stockholder and
Paradise fail to agree on the fair market value of the shares or whether the
shares qualify as dissenting shares, the stockholder or Paradise may file a
complaint with the court within six months after the date on which notice of the
approval of the merger, is mailed to stockholders. If no complaint is filed
within the six month period, the dissenters' rights of the dissenting
stockholders will cease.
If a complaint is filed by the dissenting stockholder or Paradise, a
California Superior Court will determine if the stockholder is entitled to
dissenters' rights and will determine the fair market value of the dissenting
shares to be paid, with interest at the legal rate of interest from the date of
judgment.
If Chapter 5 of the California Corporations Code prevents the payment of
the fair market value of the dissenting shares, a dissenting stockholder will be
a creditor of Paradise for the amount that it otherwise would have received in
repurchase of the dissenting shares, plus interest at the legal rate on
judgments until the date of payment. The creditor will be subordinate to all
other creditors in any liquidation proceeding and the debt will be payable when
permissible under the provisions of Chapter 5 of the California Corporations
Code.
DELAWARE LAW
To exercise appraisal rights under Delaware law, a Paradise stockholder
must:
- deliver a written demand for appraisal prior to the vote on the merger,
- continuously hold the dissenting shares from the date the demand was made
through the effective time of the merger, and
- not vote to approve the merger.
Within ten days after the effective time of the merger, Paradise will mail
to the dissenting stockholders a notice setting forth the effective time of the
merger.
Within 120 days after the effective time of the merger, Paradise or the
dissenting stockholder may file a petition with the Delaware Court of Chancery
demanding a determination of the value of the dissenting shares of the
dissenting stockholder. Within 120 days after the effective time of the merger,
upon written request, the dissenting stockholder is entitled to receive from
Paradise, a statement setting forth the aggregate number of dissenting shares
not voted in favor of the merger, for which demands for appraisal have been
received and the aggregate number of holders of such dissenting shares. If no
petition is filed by either Paradise or the dissenting stockholder within such
120 day period, the appraisal rights of the dissenting stockholder will cease.
In the event Paradise or the dissenting stockholder files a petition for
appraisal, the Court of Chancery will determine if the stockholder is entitled
to appraisal rights and will appraise the dissenting shares, determining their
fair value together with a fair rate of interest, if any, to be paid.
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<PAGE> 86
The receipt of payment for its stock by the dissenting stockholder may
result in the recognition of gain or loss for Federal income tax purposes.
THE FOREGOING SUMMARY DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE
PROVISIONS OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW AND CHAPTER 13
OF THE CALIFORNIA CORPORATIONS CODE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CHAPTER AND SECTION, COPIES OF WHICH ARE ATTACHED HERETO AS
ANNEX B AND ANNEX C. PARADISE STOCKHOLDERS WHO ARE CONSIDERING DISSENTING SHOULD
CONSULT LEGAL COUNSEL.
Under the merger agreement, there is a condition to closing that the
holders of no more than 5% of the Paradise capital stock will be entitled to
demand appraisal of their shares pursuant to Chapter 13 of the California
Corporations Code or Section 262 of the Delaware General Corporation Law.
Consequently, unless the holders of at least 95% of the Paradise capital stock
vote in favor of the merger or affirmatively waive their dissenters rights,
Genesis will not be obligated to close until after the expiration of the 30 day
period during which a shareholder may make a written demand for purchase under
California law, and then only if no more than 5% of the holders of Paradise
capital stock have demanded appraisal of their shares under California or
Delaware law. Genesis may waive the condition to closing in order to effect the
merger prior to the expiration of the 30 day period.
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<PAGE> 87
DESCRIPTION OF GENESIS SHARE CAPITAL
The following summary of material provisions of the common shares and
special shares does not purport to be complete and is qualified in its entirety
by, the provisions of Genesis' Memorandum and Articles of Association which are
included as an exhibit to the registration statement that includes this proxy
statement/prospectus.
AUTHORIZED AND ISSUED SHARE CAPITAL
The authorized capital of Genesis consists of 1,000,000,000 common shares
and 1,000,000,000 special shares, issuable in series, both without par value. As
of March 31, 1999, 14,478,536 common shares and no special shares were issued
and outstanding.
COMMON SHARES
Holders of Genesis common shares are entitled to one vote for each common
share held at all Genesis shareholder meetings, except for meetings where only
holders of another specified class or series of shares are entitled to vote
separately. Holders of common shares are entitled to dividends only when and if
declared by the board of directors. The board of directors can declare dividends
out of legally available funds subject to any preferences of any special shares
issued in the future. Holders of Genesis common shares are not entitled to
cumulative voting rights. In the event of any liquidation, dissolution or
winding up of Genesis, the holders of common shares will be entitled to be
distributed ratably the assets of Genesis remaining after payment of debts and
liabilities, subject to any preferences that might be applicable to any special
shares issued in the future. Holders of the common shares have no preemptive,
subscription, redemption or conversion rights. All outstanding common shares
are, and the common shares to be issued in the merger will be, fully paid and
non-assessable.
SPECIAL SHARES
The board of directors is authorized to issue up to 1,000,000,000 special
shares from time to time in one or more series, to fix the number of special
shares in a series and to determine the designation, rights, privileges,
restrictions and conditions attaching to the shares of a series, without further
vote or action by the shareholders. No series of special shares may have a
priority over any other series of special shares with respect to dividends or
liquidation rights. The special shares may have voting rights superior to the
common shares or other series of special shares and may rank senior to the
common shares as to dividends and as to the distribution of assets in the event
of liquidation, dissolution or winding-up of Genesis. Genesis has no present
plans to issue any series of special shares.
SHAREHOLDER RIGHTS PLAN
Genesis adopted a shareholder rights plan effective as of December 19,
1997. Under the shareholder rights plan each holder of Genesis common shares is
entitled to one right per share in the event that rights are distributed under
the plan. The objective of the shareholder rights plan is to ensure that all
shareholders of Genesis are treated equally and fairly in connection with any
takeover bid for Genesis. The shareholder rights plan is designed to discourage
discriminatory or unfair takeover bids for Genesis and to give the board of
directors time, if appropriate, to pursue alternatives to maximize shareholder
value in the event of an unsolicited takeover bid for Genesis.
The shareholder rights plan will encourage a company making a takeover bid
for Genesis to take steps to avoid the potential for substantial dilution of
that company's share position in Genesis by approaching the board of directors
to negotiate or by doing a permitted bid which requires that:
- the offer must be made for all voting shares and must be made by way of a
takeover bid circular to all holders of Genesis' voting shares,
- the company making the offer must not beneficially own more than 10% of
the outstanding voting shares,
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- the offer must be outstanding for a minimum of 90 days (and up to 120
days in the event that a competing permitted bid emerges) to permit
shareholders of Genesis to properly assess the bid, allow competing bids
to emerge and give the board of directors sufficient time to review the
offer, seek or formulate alternatives and communicate its recommendation
to shareholders of Genesis,
- the offer must provide that voting shares may only be taken up and paid
for if more than 50% of the voting shares held by shareholders other than
the offeror have been deposited or tendered and not withdrawn,
- when the offer has been made, no further voting shares may be acquired by
the offeror except pursuant to the permitted bid, and
- if the consideration offered is not payable entirely in cash, a fairness
opinion must be provided to the shareholders of Genesis in connection
with the offer.
The permitted bid provisions of the shareholder rights plan are designed to
ensure that, in any take-over bid, all shareholders are treated equally, receive
the maximum value for their investment and are given adequate time to properly
assess the take-over bid on a fully informed basis.
The dilutive effects of the shareholder rights plan are triggered by a
person acquiring beneficial ownership of 20% of more of the outstanding voting
shares of Genesis which is referred to as a "Flip-in Event". When a Flip-in
Event occurs each right (except for rights beneficially owned by the acquiring
person or transferees of the acquiring person), becomes a right to purchase from
Genesis that number of common shares having an aggregate market price on the
occurrence of such Flip-in Event equal to twice the exercise price (as defined
in the shareholder rights plan) for an amount in cash equal to the exercise
price. The shareholder rights plan provides for adjustments to the number of
rights outstanding, the number of common shares that can be acquired pursuant to
each right and the exercise price (or a combination of the foregoing) in certain
circumstances including, consolidations or subdivisions of the common shares,
the payment of dividends, or the exchange of existing common shares for other
shares or securities of Genesis.
The issuance of common shares pursuant to the merger will not cause a
Flip-in Event to occur.
AMENDMENT OF SHAREHOLDERS' RIGHTS
In accordance with the provisions of the Companies Act (Nova Scotia), the
amendment of rights of holders of a class of shares, including common shares,
requires the approval of two-thirds of the votes cast by the holders of such
shares voting at a special meeting of such holders. Pursuant to Genesis'
articles of association, a quorum for a meeting of Genesis' shareholders occurs
when at least two persons entitled to vote are present at a meeting and they are
shareholders, proxyholders or representatives of corporate shareholders, and
they hold or represent at least a majority of the total number of Genesis issued
shares. Where a quorum is not present at a scheduled shareholder meeting, the
articles of association of Genesis require, except in the case of a meeting
convened on requisition of shareholders, that the meeting be adjourned to the
next week. If at the adjourned meeting a quorum is not present within half an
hour from the time appointed for the meeting, the shareholders present shall be
a quorum and may hold the meeting.
Voting at a meeting of Genesis shareholders is by show of hands, unless the
chairman, a shareholder or a proxyholder entitled to vote at the meeting
requests that a vote be taken by poll. Unless a poll is demanded, a declaration
by the chairman that the resolution has been carried and an entry in the minutes
of the meeting to that effect is conclusive evidence of the fact without proof
of the number or proportion of the votes recorded in favour or against such
resolution.
Where the rights of common shares may be amended, holders of common shares
have the right under the Companies Act (Nova Scotia) to dissent from such
amendment and require Genesis to pay them the then fair value of the common
shares.
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EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING HOLDERS OF COMMON SHARES
Exchange Controls
Canada has no system of exchange controls. There is no law, government
decree or regulation in Canada restricting the export or import of capital or
affecting the payment of dividends, interest or other payments to a non-resident
holder of common shares, other than withholding tax requirements.
Investment Canada Act
There is no limitation imposed by Canadian law or by the memorandum and
articles of association of Genesis on the right of a non-resident to hold or
vote common shares or special shares of Genesis with voting rights, other than
as provided in the Investment Canada Act, including by the World Trade
Organization Agreement Implementation Act (Canada). The Investment Canada Act
prohibits implementation of a reviewable investment by an individual, government
or agency thereof, corporation, partnership, trust or joint venture that is not
a "Canadian," as defined in the Investment Canada Act, unless, after review, the
minister responsible for the Investment Canada Act is satisfied that the
investment is likely to be of net benefit to Canada. An investment in common
shares or special shares of Genesis by a non-Canadian would generally be
reviewable under the Investment Canada Act, if it were an investment to acquire
control of Genesis, and the value of the assets of Genesis were CDN$5.0 million
or more. An investment in common shares or special shares of Genesis by an
investor who is a "WTO Investor" under the Investment Canada Act would be
reviewable under the Investment Canada Act if it were an investment to acquire
control of Genesis, and the value of the assets of Genesis equalled or exceeded
CDN$184.0 million. A non-Canadian would be deemed to acquire control of Genesis
for purposes of the Investment Canada Act if such person acquired a majority of
the voting shares of Genesis. The acquisition of less than a majority, but at
least one-third of the voting shares of Genesis, would be presumed to be an
acquisition of control of Genesis, unless it could be established that Genesis
was not controlled in fact by the acquiror through the ownership of voting
shares. The United States is a member of the World Trade Organization.
Transactions involving voting shares of Genesis would be exempt from the
Investment Canada Act, as amended, if they involve, for example:
- an acquisition of Genesis voting shares if the acquisition were made in
connection with the person's business as a trader or dealer in
securities,
- an acquisition of control of Genesis in connection with the realization
of a security granted for a loan or other financial assistance and not
for any purpose related to the provisions of the Investment Canada Act,
and
- an acquisition of control of Genesis by reason of an amalgamation,
merger, consolidation or corporate reorganization, following which the
ultimate direct or indirect control in fact of Genesis, through the
ownership of voting interests, remains unchanged.
TRANSFER AGENT, EXCHANGE AGENT AND REGISTRAR
The transfer agent and registrar for Genesis common shares and the exchange
agent in the merger, is ChaseMellon Shareholder Services L.L.C., 85 Challenger
Road, Overpeck Centre, Ridgefield Park, NJ, 07660.
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COMPARISON OF RIGHTS OF HOLDERS OF GENESIS COMMON SHARES AND
PARADISE COMMON STOCK
Genesis is incorporated in Nova Scotia, Canada and Paradise is incorporated
in the State of Delaware, United States of America. Following the closing of the
merger, Genesis will continue to be governed by the Companies Act (Nova Scotia)
and Paradise will continue to be governed by the Delaware General Corporation
Law. Stockholders of Paradise will hold Genesis common shares rather than
Paradise common stock. Therefore, their rights will be governed by the Companies
Act (Nova Scotia), and the provisions of the Genesis memorandum and articles of
association, rather than the Paradise certificate of incorporation and bylaws.
This section of the proxy statement/prospectus sets out the material differences
in rights that a person will have following the merger when he holds Genesis
common shares rather than Paradise shares.
NO CUMULATIVE VOTING FOR ELECTION OF GENESIS DIRECTORS
The Companies Act (Nova Scotia) does not specifically regulate cumulative
voting and the Genesis memorandum and articles of association do not provide for
cumulative voting. Under Delaware law, cumulative voting in the election of
directors is not mandatory but is a permitted option. The Paradise certificate
of incorporation does not provide for cumulative voting, but under California
law, the Paradise stockholders are currently entitled to cumulative voting. In
an election of directors under cumulative voting, each share of stock normally
having one vote is entitled to a number of votes equal to the number of
directors to be elected. A stockholder may then cast all his votes for a single
candidate or may allocate them among as many candidates as he may choose.
Cumulative voting increases the probability that a minority shareholder will be
able to elect a director. Paradise stockholders will lose this right when they
become shareholders of Genesis following the merger. Even without cumulating
votes, Paradise stockholders can elect directors with a plurality of the votes
as opposed to Genesis shareholders which require a majority of votes to elect a
director.
Except in the case of a vacancy, each director of Genesis is elected for a
three-year term by majority vote at shareholder meetings. Since Genesis
shareholders do not have the right to cumulate votes, the holders of a majority
of the shares present at any Genesis shareholders' meeting held to elect
directors have the power to elect all the directors to be elected at that
meeting, and no person can be elected without the support of holders of a
majority of the shares voting at the meeting.
ALTERED QUORUM AND PER CAPITA VOTING PROCEDURE
Pursuant to Genesis' articles of association, a quorum for a meeting of
Genesis' shareholders occurs when at least two persons entitled to vote are
present at a meeting and they are shareholders, proxy-holders or representatives
of corporate shareholders, and they hold or represent at least a majority of the
total number of Genesis issued shares. Where a quorum is not present at a
scheduled shareholder meeting, the articles of association of Genesis require,
except in the case of a meeting convened on requisition of shareholders, that
the meeting be adjourned to next week. If, at the meeting held the following
week, a quorum is not present within half an hour from the time appointed for
the meeting, the shareholders present shall be a quorum and may hold the
meeting.
Voting at a meeting of Genesis shareholders is by show of hands, unless the
chairman, a shareholder or a proxyholder entitled to vote at the meeting
requests that a vote be taken by poll. Unless a poll is demanded, a declaration
by the chairman that the resolution has been carried and an entry in the minutes
of the meeting to that effect is conclusive evidence of the fact without proof
of the number or proportion of the votes recorded in favor or against such
resolution.
According to Paradise's bylaws, the presence of the holders of a majority
of the outstanding shares of stock entitled to vote shall constitute a quorum
for the transaction of business. In the absence of a quorum, the meeting shall
not transact any business. All action taken by the holders of a majority of the
votes cast, including abstentions, at any meeting at which a quorum is present
shall be valid and binding
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upon Paradise, provided, however, that directors shall be elected by a plurality
of the votes of shares present in person or represented by proxy at the meeting.
The Paradise board of directors is entitled to make rules or regulations
for the conduct of meetings of stockholders as they deem necessary.
Therefore, when Paradise stockholders become Genesis shareholders following
the merger, they will be subject to substantially similar quorum and voting
requirements.
GREATER POWER TO CALL SPECIAL MEETING OF SHAREHOLDERS
Under the Companies Act (Nova Scotia) special meetings of shareholders must
be called by the directors on the request of the shareholders entitled to cast
not less than five percent of the votes at the special meeting, or on the
requisition of not less than ten percent of the shareholders. The Genesis
memorandum and articles of association provide that special meetings of the
shareholders may be called by the President, a vice president or the directors.
Under Delaware law, a special meeting of stockholders may be called by the board
of directors or any other person as may be provided in the certificate of
incorporation or bylaws. The Paradise bylaws provide that a special meeting of
stockholders may be called by the Chairman of the Board, the President, the
board of directors by a majority of the authorized directors or by the
stockholders entitled to cast at least ten percent of the votes at the special
meeting. Therefore, when Paradise stockholders become Genesis shareholders
following the merger, they will gain the right to call a special meeting by the
request of a fewer number of shareholders.
MORE STRINGENT REQUIREMENTS FOR SHAREHOLDER ACTION WITHOUT A MEETING
Under the Companies Act (Nova Scotia), a resolution in writing and signed
by every shareholder who would be entitled to vote on the resolution at a
meeting is as valid as if it were passed by the shareholders at a meeting and
satisfies all the requirements of the Companies Act (Nova Scotia) concerning
meetings of shareholders. Under Delaware law, unless otherwise provided in the
certificate of incorporation, any action which may be taken at a meeting of the
stockholders may be taken without a meeting and without prior notice if a
consent in writing is signed by the holders of outstanding shares having at
least the minimum number of votes that would be necessary to take such action at
a meeting at which all shares entitled to vote were present and voted. The
Paradise bylaws contain a provision for stockholder actions without a meeting.
Therefore, when Paradise stockholders become Genesis shareholders following the
merger, it will become more difficult for them to take action without a meeting.
Genesis shareholders must be unanimous in order to take action without a
meeting.
SIZE OF THE BOARD OF DIRECTORS
Genesis shareholders may elect any number of directors permitted by the
memorandum and articles of association. The Genesis memorandum and articles of
association specify the number of directors will be not less than five nor more
than eleven. The Paradise certificate of incorporation provides that the holders
of each series of preferred stock will be entitled to elect a director, the
holders of common stock will be entitled to elect two directors and that the
remaining directors will be elected by the holders of common and preferred
stock, voting together as a single class. Therefore, when Paradise stockholders
become Genesis shareholders following the merger, each shareholder will be
voting for a greater number of directors. In addition, as Genesis shareholders,
they will have greater flexibility to change the number of directors (within the
specified range) at any given election.
CLASSIFICATION OF BOARD OF DIRECTORS
Delaware law permits classified boards and Nova Scotia law does not
specifically address the issue. A classified board of directors is a board with
some directors, but not necessarily all, elected on a rotating basis each year.
The Genesis memorandum and articles of association provide that directors will
be elected and retire in rotation. The Paradise certificate of incorporation
does not provide for a classified board of directors. Directors are elected
annually and may be removed by the stockholders. Therefore, when
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<PAGE> 92
Paradise stockholders become Genesis shareholders, they will change from the
unclassified method to the classified method of election of directors. The
ability of Paradise stockholders to change directors and change management will
be substantially limited once they become Genesis shareholders.
REMOVAL OF DIRECTORS
The Genesis memorandum and articles of association provide that Genesis
may, by special resolution of the shareholders, remove any director before the
expiration of that director's term of office. Under the Companies Act (Nova
Scotia), a special resolution requires a vote of three-fourths of shareholders
entitled to vote, and confirmation by a majority of shareholders entitled to
vote at a subsequent confirmatory meeting held not more than one month from the
date of the first meeting. Alternatively, a resolution which has been
unanimously passed by all of the shareholders of a company is deemed to be a
special resolution. The Paradise bylaws provide that directors may be removed
with the affirmative vote of the holders of a majority of the voting power.
Under California law, no director may be removed without cause (unless the
entire board of directors is removed, or the votes cast against the removal
would be sufficient to elect the director in cumulative voting). Therefore, when
Paradise stockholders become Genesis shareholders following the merger, they
will be subject to a higher threshold number of votes required to remove a
director.
TRANSACTIONS INVOLVING OFFICERS OR DIRECTORS
Nova Scotia Law does not specifically regulate loans to officers or
employees. Nova Scotia Law does not restrict a company from giving guarantees or
providing other financial assistance except where the shares of the company
itself are being purchased, in which case financial assistance is restricted.
The memorandum and articles of association of Genesis provide that a
director is not disqualified by entering into contracts with Genesis, either as
a vendor, purchaser, or otherwise, and that no contract or arrangement entered
into by Genesis in which any director is in any way interested, can be voided.
The memorandum and articles of association of Genesis also provide that a
director is not liable to account for any profit realized by any such contract
or arrangement by reason only of such director holding that office or of having
a fiduciary relationship, provided the director makes a declaration or gives a
general notice in accordance with the Companies Act (Nova Scotia). Nova Scotia
law governing fiduciary duties owed by directors to the companies they serve may
restrict the ability of a director to act in certain situations where a conflict
of interest exists or may exist.
The Companies Act (Nova Scotia) permits a director to vote notwithstanding
a conflict of interest provided that such conflict is declared. The memorandum
and articles of association of Genesis prohibit voting by an interested director
but allow the shareholders to modify this restriction.
Under Delaware law, any corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
corporation, including any officer or employee who is also a director of the
corporation, whenever, in the judgment of the directors, such loan, guaranty or
assistance may reasonably be expected to benefit the corporation. Furthermore,
under Delaware law, contracts or transactions between a corporation and either
any of its directors or a second corporation of which a director is also a
director, are not void or voidable if either:
- The material facts as to the transaction and as to the director's
interest are fully disclosed, and either the disinterested directors or a
majority of the disinterested stockholders approve or ratify the
transaction in good faith, or
- The person asserting the validity of the contract or transaction sustains
the burden of proving that the contract or transaction was just and
reasonable as to the corporation at the time it was authorized, approved
or ratified.
Therefore, Genesis is subject to rules governing transactions with its
officers and directors that are substantially similar to the rules applicable to
Paradise and its officers and directors.
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<PAGE> 93
LIMITATION OF LIABILITY OF DIRECTORS; INDEMNIFICATION
The law of Nova Scotia requires directors and members of any committee
designated by the board of directors to discharge their duties in good faith and
with that degree of care and skill which ordinary prudent people of similar
experience would exercise under similar circumstances. The Companies Act (Nova
Scotia) does not restrict a company from indemnifying directors. In any
proceeding against a director, if the director or person was negligent but has
acted honestly and reasonably, the court may relieve the person from liability.
The Genesis memorandum and articles of association also provide that no
director or officer, in the absence of any dishonesty, will be liable for the
acts or negligence of any other director.
Under the memorandum and articles of association of Genesis, the directors
of Genesis are authorized, without the approval or confirmation of Genesis
shareholders, to cause Genesis to indemnify directors or other persons who have
underwritten liabilities on behalf of Genesis. The directors are authorized to
mortgage the property of Genesis as security for this indemnity.
Under Delaware law, a company's indemnification of its directors may not
eliminate or limit director monetary liability for:
- Breaches of the director's duty of loyalty to the corporation or its
stockholders,
- Acts or omissions not in good faith or involving intentional misconduct
or knowing violations of law,
- The payment of unlawful dividends or unlawful stock repurchases or
redemptions, or
- Transactions in which the director received an improper personal benefit.
A Delaware Corporation may not limit a director's liability for violation
of federal or state securities laws, or affect the availability of non-monetary
remedies such as injunctive relief or rescission.
Delaware law generally permits indemnification of expenses, including
attorneys' fees, incurred in the defense or settlement of a derivative or
third-party action, provided there is a determination by a majority vote of a
disinterested quorum of the directors, by independent legal counsel or by a
majority vote of a quorum of the stockholders that the person seeking
indemnification acted in good faith and in a manner reasonably believed to be in
the best interests of the corporation. Without court approval, however, no
indemnification may be made in any derivative action in which such person is
judged liable for negligence or misconduct in the performance of his or her duty
to the corporation. Delaware law requires indemnification of expenses to the
extent the individual being indemnified has successfully defended any action, on
the merits or otherwise.
Expenses incurred by an officer or director in defending any action may be
paid in advance, under Delaware law, if such director or officer undertakes to
repay such amounts if it is ultimately determined that he or she is not entitled
to indemnification. In addition, Delaware law authorizes a corporation's
purchase of indemnity insurance for the benefit of its officers, directors,
employees and agents whether or not the corporation would have the power to
indemnify against the liability covered by the policy. Delaware law also permits
a Delaware corporation to provide indemnification in excess of that provided by
statute. Delaware law does not require authorizing provisions in the certificate
of incorporation. Limitations on indemnification may be imposed by a court based
on principles of public policy.
Under currently applicable California law, the standards for
indemnification vary from Delaware law. The Paradise certificate of
incorporation contains provisions limiting a director's liability to the fullest
extent permitted by Delaware and California law.
Therefore, Genesis is subject to laws regarding the indemnification of
directors and officers that are substantially similar to those applicable to
Paradise. Paradise, however, may have a greater range of options to purchase
directors and officers' insurance than Genesis.
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DIVIDENDS AND REPURCHASES OF SHARES
The Companies Act (Nova Scotia) does not address specifically the payment
of ordinary dividends. It is generally recognized that Nova Scotia law permits
the payment of dividends out of profits and in any case where payment would not
impair the capital of the company declaring dividends. The memorandum and
articles of association of Genesis permit the directors to declare such
dividends as they deem proper out of the profits, retained earnings or
contributed surplus of Genesis shares so long as such dividends are declared in
accordance with the respective rights of holders of common shares and special
shares as set forth in the memorandum and articles of association. The Companies
Act (Nova Scotia) permits a company to purchase or otherwise acquire, its
shares, subject to solvency tests and exceptions, only upon authorization of the
shareholders of the company by special resolution.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year. If the
amount of capital of the corporation following the declaration and payment of
the dividend is less than the aggregate amount of the capital represented by the
issued and outstanding stock of all classes having a preference upon the
distribution of assets, the directors may not declare and pay out a dividend
from the corporation's net profits. In addition, Delaware law generally provides
that a corporation may redeem or repurchase its shares only if the capital of
the corporation is not impaired and such redemption or repurchase would not
impair the capital of the corporation.
Under currently applicable California law (which applies to Paradise),
dividends may be declared only out of retained earnings or if certain financial
ratios will be satisfied after the dividend. A determination must be made in
accordance with generally accepted accounting principles subject to certain
adjustments.
Therefore, both the Nova Scotia convention regarding payment of dividends
and the Nova Scotia law regarding redemption of shares, are less restrictive
than the law applicable to Paradise regarding these matters.
DIFFERENT REQUIREMENTS FOR APPROVAL OF MATERIAL CORPORATE TRANSACTIONS
Under the Companies Act (Nova Scotia), a statutory amalgamation requires
approval of a three-quarters majority of the votes cast by the holders of shares
entitled to vote, and if any class or series is entitled to vote as a class, the
affirmative vote of two-thirds of the shares within each class or series
entitled to vote separately. In addition, the amalgamation must be approved by
the court before it becomes effective. The sale, lease, exchange or other
disposition of all, or substantially all, the property and assets, of a Nova
Scotia company, requires a special resolution.
Subject to Delaware law, a merger, consolidation or sale of all or
substantially all the assets of Paradise must be approved by its board of
directors and a majority of the outstanding shares entitled to vote.
Material corporate transactions require the approval of a larger proportion
of shares for Genesis than for Paradise. In addition, Genesis is not required to
obtain board approval for, and Paradise is not required to obtain court
approval, prior to completing a material corporate transaction.
CLASS VOTING IN MATERIAL CORPORATE TRANSACTIONS
The Companies Act (Nova Scotia) provides for class voting in order to
approve material charter amendments, amalgamations, continuances out of Nova
Scotia, and dispositions of substantially all of a company's assets, whether or
not the shares otherwise carry the right to vote. Such matters will be deemed to
be adopted by the shareholders when, in addition to any other action required to
be taken by shareholders under the Companies Act (Nova Scotia), they are
approved by the holders of each class and series by a majority of not less than
two thirds of the votes cast with respect thereto. Subject to Delaware law,
material amendments to Paradise's certificate of incorporation must be approved
by a majority of the outstanding shares of each class of stock (without regard
to limitations on voting rights), and any merger or sale of all or substantially
all of its assets must be approved by the holders of a majority of its
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<PAGE> 95
outstanding stock. The Paradise certificate of incorporation provides for a
class vote for the preferred stock and currently applicable California law
provides that common stock and preferred stockholders must each vote as a class.
Therefore, class voting is required for both Genesis shareholders and Paradise
stockholders in the approval of material corporate transactions.
BUSINESS COMBINATIONS/MERGER
Under Section 203 of the Delaware General Corporation Law, a Delaware
corporation is prohibited from engaging in a business combination with an
interested stockholder for three years following the date that such person or
entity becomes an interested stockholder. Subject to this law, an interested
stockholder is a person or entity who or which owns, individually or with or
through other persons or entities, 15% or more of the corporation's outstanding
voting stock, including any rights to acquire stock pursuant to an option,
warrant, agreement, arrangement or understanding, or upon the exercise of
conversion or exchange rights, and stock with respect to which the person has
voting rights only. The three-year moratorium imposed by Section 203 on business
combinations does not apply if one or more of the following applies:
- Prior to the date on which such stockholder becomes an interested
stockholder, the board of directors of the subject corporation approves
either the business combination or the transaction that resulted in the
person or entity becoming an interested stockholder,
- Upon completion of the transaction that made him or her an interested
stockholder, the interested stockholder owns at least 85% of the
corporation's voting stock outstanding at the time the transaction
commenced, excluding from the 85% calculation shares owned by directors
who are also officers of the subject corporation and shares held by
employee stock plans that do not give employee participants the right to
decide confidentially whether to accept a tender or exchange offer, or
- On or after the date such person or entity becomes an interested
stockholder, the board of directors approves the business combination and
it is also approved at a stockholder meeting by 66 2/3% of the
outstanding voting stock not owned by the interested stockholder.
Although a Delaware corporation may elect not to be subject to Section 203,
Paradise has not made this election.
Paradise believes that Section 203 will encourage any potential acquiror to
negotiate with the Paradise board of directors. Section 203 also might have the
effect of limiting the ability of a potential acquiror to make a two-tiered bid
for Paradise in which all stockholders would not be treated equally.
Stockholders should note, however, that the application of Section 203 to
Paradise confers upon its board of directors the power to reject a proposed
business combination in certain circumstances, even though a potential acquiror
may be offering a substantial premium for Paradise's shares over the
then-current market price. Section 203 would also discourage certain potential
acquirors unwilling to comply with its provisions.
The Companies Act (Nova Scotia) does not restrict take-over bids or related
party transactions. In Canada, take-over bids and related party transactions are
addressed in provincial securities legislation and policies which may apply to
any company having shareholders in Canada. These requirements do not apply where
the number of shareholders resident in Canada is less than specified thresholds.
A "take-over bid" occurs where an offer to acquire outstanding shares is
made by a person who would hold more than 20% of the shares upon completion of
the acquisition. Subject to the securities legislation of several Canadian
provinces it is required that a take-over bid:
- be made to all shareholders in the jurisdiction,
- be accompanied by specified disclosure,
- remain open for a minimum period of time, and
- provide the same consideration to all shareholders.
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<PAGE> 96
There are additional rules or policies in some provinces involving
take-over bids by insiders or transactions between the company and a related
party. Insiders and related parties include persons holding in excess of 10% of
the shares of a company. Related party transactions and insider bids require
enhanced information disclosure, approval of an independent committee of the
board of directors of the company, formal valuation of the subject matter of the
transaction and, in the case of a related party transaction, disinterested
shareholder approval. A company may be exempt from these requirements if it is
not a reporting public company in Canada.
APPRAISAL RIGHTS
Under the Companies Act (Nova Scotia) and Delaware law, a shareholder of a
corporation participating in major corporate transactions, such as a merger, may
be entitled to dissenters' rights or to appraisal rights in which the
shareholder may receive cash in the amount of the fair market value of the
shares held by such shareholder (as determined by a court or by agreement of the
corporation and the stockholder) in lieu of the consideration such shareholder
would otherwise receive in the transaction.
Dissenters' rights are available to the stockholders of Paradise with
respect to the merger. These rights are discussed in the section of the proxy
statement/prospectus entitled "Dissenters' Rights." Once Paradise stockholders
have become Genesis shareholders, they will also have appraisal rights in any
future major corporate transactions undertaken by Genesis.
INSPECTION OF STOCKHOLDER LIST
The Companies Act (Nova Scotia) permits any person to examine a company's
books and records for any proper purpose upon written demand stating the purpose
of the examination accompanied by, in the case of a non-shareholder, the
prescribed fee. Any shareholder or other person may require a copy of the share
register on payment of a prescribed fee. Delaware law allows any stockholder to
inspect the stockholder list for a purpose reasonably related to such person's
interest as a stockholder. Delaware law also provides for inspection rights as
to a list of stockholders entitled to vote at a meeting within a ten day period
preceding a stockholders' meeting for any purpose germane to the meeting.
Under currently applicable California law, a 5% stockholder has an absolute
right to inspect and receive a copy of the stockholder list.
Therefore, both Genesis shareholders and Paradise stockholders have similar
rights with respect to the inspection of a shareholder list.
MEMORANDUM OF ASSOCIATION
Under the Companies Act (Nova Scotia), no amendment may be made to a
memorandum of association except as expressly permitted. Those provisions of a
memorandum of association concerning capital may be altered by majority vote or
special resolution, depending on the particular amendment proposed.
A special resolution is required for amendments to:
- effect a name change,
- subdivide shares,
- convert shares into preference shares redeemable or purchasable by the
company,
- provide for the issue of shares without any nominal or par value,
- convert previously authorized unissued or issued shares with nominal
or par value into the same number of shares without any nominal or par
value, and
- convert previously authorized unissued or issued shares without
nominal or par value into the same or a different number of shares
with nominal or par value.
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A resolution passed by majority vote is required for amendments to:
- create new common shares,
- consolidate and divide shares into shares of larger amount,
- convert paid-up shares into stock, and reconvert that stock into
paid-up shares of any denomination,
- exchange shares of one denomination for another, and
- cancel shares which, at the date of the passing of the resolution,
have not been taken or agreed to be taken by any person.
The provisions of a memorandum of association relating to the objects and
powers of Genesis may be changed only by special resolution and court approval.
In addition, under the Companies Act (Nova Scotia), the holders of outstanding
shares of a class or series will ordinarily be entitled to vote as a class or
series upon a proposed amendment, whether or not they are entitled to vote upon
the amendment by the provisions of Genesis' memorandum and articles of
association. The provisions of a memorandum of association concerning the
limited liability of members cannot be changed.
Paradise does not have a memorandum of association. It does, however, have
a similar legal document called the certificate of incorporation. Amendment of
the certificate of incorporation also requires stockholder approval.
Therefore, material amendments of provisions of Genesis' memorandum of
association and Paradise's certificate of incorporation requires shareholder
approval.
BYLAWS
Genesis has no bylaws. Under the Companies Act (Nova Scotia), the
memorandum and articles of association may only be amended by special resolution
of the shareholders. Some amendments also require class approval by the holders
of outstanding shares of a class or series, whether or not such shares
ordinarily carry the right to vote. Under Delaware law, the corporation's bylaws
may be adopted, amended or repealed by the stockholders of the corporation.
However, under Delaware law, a corporation may, in its certificate of
incorporation, confer the power to adopt, amend, or repeal the bylaws upon the
directors, subject to the stockholders' right to do the same. The Paradise
certificate provides that the board of directors has the right to adopt, amend,
or repeal the bylaws. It would take proportionately more shares to amend the
memorandum and articles of association of Genesis than to amend the bylaws of
Paradise.
DISSOLUTION
Under the Companies Act (Nova Scotia), the voluntary dissolution of a
company requires approval by special resolution. The Genesis memorandum and
articles of association do not contain a supermajority voting requirement. Under
Delaware law, unless the board of directors approves the proposal to dissolve,
the dissolution must be unanimously approved by all the stockholders entitled to
vote on the proposal. Only if the dissolution is initially approved by the board
of directors may the dissolution be approved by a simply majority of the
outstanding shares of the corporation's stock entitled to vote. In the event of
a board initiated dissolution, Delaware law allows a Delaware corporation to
include in its certificate of incorporation a supermajority (greater than a
simple majority) voting requirement in connection with dissolutions.
Under the Paradise certificate of incorporation, the approval of the
holders of a majority of the outstanding preferred stock is required to
dissolve.
Accordingly, it would take proportionately fewer shares to approve the
dissolution of Genesis than that of Paradise.
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UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma combined financial information for
Genesis consists of the unaudited pro forma combined statements of operations
for the years ended May 31, 1997 and 1998 and for the nine months ended February
28, 1998 and 1999 and the unaudited pro forma combined balance sheet as of
February 28, 1999. These pro forma financial statements give effect to Genesis'
intended acquisition of Paradise through a merger and exchange of shares. The
business combination is expected to be accounted for as a pooling of interests
combination.
The unaudited pro forma combined statements of operations combine Genesis'
historical results of operations with the historical results of operations of
Paradise. Because Genesis and Paradise have different fiscal year ends, the pro
forma results have been prepared by combining the following periods of
operations of Genesis and Paradise:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRO FORMA PERIOD OF OPERATIONS GENESIS PERIOD OF OPERATIONS PARADISE PERIOD OF OPERATIONS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended May 31, 1997 Year Ended May 31, 1997 June 17, 1996 (inception) to May 31,
1997
- ----------------------------------------------------------------------------------------------------------------------
Year Ended May 31, 1998 Year Ended May 31, 1998 Year Ended May 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended February 28, 1998 Nine Months Ended February 28, 1998 Nine Months Ended February 28, 1998
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended February 28, 1999 Nine Months Ended February 28, 1999 Nine Months Ended February 28, 1999
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
A pro forma combined statement of operations for the year ended May 31,
1996 has not been presented since Paradise commenced operations on June 17,
1996. The pro forma financial statements are not necessarily indicative of what
the actual financial results would have been had the transactions taken place on
the dates indicated, and do not purport to indicate the results of future
operations or financial condition.
The unaudited pro forma combined financial statements should be read in
conjunction with the related notes to the unaudited pro forma combined financial
statements included in this document and the audited consolidated financial
statements and notes of Genesis and Paradise, included elsewhere in this proxy
statement/prospectus.
In preparing the pro forma adjustments reflected in the accompanying notes
to the unaudited pro forma combined financial statements, Genesis made estimates
and assumptions that it believes are reasonable. The unaudited pro forma
combined statements of operations do not include adjustments for any synergies,
including cost savings or restructuring costs, which may occur or are expected
to occur.
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GENESIS MICROCHIP INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
FEBRUARY 28, 1999
(IN THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
GENESIS PARADISE PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 36,096 $ 1,904 $ -- $ 38,000
Accounts receivable trade, net................ 7,261 1,616 -- 8,877
Investment tax credits receivable............. 1,504 -- -- 1,504
Inventory..................................... 7,482 455 -- 7,937
Other......................................... 990 280 (432)(b) 838
-------- ------- ------- --------
Total current assets.................. 53,333 4,255 (432) 57,156
Capital assets.................................. 2,657 1,160 -- 3,817
Deferred income taxes........................... 1,642 -- -- 1,642
Other........................................... 80 -- -- 80
-------- ------- ------- --------
Total assets.......................... $ 57,712 $ 5,415 $ (432) $ 62,695
======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.............................. $ 2,040 $ 730 $ 3,324(b) $ 6,094
Accrued liabilities........................... 1,880 779 -- 2,659
Convertible notes payable..................... -- 1,027 -- 1,027
Current portion of loan payable............... 130 145 -- 275
-------- ------- ------- --------
Total current liabilities............. 4,050 2,681 3,324 10,055
Loan payable.................................... 597 349 -- 946
-------- ------- ------- --------
Total liabilities..................... 4,647 3,030 3,324 11,001
-------- ------- ------- --------
Commitments and contingencies
Redeemable convertible preferred shares......... -- 6,669 (6,669)(a) --
Shareholders' equity (net capital deficiency):
Share capital:
Common shares.............................. 61,397 12 6,671(a) 68,080
Preferred shares........................... -- 2 (2)(a) --
Additional paid in capital................. -- 1,293 -- 1,293
Cumulative other comprehensive income
(loss)..................................... (94) -- -- (94)
Deferred compensation......................... (113) (311) -- (424)
Deficit....................................... (8,125) (5,280) (3,756)(b) (17,161)
-------- ------- ------- --------
Total shareholders' equity (net
capital deficiency)................. 53,065 (4,284) 2,913 51,694
-------- ------- ------- --------
Total liabilities and shareholders'
equity.............................. $ 57,712 $ 5,415 $ (432) $ 62,695
======== ======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
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<PAGE> 100
GENESIS MICROCHIP INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GENESIS PARADISE PRO FORMA
HISTORICAL HISTORICAL COMBINED
------------------ ------------------ ------------------
1997 1998 1997 1998 1997 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products...................... $ 4,164 $14,941 $ -- $ 241 $ 4,164 $15,182
Design services and other..... 363 806 -- -- 363 806
------- ------- ------- ------- ------- -------
Total revenues........ 4,527 15,747 -- 241 4,527 15,988
Cost of revenues................ 2,983 4,819 -- 50 2,983 4,869
------- ------- ------- ------- ------- -------
Gross profit.................... 1,544 10,928 -- 191 1,544 11,119
Operating expenses:
Research and development...... 2,644 3,648 244 2,562 2,888 6,210
Selling, general and
administrative............. 4,245 4,842 588 1,295 4,833 6,137
------- ------- ------- ------- ------- -------
Total operating
expenses............ 6,889 8,490 832 3,857 7,721 12,347
------- ------- ------- ------- ------- -------
Income (loss) from operations... (5,345) 2,438 (832) (3,666) (6,177) (1,228)
Interest income................. 147 675 37 98 184 773
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... (5,198) 3,113 (795) (3,568) (5,993) (455)
Provision for income taxes...... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net income (loss)............... $(5,198) $ 3,113 $ (795) $(3,568) $(5,993) $ (455)
======= ======= ======= ======= ======= =======
Earnings (loss) per share:
Basic......................... $ (0.70) $ 0.33 $ (0.08) $ (0.33) $ (0.63) $ (0.04)
Diluted....................... $ (0.70) $ 0.26 $ (0.08) $ (0.33) $ (0.63) $ (0.04)
Weighted average number of
common shares outstanding:
Basic......................... 7,463 9,559 10,346 10,820 9,447 11,634
Diluted....................... 7,463 12,204 10,346 10,820 9,447 11,634
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
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GENESIS MICROCHIP INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GENESIS PARADISE PRO FORMA
HISTORICAL HISTORICAL COMBINED
------------------ ------------------ ------------------
1998 1999 1998 1999 1998 1999
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products..................... $ 9,440 $25,078 $ 12 $ 6,618 $ 9,452 $31,696
Design services and other.... 766 1,363 -- -- 766 1,363
------- ------- ------- ------- ------- -------
Total revenues....... 10,206 26,441 12 6,618 10,218 33,059
Cost of revenues............... 2,936 10,654 -- 1,648 2,936 12,302
------- ------- ------- ------- ------- -------
Gross profit................... 7,270 15,787 12 4,970 7,282 20,757
Operating expenses:
Research and development..... 2,522 4,008 1,495 3,584 4,017 7,592
Selling, general and
administrative............ 3,451 6,232 856 2,233 4,307 8,465
------- ------- ------- ------- ------- -------
Total operating
expenses 5,973 10,240 2,351 5,817 8,324 16,057
------- ------- ------- ------- ------- -------
Income (loss) from
operations................... 1,297 5,547 (2,339) (847) (1,042) 4,700
Interest income (expense)...... 188 1,409 71 (72) 116 1,337
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................ 1,485 6,956 (2,268) (919) (926) 6,037
Provision for income taxes..... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net income (loss).............. $ 1,485 $ 6,956 $(2,268) $ (919) $ (926) $ 6,037
======= ======= ======= ======= ======= =======
Earnings (loss) per share:
Basic........................ $ 0.18 $ 0.49 $ (0.21) $ (0.08) $ (0.09) $ 0.34
Diluted...................... $ 0.13 $ 0.46 $ (0.21) $ (0.08) $ (0.09) $ 0.31
Weighted average number of
common shares outstanding:
Basic........................ 8,168 14,131 10,964 11,833 10,271 17,984
Diluted...................... 11,367 15,040 10,964 11,833 10,271 19,239
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
96
<PAGE> 102
GENESIS MICROCHIP INCORPORATED
UNAUDITED NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997 AND 1998 AND THE NINE MONTHS ENDED FEBRUARY 28, 1998
AND 1999
1. BASIS OF PRESENTATION
The unaudited pro forma financial statements give effect to Genesis'
acquisition of Paradise through a merger and exchange of shares. Under the terms
of the merger, a wholly owned subsidiary of Genesis will merge directly into
Paradise in a tax-free reorganization. Genesis will exchange 4,500,000 Genesis
common shares in exchange for all of the outstanding shares, options and
warrants of Paradise. The unaudited pro forma combined balance sheet gives
effect to the merger as if it had occurred on February 28, 1999. The unaudited
pro forma combined statements of operations give effect to the merger as if it
had occurred at the beginning of the earliest period presented.
The merger has been accounted for under the pooling of interests method.
The pro forma financial statements have been prepared on the basis of
assumptions described in the following notes. In the opinion of Genesis
management, all adjustments necessary to present fairly such pro forma financial
statements have been made based on the proposed terms and structure of the
Paradise merger and presently available information.
Prior to the combination, Paradise's fiscal year ended December 31. In
recording the pooling of interests combination:
- the unaudited pro forma combined statement of operations for the year
ended May 31, 1997 combines the audited results of operations of Genesis
for the year ended May 31, 1997 with the audited results of operations of
Paradise from commencement of operations on June 17, 1996 to May 31,
1997,
- the unaudited pro forma combined statement of operations for the year
ended May 31, 1998 combines the audited results of operations of Genesis
for the year ended May 31, 1998 with the unaudited results of operations
of Paradise for the year ended May 31, 1998,
- the unaudited pro forma combined statement of operations for the nine
months ended February 28, 1998 combines the unaudited results of
operations of Genesis for the nine months ended February 28, 1998 with
the unaudited results of operations of Paradise for the nine months ended
February 28, 1998, and
- the unaudited pro forma combined statement of operations for the nine
months ended February 28, 1999 combines the unaudited results of
operations of Genesis for the nine months ended February 28, 1999 with
the unaudited results of operations of Paradise for the nine months ended
February 28, 1999.
No adjustments have been made in these unaudited pro forma financial
statements to conform the accounting policies of the combining companies. The
nature and extent of such adjustments, if any, are not expected to be
significant.
2. PRO FORMA ADJUSTMENTS
(a) To record the conversion of preferred shares of Paradise into common
shares immediately prior to the combination.
(b) Genesis and Paradise estimate that they will incur merger-related
expenses, consisting primarily of investment bankers' fees, attorneys,
accountants, financial printing and other related charges, as well as lease
cancellation costs and costs associated with redundant assets, of approximately
$3.8 million. This estimate is preliminary and is therefore subject to change.
These non-recurring expenses will be charged to operations upon completion of
the merger.
The unaudited pro forma combined balance sheet gives effect to such
expenses as if they had been incurred as of February 28, 1999, but the unaudited
pro forma combined statements of operations do not give effect to such expenses.
97
<PAGE> 103
LEGAL MATTERS
Certain legal matters in connection with the issuance of Genesis common
shares in the merger and the Canadian federal income tax consequences of the
merger will be passed upon for Genesis by Stewart McKelvey Stirling Scales,
Halifax, Nova Scotia, Canada. Certain legal matters in connection with the
merger and the U.S. federal income tax consequences of the merger will be passed
upon for Genesis by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Certain legal matters in connection with the merger and
the U.S. federal income tax consequences of the merger will be passed upon for
Paradise by Cooley Godward LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of Genesis at May 31, 1998 and May
31, 1997 and for each of the three years in the period ended May 31, 1998
appearing in this proxy statement/prospectus have been audited by KPMG LLP,
independent chartered accountants, as set forth in their reports which are
included herein and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing. Representatives of
KPMG LLP are expected to be present at the Genesis special meeting and will have
the opportunity to make a statement and are expected to be available to respond
to appropriate questions.
The consolidated financial statements of Paradise at December 31, 1998 and
1997, and for each of the two years in the period ended December 31, 1998, and
for the period from June 17, 1996 (inception) to December 31, 1996 appearing in
this proxy statement/prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing. Representatives of Ernst &
Young LLP are not currently expected to be present at the Paradise special
meeting.
SHAREHOLDER PROPOSALS
Genesis is not aware of any additional matters which may be presented at
its special meeting. As to any proposal that a shareholder of Genesis intends to
present to shareholders without inclusion in this proxy statement/prospectus,
the proxies named in the management's proxy will be entitled to exercise their
discretionary authority on that proposal.
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, Genesis
shareholders may present proper proposals for inclusion in Genesis' proxy
statement and for consideration at the next annual meeting of its shareholders
by submitting their proposals to Genesis in a timely manner. In order to be
included for the 1999 annual meeting of shareholders, shareholder proposals must
be received by Genesis no later than May 27, 1999, and must otherwise comply
with the requirements of Rule 14a-8. As to any proposal that a shareholder
intends to present without inclusion in Genesis' proxy statement for Genesis'
1999 annual meeting of shareholders, the proxies named in management's proxy for
that meeting will be entitled to exercise their discretionary authority on that
proposal unless Genesis receives notice of the matter to be proposed not later
than August 10, 1999. Even if proper notice is received on or prior to August
10, 1999, the proxies named in management's proxy for that meeting may
nevertheless exercise their discretionary authority with respect to the proposed
matter by advising shareholders of the proposal and how they intend to exercise
their discretion to vote on the proposed matter, unless the shareholder making
the proposal solicits proxies with respect to the proposal to the extent
required by Rule 14a-4(c)(2) under the Securities Exchange Act of 1934.
98
<PAGE> 104
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
GENESIS MICROCHIP INCORPORATED
Report of KPMG LLP, Chartered Accountants................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
PARADISE ELECTRONICS, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-21
Consolidated Balance Sheets................................. F-22
Consolidated Statements of Operations....................... F-23
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency)... F-24
Consolidated Statements of Cash Flows....................... F-25
Notes to Consolidated Financial Statements.................. F-26
</TABLE>
F-1
<PAGE> 105
AUDITORS' REPORT
To the Board of Directors of Genesis Microchip Incorporated
We have audited the consolidated balance sheets of Genesis Microchip
Incorporated as at May 31, 1997 and 1998 and the consolidated statements of
operations, shareholders' equity and cash flows for each of the years in the
three year period ended May 31, 1998. 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 in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at May 31, 1997
and 1998 and the results of operations and its cash flows for each of the years
in the three year period ended May 31, 1998 in accordance with generally
accepted accounting principles in the United States.
Toronto, Canada KPMG LLP
July 13, 1998 (except Chartered Accountants
as to note 13 which is
as of January 22, 1999)
F-2
<PAGE> 106
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
MAY 31,
------------------- FEBRUARY 28,
1997 1998 1999
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,687 $ 35,904 $ 36,096
Accounts receivable trade, net of allowance for doubtful
accounts of $75 in 1997 and $90 at May 31, 1998 and
February 28, 1999....................................... 915 2,523 7,261
Employee loan receivable.................................. 72 69 --
Investment tax credits receivable......................... 1,516 1,735 1,504
Inventory................................................. 1,753 3,278 7,482
Other..................................................... 158 135 990
-------- -------- --------
Total current assets.................................... 8,101 43,644 53,333
Capital assets(note 3)...................................... 1,432 2,080 2,657
Deferred income taxes....................................... -- 1,642 1,642
Other....................................................... 80 80 80
-------- -------- --------
Total assets....................................... $ 9,613 $ 47,446 $ 57,712
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 646 $ 1,498 $ 2,040
Accrued liabilities....................................... 488 1,045 1,880
Current portion of loan payable(note 5)................... 64 97 130
-------- -------- --------
Total current liabilities............................... 1,198 2,640 4,050
Long-term liabilities:
Loan payable(note 5)...................................... 794 655 597
-------- -------- --------
Total liabilities....................................... 1,992 3,295 4,647
-------- -------- --------
Shareholders' equity(note 6):
Share capital:
Special shares:
Authorized -- 1,000,000,000 special shares
Issued and outstanding -- nil shares at May 31, 1997
and 1998 and February 28, 1999....................... -- -- --
Preference shares:
Issued and outstanding -- 227,200 shares at May 31,
1997 and nil shares at May 31, 1998 and February 28,
1999................................................. 1,121 -- --
Common shares:
Authorized -- 1,000,000,000 common shares
Issued and outstanding -- 7,498,834 shares at May 31,
1997 and 13,808,132 shares at May 31, 1998 and
14,439,249 at February 28, 1999...................... 14,088 59,619 61,397
Common share purchase warrants:
Issued and outstanding -- 946,349 warrants at May 31,
1997 and nil warrants at May 31, 1998 and February
28, 1999............................................. 1 -- --
Special and bonus warrants:
Issued and outstanding -- 17,800,000 warrants at May
31, 1997 and nil warrants at May 31, 1998 and
February 28, 1999.................................... 10,809 -- --
Share purchase loans receivable........................... (36) (124) --
Cumulative other comprehensive income (loss).............. 46 (94) (94)
Deferred compensation..................................... (214) (169) (113)
Deficit................................................... (18,194) (15,081) (8,125)
-------- -------- --------
Total shareholders' equity.............................. 7,621 44,151 53,065
-------- -------- --------
Total liabilities and shareholders' equity......... $ 9,613 $ 47,446 $ 57,712
======== ======== ========
Commitments and contingencies(note 11)
Subsequent event(note 13)
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 107
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Products.................................. $ 1,381 $ 4,164 $14,941 $ 9,440 $ 25,078
Design services and other................. 143 363 806 766 1,363
------- ------- ------- ------- --------
Total revenues.................... 1,524 4,527 15,747 10,206 26,441
Cost of revenues............................ 434 2,983 4,819 2,936 10,654
------- ------- ------- ------- --------
Gross profit................................ 1,090 1,544 10,928 7,270 15,787
Operating expenses:
Research and development (note 8)......... 2,097 2,644 3,648 2,522 4,008
Selling, general and administrative....... 2,665 4,245 4,842 3,451 6,232
------- ------- ------- ------- --------
Total operating expenses.......... 4,762 6,889 8,490 5,973 10,240
------- ------- ------- ------- --------
Income (loss) from operations............... (3,672) (5,345) 2,438 1,297 5,547
Interest income (expense)................... (143) 147 675 188 1,409
------- ------- ------- ------- --------
Income (loss) before income taxes........... (3,815) (5,198) 3,113 1,485 6,956
Provision for income taxes.................. -- -- -- -- --
------- ------- ------- ------- --------
Net income (loss)........................... $(3,815) $(5,198) $ 3,113 $ 1,485 $ 6,956
======= ======= ======= ======= ========
Earnings (loss) per share:
Basic..................................... $ (0.63) $ (0.70) $ 0.33 $ 0.18 $ 0.49
Diluted................................... $ (0.63) $ (0.70) $ 0.26 $ 0.13 $ 0.46
Weighted average number of common shares
outstanding (in thousands):
Basic..................................... 6,071 7,463 9,559 8,168 14,131
Diluted................................... 6,071 7,463 12,204 11,367 15,040
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 108
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
COMMON SHARE SPECIAL AND BONUS
PREFERENCE SHARES COMMON SHARES PURCHASE WARRANTS WARRANTS
------------------ -------------------- ------------------- ----------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
-------- ------- ---------- ------- ---------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, May 31, 1995................... 227,200 $ 1,121 5,375,066 $ 7,945 1,484,352 $ 9 -- $ --
Loss..................................... -- -- -- -- -- -- -- --
Issued................................... -- -- 929,299 3,400 533,369 -- -- --
Issued on exercise of warrants........... -- -- 1,071,172 1,576 (1,071,172) (8) -- --
Expired.................................. -- -- -- -- (200) -- -- --
Issued on exercise of stock options...... -- -- 34,297 37 -- -- -- --
Currency translation adjustment.......... -- -- -- -- --
Additional paid in capital related to
stock options........................... -- -- -- 223 -- -- -- --
-------- ------- ---------- ------- ---------- ---- ----------- --------
Balances, May 31, 1996................... 227,200 1,121 7,409,834 13,181 946,349 1 -- --
Loss..................................... -- -- -- -- -- -- -- --
Issued for cash.......................... -- -- 3,000 11 -- -- 17,800,000 11,653
Issue costs.............................. -- -- -- -- -- -- -- (844)
Issued on exercise of stock options...... -- -- 86,000 92 -- -- -- --
Currency translation adjustment.......... -- -- -- -- -- -- -- --
Additional paid in capital related to
stock options........................... -- -- -- 514 -- -- -- --
Deferred compensation related to stock
options................................. -- -- -- 290 -- -- -- --
Amortization of deferred compensation
related to stock options................ -- -- -- -- -- -- -- --
-------- ------- ---------- ------- ---------- ---- ----------- --------
Balances, May 31, 1997................... 227,200 1,121 7,498,834 14,088 946,349 1 17,800,000 10,809
Net income............................... -- -- -- -- -- -- -- --
Issued................................... -- -- 3,119,488 35,210 -- -- -- --
Additional paid in capital related to
shares issued........................... -- -- -- 214 -- -- -- --
Issued on exercise of warrants........... -- -- 2,000 4 (2,000) -- -- --
Issued on exercise of stock options...... -- -- 117,500 169 -- -- -- --
Issue costs.............................. -- -- -- (2,036) -- -- -- --
Conversion of preference shares.......... (227,200) (1,121) 227,200 1,121 -- -- -- --
Conversion of warrants................... -- -- 2,843,110 10,813 (944,349) (1) (17,800,000) (10,809)
Currency translation adjustment.......... -- -- -- -- -- -- -- --
Deferred compensation related to stock
options................................. -- -- -- 36 -- -- -- --
Amortization of deferred compensation
related to stock options................ -- -- -- -- -- -- -- --
-------- ------- ---------- ------- ---------- ---- ----------- --------
Balances, May 31, 1998................... -- -- 13,808,132 59,619 -- -- -- --
Net income (unaudited)................... -- -- -- -- -- --
Issued on exercise of stock options
(unaudited)............................. -- -- 631,117 1,778 -- -- -- --
Repayment of share purchase loans
receivable (unaudited).................. -- -- -- -- -- -- -- --
Amortization of deferred compensation
related to stock options (unaudited).... -- -- -- -- -- -- -- --
-------- ------- ---------- ------- ---------- ---- ----------- --------
Balances, February 28, 1999
(unaudited)............................. -- $ -- 14,439,249 $61,397 -- $ -- -- $ --
======== ======= ========== ======= ========== ==== =========== ========
<CAPTION>
SHARE CUMULATIVE
PURCHASE OTHER TOTAL
LOANS COMPREHENSIVE DEFERRED SHAREHOLDERS'
RECEIVABLE INCOME (LOSS) COMPENSATION DEFICIT EQUITY
---------- ------------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Balances, May 31, 1995................... $ -- $ 53 $ -- $ (9,181) $ (53)
Loss..................................... -- -- -- (3,815) (3,815)
Issued................................... -- -- -- -- 3,400
Issued on exercise of warrants........... -- -- -- -- 1,568
Expired.................................. -- -- -- -- --
Issued on exercise of stock options...... -- -- -- -- 37
Currency translation adjustment.......... -- (38) -- -- (38)
Additional paid in capital related to
stock options........................... -- -- -- -- 223
----- ----- ----- -------- -------
Balances, May 31, 1996................... -- 15 -- (12,996) 1,322
Loss..................................... -- -- -- (5,198) (5,198)
Issued for cash.......................... -- -- -- -- 11,664
Issue costs.............................. -- -- -- -- (844)
Issued on exercise of stock options...... (36) -- -- -- 56
Currency translation adjustment.......... -- 31 -- -- 31
Additional paid in capital related to
stock options........................... -- -- -- -- 514
Deferred compensation related to stock
options................................. -- -- (290) -- --
Amortization of deferred compensation
related to stock options................ -- -- 76 -- 76
----- ----- ----- -------- -------
Balances, May 31, 1997................... (36) 46 (214) (18,194) 7,621
Net income............................... -- -- -- 3,113 3,113
Issued................................... -- -- -- -- 35,210
Additional paid in capital related to
shares issued........................... -- -- -- -- 214
Issued on exercise of warrants........... -- -- -- -- 4
Issued on exercise of stock options...... (88) -- -- -- 81
Issue costs.............................. -- -- -- -- (2,036)
Conversion of preference shares.......... -- -- -- -- --
Conversion of warrants................... -- -- -- -- 3
Currency translation adjustment.......... -- (140) -- -- (140)
Deferred compensation related to stock
options................................. -- -- (36) -- --
Amortization of deferred compensation
related to stock options................ -- -- 81 -- 81
----- ----- ----- -------- -------
Balances, May 31, 1998................... (124) (94) (169) (15,081) 44,151
Net income (unaudited)................... -- -- -- 6,956 6,956
Issued on exercise of stock options
(unaudited)............................. -- -- -- -- 1,778
Repayment of share purchase loans
receivable (unaudited).................. 124 -- -- -- 124
Amortization of deferred compensation
related to stock options (unaudited).... -- -- 56 -- 56
----- ----- ----- -------- -------
Balances, February 28, 1999
(unaudited)............................. $ -- $ (94) $(113) $ (8,125) $53,065
===== ===== ===== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 109
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $(3,815) $(5,198) $ 3,113 $ 1,485 $ 6,956
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Amortization.............................. 434 510 670 449 696
Non-cash compensation expense related to
stock options and shares issued......... 223 590 295 276 56
Inventory provision....................... -- 1,293 86 154 --
Change in operating assets and
liabilities:
Accounts receivable trade............... (334) (403) (1,628) (1,608) (4,748)
Investment tax credits receivable....... (243) (407) (301) (8) 138
Inventory............................... (641) (2,321) (1,637) (1,236) (4,226)
Other................................... (177) 52 26 (102) (787)
Accounts payable........................ 505 (51) 902 986 557
Accrued liabilities..................... 50 191 623 421 888
------- ------- ------- ------- -------
Net cash from (used in) operating
activities......................... (3,998) (5,744) 2,149 817 (470)
Cash flows from investing activities:
Additions to capital assets.................. (303) (979) (1,388) (762) (1,272)
------- ------- ------- ------- -------
Cash used in investing activities.... (303) (979) (1,388) (762) (1,272)
Cash flows from financing activities:
Proceeds from:
Issue of common shares and common share
purchase warrants, net of issue costs... 5,005 103 31,708 28,102 1,778
Issue of special and bonus warrants, net
of issue costs.......................... -- 10,809 -- -- --
Loan payable.............................. 45 118 -- -- --
Repayment of:
Loan payable.............................. -- (64) (62) -- --
Debentures payable........................ -- (1,275) -- -- --
Obligations under capital leases.......... (109) (810) -- -- --
Repayment (issuance) of share purchase
loans..................................... -- (36) (94) (94) 119
------- ------- ------- ------- -------
Net cash from financing activities... 4,941 8,845 31,552 28,008 1,897
Effect of currency translation on cash
balances..................................... -- 32 (96) (126) 37
------- ------- ------- ------- -------
Increase (decrease) in cash and cash
equivalents.................................. 640 2,154 32,217 27,937 192
Cash and cash equivalents, beginning of
period....................................... 893 1,533 3,687 3,687 35,904
------- ------- ------- ------- -------
Cash and cash equivalents, end of period....... $ 1,533 $ 3,687 $35,904 $31,624 $36,096
======= ======= ======= ======= =======
Supplemental cash flow information:
Cash paid for interest....................... $ 207 $ 181 $ 5 $ 1 $ 1
Cash paid for income taxes................... $ -- $ -- $ -- $ -- $ 56
Supplemental disclosure of non-cash investing
and financing activities:
Capital lease obligations incurred for
purchase of property and equipment........ $ 755 $ -- $ -- $ -- $ --
Deferred compensation related to stock
options................................... $ 223 $ 804 $ 250 $ 250 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 110
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
1. NATURE OF OPERATIONS
Genesis Microchip Incorporated designs, develops and markets integrated
circuits that manipulate and process digital video and graphic images.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of Genesis and
its wholly owned subsidiary, Genesis Microchip Corporation. All material
inter-company transactions and balances have been eliminated.
USE OF ESTIMATES
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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or
less at the date of acquisition are classified as cash equivalents.
INVENTORY
Inventory consists principally of finished goods and is stated at the lower
of cost (first-in, first-out) or market.
CAPITAL ASSETS
Capital assets are stated at cost. Amortization is recorded using the
following methods and annual rates over the estimated useful lives of the
assets:
<TABLE>
<S> <C>
Property and equipment 20% to 30% declining balance
Computer software 100% straight line
Leasehold improvements Straight line over the term of the lease
Patents Straight line over the life of the patent
</TABLE>
Genesis regularly reviews the carrying values of its capital assets. If the
carrying value of its capital assets exceeds the amount recoverable, a
write-down is charged to the consolidated statement of operations.
REVENUE RECOGNITION
Genesis recognizes revenue from product sales upon shipment. Product
returns and allowances are estimated and provided for at the time of sale. To
date, Genesis has not experienced any significant product returns. Design
services revenues are recognized as Genesis performs engineering services for
the customer or completes phases of the project defined by the applicable
development agreement.
F-7
<PAGE> 111
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
CURRENCY TRANSLATION
Effective June 1, 1998, the U.S. dollar became the functional currency of
Genesis and of its wholly owned subsidiary as all of their revenues and a
significant portion of their expenditures are denominated in U.S. dollars. This
change resulted from the increased significance of U.S. dollar denominated
revenues and expenditures in relation to Genesis' Canadian dollar denominated
transactions. In addition, Genesis' financing is primarily denominated in U.S.
dollars. Exchange gains and losses resulting from transactions denominated in
currencies other than U.S. dollar are included in the results of operations for
the period.
Prior to June 1, 1998, the functional currency of Genesis and its
subsidiary was the Canadian dollar. Accordingly, monetary assets and liabilities
of Genesis and of its wholly owned subsidiary that were denominated in foreign
currencies were translated into Canadian dollars at the exchange rate prevailing
at the balance sheet date. Transactions included in operations were translated
at the average rate for the period. Exchange gains and losses resulting from the
translation of these amounts were reflected in the consolidated statement of
operations in the period in which they occurred. As Genesis' reporting currency
was the U.S. dollar, Genesis translated consolidated assets and liabilities
denominated in Canadian dollars into U.S. dollars at the exchange rate
prevailing at the balance sheet date, and the consolidated results of operations
at the average rate for the period. Cumulative net translation adjustments were
included as a separate component of shareholders' equity.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
INVESTMENT TAX CREDITS
Genesis is entitled to Canadian federal and provincial investment tax
credits which are earned as a percentage of eligible current and capital
research and development expenditures incurred in each taxation year.
Investment tax credits are accounted for as a reduction of the related
expenditure for items of a current nature and a reduction of the related asset
cost for items of a long-term nature, provided that Genesis has reasonable
assurance that the tax credits will be realized.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments consist of cash and cash equivalents, accounts
receivable trade, employee loan receivable, accounts payable, accrued
liabilities and loan payable. Genesis determines the fair value of its financial
instruments based on quoted market values or discounted cash flow analyses.
Unless otherwise indicated, the fair values of financial assets and financial
liabilities approximate their recorded amounts.
Financial instruments that potentially subject Genesis to concentrations of
credit risk consist primarily of cash equivalents and accounts receivable trade.
Cash equivalents consist of deposits with or guaranteed by major commercial
banks, the maturities of which are three months or less from the date of
purchase. Genesis performs periodic credit evaluations of the financial
condition of its customers and typically does not require collateral from them.
Allowances are maintained for potential credit losses consistent with the credit
risk of specific customers, historical trends and other information, and have
been within management's range of expectations.
F-8
<PAGE> 112
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings (loss) per share has been calculated by dividing the net income
(loss) for the period available to common shareholders by the weighted average
number of common shares outstanding during that period. Basic earnings (loss)
per share excludes the dilutive effect of potential common shares. Diluted
earnings per share give effect to all potential common shares outstanding during
the period. The weighted average number of diluted shares outstanding is
calculated assuming that the proceeds from potential common shares are used to
repurchase common shares at the average share price in the period.
STOCK-BASED COMPENSATION
Genesis has elected to follow Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting of Stock Issued to Employees" and related
interpretations, in accounting for its employee stock options because the
alternative fair value accounting provided for under Financial Accounting
Standards Board, Statement No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation", requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, deferred compensation
liability is recorded at the option grant date in an amount equal to the
difference between the fair market value of a common share and the exercise
price of the option. Compensation expense is recognized over the vesting period
of the option. The issuance of shares for consideration that is less than the
fair market value of the shares results in compensation expense equal to the
excess of the fair market value of the shares over the value of the
consideration received.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements at February 28, 1999 and
for the nine months ended February 28, 1999 and 1998 are unaudited but include
all adjustments (consisting of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair statement of the financial
position and the operating results and cash flows for the interim date and
periods presented. Results for the interim period ended February 28, 1999 are
not necessarily indicative of results of the entire fiscal year or future
periods.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income ("SFAS 130"). This Statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Components of comprehensive income
(loss) include net income (loss) and all other nonowner changes in equity.
Initial application of SFAS 130 is required for interim periods of fiscal years
beginning after December 15, 1997; however, interim period disclosure is limited
to reporting a total for comprehensive income. In accordance with SFAS 130,
total comprehensive income (loss), is ($3,853,000) for the year ended May 31,
1996, ($5,167,000) for the year ended May 31, 1997, $2,973,000 for the year
ended May 31, 1998, $1,345,000 for the nine months ended February 28, 1998 and
$6,956,000 for the nine months ended February 28, 1999.
INCOME TAXES
Under the asset and liability method of Statement of Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), deferred tax assets and
liabilities are recognized for the future tax
F-9
<PAGE> 113
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires publicly
held companies to report financial and other information about key
revenue-producing segments of the entity for which such information is available
and is utilized by the chief operating decision maker. Specific information to
be reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
The impact of adopting SFAS 131, which is effective for Genesis' 1999 fiscal
year, has not been determined.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The impact of adopting SFAS 133, which is effective for Genesis'
2001 fiscal year, has not been determined.
3. CAPITAL ASSETS
Capital assets consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------ FEBRUARY 28,
1997 1998 1999
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment.............................. $ 2,039 $ 2,623 $ 3,173
Computer software................................... 580 1,085 1,611
Leasehold improvements.............................. 30 87 166
Patents............................................. 260 326 431
------- ------- -------
2,909 4,121 5,381
Less accumulated amortization....................... (1,477) (2,041) (2,724)
------- ------- -------
$ 1,432 $ 2,080 $ 2,657
======= ======= =======
</TABLE>
4. BANK CREDIT FACILITY
Genesis has a $3.5 million credit facility with the Royal Bank of Canada.
The credit facility is subject to a borrowing formula, and may be drawn in
either Canadian or U.S. dollars. It is secured by way of a general security
agreement covering all of Genesis' assets, excluding intellectual property. The
interest rate on the credit facility is at bank prime rate plus one-half of one
percent, based on either Canadian or U.S. prime rates, as applicable. At May 31,
1997 and 1998 and February 28, 1999 there were no borrowings outstanding under
this facility.
F-10
<PAGE> 114
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
5. LOAN PAYABLE
The loan payable is non-interest bearing and is unsecured. It is payable in
annual principal installments by fiscal year as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31, 1998 FEBRUARY 28, 1999
------------ -----------------
(UNAUDITED)
<S> <C> <C>
1999...................................................... $ 97 $ 94
2000...................................................... 97 94
2001...................................................... 97 94
2002...................................................... 97 94
2003...................................................... 97 94
2004 and thereafter....................................... 267 257
---- -----
752 727
Less current portion...................................... (97) (130)
---- -----
$655 $ 597
==== =====
</TABLE>
The fair value of the loan payable was $717,000 at May 31, 1997, $613,000
at May 31, 1998, and $611,000 at February 28, 1999, based on the present value
of contractual future payments, discounted at the current market rate of
interest available to Genesis for the same or similar debt instrument.
6. SHAREHOLDERS' EQUITY
Genesis' share capital and earnings per share information for the fiscal
years ended May 31, 1996 and May 31, 1997 has been restated to reflect the
ten-for-one reverse split of Genesis' common shares effective November 14, 1997.
On January 20, 1999, Genesis Microchip Inc. was continued as Genesis
Microchip Incorporated in the province of Nova Scotia.
SPECIAL SHARES
The board of directors of Genesis is authorized to issue up to
1,000,000,000 special shares from time to time in one or more series, to fix the
number of special shares of such series and to determine the designation, rights
(including voting rights, dividend rights, rights of retraction and rights of
redemption), privileges, restrictions and conditions attaching to the shares of
each such series, without further vote or action by the shareholders. No series
of special shares may have a priority over any other series of special shares
with respect to dividends or liquidation rights. The special shares may have
voting rights superior to the common shares or other series of special shares
and may rank senior to the common shares as to dividends and as to the
distribution of assets in the event of liquidation, dissolution or winding-up of
Genesis.
PREFERENCE SHARES
In September 1997, all of the outstanding preference shares were converted
into common shares on the basis of one common share for each preference share.
On November 14, 1997, Genesis amended its articles of amalgamation to remove the
authorized preference shares and to authorize a new class of common shares.
F-11
<PAGE> 115
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
CONVERSION OF SPECIAL AND BONUS WARRANTS
The 17,800,000 special and bonus warrants were converted into a total of
2,136,000 common shares for no additional consideration upon Genesis' initial
public offering effective February 23, 1998.
CONVERSION OF COMMON SHARE PURCHASE WARRANTS
On November 1, 1997, all of the 944,349 outstanding common share purchase
warrants were converted into 707,110 common shares for proceeds of $3,000. This
conversion was made pursuant to an offer made by Genesis to the holders of each
class of its common share purchase warrants. The offer was made in order to
simplify the capital structure of Genesis prior to Genesis' initial public
offering of common shares. Each class of warrant holder was provided with the
option of either converting their common share purchase warrants into common
shares at the specified exercise price for that class of warrant or of choosing
to convert their common share purchase warrants into a specified lesser number
of common shares without the payment of additional consideration. The exercise
price offered to each class of warrant holder was determined by calculating the
present value of the existing exercise price for each class of warrant with
reference to the original expiry date of the warrant. This amount was also used
to calculate the equivalent number of common shares to be offered on conversion
where the warrant holder chose to select the cashless option offered by Genesis.
YORKTON SECURITIES INC. OPTIONS
As a condition of the issuance of the special and bonus warrants in July
1996, Genesis granted Yorkton Securities Inc. an option to purchase 213,600
common shares at any time prior to July 31, 1998 at an exercise price of CDN
$9.00 (U.S. $6.18) per share. On June 17, 1998, in lieu of purchasing the entire
number of shares for cash, Yorkton chose a cashless exercise alternative,
whereby it received 113,252 common shares for no additional cash consideration
in complete settlement of the above option on that date.
SHARE PURCHASE LOANS RECEIVABLE
In October 1996, Genesis loaned $107,000 to an executive officer of
Genesis. In July 1997, Genesis loaned $94,000 to two executive officers of
Genesis to assist these individuals in purchasing common shares of Genesis
through the exercise of 70,000 options previously issued to them.
The loans were repaid by the executive officers during the period ended
February 28, 1999.
7. STOCK OPTION AND STOCK PURCHASE PLANS
1987 STOCK OPTION PLAN
The 1987 Stock Option Plan (the "1987 Plan") was established for the
benefit of full-time employees and directors of Genesis and consultants engaged
by Genesis. Options granted under the 1987 Plan vest over periods of two to four
years and expire from five to seven years from the dates of the grants, unless
extended by the board of directors. As a result of the establishment of the 1997
Employee Stock Option Plan, no additional options will be granted under the 1987
Plan. Upon exercise, expiration or cancellation of all of the options granted
under the 1987 Plan, this plan will be terminated. All options granted under the
1987 Plan are exercisable in Canadian dollars.
F-12
<PAGE> 116
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
1997 EMPLOYEE STOCK OPTION PLAN
The 1997 Employee Stock Option Plan (the "1997 Employee Plan") provides for
the granting to employees of incentive stock options, non-statutory stock
options and stock purchase rights for up to 800,000 common shares. The exercise
price of incentive stock options granted under the 1997 Employee Plan may not be
less than 100% (110% in the case of any options granted to a person who holds
more than 10% of the total combined voting power of all classes of shares of
Genesis) of the fair market value of the common shares subject to the option on
the date of the grant. The term of the options may not exceed 10 years (five
years in the case of any options granted to a person who holds more than 10% of
the total combined voting power of all classes of shares of Genesis) and
generally vest over four years. As of February 28, 1999, there were 450,084
shares available for grant under the 1997 Employee Plan.
1997 NON-EMPLOYEE STOCK OPTION PLAN
The 1997 Non-Employee Stock Option Plan (the "Non-Employee Plan") provides
for the granting to non-employee directors and consultants of Genesis of up to
150,000 common shares. The exercise price of stock options granted under the
Non-Employee Plan may not be less than 100% of the fair market value of the
common shares subject to the option on the date of the grant. Options granted
under the Non-Employee Plan have a term of up to ten years and generally vest
over periods of up to two years. As of February 28, 1999, there were 65,000
shares available for grant under the 1997 Non-Employee Plan.
EMPLOYEE STOCK PURCHASE PLAN
Genesis has established an employee stock purchase plan under which
employees may authorize payroll deductions of up to 15% of their compensation
(as defined in the plan) to purchase common shares at a price equal to 85% of
the lower of the fair market values as of the beginning or the end of the
offering period. As of February 28, 1999 there were 65,243 common shares
available for issuance under this plan.
F-13
<PAGE> 117
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
Details of stock option transactions are as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTION PRICE AVERAGE
NUMBER OF PER EXERCISE PRICE
SHARES SHARE PER SHARE
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balances, May 31, 1995 619,050 $0.07 - 4.21 $ 2.39
Issued.................................. 65,500 3.51 3.51
Exercised............................... (34,297) 0.07 - 3.51 1.08
Canceled................................ (40,203) 3.51 - 4.21 4.00
---------
Balances, May 31, 1996.................... 610,050 0.70 - 3.51 2.53
Issued.................................. 486,500 3.51 - 4.91 3.58
Exercised............................... (86,000) 0.70 - 3.51 1.07
Canceled................................ (28,900) 3.51 3.51
---------
Balances, May 31, 1997.................... 981,650 0.70 - 4.91 3.09
Issued.................................. 489,000 4.80 - 14.00 8.17
Exercised............................... (117,500) 0.70 - 3.43 1.45
Canceled................................ (19,250) 3.43 - 4.80 3.86
---------
Balances, May 31, 1998.................... 1,333,900 1.37 - 14.00 5.09
Issued (unaudited)...................... 650,300 6.75 - 31.50 10.86
Exercised (unaudited)................... (462,256) 1.37 - 16.69 3.50
Canceled (unaudited).................... (41,284) 3.31 - 13.88 6.52
---------
Balances, February 28, 1999 (unaudited)... 1,480,660 3.31 - 31.50 7.09
=========
</TABLE>
There were 518,000 options at May 31, 1997, 659,000 options at May 31,
1998, and 437,000 options at February 28, 1999 that had vested and were
exercisable, with a weighted average exercise price per share of $2.83 at May
31, 1997, $3.31 at May 31, 1998, and $4.79 at February 28, 1999. The weighted
average remaining contractual life of the options outstanding at May 31, 1997
was 3.80 years, at May 31, 1998 was 5.06 years and as of February 28, 1999 was
7.15 years.
During the fiscal years ended May 31, 1996 and May 31, 1997, Genesis
extended the expiration dates of certain employee stock options issued under the
1987 Stock Option Plan. All other terms associated with the stock options
remained unchanged. Under APB 25, the extension is treated as the issuance of
new stock options requiring the fair market value of a common share at the date
of the extension to be compared to the exercise price of the option in order to
calculate any compensation expense. Compensation expense related to the
extension of the expiration dates amounted to $223,000 for the year ended May
31, 1996 and $514,000 for the year ended May 31, 1997.
Genesis recorded no deferred compensation for the year ended May 31, 1996,
$290,000 for the year ended May 31, 1997, $36,000 for the year ended May 31,
1998, $36,000 for the nine months ended February 28, 1998 and nil for the nine
months ended February 28, 1999. The amortization of deferred compensation is
charged to operations and is amortized over the vesting period of the options.
Amortization of deferred compensation was nil for the year ended May 31, 1996,
$76,000 for the year ended May 31, 1997, $81,000 for the year ended May 31,
1998, $62,000 for the nine months ended February 28, 1998 and $56,000 for the
nine months ended February 28, 1999.
SFAS 123 requires the disclosure of pro forma net income and earnings per
share had Genesis adopted the fair value method as of the beginning of its 1996
fiscal year. Under SFAS 123, the fair value of stock-based awards to employees
is calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without
F-14
<PAGE> 118
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
vesting restrictions, which significantly differ from Genesis' stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. Genesis' calculations for fiscal 1998 were made using the
Black-Scholes option pricing model using a dividend yield of 0% and the
assumptions noted below in the table. In fiscal years 1997 and 1996, the fair
value for each option grant was calculated using the minimum value method using
a dividend yield of 0% and the assumptions noted below in the table. The minimum
value method differs from other methods designed to estimate fair values, such
as the Black-Scholes method, in that it does not consider the effect of expected
volatility.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------
1996 1997 1998
---- ---- ------
<S> <C> <C> <C>
Risk-free interest rates.............................. 4% 4% 5%
Volatility............................................ -- -- 0.8739
Expected life of option in years...................... 4 4 5
</TABLE>
Had compensation expense been determined based on the fair value of the
awards at the grant dates in accordance with the methodology prescribed in SFAS
123, Genesis' net income and earnings per share for fiscal 1998 would have
decreased by approximately $219,000 or by $0.02 per share for both basic and
diluted earnings per share. The net loss and net loss per share for Genesis'
fiscal years ended May 31, 1997 and 1996 would have increased by approximately
$74,000 or $0.01 per share for both basic and diluted earnings per share, and by
approximately $46,000 or $0.01 per share for both basic and diluted earnings per
share, respectively. The effects on pro forma disclosure of applying SFAS 123
are not likely to be representative of the effects on pro forma disclosure in
future years. Because SFAS 123 is applicable only to options granted subsequent
to June 1, 1995, the pro forma effect will not be fully reflected until fiscal
1999.
The weighted average fair values of options granted during fiscal 1996,
1997 and 1998 are $0.52, $0.56 and $5.85, respectively.
8. RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross research and development expenditures......... $2,605 $3,351 $4,538 $3,171 $4,941
Less investment tax credits and government
assistance........................................ (508) (707) (890) (649) (933)
------ ------ ------ ------ ------
$2,097 $2,644 $3,648 $2,522 $4,008
====== ====== ====== ====== ======
</TABLE>
F-15
<PAGE> 119
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
9. INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income (loss) before provision for income
taxes. The sources and tax effects of the differences are as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
--------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic rate applied to income (loss) before
provision for income taxes..................... $(1,701) $(2,318) $ 1,388 $ 664 $ 3,095
Adjustments resulting from:
Provincial research and development
deductions................................ (176) (99) (95) (95) --
Federal research and development
deductions................................ -- -- -- -- (600)
Small business deduction.................... 35 34 (22) (22) --
Foreign tax and exchange rate differences... 108 194 473 143 (178)
Utilization of tax loss carryforwards....... -- -- (1,744) (531) (1,728)
Other items................................. 110 200 -- (159) (589)
------- ------- ------- ----- -------
(1,624) (1,989) -- -- --
Unrecognized benefit of losses carried forward... 1,624 1,989 -- -- --
------- ------- ------- ----- -------
$ -- $ -- $ -- $ -- $ --
======= ======= ======= ===== =======
</TABLE>
Pretax loss from foreign operations was $1,015,000 in the year ended May
31, 1996, $1,832,000 in the year ended May 31, 1997 and $4,465,000 in the year
ended May 31, 1998, $3,112,000 for the nine months ended February 28, 1998.
Pretax income from foreign operations was $3,875,000 for the nine months ended
February 28, 1999.
Significant components of Genesis' deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Research and development expenses deferred for income tax
purposes.................................................. $ 5,028 $ 1,708
Net operating loss carryforwards............................ 1,915 1,806
Investment tax credit carryforwards......................... 268 388
Deferred interest charges................................... 262 796
Issue costs................................................. 300 1,868
Other....................................................... 3 193
------- -------
Net deferred tax asset...................................... 7,776 6,759
Less valuation allowance.................................... (7,776) (5,117)
------- -------
$ -- $ 1,642
======= =======
</TABLE>
During the year ended May 31, 1997, the valuation allowance increased by
approximately $2,242,000. During the year ended May 31, 1998, the valuation
allowance decreased by approximately $2,659,000 primarily as a result of
utilization of net operating losses.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income,
F-16
<PAGE> 120
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
uncertainties related to the industry in which Genesis operates, and tax
planning strategies in making this assessment. In order to fully realize the
deferred tax asset, Genesis will need to generate future taxable income of
approximately $15,900,000 prior to the expiration of the net operating loss
carryforwards in the years 2010 to 2013. Based upon the level of historical
taxable income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not Genesis will realize the benefits of these deductible differences, net
of the existing valuation allowances.
10. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation as required by SFAS 128 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
--------------------------- ---------------------
1996 1997 1998 1997 1998)
------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator for basic and diluted net income
(loss) per share:
Net income (loss).......................... $(3,815) $(5,198) $ 3,113 $ 1,485 $ 6,956
======= ======= ======= ======= =======
Denominator for basic net income (loss) per
share:
Weighted average common shares............. 6,071 7,463 9,559 8,168 14,131
======= ======= ======= ======= =======
Basic net income (loss) per share............ $ (0.63) $ (0.70) $ 0.33 $ 0.18 $ 0.49
======= ======= ======= ======= =======
Denominator for diluted net income (loss) per
share:
Weighted average common shares............. 6,071 7,463 9,559 8,168 14,131
Stock options and warrants................. -- -- 2,645 3,199 909
------- ------- ------- ------- -------
Shares used in computing diluted net income
(loss) per share........................... 6,071 7,463 12,204 11,367 15,040
======= ======= ======= ======= =======
Diluted net income (loss) per share.......... $ (0.63) $ (0.70) $ 0.26 $ 0.13 $ 0.46
======= ======= ======= ======= =======
</TABLE>
Due to the net loss in the years ended May 31, 1996 and 1997, all potential
common shares outstanding are considered anti-dilutive and are excluded from the
calculation of diluted net income (loss) per share.
F-17
<PAGE> 121
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Genesis leases premises in Markham, Ontario and Mountain View, California
under operating leases that expire on May 31, 2009 and July 31, 2003,
respectively. In addition, certain equipment is leased under non-cancellable
operating leases expiring in various years through 2003. Future minimum lease
payments by fiscal year are as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
-----------
(UNAUDITED)
<S> <C>
1999........................................................ $ 451
2000........................................................ 1,103
2001........................................................ 1,055
2002........................................................ 980
2003........................................................ 964
Thereafter.................................................. 2,973
------
$7,526
======
</TABLE>
SUPPLY AGREEMENTS
Genesis has supply agreements with certain manufacturers for the supply of
its semiconductor products. Through February 28, 1999, a sole source
manufacturer produced each of Genesis' semiconductor products, with the majority
of these products being supplied by a single company. Should that source of
products cease to be available, management believes that this would have a
material adverse effect on Genesis' business, financial condition and results of
operations. Under the terms of the supply agreements, Genesis has no guarantees
of minimum capacity from its suppliers and is not liable for minimum purchase
commitments.
UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting
Genesis, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
12. SEGMENT INFORMATION
Genesis operates in one industry segment, which is the design, development
and marketing of integrated circuits that manipulate and process digital video
and graphic images.
F-18
<PAGE> 122
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
Genesis sells its products internationally. The following table summarizes
revenues by geographical region (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
--------------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States...................... $1,309 $3,293 $ 8,163 $ 5,227 $ 7,029
Japan and Asia..................... 36 443 6,620 4,237 17,975
Europe............................. 78 408 729 507 1,151
Canada............................. 101 383 235 235 286
------ ------ ------- ------- -------
$1,524 $4,527 $15,747 $10,206 $26,441
====== ====== ======= ======= =======
</TABLE>
For the year ended May 31, 1996, two customers accounted for 16% and 14% of
total revenues, respectively. For the year ended May 31, 1997, one customer
accounted for 14% of total revenues. For the year ended May 31, 1998, two
customers accounted for 24% and 23% of total revenues, respectively. For the
nine months ended February 28, 1998, two customers each accounted for 25% of
total revenues, and for the nine months ended February 28, 1999, two customers
accounted for 20% and 10% of total revenues, respectively.
At May 31, 1997, one customer represented 33% of total accounts receivable
trade. At May 31, 1998, one customer represented 12% of total accounts
receivable trade. At February 28, 1999, one customer represented 14% of total
accounts receivable trade.
Genesis conducts operations in the United States and Canada. Total
revenues, income (loss) from operations and identifiable assets applicable to
operations by geographic segment were as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, FEBRUARY 28,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total revenues:
United States.................. $ 1,165 $ 3,100 $ 7,609 $ 4,940 $ --
Canada......................... 359 1,427 8,138 5,266 26,441
------- ------- ------- ------- -------
Total revenues......... $ 1,524 $ 4,527 $15,747 $10,206 $26,441
======= ======= ======= ======= =======
Income (loss) from operations:
United States.................. $ (886) $(1,190) $(2,893) $(2,131) $ 1,538
Canada......................... (2,786) (4,155) 5,331 3,428 4,009
------- ------- ------- ------- -------
Total income (loss)
from operations...... $(3,672) $(5,345) $ 2,438 $ 1,297 $ 5,547
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
MAY 31, 1997 MAY 31, 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Identifiable assets:
United States............................... $ 442 $ 1,584 $ 80
Canada...................................... 9,171 45,862 57,632
------ ------- -------
Total assets........................ $9,613 $47,446 $57,712
====== ======= =======
</TABLE>
F-19
<PAGE> 123
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1999
IS UNAUDITED)
13. SUBSEQUENT EVENT
On January 22, 1999, Genesis signed a definitive agreement to merge with
Paradise Electronics, Inc. ("Paradise"). Under the terms of the merger,
4,500,000 common shares of Genesis will be exchanged for all of the outstanding
shares, options and warrants of Paradise. The merger is expected to be accounted
for as a pooling of interests at such time as it is completed.
F-20
<PAGE> 124
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Paradise Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Paradise
Electronics, Inc. as of December 31, 1997 and 1998, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity (net capital deficiency), and cash flows for the years
ended December 31, 1997 and 1998 and for the period from June 17, 1996
(inception) to December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Paradise Electronics, Inc. at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1997 and 1998 and for the period from June 17, 1996 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
February 5, 1999
F-21
<PAGE> 125
PARADISE ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,523,415 $ 1,615,340
Accounts receivable....................................... 1,075 1,231,576
Inventory................................................. -- 543,636
Prepaid expenses and other current assets................. 28,178 11,194
----------- -----------
Total current assets........................................ 4,552,668 3,401,746
Property and equipment, net................................. 715,009 1,057,860
Other assets................................................ 18,516 18,516
----------- -----------
Total assets................................................ $ 5,286,193 $ 4,478,122
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 152,873 $ 1,038,203
Accrued payroll, vacation, and related expenses........... 93,859 85,099
Other accrued liabilities................................. 35,911 284,912
Current portion of capital lease obligation............... 26,530 --
Convertible notes payable................................. -- 1,014,118
Current portion of lease line of credit................... -- 145,000
----------- -----------
Total current liabilities................................... 309,173 2,567,332
Long-term portion of lease line of credit................... -- 372,773
----------- -----------
Total liabilities........................................... 309,173 2,940,105
Commitments and contingencies
Series B redeemable convertible preferred stock, $0.001 par
value, at amount paid in:
Authorized shares -- 1,749,000
Issued and outstanding shares -- 1,749,000 in 1997 and
1998 Liquidation preference of $2,658,480 at December 31,
1998...................................................... 1,549,177 1,549,177
Series C redeemable convertible preferred stock, $0.001 par
value, at amount paid in:
Authorized shares -- 4,557,522
Issued and outstanding shares -- 4,557,522 in 1997 and
1998 Liquidation preference of $5,150,000 at December 31,
1998...................................................... 5,120,028 5,120,028
Stockholders' equity (net capital deficiency):
Series A convertible preferred stock, $0.001 par value:
Authorized shares -- 1,950,000
Issued and outstanding shares -- 1,950,000 in 1997 and
1998 Liquidation preference of $643,500 at December 31,
1998................................................... 1,950 1,950
Common stock, $0.001 par value:
Authorized shares -- 30,000,000
Issued and outstanding shares -- 11,016,255 in 1997 and
11,728,755 in 1998.................................... 11,016 11,729
Additional paid-in capital................................ 728,609 1,234,128
Stockholder notes receivable.............................. (40,000) --
Deferred compensation..................................... -- (330,026)
Accumulated deficit....................................... (2,393,760) (6,048,969)
----------- -----------
Total stockholders' equity (net capital deficiency)......... (1,692,185) (5,131,188)
----------- -----------
Total liabilities and stockholders' equity (net capital
deficiency)............................................... $ 5,286,193 $ 4,478,122
=========== ===========
</TABLE>
See accompanying notes.
F-22
<PAGE> 126
PARADISE ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 17, 1996
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1996 1997 1998
-------------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $ -- $ 2,100 $ 3,803,085
Cost of revenues.................................... -- -- 1,047,771
---------- ----------- -----------
Gross profit........................................ -- 2,100 2,755,314
Operating expenses:
Research and development.......................... 264,900 1,310,687 3,946,027
General and administrative........................ 70,926 641,492 1,535,716
Sales and marketing............................... 5,171 176,135 931,190
---------- ----------- -----------
Total operating expenses............................ 340,997 2,128,314 6,412,933
---------- ----------- -----------
Operating loss...................................... (340,997) (2,126,214) (3,657,619)
Interest income..................................... 13,030 60,421 111,943
Interest expense.................................... -- -- (109,533)
---------- ----------- -----------
Net loss............................................ $ (327,967) $(2,065,793) $(3,655,209)
========== =========== ===========
Basic and diluted net loss per common share......... $ (0.03) $ (0.20) $ (0.32)
Shares used in computing per share amounts.......... 9,808,755 10,283,251 11,471,786
</TABLE>
See accompanying notes.
F-23
<PAGE> 127
PARADISE ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------- SERIES A CONVERTIBLE
SERIES B SERIES C LLC UNITS PREFERRED STOCK
---------------------- ---------------------- ------------------------ --------------------
SHARES AMOUNT SHARES AMOUNT UNITS AMOUNT SHARES AMOUNT
--------- ---------- --------- ---------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Unit A of
Paradise LLC's units at
$1.00 per unit.............. -- $ -- -- $ -- 1,600,000 $ 1,600,000 -- $ --
Issuance of Unit B of
Paradise LLC's units at
$0.1207 per unit............ -- -- -- -- 119,444 14,464 -- --
Issuance of Unit B of
Paradise LLC's units at
$0.2054 per unit............ -- -- -- -- 111,111 22,822 -- --
Issuance of Unit B of
Paradise LLC's units at
$0.90 per unit.............. -- -- -- -- 327,780 295,002 -- --
Issuance of Unit C of
Paradise LLC's units at
$0.0125 per unit............ -- -- -- -- 1,200,000 15,000 -- --
Issuance of Unit C of
Paradise LLC's units at
$0.1207 per unit............ -- -- -- -- 860,000 103,802 -- --
Issuance of Unit C of
Paradise LLC's units at
$0.2054 per unit............ -- -- -- -- 400,000 82,160 -- --
Net loss..................... -- -- -- -- -- -- -- --
--------- ---------- --------- ---------- ---------- ----------- --------- ------
Balance at December 31,
1996........................ -- -- -- -- 4,618,335 2,133,250 -- --
Incorporation of Paradise
Electronics, Inc. .......... 1,749,000 1,549,177 -- -- (4,618,335) (2,133,250) 1,950,000 1,950
Issuance of common stock to
employee at $0.033 per share
in exchange for stockholder
note receivable............. -- -- -- -- -- -- -- --
Issuance of Series C
preferred stock of Paradise
Electronics, Inc. at $1.13
per share for cash, net of
issuance costs of $29,971... -- -- 4,557,522 5,120,028 -- -- -- --
Exercise of common stock
options at $0.033 per share
for cash.................... -- -- -- -- -- -- -- --
Net loss..................... -- -- -- -- -- -- -- --
--------- ---------- --------- ---------- ---------- ----------- --------- ------
Balance at December 31,
1997........................ 1,749,000 1,549,177 4,557,522 5,120,028 -- -- 1,950,000 1,950
Repurchase of common stock
at cost and cancellation
of note................... -- -- -- -- -- -- -- --
Deferred compensation
relating to stock options... -- -- -- -- -- -- -- --
Amortization of deferred
compensation relating to
stock options............... -- -- -- -- -- -- -- --
Issuance of common stock
warrants in conjunction with
promissory note............. -- -- -- -- -- -- -- --
Issuance of common stock to
sales representatives and
consultants at $0.0333...... -- -- -- -- -- -- -- --
Exercise of options for
common stock at $0.0333 per
share....................... -- -- -- -- -- -- -- --
Exercise of options for
common stock at $0.15....... -- -- -- -- -- -- -- --
Net loss..................... -- -- -- -- -- -- -- --
--------- ---------- --------- ---------- ---------- ----------- --------- ------
Balance at December 31,
1998........................ 1,749,000 $1,549,177 4,557,522 $5,120,028 -- $ -- 1,950,000 $1,950
========= ========== ========= ========== ========== =========== ========= ======
<CAPTION>
TOTAL
STOCKHOLDERS'
COMMON STOCK ADDITIONAL STOCKHOLDER EQUITY (NET
-------------------- PAID-IN NOTES DEFERRED ACCUMULATED CAPITAL
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT DEFICIENCY)
---------- ------- ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Unit A of
Paradise LLC's units at
$1.00 per unit.............. -- $ -- -- $ -- $ -- $ -- $ 1,600,000
Issuance of Unit B of
Paradise LLC's units at
$0.1207 per unit............ -- -- -- -- -- -- 14,464
Issuance of Unit B of
Paradise LLC's units at
$0.2054 per unit............ -- -- -- -- -- -- 22,822
Issuance of Unit B of
Paradise LLC's units at
$0.90 per unit.............. -- -- -- -- -- -- 295,002
Issuance of Unit C of
Paradise LLC's units at
$0.0125 per unit............ -- -- -- -- -- -- 15,000
Issuance of Unit C of
Paradise LLC's units at
$0.1207 per unit............ -- -- -- -- -- -- 103,802
Issuance of Unit C of
Paradise LLC's units at
$0.2054 per unit............ -- -- -- -- -- -- 82,160
Net loss..................... -- -- -- -- -- (327,967) (327,967)
---------- ------- ---------- -------- ----------- ----------- -----------
Balance at December 31,
1996........................ -- -- -- -- -- (327,967) 1,805,283
Incorporation of Paradise
Electronics, Inc. .......... 9,808,755 9,809 689,566 -- -- -- (1,431,925)
Issuance of common stock to
employee at $0.033 per share
in exchange for stockholder
note receivable............. 1,200,000 1,200 38,800 (40,000) -- -- --
Issuance of Series C
preferred stock of Paradise
Electronics, Inc. at $1.13
per share for cash, net of
issuance costs of $29,971... -- -- -- -- -- -- --
Exercise of common stock
options at $0.033 per share
for cash.................... 7,500 7 243 -- -- -- 250
Net loss..................... -- -- -- (2,065,793) (2,065,793)
---------- ------- ---------- -------- ----------- ----------- -----------
Balance at December 31,
1997........................ 11,016,255 11,016 728,609 (40,000) -- (2,393,760) (1,692,185)
Repurchase of common stock
at cost and cancellation
of note................... (1,200,000) (1,200) (38,800) 40,000 -- -- --
Deferred compensation
relating to stock options... -- -- 388,259 -- (388,259) -- --
Amortization of deferred
compensation relating to
stock options............... -- -- -- -- 58,233 -- 58,233
Issuance of common stock
warrants in conjunction with
promissory note............. -- -- 57,522 -- -- -- 57,522
Issuance of common stock to
sales representatives and
consultants at $0.0333...... 120,000 120 3,880 -- -- -- 4,000
Exercise of options for
common stock at $0.0333 per
share....................... 1,477,500 1,478 47,723 -- -- -- 49,201
Exercise of options for
common stock at $0.15....... 315,000 315 46,935 -- -- -- 47,250
Net loss..................... -- -- -- -- -- (3,655,209) (3,655,209)
---------- ------- ---------- -------- ----------- ----------- -----------
Balance at December 31,
1998........................ 11,728,755 $11,729 $1,234,128 $ -- $ (330,026) $(6,048,969) $(5,131,188)
========== ======= ========== ======== =========== =========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE> 128
PARADISE ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 17, 1996
(INCEPTION) TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1997 1998
--------------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (327,967) $(2,065,793) $(3,655,209)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation related to issuance of common stock
to consultants.................................. -- -- 4,000
Interest expense related to issuance of
warrants........................................ -- -- 57,522
Depreciation and amortization..................... 41,646 171,680 310,096
Amortization of deferred compensation............. -- -- 58,233
Accounts receivable............................... (80) (995) (1,230,501)
Inventory......................................... -- -- (543,636)
Prepaid expenses and other current assets......... (8,413) (19,765) 16,984
Other assets...................................... (12,280) (6,236) --
Accounts payable.................................. 114,971 37,902 885,330
Accrued payroll, vacation, and related expenses... -- 93,859 (8,760)
Other accrued liabilities......................... -- 35,911 249,001
---------- ----------- -----------
Net cash used in operating activities.................. (192,123) (1,753,437) (3,856,940)
INVESTING ACTIVITIES
Acquisition of property, plant, and equipment.......... (387,545) (503,454) (652,948)
---------- ----------- -----------
Net cash used in investing activities.................. (387,545) (503,454) (652,948)
FINANCING ACTIVITIES
Principal payments under capital leases................ -- (10,806) (26,530)
Proceeds from issuance of LLC units.................... 2,133,250 -- --
Proceeds from issuance of common and preferred stock... -- 5,237,530 96,452
Proceeds from the issuance of promissory notes......... -- -- 1,014,118
Proceeds from the line of credit....................... -- -- 517,773
---------- ----------- -----------
Net cash provided by financing activities.............. 2,133,250 5,226,724 1,601,813
---------- ----------- -----------
Net increase (decrease) in cash........................ 1,553,582 2,969,833 (2,908,075)
Cash and cash equivalents at beginning of period....... -- 1,553,582 4,523,415
---------- ----------- -----------
Cash and cash equivalents at end of period............. $1,533,582 $ 4,523,415 $ 1,615,340
========== =========== ===========
</TABLE>
<TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING ACTIVITIES
<S> <C> <C> <C>
Interest expense....................................... $ -- $ -- $ 109,533
Issuance of common stock to consultants................ $ -- $ -- $ 4,000
Issuance of warrants................................... $ -- $ -- $ 57,522
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock for notes receivable.......... $ -- $ 40,000 $ --
Repurchase of common stock via cancellation of notes
receivable........................................... $ -- $ -- $ 40,000
Acquisition of property under capital leases........... $ -- $ 37,336 $ --
Deferred compensation.................................. $ -- $ -- $ 388,259
</TABLE>
See accompanying notes.
F-25
<PAGE> 129
PARADISE ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Paradise Electronics LLC (LLC) was founded on June 17, 1996 (inception) in
the state of California for the purpose of developing and marketing integrated
circuits for the non-notebook flat panel display industry and conducts all of
its business within one industry segment.
On May 23, 1997, LLC and Accent, Inc. (a significant shareholder of LLC)
entered into an exchange agreement pursuant to which the stockholders of LLC and
Accent, Inc. agreed to exchange their equity interests for shares of Paradise
Electronics, Inc. (the Company). Pursuant to this exchange, (i) LLC was
dissolved and all assets and liabilities of LLC were transferred to the newly
founded Paradise Electronics, Inc. and (ii) Accent, Inc. became a wholly owned
subsidiary of Paradise Electronics, Inc. Prior to this reorganization, Accent,
Inc. had assets consisting of cash and its investment in LLC and had no ongoing
operations. The acquisition of Accent, Inc. by the Company was accounted for as
a purchase of assets. The Company was incorporated in the state of Delaware.
Basis of Presentation
Prior to fiscal 1998, the Company was in the development stage, primarily
engaged in product development, product testing, and the establishment of
strategic relationships with customers and suppliers. The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Accent, Inc. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. Cash equivalents consist principally of short-term money market
funds and commercial paper. These instruments are short term in nature and bear
minimal interest rate risk. The investments are stated at cost, which
approximates fair value. To date, the Company has not experienced losses on
these investments.
Inventory
Inventories are stated at lower of cost or market value. Cost is determined
by the first-in, first-out method.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Work-in-process............................................. $ -- $368,648
Finished goods.............................................. -- 174,988
-------- --------
Total inventory............................................. $ -- $543,636
======== ========
</TABLE>
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which are generally three to five years.
F-26
<PAGE> 130
PARADISE ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Revenue Recognition
Revenue from product sales is recognized upon shipment to customers. To
date, there have been no instances requiring the Company to provide for returns
or allowances.
Concentration of Credit Risk, Significant Customers, and Export Sales
The Company sells its products directly to customers. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. To date, there have not been any uncollectible accounts receivable
balances.
In fiscal 1998, one customer accounted for 66% of net sales. Net sales to
customers in Japan, Taiwan, Korea, and United States totaled 67%, 22%, 10%, and
1%, respectively.
Loss Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). Under
FAS 128, the basic and dilutive net loss per share amounts are computed using
the weighted average number of shares of common stock outstanding, net of shares
subject to repurchase. Potentially dilutive shares from stock options and the
conversion of preferred stock are excluded from the computation as their effect
is antidilutive.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 5, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB Opinion No. 25,
when the exercise price of the Company's employee stock options equals the fair
value of the underlying stock on the date of grant, no compensation expense is
recognized. As allowed by FAS 123, the Company plans to continue to account for
its employee stock plan in accordance with the provisions of APB Opinion No. 25
and to adopt the "disclosure only" alternative described in FAS 123.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
--------- ----------
<S> <C> <C>
Equipment and tools, hardware............................... $ 486,656 $ 739,119
Equipment and tools, software............................... 420,369 806,855
Furniture and office equipment.............................. 21,310 35,309
--------- ----------
928,335 1,581,283
Less accumulated depreciation............................... (213,326) (523,423)
--------- ----------
$ 715,009 $1,057,860
========= ==========
</TABLE>
3. FINANCING
The Company established an $800,000 lease line-of-credit agreement with the
Silicon Valley Bank, dated November 13, 1997. This agreement allowed the Company
to borrow at an interest rate of 8% per annum until November 13, 1998. Repayment
of the borrowings begins at the earlier of: (i) six months after the drawdown
document has been signed or (ii) when the drawdown amount equals or exceeds
F-27
<PAGE> 131
PARADISE ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
$400,000. The amounts borrowed are to be repaid over 48 months. Borrowings are
secured by the Company's assets. At December 31, 1998, $517,773 was outstanding
on the line-of-credit.
Notes Payable
In October 1998, the Company entered into a $1,000,000 convertible note
payable agreement with certain of its shareholders. If the Company raises no
less than $2,000,000 of preferred stock by April 1999, then the outstanding
principal balance and unpaid accrued interest will automatically convert in
whole into such preferred stock. The conversion price will be equal to the price
per share paid by the investors purchasing the preferred stock.
If the above conversion does not occur, then the entire outstanding
principal balance and all unpaid accrued interest will become due in April 1999.
As of December 31, 1998, total principal and interest due are $1,000,000 and
$14,118, respectively. Interest accrues at a rate of 8% per year.
Accounts Receivable Purchase Agreement
In October 1998, the Company entered into an agreement with Silicon Valley
Financial Services whereby the Company can sell its receivables for 80% of the
face amount of each receivable up to $1,500,000. As of December 31, 1998, there
were no purchased accounts receivable outstanding.
4. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases its facilities under noncancelable operating lease
arrangements. Additionally, during 1997, the Company leased certain property and
equipment under capital leases. The Company had capitalized property and
equipment totaling $37,336 with associated accumulated amortization of $1,245 at
December 31, 1997. During 1998, the Company purchased the leased property and
equipment.
Future minimum lease payments under noncancelable operating leases consist
of the following at December 31, 1998:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
<S> <C>
Years ending December 31:
1999........................................................ $135,677
2000........................................................ 108,453
2001........................................................ 74,066
2002........................................................ --
2003........................................................ --
--------
Total minimum lease payments................................ $318,196
========
</TABLE>
Total rent expense for the period from inception to December 31, 1996 was
$15,984, and for the years ended in 1997 and 1998 was $74,480 and $138,257,
respectively.
Contingencies
In September 1998, a potential merger partner (the Plaintiff) of the
Company filed an action against the Company claiming misappropriation of trade
secrets, unfair business practices, trade libel, negligent misrepresentation,
and breach of contract of three separate agreements stemming from a failed
merger between the two companies. The action is currently in the discovery
stage. Although certain losses may be incurred, an estimate cannot be made at
this time. There can be no assurance that the Company would prevail in such
litigation or that any damages payable by the Company in such litigation will
not have a material adverse effect on the Company's business, financial
condition, or results of operations.
F-28
<PAGE> 132
PARADISE ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Convertible Preferred Stock
The holders of Series A preferred stock are entitled to cumulative,
noncompounding dividends of $0.033 per share, per annum, when and if declared by
the Board of Directors, or upon liquidation of the Company. As of December 31,
1998, there were no dividends paid or declared by the Company. The Series A
stockholders are entitled to a liquidation preference of $0.33 per share plus
all declared but unpaid dividends. As of December 31, 1998, the aggregate
liquidation preference of the Series A preferred stock was $643,500. Each holder
of Series A preferred stock is entitled to one vote for each share of common
stock into which the shares of preferred stock held by such holders are then
convertible.
Redeemable Convertible Preferred Stock
The holders of Series B and C preferred stock are entitled to cumulative
dividends of $0.152 and $0.113 per share, per annum for each share of Series B
and C preferred stock, respectively, when and if declared by the Board of
Directors, or upon liquidation of the Company. The Series B preferred
stockholders are entitled to a liquidation preference of $1.52 per share. The
Series C preferred stockholders are entitled to a liquidation preference of
$1.13 per share. As of December 31, 1998, the aggregate liquidation preference
of the Series B and C preferred stock was $2,658,480 and $5,150,000,
respectively. Any remaining funds will be distributed entirely to the holders of
common stock. Additionally, preferred stockholders have voting rights equal to
the number of common shares that would be held upon conversion.
The Series B and C stockholders may elect to redeem their shares of Series
B and C preferred stock upon written request of the holders of at least 60% of
Series B preferred stock and 75% of Series C preferred stock at any time after
May 23, 2001 and December 31, 2001, respectively. The redemption amount for each
share of Series B and C preferred stock will be $1.52 and $1.13, respectively.
Conversion of Preferred Stock
The holders of Series A, B, and C preferred stock have the right, at the
option of the holder, at any time, to convert their shares into common stock at
the then applicable conversion rate, currently one-for-one, subject to
adjustments for future dilution. Preferred stock automatically converts into
common stock, at the then applicable conversion rate, upon a public offering of
the Company's common stock at a per share price of not less than $3.39, subject
to adjustments for future dilution, with aggregate proceeds in excess of
$15,000,000.
Stock Option Plan
The Company adopted the 1997 Stock Option Plan (the Plan) under which only
employees may be granted Incentive Stock Options (ISOs), and employees,
directors, and consultants are eligible for Nonstatutory Stock Options (NSOs) to
purchase shares of the Company's common stock. The Plan permits ISOs and NSOs to
be granted at an exercise price of not less than 100% and 85%, respectively, of
the fair value on the date of grant as determined by the Board of Directors.
Options that expire (generally ten years from the grant date) or are canceled
are returned to the Plan. All options are exercisable immediately upon grant.
However, common shares issued on exercise of options prior to vesting are
subject to repurchase by the Company (at the Company's discretion) if the holder
is no longer employed by the Company. Vesting provisions for options granted
under the Plan are determined by the Board of Directors. Options generally vest
25% upon completion of one year and 1/48 per month thereafter. As of December
31, 1998, 535,423 shares were subject to repurchase.
During 1998, the Board of Directors approved the increase of options
available under the 1997 Plan by 3,200,000 shares.
F-29
<PAGE> 133
PARADISE ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
A summary of activity under the option plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED
SHARES --------------------------- AVERAGE
AVAILABLE NUMBER PRICE EXERCISE
FOR GRANT OF SHARES PER SHARE PRICE
---------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Authorized........................ 3,000,000 -- $ -- $ --
Granted........................... (2,426,000) 2,426,000 $0.03 - $0.15 $0.03
Exercised......................... -- (7,500) $0.03 $0.03
Canceled.......................... -- -- $ -- $ --
---------- ----------
Balance at December 31, 1997...... 574,000 2,418,500 $0.03 - $0.15 $0.03
Authorized........................ 3,200,000 -- $ -- $ --
Granted........................... (2,545,000) 2,545,000 $0.15 - $0.50 $0.17
Exercised......................... -- (1,792,500) $0.03 - $0.15 $0.05
Canceled.......................... 135,000 (135,000) $0.03 $0.03
---------- ----------
Balance at December 31, 1998...... 1,364,000 3,036,000 $0.03 - $0.50 $0.14
========== ==========
</TABLE>
At December 31, 1998, options to purchase 404,608 shares of common stock
were vested at prices ranging from $0.03 to $0.15.
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OUTSTANDING AND EXERCISABLE WEIGHTED AVERAGE
----------------------------- REMAINING
NUMBER WEIGHTED AVERAGE CONTRACTUAL LIFE
EXERCISE PRICE OF SHARES EXERCISE PRICE (IN YEARS)
-------------- --------- ---------------- ----------------
<S> <C> <C> <C>
$0.03.................................... 806,000 $0.03 8.64
$0.15.................................... 2,090,000 $0.15 9.59
$0.50.................................... 140,000 $0.50 9.92
---------
3,036,000 $0.13 9.36
=========
</TABLE>
Valuation of Stock Options
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In fiscal 1997 and 1998, the fair value of each option grant was estimated
on the date of grant using the minimum value method with the following weighted
average assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
------------ ----
<S> <C> <C>
Risk-free interest rate..................................... 5.8% 6.0%
Expected life of option in years............................ 4 4
Expected dividend yield..................................... -- --
</TABLE>
Had compensation costs been determined based upon the fair value at the
date of grant for awards under this plan, consistent with the methodology
prescribed under FAS 123, the Company's fiscal 1997 and 1998 net loss would have
been $2,069,530 and $3,756,333, respectively. Net loss per share for basic and
diluted loss per share would have been $(0.20) and $(0.33), respectively. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized over the option's vesting period. The
F-30
<PAGE> 134
PARADISE ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
effects on pro forma disclosure of applying FAS 123 are not likely to be
representative of the effects on pro forma disclosure for future years.
Pursuant to APB Opinion No. 25, for certain options granted during 1998,
the Company recognized as deferred compensation expense the excess of the deemed
fair value for financial reporting purposes of the common stock issuable upon
the exercise of such options over the aggregate exercise price of such options.
The total deferred compensation expense of $388,259 is being amortized over the
vesting period of such options (generally four years).
Stock Warrants
On October 27, 1998, in connection with the issuance of notes payable, the
Company issued warrants to purchase up to 221,239 shares of common stock at
$0.25 per share. The warrants are exercisable at any time and expire on October
27, 2003. The Company expensed the value of the warrant ($57,522) in 1998.
Shares Reserved
Common stock reserved for future issuance at December 31, 1998 is as
follows:
<TABLE>
<S> <C>
Stock Option Plan........................................... 4,400,000
Warrants.................................................... 221,239
Conversion of outstanding preferred stock................... 8,256,522
----------
Total common stock reserved for future issuance............. 12,877,761
==========
</TABLE>
6. INCOME TAXES
As of December 31, 1998, the Company had federal and California net
operating loss (NOL) carryforwards of approximately $7,000,000 each.
Approximately $3,500,000 of such NOLs are subject to an annual limitation of
$300,000 per year on subsequent utilization because of certain tax rules
regarding changes in ownership. The federal NOLs begin expiring in 2008, if not
previously utilized. The California NOLs begin expiring in 2000.
As of December 31, 1998, the Company had net deferred tax assets of
approximately $3,000,000. The net deferred tax assets have been fully offset by
a valuation allowance. Deferred tax assets relate to net operating loss and
credit carryforwards and temporary differences in the recognition of certain
income and expense items.
7. EMPLOYEE BENEFIT PLAN
The Company has a savings plan that qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
15% of their pretax salary but not more than statutory limits. The Company may
elect to make matching contributions to the plan. For the periods ended December
31, 1997 and 1998, the Company made no matching contributions and incurred
immaterial expenses related to the plan.
8. SUBSEQUENT EVENT
On January 22, 1999, the Company signed a definitive merger agreement
pursuant to which the Company would merge with Genesis Microchip Incorporated.
F-31
<PAGE> 135
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
GENESIS MICROCHIP INCORPORATED,
RAINBOW ACQUISITION CORPORATION
AND
PARADISE ELECTRONICS, INC.
DATED AS OF JANUARY 22, 1999
<PAGE> 136
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER.................................................. A-4
1.1 The Merger.................................................. A-4
1.2 Effective Time.............................................. A-5
1.3 Effect of the Merger........................................ A-5
1.4 Certificate of Incorporation; Bylaws........................ A-5
1.5 Directors and Officers...................................... A-5
1.6 Maximum Shares to Be Issued; Effect on Capital Stock........ A-5
1.7 Dissenting Shares........................................... A-7
1.8 Surrender of Certificates................................... A-8
1.9 No Further Ownership Rights in Company Common Stock......... A-9
1.10 Lost, Stolen or Destroyed Certificates...................... A-9
1.11 Tax and Accounting Consequences............................. A-9
1.12 Taking of Necessary Action; Further Action.................. A-9
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-9
2.1 Organization of the Company................................. A-10
2.2 Company Capital Structure................................... A-10
2.3 Subsidiaries................................................ A-11
2.4 Authority................................................... A-11
2.5 Company Financial Statements................................ A-11
2.6 No Undisclosed Liabilities.................................. A-12
2.7 No Changes.................................................. A-12
2.8 Tax and Other Returns and Reports........................... A-13
2.9 Restrictions on Business Activities......................... A-14
2.10 Title to Properties; Absence of Liens and Encumbrances...... A-14
2.11 Intellectual Property....................................... A-15
2.12 Agreements, Contracts and Commitments....................... A-17
2.13 Interested Party Transactions............................... A-18
2.14 Compliance with Laws........................................ A-18
2.15 Litigation.................................................. A-18
2.16 Insurance................................................... A-19
2.17 Minute Books................................................ A-19
2.18 Environmental Matters....................................... A-19
2.19 Brokers' and Finders' Fees; Third Party Expenses............ A-20
2.20 Employee Matters and Benefit Plans.......................... A-20
2.21 Employees................................................... A-23
2.22 Governmental Authorizations and Licenses.................... A-23
2.23 Pooling of Interests........................................ A-23
2.24 Representations Complete.................................... A-23
2.25 Statements; Proxy Statement/Prospectus...................... A-23
2.26 Board Approval.............................................. A-23
2.27 Complete Copies of Materials................................ A-23
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..... A-24
3.1 Organization, Standing and Power............................ A-24
3.2 Authority................................................... A-24
3.3 Capital Structure........................................... A-25
3.4 SEC Documents; Parent Financial Statement................... A-25
3.5 No Material Adverse Change.................................. A-26
</TABLE>
A-1
<PAGE> 137
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.6 Litigation.................................................. A-26
3.7 Employee Matters and Benefit Plans.......................... A-27
3.8 Employees................................................... A-29
3.9 Tax and Other Returns and Reports........................... A-29
3.10 Restrictions on Business Activities......................... A-30
3.11 Intellectual Property....................................... A-30
3.12 Nova Scotia Continuance..................................... A-30
3.13 Fairness Opinion............................................ A-30
3.14 Pooling of Interests........................................ A-31
3.15 Brokers' and Finders' Fees; Third Party Expenses............ A-31
3.16 Disclosure.................................................. A-31
3.17 Statements; Proxy Statement/Prospectus...................... A-31
3.18 Board Approval.............................................. A-31
3.19 Complete Copies of Materials................................ A-31
3.20 Environmental Matters....................................... A-31
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME......................... A-32
4.1 Conduct of Business of the Company.......................... A-32
4.2 Conduct of Business of Parent............................... A-34
4.3 No Solicitation............................................. A-35
ARTICLE V ADDITIONAL AGREEMENTS....................................... A-37
5.1 Proxy Statement/Prospectus; Registration Statement; Other A-37
Filings; Board Recommendations..............................
5.2 Meetings of Stockholders.................................... A-38
5.3 Additional Assurances....................................... A-38
5.4 Access to Information....................................... A-38
5.5 Public Disclosure........................................... A-39
5.6 Consents.................................................... A-39
5.7 FIRPTA Compliance........................................... A-39
5.8 Commercially Reasonable Efforts............................. A-39
5.9 Notification of Certain Matters............................. A-39
5.10 Certain Benefit Plans....................................... A-39
5.11 Pooling Accounting.......................................... A-40
5.12 Affiliate Agreements........................................ A-40
5.13 Voting Agreements........................................... A-40
5.14 Additional Documents and Further Assurances................. A-40
5.15 Registration Statement on Form S-8.......................... A-40
5.16 Nasdaq National Market Listing.............................. A-40
5.17 Company's Auditors.......................................... A-40
5.18 Non-Competition Agreements.................................. A-40
5.19 Tax Matters................................................. A-41
5.20 SEC Reports................................................. A-41
ARTICLE VI CONDITIONS TO THE MERGER.................................... A-41
6.1 Conditions to Obligations of Each Party to Effect the A-41
Merger......................................................
6.2 Additional Conditions to Obligations of the Company......... A-42
6.3 Additional Conditions to the Obligations of Parent and A-43
Merger Sub..................................................
</TABLE>
A-2
<PAGE> 138
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VII ESCROW...................................................... A-44
7.1 Escrow Period............................................... A-44
7.2 Escrow Arrangements......................................... A-44
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER........................... A-51
8.1 Termination................................................. A-51
8.2 Effect of Termination....................................... A-52
8.3 Fees and Expenses........................................... A-52
8.4 Amendment................................................... A-53
8.5 Extension; Waiver........................................... A-53
ARTICLE IX GENERAL PROVISIONS.......................................... A-54
9.1 Survival of Representations, Warranties and Agreements...... A-54
9.2 Notices..................................................... A-54
9.3 Interpretation.............................................. A-55
9.4 Counterparts................................................ A-55
9.5 Entire Agreement; Assignment................................ A-55
9.6 Severability................................................ A-55
9.7 Other Remedies.............................................. A-55
9.8 Governing Law............................................... A-55
9.9 Arbitration................................................. A-55
9.10 Specific Performance........................................ A-56
</TABLE>
A-3
<PAGE> 139
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made and
entered into as of January 22, 1999 by and among Genesis Microchip Incorporated,
a Nova Scotia company ("PARENT"), Rainbow Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Parent ("MERGER SUB"), and Paradise
Electronics, Inc., a Delaware corporation (the "COMPANY").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
stockholders that Parent acquire the Company through the statutory merger of
Merger Sub with and into the Company (the "MERGER") and, in furtherance thereof,
have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms and
conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company (including all shares of Common Stock of the
Company issued upon conversion of all Preferred Stock of the Company immediately
prior to the closing of the Merger) ("COMPANY CAPITAL STOCK") shall be converted
into the right to receive shares of voting Common Stock of Parent ("PARENT
COMMON STOCK"), and all outstanding options to purchase shares of Common Stock
of the Company shall be assumed by Parent.
C. A portion of the shares of Parent Common Stock otherwise issuable by
Parent in connection with the Merger shall be placed in escrow by Parent and
Merger Sub, and the release of such amount shall be contingent upon certain
events and conditions, all as set forth in Article VII hereof.
D. The Company, Parent and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
E. Concurrent with the execution and delivery of this Agreement, as a
material inducement to Parent, Merger Sub and the Company to enter into this
Agreement, certain stockholders of the Company are entering into a Voting
Agreement in the form attached hereto as Exhibit A-1, ("COMPANY STOCKHOLDER
VOTING AGREEMENT"), and certain stockholders of Parent are entering into a
Voting Agreement in the form attached hereto as Exhibit A-2 (the "PARENT
STOCKHOLDER VOTING AGREEMENT") and certain employees of the Company are entering
into Non-Competition Agreements, each in the form attached as Exhibit B hereto
(the "NON-COMPETITION AGREEMENTS").
F. It is intended by the parties hereto that the Merger shall (i)
constitute a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "CODE"), and (ii) qualify for accounting
treatment as a pooling of interests for the purposes of U.S. GAAP.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Delaware General Corporation Law ("DELAWARE LAW"),
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease, and the Company shall continue as the
surviving corporation and as a wholly-owned subsidiary of Parent. The Company as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "SURVIVING CORPORATION."
A-4
<PAGE> 140
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "CLOSING") will take place as
promptly as practicable, but no later than two (2) business days following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California,
unless another place or time is agreed to by Parent and the Company. The date
upon which the Closing actually occurs is herein referred to as the "CLOSING
DATE." On the Closing Date, the parties hereto shall cause the Merger to be
consummated by filing a Certificate of Merger (or like instrument) with the
Secretary of State of the State of Delaware (the "MERGER CERTIFICATE"), in
accordance with the relevant provisions of applicable law, the time of
confirmation and acceptance by the Secretary of State of Delaware of such filing
being referred to herein as the "EFFECTIVE TIME."
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of Delaware Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation, Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective Time, at
the Effective Time, the Certificate of Incorporation of Merger Sub as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law and such Certificate of Incorporation; provided, however, that Article 1
of the Certificate of Incorporation of the Surviving Corporation shall read as
follows: "The Name of the Corporation is Paradise Electronics, Inc."
(b) Unless otherwise determined by Parent prior to the Effective Time, the
Bylaws of Merger Sub, as in effect immediately prior to the Effective Time,
shall be the Bylaws of the Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The director(s) of Merger Sub immediately
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Merger
Sub immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Maximum Shares to Be Issued; Effect on Capital Stock. The maximum
number of shares of Parent Common Stock to be issued (including Parent Common
Stock issued to Merger Sub and held by the Surviving Corporation for
distribution upon exercise of any of the Company's options to be assumed by
Parent) in exchange for the acquisition by Parent of all outstanding Company
Capital Stock shall be equal to the Aggregate Parent Share Number (as defined in
Section 1.6(g)(iii)). No adjustment shall be made in the number of shares of
Parent Common Stock issued in the Merger as a result of any cash proceeds
received by the Company from the date hereof to the Effective Time pursuant to
the exercise of options, warrants or other rights to acquire Company Capital
Stock. Subject to the terms and conditions of this Agreement, as of the
Effective Time, by virtue of the Merger and without any action on the part of
Merger Sub, the Company or the holder of any shares of the Company Capital
Stock, the following shall occur:
(a) Conversion of Company Common Stock. Each share of Common Stock of the
Company (including all shares of Common Stock of the Company issued upon
conversion of all Preferred Stock of the Company ("COMPANY PREFERRED STOCK") as
required under the Company's Certificate of Incorporation, and upon exercise of
all outstanding warrants (the "WARRANTS" immediately prior to the Closing)
(collectively, the "COMPANY COMMON STOCK") issued and outstanding immediately
prior to the Effective Time (other than any shares of Company Stock to be
canceled pursuant to Section 1.6(b) and any Dissenting Shares (as defined and to
the extent provided in Section 1.7(a)) will be canceled and extinguished and be
converted automatically into the right to receive that number of shares of
Parent
A-5
<PAGE> 141
Common Stock equal to the Exchange Ratio (as defined in Section 1.6(g)(v) below)
upon surrender of the certificate representing such share of Company Common
Stock in the manner provided in Section 1.8. To the extent that shares of
Company Common Stock and Company Preferred Stock were subject to vesting
immediately prior to the Effective Time, such vesting provisions shall be
applicable to the shares of Parent Common Stock received pursuant to this
Section 1.6(a). The right to receive shares of Parent Common Stock as of the
Effective Time in the Merger will be by way of distribution of such shares from
Merger Sub following the contribution by Parent to Merger Sub of shares of
Parent Common Stock equal to the Aggregate Parent Share Number immediately prior
to the Effective Time.
(b) Cancellation of Company-Owned Stock. Each share of Company Capital
Stock owned by the Company or any direct or indirect wholly owned subsidiary of
the Company immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(c) Stock Options. At the Effective Time, all options to purchase Company
Common Stock then outstanding under the Company's 1997 Stock Option Plan (the
"OPTION PLAN") or otherwise shall be assumed by Parent in accordance with the
provisions described below.
(i) At the Effective Time, each outstanding option to purchase shares
of Company Common Stock (each a "COMPANY OPTION") under the Option Plan or
otherwise, whether vested or unvested, shall be, in connection with the
Merger, assumed by Parent. Each Company Option so assumed by Parent under
this Agreement shall continue to have, and be subject to, the same terms
and conditions set forth in the Option Plan and/or as provided in the
respective option agreements governing such Company Option immediately
prior to the Effective Time, except that (A) such Company Option shall be
exercisable when permitted by such option for that number of whole shares
of Parent Common Stock equal to the product of the number of shares of
Company Common Stock that were issuable upon exercise of such Company
Option immediately prior to the Effective Time multiplied by the Exchange
Ratio, rounded down to the nearest whole number of shares of Parent Common
Stock and (B) the per share exercise price for the shares of Parent Common
Stock issuable upon exercise of such assumed Company Option shall be equal
to the quotient determined by dividing the exercise price per share of
Company Common Stock at which such Company Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded up
to the nearest tenth of a cent.
(ii) It is the intention of the parties that the Company Options
assumed by Parent qualify following the Effective Time as incentive stock
options as defined in Section 422 of the Code, to the extent the Company
Options qualified as incentive stock options immediately prior to the
Effective Time.
(iii) Promptly following the Effective Time, Parent will issue to each
holder of an outstanding Company Option a document evidencing the foregoing
assumption of such Company Option by Parent.
(d) Capital Stock of Merger Sub. Each share of Common Stock of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any such shares of Common
Stock of Merger Sub shall, as of the Effective Time, shall evidence ownership of
such shares of Common Stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Company
Capital Stock), reorganization, recapitalization or other like change with
respect to Company Capital Stock that occurs or has a record date after the date
hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Parent Common Stock will
be issued, but in lieu thereof, each holder of shares of Company Capital Stock
who would otherwise be entitled to a fraction of
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a share of Parent Common Stock (after aggregating all fractional shares of
Parent Common Stock to be received by such holder) shall be entitled to receive,
without any interest, from Parent an amount of cash (rounded to the nearest
whole cent) equal to the product of (i) such fraction, multiplied by (ii) the
average closing price of a share of Parent Common Stock for the twenty (20)
consecutive trading days ending on the trading day immediately prior to the
Closing Date, as reported on the Nasdaq National Market.
(g) Definitions.
(i) Aggregate Company Common Number. The "AGGREGATE COMPANY COMMON
NUMBER" shall mean the aggregate number of shares of Company Common Stock
outstanding immediately prior to the Effective Time (including all shares
of Company Common Stock to be issued upon conversion of all Company
Preferred Stock and following exercise of the Warrants).
(ii) Aggregate Company Option Number. The "AGGREGATE COMPANY OPTION
NUMBER" shall mean the aggregate number of shares of Company Common Stock
issuable upon the exercise of all outstanding Company Options (vested and
unvested), and other rights to acquire shares of Company Common Stock
immediately prior to the Effective Time.
(iii) Aggregate Parent Share Number. The "AGGREGATE PARENT SHARE
NUMBER" shall be the four and one half million (4,500,000) shares of Parent
Common Stock as adjusted to reflect fully the effect of any stock split,
reverse split, stock dividend (including any dividend or distribution of
securities convertible into Parent Common Stock), reorganization,
recapitalization or other like change with respect to Parent Common Stock
that occurs or has a record date after the date hereof and prior to the
Effective Time.
(iv) Escrow Amount. The "ESCROW AMOUNT" shall be a number of shares of
Parent Common Stock obtained by multiplying (x) the Aggregate Company
Common Number by (y) the Exchange Ratio by (z) 0.10.
(v) Exchange Ratio. The "EXCHANGE RATIO" shall mean the quotient
obtained, by dividing (x) the Aggregate Parent Share Number by (y) the sum
of (A) the Aggregate Company Common Number, plus (B) the Aggregate Company
Option Number.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Capital Stock held by a holder who has demanded and perfected
appraisal or dissenters' rights for such shares in accordance with Delaware Law
or the General Corporation Law of California ("CALIFORNIA LAW"), as the case may
be, and who, as of the Effective Time, has not effectively withdrawn or lost
such appraisal or dissenters' rights ("DISSENTING SHARES") shall not be
converted into or represent a right to receive Parent Common Stock pursuant to
Section 1.6, but the holder thereof shall only be entitled to such rights as are
granted by Delaware Law or California Law, as the case may be.
(b) Notwithstanding the provisions of subsection (a), if any holder of
shares of Company Capital Stock who is otherwise entitled to exercise
dissenters' rights under Delaware Law or California Law, as the case may be,
shall effectively withdraw or lose (through failure to perfect or otherwise)
such dissenters' rights, then, as of the later of the Effective Time and the
occurrence of such event, such holder's shares shall automatically be converted
into and represent only the right to receive Parent Common Stock and payment for
any fractional share as provided in Section 1.6(f), without interest thereon,
upon surrender of the certificate representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written demands
for the exercise of dissenters' rights in respect of any shares of Company
Capital Stock, withdrawals of such demands, and any other instruments served
pursuant to Delaware Law or California Law, as the case may be (including
without limitation instruments concerning appraisal or dissenters' rights), and
received by the Company and (ii) the opportunity to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Parent, voluntarily make any
payment
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with respect to any demands for the exercise of dissenters' rights in respect of
any shares of Company Capital Stock or offer to settle or settle any such
demands.
1.8 Surrender of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Parent shall designate
Chase Mellon Shareholder Services, L.L.C. to act as exchange agent (the
"EXCHANGE AGENT") in the Merger.
(b) Parent to Provide Common Stock. As soon as practicable after the
Effective Time, Parent shall make available to the Exchange Agent for exchange
in accordance with this Article I, (i) the aggregate number of shares of Parent
Common Stock issuable pursuant to Section 1.6 in exchange for outstanding shares
of Company Capital Stock, and (ii) cash for fractional shares in the amount
described in Section 1.6(f); provided that, on behalf of the holders of Company
Capital Stock, Parent shall deposit into an escrow account a number of shares of
Parent Common Stock equal to the Escrow Amount out of the aggregate number of
shares of Parent Common Stock otherwise issuable pursuant to Section 1.6. The
portion of the Escrow Amount contributed on behalf of each holder of Company
Capital Stock shall be in proportion to the aggregate number of shares of Parent
Common Stock which such holder would otherwise be entitled to receive under
Section 1.6 by virtue of ownership of outstanding shares of Company Capital
Stock.
(c) Exchange Procedures. As soon as practicable after the Effective Time,
the Surviving Corporation shall cause to be mailed to each holder of record of a
certificate or certificates (the "CERTIFICATES") which immediately prior to the
Effective Time represented outstanding shares of Company Capital Stock and which
shares were converted into the right to receive shares of Parent Common Stock
pursuant to Section 1.6, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as Parent and Company may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Parent Common
Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or
to such other agent or agents as may be appointed by Parent, together with such
letter of transmittal, duly completed and validly executed in accordance with
the instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor, a certificate representing the number of whole
shares of Parent Common Stock (less the number of shares of Parent Common Stock,
if any, to be deposited in the Escrow Fund (defined in Section 7.2) on such
holder's behalf pursuant to Article VII hereof), plus cash in lieu of fractional
shares in accordance with Section 1.6(f), to which such holder is entitled
pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be
canceled. As soon as practicable after the Effective Time, and subject to and in
accordance with the provisions of Article VII hereof, Parent shall cause to be
distributed to the Escrow Agent (as defined in Article VII) a certificate or
certificates representing that number of shares of Parent Common Stock equal to
the Escrow Amount, which certificate shall be registered in the name of the
Escrow Agent. Such shares shall be beneficially owned by the holders on whose
behalf such shares were deposited in the Escrow Fund and shall be available to
compensate Parent as provided in Article VII. Notwithstanding the provisions of
Section 1.6(a), from the Closing and until so surrendered, each outstanding
Certificate that, prior to the Effective Time, represented shares of Company
Capital Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends (subject to Section
1.8(d)), to evidence the ownership of the number of full shares of Parent Common
Stock into which such shares of Company Capital Stock shall have been so
converted and the right to receive an amount in cash in lieu of the issuance of
any fractional shares in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions with respect to Parent Common Stock declared or made with a record
date after the Effective Time will be paid to the holder of any unsurrendered
Certificate with respect to the shares of Parent Common Stock represented
thereby until the holder of record of such Certificate shall surrender such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Parent Common Stock issued in exchange therefor,
without
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interest, at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore payable
with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.8, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to a holder of shares of Parent Common Stock or Company Capital
Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued and transferred upon the surrender for exchange of
shares of Company Capital Stock in accordance with the terms hereof (including
any cash paid in respect thereof) shall be deemed to have been issued and
transferred in full satisfaction of all rights pertaining to such shares of
Company Capital Stock, and there shall be no further registration of transfers
on the records of the Surviving Corporation of shares of Company Capital Stock
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
evidencing shares of Company Capital Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Parent Common Stock and cash for fractional
shares, if any, as may be required pursuant to Section 1.6.
1.11 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall (i) constitute a reorganization within the meaning of
Section 368 of the Code and (ii) qualify for accounting treatment as a pooling
of interests. No party to this Agreement shall take any action inconsistent with
such treatment. The parties hereto adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.12 Taking of Necessary Action, Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in a document dated as of the date hereof to the
representations, warranties or covenants in this Agreement which reasonably
identifies the basis for an exception to a representation, warranty or covenant
in this Agreement and which is delivered by the Company to Parent immediately
prior to the execution of this Agreement (the "COMPANY DISCLOSURE SCHEDULES"),
the Company represents and warrants to Parent and Merger Sub as set forth below
and as set forth in the Company Disclosure Schedules.
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2.1 Organization of the Company.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Company has the
corporate power to own its properties and to carry on its business as now being
conducted. The Company is duly qualified to do business and in good standing as
a foreign corporation in each jurisdiction in which the failure to be so
qualified would have or would reasonably be expected to have a Material Adverse
Effect on the Company, as defined in Section 2.1(b) below.
(b) When used in connection with the Company the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect that
is materially adverse to the business, financial condition or results of
operations of the Company except for those changes, events and effects that are
caused by (i) conditions affecting the San Francisco Bay Area, United States or
the worldwide economy as a whole; or (ii) conditions affecting either the
semiconductor, image manipulation, silicon wafer manufacturing industry,
computer hardware or computer peripheral industry, in any such case as a whole;
or (iii) any adverse effect primarily attributable to the transactions
contemplated by this Agreement or the pendency or announcement of the Merger.
(c) The Company has delivered a true and correct copy of its Certificate of
Incorporation and Bylaws, each as amended to date, to Parent. Schedule 2.1 lists
the current directors and officers of the Company.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of 30,000,000
shares of authorized Common Stock, of which 12,014,755 shares are issued and
outstanding on the date of this Agreement, 1,950,000 shares of authorized Series
A Preferred Stock ("SERIES A PREFERRED"), of which 1,950,000 shares are issued
and outstanding on the date of this Agreement, 1,749,000 shares of authorized
Series B Preferred Stock ("SERIES B PREFERRED"), of which 1,749,000 shares are
issued and outstanding on the date of this Agreement and 4,557,522 shares of
authorized Series C Preferred Stock ("SERIES C PREFERRED") of which 4,557,522
are issued and outstanding on the date of this Agreement. The number of shares
of Company Common Stock into which each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock is convertible is set
forth in Schedule 2.2(a). On the date of this Agreement, the Company Capital
Stock is held of record by the persons, with the addresses of record and in the
amounts as set forth on Schedule 2.2(a). All outstanding shares of Company
Capital Stock are duly authorized, validly issued, fully paid and non-assessable
and not subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of the Company or any agreement to which the Company is
a party or by which it is bound. All outstanding shares of Company Capital Stock
have been issued in compliance with applicable federal and state securities
laws.
(b) The Company has reserved 6,200,000 shares of Common Stock for issuance
to employees and consultants pursuant to the Option Plan, of which on the date
of this Agreement 3,000,000 shares are subject to outstanding, unexercised
options, 1,114,000 shares remain available for future grant and 2,086,000 shares
have been issued pursuant to the exercise of options issued under the Option
Plan. The Company has reserved 221,239 shares of Common Stock for issuance upon
exercise of the Warrants. The Company has reserved sufficient shares of Common
Stock for issuance upon conversion of the Series A Preferred, Series B Preferred
and Series C Preferred. Schedule 2.2(b) sets forth for each outstanding Company
Option or Warrant the name of the holder of such option or Warrant, the address
of such holder on the records of the Company, the number of shares of Common
Stock subject to such option or Warrant, the exercise price of such option or
Warrant and the vesting schedule for such option or Warrant, and whether the
exercisability of such option or Warrant will be accelerated and become
exercisable by reason of the transactions contemplated by this Agreement. Except
for the Company Options and Warrants described in Schedule 2.2(b), there are no
options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which the Company is a party or by which it is bound
obligating the Company to issue, deliver, sell, repurchase or redeem, or cause
to be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of the Company or obligating the Company to grant, extend,
accelerate the vesting of, change the price of, otherwise amend or enter into
any such
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option, warrant, call, night, commitment or agreement. There are no outstanding
or authorized stock appreciation, phantom stock, profit participation, or other
similar rights with respect to the Company. Except as contemplated hereby, there
are no voting trusts, proxies, or other agreements or understandings with
respect to the voting stock of the Company. The holders of Company Capital Stock
and Company Options and Warrants have been or will be properly given, or shall
have properly waived, any required notice prior to the Merger, As a result of
the Merger, Parent will be the record and sole beneficial owner of all capital
stock of the Company and rights to acquire or receive such capital stock.
2.3 Subsidiaries.
(a) The Company does not have, and has never had any subsidiaries or
affiliated companies and does not otherwise own or control and has never
otherwise owned any shares of capital stock or any interest in, directly or
indirectly, any other corporation, partnership, association, joint venture or
other business entity.
2.4 Authority. Subject only to the requisite approval of the Merger and
this Agreement by the Company's stockholders, the Company has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby, The vote required of the Company's
stockholders to duly approve the Merger and this Agreement is that number of
shares as would constitute a majority of the outstanding shares of Company
Common Stock and a majority of the outstanding shares of Company Preferred
Stock. The execution and delivery of this Agreement and the completion of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval of the
Merger and this Agreement by the Company's stockholders. The Company's Board of
Directors has unanimously approved the Merger and this Agreement. This Agreement
has been duly executed and delivered by the Company and constitutes the valid
and binding obligation of the Company, enforceable in accordance with its terms
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally and (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies. Subject only to the approval of the Merger and this Agreement by the
Company's stockholders, the execution and delivery of this Agreement by the
Company does not, and, as of the Effective Time, the completion of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any benefit under (any such event, a "CONFLICT") (i)
any provision of the Certificate of Incorporation or Bylaws of the Company or
(ii) any mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets, except for any conflict that would not result in a Material Adverse
effect on the Company. No consent, waiver, approval, order or authorization of,
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or foreign governmental
authority, instrumentality, agency or commission ("GOVERNMENTAL ENTITY") or any
third party (so as not to trigger any Conflict) is required by or with respect
to the Company in connection with the Company's execution and delivery of this
Agreement or its completion of the transactions contemplated hereby, except (i)
for the filing of the Merger Certificate with the Delaware Secretary of State,
and (ii) for such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws, except for those for which the failure to
obtain would not result in a Material Adverse Effect on the Company.
2.5 Company Financial Statements. Schedule 2.5 sets forth the Company's
audited balance sheet as of December 31, 1997 and the related audited statements
of operations, stockholders' equity and cash flows for the twelve (12) month
period then ended and the footnotes thereto, as well as the Company's unaudited
balance sheet as of December 31, 1998 (the "BALANCE SHEET") and the related
unaudited statements of operations, stockholders' equity and cash flows for the
twelve (12) month period then ended and the footnotes thereto (collectively, the
"COMPANY FINANCIALS"). The Company Financials have been prepared in accordance
with United States generally accepted accounting principles ("GAAP") applied on
a basis consistent throughout the periods indicated and consistent with each
other except that the
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unaudited financials do not have any footnotes. The Company Financials present
fairly, in all material respects, the financial condition, operating results and
cash flows of the Company as of the dates and during the periods indicated
therein, subject, in the case of the unaudited financials, to normal year-end
adjustments which adjustments and cash flows will not be material in amount or
significance.
2.6 No Undisclosed Liabilities. The Company does not have any liabilities
of the type required to be disclosed in the liabilities column of a balance
sheet prepared in accordance with GAAP, which individually or in the aggregate,
would be reasonably likely to have a Material Adverse Effect, other than (i)
liabilities reflected in the Balance Sheet, (ii) liabilities specifically
described in this Agreement, or in the Company Disclosure Schedules, (iii)
liabilities for future performance under contracts entered into by the Company
or by which it or its assets or properties may be bound, and (iv) normal or
recurring liabilities incurred since the date of the Balance Sheet in the
ordinary course of business consistent with past practices.
2.7 No Changes. From the date of the Balance Sheet to the date of this
Agreement, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of business as
conducted on the date of the Balance Sheet consistent with past practices;
(b) amendments or changes to the Certificate of Incorporation or Bylaws of
the Company;
(c) capital expenditure or commitment by the Company, either individually
or in the aggregate, exceeding $200,000;
(d) destruction of, damage to or loss of any material assets, business or
customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any capital
stock of the Company or any split, combination or reclassification in respect of
any shares of Company Capital Stock, or any issuance or authorization of any
issuance of any other securities in lieu of or in substitution for shares of
Company Capital Stock;
(i) except in the ordinary course of business in connection with annual
reviews, increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment by the Company of a bonus or other additional salary or compensation to
any such person;
(j) sale, lease, license or other disposition of any of the assets or
properties of the Company, or the creation of any security interest in such
assets or properties except in the ordinary course of business consistent with
past practices;
(k) amendment or termination of any material contract, agreement, license
or commitment to which the Company is a party or by which it is bound;
(l) loan by the Company to any person or entity, incurring by the Company
of any indebtedness, guaranteeing by the Company of any indebtedness, issuance
or sale of any debt securities of the Company or guaranteeing of any debt
securities of others, or creation of any security interest in any of the
Company's assets or properties except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
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(m) waiver or release of any right or claim of the Company, including any
writeoff or other compromise of any account receivable of the Company exceeding
$25,000 individually or $100,000 in the aggregate;
(n) commencement or notice or threat, or reasonable basis therefor, of any
lawsuit or proceeding against or investigation of the Company or its affairs;
(o) issuance or sale by the Company of any of its shares of capital stock,
or securities exchangeable, convertible or exercisable therefor, or of any other
of its securities, except for the grant of options exercisable for shares of
Company common stock, and for issuance of shares of Company Common Stock in
accordance with options granted under the Option Plan;
(p) change in pricing or royalties set or charged by the Company to its
customers or licensees or in pricing or royalties set or charged by persons who
have licensed Company Intellectual Property Rights to the Company;
(q) written notice of any claim or potential claim of ownership by a third
party of Company Intellectual Property Rights (as defined in Section 2.11 below)
or of infringement by the Company of any third party's intellectual property
rights;
(r) event or condition of any character that has had or would be reasonably
expected to have a Material Adverse Effect; or
(s) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a) through
(r) (other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.8 Tax and Other Returns and Reports.
(a) Definition of Taxes. For the purposes of this Agreement, "TAX" or,
collectively, "TAXES," means (i) any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts; (ii) any liability for the payment of any amounts of the type
described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Schedule 2.8:
(i) The Company as of the Effective Time will have prepared and timely
filed all required federal, state, local and foreign returns, estimates,
information statements and reports ("RETURNS") relating to any and all
Taxes concerning or attributable to the Company or its operations within
the time prescribed by applicable law.
(ii) The Company as of the Effective Time: (A) will have paid or set
up adequate reserves (which reserves were established in accordance with
GAAP) for repayment of all Taxes it is required to pay or accrue for all
periods through the Effective Time and (B) will have withheld with respect
to its employees all federal and state income taxes, FICA, FUTA and other
Taxes required to be withheld.
(iii) There is no Tax deficiency proposed or assessed in writing
against the Company, nor has the Company executed any waiver of any statute
of limitations on or extending the period for the assessment or collection
of any Tax.
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(iv) No audit or other examination of any Return of the Company is
currently in progress, nor has the Company been notified in writing of any
request for such an audit or other examination.
(v) The Company does not have any liabilities for unpaid federal,
state, local and foreign Taxes which have not been accrued or reserved
against on the Balance Sheet, whether asserted or unasserted, contingent or
otherwise, and the Company has no knowledge of any basis for the assertion
of any such liability attributable to the Company, or its assets or
operations.
(vi) The Company has provided to Parent's accountants copies of all
federal and state income and all state sales and use Tax Returns for all
periods since the date of the Company's incorporation.
(vii) There are (and as of immediately following the Effective Time
there will be) no liens, pledges, charges, claims, restrictions on
transfer, security interests or other encumbrances of any sort ("LIENS") on
the assets of the Company relating to or attributable to Taxes and the
Company has no knowledge of any basis for the assertion of any claims
relative or attributable to Taxes, which if adversely determined, would
result in any Lien on the assets of the Company.
(viii) None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement to which the Company is a party, including
but not limited to the provisions of this Agreement, covering any employee
or former employee of the Company that, individually or collectively, could
give rise to the payment of any amount that would not be deductible
pursuant to Section 280G, 162 or 404 of the Code.
(x) The Company has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to
any disposition of a subsection (f) asset (as defined in Section 341(f)(4)
of the Code) owned by the Company.
(xi) The Company is not a party to a tax sharing, tax indemnification
or tax allocation agreement nor does the Company owe any amount under any
such agreement.
(xii) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal income
tax deductions are accurately reflected on the Company's tax books and
records, to the extent they are shown on such books and records.
(xiii) The Company is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
(xiv) No adjustment relating to any Return filed by the Company has
been proposed formally or, to the knowledge of the Company, informally by
any tax authority to the Company or any representative thereof.
2.9 Restrictions on Business Activities. Excluding any limitations
expressed in the grant to the Company of any Intellectual Property and grants of
exclusive territory in overseas distribution agreements, there is no agreement
(non-compete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or otherwise binding upon the Company which has or
reasonably could be expected to have the effect of prohibiting any business
practice of, or the conduct of business by, the Company, any acquisition of
property (tangible or intangible) by the Company, or the freedom of the Company
to engage in any line of business or to compete with any other person. Without
limiting the foregoing, the Company has not entered into any agreement under
which the Company is restricted from selling, licensing or otherwise
distributing any of its technology or products to any class of customers, in any
geographic area, during any period of time or in any segment of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company does not own real property, nor has it ever owned any real
property. Schedule 2.10(a) sets forth a list of all real property currently
leased by the Company, the name of the
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lessor, the date of the lease and each amendment thereto and the aggregate
annual rental and/or other fees payable under any such lease. All such current
leases are in full force and effect, are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
default by the Company (or event which with notice or lapse of time, or both,
would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its material
tangible properties and assets, real, personal and mixed, used or held for use
in its business, free and clear of any Liens (as defined in Section 2.8(b)(vii))
and except for Liens for taxes not yet due and payable and such imperfections of
title and encumbrances, if any, which are not material in character, amount or
extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
(c) Schedule 2.10(c) lists all material items of equipment (the
"EQUIPMENT") owned or leased by the Company and such Equipment is (i) adequate
for the conduct of the business of the Company as currently conducted and (ii)
in good operating condition subject to normal wear and tear.
2.11 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"INTELLECTUAL PROPERTY" means any or all of the following and all rights
in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all reissues.
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or not),
invention disclosures, improvements, trade secrets, proprietary information,
know how, technology, technical data and customer lists and all documentation
relating to any of the foregoing; (iii) all copyrights, copyright registrations
and applications therefor and all other rights corresponding thereto throughout
the world; (iv) all mask works, mask work registrations and applications
therefor; (v) all industrial designs and any registrations and applications
therefor throughout the world; (vi) all trade names, logos, common law
trademarks and service marks; trademark and service mark registrations and
applications therefor and all goodwill associated therewith throughout the
world; (vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all source
code, object code, firmware, development tools, files, records and data, and all
media on which any of the foregoing is recorded; (ix) any similar, corresponding
or equivalent rights to any of the foregoing and (xi) all documentation related
to any of the foregoing.
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property that
(i) is owned by or (ii) exclusively licensed to the Company.
"REGISTERED INTELLECTUAL PROPERTY" shall mean all United States,
international and foreign (i) patents, patent applications (including
provisional applications); (ii) registered trademarks, or service marks
applications to register trademarks or service marks, intent-to-use
applications, or other registrations or applications related to trademarks or
service marks; (iii) registered copyrights and applications for copyright
registration; (iv) any mask work registrations and applications to register mask
works; and (v) any other Company Intellectual Property that is the subject of an
application, certificate, filing, registration or other document issued by,
filed with, or recorded by, any state. government or other public or private
legal authority.
(b) Schedule 2.11(b) lists all Registered Intellectual Property owned by,
or filed in the name of, the Company (the "COMPANY REGISTERED INTELLECTUAL
PROPERTY") and lists any adversarial proceedings or actions before any court,
tribunal (including the United States Patent and Trademark Office (the "PTO") or
equivalent authority anywhere in the world) related to any of the Company
Registered Intellectual Property.
(c) Each item of Company Intellectual Property, including all Company
Registered Intellectual Property, is free and clear of any Liens. The Company
(i) is the exclusive owner and has the right to use exclusively all Trademarks
used in connection with the operation or conduct of the business of the Company,
including the sale of any products or technology or the provision of any
services by the
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Company and (ii) owns exclusively and has good title to all copyrighted works
that are Company products (currently shipping and under development) or other
works of authorship that the Company otherwise purports to own, other than
non-exclusive licenses granted to customers.
(d) To the extent that any Intellectual Property has been developed or
created by any person other than the Company for which the Company has paid, the
Company has a written agreement with such person with respect thereto and the
Company thereby has obtained valid ownership of, and is the exclusive owner of,
all such Intellectual Property other than "shrink wrap" and other commercial
end-user licenses. To the extent that the Company has acquired any Intellectual
Property from a third party, to the extent necessary to preserve its rights
therein, and in accordance with, applicable laws and regulations, the Company
has recorded each such assignment with the relevant authorities.
(e) Except for non-exclusive licenses in connection with the sale of its
products, the Company has not transferred ownership of or granted any license of
or right to use or authorized the retention of any rights to use any material
Intellectual Property that is or was Company Intellectual Property, to any other
person.
(f) The Company owns or has a written license to all material Intellectual
Property necessary to the conduct of its business as it currently is conducted,
including, without limitation, products, technology or services currently under
development and the design, development, manufacture, use, import and sale of
the products, and technology of the Company.
(g) Other than "shrink-wrap" and other commercial end-user licenses, the
contracts, licenses and agreements listed in Schedule 2.11(g) include all
contracts, licenses and agreements, to which the Company is a party with respect
to any Intellectual Property of any person other than the Company. No person
other than the Company has ownership rights to improvements made by the Company
in Intellectual Property which has been licensed to the Company.
(h) There are no contracts, licenses and agreements between the Company and
any other person wherein or whereby the Company has agreed to, or assumed, any
material obligation or duty to warrant, indemnify, reimburse, hold harmless,
guaranty or otherwise ass or incur any material obligation or liability or
provide a right of rescission with respect to the infringement or
misappropriation by the Company or such other person of the Intellectual
Property of any person other than the Company, except pursuant to agreements
with customers and in distribution agreements entered into in the ordinary
course of business consistent with past practice.
(i) The operation of the business of the Company as it is currently
conducted (including, without limitation, products or technology currently
underdevelopment and the design, development, manufacture, use, import and sale
of the products or technology of the Company) does not infringe or
misappropriate the Intellectual Property of any person, violate the rights of
any person (including rights to privacy or publicity) or constitute unfair
competition or trade practices under the laws of any jurisdiction. The Company
has not received written notice from any person claiming that such operation or
any act, product or technology (including products or technology currently under
development) of the Company infringes or misappropriates the Intellectual
Property of any person or constitutes unfair competition or trade practices
under the laws of any jurisdiction or is owned by any person (nor is the Company
aware of any basis therefor).
(j) Each item of Company Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been paid and all
necessary documents and certificates in connection with such Company Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property. In each case in which the Company has acquired ownership of any
Intellectual Property rights from any person, the Company has obtained a valid
and enforceable assignment sufficient to irrevocably transfer all rights of the
transferors in such Intellectual Property
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(including any right existing on the date of the assignment to seek past and
future damages with respect to such Intellectual Property).
(k) There are no contracts, licenses or agreements between the Company and
any other person with respect to Company Intellectual Property under which there
is any dispute known to the Company regarding the scope of such agreement. or
performance wider such agreement, including with respect to any payments to be
made or received by the Company thereunder.
(1) To the knowledge of the Company, no person is infringing or
misappropriating any Company Intellectual Property.
(m) The Company has taken reasonable steps in accordance with normal
industry practice to protect the Company's rights in confidential information
and trade secrets of the Company or provided by any other person to the Company.
Without limiting the foregoing, the Company has and enforces a policy requiring
each technical employee, consultant and contractor to execute proprietary
information, confidentiality and assignment agreements substantially in the
Company's standard forms and all current and former technical employees,
consultants and contractors of the Company have executed such an agreement.
(n) No Company Intellectual Property or product or technology of the
Company is subject to any proceeding or outstanding decree, order, judgment,
settlement agreement or stipulation that restricts in any manner the use,
transfer or licensing thereof by the Company or may be reasonably expected to
affect the validity, use or enforceability of such Company Intellectual
Property.
(o) No (i) product, technology or publication of the Company or (ii)
material published or distributed by the Company, constitutes obscene material
or a defamatory statement.
(p) Neither this Agreement nor the transactions contemplated by this
Agreement, including the assignment by operation of law or otherwise of any
contracts or agreements to which the Company is a party, will result in the
Parent or the Merger Sub granting to any third party any right to or with
respect to any Intellectual Property owned by, or licensed to, either of them,
or will result in either the Parent or the Merger Sub being bound by, or subject
to, any non-compete or other restriction on the operation or scope of their
respective businesses.
(q) The Company has taken all reasonable steps to ensure that its products
(including existing products and technology and products and technology
currently under development) will accurately record, store, process, calculate
and present calendar dates falling on and after (and if applicable, spans of
time including) January 1, 2000, and will calculate any information dependent on
or relating to such dates in the same manner, and with the same functionality,
data integrity and performance, as the products record, store, process,
calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates (collectively,
"YEAR 2000 COMPLIANT"). All of the Company's products will lose no functionality
with respect to the introduction of records containing dates falling on or after
January 1, 2000.
2.12 Agreements, Contracts and Commitments.
(a) As of the date of this Agreement, the Company does not have, is not a
party to nor is it bound by:
(i) any collective bargaining agreements,
(ii) any agreements or arrangements that contain any severance pay,
(iii) any employment or consulting agreement, contract or commitment
(excluding "at will" employment relationships) with an employee or
individual consultant or salesperson or any consulting or sales agreement,
contract or commitment wider which any firm or other organization provides
material services to the Company,
(iv) any fidelity or surety bond or completion bond,
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(v) any lease of personal property having a value individually in
excess of $100,000,
(vi) any agreement of indemnification or guaranty,
(vii) any agreement, contract or commitment relating to capital
expenditures and involving payments in excess of $100,000,
(viii) any agreement, contract or commitment relating to the
disposition or acquisition by the Company of material assets or any
interest in any business enterprise outside the ordinary course of the
Company's business,
(ix) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of
money or extension of credit, including guaranties referred to in clause
(viii) hereof, other than advances to employees for travel and business
expenses in the ordinary course of business consistent with past practices,
(x) any purchase order or contract for the purchase of raw materials
involving $100,000 or more,
(xi) any construction contracts,
(xii) any distribution, joint marketing or development agreement,
(xiii) any agreement pursuant to which the Company has granted or may
grant in the future, to any party, a source-code license or option or other
right to use or acquire source-code, or
(xiv) any other agreement, contract or commitment that involves
$100,000 or more or is not cancelable without penalty within sixty (60)
days excluding orders for products received by the Company in the ordinary
course of business; or
(xv) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or to
compete with any person, excluding any limitations expressed in the grant
to the Company of any Intellectual Property and grants of exclusive
territory in overseas distribution agreements
(b) The Company is not in material breach, violation or default under, or
received notice that it is in breach, violation or default (except for notices
relating to breaches, violations or defaults that have been cured or corrected
in all respects) under, any of the terms or conditions of any agreement,
contract or commitment required to be set forth on Schedule 2.12(a) or Schedule
2.11(b), (each such agreement, contract or commitment a "CONTRACT"). Each
Contract is in full force and effect and, except as otherwise disclosed in
Schedule 2.12(b), is not subject to any default thereunder by any party
obligated to the Company pursuant thereto.
2.13 Interested Party Transactions. Except as set forth on Schedule 2.13,
no officer, director or stockholder of the Company (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust, partnership or
corporation in which any of such persons has or has had an interest), has or has
had directly or indirectly, (i) an interest in any entity which furnishes or
sells services or products that the Company furnishes or sells or proposes to
furnish or sell, (ii) an interest in any entity that purchases from or sells or
furnishes to, the Company, any goods or services or (iii) a beneficial interest
in any contract or agreement set forth in Schedule 2.12(a) or Schedule 2.11 (b);
provided, that ownership of no more than one percent (1%) of the outstanding
voting stock of a publicly traded corporation shall not be deemed an "interest
in any entity" for purposes of this Section 2.13.
2.14 Compliance with Laws. The Company is in compliance in all material
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any foreign, federal, state or local statute, law
or regulation.
2.15 Litigation. There is no action, suit or proceeding of any nature
pending or to the Company's knowledge threatened against the Company, its
properties or any of its officers or directors, in their respective capacities
as such, nor, to the Company's knowledge, is there any reasonable basis
therefor. Except as set forth in Schedule 2.15, there is no investigation
pending or threatened against the Company,
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its properties or any of its officers or directors in their respective
capacities as such by or before any Governmental Entity, nor is there any
reasonable basis therefor. No Governmental Entity has at any time challenged or
questioned the legal right of the Company to manufacture, offer or sell any of
its products or conduct its operations as presently or previously conducted.
2.16 Insurance. The Company maintains valid and enforceable insurance
policies and fidelity bonds regarding its assets, business, equipment,
properties, operations, employees, of the Company, and such insurance policies
and fidelity bonds, which are identified in Schedule 2.16, contain provisions
which are reasonable and customary in the Company's industry, and there is no
claim by the Company pending under any of such policies or bonds as to which
coverage has been questioned, denied or disputed by the underwriters of such
policies or bonds. All premiums due and payable under all such policies and
bonds have been paid and the Company is otherwise in compliance with the terms
of such policies and bonds (or other policies and bonds providing substantially
similar insurance coverage). The Company has no knowledge of any threatened
termination of, or premium increase with respect to, any of such policies.
2.17 Minute Books. The minute books of the Company made available to
counsel for Parent (a) are the only minute books of the Company, and (b)
accurately reflect all meetings of directors (or committees thereof) and
stockholders or actions by written consent of the board of directors or
stockholders of the Company.
2.18 Environmental Matters
(a) Hazardous Materials. The Company has not operated any underground
storage tanks, and has no knowledge of the existence, at any time, of any
underground storage tank (or related piping or pumps), at any property that the
Company has at any time owned, operated, occupied or leased ("BUSINESS
FACILITIES"). No Hazardous Materials (defined below) are present as a result of
the actions or omissions which constitute a violation of law of the Company, or,
to the Company's knowledge, as a result of any actions of any third party or
otherwise, in, on or under any Business Facilities, including the land and the
improvements, ground water and surface water thereof which Hazardous Materials
would give rise to a Material Adverse Effect,
(b) Hazardous Material Activities. The Company has not transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Effective
Time which Hazardous Materials would give rise to a Material Adverse Effect, nor
has the Company disposed of, transported, sold, or manufactured any product
containing a Hazardous Material (any or all of the foregoing being collectively
referred to as "HAZARDOUS MATERIAL ACTIVITIES") in violation of any rule,
regulation, treaty or statute promulgated by any Governmental Entity in effect
prior to or as of the date hereof to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "ENVIRONMENTAL PERMITS")
necessary for the conduct of the Company's Hazardous Material Activities as such
Hazardous Material Activities are currently being conducted. All such
Environmental Permits are valid and in full force and effect. The Company has
complied in all material respects with all covenants and conditions of any
Environmental Permit which is or has been in force with respect to its Hazardous
Materials Activities.
(d) Offsite Hazardous Material Disposal. To the knowledge of the Company,
no action, proceeding, liability or claim exists or is threatened against any
disposal site or against the Company with respect to any transfer or release of
Hazardous Materials relating to the business of the Company which could
reasonably be expected to subject the Company to material liability.
(e) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company.
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(f) Reports and Records. The Company has delivered to Parent or made
available for inspection by Parent and its agents, representatives and employees
all records in the Company's possession concerning the Hazardous Materials
Activities of the Company relating to its business and all environmental audits
and environmental assessments of any Business Facilities.
(g) Definition of "Hazardous Materials." As used herein, "HAZARDOUS
MATERIALS" shall mean any substance that has been designated by any Governmental
Entity or by applicable federal, state or local law to be radioactive, toxic,
hazardous or otherwise a danger to health, reproduction or the environment,
including, without limitation, PCBs, asbestos, petroleum products or any
fraction thereof, urea-formaldehyde and all substances listed as a "hazardous
substance," "hazardous waste," "hazardous material" or "toxic substance" or
words of similar import, under any law, including but not limited to, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended; the Resource Conservation and Recovery Act of 1976, as amended; the
Federal Water Pollution Control Act, as amended; the Clean Air Act, as amended.
and the regulations promulgated pursuant to such laws.
2.19 Brokers' and Finders' Fees; Third Party Expenses. The Company has not
incurred, nor will it incur any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
2.20 Employee Matters and Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate" set
forth in Section 2.20(a)(i) below (which definition shall apply only to this
Section 2.20), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c), (m) or
(o) of the Code and the regulations thereunder;
(ii) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended;
(iii) "COMPANY EMPLOYEE PLAN" shall refer to any plan, program,
policy, practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether formal or informal, funded or unfunded,
including without limitation, each "employee benefit plan," within the
meaning of Section 3(3) of ERISA which is or has been maintained,
contributed to, or required to be contributed to, by the Company or any
Affiliate for the benefit of two (2) or more "Company Employees" (as
defined below), or pursuant to which the Company or any Affiliate has or
may have any material liability, contingent or otherwise, in respect of two
(2) or more Company Employees (as defined below) contingent or otherwise;
(iv) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(v) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(vi) "COMPANY EMPLOYEE" shall mean any current, former, or retired
employee, consultant, or director of the Company or any Affiliate;
(vii) "EMPLOYEE AGREEMENT" shall refer to each management, employment,
stock purchase, severance, separation, consulting, relocation, loan,
repatriation, expatriation, visas, work permit or similar agreement,
contract or arrangement between the Company or any Affiliate and any
Company Employee;
(viii) "IRS" shall mean the Internal Revenue Service;
(ix) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan" as defined in Section 3(37) of
ERISA; and
(x) "PENSION PLAN" shall mean each Company Employee Plan which is an
employee pension benefit plan" within the meaning of Section 3(2) of ERISA.
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(b) Schedule. Schedule 2.20(b) lists each Company Employee Plan and each
Employee Agreement. The Company does not have any plan or commitment, whether
legally binding or not, to establish or enter into any new Company Employee Plan
or Employee Agreement, to modify any Company Employee Plan or Employee Agreement
(except to the extent required by law or to conform any such Company Employee
Plan or Employee Agreement to the requirements of any applicable law, in each
case as previously disclosed to Parent in writing, or as required by this
Agreement).
(c) Documents. The Company has provided to Parent copies of (i) Company
Employee Plans and each Employee Agreement including all amendments thereto;
(ii) the most recent annual actuarial valuations, if any, prepared for each
Company Employee Plan; (iii) the most recent annual report (Series 5500 and all
schedules thereto), if any, required under ERISA or the Code in connection with
each Company Employee Plan or related trust; (iv) the most recent summary plan
description together with the most recent summary of material modifications, if
any, required under ERISA with respect to each Company Employee Plan; (v) all
IRS determination, opinion, notification and advisory letters and rulings
relating to Company Employee Plans and all applications and correspondence to or
from the IRS or the Department of Labor ("DOL") with respect to any Company
Employee Plan; (vi) all communications material to any Employee or Employees
relating to any Company Employee Plan and any proposed Company Employee Plans,
in each case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability to the
Company; (vii) all discrimination tests for each Company Employee Plan for the
most recently completed plan year.
(d) Employee Plan Compliance. (i) The Company has performed in all material
respects all obligations required to be performed by it under each Company
Employee Plan, and each Company Employee Plan has been established and
maintained in all material respects in accordance with its terms and in
compliance with all applicable laws, statutes, orders, rules and regulations,
including but not limited to ERISA and the Code; (ii) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Section 406 or
407 of ERISA, has occurred with respect to any Company Employee Plan; (iii)
there are no actions, suits or claims pending, or, to the knowledge of the
Company, threatened (other than routine claims for benefits) against any Company
Employee Plan or against the assets of any Company Employee Plan; and (iv) each
Company Employee Plan can be amended, terminated or otherwise discontinued after
the Effective Time in accordance with its terms, without material liability to
the Company, Parent or any of its Affiliates (other then ordinary administration
expenses typically incurred in a termination event); (v) to the knowledge of the
Company or any Affiliates, there are no inquiries or proceedings pending or
threatened by the IRS or DOL with respect to any Company Employee Plan; (vi)
neither the Company nor any Affiliate is, to its knowledge, subject to any
penalty or tax with respect to any Company Employee Plan under Section 402(i) of
ERISA or Section 4975 through 4980 of the Code; and (vii) each Company Employee
Plan intended to qualify under Section 401(a) of the Code and each trust
intended to qualify under Section 501(a) of the Code has received or applied for
a favorable determination letter with respect to each such Company Employee Plan
from the IRS, has remaining a period of time under applicable Treasury
regulations or IRS pronouncements in which to apply for such a determination
letter and make any amendments necessary to obtain a favorable determination, or
is a form of standardized prototype plan or which such a determination letter
may not be sought.
(e) Pension Plans. Neither the Company nor any Affiliate has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company or any Affiliate
contributed to or been requested to contribute to any Multiemployer Plan,
(g) No Post-Employment Obligations. No Company Employee Plan provides, or
has any liability to provide, life insurance, medical or other employee benefits
to any Employee upon his or her retirement or termination of employment for any
reason, except as may be required by statute, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either
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individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent requited by
statute.
(h) COBRA. Neither the Company nor any Affiliate has, prior to the
Effective Time and in any material respect, violated any of the health care
continuation requirements of COBRA, the requirements of FMLA or any similar
provisions of state law applicable to its Employees.
(i) Effect of Transaction.
(i) The execution of this Agreement and the completion of the
transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, or related trust that
will or may result in any payment (whether of severance pay or otherwise),
vesting, distribution, increase in benefits or obligation to fund benefits
with respect to any Employee.
(ii) No payment or benefit which will or may be made by the Company or
its Affiliates or by Parent or any of its Affiliates with respect to any
Employee as a result of the transactions contemplated by this Agreement
will be characterized as a "parachute payment" within the meaning of
Section 280G(b)(2) of the Code.
(j) Employment Matters. The Company (i) is in compliance in all material
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours with respect to Employees; (ii) has withheld all
amounts required by law or by agreement to be withheld from the wages, salaries
and other payments to Employees or other persons who by virtue of their
activities performed on behalf of the Company may be deemed employees within the
meaning of applicable law; (iii) is not liable for any arrears of wages or any
taxes or penalties in respect thereof; and (iv) is not liable for any payment to
any trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other benefits
or obligations for Employees (other than routine payments to be made in the
normal course of business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against the Company is pending
or, to the knowledge of the Company, threatened. The Company is not involved in
or, to the knowledge of the Company, threatened with, any labor dispute,
grievance, or litigation relating to labor, safety or discrimination matters
involving any Employee, including, without limitation, charges of unfair labor
practices or discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, result in a material liability to the Company.
The Company has not engaged in any unfair labor practices within the meaning of
the National Labor Relations Act which would, individually or in the aggregate,
directly or indirectly result in a material liability to the Company. The
Company is not presently, nor has it been in the past, a party to, or bound by,
any collective bargaining agreement or union contract with respect to Employees
and no collective bargaining agreement is being negotiated by the Company.
(l) No Interference or Conflict. To the knowledge of the Company, no
stockholder, officer, employee or consultant of the Company is obligated under
any contract or agreement or subject to any judgment, decree or order of any
court or administrative agency, that would interfere with such person's efforts
to promote the interests of the Company or that would interfere with the
Company's business. Neither the execution nor delivery of this Agreement, nor
the carrying on of the Company's business as presently conducted or proposed to
be conducted nor any activity of such officers, directors, employees or
consultants in connection with the carrying on of the Company's business as
presently conducted or proposed to be conducted, will, to the Company's
knowledge, conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract or agreement under
which any of such officers, directors, employees or consultants is now bound
(excluding, however, from this representation any agreements between any such
officer, director, employee or consultant and Parent and/or any of its
affiliates).
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2.21 Employees. To the Company's knowledge, no employee of the Company (i)
is in material violation of any term of any employment contract, patent
disclosure agreement, noncompetition agreement, or any restrictive covenant to a
former employer relating to the right of any such employee to be employed by the
Company because of the nature of the business conducted or presently proposed to
be conducted by the Company or to the use of trade secrets or proprietary
information of others and (ii) has given notice to the Company, nor is the
Company otherwise aware, that any employee intends to terminate his or her
employment with the Company.
2.22 Governmental Authorizations and Licenses. The Company possesses all
material consents, licenses, permits, grants or other authorizations issued to
the Company by a Governmental Entity (i) pursuant to which the Company currently
operates or holds any interest in any of its properties or (ii) which is
required for the operation of its business or the holding of any such interest
therein (collectively called "COMPANY AUTHORIZATIONS"), which Company
Authorizations are in full force and effect.
2.23 Pooling of Interests. To the Company's knowledge, based on
consultation with its independent accountants, neither the Company nor any of
its directors, officers or stockholders has taken any action which would
interfere with Parent's ability to account for the. Merger as a pooling of
interests.
2.24 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Company Disclosure Schedules), nor any
statement made in any schedule or certificate furnished by the Company pursuant
to this Agreement, contains or will contain at the Effective Time any untrue
statement of a material fact, or omits or will omit at the Effective Time to
state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
2.25 Statements; Proxy Statement/Prospectus. The information supplied by
the Company for inclusion in the Registration Statement shall not at the time
the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by the Company for inclusion in the Proxy Statement shall
not, on the date the Proxy Statement is first mailed to the Company's
stockholders and Parent's stockholders and at the time of the Company
Stockholders' Meeting or Parent Stockholders' Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Stockholders' Meeting or Parent Stockholders' Meeting which has become false or
misleading. If at any time prior to the Effective Time, any event relating to
the Company or any of its affiliates, officers or directors should be discovered
by the Company which should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement, the Company shall promptly
inform Parent. Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information supplied by Parent
which is contained in any of the foregoing documents.
2.26 Board Approval. The Board of Directors of the Company has, as of the
date of this Agreement, determined in its reasonable business judgment, that the
Merger is fair from a financial point of view to, and in the best interests of
the Company.
2.27 Complete Copies of Materials. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as disclosed in a document dated as of the date hereof to the
representations, warranties or covenants in this Agreement which reasonably
identifies the basis for an exception to a representation, warranty or covenant
in this Agreement and which is delivered by the Parent to the Company
immediately prior to the execution of this Agreement (the "PARENT DISCLOSURE
SCHEDULES"), the Parent and Merger Sub represent and warrant to the Company as
set forth below and as set forth in the Parent Disclosure Schedules.
For purposes of the representations and warranties given in Section 3.5 and
following, any reference to Parent shall be deemed to include Parent's
wholly-owned subsidiary, Genesis Microchip Corporation, a California
corporation, as applicable.
3.1 Organization, Standing and Power.
(a) Parent is a company duly organized, validly existing and in good
standing under the laws of the Province of Nova Scotia. Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Each of Parent and Merger Sub has the corporate power
to own its properties and to carry on its business as now being conducted and is
duly qualified to do business and is in good standing as a foreign corporation
in each in which the failure to be so qualified would have a Material Adverse
Effect or defined in Section 3.1(b) below.
(b) When used in connection with Parent the term "MATERIAL ADVERSE EFFECT"
means, for purposes of this Agreement, any change, event or effect that is
materially adverse to the business, assets, financial condition or results of
operations of Parent and its subsidiaries taken as a whole except for those
changes, events and effects that are caused by (i) conditions affecting the San
Francisco Bay Area, United States or the worldwide economy as a whole; or (ii)
conditions affecting either the semiconductor, image manipulation or silicon
wafer manufacturing industry, computer hardware or computer peripheral industry,
in any such case as a whole; or (iii) any adverse effect primarily attributable
to the transactions contemplated by this Agreement or the pendency or
announcement of the Merger. A change in the market price of Parent Common Stock
shall not, in and of itself, be deemed a Material Adverse Effect with respect to
Parent.
3.2 Authority. Parent and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
completion of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of Parent and Merger Sub. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes the valid and binding obligations of Parent and Merger Sub,
enforceable in accordance with its terms except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally and (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies. The execution and delivery of this Agreement
by Parent and Merger Sub does not, and, as of the Effective Time, the completion
of the transactions contemplated hereby will not, constitute a Conflict with (i)
any provision of the Articles of Incorporation or Bylaws of Parent or Merger Sub
or (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent or Merger Sub
or their properties or assets. No consent, waiver, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity or any third party (so as not to trigger any Conflict) is required by or
with respect to Parent or Merger Sub in connection with Parent's or Merger Sub's
execution and delivery of this Agreement or its completion of the transactions
contemplated hereby, except (i) the filing of the Merger Certificate with the
Delaware Secretary of State, or (ii) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal and state securities laws, and
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(iii) where the failure to obtain or make any such consent, waiver,
authorization, filing, approval or registration would not have a Material
Adverse Effect on Parent.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of one billion (1,000,000,000)
shares of Common Stock, no par value, of which 14,353,768 shares are issued and
outstanding on January 19,1999
(b) and one billion (1,000,000,000) shares of Preferred Stock, no par
value, none of which are issued and outstanding. The authorized capital stock of
Merger Sub consists of 1,000 shares of Common Stock, all of which, as of the
date hereof, are issued and outstanding and are held by Parent. All such shares
have been duly authorized, and all such issued and outstanding shares have been
validly issued, are fully paid and nonassessable and are free of any liens or
encumbrances other than any liens or encumbrances created by or imposed upon the
holders thereof.
(c) The shares of Parent Common Stock to be issued pursuant to the Merger,
when issued, will be duly authorized, validly issued, fully paid and
non-assessable.
(d) The Parent has reserved shares of Common Stock for issuance to
employees, directors and consultants pursuant to the Parent's Employee and
Non-Employee Option Plans and Employee Stock Purchase Plan, of which on the date
of this Agreement 1,563,925 shares are subject to outstanding, unexercised
options, 587,027 shares remain available for future grant. Except for the
options described in the immediately preceding sentence, there are no options,
warrants, calls, rights, commitments or agreement of any character, written or
oral, to which the Parent is a party or by which it is bound obligating the
Parent to issue, deliver, sell, repurchase or redeem, or caused to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of the
Parent or obligating the Parent to grant, extend, accelerate the vesting of,
change the price of, otherwise amend or enter into any such option, warrant,
call, right, commitment or agreement. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation or other similar rights
with respect to the Parent. Except as contemplated hereby, there are no voting
trusts, proxies, or other agreements or understandings with respect to the
voting stock of the Parent.
3.4 SEC Documents; Parent Financial Statement.
(a) Parent has furnished or made available to the Company true and complete
copies of all reports, registration statements and definitive proxy statements
filed by it with the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933 as amended (the "SECURITIES ACT") and
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") for all
periods since and including February 23, 1998, all in the form so filed (all of
the foregoing being collectively referred to as the "SEC DOCUMENTS"). As of
their respective filing dates, the SEC Documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
in which they were made, not misleading, except to the extent corrected by a
document subsequently filed with the SEC. The financial statements of Parent,
including the notes thereto, included in the SEC Documents (the "PARENT
FINANCIAL STATEMENTS") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with Canadian
GAAP with a reconciliation to United States GAAP, consistently applied (except
as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by applicable rules and regulations of the SEC) and
present fairly the consolidated financial position of Parent at the dates
thereof and the consolidated results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
audit adjustments which are not expected to be material in amount). There has
been no change in Parent accounting policies except as described in the notes to
the Parent Financing Statements.
(b) Parent does not have any liabilities of the type required to be
disclosed in the liabilities column of a balance sheet prepared in accordance
with GAAP, which individually or in the aggregate, would be
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reasonably likely to have a Material Adverse Effect, other than (i) liabilities
reflected in the Parent Balance Sheet (defined below), (ii) liabilities
specifically described in this Agreement, or in the Parent Disclosure Schedules,
(iii) liabilities for future performance under contracts entered into by Parent
or by which it or its assets or properties may be bound, and (iv) normal or
recurring liabilities incurred since the date of the Parent Balance Sheet in the
ordinary course of business consistent with past practices.
3.5 No Material Adverse Change. Since the date of the balance sheet
included in Parent's most recently filed report on Form 6-K (the "PARENT BALANCE
SHEET") to the date of this Agreement, Parent has conducted its business in the
ordinary course of business consistent with past practices and there has not
occurred:
(a) any material adverse change in the financial condition, liabilities,
assets or business of Parent;
(b) any amendment or change in the Memorandum and Articles of Association
of Parent other than those changes effective upon the continuance of Parent,
from an Ontario corporation to a Nova Scotia company;
(c) any damage to, destruction or loss of any assets of Parent (whether or
not covered by insurance) that materially and adversely affects the financial
condition or business of Parent;
(d) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Parent;
(e) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of Parent, or any direct or
indirect redemption, purchase or other acquisition by Parent of any capital
stock of Parent or any split, combination or reclassification in respect of any
shares of Parent Capital Stock, or any issuance or authorization of any issuance
of any other securities in lieu of or in substitution for shares of Parent
Capital Stock;
(f) sale, lease, license or other disposition of any of the assets or
properties of Parent, or the creation of any security interest in such assets or
properties except in the ordinary course of business consistent with past
practices;
(g) loan by Parent to any person or entity, incurring by Parent of any
indebtedness, guaranteeing by Parent of any indebtedness, issuance or sale of
any debt securities of Parent or guaranteeing of any debt securities of others,
or creation of any security interest in any of Parent's assets or properties
except for advances to employees for travel and business expenses in the
ordinary course of business, consistent with past practices;
(h) commencement or notice or threat, or reasonable basis therefor, of any
lawsuit or proceeding against or investigation of Parent or its affairs; or
(i) written notice of any claim or potential claim of ownership by a third
party of Parent Intellectual Property Rights or of infringement by Parent of any
third party's intellectual property rights;
3.6 Litigation. Except as set forth in Schedule 3.6, there is no action,
suit or proceeding of any nature pending or to Parent's knowledge threatened
against Parent, its properties or any of its officers or directors, in their
respective capacities as such, nor is there any reasonable basis therefor.
Except as set forth in Schedule 3.6, there is no investigation pending or
threatened against Parent, its properties or any of its officers or directors by
or before any Governmental Entity, nor is there any reasonable basis therefor.
Schedule 3.6 sets forth, with respect to any pending or threatened action, suit,
proceeding or investigation, the forum, the parties thereto, the subject matter
thereof and the amount of damages claimed or other remedy requested. No
Governmental Entity has at any time challenged or questioned the legal right of
Parent to manufacture, offer or sell any of its products or conduct its
operations as presently or previously conducted.
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3.7 Employee Matters and Benefit Plans.
(a) Definitions. With the exception of the definition of "Parent Affiliate"
set forth in Section 3.7(a)(i) (which definition shall apply only to this
Section 3.7), for purposes of this Agreement, the following terms shall have the
meanings set forth below:
(i) "PARENT AFFILIATE" shall mean any other person or entity under
common control with Parent within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder;
(ii) "PARENT EMPLOYEE PLAN" shall refer to any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether formal or informal, funded or unfunded
and whether or not legally binding, including without limitation, each
"employee benefit plan," within the meaning of Section 3(3) of ERISA which
is maintained, contributed to, or required to be contributed to, by Parent
or any Parent Affiliate for the benefit of any two (2) "Employees" (as
defined below), or pursuant to which Parent or any Parent Affiliate has or
may have any material liability contingent or otherwise;
(iii) "PARENT EMPLOYEE" shall mean any current, former, or retired
employee, consultant, or director of Parent or any Parent Affiliate;
(iv) "PARENT EMPLOYEE AGREEMENT" shall refer to each management,
employment, stock purchase, severance, separation, consulting, relocation,
loan, repatriation, expatriation, visas, work permit or similar agreement,
contract or arrangement between Parent or any Parent Affiliate and any
Parent Employee or consultant;
(v) "PARENT PENSION PLAN" shall refer to each Parent Employee Plan
which is an "employee pension benefit plan" within the meaning of Section
3(2) of ERISA.
(b) Schedule. Schedule 3.7(b) lists each Parent Employee Plan. Parent does
not have any plan or commitment, whether legally binding or not, to establish
any new Parent Employee Plan, to modify any Parent Employee Plan (except to the
extent required by law or to conform any such Parent Employee Plan to the
requirements of any applicable law, in each case as previous disclosed to the
Company in writing, or as required by this Agreement), or to enter into any
Parent Employee Plan, nor does it have any intention or commitment to do any of
the foregoing.
(c) Documents. Parent has provided or made available to the Company (i)
copies of each Parent Employee Plan including all amendments thereto; (ii) the
most recent annual actuarial valuations, if any, prepared for each Parent
Employee Plan; (iii) the most recent annual report (Series 5500 and all
schedules thereto), if any, required under ERISA or the Code in connection with
each Parent Employee Plan or related trust; (iv) the most recent summary plan
description together with the most recent summary of material modifications, if
any, required under ERISA with respect to each Parent Employee Plan; (v) all IRS
determination, opinion, notification and advisory letters and rulings relating
to Parent Employee Plans and copies of all applications and correspondence to or
from the IRS or the Department of Labor ("DOL") with respect to any Parent
Employee Plan; and (vi) all communications material to any Parent Employee or
Employees relating to any Parent Employee Plan and any proposed Parent Employee
Plans, in each case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability to
Parent.
(d) Parent Employee Plan Compliance. Parent has performed in all material
respects all obligations required to be performed by it under each Parent
Employee Plan, and each Parent Employee Plan has been established and maintained
in all material respects in accordance with its terms and in compliance with all
applicable laws, statutes, orders, rules and regulations, including but not
limited to ERISA or the Code; (ii) no "prohibited transaction," within the
meaning of Section 4975 of the Code or Section 406 or 407 of ERISA, has occurred
with respect to any Parent Employee Plan; (iii) there are no actions, suits or
claims pending, or, to the knowledge of Parent, threatened (other than routine
claims for benefits) against
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any Parent Employee Plan or against the assets of any Parent Employee Plan; and
(iv) each Parent Employee Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to Parent or any Parent Affiliates (other than ordinary administration
expenses typically incurred in a termination event); (v) there are no inquiries
or proceedings pending or, to the knowledge of Parent or any Parent Affiliates,
threatened by the IRS or DOL with respect to any Parent Employee Plan; (vi)
neither Parent nor any Parent Affiliate is, to its knowledge, subject to any
penalty or tax with respect to any Parent Employee Plan under Section 402(i) of
ERISA or Section 4975 through 4980 of the Code; and (vii) each Parent Employee
Plan intended to qualify under Section 401(a) of the Code and each trust
intended to qualify under Section 501(a) of the Code has either received a
favorable determination letter with respect to each such Parent Employee Plan
from the IRS or has remaining a period of time under applicable Treasury
regulations or IRS pronouncements in which to apply for such a determination
letter and make any amendments necessary to obtain a favorable determination.
(e) Pension Plans. Neither Parent nor any Parent Affiliate has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has Parent or any Parent Affiliate
contributed to or been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Parent Employee Plan provides, or
has any liability to provide, life insurance, medical or other employee benefits
to any Parent Employee upon his or her retirement or termination of employment
for any reason, except as may be required by statute, and Parent has never
represented, promised or contracted (whether in oral or written form) to any
Parent Employee (either individually or to Parent Employees as a group) that
such Parent Employee(s) would be provided with life insurance, medical or other
employee welfare benefits upon their retirement or termination of employment,
except to the extent required by statute.
(h) COBRA. Neither Parent nor any Parent Affiliate has, prior to the
Effective Time and in any material respect, violated any of the health care
continuation requirements of COBRA, the requirements of FMLA or any similar
Provisions of state law applicable to its Employees.
(i) Effect of Transaction.
(i) The execution of this Agreement and the completion of the
transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any Parent Employee Plan, Parent Employee Agreement, trust or loan
that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with
respect to any Parent Employee.
(ii) No payment or benefit which will or may be made by Parent or
Parent Affiliates or by Parent or any Parent Affiliates with respect to any
Parent Employee as a result of the transactions contemplated by this
Agreement or otherwise will be characterized as "parachute payments" within
the meaning of Section 280G(b)(2) of the Code.
(j) Employment Matters. Parent (i) is in compliance in all material
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Parent Employees;
(ii) has withheld all amounts required by law or by agreement to be withheld
from the wages, salaries and other payments to Parent Employees or other persons
who by virtue of their activities performed on behalf of Parent may be deemed
employees within the meaning of applicable law; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any payment to any trust or other fund
or to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Parent
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Employees (other than routine payments to be made in the normal course of
business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against Parent is pending or,
to the best knowledge of Parent, threatened. Parent is not involved in or, to
the knowledge of Parent, threatened with, any labor dispute, grievance, or
litigation relating to labor, safety or discrimination matters involving any
Parent Employee, including, without limitation, charges of unfair labor
practices or discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, result in material liability to Parent.
Neither Parent nor any of its subsidiaries has engaged in any unfair labor
practices within the meaning of the National Labor Relations Act which would,
individually or in the aggregate, directly or indirectly result in a material
liability to Parent. Parent is not presently, nor has it been in the past, a
party to, or bound by, any collective bargaining agreement or union contract
with respect to Parent Employees and no collective bargaining agreement is being
negotiated by Parent.
(l) No Interference or Conflict. To the knowledge of Parent, no
stockholder, officer, employee or consultant of Parent is obligated under any
contract or agreement or subject to any judgment, decree or order of any court
or administrative agency, that would interfere with such person's efforts to
promote the interests of Parent or that would interfere with Parent's business.
Neither the execution nor delivery of this Agreement, nor the carrying on of
Parent's business as presently conducted or proposed to be conducted nor any
activity of such officers, directors, employees or consultants in connection
with the carrying on of Parent's business as presently conducted or proposed to
be conducted, will, to Parent's knowledge, conflict with or result in a breach
of the terms, conditions or provisions of, or constitute a default under, any
contract or agreement under which any of such officers, directors, employees or
consultants is now bound (excluding, however, from this representation any
agreements between any such officer, director, employee or consultant and Parent
and/or any of its Affiliates).
3.8 Employees. To Parent's knowledge, no employee of Parent or any of its
subsidiaries (i) is in material violation of any term of any employment
contract, patent disclosure agreement, non-competition agreement, or any
restrictive covenant to a former employer relating to the right of any such
employee to be employed by Parent because of the nature of the business
conducted by Parent or to the use of trade secrets or proprietary information of
others and (ii) has given notice to Parent, nor is Parent otherwise aware, that
any employee intends to terminate his or her employment with Parent.
3.9 Tax and Other Returns and Reports.
(a) Tax Returns and Audits.
(i) Parent as of the Effective Time will have prepared and timely
filed all required returns ("RETURNS") relating to any and all Taxes
concerning or attributable to Parent or its operations within the time
prescribed by applicable law.
(ii) Parent as of the Effective Time: (A) will have paid or set up
adequate reserves (which reserves were established in accordance with GAAP)
for repayment of all Taxes it is required to pay or accrue for all periods
through the Effective Time and (B) will have withheld with respect to its
employees all federal and state income taxes, FICA, FUTA and other Taxes
required to be withheld.
(iii) There is no Tax deficiency proposed or assessed in writing
against Parent, nor has Parent executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax.
(iv) No audit or other examination of any Return of Parent is
currently in progress, nor has Parent been notified of any request for such
an audit or other examination.
(v) Parent does not have any liabilities for unpaid federal, state,
local and foreign Taxes which have not been accrued or reserved against on
the Parent Balance Sheet, whether asserted or unasserted, contingent or
otherwise, and Parent has no knowledge of any basis for the assertion of
any such liability attributable to Parent, or its assets or operations.
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3.10 Restrictions on Business Activities. Excluding any limitations
expressed in the grant to Parent of any Intellectual Property and grants of
exclusive territory in overseas distribution agreements, there is no agreement
(non-compete or otherwise), commitment, judgment, injunction, order or decree to
which Parent is a party or otherwise binding upon Parent which has or reasonably
could be expected to have the effect of prohibiting any business practice of, or
the conduct of business by, Parent, any acquisition of property (tangible or
intangible) by Parent, or the freedom of Parent to engage in any line of
business or to compete with any other person. Without limiting the foregoing,
Parent has not entered into any agreement under which Parent is restricted from
selling, licensing or otherwise distributing any of its technology or products
to any class of customers, in any geographic area, during any period of time or
in any segment of the market.
3.11 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"PARENT INTELLECTUAL PROPERTY" shall mean any Intellectual Property that
(i) is owned by or (ii) is exclusively licensed to Parent.
(b) The operation of the business of Parent as it is currently conducted
(including, without limitation, products or technology currently under
development and the design, development, manufacture, use, import and sale of
the products or technology of Parent) does not infringe or misappropriate the
Intellectual Property of any person, violate the rights of any person (including
rights to privacy or publicity) or constitute unfair competition or trade
practices under the laws of any jurisdiction. Parent has not received written
notice from any person claiming that such operation or any act, product or
technology (including products or technology currently under development) of
Parent infringes or misappropriates the Intellectual Property of any person or
constitutes unfair competition or trade practices under the laws of any
jurisdiction or is owned by any person (nor is Parent aware of any basis
therefor).
(c) There are no contracts, licenses or agreements between Parent and any
other person with respect to Parent Intellectual Property under which there is
any dispute known to Parent regarding the scope of such agreement, or
performance under such agreement, including with respect to any payments to be
made or received by Parent thereunder.
(d) To the knowledge of Parent, no person is infringing or misappropriating
any Parent Intellectual Property.
(e) Parent has taken reasonable steps in accordance with normal industry
practice to protect Parent's rights in confidential information and trade
secrets of Parent or provided by any other person to Parent. Without limiting
the foregoing, Parent has and enforces a policy requiring each technical
employee, consultant and contractor to execute proprietary information,
confidentiality and assignment agreements substantially in Parent's standard
forms and all current and former technical employees, consultants and
contractors of Parent have executed such an agreement.
(f) No Parent Intellectual Property or product or technology of Parent is
subject to any proceeding or outstanding decree, order, judgment, settlement
agreement or stipulation that restricts in any manner the use, transfer or
licensing thereof by Parent or may be reasonably expected to affect the
validity, use or enforceability of such Parent Intellectual Property.
3.12 Nova Scotia Continuance. Immediately prior to the date of this
Agreement, Parent duly and validly continued as a company into the province of
Nova Scotia from the province of Ontario, in compliance with applicable Nova
Scotia and Ontario laws and in compliance with applicable United States
securities laws.
3.13 Fairness Opinion. Parent has received an oral opinion from
NationsBanc Montgomery Securities LLC, to the effect that as of the date hereof
the Exchange Ratio is fair to Parent from a financial point of view and has
committed to promptly deliver to the Company a written confirmation of such
opinion.
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3.14 Pooling of Interests. To Parent's knowledge, based on consultation
with its independent accountants, neither Parent nor any of its directors,
officers or stockholders has taken any action which would interfere with
Parent's ability to account for the Merger as a pooling of interests.
3.15 Brokers' and Finders' Fees; Third Party Expenses. Parent has not
incurred nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with the Agreement on any transaction contemplated hereby.
3.16 Disclosure. None of the representations or warranties made by Parent
(as modified by the Parent Disclosure Schedules), nor any statement made in any
schedule or certificate furnished by Parent pursuant to this Agreement, or
furnished by Parent in or in connection with documents mailed or delivered to
the stockholders of Parent in connection with soliciting their consent to this
Agreement and the Merger or to the stockholders of the Company in connection
with their approval of this Agreement and the Merger, contains or will contain
at the Effective Time any untrue statement of a material fact, or omits or will
omit at the Effective Time to state any material fact necessary in order to make
the statements contained herein or therein, in the light of the circumstances
under which made, not misleading.
3.17 Statements; Proxy Statement/Prospectus. The information supplied by
Parent for inclusion in the Registration Statement shall not at the time the
Registration Statement becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, The information supplied by Parent for inclusion in the Proxy
Statement shall not, on the date the Proxy Statement is first mailed to Parent's
stockholders and the Company's stockholders, at the time of the Parent
Stockholders' Meeting or the Company Stockholders' Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Parent
Stockholders' Meeting or the Company Stockholders' Meeting which has become
false or misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder and Nova Scotia Law. If at any time prior to the Effective Time, any
event relating to Parent or any of its affiliates, officers or directors should
be discovered by Parent which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, Parent shall
promptly inform the Company, Notwithstanding the foregoing, Parent makes no
representation or warranty with respect to any information supplied by the
Company which is contained in any of the foregoing documents.
3.18 Board Approval. The Board of Directors of Parent has, as of the date
of this Agreement, determined (i) in its reasonable business judgment, that the
Merger is fair from a financial point of view to, and in the best interests of
Parent, and (ii) to recommend that the stockholders of Parent approve the
issuance of shares of Parent Common Stock by virtue of the Merger.
3.19 Complete Copies of Materials. Parent has delivered or made available
true and complete copies of each document (or summaries of same) that has been
requested by the Company or its counsel.
3.20 Environmental Matters.
(a) Hazardous Materials. Parent has not operated any underground storage
tanks, and has no knowledge of the existence, at any time, of any underground
storage tank (or related piping or pumps), at any property that Parent has at
any time owned, operated, occupied or leased ("BUSINESS FACILITIES"). No
Hazardous Materials (defined below) are present as a result of the actions or
omissions of Parent which constitute a violation of law, or, to Parent's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any Business Facilities, including the land and the improvements, ground
water and surface water thereof which Hazardous Materials could give rise to a
Material Adverse Effect.
(b) Hazardous Material Activities. Parent has not transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Effective
Time which Hazardous Materials could give rise to a Material Adverse Effect, nor
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has Parent disposed of, transported, sold, or manufactured any product
containing a Hazardous Material (any or all of the foregoing being collectively
referred to as "HAZARDOUS MATERIAL ACTIVITIES") in violation of any rule,
regulation, treaty or statute promulgated by any Governmental Entity in effect
prior to or as of the date hereof to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity.
(c) Permits. Parent currently holds all environmental approvals, permits,
licenses, clearances and consents (the "ENVIRONMENTAL PERMITS") necessary for
the conduct of Parent's Hazardous Material Activities as such Hazardous Material
Activities are currently being conducted. All such Environmental Permits are
valid and in full force and effect. Parent has complied in all material respects
with all covenants and conditions of any Environmental Permit which is or has
been in force with respect to its Hazardous Materials Activities.
(d) Offsite Hazardous Material Disposal. Parent has transferred or released
Hazardous Materials only to those Disposal Sites set forth in Section 2.18(d) of
the Disclosure Schedule; and, to the knowledge of Parent, no action, proceeding,
liability or claim exists or is threatened against any disposal site or against
Parent with respect to any transfer or release of Hazardous Materials relating
to the business of Parent to a Disposal Site which could reasonably be expected
to subject the Business to liability.
(e) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
Parent's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of Parent.
(f) Reports and Records. Parent has delivered to the Company or made
available for inspection by the Company and its agents, representatives and
employees all records in Parent's possession concerning the Hazardous Materials
Activities of Parent relating to its business and all environmental audits and
environmental assessments of any Business Facilities.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, the Company agrees to use commercially
reasonable efforts (except to the extent that Parent shall otherwise consent in
writing, which consent will not be unreasonably withheld) to carry on its
business in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted, to pay its debts and Taxes when due, to pay or
perform other obligations when due (except for any of such which are in good
faith being contested), and, to the extent consistent with such business, to use
commercially reasonable efforts to preserve intact its present business
organization, keep available the services of its present officers and key
employees, and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
all with the goal of preserving unimpaired its goodwill and ongoing businesses
at the Effective Time. The Company shall promptly notify Parent of any event or
occurrence not in the ordinary course of its business. Except as expressly
contemplated by this Agreement, the Company shall not, without the prior written
consent of Parent, which consent will not be unreasonably withheld:
(a) Enter into any commitment, activity or transaction not in the ordinary
course of business;
(b) (i) Except for licenses of software to customers in the ordinary course
of business and consistent with past practices, sell, license or transfer to any
person or entity any rights to any Company Intellectual Property or enter into
any agreement with respect to the Company Intellectual Property with any person
or entity or with respect to the Intellectual Property of any person or entity,
(ii) other than Intellectual Property rights acquired under "shrink-wrap" and
other commercial end-user licenses (in each case which is not included in the
Company's products or technology including products and technology currently
available or under development), buy or license any Intellectual Property or
enter into any agreement with respect to the Intellectual Property of any person
or entity, (iii) enter into any agreement with respect to
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the development of any Intellectual Property with a third party, (iv) or change
pricing or royalties charged by the Company to its customers or licensees, or
the pricing or royalties set or charged by persons who have licensed
Intellectual Property to the Company;
(c) Transfer to any person or entity any rights to any Company Intellectual
Property except for licenses of software to customers in the ordinary course of
business and consistent with past practices;
(d) Enter into or amend any agreements pursuant to which any other party is
granted manufacturing, marketing, distribution or similar rights of any type or
scope with respect to any products of the Company except in the ordinary course
of business and consistent with past practices;
(e) Amend or otherwise modify (or agree to do so), except in the ordinary
course of business consistent with past practice, or violate the terms of, any
of the agreements set forth or described in the Company Disclosure Schedules;
(f) Commence or settle any litigation or any dispute resolution process,
except in connection with this Agreement;
(g) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) any Company Capital Stock, or
split, combine or reclassify any of the Company Capital Stock or issue or
authorize the issuance of any other securities in lieu of or in substitution for
shares of Company Capital Stock, or repurchase, redeem or otherwise acquire,
directly or indirectly, any shares of Company Capital Stock (or options,
warrants or other rights exercisable therefor) other than the repurchase at cost
of shares of employees upon termination of their employment with the Company;
(h) Cause or permit any amendments to its Certificate of Incorporation or
Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
the Company;
(j) Sell, lease, license or otherwise dispose of any of its properties or
assets, except in the ordinary course of business and consistent with past
practice;
(k) Incur any indebtedness for borrowed money (except pursuant to any
existing loan agreement) or guarantee any such indebtedness of any other party
or issue or sell any debt securities of the Company or purchase or guarantee any
debt securities of others or amend the terms of any outstanding loan agreement;
(1) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement except in the ordinary course
of business and consistent with past practices;
(m) Grant any severance or termination pay to any director, officer,
employee or consultant, except payments made pursuant to written agreements or
policies outstanding on the date hereof (all of which such agreements are
disclosed on Schedule 2.20(b));
(n) Adopt or amend any employee benefit plan, program, policy or
arrangement (including without limitation any amendment which accelerates
vesting under any such employee benefit plan, program, policy or arrangements,
or enter into any employment contract, extend any employment offer, pay or agree
to pay any special bonus or special remuneration to any director, employee or
consultant (except pursuant to any policy, plan, agreement or arrangement in
effect on the date of this Agreement) or except in the ordinary course of
Business in connection with annual reviews, or increase the salaries or wage
rates of its employees;
(o) Take any action, including the acceleration of vesting of any options,
warrants, restricted stock or other rights to acquire shares of Company capital
stock, which would be reasonably likely to interfere with Parent's ability to
account for the Merger as a pooling of interests or any other action that could
jeopardize the treatment of the Merger as a tax-free reorganization hereunder;
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(p) Pay, discharge or satisfy, in an amount in excess of $25,000, in any
one case, or $100,000, in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
payment, discharge or satisfaction in the ordinary course of business and
consistent with past practices;
(q) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any material
closing agreement in respect of taxes, settle any material claim or assessment
in respect of Taxes, or consent to any extension or waiver of the limitation
period applicable to any claim or assessment in respect of Taxes;
(r) Enter into any strategic alliance, joint development or joint marketing
arrangement or agreement;
(s) Waive or commit to waive any rights with a value in excess of $25,000,
in any one case, or $100,000, in the aggregate;
(t) Cancel, materially amend or renew any insurance policy other than in
the ordinary course of business;
(u) Alter, or enter into any commitment to alter, its equity interest in
any corporation, association, joint venture, partnership or business entity in
which the Company directly or indirectly holds any such interest on the date
hereof; or
(v) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (x) above, or any other action that would
prevent the Company from performing or cause the Company not to perform its
covenants hereunder.
4.2 Conduct of Business of Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
and the Effective Time, except as expressly contemplated by this Agreement
Parent agrees (except to the extent that the Company shall otherwise consent in
writing) (i) to carry on its business in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted, to pay its debts and
Taxes when due, to pay or perform other obligations when due (except for any of
such which are being contested in good faith), and, to the extent consistent
with such business, to use all commercially reasonable efforts to preserve
intact its present business organization, (ii) keep available the services of
its present officers and key employees, and (iii) preserve its relationships
with customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it, all with the goal of preserving unimpaired its
goodwill and ongoing businesses at the Effective Time. During the period from
the date of this Agreement and continuing until the earlier of the termination
of this Agreement and the Effective Time, Parent shall promptly notify the
Company of any event or occurrence not in the ordinary course of its business.
Except as expressly contemplated by this Agreement, Parent shall not, without
the prior written consent of the Company:
(a) Enter into any commitment activity or transaction not in the ordinary
course of business.
(b) Amend or otherwise modify (or agree to do so), except in the ordinary
course of business consistent with past practice, or violate the terms of, any
of the agreements set forth or described in Parent Disclosure Schedules;
(c) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any Parent
Common Stock.
(d) Cause or permit any amendments to its Memorandum and Articles of
Association;
(e) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
Parent;
(f) Sell, lease, license or otherwise dispose of any of its properties or
assets, except in the ordinary course of business and consistent with past
practice;
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(g) Incur any indebtedness or guarantee any such indebtedness of any other
party or issue or sell any debt securities of the Company or guarantee any debt
securities of others;
(h) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement except in the ordinary course
of business and consistent with past practices;
(i) Take any action, including the acceleration of vesting of any options,
warrants, restricted stock or other rights to acquire shares of Parent Common
Stock, which would be reasonably likely to interfere with Parent's ability to
account for the Merger as a pooling of interests or any other action that could
jeopardize the tax-free reorganization hereunder;
(j) Revalue any of its assets (including without limitation writing down
the value of inventory or writing off notes or accounts receivable) other than
in the ordinary course of business and consistent with past practice;
(k) Fail to pay or otherwise satisfy its monetary obligations as they
become due, except such as are being contested in good faith;
(1) Grant any exclusive license of, sell or assign, any material Parent
Intellectual Property; or
(m) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.2(a) through (1) above, or any other action that would
prevent Parent from performing or cause Parent not to perform its covenants
hereunder,
4.3 No Solicitation.
(a) Restriction on Parent.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms,
Parent and its subsidiaries will not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents
and affiliates not to, directly or indirectly, (i) solicit or knowingly
encourage submission of, any proposals or offers by any person, entity or
group, or (ii) participate in any discussions or negotiations with, or
disclose any non-public information concerning Parent or any of its
subsidiaries to, or afford any access to the properties, books or records
of Parent or any of its subsidiaries to, or otherwise assist or facilitate,
or enter into any agreement or understanding with, any person, entity or
group, in connection with any Acquisition Proposal with respect to Parent.
For the purposes of this Agreement, an "ACQUISITION PROPOSAL" with respect
to an entity means any proposal or offer relating to (i) any merger,
consolidation, sale of substantially all the assets or similar transactions
involving the entity or any subsidiaries of the entity (other than sales of
assets or inventory in the ordinary course of business or as permitted
under the terms of this Agreement); (ii) sale of 15% or more of the
outstanding shares of capital stock of the entity (including without
limitation by way of a tender offer or an exchange offer); (iii) the
acquisition by any person of beneficial ownership or a right to acquire
beneficial ownership of, or the formation of any "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder)
which beneficially owns, or has the right to acquire beneficial ownership
of, 15% or more of the then outstanding shares of capital stock of the
entity (except for acquisitions for passive investment purposes only in
circumstances where the person or group qualifies for and files a Schedule
13G with respect thereto and does not subsequently become required to file
a Schedule 13D); or (iv) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of
the foregoing. Parent will immediately disclose to the Company and cease
any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing. Parent
will (i) notify the Company as promptly as practicable if any inquiry or
proposal is made or any information or access is requested in connection
with an Acquisition Proposal or potential Acquisition Proposal and (ii) as
promptly as practicable notify the Company of the significant terms and
conditions of any such Acquisition Proposal. In addition, subject to the
other provisions of this Section 4.3(a), from and after the date of this
Agreement until the earlier of the Effective Time and termination of this
Agreement pursuant to
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its terms, Parent and its subsidiaries will not, and will instruct their
respective directors, officers, employees, representatives, investment
bankers, agents and affiliates not to, directly or indirectly, make or
authorize any public statement, recommendation or solicitation in support
of any Acquisition Proposal made by any person, entity or group; provided,
however, that nothing herein shall prohibit Parent's Board of Directors
from taking and disclosing to Parent's stockholders a position with respect
to a tender offer pursuant to Rules l4d-9 and 14e-2 promulgated under the
Exchange Act.
(ii) Notwithstanding any other provision of this Agreement, prior to
the Effective Time, Parent may, to the extent the Board of Directors of
Parent determines, in good faith, after consultation with outside legal
counsel, that the Board's fiduciary duties under applicable law require it
to do so, participate in discussions or negotiations with, and, subject to
the requirements of paragraph (iii) below, furnish information to any
person, entity or group after such person, entity or group has delivered to
Parent, an unsolicited bona fide Acquisition Proposal which the Board of
Directors of Parent in its good faith reasonable judgment determines, (i)
after consultation with its independent financial advisors, would result in
a transaction more favorable than the Merger to the stockholders of Parent
from a financial point of view and (ii) after reasonable inquiry by Parent,
that the party making such Acquisition Proposal is financially capable of
consummating such Acquisition Proposal (a "PARENT SUPERIOR PROPOSAL"). In
addition, notwithstanding any other provision of this Agreement in
connection with a possible Acquisition Proposal, Parent may refer any third
party to this Section 4.3 or make a copy of this Section 4.3 available to a
third party. In the event Parent receives a Parent Superior Proposal,
nothing contained in this Agreement (but subject to the terms of this
Section 4.3(a)) will prevent the Board of Directors of Parent from
recommending such Parent Superior Proposal to its stockholders, if the
Board determines, in good faith, after consultation with outside legal
counsel, that such action is required by its fiduciary duties under
applicable law; in such case, the Board of Directors of Parent may
withdraw, modify or refrain from making its recommendation set forth in
Section 5.1(d), and, to the extent it does so, Parent may refrain from
soliciting proxies and taking such other action necessary to secure the
vote of its stockholders as may be required by Section 5.1(d); provided,
however, that Parent shall not recommend to its stockholders a Parent
Superior Proposal for a period of not less than 48 hours after the
Company's receipt of a copy of such Parent Superior Proposal (or a
description of the significant terms and conditions thereof, if such Parent
Superior Proposal is not in writing); and provided further, that nothing
contained in this Section shall limit Parent's obligation to hold and
convene the Parent Stockholders Meeting (regardless of whether the
recommendation of the Board of Directors of Parent shall have been
withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary in this Section 4.3(a)
Parent will not provide any non-public information to a third party unless:
(x) Parent provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information
at least as restrictive as such terms in the Non-Disclosure and
Confidentiality Agreement entered into by and among Parent and the Company;
and (y) such non-public information has been previously delivered to the
Company.
(b) Restrictions on the Company.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms, the
Company will not, and will instruct its directors, officers, employees,
representatives, investment bankers, agents and affiliates not to, directly
or indirectly, (i) solicit or knowingly encourage submission of, any
proposals or offers by any person, entity or group (other than Parent and
its affiliates, agents and representatives), or (ii) participate in any
discussions or negotiations with, or disclose any non-public information
concerning the Company to, or afford any access to the properties, books or
records of the Company to, or otherwise assist or facilitate, or enter into
any agreement or understanding with, any person, entity or group (other
than Parent and its affiliates, agents and representatives), in connection
with any Acquisition Proposal with respect to the Company. The Company will
immediately disclose to Parent and cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to
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any of the foregoing. The Company will (i) notify Parent as promptly as
practicable if any inquiry or proposal is made or any information or access
is requested in connection with an Acquisition Proposal or potential
Acquisition Proposal and (ii) as promptly as practicable notify Parent of
the significant terms and conditions of any such Acquisition Proposal. In
addition, subject to the other provisions of this Section 4.3(b), from and
after the date of this Agreement until the earlier of the Effective Time
and termination of this Agreement pursuant to its terms, the Company will
not, and will instruct its directors, officers, employees, representatives,
investment bankers, agents and affiliates not to, directly or indirectly,
make or authorize any public statement, recommendation or solicitation in
support of any Acquisition Proposal made by any person, entity or group
(other than Parent).
(ii) Notwithstanding any other provision of this Agreement, prior to
the Effective Time, the Company may, to the extent the Board of Directors
of the Company determines, in good faith, after consultation with outside
legal counsel, that the Board's fiduciary duties under applicable law
require it to do so, participate in discussions or negotiations with, and,
subject to the requirements of paragraph (iii), below, furnish information
to any person, entity or group after such person, entity or group has
delivered to the Company, an unsolicited bona fide Acquisition Proposal
which the Board of Directors of the Company in its good faith reasonable
judgment determines, (i) would result in a transaction more favorable to
the stockholders of the Company from a financial point of view than the
Merger and (ii) after reasonable inquiry by the Company, that the party
making such Acquisition Proposal is financially capable of consummating
such Acquisition Proposal (a "COMPANY SUPERIOR PROPOSAL"). In addition,
notwithstanding any other provision of this Agreement, in connection with a
possible Acquisition Proposal, the Company may refer any third party to
this Section 4.3 or make a copy of this Section 4.3 available to a third
party. In the event the Company receives a Company Superior Proposal,
nothing contained in this Agreement (but subject to the terms of this
Section 4.3(b)) will prevent the Board of Directors of the Company from
recommending such Company Superior Proposal to its stockholders, if the
Board determines, in good faith, after consultation with outside legal
counsel, that such action is required by its fiduciary duties under
applicable law; in such case, the Board of Directors of the Company may
withdraw, modify or refrain from making its recommendation set forth in
Section 5.1(c), and, to the extent it does so, the Company may refrain from
soliciting proxies and taking such other action necessary to secure the
vote of its stockholders as may be required by Section 5.1(c); provided,
however, that the Company shall not recommend to its stockholders a Company
Superior Proposal for a period of not less than 48 hours after Parent's
receipt of a copy of such Company Superior Proposal (or a description of
the significant terms and conditions thereof, if such Company Superior
Proposal is not in writing); and provided further, that nothing contained
in this Section shall limit the Company's obligation to hold and convene
the Company Stockholders Meeting (regardless of whether the recommendation
of the Board of Directors of the Company shall have been withdrawn,
modified or not yet made).
(iii) Notwithstanding anything to the contrary in this paragraph (b),
the Company will not provide any non-public information to a third party
unless: (x) the Company provides such non-public information pursuant to a
nondisclosure agreement with terms regarding the protection of confidential
information at least as restrictive as such terms in the Non-Disclosure and
Confidentiality Agreement entered into by and among Parent and the Company;
and (y) such non-public information has been previously delivered to
Parent.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings;
Board Recommendations.
(a) As promptly as practicable after the execution of this Agreement, the
Company and Parent will prepare, and file with the SEC, the Proxy Statement and
Parent will prepare and file with the SEC the Registration Statement in which
the Proxy Statement will be included as a prospectus. Each of the Company and
Parent will respond to any comments of the SEC, will use its respective best
efforts to have
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the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing and will cause the Proxy Statement to
be mailed to its respective stockholders at the earliest practicable time. As
promptly as practicable after the date of this Agreement, Parent will prepare
and file any other filings required under the Exchange Act, the Securities Act
or any other Federal, foreign or Blue Sky laws relating to the Merger and the
transactions contemplated by this Agreement (the "OTHER FILINGS"). Parent will
notify the Company promptly upon the receipt of any comments from the SEC or its
staff and of any request by the SEC or its staff or any other government
officials for amendments or supplements to the Registration Statement, the Proxy
Statement or any Other Filing or for additional information and will supply the
other with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Registration
Statement, the Proxy Statement, the Merger or any Other Filing. The Proxy
Statement, the Registration Statement and the Other Filings will comply in all
material respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs which is required
to be set forth in an amendment or supplement to the Proxy Statement, the
Registration Statement or any Other Filing, the Company or Parent, as the case
may be, will promptly inform the other of such occurrence and cooperate in
filing with the SEC or its staff or any other government officials, and/or
mailing to stockholders of the Company and Parent, such amendment or supplement.
(b) Subject to the provisions of Section 4.3, the Proxy Statement will
include the recommendation of the Board of Directors of the Company in favor of
adoption and approval of this Agreement and approval of the Merger. In addition,
the Proxy Statement will include the recommendation of the Board of Directors of
Parent in favor of the issuance of shares of Parent Common Stock by virtue of
the Merger.
5.2 Meetings of Stockholders. Promptly after the date hereof, the Company
will take all action necessary in accordance with Delaware Law and its
Certificate of Incorporation and Bylaws to convene the Company Stockholders'
Meeting to be held as promptly as practicable, and in any event (to the extent
permissible under applicable law) within forty-five (45) days after the
declaration of effectiveness of the Registration Statement, for the purpose of
voting upon this Agreement. The Company will consult with Parent and use all
commercially reasonable efforts to hold the Company Stockholders' Meeting on the
same day as the Parent Stockholders' Meeting. Promptly after the date hereof,
Parent will take all action necessary in accordance with Nova Scotia Law and its
Memorandum and Articles of Association to convene the Parent Stockholders'
Meeting to be held as promptly as practicable, and in any event (to the extent
permissible under applicable law) within forty-five (45) days after the
declaration of effectiveness of the Registration Statement for the purpose of
voting upon the issuance of shares of Parent Common Stock by virtue of the
Merger. Parent will consult with the Company and will use all commercially
reasonable efforts to hold the Parent Stockholders' Meeting on the same day as
the Company Stockholders' Meeting. For so long as the Board of Directors of the
Company is required to make the recommendation set forth in Section 5.1, the
Company will use all commercially reasonable efforts to solicit from its
stockholders proxies in favor of the adoption and approval of this Agreement and
the approval of the Merger and will take all other action necessary or advisable
to secure the vote or consent of its stockholders required by Delaware law to
approve the Merger. For so long as the Board of Directors of Parent is required
to make the recommendations set forth in Section 5.1., Parent will use all
commercially reasonable efforts to solicit from its stockholders proxies in
favor of the issuance of shares of Parent Common Stock by virtue of the Merger.
5.3 Additional Assurances. At the request of Parent, the Company shall use
commercially reasonable efforts to cause the Company's stockholders to execute
and deliver to Parent such instruments and do and perform such acts and things
as may be necessary or desirable for complying with all applicable securities
laws, California Law, Delaware Law and Nova Scotia Law.
5.4 Access to Information. Each party shall afford the others and their
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of its
properties, books, contracts, commitments and records, and (b) all other
information concerning its business, properties and personnel (subject to
restrictions imposed by applicable
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law) as the other may reasonably request, subject, in the case of Parent, to
reasonable limits on access to its technical and other nonpublic information. No
information or knowledge obtained in any investigation pursuant to this Section
5.4 shall affect or be deemed to modify any representation or warranty contained
herein or the conditions of the parties to consummate the Merger.
5.5 Public Disclosure. Parent, Merger Sub and the Company will consult
with each other before issuing any press release or otherwise making any public
statement with respect to the Merger, this Agreement or an Acquisition Proposal
and will not issue any such press release or make any such public statement
prior to such consultation, except as may be required by law or any listing
agreement with a national securities exchange or the Nasdaq National Market. If
such law or listing agreement requires disclosure prior to such consultation,
the entity issuing the press release or making the public statement will provide
the press release or the public statement in writing to the other with as much
advance notice as is practicable, and in any event at the same time as the press
release or public statement is distributed to the media.
5.6 Consents. Each party shall use, in respect of any contract to which it
is a party, all reasonably commercial efforts to obtain all material consents,
waivers and approvals of parties to any Contract as may be required in
connection with the Merger, or for any such Contract to remain in full force and
effect without limitation, modification or alteration after the Effective Time
(all of such consents, waivers and approvals are set forth in Company Disclosure
Schedules) so as to preserve all rights of and benefits to the Company and
Parent thereunder.
5.7 FIRPTA Compliance. On or prior to the Closing Date, the Company shall
deliver to Parent a properly executed statement in a form reasonably acceptable
to Parent for purposes of satisfying Parent's obligations under Treasury
Regulation Section 1.1445-2(c)(3).
5.8 Commercially Reasonable Efforts. Subject to the terms and conditions
provided in this Agreement, each of the parties hereto shall use all
commercially reasonable efforts to ensure that the closing conditions set forth
in Article VI of the other party are satisfied, and to take promptly, or cause
to be taken, all actions, and to do promptly, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby, to obtain
all necessary waivers, consents and approvals, to effect all necessary
registrations and filings, and to remove any injunctions or other impediments or
delays, legal or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement for the purpose of securing to the
parties hereto the benefits contemplated by this Agreement; provided that
neither party shall be required to agree to any divestiture by Parent or the
Company or any of Parent's subsidiaries or affiliates or the Company's
subsidiary or affiliates of shares of capital stock or of any business, assets
or property of Parent or its subsidiaries or affiliates or the Company or its
affiliates, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
5.9 Notification of Certain Matters. The Company shall give prompt notice
to Parent, and Parent shall give prompt notice to the Company of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or
Parent, respectively, contained in this Agreement to be untrue or inaccurate in
any material respect at or prior to the Effective Time and (ii) any material
failure of the Company and Parent, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.9 shall not limit or otherwise affect any remedies available to the
party receiving such notice,
5.10 Certain Benefit Plans. Subject to compliance with pooling-of-interest
accounting treatment of the Merger, as soon as practicable after the Effective
Time Parent shall take such reasonable actions as are necessary to allow
eligible employees of the Company who become employees of Parent or the
Surviving Corporation to participate in the benefit programs of Parent available
to employees of Parent having similar positions and levels of responsibility on
the terms and conditions provided in such plans.
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5.11 Pooling Accounting. Each of the Company and Parent shall use its best
efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. Each of the Company and Parent shall
use its best efforts to cause its respective employees, directors, stockholders
and affiliates not to take any action that would adversely affect the ability of
Parent and the Company to account for the business combination to be effected by
the Merger as a pooling of interests.
5.12 Affiliate Agreements. Schedule 5.12 of the Company Disclosure
Schedules and the Parent Disclosure Schedules, respectively, sets forth those
persons who, in the Company's reasonable judgment, or in Parent's reasonable
judgment, as the case may be, are "affiliates" of the Company, or Parent, as the
case may be, within the meaning of Rule 145 (each such person an "AFFILIATE")
promulgated under the Securities Act ("RULE 145"). Each of the Company and
Parent shall provide the other such information and documents as shall be
reasonably requested for purposes of reviewing such list. Each of Parent and the
Company has delivered or shall cause to be delivered to Parent, as soon as
practicable after the execution of this Agreement from each of their respective
Affiliates, an executed Affiliate Agreement in the form attached hereto as
Exhibit C (for Affiliates of the Company) or Exhibit D (for Affiliates of the
Parent). Parent shall be entitled to place appropriate legends on the
certificates evidencing any Parent Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for Parent Common Stock,
consistent with the terms of such Affiliate Agreements.
5.13 Voting Agreements. The Company shall deliver or cause to be delivered
to Parent, concurrently with the execution of this Agreement, from each person
listed on Schedule 5.13 of the Company Disclosure Schedules, an executed Company
Stockholder Voting Agreement in the form attached hereto as Exhibit A-1 and
Parent shall deliver to Company, concurrently with the execution of this
Agreement, from each person listed on Schedule 5.13 of the Parent Disclosure
Schedules, an executed Parent Stockholder Voting Agreement in the form attached
hereto as Exhibit A.2.
5.14 Additional Documents and Further Assurances. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for the purposes of effecting the transactions contemplated by this
Agreement.
5.15 Registration Statement on Form S-8. Parent shall file a registration
statement on Form S-8 for the shares of Parent Common Stock issuable with
respect to assumed Company Options as soon as practicable after the Effective
Time.
5.16 Nasdaq National Market Listing. Parent shall authorize for listing on
The Nasdaq National Market the shares of Parent Common Stock issuable, and those
required to be reserved for issuance, in connection with the Merger, upon
official notice of issuance.
5.17 Company's Auditors. The Company will use all commercially reasonable
efforts to cause its management and its independent auditors to facilitate on a
timely basis (i) the preparation of audited financial statements (including pro
forma financial statements if required) for the twelve (12) month period ended
December 31, 1998 as required by Parent to comply with applicable SEC
regulations, (ii) the review of the Company's audit work papers for up to the
past three years, including the examination of selected interim financial
statements and data, and (iii) the delivery of such representations from the
Company's independent auditors as may be reasonably requested by Parent or its
accountants in order for Parent's auditors to render the letter called for by
Section 6.3(i) hereof.
5.18 Non-Competition Agreements. The Company shall deliver or use all
commercially reasonable efforts to cause to be delivered to Parent an executed
Non-Competition Agreement in substantially the form attached hereto as Exhibit B
concurrently with the execution of this Agreement from each of the persons
listed on Schedule 5.18.
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5.19 Tax Matters. Neither Parent nor the Company shall take any action
which would cause the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Code.
(a) At or prior to the filing of the Registration Statement, Parent, Merger
Sub and the Company shall execute and deliver to Wilson Sonsini Goodrich &
Rosati, P.C. and Cooley Godward LLP tax representation letters in form
reasonably satisfactory to such counsel.
(b) Following delivery of the tax representation letters pursuant to
Section 5.19(a), each of Parent and the Company shall use its best efforts to
cause its respective counsel to deliver a legal opinion satisfying the
requirements of Item 601 of Regulation S-K promulgated under the Securities Act.
In rendering such opinions, each of such counsel shall be entitled to rely upon
the tax representation letters delivered pursuant to Section 5.19(a).
(c) At or prior to the Closing, Parent, Merger Sub and the Company shall
execute and deliver to Wilson Sonsini Goodrich & Rosati, P.C. arid Cooley
Godward LLP tax representation letters in form reasonably satisfactory to such
counsel.
(d) Following delivery of the tax representation letters pursuant to
Section 5.19(c), each of Parent and the Company shall use its best efforts to
cause its respective counsel to deliver the legal opinion contemplated by
Section 6.1(e).
5.20 SEC Reports. Between the date of this Agreement and the Closing Date,
Parent shall file all reports and other filings required to be filed by it under
the 1934 Act and shall deliver to the Company, promptly after they become
available, all registration statements, proxy statements, reports and other
filings, and all amendments thereto, that Parent files with the SEC.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Company Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the requisite vote under applicable law and the
Company's Certificate of Incorporation and Bylaws.
(b) Parent Stockholder Approval. The issuance of Parent Common Stock in the
Merger shall have been approved by the stockholders of Parent by the requisite
vote in accordance with the rules of the Nasdaq National Market.
(c) Government Approvals. All approvals of governments and governmental
agencies necessary to consummate the transactions hereunder shall have been
received.
(d) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the completion of the Merger shall be in effect.
(e) Tax Opinions. Parent and the Company shall each have received
substantially identical written opinions from their counsel, Wilson Sonsini
Goodrich & Rosati and Cooley Godward LLP respectively, in form and substance
reasonably satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, provided,
however, that if counsel to either Parent or the Company does not render such
opinion, this condition shall nonetheless be deemed to be satisfied if counsel
to the other party renders such opinion to such party. In rendering such
opinions, counsel may rely upon reasonable representations and certificates of
Parent, Merger Sub and the Company.
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(f) Nasdaq Listing. The shares of Parent Common Stock issuable to
stockholders of the Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on The Nasdaq National Market upon official notice
of issuance.
(g) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose, and no similar proceeding in respect
of the Proxy Statement, shall have been initiated or threatened in writing by
the SEC.
(h) Pooling Letters. Immediately prior to the Closing, Parent shall have
received a letter from KPMG LLP regarding such firm's concurrence with Parent
management's conclusions as to the appropriateness of pooling of interests
accounting for the Merger under Accounting Principles Board Opinion No. 16 ("APB
16"), if consummated in accordance with this Agreement.
6.2 Additional Conditions to Obligations of the Company. The obligations
of the Company to consummate the Merger and the transactions contemplated by
this Agreement shall be subject to the satisfaction at or prior to the Closing
of each of the following conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) Representations and Warranties. The representations and warranties of
Parent and Merger Sub contained in this Agreement shall be true and correct in
all material respects on and as of the Closing Date, except for changes
contemplated by this Agreement and except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct in all material respects as of such date), with the same
force and effect as if made on and as of the Closing Date, except, in all such
cases, for such breaches, inaccuracies or omissions of such representations and
warranties which have neither had nor reasonably would be expected to have a
Material Adverse Effect on Parent; and the Company shall have received a
certificate to such effect signed on behalf of Parent by a duly authorized
officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by them on or prior to the
Effective Time, and the Company shall have received a certificate to such effect
signed by a duly authorized officer of Parent.
(c) Third Party Consents. The Company shall have been furnished with
evidence satisfactory to it that Parent has obtained the consents, approvals and
waivers set forth an Schedule 6.2(c) except where the failure to obtain such
consents would not result in a Material Adverse Effect on Parent and its
subsidiaries taken as a whole.
(d) Legal Opinion. The Company shall have received a legal opinion from
Stewart McKelvey Stirling Scales, Nova Scotia counsel to Parent, from Wilson
Sonsini Goodrich & Rosati, Professional Corporation, United States counsel to
Parent and from Weir & Foulds, Ontario counsel to Parent, in substantially the
forms attached hereto as Exhibit E-1, Exhibit E-2 and Exhibit E-3, respectively,
provided, however, that the opinions to be given by Nova Scotia counsel and
Ontario counsel to Parent shall be in a form reasonably satisfactory to the
Company and its counsel (which form may be different from those set forth in the
Exhibits).
(e) Material Adverse Effect. There shall not have occurred any event,
effect or change that has or would reasonably be expected to have a Material
Adverse Effect on Parent and its subsidiaries taken as a whole.
(f) Parent Board of Directors. The Parent Board of Directors shall consist
of seven (7) members and shall include as of the Effective Time, Alexander S.
Lushtak and Lawrence G. Finch appointed for three (3) year terms ending on the
date of the Third Annual General Meeting of Parent following their appointment,
duly and validly appointed by Parent in accordance with applicable laws and
Parent's Memorandum and Articles of Association.
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6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions. any of which may
be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. The representations and warranties of
the Company contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date (without regard to any updates
to the Company Disclosure Schedules, unless otherwise agreed by Parent), except
for changes contemplated by this Agreement and except for those representations
and warranties which address matters only as of a particular date (which shall
remain true and correct in all material respects as of such date), with the same
force and effect as if made on and as of the Closing Date, except, in all such
cases, for such breaches or inaccuracies of such representations and warranties
which have neither had nor reasonably would be expected to have a Material
Adverse Effect on the Company, and Parent and Merger Sub shall have received a
certificate to such effect signed on behalf of the Company by the chief
executive officer and chief financial officer of the Company.
(b) Agreements and Covenants. The Company shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time, and Parent and Merger Sub shall have received a certificate to such effect
signed by a duly authorized officer of the Company.
(c) Third Party Consents. Parent shall have been furnished with evidence
satisfactory to it that the Company has obtained the consents, approvals and
waivers set forth in Schedule 6.3(c) (including without limitation any consents,
waivers or approvals required under any contract or agreement to which the
Company is a party or by which it is bound and which are necessary in connection
with the Merger to transfer to the Surviving Corporation all rights of the
Company thereunder) except where the failure to obtain such consents would not
result in a Material Adverse Effect on the Company.
(d) Legal Opinion. Parent shall have received a legal opinion from Cooley
Godward LLP, legal counsel to the Company, in substantially the form attached
hereto as Exhibit F.
(e) Affiliate Agreements. Each of the parties identified by the Company as
being an Affiliate of the Company shall have delivered to Parent an executed
Affiliate Agreement which shall be in full force and effect.
(f) Non-Competition Agreements. Each of the persons listed on Schedule 5.18
(the "REQUIRED EMPLOYEES") shall have executed and delivered to Parent a
Non-Competition Agreement in the form attached hereto as Exhibit B pursuant to
Section 5.18 herein. Each of the Required Employees shall be employees of the
Company immediately prior to the Effective Time and the Non-Competition
Agreements executed by the Required Employees shall have not been terminated or
repudiated by the Required Employees, and all of such Non-Competition Agreements
shall be in full force and effect.
(g) Resignation of Directors. The directors of the Company in office
immediately prior to the Effective Time shall have resigned as directors of the
Company effective immediately prior to the Effective Time.
(h) Dissenters' Rights. Holders of more than 5% of the outstanding shares
of Company Capital Stock shall not have exercised, nor shall they have any
continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
(i) Company Stockholder Approval. The Company shall have obtained at the
Company Stockholder Meeting the affirmative approval of at least one share more
than ninety percent (90%) of the outstanding voting capital stock of the Company
in favor of the Merger.
(j) Material Adverse Effect. There shall not have occurred any event,
effect or change that has or would reasonably be expected to have a Material
Adverse Effect on the Company.
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ARTICLE VII
ESCROW
7.1 Escrow Period. Subject to the following requirements, the Escrow Fund
(as defined in Section 7.2(a) below) shall be in existence immediately following
the Effective Time and shall terminate at 5:00 p.m., California time, on the
first to occur of (a) the date of the first audit of financial statements
reflecting any combined operations of Parent and the Company after the Effective
Time, or (b) the date which is one (1) year following the Closing Date (from the
Effective Time to such date of termination, the "ESCROW PERIOD"); provided that
the Escrow Period shall not terminate with respect to such amount (or some
portion thereof) that is necessary to satisfy any unsatisfied claims made
pursuant to Section 7.2(d) concerning facts and circumstances existing prior to
the termination of such Escrow Period specified in any Officer's Certificate (as
defined in Section 7.2(d) below) delivered to the Escrow Agent prior to
termination of such Escrow Period; provided further that the Escrow Fund will
terminate in full upon final and complete resolution of all disputed matters.
7.2 Escrow Arrangements.
(a) Escrow Fund. At the Effective Time, the Company's stockholders will be
deemed to have received and deposited with the Escrow Agent (as defined below)
the Escrow Amount (plus any additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected by Parent after the Effective
Time) without any act of any stockholder. As soon as practicable after the
Effective Time, the Escrow Amount, without any act of any stockholder, will be
deposited with an institution acceptable to Parent and the Securityholder Agent
(as defined in Section 7.2(g) below)) as Escrow Agent (the "ESCROW AGENT"), such
deposit to constitute an escrow fund (the "ESCROW FUND") to be governed by the
terms set forth herein and at Parent's cost and expense. The portion of the
Escrow Amount contributed on behalf of each stockholder of the Company shall be
in proportion to the aggregate Parent Common Stock which such holder would
otherwise be entitled under Section 1.6(a). No portion of the Escrow Amount
shall be contributed in respect of any Company Options or Warrants. The Escrow
Fund shall be available to compensate Parent and its affiliates for any claims,
losses, liabilities, damages, costs and expenses, including, with respect to
claims asserted by third parties, reasonable attorneys' fees and expenses, and
expenses of investigation and defense (hereinafter individually a "LOSS" and
collectively "LOSSES") incurred by Patent, its officers, directors, or
affiliates (including the Surviving Corporation) as a result of any breach of a
representation or warranty of the Company contained in Article II herein (as
modified by the Company Disclosure Schedules, without giving effect to any
update thereto), or any breach by the Company of any covenant contained herein;
provided, however, that Parent may not receive any shares from the Escrow Fund
unless and until (and then only to the extent that) such Losses exceed in the
aggregate $500,000. Parent and the Company each acknowledge that such Losses, if
any, would relate to unresolved contingencies existing at the Effective Time,
which if resolved at the Effective Time would have led to a reduction in the
aggregate Merger Consideration. Nothing herein shall limit the liability of the
Company for any breach of any representation, warranty or covenant if the Merger
does not close.
(b) Distribution upon Termination of Escrow Period. Upon termination of the
Escrow Period, the Escrow Agent shall deliver to the stockholders of the Company
that portion of the Escrow Fund that is not required to satisfy any claims made
by Parent pursuant to Section 7.2(d) hereof. Deliveries of Escrow Amounts to the
stockholders of the Company pursuant to this Section 7.2(b) shall be made in
proportion to their respective original contributions to the Escrow Fund;
provided, however, that if any of the shares in escrow are subject to a
repurchase right in favor of the Company upon termination of services to the
Company, then such shares shall not be distributed to the applicable Shareholder
but in lieu thereof shall (to the extent not already repurchased in the event of
prior termination of services) be delivered to the appropriate Escrow Agent who
is authorized to hold such shares for the benefit of the Company in the event of
a future termination of services to the Company. Any shares delivered out of the
Escrow Fund to the stockholders of the Company Or the Securityholder Agent shall
be irrevocably released from the Escrow Fund and no further claim under this
Article VII may be made by any person in respect thereof
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(c) Protection of Escrow Fund.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund during
the Escrow Period, shall treat such fund as a trust fund in accordance with
the terms of this Agreement and not as the property of Parent or the
Company's stockholders and shall hold and dispose of the Escrow Fund only
in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock
split) ("NEW SHARES") in respect of Parent Common Stock in the Escrow Fund
which have not been released from the Escrow Fund shall be added to the
Escrow Fund and become a part thereof New Shares issued in respect of
shares of Parent Common Stock which have been released from the Escrow Fund
shall not be added to the Escrow Fund but shall be distributed to the
recordholders thereof. Cash dividends on Parent Common Stock shall not be
added to the Escrow Fund but shall be distributed to the recordholders
thereof.
(iii) Each stockholder shall have voting rights with respect to the
shares of Parent Common Stock contributed to the Escrow Fund by such
stockholder (and on any New Shares added to the Escrow Fund in respect of
such shares of Parent Common Stock).
(d) Claims Upon Escrow Fund.
(i) If the Escrow Agent receives at any time on or before 5:00 p.m.
Pacific Standard Time the last day of the Escrow Period a certificate
signed by any officer of Parent (an "OFFICER'S CERTIFICATE"): (A) stating
that Parent has paid or properly accrued or reasonably anticipates that it
will have to pay or accrue Losses for which it is entitled to compensation
under Section 7.2(a), and (B) specifying in reasonable detail the
individual items of such Losses included in the amount so stated, the date
each such item was paid or properly accrued, or the basis for such
anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related, the Escrow Agent shall,
subject to the provisions of Section 7.2(c) hereof, deliver to Parent out
of the Escrow Fund, as promptly as practicable, shares of Parent Common
Stock held in the Escrow Fund in an amount equal to any such Losses
incurred or accrued by Parent.
(ii) For the purposes of determining the number of shares of Parent
Common Stock to be delivered to Parent out of the Escrow Fund pursuant to
Section 7.2(d)(i) hereof, each share of Parent Common Stock shall be valued
at the closing price of Parent's Common Stock on The Nasdaq National
Market, as reported in The Wall Street Journal on the Closing Date. Parent
and the Securityholder Agent shall certify such fair market value in a
certificate signed by both Parent and the Securityholder Agent, and shall
deliver such certificate to the Escrow Agent.
(iii) The Securityholder Agent shall be entitled to have his
reasonable costs and expenses reimbursed from the Escrow Fund.
Additionally, the Escrow Fund shall be used to pay the legal and other
expenses of the Securityholder Agent in the event the Securityholder Agent
assumes the defense of a claim or legal proceeding in accordance with
Section 7.2(l) (a "THIRD PARTY DEFENSE"). The Escrow Agent may sell a
number of shares otherwise deliverable to the stockholders of the Company
equal in value as to such costs and expenses. The Securityholder Agent
shall provide to the Escrow Agent a written request detailing the costs and
expenses and the aggregate amount required and, subject to the provisions
of this paragraph, the Escrow Agent shall immediately sell the shares and
transfer the proceeds to the Securityholder Agent. For reimbursements not
relating to a Third Party Defense, the sale of shares shall occur only from
those otherwise distributable to the stockholders of the Company.
(e) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Securityholder Agent and for a period of thirty (30) days after
such delivery, the Escrow Agent shall make no delivery to Parent of any shares
of Parent Common Stock pursuant to Section 7.2(d) hereof unless the Escrow Agent
shall have received written authorization from the Securityholder Agent to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of shares of Parent Common Stock from the
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Escrow Fund in accordance with Section 7.2(d) hereof, provided that no such
payment or delivery may be made if the Securityholder Agent shall object in a
written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to the Escrow Agent prior to the expiration
of such thirty (30) day period.
(f) Exclusive Remedy. Except for cases of actual common law fraud, the sole
recourse and exclusive remedy of Parent, the Surviving Corporation, or any other
person entitled to compensation under Section 7.2, against the Company, the
Securityholder Agent and its stockholders after the Closing for the breach of
any representations, warranties, covenants and agreements contained in this
Agreement, any agreement or instrument contemplated hereby, any document
relating hereto or thereto or any Exhibit or Schedule to this Agreement, or
otherwise arising from the transactions contemplated hereby, shall be to assert
a claim under the provisions of this Article VII and to recover Parent Common
Stock from the Escrow Fund. The only legal action which may be asserted by
Parent, the Surviving Corporation, or any other person entitled to assert a
claim under Section 7.2, against the Securityholder Agent or the stockholders of
the Company with respect to any matter which is the subject of this Agreement
shall be a contract action to enforce this Agreement, and any recovery by any
such person shall be limited as provided in this Article VII. Without limiting
the generality of the foregoing, no legal action based upon predecessor or
successor liability, contribution, tort or strict liability may be maintained by
Parent, the Surviving Corporation against the stockholders of the Company or the
Securityholder Agent with respect to any matter that is the subject of this
Agreement, any agreement or instrument contemplated hereby, any document
relating hereto or thereto or any Exhibit or Schedule to this Agreement, or
otherwise arising from the transactions contemplated hereby.
(g) Limitation of Liability. Neither Parent, the Surviving Corporation or
any other person entitled to a remedy under Section 7.2, or employees or
affiliates thereof will be compensated pursuant to this Article VII:
(i) with respect to consequential damages, including, without
limitation, consequential damages consisting of business interruption or
lost profits, or with respect to punitive damages;
(ii) with respect to any obligation, liability or matter to the extent
reserves or accruals for such matter are reflected in the financial
statements of Company;
(iii) to the extent any obligation or liability or matter, including
with respect to environmental remediation and clean-up, arises under any
law or regulation or interpretations of any law or regulation that anise or
are promulgated or announced after the Effective Time; or
(iv) to the extent that insurance proceeds are recovered.
(h) Civil Liability Under RICO. The parties hereby waive all rights to
pursue civil remedies to which they may be entitled or may become entitled with
respect to this Agreement and the transactions contemplated hereby against the
other parties hereto under the Racketeer Influenced and Corrupt Organization Act
of 1970, as amended, including specifically any rights to treble damages which
may be available to them pursuant to 18 U.S.C. Section 1964(c).
(i) Resolution of Conflicts, Arbitration.
(i) In case the Securityholder Agent shall so object in writing to any
claim or claims made in any Officer's Certificate, the Securityholder Agent
and Parent shall attempt for a period of twenty-one (21) days in good faith
to agree upon the rights of the respective parties with respect to each of
such claims. If the Securityholder Agent and Parent should so agree, a
memorandum setting forth such agreement shall be prepared and signed by
both parties and shall be furnished to the Escrow Agent. The Escrow Agent
shall be entitled to rely on any such memorandum and distribute shares of
Parent Common Stock from the Escrow Fund in accordance with the terms
thereof
(ii) If no such agreement can be reached after good faith negotiation
during such twenty-one (21) day period, either Parent or the Securityholder
Agent may demand arbitration of the matter unless the amount of the damage
or loss is at issue in pending litigation with a third party, in which
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event arbitration shall not be commenced until such amount is ascertained
or both parties agree to arbitration; and in either such event the matter
shall be settled by arbitration conducted by one arbitrator. Parent and the
Securityholder Agent shall agree on such arbitrator; provided that if
Parent and the Securityholder Agent cannot agree on such arbitrator within
seven (7) days after the expiration of the twenty-one (21) day period,
either Parent or the Securityholder Agent can request that the Judicial
Arbitration and Mediation Services ("JAMS") select the arbitrator. The
arbitrator selected shall determine the dispute in accordance with Article
VII of this Agreement, The arbitrator shall set a limited time period and
establish procedures designed to reduce the cost and time for discovery
while allowing the parties an opportunity, adequate in the sole judgment of
the arbitrator, to discover relevant information from the opposing parties
about the subject matter of the dispute. The arbitrator shall rule upon
motions to compel or limit discovery and shall have the authority to impose
sanctions, including attorneys' fees and costs, to the same extent as a
court of competent law or equity, should the arbitrator determine that
discovery was sought without substantial justification or that discovery
was refused or objected to without substantial justification. The decision
of the arbitrator as to the validity and amount of any claim in such
Officer's Certificate shall be binding and conclusive upon the parties to
this Agreement, and notwithstanding anything in Section 7.2(e) hereof, the
Escrow Agent shall be entitled to act in accordance with such decision and
make or withhold payments out of the Escrow Fund in accordance therewith.
Such decision shall be written and shall be supported by written findings
of fact and conclusions which shall set forth the award, judgment, decree
or order awarded by the arbitrator.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be
held in Santa Clara County, California under the rules then in effect of
the American Arbitration Association. For purposes of this Section 7.2(f),
in any arbitration hereunder in which any claim or the amount thereof
stated in the Officer's Certificate is at issue, Parent shall be deemed to
be the Non-Prevailing Party in the event that the arbitrators award Parent
less than the sum of one-half ( 1/2) of the disputed amount plus any
amounts not in dispute; otherwise, the stockholders of the Company as
represented by the Securityholder Agent shall be deemed to be the
Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay
its own expenses, the fees of the arbitrator, the administrative costs of
the arbitration and the expenses, including without limitation, reasonable
attorneys' fees and costs, incurred by the other party to the arbitration.
(j) Securityholder Agent of the Stockholders; Power of Attorney.
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any stockholder, Robert R. Tillman, shall
be appointed as agent and attorney-in-fact (the "SECURITYHOLDER AGENT") for
each stockholder of the Company (except such stockholders, if any, as shall
have exercised their appraisal or dissenters' rights under Delaware Law or
California Law, as the case may be), for and on behalf of stockholders of
the Company, to give and receive notices and communications, to authorize
delivery to Parent of shares of Parent Common Stock from the Escrow Fund in
satisfaction of claims by Parent, to object to such deliveries, to agree
to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators with
respect to such claims, and to take all actions necessary or appropriate in
the judgment of Securityholder Agent for the accomplishment of the
foregoing. Such agency may be changed by the stockholders of the Company
from time to time upon not less than thirty (30) days prior written notice
to Parent; provided that the Securityholder Agent may not be removed unless
holders of a two-thirds interest of the Escrow Fund agree to such removal
and to the identity of the substituted agent. Any vacancy in the position
of Securityholder Agent may be filled by approval of the holders of a
majority in interest of the Escrow Fund. No bond shall be required of the
Securityholder Agent, and the Securityholder Agent shall not receive
compensation for his or her services. Notices or communications to or from
the Securityholder Agent shall constitute notice to or from each of the
stockholders of the Company.
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(ii) The Securityholder Agent shall not be liable for any act done or
omitted hereunder as Securityholder Agent in good faith, absent gross
negligence. The stockholders of the Company on whose behalf the Escrow
Amount was contributed to the Escrow Fund shall severally indemnify the
Securityholder Agent and hold the Securityholder Agent harmless against any
loss, liability or expense incurred without gross negligence or bad faith
on the part of the Securityholder Agent and arising out of or in connection
with the acceptance or administration of the Securityholder Agent's duties
hereunder, including the reasonable fees and expenses of any legal counsel
retained by the Securityholder Agent.
(k) Actions of the Securityholder Agent. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all the
stockholders for whom a portion of the Escrow Amount otherwise issuable to them
are deposited in the Escrow Fund and shall be final, binding and conclusive upon
each of such stockholders, and the Escrow Agent and Parent may rely upon any
such decision, act, consent or instruction of the Securityholder Agent as being
the decision, act, consent or instruction of each every such stockholder of the
Company, The Escrow Agent and Parent are hereby relieved from any liability to
any person for any acts done by them in accordance with such decision, act,
consent or instruction of the Securityholder Agent.
(1) Third-Party Claims.
(i) In the event Parent becomes aware of a third party claim ("THIRD
PARTY CLAIM") then Parent shall indicate in writing to Securityholder Agent
(the "CLAIM NOTICE") whether it has elected (1) to tender to the
Securityholder Agent the defense of such Third Party Claim through counsel
of the Securityholder Agent's own choosing, or (2) to assume the defense of
any such Third Party Claim through counsel of Parent's own choosing;
provided, however, that Parent shall only be entitled to assume the defense
of a Third Party Claim if such claim has been made by a customer and/or
supplier of Parent or the Company and provided further that Parent shall
not be entitled to settle such claim without the prior written consent of
the Securityholder Agent, which consent shall not be unreasonably withheld.
(ii) Securityholder Agent will have twenty (20) days following
delivery of the Claim Notice to make such investigation of the Third Party
Claim as he deems necessary or desirable. On or prior to the expiration of
such 20-day period, Securityholder Agent will, by written notice to the
Parent (a "RESPONSE NOTICE") if the defense of a Third Party Claim has been
tendered to the Securityholder Agent pursuant to Section 7.2(l)(i), or if
the Securityholder Agent is otherwise entitled to assume such defense,
indicate whether Securityholder Agent will assume or decline the tendered
defense.
The failure of the Securityholder Agent to deliver to Parent a timely
Response Notice in accordance with this Section 7.2(l)(ii) will be deemed
an a decline to assume the tendered defense of a Third Party Claim, if such
defense has been tendered.
(iii) Defense by Securityholder Agent. If the defense of a Third Party
Claim is tendered by Parent to Securityholder Agent pursuant to Section
7.2(l)(i) and is subsequently assumed by the Securityholder Agent, Parent
will be entitled, at its own expense, to participate in such settlement or
defense through counsel chosen by the Parent. If the Securityholder Agent
assumes the defense of the Third Party Claim, he will take all steps
reasonably necessary in the defense or settlement of the Third Party Claim
and all Losses (other than Parent's expenses of participation in such
defense or settlement) of Parent caused by or arising out of any settlement
thereof or any judgment in connection therewith shall be compensated from
the Escrow Fund to the extent thereof. Securityholder Agent may not, in the
defense of any Third Party Claim he assumes, except with the written
consent of the Parent, consent to the entry of any judgment or enter into
any settlement (i) which does not include as an unconditional term thereof
the giving to Parent by the third party of a full and final release from
all liability in respect of such Third Party Claim, (ii) which will limit,
restrict or otherwise affect the, right of the Parent to carry on or
conduct business (then or in the future), or require any payment to be made
by Parent or limit, restrict, make more expensive or less profitable or
otherwise adversely affect the manner in which Parent carries on or
conducts business
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(then or in the future) or (iii) under which the amount of settlement or
judgment against the Parent exceeds the amount of the Escrow Fund (valued
as set forth in this Article VII).
(iv) Defense by Securityholder Agent. If Securityholder Agent does not
assume the defense of a Third Party Claim within the 20-day period required
by Section 7.2(l)(ii), or if Parent assumes the defense of any such Third
Party Claim pursuant to Section 7.2(l)(i), then Parent may defend such
Third Party Claim in such manner as it deems appropriate, in which case
legal expenses of Parent's counsel and all other expenses incurred in such
defense will be promptly paid by the Escrow Agent on behalf of the Company
stockholders out of the Escrow Fund (unless liability for the Third Party
Claim is disputed pursuant to Section 7.2(e)) as receipts, invoices or
other reasonable evidence of such expenses are presented. In such case,
subject to Section 7.2(l)(i) Parent (with the consent of Securityholder
Agent, which will not unreasonably be withheld) may settle such Third Party
Claim on such terms as it reasonably deems appropriate, and the Escrow
Agent will promptly pay Parent for the Losses incurred as a result of such
settlement for which Parent is entitled to be compensated (unless liability
for the Third Party Claim is disputed pursuant to Section 7.2(e)). If no
such settlement of such Third Party Claim is made, the Escrow Agent will
promptly pay the Parent for the Losses arising out of any judgment rendered
with respect to such Third Party Claim (unless liability for the Third
Party Claim is disputed pursuant to Section 7.2(e)); provided, however,
that if such judgment is appealable and the Parent notifies the
Securityholder Agent of its intention not to appeal, the Securityholder
Agent may prosecute such appeal, at its sole cost and expense, subject to
the terms set forth in this Article VII. In connection with any settlement
entered into by Parent and approved by Securityholder Agent, Parent shall
grant to the Securityholder Agent an unconditional release of any further
claims against the Escrow Fund in connection with the specific Losses to
which such settlement relates, contingent upon release from the Escrow Fund
of the amounts required by this Article VII (which amounts shall be
specified in such release).
(m) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein, and as set forth in any
additional written escrow instructions which the Escrow Agent may receive
after the date of this Agreement which are signed by an officer of Parent
and the Securityholder Agent, and may rely and shall be protected in
relying or refraining from acting on any instrument reasonably believed to
be genuine and to have been signed or presented by the proper party or
parties. The Escrow Agent shall not be liable for any act done or omitted
hereunder as Escrow Agent while acting in good faith and in the exercise of
reasonable judgment, and any act taken, suffered, or permitted pursuant to
the advice of counsel shall be conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to comply with
and obey orders, judgments or decrees of any court of law, notwithstanding
any notices, warnings or other communications from any of the parties
hereto or any other person to the contrary. In case the Escrow Agent obeys
or complies with any such order, judgment or decree of any court, the
Escrow Agent shall not be liable to any of the parties hereto or to any
other person by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on account
of the identity, authority or rights of the parties executing or delivering
or purporting to execute or deliver this Agreement or any documents or
papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow Agent.
The Escrow Agent shall not incur any such liability for (A) any act or
failure to
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act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith
believe to be genuine, nor will the Escrow Agent be liable or responsible
for forgeries, fraud, impersonations, or determining the scope of any
representative authority. In addition, the Escrow Agent may consult with
legal counsel in connection with Escrow Agent's duties under this
Agreement. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf
of any party to this Agreement.
(vi) If any controversy arises between the parties to this Agreement,
or with any other party, concerning the subject matter of this Agreement,
its terms or conditions, the Escrow Agent will not be required to determine
the controversy or to take any action regarding it. The Escrow Agent may
hold all documents and shares of Parent Common Stock and may wait for
settlement of any such controversy by final appropriate legal proceedings
or other means as, in the Escrow Agent's discretion, the Escrow Agent deems
may be required, despite what may be set forth elsewhere in this Agreement.
In such event, the Escrow Agent will not be liable for damages.
(vii) The parties and their respective successors and assigns agree
jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, and disbursements that may
be imposed on Escrow Agent or incurred by Escrow Agent in connection with
the performance of his/her duties under this Agreement, including but not
limited to any litigation arising from this Agreement or involving its
subject matter.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to the parties; provided, however, that no
such resignation shall become effective until the appointment of a
successor escrow agent which shall be accomplished as follows: Parent and
the Securityholder Agent shall use their best efforts to mutually agree on
a successor escrow agent within thirty (30) days after receiving such
notice. If the parties fail to agree upon a successor escrow agent within
such time, the Escrow Agent shall have the right to appoint a successor
escrow agent authorized to do business in the State of California. The
successor escrow agent shall execute and deliver an instrument accepting
such appointment in form and substance acceptable to Parent and
Securityholder Agent and it shall, without further acts, be vested with all
the estates, properties, rights, powers, and duties of the predecessor
escrow agent as if originally named as escrow agent. The predecessor escrow
agent shall be discharged from any further duties and liability under this
Agreement upon the execution by such successor of such agreement.
(n) Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent. It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In the
event that the conditions of this Agreement are not promptly fulfilled, or if
the Escrow Agent renders any service not provided for in this Agreement, or if
the parties request a substantial modification of its terms, or if any
controversy arises, or if the Escrow Agent is made a party to, or intervenes in,
any litigation pertaining to this escrow or its subject matter, the Escrow Agent
shall be reasonably compensated for such extraordinary services and reimbursed
for all costs, attorney's fees, and expenses occasioned by such default, delay,
controversy or litigation. Parent promises to pay these sums upon demand.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual written consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not occurred
before 5:00 p.m. (Pacific time) on June 30, 1999 (provided that the right to
terminate this Agreement under this clause 8.1(b)(i) shall not be available to
any party whose willful failure to fulfill any obligation hereunder has been the
cause of, or resulted in, the failure of the Effective Time to occur on or
before such date but only so long as the other party is prepared to consummate
the Merger immediately); (ii) there shall be a final nonappealable order of a
federal or state court in effect preventing completion of the Merger; or (iii)
there shall be any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental entity that would
make completion of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to the
Merger, by any Governmental Entity, which would: (i) prohibit Parent's or the
Company's ownership or operation of all or any portion of the business of the
Company or (ii) compel Parent or the Company to dispose of or hold separate all
or a portion of the business or assets of the Company or Parent as a result of
the Merger;
(d) by Parent if it is not in material breach of its obligations under this
Agreement and there has been a breach of any representation, warranty, covenant
or agreement contained in this Agreement on the part of the Company and (i) such
breach has not been cured within fifteen (15) business days after written notice
to the Company (provided that, no cure period shall be required for a breach
which by its nature cannot be cured), and (ii) as a result of such breach the
conditions set forth in Section 6.3(a) or 6.3(b), as the case may be, would not
then be satisfied;
(e) by the Company if it is not in material breach of its obligations under
this Agreement and there has been a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of Parent or
Merger Sub and (i) such breach has not been cured within fifteen (15) business
days after written notice to Parent (provided that, no cure period shall be
required for a breach which by its nature cannot be cured), and (ii) as a result
of such breach the conditions set forth in Section 6.2(a) or 6.2(b), as the case
may be, would not then be satisfied;
(f) By Parent or Merger Sub if an event, effect or change having a Material
Adverse Effect on the Company shall have occurred after the date of this
Agreement;
(g) By the Company if an event, effect or change having a Material Adverse
Effect on Parent shall have occurred after the date of this Agreement;
(h) By either the Company or Parent if the required approvals of the
stockholders of the Company or the stockholders of Parent contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of stockholders duly convened
therefor or at any adjournment thereof (provided that the right to terminate
this Agreement under this Section 8.1(h) shall not be available to any party
where the failure to obtain stockholder approval of such party shall have been
caused by the action or failure to act of such party in breach of this Agreement
but only so long as that the other party is prepared to consummate the Merger
immediately);
(i) By Parent, if the Board of Directors of the Company recommends a
Company Superior Proposal to the stockholders of the Company, or if the Board of
Directors of the Company shall have withheld, withdrawn or modified in a manner
adverse to Parent its recommendation in favor of adoption and approval of this
Agreement and approval of the Merger;
(j) By the Company, if the Board of Directors of Parent recommends a Parent
Superior Proposal to the stockholders of Parent, or if the Board of Directors of
Parent shall have withheld, withdrawn or
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modified in a manner adverse to the Company its recommendation in favor of
approving the issuance of shares of Parent Common Stock by virtue of the Merger.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Merger Sub or the
Company, or their respective officers, directors or stockholders, provided that
each party shall remain liable for any breaches of this Agreement prior to its
termination; and provided further that, the provisions of Articles VIII and IX
(other than Section 9.1) of this Agreement shall remain in full force and effect
and survive any termination of this Agreement.
8.3 Fees and Expenses.
(a) General. Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, that Parent and the Company shall
share equally all printing fees and expenses in relation to the Proxy Statement
(including any preliminary materials related thereto) and any amendments or
supplements thereto.
(b) Company Payments.
(i) If (x) the Board of Directors of the Company shall have withheld,
withdrawn or modified in a manner adverse to Parent its recommendation in
favor of adoption and approval of this Agreement and approval of the
Merger, and at that time there shall not have occurred a Material Adverse
Effect on Parent, (y) the Board of Directors of the Company recommends a
Company Superior Proposal to the stockholders of the Company, or (z) the
Company fails to hold the Company Stockholders Meeting as required by this
Agreement by June 30, 1999, the Company shall pay to Parent an amount equal
to $5,000,000 within one (1) business day following the earlier to occur of
(A) termination of this Agreement pursuant to Section 8.1(b)(i) or 8.1(i)
hereof and (B) a Company Negative Vote (as defined below).
(ii) If no payment shall be required pursuant to clause 8.3(b)(i)
above, and if (x) the vote of the stockholders of the Company approving and
adopting this Agreement and approving the Merger shall not have been
obtained by reason of the failure to obtain the required vote upon a vote
taken at a meeting of stockholders duly convened therefor or at any
adjournment thereof (a "COMPANY NEGATIVE VOTE") and (y) prior to such
Company Negative Vote there shall have occurred an Acquisition Proposal
with respect to the Company which shall have been publicly disclosed and
not withdrawn (a "COMPANY COMPETING PROPOSAL") and (z) (i) within twelve
(12) months of such Company Negative Vote, the Company shall enter into a
definitive agreement with respect to an Acquisition Proposal with the party
(or any affiliate of the party) that made the Company Competing Proposal an
Acquisition Proposal with such party (or any such affiliate) with respect
to the Company shall have been consummated or (ii) within six (6) months
following such Company Negative Vote, the Company shall enter into a
definitive agreement with respect to an Acquisition Proposal with any other
party or an Acquisition Proposal with any other party with respect to the
Company shall have been consummated, then, provided that there shall have
not occurred a Material Adverse Effect on Parent prior to the Company
Negative Vote, the Company shall pay to Parent an amount equal to
$5,000,000 within one business day following demand therefor after the
occurrence of the events set forth in (x) and (y) and either (z)(i) or
(z)(ii) above.
(c) Parent Payments.
(i) If (x) the Board of Directors of Parent shall have withheld,
withdrawn or modified in a manner adverse to the Company its recommendation
in favor of the approval of the issuance of shares of its capital stock in
connection with the Merger, and at that time there shall not have occurred
a Material Adverse Effect on the Company, (y) the Board of Directors of
Parent recommends a Parent
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Superior Proposal to the stockholders of Parent or (z) Parent fails to hold
the Parent Stockholders Meeting as required by this Agreement by June 30,
1999, Parent shall pay to the Company an amount equal to $5,000,000 within
one business day following the earlier to occur of (A) termination of the
Agreement pursuant to Section 8.1(b)(i) or 8.1(j) hereof and (B) a Parent
Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 8.3(c)(i)
above, and if (x) the vote of the stockholders of Parent approving the
issuance of shares of Parent Common Stock by virtue of the Merger shall not
have been obtained by reason of the failure to obtain the required vote
upon a vote taken at a meeting of stockholders duly convened therefor or at
any adjournment thereof (a "PARENT NEGATIVE VOTE") and (y) prior to such
Parent Negative Vote there shall have occurred an Acquisition Proposal with
respect to Parent which shall have been publicly disclosed and not
withdrawn ("PARENT COMPETING PROPOSAL") and (z) (i) within twelve (12)
months of such Parent Negative Vote, Parent shall enter into a definitive
agreement with respect to an Acquisition Proposal with the party (or any
affiliate of the party) that made the Parent Competing Proposal or an
Acquisition Proposal with such party (or any such affiliate) with respect
to Parent shall have been consummated or (ii) within six (6) months
following such Parent Negative Vote, Parent shall enter into a definitive
agreement with respect to an Acquisition Proposal with any other party or
an Acquisition Proposal with any other party with respect to Parent shall
have been consummated, then, provided that there shall have not occurred a
Material Adverse Effect on the Company prior to the Parent Negative Vote,
Parent shall pay to the Company an amount equal to $5,000,000 within one
business day following demand therefor after the occurrence of the events
set forth in (x) and (y) and either (z)(i) or (z)(ii) above.
(d) Payment of the amounts described in Section 8.3(b) or (c) above shall
not be in lieu of damages incurred in the event of breach of this Agreement.
8.4 Amendment. Except as is otherwise required by applicable law after the
stockholders of the Company approve this Agreement, this Agreement may be
amended by the parties hereto at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto.
8.5 Extension; Waiver. At any time prior to the Effective Time, Parent and
Merger Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
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ARTICLE IX
GENERAL PROVISIONS
9.1 Survival of Representations, Warranties and Agreements.
(a) All representations, warranties, covenants and agreements in this
Agreement given or made by the Company or in any instrument delivered pursuant
to this Agreement by the Company shall survive the completion of the Merger and
shall (except to the extent that survival is necessary to resolve unsatisfied
claims brought pursuant to Section 7.2(d)) terminate one (1) year after the
Closing Date.
(b) All representations, warranties, covenants and agreements in this
Agreement given or made by Parent and/or Merger Sub shall terminate on the
Closing Date.
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
Genesis Microchip Incorporated
200 Town Center Blvd.
Markham, Ontario L3R 8G5
Canada
Attention: Chief Operating Officer
Telephone No.: (905) 470-2742
Facsimile No.: (905) 470-2447
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Francis S. Currie, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to the Company, to:
Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
United States
Attention: Chief Executive Officer
Telephone No.: (408) 325-8790
Facsimile No.: (408) 325-8799
with a copy to:
Cooley Godward LLP
Five Palo Alto Square, 4th Floor
Palo Alto, CA 94306-2155
United States
Attention: Andrei M. Manoliu, Esq.
Telephone No.: (650) 843-5000
Facsimile No.: (650) 857-0663
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(c) if to the Securityholder Agent:
Robert Tillman
14 Sunshine Avenue
Sausalito, CA 94965
Telephone No.: (415) 332-9242
Facsimile No.: (415) 332-2639
9.3 Interpretation. The words "include" "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation". The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.4 Counter parts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.5 Entire Agreement; Assignment. This Agreement, the Exhibits hereto, and
the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Parent and
Merger Sub may assign their respective rights and delegate their respective
obligations hereunder to their respective affiliates.
9.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable Provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
9.7 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
9.9 Arbitration. As to any disputes or controversies arising out of,
relating to, or in connection with the Agreement not otherwise covered by the
Article VII hereof:
(a) The parties shall attempt in good faith to agree upon the rights of the
respective parties with respect to any dispute or controversy arising out of,
relating to, or in connection with this Agreement or the interpretation,
validity, construction, performance, breach or complete termination thereof.
(b) If no such agreement can be reached after good faith negotiation,
either of the parties may demand arbitration of the matter (except any such
dispute or controversy related to Article VII or Section 2.11 or 2.15 of this
Agreement) and the matter shall be settled by arbitration conducted by one
arbitrator. Parent and the Company shall agree on the arbitrator; provided that
if Parent and the Company
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cannot agree on one arbitrator, either Parent or the Company can request that
the JAMS select the arbitrator. The arbitrator selected by the JAMS shall
determine the dispute in accordance with Section 9.9. The arbitrator shall set a
limited time period and establish procedures designed to reduce the cost and
time for discovery while allowing the parties an opportunity, adequate in the
sole judgment of the arbitrator, to discover relevant information from the
opposing parties about the subject matter of the dispute. The arbitrator shall
rule upon motions to compel or limit discovery and shall have the authority to
impose sanctions, including attorneys' fees and costs, to the same extent as a
court of competent law or equity, should the arbitrator determine that discovery
was sought without substantial justification or that discovery was refused or
objected to without substantial justification. The decision of the arbitrator
shall be final, conclusive and binding upon the parties to this Agreement. Such
decision shall be written and shall be supported by written findings of fact and
conclusions which shall set forth the award, judgment, decree or order awarded
by the arbitrator.
(c) Judgment upon any award rendered by the arbitrator may be entered in
any court having jurisdiction. Any such arbitration shall be held in Santa Clara
County, California under the rules then in effect of JAMS. For purposes of this
Section 9.9, in any arbitration hereunder, the non-prevailing Party to an
arbitration shall pay its own expenses, the fees of the arbitrator, the
administrative costs of the arbitration and the expenses, including without
limitation, reasonable attorneys' fees and costs, incurred by the other party to
the arbitration.
9.10 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Securityholder
Agent and the Escrow Agent (but only as to Articles VII and IX for
Securityholder Agent and the Escrow Agent) and have caused this Agreement to be
signed by their duly authorized respective officers, all as of the date first
written above.
<TABLE>
<S> <C>
GENESIS MICROCHIP INCORPORATED PARADISE ELECTRONICS, INC.
By: By:
- -------------------------------------------- --------------------------------------------
Name: Name:
- -------------------------------------------- --------------------------------------------
Title: Title:
- -------------------------------------------- --------------------------------------------
RAINBOW ACQUISITION CORPORATION SECURITYHOLDER AGENT
By: By:
- -------------------------------------------- --------------------------------------------
Name: Name:
- -------------------------------------------- --------------------------------------------
Title: Title:
- -------------------------------------------- --------------------------------------------
ESCROW AGENT
By:
- --------------------------------------------
Name:
- --------------------------------------------
Title:
- --------------------------------------------
</TABLE>
[SIGNATURE PAGE TO REORGANIZATION AGREEMENT]
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ANNEX B
APPRAISAL RIGHTS
DELAWARE GENERAL CORPORATION LAW
SECTION 262
<PAGE> 194
DELAWARE GENERAL CORPORATION LAW
262 Appraisal Rights -- (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsection (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation: the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of a corporation, which stock is deposited
with the depository.
(b) Appraisal rights shall be available for the share of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of
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incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
(1)such stockholder's shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand for appraisal of
(1)such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of (1)such stockholder's
shares. A proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by a
separate written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any
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time within 60 days after the effective date of the merger or consolidation, any
stockholder shall have the right to withdraw (1)such stockholder's demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after(1) such stockholder's written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determinating the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that (1)such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
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(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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ANNEX C
DISSENTERS' RIGHTS
CALIFORNIA CORPORATIONS CODE
CHAPTER 13
<PAGE> 199
CHAPTER 13
DISSENTERS' RIGHTS
sec.1300 Right to Require Purchase -- "Dissenting Shares" and "Dissenting
Shareholder" Defined.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1)(without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
sec.1301. Demand for Purchase.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
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(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
sec.1302. Endorsement of Shares.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
sec.1303. Agreed Price -- Time for Payment.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
sec.1304. Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
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(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
sec.1305. Appraisers' Report -- Payment -- Costs.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
sec.1306. Dissenting Shareholder's Status as Creditor.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
sec.1307. Dividends Paid as Credit Against Payment.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
sec.1308. Continuing Rights and Privileges of Dissenting Shareholders.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
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sec.1309. Termination of Dissenting Shareholder Status.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
sec.1310. Suspension of Proceedings for Payment Pending Litigation.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation.
sec.1311. Exempt Shares.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
sec.1312. Attacking Validity of Reorganization or Merger.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the completion of the transaction except upon 10 days prior
notice to the corporation and upon a determination by the court that clearly no
other remedy will adequately protect the complaining shareholder or the class
of shareholders of which such shareholder is a member.
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(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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<PAGE> 204
ANNEX D
GENESIS VOTING AGREEMENT
<PAGE> 205
PARENT STOCKHOLDER VOTING AGREEMENT
THIS STOCKHOLDER VOTING AGREEMENT (the "AGREEMENT") is made and entered
into as of January 22, 1999, by and among Genesis Microchip Incorporated, a Nova
Scotia corporation ("PARENT"), Paradise Electronics, Inc., a Delaware
corporation (the "COMPANY") and the undersigned stockholder (the "STOCKHOLDER")
of Parent. Capitalized terms used herein but not otherwise defined herein shall
have the meanings ascribed to them in the Reorganization Agreement (as defined
below).
RECITALS
A. Concurrently with the execution of this Agreement, Parent, Rainbow
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Parent ("MERGER SUB"), and the Company have entered into that certain Agreement
and Plan of Reorganization (the "REORGANIZATION AGREEMENT") of even date
herewith, which provides for the merger (the "MERGER") of Merger Sub with and
into the Company. Pursuant to the Merger, all outstanding capital stock of the
Company will be converted into the right to receive Common Stock of Parent, as
set forth in the Reorganization Agreement.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3 under
the United States Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), of such number of shares of the outstanding capital stock of Parent and
shares subject to outstanding options and warrants as is indicated on the
signature page of this Agreement (the "SHARES").
C. In consideration of the execution of the Reorganization Agreement by the
Company, the Stockholder agrees to restrict the transfer or disposition of any
of the Shares, or any other shares of capital stock of the Company acquired by
the Stockholder hereafter and prior to the Expiration Date (as defined in
Section 1 below), and agrees to vote the Shares and any other such shares of
capital stock of the Company so as to facilitate completion of the Merger.
NOW, THEREFORE, the parties agree as follows:
1. New Shares. The Stockholder agrees that any shares of capital stock of
Parent that the Stockholder purchases or with respect to which the Stockholder
otherwise acquires beneficial ownership after the date of this Agreement and
prior to the Expiration Date ("NEW SHARES") shall be subject to the terms and
conditions of this Agreement to the same extent as if they constituted Shares.
For all purposes hereof, "EXPIRATION DATE" shall mean the earlier to occur of
(i) such date and time as the Merger shall become effective or (ii) the
termination of the Reorganization Agreement in accordance with its terms.
2. Agreement to Vote Shares. At every meeting of the stockholders of Parent
called with respect to any of the following, and at every adjournment thereof,
and on every action or approval by written consent of the stockholders of Parent
with respect to any of the following, the Stockholder shall vote the Shares and
any New Shares that are then outstanding and in respect of which the Stockholder
has voting power: in favor of approval of the Reorganization Agreement and the
Merger and in favor of any matter that could reasonably be expected to
facilitate the Merger, including, without limitation, approval of the issuance
of shares of Parent Common Stock in connection with the Merger.
3. Non-Solicitation Agreement. Except as is explicitly permitted under the
Reorganization Agreement, the Stockholder agrees, prior to the Expiration Date,
not to, directly or indirectly, take any of the following actions with any party
other than the Company and its designees: (a) solicit, initiate, entertain, or
encourage any proposals or offers from, or conduct discussions with or engage in
negotiations with, any person relating to any possible acquisition of Parent
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise), any material portion of its capital stock or assets or any equity
interest in Parent, (b) provide information with respect to Parent to any
person, other than the Company and its affiliates, relating to, or otherwise
cooperate with, facilitate or encourage any effort or attempt by any such person
with regard to, any possible acquisition of Parent (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise), any material
portion of its capital stock or assets or any equity interest in Parent, (c)
enter into an agreement with any person, other than the Company and its
affiliates,
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<PAGE> 206
providing for the acquisition of Parent (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise), any material portion of its
capital stock or assets or any equity interest in Parent, or (d) make or
authorize any statement, recommendation or solicitation in support of any
possible acquisition of Parent (whether by way of merger, purchase of capital
stock, purchase of assets or otherwise), any material portion of its capital
stock or assets or any equity interest in Parent by any person, other than by
the Company and its affiliates. In addition to the foregoing, if the Stockholder
receives prior to the Expiration Date any offer or proposal or request, directly
or indirectly, relating to any of the above, unless Parent has already given
such notice, the Stockholder shall immediately notify the Company thereof,
including information as to the identity of the offeror or the party making any
such offer or proposal and the specific terms of such offer or proposal, as the
case may be.
4. [Intentionally Left Blank]
5. Transferee of Shares and New Shares to be Bound by this Agreement.
a. The Stockholder agrees that, during the period from the date of this
Agreement through the Expiration Date, Stockholder shall not cause or permit any
transfer, assignment, conveyance or other disposition of any Shares or New
Shares or be effected unless each person to which any Shares or New Shares, or
any interest in any of such shares, is or may be transferred shall have: (a)
executed a counterpart of this Agreement; and (b) agreed to hold such Shares and
New Shares (or interest in such shares) subject to all of the terms and
provisions of this Agreement; provided, however, that the exercise of options or
warrants or the conversion of convertible securities shall not be considered
prohibited dispositions hereunder so long as the securities so acquired continue
to be Shares or New Shares subject to the terms of this Agreement.
(a) Notwithstanding the foregoing provisions of this Agreement,
Stockholder may transfer up to Shares not later than thirty (30)
days prior to the date of Closing of the Merger free from the restrictions
of this Agreement and such Shares shall not be deemed to be Shares in the
hands of the transferee(s) of such Shares.
6. Representations, Warranties and Covenants of Stockholder. The
Stockholder represents, warrants and covenants to the Company as follows: the
Stockholder: (i) is the beneficial owner of the Shares, which at the date of
this Agreement and at all times up until the Expiration Date will be free and
clear of any liens, claims, options, charges or other encumbrances, (ii) does
not beneficially own any shares of capital stock of Parent other than the
Shares, and (iii) has full power and authority to make, enter into and carry out
the terms of this Agreement.
7. Additional Documents. The Stockholder and Parent hereby covenant and
agree to execute and deliver any additional documents reasonably necessary or
desirable to carry out the purpose and intent of this Agreement.
8. Consent and Waiver. The Stockholder hereby gives any consents or waivers
that are reasonably required for the completion of the Merger under the terms of
any agreement to which the Stockholder is a party or pursuant to any rights the
Stockholder may have.
9. Termination. This Agreement shall terminate and shall have no further
force or effect as of the Expiration Date.
10. Legending of Shares. If so requested by the Company, Stockholder agrees
that the Shares and any New Shares shall bear a legend stating that they are
subject to this Agreement. Stockholder agrees that he shall not transfer, sell,
exchange, pledge or otherwise dispose of or encumber the Shares or any New
Shares, without first having the aforementioned legend affixed to the
certificates representing the Shares or any New Shares.
11. Miscellaneous.
b. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions,
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covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by any of the
parties without the prior written consent of the other parties.
(c) Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
(d) Specific Performance; Injunctive Relief. The parties acknowledge that
the Company will be irreparably harmed and that there will be no adequate remedy
at law for a violation of any of the covenants or agreements of the Stockholder
set forth herein. Therefore, it is agreed that, in addition to any other
remedies that may be available to the Company upon any such violation, the
Company shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to the
Company at law or in equity.
(e) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
<TABLE>
<S> <C>
If to Parent: Genesis Microchip Incorporated
200 Town Center Blvd.
Markham, Ontario L3R 8G5
Canada
Attention: Chief Operating Officer
Telephone No.: (905) 470-2742
Facsimile No.: (905) 470-2447
With a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Francis S. Currie, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
If to Stockholder: To the address for notice set forth on the last page
hereof.
If to The Company: Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
United States
Attention: Chief Executive Officer
Telephone No.:(408) 325-8790
Facsimile No.:(408) 325-8799
With a copy to: Cooley Godward LLP
Five Palo Alto Square, 4th Floor
Palo Alto, CA 94306-2155
United States
Attention: Andrei M. Manoliu, Esq.
Telephone No.:(650) 843-5000
Facsimile No.:(650) 857-0663
</TABLE>
D-3
<PAGE> 208
(f) Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the province of Nova Scotia,
without giving effect to any choice or conflict of law provision or rule
(whether of Nova Scotia or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than Nova Scotia.
(g) Entire Agreement. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersede all prior
negotiations and understandings between the parties with respect to such subject
matter.
(h) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
(i) Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
* * *
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<PAGE> 209
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
GENESIS MICROCHIP INCORPORATED
By:
--------------------------------------------------
Name:
Title:
PARADISE ELECTRONICS, INC.
By:
--------------------------------------------------
Name:
Title:
STOCKHOLDER
By:
--------------------------------------------------
Name:
Title:
Stockholder's Address for Notice:
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
Shares beneficially owned:
shares of Parent Common Stock
shares of Parent Common Stock issuable upon exercise of
outstanding options and warrants
[SIGNATURE PAGE TO PARENT STOCKHOLDER VOTING AGREEMENT]
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<PAGE> 210
ANNEX E
PARADISE VOTING AGREEMENT
<PAGE> 211
STOCKHOLDER VOTING AGREEMENT
THIS STOCKHOLDER VOTING AGREEMENT (the "AGREEMENT") is made and entered
into as of January , 1999, by and among Genesis Microchip Incorporated, a Nova
Scotia corporation ("PARENT"), Paradise Electronics, Inc., a Delaware
corporation (the "COMPANY") and the undersigned stockholder (the "STOCKHOLDER")
of the Company. Capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in the Reorganization Agreement (as
defined below).
RECITALS
A. Concurrently with the execution of this Agreement, Parent, Genesis
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Parent ("MERGER SUB"), and the Company have entered into that certain Agreement
and Plan of Reorganization (the "REORGANIZATION AGREEMENT") of even date
herewith, which provides for the merger (the "MERGER") of Merger Sub with and
into the Company. Pursuant to the Merger, all outstanding capital stock of the
Company will be converted into the right to receive Common Stock of Parent, as
set forth in the Reorganization Agreement.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), of such
number of shares of the outstanding capital stock of the Company and shares
subject to outstanding options and warrants as is indicated on the signature
page of this Agreement (the "SHARES").
C. In consideration of the execution of the Reorganization Agreement by
Parent, the Stockholder agrees to restrict the transfer or disposition of any of
the Shares, or any other shares of capital stock of the Company acquired by the
Stockholder hereafter and prior to the Expiration Date (as defined in Section 1
below), and agrees to vote the Shares and any other such shares of capital stock
of the Company so as to facilitate completion of the Merger and agrees to grant
Parent an irrevocable proxy to vote the Shares and any other such shares of
capital stock of the Company upon the terms and subject to the conditions set
forth herein.
NOW, THEREFORE, the parties agree as follows:
1. New Shares. The Stockholder agrees that any shares of capital stock of
the Company that the Stockholder purchases or with respect to which the
Stockholder otherwise acquires beneficial ownership after the date of this
Agreement and prior to the Expiration Date ("NEW SHARES") shall be subject to
the terms and conditions of this Agreement to the same extent as if they
constituted Shares. For all purposes hereof, "EXPIRATION DATE" shall mean the
earlier to occur of (i) such date and time as the Merger shall become effective
or (ii) the termination of the Reorganization Agreement in accordance with its
terms.
2. Agreement to Vote Shares. At every meeting of the stockholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of the Company with respect to any of the following, the Stockholder shall vote
the Shares and any New Shares that are then outstanding and in respect of which
the Stockholder has voting power: (a) in favor of approval of the Reorganized
Agreement and the Merger and in favor of any matter that could reasonably be
expected to facilitate the Merger and (b) in favor of the conversion of the
Preferred Stock of the Company (to the extent that the Stockholder is entitled
to vote on such matters) into Common Stock of the Company immediately prior to
the Effective Time.
3. Non-Solicitation Agreement. Except as is explicitly permitted under the
Reorganization Agreement, the Stockholder agrees, prior to the Expiration Date,
not to, directly or indirectly, take any of the following actions with any party
other than Parent and its designees: (a) solicit, initiate, entertain, or
encourage any proposals or offers from, or conduct discussions with or engage in
negotiations with, any person relating to any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise), any material portion of its capital stock or assets or any equity
interest in the Company, (b) provide information with respect to the Company to
any person, other than Parent and its affiliates, relating to, or otherwise
cooperate with, facilitate or encourage any effort or
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<PAGE> 212
attempt by any such person with regard to, any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise), any material portion of its capital stock or assets or any equity
interest in the Company, (c) enter into an agreement with any person, other than
Parent and its affiliates, providing for the acquisition of the Company (whether
by way of merger, purchase of capital stock, purchase of assets or otherwise),
any material portion of its capital stock or assets or any equity interest in
the Company, or (d) make or authorize any statement, recommendation or
solicitation in support of any possible acquisition of the Company (whether by
way of merger, purchase of capital stock, purchase of assets or otherwise), any
material portion of its capital stock or assets or any equity interest in the
Company by any person, other than by Parent and its affiliates. In addition to
the foregoing, if the Stockholder receives prior to the Expiration Date any
offer or proposal or request, directly or indirectly, relating to any of the
above, unless the Company has already given such notice, the Stockholder shall
immediately notify Parent thereof, including information as to the identity of
the offeror or the party making any such offer or proposal and the specific
terms of such offer or proposal, as the case may be.
4. Irrevocable Proxy. Concurrently with the execution of this Agreement,
the Stockholder agrees to deliver to Parent a proxy in the form attached as
Exhibit A (the "PROXY"), which shall be irrevocable to the extent provided in
Section 212 of the Delaware General Corporation Law, covering the total number
of Shares and New Shares of capital stock of the Company beneficially owned (as
such term is defined in Rule 13d-3 under the Exchange Act) by the Stockholder
set forth therein. Notwithstanding the proxy, the Stockholder may vote the
Shares at any meeting or execute any consent consistent with the Stockholder's
obligations hereunder, unless otherwise notified by Parent.
5. Transferee of Shares and New Shares to be Bound by this Agreement. The
Stockholder agrees that, during the period from the date of this Agreement
through the Expiration Date, Stockholder shall not cause or permit any transfer,
assignment, conveyance or their disposition of any Shares or New Shares or be
affected unless each person to which any Shares or New Shares, or any interest
in any of such shares, is or may be transferred shall have: (a) executed a
counterpart of this Agrement and a proxy in the form attached as Exhibit A; and
(b) agreed to hold such Shares and New Shares (or interest in such shares)
subject to all of the terms and provisions of this Agreement; provided, however,
that the exercise of options or warrants of the conversion of convertible
securities shall not be considered prohibited dispositions hereunder so long as
the securities so required continue to be Share or New Shares subject to the
terms of this Agreement and to the Proxy.
6. Representations, Warranties and Covenants of Stockholder. The
Stockholder represents, warrants and covenants to Parent as follows: the
Stockholder: (i) is the beneficial owner of the Shares, which at the date of
this Agreement and at all times up until the Expiration Date will be free and
clear of any liens, claims, options, charges or other encumbrances, (ii) does
not beneficially own any shares of capital stock of the Company other than the
Shares, and (iii) has full power and authority to make, enter into and carry out
the terms of this Agreement and the Proxy.
7. Additional Documents. The Stockholder and the Company hereby covenant
and agree to execute and deliver any additional documents reasonably necessary
or desirable to carry out the purpose and intent of this Agreement.
8. Consent and Waiver. The Stockholder hereby gives any consents or waivers
that are reasonably required for the completion of the Merger under the terms of
any agreement to which the Stockholder is a party or pursuant to any rights the
Stockholder may have.
9. Termination. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Expiration Date.
10. Legending of Shares. If so requested by Parent, Stockholder agrees that
the Shares and any New Shares shall bear a legend stating that they are subject
to this Agreement and to an irrevocable proxy. Stockholder agrees that he shall
not transfer, sell, exchange, pledge or otherwise dispose of or
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<PAGE> 213
encumber the Shares or any New Shares, without first having the aforementioned
legend affixed to the certificates representing the Shares or any New Shares.
11. Miscellaneous.
a. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
b. Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties herein may
be assigned by any of the parties without the prior written consent of the
other parties.
c. Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
d. Specific Performance; Injunctive Relief. The parties acknowledge
that Parent will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of the
Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to Parent upon any such violation,
Parent shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to
Parent at law or in equity.
e. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgement of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
<TABLE>
<S> <C>
If to Parent: Genesis Microchip Incorporated
200 Town Center Blvd.
Markham, Ontario L3R 8G5
Canada
Attention: Chief Operating Officer
Telephone No.: (905) 470-2742
Facsimile No.: (905) 470-2447
With a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Francis S. Currie, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
If to Stockholder: To the address for notice set forth on the last
page hereof.
If to The Company: Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
United States
Attention: Chief Executive Officer
Telephone No.: (408) 325-8790
Facsimile No.: (408) 325-8799
</TABLE>
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<PAGE> 214
matter) into Common Stock of the Company prior to the Effective Time. The
attorneys and proxies named above may not exercise this Irrevocable Proxy on any
other matter except as provided in clauses (a) and (b) above. The undersigned
stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This Proxy is irrevocable (to the fullest extent permitted by Section 212
of the Delaware General Corporation Law). This Proxy shall terminate, and be of
no further force and effect, automatically upon the Expiration Date.
Dated: January , 1999. Signature of Stockholder:_________________
Print Name of Stockholder:
Shares beneficially owned:
shares of Company Common Stock
shares of Company Series A
Preferred Stock
shares of Company Series B
Preferred Stock
shares of Company Series C
Preferred Stock
______ shares of Company Common
Stock
issuable upon exercise of
outstanding options
and warrants
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<PAGE> 215
ANNEX F
OPINION OF NATIONSBANC MONTGOMERY SECURITIES L.L.C.
January 21, 1999
Board of Directors
Genesis Microchip Inc.
200 Town Center Blvd.
Markham, Ontario UR 8G5
Canada
Gentlemen:
We understand that Genesis Microchip Inc., a Nova Scotia corporation
("Buyer"), Rainbow Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Buyer ("Merger Sub"), and Paradise Electronics, Inc.,
a Delaware corporation ("Seller" or the "Company"), propose to enter into an
Agreement and Plan of Reorganization, a draft of which has been provided to us
by management of Buyer dated January 20, 1999 (the "Merger Agreement"), pursuant
to which Merger Sub will be merged with and into Seller, which will be the
surviving entity (the "Merger"). Pursuant to the Merger, as more fully described
in the Merger Agreement and as further described to us by management of Buyer,
we understand that each share of the Company Common Stock (all capitalized terms
not defined herein shall have the meanings set forth in the Merger Agreement),
will be converted into and exchangeable for the number of shares of the voting
common stock of Buyer ("Buyer Common Stock") equal to an exchange ratio (the
"Exchange Ratio") equal to the quotient obtained by dividing (a) the Aggregate
Parent Share Number by (b) the sum of (i) the Aggregate Company Common Number
and (ii) the Aggregate Company Option Number, subject to an escrow and certain
adjustments, for stock splits, reorganizations or like changes with respect to
the Company Common Stock. The terms and conditions of the Merger are set forth
in more detail in the Merger Agreement.
You have asked for our opinion as investment bankers as to whether the
Exchange Ratio is fair to Buyer from a financial point of view as of the date
hereof. As you are aware, we were not retained to nor did we advise Buyer with
respect to alternatives to the Merger or Buyer's underlying decision to proceed
with or effect the Merger.
In connection with our opinion, we have, among other things: (i) reviewed
publicly available financial and other data with respect to Seller, including
the financial statements for calendar year 1998 and certain other relevant
financial and operating data relating to Seller made available to us from
published sources and from the internal records of Seller; (ii) reviewed the
financial terms and conditions of the Merger Agreement; (iii) reviewed certain
publicly available information concerning the trading of, and the trading market
for, Buyer Common Stock, and analyzed the capitalization of Seller, (iv)
compared Seller from a financial point of view with certain other publicly
traded semiconductor device companies which we deemed to be relevant; (v)
considered the financial terms, to the extent publicly available, of selected
recent business combinations involving semiconductor device companies which we
deemed to be comparable, in whole or in part, to the Merger; (vi) reviewed
Seller's and Buyer's relative contributions to the combined company under
selected financial measures, based on their respective historical results and
forecasts (or, in the case of the financial forecasts for Buyer, by our research
analysts); (vii) considered
Annex F-1
<PAGE> 216
the valuation of Seller based on certain discounted cash flow analyses; (viii)
reviewed certain pro forma effects of the Merger on Buyer, including the impact
of the Merger on earnings per share estimates of Buyer provided by our research
analysts; (ix) reviewed and discussed with, representatives of the management of
Seller and Buyer certain information of a business and financial nature,
including financial forecasts and related assumptions, regarding Seller and
Buyer, furnished to us by them (or, in the case of the financial forecasts for
Buyer, by our research analysts); (x) made inquiries regarding and discussed the
Merger, the Merger Agreement and other matters related thereto with Buyer's
counsel; and (xi) performed such other analyses and examinations as we have
deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Buyer obtained by us from our research analysts and the financial
forecasts for Seller provided by Seller's management and further developed by us
with Seller's consent and assistance, upon their advice and with Your consent we
have assumed for purposes of our opinion that the forecasts have been reasonably
prepared on bases reflecting the best available estimates and judgments of their
respective managements at the time of preparation as to the future financial
performance of Seller and Buyer and that they provide a reasonable basis upon
which we can form our opinion. With your consent, we have further assumed for
purposes of preparing our analyses that resolution of any litigation between
Seller and Arithmos would not result in any material adverse effect on the value
of the Company Common Stock or Seller. We have also assumed that there have been
no material changes in Seller's or Buyer's assets, financial condition, results
of operations, business or prospects since the respective dates of their last
financial statements made available to us. We have relied on advice of counsel
and independent accountants to Buyer as to all legal and financial reporting
matters with respect to Buyer, the Merger and the Merger Agreement. We have
assumed that the Merger will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934 and all
other applicable Canadian, Canadian provincial, U.S. federal and U.S. state
statutes, rules and -regulations. In addition, we have not assumed
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of
Seller or Buyer, nor have we been furnished with any such appraisals. You have
informed us, and we have assumed, that the Merger will be recorded as a
pooling-of-interests under generally accepted accounting principles. Finally,
our opinion is based on economic, monetary and market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
Accordingly, although subsequent developments may affect this opinion, we have
not assumed any obligation to update, revise or reaffirm this opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by Buyer of any of
the conditions to its obligations thereunder.
We have provided this fairness opinion letter to Buyer in connection with
the Merger and will receive a fee for our services upon delivery of this letter
to you. In the ordinary course of our, business, we actively trade the equity
securities of Buyer for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
We have also acted as an underwriter in connection with offerings of securities
of Buyer and performed various investment banking services for Buyer.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Exchange Ratio is fair to Buyer from a financial
point of view as of the date hereof.
This opinion is directed to the Board of Directors of Buyer in its
consideration of the Merger and is not a recommendation to any shareholder as to
how such shareholder should vote with respect to the Merger. Further, this.
opinion addresses only the financial fairness of the Exchange Ratio to Buyer and
does not address the relative merits of the Merger and any alternatives to the
Merger, Buyer's underlying decision to proceed with or effect the Merger or any
other aspect of the Merger. This opinion may not be
Annex F-2
<PAGE> 217
Board of Directors
Genesis Microchip Inc.
January 21, 1999
Page Three
used or referred to by Buyer, or quoted or disclosed to any person in any
manner, without our prior written consent, which consent is hereby given to the
inclusion of this opinion in any proxy statement or prospectus filed with the
Securities and Exchange Commission in connection with the Merger. In furnishing
this opinion, we do not admit that we are experts within the meaning of the term
"experts" as used in the Securities Act and the rules and regulations
promulgated thereunder, nor do we admit that this, opinion constitutes a report
or valuation within the meaning of Section 11 of the Securities Act.
Very truly yours
/s/ NationsBanc Montgomery Securities,
LLC
--------------------------------------
NATIONSBANC MONTGOMERY
SECURITIES LLC
Annex F-3
<PAGE> 218
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Companies Act (Nova Scotia) does not restrict a company from
indemnifying directors. Section 153 of the Companies Act (Nova Scotia) provides
that if in any proceeding against a director for negligence or breach of trust
it appears to the court hearing the case that the director or person is or may
be liable for negligence or breach of trust, but has acted honestly and
reasonably and ought fairly to be excused for the negligence or breach of trust,
the court may relieve him, either wholly or partly, from his liability on such
terms as the court may think proper.
The Genesis articles of association provide that no director or officer,
former director or officer, or person who acts or acted at Genesis's request, as
a director or officer of Genesis, in the absence of any dishonesty on this
person's part, shall be liable
- for the acts, or defaults of any other director or other person, or
- for any loss to Genesis through the deficiency of title to any property
acquired for Genesis, or through the deficiency of any security in any of
the funds of Genesis are invested, or
- for any loss or damage arising from the bankruptcy, insolvency or
tortious acts of any person with whom any funds are deposited, or
- for any loss occasioned by error of judgment or oversight on the part of
such person, or
- for any other loss, damage or misfortune whatsoever which happens in the
execution of the duties of such person.
The directors of Genesis are authorized, without approval or confirmation
by Genesis shareholders, to cause Genesis to give indemnities to any director or
other person who has undertaken any liability on behalf of Genesis and to
mortgage or charge the property of Genesis as security for indemnities given to
a director or other person.
Genesis Microchip Incorporated maintains liability insurance for its
directors and principal executive officers, including insurance against
liabilities under the Securities Act.
ITEM 21. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
2.1(3) Agreement and Plan of Reorganization, dated January 22, 1999
(attached as Annex A to the proxy statement/prospectus
included in this Registration Statement).
3.1(3) Memorandum and Articles of Association of the Registrant.
4.1(1) Special Warrant Indenture between Genesis Microchip Inc. and
Montreal Trust Company of Canada.
4.2(1) Bonus Warrant Indenture between Genesis Microchip Inc. and
Montreal Trust Company of Canada.
4.3(1) Yorkton Securities Inc. Options to Purchase Common Shares of
Genesis Microchip Inc.
4.4(1) Resolution of Board of Directors dated December 11, 1997
amending the Yorkton Securities Inc. Option to Purchase
Common Shares.
4.5(1) Shareholder Rights Plan Agreement.
5.1(3) Opinion of Stewart McKelvey Stirling Scales with respect to
the legality of the securities being issued.
</TABLE>
II-1
<PAGE> 219
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation dated April 23, 1999.
8.2 Tax Opinion of Cooley Godward LLP, dated April 30, 1999.
10.1(2) Custom Sales Agreement between Genesis Microchip Inc. and
International Business Machines Corporation dated March 9,
1998.
10.2(1) 1987 Stock Option Plan.
10.3(1) 1997 Employee Stock Option Plan.
10.4(1) 1997 Non-Employee Stock Option Plan.
10.5(1) 1997 Employee Stock Purchase Plan.
10.6(1) 401(k) Plan.
10.7(1) International Distributorship Agreement with Kanematsu
Semiconductor Corporation dated May 10, 1993, amended
effective as of January 1, 1996.
10.8(1) 1993 Supply Agreement with In Focus Systems, Inc. dated
September 20, 1996.
10.9(1) Half-Band Filter IC Royalty Agreement with Miranda
Technologies Inc. dated September 23, 1993.
10.10(1) IC Royalty Agreement with NorthShore Laboratories, Inc.
dated March 2, 1993.
10.11(1) Supplemental IC Royalty Agreement with NorthShore
Laboratories dated September 1, 1994.
10.12(1) Supplemental IC Royalty Agreement No. 2 with NorthShore
Laboratories, Inc. dated October 8, 1997.
10.13(1) Agreement for ASIC Design and Purchase of Products with IBM
Microelectronics Essex Junction, Vermont dated November 19,
1996.
10.14(1) Amendment 1 to the Agreement for ASIC Design and Purchase of
Products with IBM, effective date January 1, 1997.
10.15(3) United Semiconductor Corporation Wafer Foundry Procedures
with Genesis Microchip Inc. dated January 19, 1999.
10.16(1) Loan Agreement with Royal Bank of Canada dated January 7,
1997.
10.17(1) Loan Agreement with Royal Bank of Canada dated October 24,
1997.
10.18(1) Pledge Agreement and Promissory Note of Paul M. Russo dated
October 25, 1996.
10.19(1) Pledge Agreement and Promissory Note of Paul M. Russo dated
July 25, 1997.
10.20(1) Pledge Agreement and Promissory Note of Lance Greggain dated
July 25, 1997.
10.21(1) Lease Agreement between Markham Executive Centre Building
No. 2 Limited and related parties and Genesis Microchip Inc.
of 200 Town Centre Blvd., Suite 303, Markham, Ontario L3R
8G5, commencing date April 1, 1997.
10.22(1) Lease Agreement between Markham Executive Building No. 2
Limited and related parties and Genesis Microchip Inc. of
200 Town Centre Blvd., 4th Floor, Markham, Ontario L3R 8G5,
commencing date January 1, 1994.
10.23(1) Lease Agreement between The Landmark and Genesis Microchip
Corporation for 2111 Landings Drive, Mountain View, CA 94043
dated September 15, 1994.
10.24(1) Modification No. 1 to Genesis Microchip Corporation Landmark
Lease Agreement dated September 15, 1994.
10.25(1) Modification No. 2 to Genesis Microchip Corporation Landmark
Lease Agreement dated September 15, 1994, modifying the
premises leased under the agreement to 2071 Landings Drive,
Mountain View, CA.
10.26(3) Lease Agreement between Kolter Properties Limited and
Genesis Microchip Inc. dated January 28, 1999 for 165
Commerce Valley Drive West, Markham, Ontario.
10.27(3) Form of Stock Option Agreement Under the 1987 Stock Option
Plan.
10.28(3) Form of Stock Option Agreement Under the 1997 Employee Stock
Option Plan.
10.29(3) Form of Stock Option Agreement Under the 1997 Non-Employee
Stock Option Plan.
10.30(3) Form of Genesis Affiliate Agreement dated January 22, 1999,
by and among the Registrant and affiliates of the
Registrant.
</TABLE>
II-2
<PAGE> 220
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
10.31(3) Form of Paradise Affiliate Agreement dated January 22, 1999,
by and among the Registrant, Paradise Electronics, Inc. and
affiliates of Paradise Electronics, Inc.
10.32(3) Form of Genesis Stockholder Voting Agreement dated January
22, 1999 by and among the Registrant, Paradise Electronics,
Inc. and affiliates of the Registrant.
10.33(3) Form of Paradise Stockholder Voting Agreement dated January
22, 1999 by and among the Registrant, Paradise Electronics,
Inc. and affiliates of Paradise Electronics, Inc.
10.34(3) Consulting Agreement dated January 21, 1999 between the
Registrant and Ronald A. Rohrer.
10.35(3) Consulting Agreement dated January 21, 1999 between the
Registrant and William Welling.
21.1(3) Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP dated April 29, 1999.
23.2 Consent of Ernst & Young LLP dated April 29, 1999.
23.3(3) Consent of NationsBanc Montgomery Securities LLC dated April
23, 1999.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation dated April 23, 1999. (included in Exhibit 8.1).
23.5 Consent of Cooley Godward LLP dated April 30, 1999 (included
in Exhibit 8.2).
23.6(3) Consent of Stewart McKelvey Stirling Scales dated April 22,
1999 (included in Exhibit 5.1)..............................
24.1 Power of Attorney (included on signature page at page II-5).
99.1(3) Registrant's Form of Proxy.
99.2(3) Paradise Electronics, Inc. Form of Proxy.
99.3(3) Consent to the use of name from Alexander S. Lushtak dated
April 21, 1999
99.4 Consent to the use of name from Lawrence G. Finch dated
April 23, 1999.
</TABLE>
- ---------------
(1) Incorporated by reference to the Registration Statement (Registration
Statement No. 333-8258) on Form F-1 declared effective on February 23, 1998.
(2) Incorporated by reference to the Registrant's Annual Report (SEC Document.
000-29592) on Form 20-F filed with the Securities and Exchange Commission on
September 28, 1998.
(3) Previously filed on April 23, 1999 with the Securities and Exchange
Commission on Registration Statement Form S-4 (SEC Registration Statement
No. 333-76937).
ITEM 22. UNDERTAKINGS
(a) (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 this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of 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 end 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 a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
II-3
<PAGE> 221
(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 will be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time will be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(B) The undersigned Registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(C) The undersigned Registrant undertakes that every prospectus: (i) that
is filed pursuant to paragraph (B) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Act, each such post-effective amendment
will be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time will be deemed to be the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Memorandum and Articles of Association, as amended of the
Registrant and the Companies Act (Nova Scotia), 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 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 of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the proxy
statement/prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form S-4,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE> 222
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Amendment No. 1 to the Form S-4 and has
duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in Mountain View, California on the 30th day of
April, 1999.
GENESIS MICROCHIP INCORPORATED
a Nova Scotia company
By: /s/ PAUL M. RUSSO
------------------------------------
Paul M. Russo
Chairman of the Board,
Chief Executive Officer and
Authorized U.S. Representative
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ PAUL M. RUSSO Chairman of the Board, Chief April 30, 1999
- ----------------------------------------------------- Executive Officer and
Paul M. Russo Authorized U.S.
Representative
/s/ STEPHEN J. SOLARI* President and Chief Operating April 30, 1999
- ----------------------------------------------------- Officer
Stephen J. Solari
/s/ PETER DAKIN* Vice President, Manufacturing April 30, 1999
- ----------------------------------------------------- Operations
Peter Dakin
/s/ I. ERIC ERDMAN* Vice President, Finance and April 30, 1999
- ----------------------------------------------------- Administration, Chief
I. Eric Erdman Financial Officer and
Secretary
/s/ HAMID FARZANEH* Vice President, Worldwide April 30, 1999
- ----------------------------------------------------- Sales
Hamid Farzaneh
Director April 30, 1999
- -----------------------------------------------------
Brian S. Campbell
/s/ JAMES E. DONEGAN* Director April 30, 1999
- -----------------------------------------------------
James E. Donegan
/s/ GEORGE A. DUGUAY* Director April 30, 1999
- -----------------------------------------------------
George A. Duguay
/s/ A. DAVID FERGUSON* Director April 30, 1999
- -----------------------------------------------------
A. David Ferguson
/s/ RONALD A. ROHRER* Director April 30, 1999
- -----------------------------------------------------
Ronald A. Rohrer
</TABLE>
II-5
<PAGE> 223
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ WILLIAM H. WELLING* Director April 30, 1999
- -----------------------------------------------------
William H. Welling
*By: /s/ PAUL M. RUSSO
---------------------------------------
Paul M. Russo
Attorney-in-fact
Date: April 30, 1999
</TABLE>
II-6
<PAGE> 224
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
2.1(3) Agreement and Plan of Reorganization, dated January 22, 1999
(attached as Annex A to the proxy statement/prospectus
included in this Registration Statement)....................
3.1(3) Memorandum and Articles of Association of the Registrant....
4.1(1) Special Warrant Indenture between Genesis Microchip Inc. and
Montreal Trust Company of Canada............................
4.2(1) Bonus Warrant Indenture between Genesis Microchip Inc. and
Montreal Trust Company of Canada............................
4.3(1) Yorkton Securities Inc. Options to Purchase Common Shares of
Genesis Microchip Inc. .....................................
4.4(1) Resolution of Board of Directors dated December 11, 1997
amending the Yorkton Securities Inc. Option to Purchase
Common Shares...............................................
4.5(1) Shareholder Rights Plan Agreement...........................
5.1(3) Opinion of Stewart McKelvey Stirling Scales with respect to
the legality of the securities being issued.................
8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation dated April 23, 1999...............
8.2 Tax Opinion of Cooley Godward LLP, dated April 30, 1999.....
10.1(2) Custom Sales Agreement between Genesis Microchip Inc. and
International Business Machines Corporation dated March 9,
1998........................................................
10.2(1) 1987 Stock Option Plan......................................
10.3(1) 1997 Employee Stock Option Plan.............................
10.4(1) 1997 Non-Employee Stock Option Plan.........................
10.5(1) 1997 Employee Stock Purchase Plan...........................
10.6(1) 401(k) Plan.................................................
10.7(1) International Distributorship Agreement with Kanematsu
Semiconductor Corporation dated May 10, 1993, amended
effective as of January 1, 1996.............................
10.8(1) 1993 Supply Agreement with In Focus Systems, Inc. dated
September 20, 1996..........................................
10.9(1) Half-Band Filter IC Royalty Agreement with Miranda
Technologies Inc. dated September 23, 1993..................
10.10(1) IC Royalty Agreement with NorthShore Laboratories, Inc.
dated March 2, 1993.........................................
10.11(1) Supplemental IC Royalty Agreement with NorthShore
Laboratories dated September 1, 1994........................
10.12(1) Supplemental IC Royalty Agreement No. 2 with NorthShore
Laboratories, Inc. dated October 8, 1997....................
10.13(1) Agreement for ASIC Design and Purchase of Products with IBM
Microelectronics Essex Junction, Vermont dated November 19,
1996........................................................
10.14(1) Amendment 1 to the Agreement for ASIC Design and Purchase of
Products with IBM, effective date January 1, 1997...........
10.15(3) United Semiconductor Corporation Wafer Foundry Procedures
with Genesis Microchip Inc. dated January 19, 1999..........
10.16(1) Loan Agreement with Royal Bank of Canada dated January 7,
1997........................................................
10.17(1) Loan Agreement with Royal Bank of Canada dated October 24,
1997........................................................
10.18(1) Pledge Agreement and Promissory Note of Paul M. Russo dated
October 25, 1996............................................
10.19(1) Pledge Agreement and Promissory Note of Paul M. Russo dated
July 25, 1997...............................................
10.20(1) Pledge Agreement and Promissory Note of Lance Greggain dated
July 25, 1997...............................................
10.21(1) Lease Agreement between Markham Executive Centre Building
No. 2 Limited and related parties and Genesis Microchip Inc.
of 200 Town Centre Blvd., Suite 303, Markham, Ontario L3R
8G5, commencing date April 1, 1997..........................
</TABLE>
<PAGE> 225
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
10.22(1) Lease Agreement between Markham Executive Building No. 2
Limited and related parties and Genesis Microchip Inc. of
200 Town Centre Blvd., 4th Floor, Markham, Ontario L3R 8G5,
commencing date January 1, 1994.............................
10.23(1) Lease Agreement between The Landmark and Genesis Microchip
Corporation for 2111 Landings Drive, Mountain View, CA 94043
dated September 15, 1994....................................
10.24(1) Modification No. 1 to Genesis Microchip Corporation Landmark
Lease Agreement dated September 15, 1994....................
10.25(1) Modification No. 2 to Genesis Microchip Corporation Landmark
Lease Agreement dated September 15, 1994, modifying the
premises leased under the agreement to 2071 Landings Drive,
Mountain View, CA...........................................
10.26(3) Lease Agreement between Kolter Properties Limited and
Genesis Microchip Inc. dated January 28, 1999 for 165
Commerce Valley Drive West, Markham, Ontario................
10.27(3) Form of Stock Option Agreement Under the 1987 Stock Option
Plan........................................................
10.28(3) Form of Stock Option Agreement Under the 1997 Employee Stock
Option Plan.................................................
10.29(3) Form of Stock Option Agreement Under the 1997 Non-Employee
Stock Option Plan...........................................
10.30(3) Form of Genesis Affiliate Agreement dated January 22, 1999,
by and among the Registrant and affiliates of the
Registrant..................................................
10.31(3) Form of Paradise Affiliate Agreement dated January 22, 1999,
by and among the Registrant, Paradise Electronics, Inc. and
affiliates of Paradise Electronics, Inc. ...................
10.32(3) Form of Genesis Stockholder Voting Agreement dated January
22, 1999 by and among the Registrant, Paradise Electronics,
Inc. and affiliates of the Registrant.......................
10.33(3) Form of Paradise Stockholder Voting Agreement dated January
22, 1999 by and among the Registrant, Paradise Electronics,
Inc. and affiliates of Paradise Electronics, Inc. ..........
10.34(3) Consulting Agreement dated January 21, 1999 between the
Registrant and Ronald A. Rohrer.............................
10.35(3) Consulting Agreement dated January 21, 1999 between the
Registrant and William Welling..............................
21.1(3) Subsidiaries of the Registrant..............................
23.1 Consent of KPMG LLP dated April 29, 1999.
23.2 Consent of Ernst & Young LLP dated April 29, 1999.
23.3(3) Consent of NationsBanc Montgomery Securities LLC dated April
23, 1999.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation dated April 23, 1999. (included in Exhibit 8.1).
23.5 Consent of Cooley Godward LLP dated April 30, 1999 (included
in Exhibit 8.2).
23.6(3) Consent of Stewart McKelvey Stirling Scales dated April 22,
1999 (included in Exhibit 5.1)..............................
24.1 Power of Attorney (included on signature page at page
II-5).......................................................
99.1(3) Registrant's Form of Proxy..................................
99.2(3) Paradise Electronics, Inc. Form of Proxy....................
99.3(3) Consent to the use of name from Alexander S. Lushtak dated
April 21, 1999..............................................
99.4 Consent to the use of name from Lawrence G. Finch dated
April 23, 1999..............................................
</TABLE>
- ---------------
(1) Incorporated by reference to the Registration Statement (Registration
Statement No. 333-8258) on Form F-1 declared effective on February 23, 1998.
(2) Incorporated by reference to the Registrant's Annual Report (SEC Document
No. 000-29592) on Form 20-F filed with the Securities and Exchange
Commission on September 28, 1998.
(3) Previously filed on April 23, 1999 with the Securities and Exchange
Commission on Registration Statement Form S-4 (SEC Registration Statement
No. 333-76937).
<PAGE> 1
EXHIBIT 8.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
April 23, 1999
Genesis Microchip, Incorporated
200 Town Center Blvd.
Markham, Ontario L3R 8G5
Canada
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement filed with the Securities and Exchange Commission (which
contains a Joint Proxy Statement/Prospectus) (the "Registration Statement")
filed pursuant to the Agreement and Plan of Reorganization (the "Reorganization
Agreement"), dated January 22, 1999, among Genesis Microchip, Incorporated, a
Nova Scotia company ("Genesis"), Rainbow Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Genesis ("Merger Sub"), and
Paradise Electronics, Inc., a Delaware corporation ("Paradise").
Except as otherwise provided, capitalized terms used but not defined
herein shall have the meanings set forth in the Reorganization Agreement.
We have acted as counsel to Genesis and Merger Sub in connection with
the Merger. As such, and for the purpose of rendering this opinion, we have
examined, and are relying upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all exhibits and schedules attached thereto):
1. The Reorganization Agreement;
2. The Form S-4 Registration Statement filed with the Securities
and Exchange Commission on April 23, 1999 (which contains a
Joint Proxy Statement/Prospectus);
3. Those certain tax representation letters expected to be
delivered to us by Genesis, Merger Sub, and Paradise containing
certain representations of Genesis, Merger Sub, and Paradise
(the "Tax Representation Letters"), attached here as Attachments
A and B; and
4. Such other instruments and documents related to the formation,
organization and operation of Genesis, Merger Sub, and Paradise
and related to the consummation of the Merger and the other
transactions contemplated by the Reorganization Agreement as we
<PAGE> 2
Genesis Microchip, Inc.
April 23, 1999
Page 2
have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
a. Original documents submitted to us (including signatures
thereto) are authentic, documents submitted to us as copies
conform to the original documents, and that all such documents
have been (or will be by the Effective Time) duly and validly
executed and delivered where due execution and delivery are a
prerequisite to the effectiveness thereof;
b. All representations, warranties and statements made or agreed to
by Genesis, Merger Sub, and Paradise, their managements,
employees, officers, directors and shareholders in connection
with the Merger, including, but not limited to, those set forth
in the Reorganization Agreement (including the exhibits thereto)
and the Tax Representation Letters, are true and accurate at all
relevant times;
c. All covenants contained in the Reorganization Agreement
(including exhibits thereto) and the Tax Representation Letters
are performed without waiver or breach of any material provision
thereof;
d. The Merger will be reported by Genesis, Merger Sub, and Paradise
on their respective federal income tax returns in a manner
consistent with the opinion set forth below;
e. Any representation or statement made "to the best knowledge of"
or similarly qualified is correct without such qualification;
and
f. The opinion dated April 23, 1999, rendered by Cooley Godward LLP
to Paradise with respect to the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code
has been delivered and not been withdrawn.
Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, we are of
the opinion that, if the Merger is consummated in accordance with the
Reorganization Agreement (and without any waiver, breach, or amendment of any of
the provisions thereof) and the statements set forth in the Tax Representation
Letters are true and correct as of the Effective Time, then, for U.S. federal
income tax purposes, the Merger will be a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended.
In addition, the disclosure entitled "The Merger and Related
Transactions - Material Tax
<PAGE> 3
Genesis Microchip, Inc.
April 23, 1999
Page 3
Considerations" in the Joint Proxy Statement/Prospectus constituting a part of
the Registration Statement, insofar as it relates to the statements of U.S. law
and U.S. federal legal conclusions, constitutes our opinion as to the material
United States federal income tax consequences of the Merger. We have not
reviewed, and have no opinion regarding the discussion of the Canadian tax
consequences of the merger or of holding Genesis common shares.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any tax consequence of the Merger or the other transactions
contemplated by the Reorganization Agreement except as specifically set forth
herein, and this opinion may not be relied upon except with respect to the
consequences specifically discussed herein. No opinion is expressed as to the
federal income tax treatment that may be relevant to a particular investor in
light of personal circumstances or to certain types of investors subject to
special treatment under the federal income tax laws (for example, life insurance
companies, dealers in securities, taxpayers subject to the alternative minimum
tax banks, tax-exempt organizations, non-United States persons, U.S.
stockholders who own at least five percent of either the total voting power or
the total value of the stock of Genesis immediately after the Merger, and
stockholders who acquired their shares of Paradise stock pursuant to the
exercise of options or otherwise as compensation).
No opinion is expressed as to any other transaction whatsoever,
including the Merger, if all of the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of the Reorganization
Agreement and without waiver of any material provision thereof. To the extent
that any of the representations, warranties, covenants, statements and
assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income
tax consequences of the Merger and is not binding on the Internal Revenue
Service or any court of law, tribunal, administrative agency or other
governmental body. The conclusions are based on the Internal Revenue Code of
1986, as amended, existing judicial decisions, administrative regulations and
published rulings. No assurance can be given that future legislative, judicial
or administrative changes or interpretations will not adversely affect the
accuracy of the conclusions stated herein. Nevertheless, by rendering this
opinion, we undertake no responsibility to advise you of any new developments in
the application or interpretation of the federal income tax laws.
<PAGE> 4
Genesis Microchip, Inc.
April 23, 1999
Page 4
This opinion is being delivered for the purposes of being included as an
exhibit to the Registration Statement. We hereby consent to the use of our name
under the headings "The Merger and Related Transactions - Material Tax
Considerations" and "Legal Matters" in the Joint Proxy Statement/Prospectus and
to the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 5
Attachment A
OFFICER'S TAX CERTIFICATE
Genesis Microchip Inc.
200 Town Center Blvd.
Markham, Ontario L3R 8G5
Canada
April 23, 1999
Wilson Sonsini Goodrich & Rosati Cooley Godward, LLP
650 Page Mill Road One Maritime Plaza, 20th Floor
Palo Alto, California 94304 San Francisco, CA 94111-3580
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF REORGANIZATION (THE
"REORGANIZATION AGREEMENT"), DATED JANUARY 22, 1999, AMONG GENESIS
MICROCHIP INC., A NOVA SCOTIA COMPANY ("GENESIS"), RAINBOW ACQUISITION
CORPORATION, A DELAWARE CORPORATION AND A WHOLLY-OWNED SUBSIDIARY OF
GENESIS ("MERGER SUB"), AND PARADISE ELECTRONICS, INC., A DELAWARE
CORPORATION ("PARADISE"), AND THE RELATED AGREEMENT OF MERGER BETWEEN
PARADISE AND MERGER SUB (THE "MERGER AGREEMENT").
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions regarding certain federal income tax consequences of the Merger.
Unless otherwise indicated, capitalized terms not defined herein have the
meanings set forth in the Reorganization Agreement. The Reorganization
Agreement and the Agreement of Merger, including exhibits and schedules
attached thereto, are collectively referred to as the "Agreements."
After consulting with their counsel and auditors regarding the meaning of
and factual support for the following representations, the undersigned hereby
certify and represent that the following facts are now true and will continue
to be true as of the Effective Time of the Merger and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into Paradise,
and Paradise will acquire all of the assets and liabilities of Merger Sub.
Specifically, the assets transferred to Paradise pursuant to the Merger will
represent at least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by Merger Sub immediately prior to the Merger. In addition, at
least ninety percent (90%) of the fair market value of the net assets and at
least seventy percent (70%) of the fair market value of the gross assets held
by Paradise immediately prior to the Merger will continue to be held by
Paradise immediately after the Merger. For the purpose of determining the
percentage of Paradise's and Merger Sub's net and gross
<PAGE> 6
assets held by Paradise immediately following the Merger, the following assets
will be treated as property held by Merger Sub or Paradise, as the case may be,
immediately prior but not subsequent to the Merger: (i) assets disposed of by
Paradise or Merger Sub (other than assets transferred from Merger Sub to
Paradise in the Merger) prior to or subsequent to the Merger and in
contemplation thereof (including without limitation any asset disposed of by
Paradise, other than in the ordinary course of business, pursuant to a plan or
intent existing during the period ending at the Effective Time of the Merger
and beginning with the commencement of negotiations (whether formal or
informal) with Genesis regarding the Merger (the "Pre-Merger Period")); (ii)
assets used by Paradise or Merger Sub to pay stockholders perfecting appraisal
rights or other expenses or liabilities incurred in connection with the Merger
and (iii) assets used to make distribution, redemption or other payments
in respect of stock of Paradise or rights to acquire such stock (including
payments treated as such for tax purposes) that are made in contemplation of
the Merger or that are related thereto;
2. Genesis' principal reasons for participating in the Merger are bona
fide business purposes not related to taxes;
3. Prior the Merger, Genesis will be in "Control" of Merger Sub. As
used in this letter, "Control" shall consist of direct ownership of shares of
stock possessing at least eighty percent (80%) of the total combined voting
power of all classes of stock entitled to vote and at least eighty percent
(80%) of the total number of shares of all other classes of stock of the
corporation. For purposes of determining Control, a person shall not be
considered to own shares of voting stock if rights to vote such shares (or to
restrict or otherwise control the voting of such shares) are held by a third
party (including a voting trust) other than an agent of such person;
4. In the Merger, shares of stock of Paradise representing Control of
Paradise will be exchanged solely for shares of Genesis Common Stock. For
purposes of this paragraph, shares of stock of Paradise exchanged in the Merger
for cash and other property (including, without limitation, cash paid to
stockholders of Paradise perfecting appraisal rights, if any, or in lieu of
fractional shares of Genesis Common Stock) will be treated as shares of stock
of Paradise outstanding on the date of the Merger but not exchanged for shares
of Genesis Common Stock;
5. Merger Sub was formed solely for the purposes of effecting the Merger
and has conducted no business or other activities except in connection with the
Merger;
6. Genesis has no plan or intention to cause Paradise to issue additional
shares of stock after the Merger, or take any other action, that would result in
Genesis losing Control of Paradise;
7. Other than the possible reacquisition of shares held in the Escrow
Fund, Genesis has no plan or intention to reacquire any of its stock issued
pursuant to the Merger;
8. Except for transfers described in Section 368(a)(2)(C) of the Code or
Treasury Regulation Section 1.368-2(k)(2), Genesis has no plan or intention to:
(a) liquidate Paradise; (b) merge Paradise with or into another corporation
including Genesis or its affiliates; (c) sell, distribute or otherwise dispose
of the stock of Paradise, or cause Paradise to sell or otherwise dispose of the
stock of Paradise;
-2-
<PAGE> 7
or (d) cause Paradise to sell or otherwise dispose of any of its assets or of
any assets acquired from Merger Sub, except for dispositions made in the
ordinary course of business or in payment of expenses incurred by Paradise
pursuant to the Merger;
9. In the Merger, Merger Sub will have no liabilities assumed by Paradise
and will not transfer to Paradise any assets subject to liabilities, except to
the extent incurred in connection with the transactions contemplated by the
Agreements;
10. Genesis will cause Paradise to either continue the historic business
of Paradise or use a significant portion of its historic business assets in a
business. For purposes of this representation, Genesis will be deemed to
satisfy this requirement if (a) the members of Genesis' qualified group (as
defined in Treasury Regulation Section 1.368-1(d)(4)(ii)), in the aggregate,
continue the historic business of Paradise or use a significant portion of
Paradise's historic business assets in a business, or (b) the foregoing
activities are undertaken by a partnership in which (i) the members of Genesis'
qualified group, in the aggregate, own at least a thirty-three and one-third
percent (33-1/3%) interest, or (ii) a member of the qualified group has active
and substantial management functions as a partner with respect to the
partnership business and the members of the qualified group, in the aggregate,
own at least a twenty percent (20%) interest;
11. During the past five (5) years, none of the outstanding shares of
capital stock of Paradise, including the right to acquire or vote any such
shares have, directly or indirectly, been owned by Genesis or, to Genesis'
knowledge, affiliates of Genesis;
12. Neither Genesis nor Sub is, nor will be on the Effective Time of the
Merger, an "investment company" within the meaning of Section 368(a)(2)(F)(iii)
and (iv) of the Code;
13. Neither Genesis nor Sub is, nor will be on the Effective Time of the
Merger, under the jurisdiction of a court in a Title 11 or similar case within
the meaning of Section 368(a)(3)(A) of the Code;
14. Following the Merger, Genesis will comply with the record-keeping and
information filing requirements of Treasury Regulation Section 1.368-3;
15. No stockholder of Paradise is acting as agent for Genesis in
connection with the Merger or the approval thereof; Genesis will not reimburse
any stockholder of Paradise for any stock of Paradise such stockholder may have
purchased or for other obligations such stockholder may have incurred;
16. Neither Genesis nor any persons related to Genesis within the meaning
of Treasury Regulation Section 1.368-1(e)(3) ("Genesis Related Persons"), will,
in connection with the Merger, redeem, purchase or otherwise acquire
("Purchase") shares of Genesis Common Stock to be issued in the Merger, that
would, in the aggregate, reduce the value of all of the outstanding Paradise
Capital Stock as of the Effective Time, after giving effect to such Purchases,
to a value of less than fifty percent (50%) of the value of all of the
outstanding Paradise Capital Stock as of immediately prior to the
-3-
<PAGE> 8
Effective Time determined without regard to such Purchases. For purposes of
this representation, shares of Paradise Capital Stock (i) with respect to which
a Paradise stockholder receives consideration in the Merger other than Genesis
Common Stock (including without limitation cash received in lieu of fractional
shares of Genesis Common Stock), (ii) with respect to which a Purchase by
Genesis or a Genesis Related Person occurs prior to or subsequent to, and in
connection with the Merger, for consideration other than Genesis Common Stock,
(iii) with respect to which a Purchase by Paradise or a person related to
Paradise (as defined in Treasury Regulation Section 1.368-(1)(3), determined
without regard to (e)(3)(i)(A)), occurs prior to and in connection with the
Merger for consideration other than Genesis Common Stock or Paradise Capital
Stock, or (iv) with respect to which Paradise made an extraordinary
distribution prior to and in connection with the Merger, shall be considered
shares of Paradise Capital Stock outstanding as of immediately prior to the
Effective Time and with respect to which there is a Purchase. Further, for
purposes of this representation, (i) repurchases in the ordinary course of
business of unvested shares, if any, acquired from Paradise terminating
employees, and repurchases in the open market pursuant to an ongoing stock
repurchase program which was not created or modified in connection with the
Merger, for which there is a reasonable business purpose, and (ii) the possible
reacquisition of shares held in the Escrow Fund will be disregarded;
17. The total fair market value of all consideration other than Genesis
Common Stock received by stockholders of Paradise in the Merger (including,
without limitation, cash paid to stockholders of Paradise perfecting appraisal
rights) will be less than ten percent (10%) of the aggregate fair market value
of stock of Paradise outstanding immediately prior to the Merger;
18. The fair market value of the Genesis Common Stock received by each
stockholder of Paradise will be approximately equal to the fair market value of
the stock of Paradise surrendered in exchange therefor, and the aggregate
consideration received by stockholders of Paradise in exchange for their stock
of Paradise will be approximately equal to the fair market value of all of the
outstanding shares of stock of Paradise immediately prior to the Merger;
19. Except as set forth in Section 8.3 of the Reorganization Agreement,
each of Merger Sub, Genesis, Paradise and each stockholder of Paradise will pay
separately his, her or its own expenses relating to the Merger;
20. There is no intercorporate indebtedness existing between Genesis and
Paradise or between Merger Sub and Paradise that was issued, acquired, or will
be settled at a discount as a result of the Merger, and Genesis will assume no
liabilities of Paradise or any stockholder of Paradise in connection with the
Merger;
21. The terms of the Reorganization Agreement and the agreements related
thereto are the product of arm's length negotiations;
22. None of the compensation received by any stockholder-employee of
Paradise will be separate consideration for, or allocable to, any of their
shares of stock of Paradise; none of the shares of Genesis Common Stock
received by any stockholder-employee of Paradise will be separate
-4-
<PAGE> 9
consideration for, or allocable to, any employment agreement or any covenants
not to compete; and the compensation paid to any stockholder-employee of
Paradise will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services;
23. The payment of cash in lieu of fractional shares of Genesis Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Genesis of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid in
the transaction to Paradise stockholders instead of issuing fractional shares
of Genesis Common Stock will not exceed one percent (1%) of the total
consideration that will be issued in the transaction to Paradise stockholders
in exchange for their shares of Paradise Capital Stock. The fractional share
interests of each Paradise stockholder will be aggregated, and no Paradise
stockholder will receive cash in an amount equal to or greater than the value of
one full share of Genesis Common Stock;
24. With respect to each instance, if any, in which shares of stock of
Paradise have been purchased by a stockholder of Genesis (a "Stockholder")
during the Pre-Merger Period (a "Stock Purchase"), to the best knowledge of
Genesis: (i) the Stock Purchase was made by such Stockholder not as a
representative of Genesis; (ii) the purchase price paid by such Stockholder
pursuant to the Stock Purchase was the product of arm's length negotiations,
was not advanced, and will not be reimbursed, either directly or indirectly, by
Genesis; (iii) at no time was such Stockholder or any other party required or
obligated to surrender to Genesis Paradise capital stock acquired in the Stock
Purchase, and neither such Stockholder nor any other party will be required to
surrender to Genesis the Genesis Common Stock for which such shares of stock of
Paradise will be exchanged in the Merger; and (iv) the Stock Purchase was not a
formal or informal condition to consummation of the Merger;
25. Fifty percent (50%) or less of both the total voting power and the
total value of the stock of Genesis will be received in the Merger, in the
aggregate, by Paradise stockholders who are U.S. persons;
26. Fifty percent (50%) or less of each of the total voting power and
the total value of the stock of Genesis will be owned, in the aggregate,
immediately after the Merger by U.S. persons that are either officers or
directors of Paradise or that are stockholders of Paradise who own at least
five percent (5%) of either the total voting power or total value of the stock
of Paradise immediately prior to the Merger. For purposes of this
representation, any stock of Genesis owned by U.S. persons immediately after
the transfer will be taken into account, whether or not it was received in the
Merger for stock of Paradise;
27. Genesis satisfies the "active trade or business test," as defined
in Treasury Regulation Section 1.367(a)-3(c)(3), including, without limitation,
the requirements of (i) being engaged in an active trade or business for the
entire thirty-six (36) month period immediately before the Merger, and (ii)
without an intention at the time of the Merger to substantially dispose of or
discontinue such trade or business;
28. Genesis will cause Paradise to comply with the reporting
requirements of Treasury Regulation Section 1.367(a)-3(c)(6);
-5-
<PAGE> 10
29. No stockholder of Paradise that is a "United States person" will
own, directly or indirectly, five percent (5%) or more of either the total
voting power or the total value of the outstanding capital stock of Genesis
immediately after the Merger. For purposes of the preceding sentence, (i) the
term "United States person" includes any (A) citizen or resident of the U.S.,
(B) U.S. corporation or partnership, or (C) estate or trust other than a foreign
estate or trust, and (ii) the attribution rules of Section 318 of the Code shall
apply in determining a U.S. person's direct or indirect ownership of capital
stock of Genesis;
30. The Escrow Fund is being established for good and valid business
reasons;
31. The Genesis Common Stock held in the Escrow Fund will appear as
issued and outstanding on the balance sheet of Genesis;
32. Genesis is a corporation within the meaning of Section 7701(a)(3)
of the Code and the Treasury Regulations thereunder; and
33. Genesis and Merger Sub are authorized to make all of the
representations set forth herein.
The undersigned recognize that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the
Agreements and documents related thereto, and (ii) your opinions will be subject
to certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all material respects.
-6-
<PAGE> 11
The undersigned recognize that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
GENESIS MICROCHIP INC.,
a Nova Scotia company
By: /s/ I. ERIC ERDMAN
--------------------------------
Title: Chief Financial Officer
and Secretary
-----------------------------
RAINBOW ACQUISITION CORPORATION,
a Delaware corporation
By: /s/ I. ERIC ERDMAN
--------------------------------
Title: Chief Financial Officer
and Secretary
-----------------------------
-7-
<PAGE> 12
Attachment B
OFFICER'S TAX CERTIFICATE
Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
February 12, 1999
Wilson Sonsini Goodrich & Rosati Cooley Godward, LLP
650 Page Mill Road One Maritime Plaza, 20th Floor
Palo Alto, California 94304 San Francisco, CA 94111-3580
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF REORGANIZATION (THE
"REORGANIZATION AGREEMENT"), DATED JANUARY 22, 1999, AMONG GENESIS MICROCHIP
INC., A NOVA SCOTIA COMPANY ("GENESIS"), RAINBOW ACQUISITION CORPORATION, A
DELAWARE CORPORATION AND A WHOLLY-OWNED SUBSIDIARY OF GENESIS ("MERGER SUB"),
AND PARADISE ELECTRONICS, INC., A DELAWARE CORPORATION ("PARADISE"), AND THE
RELATED AGREEMENT OF MERGER BETWEEN PARADISE AND MERGER SUB (THE "MERGER
AGREEMENT").
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions regarding certain federal income tax consequences of the Merger. Unless
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Reorganization Agreement or the Merger Agreement. The
Reorganization Agreement and the Merger Agreement, including exhibits and
schedules attached thereto, are collectively referred to as the "Agreements."
After consulting with its counsel and auditors regarding the meaning of
and factual support for the following representations, the undersigned hereby
certifies and represents that the following facts are now true and will continue
to be true as of the Effective Time of the Merger and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into
Paradise, and Paradise will acquire all of the assets and liabilities of Merger
Sub. Specifically, at least ninety percent (90%) of the fair market value of the
net assets and at least seventy percent (70%) of the fair market value of the
gross assets held by Paradise immediately prior to the Merger will continue to
be held by Paradise immediately after the Merger. For the purpose of determining
the percentage of Paradise's net and gross assets held by Paradise immediately
following the Merger, the following assets will be treated as property held by
Paradise immediately prior but not subsequent to the Merger: (i) assets disposed
of by Paradise prior to or subsequent to the Merger and in contemplation thereof
(including without limitation any asset disposed of by Paradise, other than in
the ordinary course of business,
<PAGE> 13
pursuant to a plan or intent existing during the period ending on the Effective
Time of the Merger and beginning with the commencement of negotiations (whether
formal or informal) with Genesis regarding the Merger (the "Pre-Merger
Period")); (ii) assets used by Paradise to pay stockholders perfecting
appraisal rights or other expenses or liabilities incurred in connection with
the Merger and (iii) assets used to make distribution, redemption or other
payments in respect of stock of Paradise or rights to acquire such stock
(including payments treated as such for tax purposes) that are made in
contemplation of the Merger or that are related thereto;
2. Other than in the ordinary course of business or pursuant to its
obligations under the Agreements, Paradise has made no transfer of any of its
assets (including any distribution of assets with respect to, or in redemption
of, stock) in contemplation of the Merger or during the Pre-Merger Period;
3. Paradise's principal reasons for participating in the Merger are
bona fide business purposes unrelated to taxes;
4. At the Effective Time of the Merger, Paradise will have no
outstanding equity interests other than those disclosed in Section 2.2 of the
Reorganization Agreement. At the Effective Time of the Merger, except as
specified in the Reorganization Agreement, Paradise will have no outstanding
warrants, options, or convertible securities or any other type of right
outstanding pursuant to which any person could acquire shares of Paradise
capital stock or any other equity interest in Paradise (other than those
disclosed in Section 2.2 of the Reorganization Agreement or the disclosure
schedule with respect thereto) that, if exercised, could affect Genesis'
acquisition or retention of Control of Paradise. As used in this letter,
"Control" shall consist of direct ownership of shares of stock possessing at
least eighty percent (80%) of the total combined voting power of shares of all
classes of stock entitled to vote and at least eighty percent (80%) of the total
number of shares of all other classes of stock of the corporation. For purposes
of determining Control, a person shall not be considered to own shares of voting
stock if rights to vote such shares (or to restrict or otherwise control the
voting of such shares) are held by a third party (including a voting trust)
other than an agent of such person;
5. In the Merger, shares of stock of Paradise representing Control of
Paradise will be exchanged solely for shares of voting stock of Genesis. For
purposes of this paragraph, shares of the stock of Paradise exchanged in the
Merger for cash and other property (including, without limitation, cash paid to
stockholders of Paradise perfecting appraisal rights, if any, or in lieu of
fractional shares of Genesis Common Stock) will be treated as shares of stock
of Paradise outstanding on the date of the Merger but not exchanged for shares
of voting stock of Genesis;
6. The total fair market value of all consideration other than shares of
Genesis Common Stock received by stockholders of Paradise in the Merger
(including, without limitation, cash paid to Paradise stockholders perfecting
appraisal rights or in lieu of fractional shares of Genesis Common Stock) will
be less than ten percent (10%) of the aggregate fair market value of shares of
stock of Paradise outstanding immediately prior to the Merger;
-2-
<PAGE> 14
7. Paradise has no plan or intention to issue additional shares of stock
after the Merger, or take any other action, that would result in Genesis losing
Control of Paradise;
8. Except for transfers described in Section 368(a)(2)(C) of Code or
Treasury Regulation Section 1.368-2(k)(2), to the best knowledge of Paradise,
Genesis has no plan or intention to: (a) liquidate Paradise; (b) merger Paradise
with or into another corporation, including Genesis or its affiliates; (c) sell
or otherwise dispose of the stock of Paradise, or cause Paradise to sell or
otherwise dispose of the stock of Paradise; or (d) cause Paradise to sell or
otherwise dispose of any of its assets or of any of the assets acquired from
Merger Sub, except for dispositions made in the ordinary course of business or
in payment of expenses incurred by Paradise pursuant to the Merger;
9. Paradise intends to continue its historic business or use a
significant portion of its historic business assets in a business following the
Merger;
10. The liabilities of Paradise have been incurred by Paradise in the
ordinary course of its business;
11. The fair market value of Paradise's assets will, on the Effective
Time of the Merger, exceed the aggregate liabilities of Paradise plus the amount
of liabilities, if any, to which such assets are subject;
12. To the best knowledge of Paradise, Genesis does not own, nor has it
owned during the past five (5) years, directly, any shares of stock of Paradise
or rights to acquire such stock;
13. Paradise is not and will not be on the Effective Time of the Merger
an "investment company" within the meaning of Section 368(a)(2)(F)(iii) and (iv)
of the Code;
14. Paradise is not and will not be on the Effective Time of the Merger
under the jurisdiction of a court in a Title 11 or similar case within the
meaning of Section 368(a)(3)(A) of the Code;
15. Paradise, and persons related to Paradise (as defined in Treasury
Regulation Section 1.368-1(e)(3), determined without regard to (e)(3)(i)(A)),
have not redeemed, purchased or otherwise acquired ("Purchased") other than in
exchange for Genesis Common Stock or Paradise Capital Stock, an amount of
Paradise Capital Stock, and Paradise has not made any extraordinary
distributions with respect to its common stock, prior to and in connection with
the Merger, that would, in the aggregate, reduce the value of all of the
outstanding Paradise Capital Stock immediately prior to the Merger, after giving
effect to such Purchases and extraordinary distributions (the "Pre-Merger
Value"), to a value of less than fifty percent (50%) of the Pre-Merger Value
(the "Continuing Proprietary Interest"). For purposes of this representation,
Paradise Capital Stock treated as part of the Continuing Proprietary Interest
will not include shares of Paradise Capital Stock that will be (i) exchanged in
the Merger for consideration other than Genesis Common Stock, including Paradise
Capital Stock surrendered for cash or other property by dissenters, or (ii)
deemed
-3-
<PAGE> 15
exchanged for a fractional share of Genesis Common Stock which is redeemed by
Genesis. In addition, for purposes of this representation, extraordinary
distributions will not include periodic dividends that are consistent with
Paradise's historic dividend practices, and repurchases in the ordinary course
of business of unvested shares by Paradise, if any, acquired from Paradise
terminating employees will be disregarded;
16. The payment of cash in lieu of fractional shares of Genesis
Common Stock is solely for the purpose of avoiding the expense and inconvenience
to Genesis of issuing fractional shares of Genesis Common Stock and does not
represent separately bargained-for consideration. The total cash consideration
that will be paid in the transaction to stockholders of Paradise instead of
issuing fractional Genesis Common Stock will not exceed one percent (1%) of the
total consideration that will be issued in the transaction to the stockholders
of Paradise in exchange for their shares of Paradise. The fractional share
interests of each stockholder of Paradise will be aggregated, and no stockholder
of Paradise will receive cash in an amount equal to or greater than the value of
one share of Genesis Common Stock;
17. The fair market value of the shares of Genesis Common Stock
received by each stockholder of Paradise will be approximately equal to the fair
market value of the shares of stock of Paradise surrendered in exchange therefor
and the aggregate consideration received by stockholders of Paradise in exchange
for their shares of stock of Paradise will be approximately equal to the fair
market value of all of the outstanding shares of stock of Paradise immediately
prior to the Merger;
18. Except as set forth in Section 8.3 of the Reorganization
Agreement, each of Merger Sub, Genesis, Paradise and each stockholder of
Paradise will each pay separately his, her or its own expenses relating to the
Merger;
19. There is no intercorporate indebtedness existing between Genesis
and Paradise or between Merger Sub and Paradise that was issued, acquired, or
will be settled at a discount as a result of the Merger; Genesis will assume no
liabilities of Paradise or any stockholder of Paradise in connection with the
Merger;
20. The terms of the Reorganization Agreement and the other
agreements relating thereto are the product of arm's length negotiations;
21. None of the compensation received by any stockholder-employees of
Paradise will be separate consideration for, or allocable to, any of their
shares of stock of Paradise; none of the shares of Genesis Common Stock received
by any stockholder-employees of Paradise will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and the
compensation paid to any stockholder-employees of Paradise will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services;
22. With respect to each instance, if any, in which shares of stock
of Paradise have been purchased by a stockholder of Genesis ( a "Stockholder")
during the Pre-Merger Period (a "Stock Purchase"): (i) to the best knowledge of
Paradise, (A) the Stock Purchase was made by such
-4-
<PAGE> 16
Stockholder on its own behalf, rather than as a representative, or for the
benefit, of Genesis, (B) the Stock Purchase was entered into solely to satisfy
the separate interests of such Stockholder and the seller, and (C) the purchase
price paid by such Stockholder pursuant to the Stock Purchase was the product
of arm's length negotiations; and (ii) the Stock Purchase was not a formal or
informal condition to consummation of the Merger;
23. Fifty percent (50%) or less of both the total voting power and the
total value of the stock of Genesis will be received in the Merger, in the
aggregate, by Paradise stockholders who are U.S. persons;
24. Fifty percent (50%) or less of each of the total voting power and the
total value of the stock of Genesis will be owned, in the aggregate,
immediately after the Merger by U.S. persons that are either officers or
directors of Paradise or that are shareholders of Paradise who own at least five
percent (5%) of either the total voting power or the total value of the stock
of Paradise immediately prior to the Merger. For purposes of this
representation, any stock of Parent owned by U.S. persons immediately after the
transfer will be taken into account, whether or not it was received in the
Merger for stock of Paradise;
25. No Paradise stockholder will own, as a result of the Merger, an
ownership interest in Genesis, as of immediately after the Merger, equal to or
greater than five percent (5%) of either the total voting power or the total
value of the stock of Genesis;
26. Paradise has no intention to cause Genesis to substantially dispose
of or discontinue a trade or business such that Genesis would not satisfy the
"active trade or business test", as defined in Treasury Regulation Section
1.367(a)-3(c)(3);
27. No stockholder of Paradise that is a "United States person" will own,
directly or indirectly, five percent (5%) or more of either the total voting
power or the total value of the outstanding capital stock of Genesis
immediately after the Merger. For purposes of the preceding sentence, (i) the
term "United States person" includes any (A) citizen or resident of the U.S.,
(B) U.S. corporation or partnership, or (C) estate or trust other than a
foreign estate or trust, and (ii) the attribution rules of Section 318 of the
Code shall apply in determining a U.S. person's direct or indirect ownership of
capital stock of Genesis;
28. The Escrow Fund is being established for good and valid business
reasons; and
29. Paradise is authorized to make all of the representations set forth
herein.
The undersigned recognizes that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the
Agreements and documents related thereto, and (ii) your opinions will be
subject to certain limitations and qualifications including that they may not
be relied upon if any such representations are not accurate in all material
respects.
-5-
<PAGE> 17
Notwithstanding anything herein to the contrary, the undersigned makes
no representations regarding any actions or conduct of Paradise pursuant to
Genesis' exercise of control over Paradise after the Merger.
The undersigned recognizes that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except
as expressly set forth in such opinions.
Very truly yours,
PARADISE ELECTRONICS, INC.,
a Delaware corporation
By: /s/ JEFFREY DIAMOND
--------------------------------
Title: President & CEO
-----------------------------
-6-
<PAGE> 18
OFFICER'S TAX CERTIFICATE
Genesis Microchip Inc.
200 Town Center Blvd.
Markham, Ontario L3R 8G5
Canada
April 29, 1999
<TABLE>
<S> <C>
Wilson Sonsini Goodrich & Rosati Cooley Godward, LLP
650 Page Mill Road One Maritime Plaza, 20th Floor
Palo Alto, California 94304 San Francisco, CA 94111-3580
</TABLE>
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF REORGANIZATION (THE
"REORGANIZATION AGREEMENT"), DATED JANUARY 22, 1999, AMONG GENESIS
MICROCHIP INC., A NOVA SCOTIA COMPANY ("GENESIS"), RAINBOW ACQUISITION
CORPORATION, A DELAWARE CORPORATION AND A WHOLLY-OWNED SUBSIDIARY OF
GENESIS ("MERGER SUB"), AND PARADISE ELECTRONICS, INC., A DELAWARE
CORPORATION ("PARADISE"), AND THE RELATED AGREEMENT OF MERGER BETWEEN
PARADISE AND MERGER SUB (THE "MERGER AGREEMENT").
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions regarding certain federal income tax consequences of the Merger. Unless
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Reorganization Agreement. The Reorganization Agreement and the
Agreement of Merger, including exhibits and schedules attached thereto, are
collectively referred to as the "Agreements."
After consulting with their counsel and auditors regarding the meaning of
and factual support for the following representations, the undersigned hereby
certify and represent that the following facts are now true and will continue to
be true as of the Effective Time of the Merger and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into Paradise,
and Paradise will acquire all of the assets and liabilities of Merger Sub.
Specifically, the assets transferred to Paradise pursuant to the Merger will
represent at least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by Merger Sub immediately prior to the Merger. In addition, at least
ninety percent (90%) of the fair market value of the net assets and at least
seventy percent (70%) of the fair market value of the gross assets held by
Paradise immediately prior to the Merger will continue to be held by Paradise
immediately after the Merger. For the purpose of determining the percentage of
Paradise's and Merger Sub's net and gross assets held by Paradise immediately
following the Merger, the following assets will be treated as property held by
Merger Sub or Paradise, as the case may be, immediately prior but not subsequent
to the Merger: (i) assets disposed of by Paradise or Merger Sub (other than
assets transferred from Merger Sub to Paradise in the Merger) prior to or
subsequent to the Merger and in contemplation thereof (including without
limitation any asset disposed of by Paradise, other than in the ordinary course
of business, pursuant to a plan or intent existing during the period ending at
the Effective Time of the Merger and beginning with the commencement of
negotiations (whether formal or informal) with Genesis regarding the Merger (the
"Pre-Merger Period")); (ii) assets used by Paradise or Merger Sub to pay
stockholders perfecting appraisal rights or other expenses or liabilities
incurred in connection with the Merger and (iii) assets used to make
distribution, redemption or other payments in respect of stock of Paradise or
rights to acquire such stock (including payments treated as such for tax
purposes) that are made in contemplation of the Merger or that are related
thereto;
2. Genesis' principal reasons for participating in the Merger are bona fide
business purposes not related to taxes;
3. Prior to the Merger, Genesis will directly own shares of stock
possessing at least eighty percent (80%) of the total combined voting power of
all classes of stock entitled to vote and at least eighty percent (80%) of the
total number of shares of all other classes of stock of Merger Sub (such
percentage ownership to be referred to hereinafter as "Control"). For purposes
of determining Control, a person shall not be considered to
<PAGE> 19
own shares of voting stock if rights to vote such shares (or to restrict or
otherwise control the voting of such shares) are held by a third party
(including a voting trust) other than an agent of such person;
4. In the Merger, shares of stock of Paradise representing Control of
Paradise will be exchanged solely for shares of Genesis Common Stock. For
purposes of this paragraph, shares of stock of Paradise exchanged in the Merger
for cash and other property (including, without limitation, cash paid to
stockholders of Paradise perfecting appraisal rights, if any, or in lieu of
fractional shares of Genesis Common Stock) will be treated as shares of stock of
Paradise outstanding on the date of the Merger but not exchanged for shares of
Genesis Common Stock;
5. Merger Sub was formed solely for the purposes of effecting the Merger
and has conducted no business or other activities except in connection with the
Merger;
6. Genesis has no plan or intention to cause Paradise to issue additional
shares of stock after the Merger, or take any other action, that would result in
Genesis losing Control of Paradise;
7. Other than the possible reacquisition of shares held in the Escrow Fund,
Genesis has no plan or intention to reacquire any of its stock issued pursuant
to the Merger;
8. Except for successive transfers of assets or stock acquired in the
Merger to corporations Controlled in each transfer by Genesis, and subsequent
transfers to corporations Controlled by Genesis-Controlled corporations, Genesis
has no plan or intention to: (a) liquidate Paradise; (b) merge Paradise with or
into another corporation including Genesis or its affiliates; (c) sell,
distribute or otherwise dispose of the stock of Paradise, or cause Paradise to
sell or otherwise dispose of the stock of Paradise; or (d) cause Paradise to
sell or otherwise dispose of any of its assets or of any assets acquired from
Merger Sub, except for dispositions made in the ordinary course of business or
in payment of expenses incurred by Paradise pursuant to the Merger;
9. In the Merger, Merger Sub will have no liabilities assumed by Paradise
and will not transfer to Paradise any assets subject to liabilities, except to
the extent incurred in connection with the transactions contemplated by the
Agreements;
10. Genesis will cause Paradise to either continue the historic business of
Paradise or use a significant portion of its historic business assets in a
business. For purposes of this representation, Genesis will be deemed to satisfy
this requirement if (a) the members of Genesis' qualified group (defined to be
one or more chains of corporations connected through stock ownership with
Genesis, provided Genesis directly holds stock in an amount constituting Control
of at least one other corporation in the chain, and the stock in each of the
other corporations is directly owned in an amount constituting Control by one of
the other corporations), in the aggregate, continue the historic business of
Paradise or use a significant portion of Paradise's historic business assets in
a business, or (b) the foregoing activities are undertaken by a partnership in
which (i) the members of Genesis' qualified group, in the aggregate, own at
least a thirty-three and one-third percent (33 1/3%) interest, or (ii) a member
of the qualified group has active and substantial management functions as a
partner with respect to the partnership business and the members of the
qualified group, in the aggregate, own at least a twenty percent (20%) interest;
11. During the past five (5) years, none of the outstanding shares of
capital stock of Paradise, including the right to acquire or vote any such
shares have, directly or indirectly, been owned by Genesis or, to Genesis'
knowledge, affiliates of Genesis;
12. Neither Genesis nor Sub is, nor will be on the Effective Time of the
Merger, an "investment company" -- i.e. a regulated investment company, a real
estate investment trust, or a corporation fifty percent (50%) or more of whose
total assets are stock and securities and eighty percent (80%) or more of the
value of whose total assets are assets held for investment.
13. Neither Genesis nor Sub is, nor will be on the Effective Time of the
Merger, under the jurisdiction of a court in a Title 11 case, or in a
receivership, foreclosure, or similar proceeding in a federal or state court;
14. Following the Merger, Genesis will comply with all necessary
record-keeping and information filing requirements by filing as part of its
return for the taxable year within which the Merger occurs a complete statement
of all facts pertinent to the nonrecognition of gain or loss in connection with
the Merger;
-2-
<PAGE> 20
15. No stockholder of Paradise is acting as agent for Genesis in connection
with the Merger or the approval thereof; Genesis will not reimburse any
stockholder of Paradise for any stock of Paradise such stockholder may have
purchased or for other obligations such stockholder may have incurred;
16. Neither Genesis nor any persons related to Genesis ("Genesis Related
Persons"), will, in connection with the Merger, redeem, purchase or otherwise
acquire ("Purchase") shares of Genesis Common Stock to be issued in the Merger,
that would, in the aggregate, reduce the value of all of the outstanding
Paradise Capital Stock as of the Effective Time, after giving effect to such
Purchases, to a value of less than fifty percent (50%) of the value of all of
the outstanding Paradise Capital Stock as of immediately prior to the Effective
Time determined without regard to such Purchases. For purposes of this
representation, shares of Paradise Capital Stock (i) with respect to which a
Paradise stockholder receives consideration in the Merger other than Genesis
Common Stock (including without limitation cash received in lieu of fractional
shares of Genesis Common Stock), (ii) with respect to which a Purchase by
Genesis or a Genesis Related Person occurs prior to or subsequent to, and in
connection with the Merger, for consideration other than Genesis Common Stock,
(iii) with respect to which a Purchase by Paradise or a person related to
Paradise occurs prior to and in connection with the Merger for consideration
other than Genesis Common Stock or Paradise Capital Stock, or (iv) with respect
to which Paradise made an extraordinary distribution prior to and in connection
with the Merger, shall be considered shares of Paradise Capital Stock
outstanding as of immediately prior to the Effective Time and with respect to
which there is a Purchase. Further, for purposes of this representation, (i)
repurchases in the ordinary course of business of unvested shares, if any,
acquired from Paradise terminating employees, and repurchases in the open market
pursuant to an ongoing stock repurchase program which was not created or
modified in connection with the Merger, for which there is a reasonable business
purpose, and (ii) the possible reacquisition of shares held in the Escrow Fund
will be disregarded;
17. The total fair market value of all consideration other than Genesis
Common Stock received by stockholders of Paradise in the Merger (including,
without limitation, cash paid to stockholders of Paradise perfecting appraisal
rights) will be less than ten percent (10%) of the aggregate fair market value
of stock of Paradise outstanding immediately prior to the Merger;
18. The fair market value of the Genesis Common Stock received by each
stockholder of Paradise will be approximately equal to the fair market value of
the stock of Paradise surrendered in exchange therefor, and the aggregate
consideration received by stockholders of Paradise in exchange for their stock
of Paradise will be approximately equal to the fair market value of all of the
outstanding shares of stock of Paradise immediately prior to the Merger;
19. Except as set forth in Section 8.3 of the Reorganization Agreement,
each of Merger Sub, Genesis, Paradise and each stockholder of Paradise will pay
separately his, her or its own expenses relating to the Merger;
20. There is no intercorporate indebtedness existing between Genesis and
Paradise or between Merger Sub and Paradise that was issued, acquired, or will
be settled at a discount as a result of the Merger, and Genesis will assume no
liabilities of Paradise or any stockholder of Paradise in connection with the
Merger;
21. The terms of the Reorganization Agreement and the agreements related
thereto are the product of arm's length negotiations;
22. None of the compensation received by any stockholder-employee of
Paradise will be separate consideration for, or allocable to, any of their
shares of stock of Paradise; none of the shares of Genesis Common Stock received
by any stockholder-employee of Paradise will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and the
compensation paid to any stockholder-employee of Paradise will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services;
23. The payment of cash in lieu of fractional shares of Genesis Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Genesis of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid in
the transaction to Paradise stockholders instead of issuing fractional shares of
Genesis Common Stock will not exceed one percent (1%) of the total consideration
that will be issued in the transaction to Paradise stockholders in
-3-
<PAGE> 21
exchange for their shares of Paradise Capital Stock. The fractional share
interests of each Paradise stockholder will be aggregated, and no Paradise
stockholder will receive cash in an amount equal to or greater than the value of
one full share of Genesis Common Stock;
24. With respect to each instance, if any, in which shares of stock of
Paradise have been purchased by a stockholder of Genesis (a "Stockholder")
during the Pre-Merger Period (a "Stock Purchase"), to the best knowledge of
Genesis: (i) the Stock Purchase was made by such Stockholder not as a
representative of Genesis; (ii) the purchase price paid by such Stockholder
pursuant to the Stock Purchase was the product of arm's length negotiations, was
not advanced, and will not be reimbursed, either directly or indirectly, by
Genesis; (iii) at no time was such Stockholder or any other party required or
obligated to surrender to Genesis Paradise capital stock acquired in the Stock
Purchase, and neither such Stockholder nor any other party will be required to
surrender to Genesis the Genesis Common Stock for which such shares of stock of
Paradise will be exchanged in the Merger; and (iv) the Stock Purchase was not a
formal or informal condition to consummation of the Merger;
25. Fifty percent (50%) or less of both the total voting power and the
total value of the stock of Genesis will be received in the Merger, in the
aggregate, by Paradise stockholders who are U.S. persons;
26. Fifty percent (50%) or less of each of the total voting power and the
total value of the stock of Genesis will be owned, in the aggregate, immediately
after the Merger by U.S. persons that are either officers or directors of
Paradise or that are stockholders of Paradise who own at least five percent (5%)
of either the total voting power or total value of the stock of Paradise
immediately prior to the Merger. For purposes of this representation, any stock
of Genesis owned by U.S. persons immediately after the transfer will be taken
into account, whether or not it was received in the Merger for stock of
Paradise;
27. Genesis (i) has been engaged in an active trade or business for the
entire thirty-six (36) month period immediately before the Merger, (ii) will not
now, or in the future, substantially dispose of or discontinue such trade or
business. Also, the fair market value of Genesis is generally at least equal to
the fair market value of Paradise;
28. Genesis will cause Paradise to attach to its timely filed U.S. income
tax return for the taxable year in which the transfer occurs a statement titled
"Section 367(a) -- Reporting of Cross-Border Transfer Under Reg. Section
1.367(a)-3(c)(6)," signed under penalties of perjury by an officer of the
corporation to the best of the officer's knowledge and belief;
29. No stockholder of Paradise that is a "United States person" will own,
directly or indirectly, five percent (5%) or more of either the total voting
power or the total value of the outstanding capital stock of Genesis immediately
after the Merger. For purposes of the preceding sentence, the term "United
States person" includes any (A) citizen or resident of the U.S., (B) U.S.
corporation or partnership, or (C) estate or trust other than a foreign estate
or trust;
30. The Escrow Fund is being established for good and valid business
reasons;
31. The Genesis Common Stock held in the Escrow Fund is issued and
outstanding on the balance sheet of Genesis;
32. Genesis is a corporation; and
33. Genesis and Merger Sub are authorized to make all of the
representations set forth herein.
The undersigned recognize that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the
Agreements and documents related thereto, and (ii) your opinions will be subject
to certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all material respects.
-4-
<PAGE> 22
The undersigned recognize that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
GENESIS MICROCHIP INC.,
a Nova Scotia company
By: /s/ PAUL M. RUSSO
--------------------------------
Title: Chairman and Chief Executive
Officer
RAINBOW ACQUISITION CORPORATION,
a Delaware corporation
By: /s/ PAUL M. RUSSO
--------------------------------
Title: Chairman and Chief Executive
Officer
-5-
<PAGE> 23
OFFICER'S TAX CERTIFICATE
PARADISE ELECTRONICS, INC.
1999 CONCOURSE DRIVE
SAN JOSE, CA 95131
APRIL 29, 1999
<TABLE>
<S> <C>
Wilson Sonsini Goodrich & Rosati Cooley Godward, LLP
650 Page Mill Road One Maritime Plaza, 20th Floor
Palo Alto, California 94304 San Francisco, CA 94111-3580
</TABLE>
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF REORGANIZATION (THE
"REORGANIZATION AGREEMENT"), DATED JANUARY 22, 1999, AMONG GENESIS
MICROCHIP INC., A NOVA SCOTIA COMPANY ("GENESIS"), RAINBOW ACQUISITION
CORPORATION, A DELAWARE CORPORATION AND A WHOLLY-OWNED SUBSIDIARY OF
GENESIS ("MERGER SUB"), AND PARADISE ELECTRONICS, INC., A DELAWARE
CORPORATION ("PARADISE"), AND THE RELATED AGREEMENT OF MERGER BETWEEN
PARADISE AND MERGER SUB (THE "MERGER AGREEMENT").
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions regarding certain federal income tax consequences of the Merger. Unless
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Reorganization Agreement or the Merger Agreement. The
Reorganization Agreement and the Merger Agreement, including exhibits and
schedules attached thereto, are collectively referred to as the "Agreements."
After consulting with its counsel and auditors regarding the meaning of and
factual support for the following representations, the undersigned hereby
certifies and represents that the following facts are now true and will continue
to be true as of the Effective Time of the Merger and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into Paradise,
and Paradise will acquire all of the assets and liabilities of Merger Sub.
Specifically, at least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by Paradise immediately prior to the Merger will continue to be held
by Paradise immediately after the Merger. For the purpose of determining the
percentage of Paradise's net and gross assets held by Paradise immediately
following the Merger, the following assets will be treated as property held by
Paradise immediately prior but not subsequent to the Merger: (i) assets disposed
of by Paradise prior to or subsequent to the Merger and in contemplation thereof
(including without limitation any asset disposed of by Paradise, other than in
the ordinary course of business, pursuant to a plan or intent existing during
the period ending on the Effective Time of the Merger and beginning with the
commencement of negotiations (whether formal or informal) with Genesis regarding
the Merger (the "Pre-Merger Period")); (ii) assets used by Paradise to pay
stockholders perfecting appraisal rights or other expenses or liabilities
incurred in connection with the Merger and (iii) assets used to make
distribution, redemption or other payments in respect of stock of Paradise or
rights to acquire such stock (including payments treated as such for tax
purposes) that are made in contemplation of the Merger or that are related
thereto;
2. Other than in the ordinary course of business or pursuant to its
obligations under the Agreements, Paradise has made no transfer of any of its
assets (including any distribution of assets with respect to, or in redemption
of, stock) in contemplation of the Merger or during the Pre-Merger Period;
3. Paradise's principal reasons for participating in the Merger are bona
fide business purposes unrelated to taxes;
4. At the Effective Time of the Merger, Paradise will have no outstanding
equity interests other than those disclosed in Section 2.2 of the Reorganization
Agreement. At the Effective Time of the Merger, except
<PAGE> 24
as specified in the Reorganization Agreement, Paradise will have no outstanding
warrants, options, or convertible securities or any other type of right
outstanding pursuant to which any person could acquire shares of Paradise
capital stock or any other equity interest in Paradise (other than those
disclosed in Section 2.2 of the Reorganization Agreement or the disclosure
schedule with respect thereto) that, if exercised, could affect Genesis'
acquisition or retention of the direct ownership of shares of stock possessing
at least eighty percent (80%) of the total combined voting power of shares of
all classes of stock entitled to vote and at least eighty percent (80%) of the
total number of shares of all other classes of stock of Paradise (such
percentage ownership to be referred to hereinafter as "Control"). For purposes
of determining Control, a person shall not be considered to own shares of voting
stock if rights to vote such shares (or to restrict or otherwise control the
voting of such shares) are held by a third party (including a voting trust)
other than an agent of such person;
5. In the Merger, shares of stock of Paradise representing Control of
Paradise will be exchanged solely for shares of voting stock of Genesis. For
purposes of this paragraph, shares of the stock of Paradise exchanged in the
Merger for cash and other property (including, without limitation, cash paid to
stockholders of Paradise perfecting appraisal rights, if any, or in lieu of
fractional shares of Genesis Common Stock) will be treated as shares of stock of
Paradise outstanding on the date of the Merger but not exchanged for shares of
voting stock of Genesis;
6. The total fair market value of all consideration other than shares of
Genesis Common Stock received by stockholders of Paradise in the Merger
(including, without limitation, cash paid to Paradise stockholders perfecting
appraisal rights or in lieu of fractional shares of Genesis Common Stock) will
be less than ten percent (10%) of the aggregate fair market value of shares of
stock of Paradise outstanding immediately prior to the Merger;
7. Paradise has no plan or intention to issue additional shares of stock
after the Merger, or take any other action, that would result in Genesis losing
Control of Paradise;
8. Except for successive transfers of assets or stock acquired in the
Merger to corporations Controlled in each transfer by Genesis, to the best
knowledge of Paradise, Genesis has no plan or intention to: (a) liquidate
Paradise; (b) merge Paradise with or into another corporation, including Genesis
or its affiliates; (c) sell or otherwise dispose of the stock of Paradise, or
cause Paradise to sell or otherwise dispose of the stock of Paradise; or (d)
cause Paradise to sell or otherwise dispose of any of its assets or of any of
the assets acquired from Merger Sub, except for dispositions made in the
ordinary course of business or in payment of expenses incurred by Paradise
pursuant to the Merger;
9. Paradise intends to continue its historic business or use a significant
portion of its historic business assets in a business following the Merger;
10. The liabilities of Paradise have been incurred by Paradise in the
ordinary course of its business;
11. The fair market value of Paradise's assets will, on the Effective Time
of the Merger, exceed the aggregate liabilities of Paradise plus the amount of
liabilities, if any, to which such assets are subject;
12. To the best knowledge of Paradise, Genesis does not own, nor has it
owned during the past five (5) years, directly or indirectly, any shares of
stock of Paradise or rights to acquire such stock;
13. Paradise is not and will not be on the Effective Time of the Merger an
"investment company" -- i.e. a regulated investment company, a real estate
investment trust, or a corporation fifty percent (50%) or more of whose total
assets are stock and securities and eighty percent (80%) or more of the value of
whose total assets are assets held for investment;
14. Paradise is not and will not be on the Effective Time of the Merger
under the jurisdiction of a court in a Title 11 case, or in a receivership,
foreclosure, or similar proceeding in a federal or state court;
15. Paradise, and persons related to Paradise, have not redeemed, purchased
or otherwise acquired ("Purchased") other than in exchange for Genesis Common
Stock or Paradise Capital Stock, an amount of Paradise Capital Stock, and
Paradise has not made any extraordinary distributions with respect to its common
stock, prior to and in connection with the Merger, that would, in the aggregate,
reduce the value of all of the
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<PAGE> 25
outstanding Paradise Capital Stock immediately prior to the Merger, after giving
effect to such Purchases and extraordinary distributions (the "Pre-Merger
Value"), to a value of less than fifty percent (50%) of the Pre-Merger Value
(the "Continuing Proprietary Interest"). For purposes of this representation,
Paradise Capital Stock treated as part of the Continuing Proprietary Interest
will not include shares of Paradise Capital Stock that will be (i) exchanged in
the Merger for consideration other than Genesis Common Stock, including Paradise
Capital Stock surrendered for cash or other property by dissenters, or (ii)
deemed exchanged for a fractional share of Genesis Common Stock which is
redeemed by Genesis. In addition, for purposes of this representation,
extraordinary distributions will not include periodic dividends that are
consistent with Paradise's historic dividend practices, and repurchases in the
ordinary course of business of unvested shares by Paradise, if any, acquired
from Paradise terminating employees will be disregarded;
16. The payment of cash in lieu of fractional shares of Genesis Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Genesis of issuing fractional shares of Genesis Common Stock and does not
represent separately bargained-for consideration. The total cash consideration
that will be paid in the transaction to stockholders of Paradise instead of
issuing fractional Genesis Common Stock will not exceed one percent (1%) of the
total consideration that will be issued in the transaction to the stockholders
of Paradise in exchange for their shares of Paradise. The fractional share
interests of each stockholder of Paradise will be aggregated, and no stockholder
of Paradise will receive cash in an amount equal to or greater than the value of
one share of Genesis Common Stock;
17. The fair market value of the shares of Genesis Common Stock received by
each stockholder of Paradise will be approximately equal to the fair market
value of the shares of stock of Paradise surrendered in exchange therefor and
the aggregate consideration received by stockholders of Paradise in exchange for
their shares of stock of Paradise will be approximately equal to the fair market
value of all of the outstanding shares of stock of Paradise immediately prior to
the Merger;
18. Except as set forth in Section 8.3 of the Reorganization Agreement,
each of Merger Sub, Genesis, Paradise and each stockholder of Paradise will each
pay separately his, her or its own expenses relating to the Merger;
19. There is no intercorporate indebtedness existing between Genesis and
Paradise or between Merger Sub and Paradise that was issued, acquired, or will
be settled at a discount as a result of the Merger; Genesis will assume no
liabilities of Paradise or any stockholder of Paradise in connection with the
Merger;
20. The terms of the Reorganization Agreement and the other agreements
relating thereto are the product of arm's length negotiations;
21. None of the compensation received by any stockholder-employees of
Paradise will be separate consideration for, or allocable to, any of their
shares of stock of Paradise; none of the shares of Genesis Common Stock received
by any stockholder-employees of Paradise will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and the
compensation paid to any stockholder-employees of Paradise will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services;
22. With respect to each instance, if any, in which shares of stock of
Paradise have been purchased by a stockholder of Genesis (a "Stockholder")
during the Pre-Merger Period (a "Stock Purchase"): (i) to the best knowledge of
Paradise, (A) the Stock Purchase was made by such Stockholder on its own behalf,
rather than as a representative, or for the benefit, of Genesis, (B) the Stock
Purchase was entered into solely to satisfy the separate interests of such
Stockholder and the seller, and (C) the purchase price paid by such Stockholder
pursuant to the Stock Purchase was the product of arm's length negotiations; and
(ii) the Stock Purchase was not a formal or informal condition to consummation
of the Merger;
23. Fifty percent (50%) or less of both the total voting power and the
total value of the stock of Genesis will be received in the Merger, in the
aggregate, by Paradise stockholders who are U.S. persons;
24. Fifty percent (50%) or less of each of the total voting power and the
total value of the stock of Genesis will be owned, in the aggregate, immediately
after the Merger by U.S. persons that are either officers
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<PAGE> 26
or directors of Paradise or that are shareholders of Paradise who own at least
five percent (5%) of either the total voting power or the total value of the
stock of Paradise immediately prior to the Merger. For purposes of this
representation, any stock of Parent owned by U.S. persons immediately after the
transfer will be taken into account, whether or not it was received in the
Merger for stock of Paradise;
25. No Paradise stockholder will own, as a result of the Merger, an
ownership interest in Genesis, as of immediately after the Merger, equal to or
greater than five percent (5%) of either the total voting power or the total
value of the stock of Genesis;
26. Paradise has no intention to cause Genesis to substantially dispose of
or discontinue a trade or business such that Genesis would not (i) be engaged in
an active trade or business for the entire thirty-six (36) month period
immediately before the Merger, (ii) now, or in the future, substantially dispose
of or discontinue such trade or business, (iii) be valued at a fair market value
that is not at least generally equal to the fair market value of Paradise;
27. No stockholder of Paradise that is a "United States person" will own,
directly or indirectly, five percent (5%) or more of either the total voting
power or the total value of the outstanding capital stock of Genesis immediately
after the Merger. For purposes of the preceding sentence, the term "United
States person" includes any (A) citizen or resident of the U.S., (B) U.S.
corporation or partnership, or (C) estate or trust other than a foreign estate
or trust;
28. The Escrow Fund is being established for good and valid business
reasons; and
29. Paradise is authorized to make all of the representations set forth
herein.
The undersigned recognizes that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the
Agreements and documents related thereto, and (ii) your opinions will be subject
to certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all material respects.
Notwithstanding anything herein to the contrary, the undersigned makes no
representations regarding any actions or conduct of Paradise pursuant to
Genesis' exercise of control over Paradise after the Merger.
The undersigned recognizes that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
PARADISE ELECTRONICS, INC.,
a Delaware corporation
By: /s/ JEFF DIAMOND
------------------------------------
Title: President & CEO
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<PAGE> 1
EXHIBIT 8.2
April 30, 1999
Paradise Electronics, Inc.
1999 Concourse Drive
San Jose, CA 95131
Dear Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Reorganization dated as of January 22, 1999 (the
"Agreement") by and among Genesis Microchip Inc., a Nova Scotia company
("Genesis"), Rainbow Acquisition Corporation, a Delaware corporation and wholly
owned subsidiary of Genesis ("Merger Sub") and Paradise Electronics, Inc., a
Delaware corporation ("Paradise").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Agreement. All section references,
unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended
(the "Code").
We have acted as counsel to Paradise in connection with the Merger. As
such, and for the purpose of rendering this opinion, we have examined, and are
relying upon (without any independent investigation or review thereof) the truth
and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in, the following documents (including
all exhibits and schedules attached thereto):
(a) the Agreement and the Registration Statement filed with the
Securities and Exchange Commission on April 30, 1999;
(b) those certain tax representation letters delivered to us by
Genesis, Merger Sub and Paradise containing certain representations of
Genesis, Merger Sub and Paradise (the "Tax Representation Letters"),
attached hereto as Attachments A and B; and
(c) such other instruments and documents related to the formation,
organization and operation of Genesis, Merger Sub and Paradise and related
to the consummation of the Merger and the other transactions contemplated
by the Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
1. Original documents submitted to us (including signatures thereto)
are authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the
Effective Time) duly and validly executed and delivered where due execution
and delivery are a prerequisite to the effectiveness thereof;
2. All representations, warranties and statements made or agreed to by
Genesis, Merger Sub and Paradise, their managements, employees, officers,
directors and stockholders in connection with the Merger, including, but
not limited to, those set forth in the Agreement (including the exhibits
thereto) and the Tax Representation Letters are true and accurate at all
relevant times;
3. All covenants contained in the Agreement (including exhibits
thereto) and the Tax Representation Letters are performed without waiver or
breach of any material provision thereof;
4. The Merger will be reported by Genesis and Paradise on their
respective federal income tax returns in a manner consistent with the
opinion set forth below;
5. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification; and
<PAGE> 2
Paradise Electronics, Inc.
April 30, 1999
Page 2
6. The opinion, dated April 23, 1999, rendered by Wilson Sonsini
Goodrich & Rosati to Genesis with respect to certain tax consequences of
the Merger as a reorganization within the meaning of Section 368(a)(1) of
the Code has been delivered and has not been withdrawn.
Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, we are of
the opinion that, for United States federal income tax purposes, the Merger will
be a reorganization within the meaning of Section 368(a)(1) of the Code.
In addition, the disclosure entitled "The Merger and Related
Transactions -- Material Tax Considerations" in the Joint Proxy
Statement/Prospectus constituting a part of the Registration Statement, insofar
as it relates to the statements of U.S. law and U.S. federal legal conclusions,
constitutes our opinion as to the material United States federal income tax
consequences of the Merger to stockholders of Paradise. Notwithstanding the
above, we have not reviewed and have no opinion regarding the discussion of (i)
the Canadian tax consequences of the Merger or of holding Genesis common shares;
and (ii) whether Genesis is a passive foreign investment company for U.S.
federal income tax purposes.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Agreement. In addition, no opinion is expressed as to any
federal income tax consequence of the Merger or the other transactions
contemplated by the Agreement except as specifically set forth herein and this
opinion may not be relied upon except with respect to the consequences
specifically discussed herein. Moreover, no opinion is expressed as to the
federal income tax treatment that may be relevant to a particular investor in
light of personal circumstances or to certain types of investors subject to
special treatment under the federal income tax laws (for example, life insurance
companies, dealers in securities, taxpayers subject to the alternative minimum
tax, banks, tax-exempt organizations, non-United States persons, and
stockholders who acquired their shares of Paradise capital stock pursuant to the
exercise of options or otherwise as compensation, who hold their Paradise
capital stock as part of a straddle or risk reduction transaction or who do not
hold their Paradise capital stock as capital assets).
No opinion is expressed as to any transaction other than the Merger as
described in the Agreement, or as to any other transaction whatsoever, including
the Merger, if all of the transactions described in the Agreement are not
consummated in accordance with the terms of the Agreement and without waiver of
any material provision thereof. To the extent that any of the representations,
warranties, statements and assumptions material to our opinion and upon which we
have relied are not accurate and complete in all material respects at all
relevant times, our opinion would be adversely affected and should not be relied
upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given that
future legislative, judicial or administrative changes or interpretations would
not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
<PAGE> 3
Paradise Electronics, Inc.
April 30, 1999
Page 3
This opinion is being delivered for the purpose of being included as an
exhibit to the Registration Statement. We consent to the reference to our firm
in the Proxy Statement included in the Registration Statement and to the
reproduction and filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
COOLEY GODWARD LLP
/s/ WEBB B. MORROW III
--------------------------------------
Webb B. Morrow III
WBM:gb
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP
The Board of Directors
Genesis Microchip Incorporated
We consent to the inclusion of our report on the financial statements of
Genesis Microchip Incorporated as at May 31, 1998 and 1997 and for each of the
years in the three year period ended May 31, 1998 to be included in this
proxy/prospectus and to the reference to our firm under the heading "Experts" on
the proxy/ prospectus.
KPMG LLP
Chartered Accountants
Toronto, Canada
April 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under that caption "Experts" and to
the use of our report dated February 5, 1999, with respect to the consolidated
financial statements of Paradise Electronics, Inc. included in the Proxy
Statement/Prospectus included in the Registration Statement (Form S-4) of
Genesis Microchip Incorporated.
/s/ Ernst & Young LLP
San Jose, California
April 29, 1999
<PAGE> 1
EXHIBIT 99.4
Ladies and Gentlemen:
I hereby consent to being named as expected to become a director of Genesis
Microchip Incorporated (the "Company") in the Registration Statement on Form
S-4, so amended, filed by the Company with the Securities and Exchange
Commission.
Sincerely,
/s/ LAWRENCE G. FINCH
--------------------------------------
Lawrence G. Finch
