PROSPECTUS Filed pursuant to Rule 424(b)(3)
Registration No. 333-17519
S3 INCORPORATED
$103,500,000
5 3/4% Convertible Subordinated Notes due 2003
and
Shares of Common Stock
Issuable upon Conversion Thereof
This Prospectus relates to $103,500,000 aggregate principal amount of 5
3/4% Convertible Subordinated Notes due 2003 (the "Notes") of S3 Incorporated
("S3" or the "Company") and the shares of Common Stock, par value $.0001 per
share (the "Common Stock"), of the Company issuable upon the conversion of the
Notes (the "Conversion Shares"). The Notes and the Conversion Shares may be
offered from time to time for the accounts of the holders named herein (the
"Selling Securityholders"). Of the $103,500,000 aggregate principal amount of
the Notes originally included in the registration statement relating to this
Prospectus, $9,284,000 have been sold as of the date hereof.
The Notes are convertible at the option of the holder into shares of Common
Stock of the Company, at any time prior to redemption or maturity, at a
conversion price of $19.22 per share (equal to a conversion rate of 52.0291
shares per $1,000 principal amount of Notes and representing in the aggregate
5,385,015 shares), subject to adjustment under certain circumstances. Interest
on the Notes is payable semi-annually in arrears on April 1 and October 1 of
each year, commencing on April 1, 1997.
The Notes are unsecured general obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined in the Indenture). See "Description of the Notes--Subordination."
The Notes will mature on October 1, 2003, and may be redeemed, at the option of
the Company, in whole or in part, at any time on or after October 8, 1999 at the
redemption prices set forth herein plus accrued interest. Each holder of Notes
will have the right to cause the Company to repurchase all of such holder's
Notes, payable in cash or, at the Company's option, in Common Stock, in the
event the Common Stock is no longer publicly traded or in certain circumstances
involving a Change of Control (as defined in the Indenture).
The Notes and the Conversion Shares may be offered by the Selling
Securityholders from time to time in transactions (which may include block
transactions in the case of the Conversion Shares) on any exchange or market on
which such securities are listed or quoted, as applicable, in negotiated
transactions, through a combination of such methods of sale, or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices, or at negotiated prices.
The Selling Securityholders may effect such transactions by selling the Notes or
Conversion Shares directly or to or through broker-dealers, who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders and/or the purchasers of the Notes or Conversion Shares
for whom such broker-dealers may act as agents or to whom they may sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). The Company will not receive any of the
proceeds from the sale of the Notes or Conversion Shares by the Selling
Securityholders. The Company has agreed to pay all expenses incident to the
offer and sale of the Notes and Conversion Shares offered by the Selling
Securityholders hereby, except that the Selling Securityholders will pay all
underwriting discounts and selling commissions, if any. See "Plan of
Distribution."
The Notes have been designated for trading on the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") Market. Notes sold
pursuant to this Prospectus are not expected to remain eligible for trading on
the PORTAL Market. The Common Stock is traded on the Nasdaq National Market
under the symbol "SIII." On April 17, 1997, the last reported sale price of the
Common Stock on the Nasdaq National Market was $11.88 per share.
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The Notes and the Common Stock offered hereby involve a high degree of risk.
See "Risk Factors" beginning on page 3.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is April 18, 1997
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements, and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements, and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C., as
well as the regional offices of the Commission located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois, and 7 World Trade Center,
Suite 1300, New York, New York. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements, and other
information that are filed through the Commission's Electronic Data Gathering,
Analysis and Retrieval System. This Web site can be accessed at
http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Notes and Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company, the Notes and the Common Stock,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. Copies of the Registration Statement, including all
exhibits thereto, may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fees prescribed by the Commission, or may
be examined without charge at the offices of the Commission described above.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus: (i) the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 and (ii) the description of
the Common Stock contained in the Company's Registration Statement on Form 8-A
filed under the Exchange Act on January 21, 1993. All documents subsequently
filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act prior to the termination of the offering to which this Prospectus
relates shall be deemed to be incorporated by reference into this Prospectus and
to be part of this Prospectus from the date of filing thereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus and
the Registration Statement of which it is a part to the extent that a statement
contained herein or in any other subsequently filed document which also is
incorporated herein modifies or replaces such statement. Any statement so
modified or superseded shall not be deemed, in its unmodified form, to
constitute a part of this Prospectus or such Registration Statement. The Company
will provide without charge to each person to whom a copy of the Prospectus has
been delivered, and who makes a written or oral request, a copy of any and all
of the foregoing documents incorporated by reference in the Registration
Statement (other than exhibits unless such exhibits are specifically
incorporated by reference into such documents). Requests should be submitted in
writing or by telephone to Investor Relations, S3 Incorporated, at the Company's
principal executive offices, 2801 Mission College Boulevard, Santa Clara,
California 95052, telephone (408) 588-8000.
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S3 is a registered trademark of the Company and the Trio, ViRGE and
Vision families of marks are trademarks of the Company. Other trademarks
referenced in this Prospectus are owned by their respective companies.
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THE COMPANY
S3 Incorporated ("S3" or the "Company") is a leading supplier of high
performance multimedia accelerator solutions for the personal computer ("PC")
market. The Company's accelerators are designed to work cooperatively with a
PC's central processing unit ("CPU"), implementing functions best suited for a
dedicated accelerator while allowing the CPU to perform the more general purpose
computing functions of today's advanced graphical user interface ("GUI")
environment and applications. By complementing the computing power of the
general purpose CPU, the Company's integrated software and silicon-based
accelerator solutions significantly improve the multimedia performance of PCs
while reducing overall system cost and complexity. S3 has been a pioneer in
graphics acceleration since 1991, when it was the first company to ship in
volume a single chip graphics accelerator with a local bus interface. S3 has
since delivered new generations of high performance accelerator solutions with
32-bit and 64-bit multimedia products such as integrated 2D and 3D graphics and
video accelerators, MPEG decoders and audio processors enabling more advanced
graphics and integrated full-motion video acceleration. As the demand for
greater multimedia capabilities in PCs increases, particularly the demand for
2D/3D technology, the Company is focused on delivering accelerator solutions for
use in business desktop, home and mobile computing systems. S3's families of
accelerator products and software are currently used by many of the world's
leading original equipment PC manufactureres and add-in card and motherboard
manufacturers.
When used in this Prospectus, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements contained in "Risk
Factors" concerning the timing of availability and functionality of products
under development, product mix, trends in average selling prices, trends in the
PC market, the percentage of export sales and sales to strategic customers, the
adoption or retention of industry standards, and the availability and cost of
products from the Company's suppliers, are subject to risks and uncertainties,
including those set forth under "Risk Factors" and elsewhere in this Prospectus,
that could cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date of this Prospectus. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
RISK FACTORS
The securities offered hereby involve a high degree of risk. The
following factors should be considered carefully in evaluating an investment in
the Notes and Conversion Shares offered hereby.
Fluctuations in Quarterly Operating Results
The Company's operating results have historically been, and will
continue to be, subject to quarterly and other fluctuations due to a variety of
factors, including changes in pricing policies by the Company, its competitors
or its suppliers, anticipated and unanticipated decreases in unit average
selling prices of the Company's products, availability and cost of products from
the Company's suppliers, changes in the mix of products sold and in the mix of
sales by distribution channels, the gain or loss of significant customers, new
product introductions by the Company or its competitors, market acceptance of
new or enhanced versions of the Company's products, seasonal customer demand,
and the timing of significant orders. Operating results could also be adversely
affected by general economic and other conditions affecting the timing of
customer orders and capital spending, a downturn in the market for PCs, and
order cancellations or rescheduling. In particular, the market for PCs in 1996
experienced a weakening in the trends for demand as compared with 1995 and grew
at a lower rate as compared with 1995. These factors could adversely affect
demand for the Company's products. In addition, the pricing environment for
graphics accelerators has recently experienced and is expected to continue to
experience increasing pricing pressures due in part to the alleviation of supply
constraints that contributed to more stable pricing in 1995 and to aggressive
pricing from certain of the Company's competitors. In particular, the Company's
Trio family of integrated 2D accelerators, which accounted for a majority of the
Company's revenues in 1996, experienced significant decreases in average selling
prices in 1996. The Company expects that the graphics accelerator market will
transition from 2D acceleration to
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3D acceleration, and the Company has introduced its ViRGE family of 2D/3D
accelerators in response to this expected transition. As a result of the entry
of competitors into the 3D acceleration market, the Company anticipates that it
may experience increased pricing pressures on average selling prices for the
ViRGE family of 2D/3D accelerators. If the transition occurs slower than
expected, if the Company's 2D/3D products do not achieve market acceptance, or
if pricing pressures increase, the Company's operating results could be
adversely affected. Further, because the Company is continuing to increase its
operating expenses for personnel and new product development, the Company's
operating results would be adversely affected if such budgeted sales levels were
not achieved. PC graphics and multimedia subsystems include, in addition to the
Company's products, a number of other components which are supplied by
third-party manufacturers. Any shortage of such components in the future could
adversely affect the Company's business and operating results. Furthermore, it
is possible that the Company's products may be found to be defective after the
Company has already shipped significant volume production. There can be no
assurance that the Company would be able to successfully correct such defects or
that such corrections would be acceptable to customers, and the occurrence of
such events could have a material adverse effect on the Company's business and
operating results.
Because the Company must order products and build inventory
substantially in advance of product shipments, and because the markets for the
Company's products are volatile and subject to rapid technological and price
changes, there is a risk that the Company will forecast incorrectly and produce
excess or insufficient inventories o particular products. In addition, the
Company's customers may change delivery schedules or cancel orders without
significant penalty. To the extent the Company produces excess or insufficient
inventories of particular products, the Company's operating results could be
adversely affected.
The Company ships more product in the third month of each quarter than
in either of the first two months of the quarter, with shipments in the third
month higher at the end of the month. This patt rn, which is common in the
semiconductor industry, is likely to continue. The concentration of sales in the
last month of the quarter may cause the Company's quarterly results of
operations to be more difficult to predict. Moreover, a disruption in the
Company's production or shipping near the end of a quarter could materially
reduce the Company's net sales for that quarter. The Company's reliance on
outside foundries and independent assembly and testing houses reduces the
Company's ability to control, among other things, delivery schedules.
Due to the foregoing factors, it is likely that in some future quarter
or quarters the Company's operating results may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially and adversely affected.
Importance of New Products; Rapid Technological Change
The PC industry in general, and the market for the Company' products in
particular, is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and significant price competition,
resulting in short product life cycles and regular reductions of unit average
selling prices over the life of a specific product. Products in the Company's
market typically have a life cycle of 12 to 24 months, with regular reductions
of unit average selling prices over the life of a specific product. The
successful development and commercialization of new products required to replace
or supplement existing products involve many risks, including the identification
of new product opportunities, the successful and timely completion of the
development process, and the selection of the Company's products by leading
systems suppliers and add-in card and motherboard manufacturers for design into
their products. There can be no assurance that the Company will successfully
identify new product opportunities and develop and bring to market in a timely
manner successful new products, that products or technologies developed by
others will not render the Company's products or technologies noncompetitive, or
that the Company's products will be selected for design into its customers'
products.
The Company is continually developing new products to address changing
market needs, and its operating results may fluctuate from those in prior
quarters or may be adversely affected in quarters in which it is undergoing a
product transition or in which existing products are under price pressures due
to competitive factors. The Company also intends to add increased functionality
to its multimedia products, such as system logic, audio, communications
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or other additional functions. Market acceptance of the Company's products will
also depend upon acceptance of other components, such as memory, that the
Company's products are designed to work with. For example, the Company has
recently introduced accelerators designed to work with synchronous graphics RAM
("SGRAM") and/or synchronous DRAM ("SDRAM") which the Company believes offer
better performance for its price than the more expensive video RAM ("VRAM").
However, there can be no assurance that other memory technologies, such as
Rambus DRAM, will not achieve a greater degree of market acceptance than SGRAMs
or SDRAMs. If new products are not brought to market in a timely manner or do
not address market needs or achieve market acceptance, then the Company's
operating results will be adversely affected. The Company's 1994 operating
results were adversely affected in part because the Company had made a strategic
decision to transition its product offerings from 32-bit to 64-bit accelerators
during the first half of 1994, but due to a lack of PC system logic chipsets
based on the PCI bus standard and a slower than anticipated shift from 32-to
64-bit graphics, sales of S3's PCI-based Vision64 family of accelerators were
less than expected. During the same period of time, competitors' 32-bit
integrated accelerator products offered a more competitive solution to the
Company's customers and ultimately necessitated an adjustment in the valuation
of the Company's 32-bit non-integrated inventory. In anticipation of a shift in
demand from 2D to 3D technology, the Company has introduced and is continuing to
develop products in its ViRGE family of 2D/3D multimedia accelerators. If the
transition from 2D to 3D in the PC market is slower than the Company expects or
if these products are not brought to market in a timely manner or do not address
market needs or achieve market acceptance, the Company's operating results could
be adversely affected.
Dependence on Foundries and Other Third Parties
The Company currently relies on several independent foundries to
manufacture its products either in finished form or wafer form. The Company
currently has long-term supply arrangements with two of its foundries, a "take
or pay" contract with Taiwan Semiconductor Manufacturing Company ("TSMC") and a
joint venture foundry, United Semiconductor Corporation ("USC"). In 1995, the
Company expanded and formalized its relationship with TSMC to provide additional
capacity over the 1996 to 2000 timeframe. The foundry agreement with TSMC
requires the Company to make certain annual advance payments to purchase certain
committed capacity amounts to be applied against the following year's capacity
or forfeit advance payments against such amounts. In addition, the Company
entered into an agreement with United Microelectronics Corporation ("UMC") and
Alliance Semiconductor Corporation to form a separate Taiwanese company, USC,
for the purpose of building and managing a semiconductor manufacturing facility.
The Company invested $53.0 million in 1996 and $36.4 million in 1995 for its
23.75% equity interest. The facility commenced production utilizing advanced
submicron semiconductor manufacturing processes in late 1996. The Company has
the right to purchase up to 31.25% of the output from the foundry. To the extent
the Company purchases excess inventories of particular products or chooses to
forfeit advance payments, the Company's operating results could be adversely
affected. To the extent USC experiences operating losses, the Company will
recognize its proportionate share of such losses and may be required to
contribute additional capital. The Company believes that a number of
manufacturers are expanding or planning to expand their fabrication capacity
over the next several years, which could lead to overcapacity in the market and
resulting decreases in costs of finished wafers. If the wafers produced by USC
cannot be produced at competitive prices, USC could sustain operating losses.
There can be no assurance that such operating losses will not have a material
adverse effect on the Company's consolidated results of operations.
The Company conducts business with its other current foundries by
delivering written purchase orders specifying the particular pr duct ordered,
quantity, price, delivery date and shipping terms and, therefore, such foundries
are generally not obligated to supply products to the Company for any specific
period, in any specific quantity or at any specified price, except as may be
provided in a particular purchase order. To the extent a foundry terminates its
relationship with the Company or should the Company's supply from a foundry be
interrupted or terminated for any other reason, such as a natural disaster or an
injunction arising from alleged violations of third party intellectual property
rights, the Company may not have a sufficient amount of time to replace the
supply of products manufactured by that foundry. Until 1996, due to worldwide
semiconductor supply constraints, especially with respect to advanced process
technologies required by the Company's products, the Company was unable to
obtain a sufficient supply of products to enable it to meet demand and was
required to allocate available supply of its products among its customers. There
can be no assurance that the Company will obtain sufficient advanced process
technology foundry capacity to meet customer demand in the future. The Company
is continuously evaluating
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potential new sources of supply. However, the qualification process and the
production ramp-up for additional foundries has in the past taken, and could in
the future take, longer than anticipated, and there can be no assurance that
such sources will be able or willing to satisfy the Company's requirements on a
timely basis or at acceptable quality or per unit prices.
Two of the Company's principal foundries, TSMC and UMC, and the
Company's foundry joint venture, USC, are located in the Science-Based
Industrial Park in Hsin Chu City, Taiwan. The Company currently expects these
three foundries to supply the substantial portion of the Company's products in
1997. Disruption of operations at these foundries for any reason, including work
stoppages, fire, earthquakes r other natural disasters, would cause delays in
shipments of the Company's products, and could have a material adverse effect on
the Company's results of operations. In addition, as a result of the rapid
growth of the semiconductor industry based in the Science-Based Industrial Park,
severe constraints have been placed on the water and electricity supply in that
region. Any shortages of water or electricity could adversely affect the
Company's foundries' ability to supply the Company's products, which could have
a material adverse effect on the Company's results of operations.
The Company is using multiple sources for certain of its products, which
may require the Company's customers to perform separate product qualifications.
The Company has not, however, developed alternate sources of supply for certain
other products, and its newly introduced products are typically produced
initially by a single foundry until alternate sources can be qualified. The
requirement that a customer per orm separate product qualifications or a
customer's inability to obtain a sufficient supply of products from the Company
may cause that customer to satisfy its product requirements from the Company's
competitors, which would adversely affect the Company's results of operations.
The Company's products are assembled and tested by a variety of
independent subcontractors. The Company's reliance on independent assembly and
testing houses to provide these services involves a number of ri ks, including
the absence of adequate availability of certain packaging technologies, the
absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance and costs. The Company also is subject to the risks of
shortages and increases in the cost of raw materials used in the manufacture or
assembly of the Company's products.
Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at t e foundries or
assembly or testing houses, delays in obtaining additional production at
existing foundries or in obtaining production from new foundries, shortages of
raw materials, or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including effects
that may result should the Company be forced to purchase products from higher
cost foundries or pay expediting charges to obtain additional supply.
Transactions to Obtain Manufacturing Capacity; Future Capital Needs
In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company has entered into
and may consider in the future various transactions, including the use of "take
or pay" contracts that commit the Company to purchase specified quantities of
wafers over extended periods, equity investments in or advances or issuances of
equity securities to wafer manufacturing companies in exchange for guaranteed
production capacity, or the formation of joint ventures to own and operate or
construct foundries or to develop certain products. Any of such transactions
would involve financial risk to the Company and could require the Company to
commit substantial capital or provide technology licenses in return for
guaranteed production capacity. In particular, the Company has entered into a
"take or pay" contract with TSMC and has entered into the USC joint venture. The
need to commit substantial capital may require the Company to seek additional
equity or debt financing. The sale or issuance of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. There can be no assurance that such additional financing, if
required, will be available when needed or, if available, will be on terms
acceptable to the Company.
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Dependence on Accelerator Product Line
S3's products are designed to improve the graphics and multimedia
performance of x86-based PCs and Microsoft Windows, Windows NT and IBM OS/2
operating systems, the predominant standards in today's PC market. Any shift
away from such standards would require the Company to develop new products. The
Company expects that additional specialized graphics processing and general
purpose computing capabilities will be integrated into future versions of Intel
and other x86-based microprocessors and that standard multimedia accelerators in
the future will likely integrate memory, system logic, audio, communications or
other additional functions. The Company has not previously offered either single
function or integrated accelerator products that provide these functions, which
have traditionally been provided by separate single function chips or chipsets.
The Company has been and will continue to be required to expand the scope of its
research and development efforts to provide these functions, which will require
the hiring of engineers skilled in the respective areas and additional
management and coordination among the Company's design and engineering groups.
Alternatively, the Company may find it necessary or desirable to license or
acquire technology to enable the Company to provide these functions, and there
can be no assurance that any such technology will be available for license or
purchase on terms acceptable to the Company. Furthermore, there is a limited
amount of space on PC motherboards, and companies that offer solutions that
provide the greatest amount of functionality within this limited space may have
a competitive advantage. While the Company's strategy is to develop new and
enhanced graphics and multimedia accelerator products that will be complementary
to present and future versions of Intel and other x86-based microprocessors and
integrate additional functionality, there can be no assurance that the Company
will be able to develop such new or enhanced products in a timely manner or
correctly anticipate the additional functionality that will be required to
compete effectively in this market. There can be no assurance that, if
developed, the Company's new or enhanced products that incorporate these
functions will achieve market acceptance. There also can be no assurance that
the market for graphics and multimedia accelerators will continue to grow in the
future or that new technological developments or changes in standards will not
result in decreased demand for graphics and multimedia accelerators or for the
Company's products that are not compatible with such changed standards. For
example, in 1996, there was an absence of an industry standard 3D graphics API.
As a result, the Company developed and promoted its proprietary API. Microsoft
has since introduced its Direct3D API, which has emerged as the standard API for
3D acceleration. While the Company's 3D accelerators currently support the
Company's proprietary API and Microsoft's Direct 3D API, there can be no
assurance that another API will emerge as an industry standard that the
Company's accelerators will not support. While the PC industry in recent periods
has been characterized by substantial demand, such demand has historically been
cyclical, and there can be no assurance that this demand will continue in future
periods or that demand for the Company's products will continue. The occurrence
of any such events would have a material adverse effect on the Company's
operating results.
Substantial Competition
The market for the Company's products is extremely competitive and is
characterized by declining selling prices over the life of a particular product
and rapid technological changes. The Company's principal competitors for
graphics accelerators include ATI Technologies, Inc., Cirrus Logic, Inc., Matrox
Graphics Inc., and Trident Microsystems, Inc. The Company's principal
competitors in the multimedia market include the companies named in the
preceding sentence and a number of smaller companies which may have greater
flexibility to address specific market needs. Potential competitors in these
markets include both large and emerging domestic and foreign semiconductor
companies. In particular, there is a significant number of established and
emerging companies that have developed, are developing or have announced plans
to develop 3D graphics chips, including Intel Corporation and Lockheed Martin
Corporation, which have announced that they are jointly developing such chips,
which are currently expected to become available in the second half of 1997, and
Texas Instruments Incorporated, which has announced a development and marketing
agreement with 3Dlabs Inc., Ltd. In addition, Microsoft has announced that it is
developing a reference architecture, Talisman, with an alternative method of
providing 3D functionality. Microsoft is working with a number of companies,
including Cirrus Logic, Inc., Samsung Electronics Co., Ltd., Philips N.V. and
Fujitsu Ltd., to implement this architecture. There can be no assurance that the
Company's product offerings to address the demand for the next generation of
2D/3D accelerators will be competitive, and if such product offerings are not
competitive, the Company's results of operations in 1997 and future periods
could be materially and adversely affected. To the extent the Company expands
its product line to add products with additional
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functionality, such as audio, communications and system logic functions, it will
encounter substantial competition from established semiconductor companies and
may experience competition from companies designing chips based on different
technologies, such as software-centric multimedia processors. Further, the need
of PC manufacturers to rapidly introduce a variety of products aimed at
different segments of the PC market may lead to the shift by such system OEMs to
the purchase of graphics and multimedia add-in cards provided by others. Certain
of the Company's competitors supply both add-in cards and accelerator chips,
which may provide those competitors with an advantage over suppliers such as the
Company that supply only accelerator chips. In addition, certain of the
Company's potential competitors that supply add-in cards and/or motherboards,
such as Intel Corporation, may seek to use their card/board business to leverage
the startup of their graphics accelerator business. Certain of the Company's
current and potential competitors have greater technical, manufacturing,
financial and marketing resources than the Company. The Company believes that
its ability to compete successfully depends upon a number of factors both within
and outside of its control, including product performance, product features,
product availability, price, quality, timing of new product introductions by the
Company and its competitors, the emergence of new graphics and PC standards,
customer support, and industry and general economic trends. There can be no
assurance that the Company will have the financial resources, technical
expertise, or marketing, distribution and support capabilities to compete
successfully. The Company's future success will be highly dependent upon the
successful development and introduction of new products that are responsive to
market needs. There can be no assurance that the Company will be able to
successfully develop or market any such products.
Customer Concentration
The Company's sales are concentrated within a limited customer base. One
customer, Diamond Multimedia Systems, Inc. accounted for 15% of net sales in
1996, two customers, Diamond Multimedia Systems, Inc. and Intel Corporation,
accounted for 17% and 12%, respectively, of net sales in 1995, and two
customers, International Business Machines Corporation and Digital Equipment
Corporation, accounted for 19% and 16%, respectively, of net sales in 1994. The
Company expects a significant portion of its future sales to remain concentrated
within a limited number of strategic customers. There can be no assurance that
the Company will be able to retain its strategic customers or that such
customers will not otherwise cancel or reschedule orders, or in the event of
canceled orders, that such orders will be replaced by other sales. In addition,
sales to any particular customer may fluctuate significantly from quarter to
quarter. The occurrence of any such events could have a material adverse effect
on the Company's operating results.
Management of Growth; Dependence on Key Personnel
Since its inception, the Company has experienced significant growth in
the number of its employees and in the scope of its operating and financial
systems, resulting in increased responsibilities for the Company's management.
To manage future growth effectively, the Company will need to continue to
improve its operational, financial and management information systems,
procedures and controls, and expand, train, motivate, retain and manage its
employee base. The Company is in the process of implementing a new management
information system. Any problems encountered in the implementation of such
system could adversely affect the Company's operations. There can be no
assurance that the Company will be able to manage its growth effectively, and
failure to do so could have a material adverse effect on the Company's operating
results.
The Company's future success depends in part on the continued service of
its key engineering, sales, marketing and executive personnel, including highly
skilled semiconductor design personn l and software developers, and its ability
to identify and hire additional personnel. Competition for such personnel is
intense and there can be no assurance that the Company can retain and recruit
necessary personnel to operate its business and support its future growth. In
August 1996, the Company appointed a new President and Chief Executive Officer
to replace Terry N. Holdt, who retired, and in March 1997, the Company's Chief
Financial Officer resigned, and there can be no assurance as to the effects of
this management transition on the Company's business and operating results. The
loss of key personnel could have a material adverse effect on the Company's
business and operating results. The Company does not maintain key man insurance
on any of its employees.
8
<PAGE>
Importance of Intellectual Property; Litigation Involving Intellectual Property
The Company's ability to compete will be affected by its ability to
protect its proprietary information. The Company has filed several United States
and foreign patent applications and to date has a number of issued United States
patents. The Company relies primarily on its trade secrets and technological
know-how in the conduct of its business. There can be no assurance that the
steps taken by the Company to protect its intellectual property will be adequate
to prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. The semiconductor and software industries
are characterized by frequent claims and related litigation regarding patent and
other intellectual property rights. The Company is party to various claims of
this nature. Although the ultimate outcome of these matters is not presently
determinable, management presently believes that the resolution of all such
pending matters will not have a material adverse effect on the Company's
operating results. There can be no assurance that third parties will not assert
additional claims or initiate litigation against the Company, its foundries, or
its customers with respect to existing or future products. In addition, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to determine the scope and validity of
the proprietary rights of the Company or others. Litigation by or against the
Company has in the past, in the case of the Brooktree Corporation ("Brooktree")
litigation, resulted and could in the future result in substantial expense to
the Company and diversion of the efforts of the Company's technical and
management personnel, whether or not litigation is determined in favor of the
Company. In the event of an adverse result in any such litigation, the Company
could be required to pay substantial damages, cease the manufacture, use, sale,
offer for sale and importation of infringing products, expend significant
resources to develop or obtain non-infringing technology, discontinue the use of
certain processes or obtain licenses to the technology which is the subject of
the litigation. There can be no assurance that the Company would be successful
in such development or acquisition or that any such licenses, if available,
would be available on commercially reasonable terms, and any such development or
acquisition could require expenditures by the Company of substantial time and
other resources. Any such litigation or adverse result therefrom could have a
material adverse effect on the Company's operating results.
In October 1995, Brooktree filed a complaint against the Company in the
United States District Court for the Southern District of California, alleging
that the Company's current products infringe a Brooktree patent. Such lawsuit
resulted in substantial expense to the Company to defend the action and diverted
the efforts of the Company's technical and management personnel. In August 1996,
the Company and Brooktree entered i to a settlement and license agreement
pursuant to which all claims and counterclaims between the parties were
dismissed and the Company agreed to pay to Brooktree a license fee and royalties
related to certain product revenues over a five-year period.
International Operations
Export sales accounted for 61%, 44% and 42% of the Company's net sales
in 1996, 1995 and 1994, respectively, and the Company expects that export sales
will continue to represent a significant portion of net sales, although there
can be no assurance that export sales, as a percentage of net sales, will remain
at current levels. In addition, a substantial proportion of the Company's
products are manufactured, assembled and tested by independent third parties in
Asia. Due to its export sales and independent third party manufacturing,
assembly and testing operations, and its joint venture foundry, the Company is
subject to the risks of conducting business internationally, including
unexpected changes in, or impositions of, legislative or regulatory
requirements, fluctuations in the U.S. dollar, which could increase the sales
price in local currencies of the Company's products in foreign markets or
increase the cost of wafers purchased by the Company, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs and
other barriers and restrictions, potentially longer payment cycles, greater
difficulty in accounts receivable collection, potentially adverse taxes, and the
burdens of complying with a variety of foreign laws. In addition, the Company is
subject to general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships, in connection
with its international operations. Two of the Company's independent foundries,
UMC and TSMC, and the Company's joint venture foundry, USC, are located in
Taiwan. The Company currently expects these three foundries to supply the
substantial portion of the Company's products in 1997. The People's Republic of
China and Taiwan
9
<PAGE>
at times experienced strained relations in 1995 and 1996, and the worsening of
relations or the development of hostilities between the two parties could have a
material adverse effect on the Company. Although the Company has not to date
experienced any material adverse effect on its operations as a result of such
regulatory, geopolitical, economic and other factors, there can be no assurance
that such factors will not adversely impact the Company's operations in the
future or require the Company to modify its current business practices. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States.
Increased Leverage
In connection with the sale of the Notes, the Company's ratio of its
long-term debt to its total capitalization increased from approximately 9.5% at
June 30, 1996 to approximately 30.6% at December 31, 1996. As a result of this
additional indebtedness, the Company's principal and interest obligations will
increase substantially. The degree to which the Company is leveraged could
adversely affect the Company's ability to obtain additional financing for
working capital or other purposes and could make it more vulnerable to economic
downturns and competitive pressures. The Company's increased leverage could also
adversely affect its liquidity, as a substantial portion of available cash from
operations may have to be applied to meet debt service requirements and, in the
event of a cash shortfall, the Company could be forced to reduce other
expenditures to be able to meet such requirements.
Subordination
The Notes are unsecured obligations of the Company subordinated to all
existing and future Senior Indebtedness of the Company. As of December 31, 1996,
the principal amount of the Company's outstanding Senior Indebtedness was
approximately $40.8 million. The Indenture will not limit the amount of
indebtedness, including Senior Indebtedness, which the Company can incur or
guarantee. Upon any distribution of assets of the Company pursuant to any
insolvency, bankruptcy, dissolution, winding up, liquidation or reorganization,
the payment of the principal of and interest on the Notes will be subordinated
to the extent provided in the Indenture to the prior payment in full of all
Senior Indebtedness. In addition, the Company may not repurchase any Notes in
the event the Common Stock is no longer publicly traded or in certain
circumstances involving a Change of Control if at such time the subordination
provisions of the Indenture would prohibit the Company from making payments of
principal in respect of the Notes. The failure to so repurchase the Notes when
required would result in an Event of Default (as defined herein) under the
Indenture and may constitute a default under the terms of other indebtedness of
the Company. See "Description of Notes."
Absence of Public Market for the Notes
Prior to date hereof, there has been no established trading market for
the Notes. The Notes have been designated for trading on the PORTAL Market;
however, Notes sold pursuant to this Prospectus are not expected to remain
eligible for trading on the PORTAL Market. The Company does not intend to list
the Notes on any national securities exchange or on The Nasdaq Stock Market.
There can be no assurance that an active trading market for the Notes will
develop or, if one does develop, that it will be maintained. If an active
trading market for the Notes fails to develop or be sustained, the trading price
of such Notes could be adversely affected and holders of the Notes may
experience difficulty in reselling the Notes or may be unable to sell them at
all. If a public trading market develops for the Notes, future trading prices of
the Notes will depend upon many factors, including, among other things,
prevailing interest rates and the market price of the shares of Common Stock.
Limitation on Repurchase of Notes
In the event the Common Stock is no longer publicly traded or in certain
circumstances involving a Change of Control, each holder of Notes may require
the Company to repurchase all or a portion of such holder's Notes. In such
event, there can be no assurance that the Company would have sufficient
financial resources or would be able to arrange financing to pay the repurchase
price. (The Company may also elect to make such payment using shares of Common
Stock.) The Company's ability to repurchase the Notes in such
10
<PAGE>
event may be limited by law, the Indenture and by the terms of other agreements
relating to borrowings that constitute Senior Indebtedness, as such indebtedness
or agreements may be entered into, replaced, supplemented or amended from time
to time. The Company may be required to refinance Senior Indebtedness in order
to make any such payment. The Company may not have the financial ability to
repurchase the Notes in the event payment of Senior Indebtedness is accelerated.
See "Description of Notes--Repurchase at Option of Holders."
Volatility of Stock Price
The market price of the shares of Common Stock, like that of the common
stock of many other semiconductor companies, has been and is likely to be highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. The market price of the Common Stock could be subject to
significant fluctuations in response to quarter-to-quarter variations in the
Company's anticipated or actual operating results, announcements of new
products, technological innovations or setbacks by the Company or its
competitors, conditions in the semiconductor and PC industries, the commencement
of, developments in or outcome of litigation, changes in or the failure by the
Company to meet estimates of the Company's performance by securities analysts,
market conditions for high technology stocks in general, and other events or
factors.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale by the Selling
Securityholders of the Notes or the Conversion Shares.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
The following table sets forth the Company's consolidated ratio of
earnings to fixed charges for the periods shown.
<CAPTION>
Year Ended December 31,
---------------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges...................... 19.45x 137.34x 165.95x -- 38.75x
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, (i)
earnings consist of consolidated income (loss) before income taxes plus fixed
charges and (ii) fixed charges consist of interest expense incurred and the
portion of rental expense under operating leases deemed by the Company to be
representative of the interest factor. The Company had no fixed charges in 1995.
SELLING SECURITYHOLDERS
The Notes were originally issued by the Company in a private placement
and were resold by the initial purchasers thereof to qualified institutional
buyers (within the meaning of Rule 144A under the Securities Act) or other
institutional accredited investors (as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act) in transactions exempt from registration under the
Securities Act, and in sales outside the United States to persons other than
U.S. persons in reliance upon Regulation S under the Securities Act. The Notes
and the Conversion Shares that may be offered pursuant to this Prospectus will
be offered by the Selling Securityholders. The following table sets forth
certain information as of January 21, 1997 concerning the principal amount of
Notes beneficially owned by each Selling Securityholder and the number of
Conversion Shares that may be offered from time to time pursuant to this
Prospectus.
11
<PAGE>
From time to time, Lehman Brothers Inc. or its affiliates have provided,
and may continue to provide, investment banking services to the Company, for
which they received or will receive customary fees. None of the other Selling
Securityholders has had any position, office or other material relationship with
the Company or its affiliates within the past three years.
<TABLE>
<CAPTION>
Principal Amount
of Notes Number of
Beneficially Percentage of Conversion Shares Percentage of
Owned Notes That Common Stock
Name That May be Sold Outstanding May be Sold (1) Outstanding (2)
---- ---------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Allstate Insurance Company............. $1,300,000 1.4 67,637 *
Argent Classic Convertible Arbitrage
Fund (Bermuda) L.P................... 1,450,000 1.5 75,442 *
Bond Fund Series - Oppenheimer Bond
Fund for Growth...................... 4,000,000 4.2 208,116 *
Boston College Endowment............... 185,000 * 9,625 *
Castle Convertible Fund, Inc........... 500,000 * 26,014 *
Christian Science Trustees for Gifts and
Endowments........................... 170,000 * 8,844 *
Colonial Penn Insurance Co............. 780,000 * 40,582 *
Colonial Penn Life Insurance Co........ 780,000 * 40,582 *
David Lipscomb University (4).......... 60,000 * 3,121 *
Declaration of Trust for the Defined
Benefit Plans of ICI American
Holdings Inc......................... 200,000 * 10,405 *
Declaration of Trust for the Defined
Benefit Plans of Zeneca Holdings
Inc.................................. 135,000 * 7,023 *
Delaware State Employees' Retirement
Fund................................. 665,000 * 34,599 *
Employers' Reinsurance Corporation..... 550,000 * 28,616 *
Equitable Life Assurance - Separate
Account Balanced (4).................. 110,000 * 5,732 *
Equitable Life Assurance - Separate
Account Convertibles (4).............. 1,655,000 1.8 86,108 *
First Church of Christ, Scientist -
Endowment............................ 190,000 * 9,885 *
First Hawaiian Bank Custodian Hotel
Industry ILWU Pension Plan........... 90,000 * 4,682 *
First Hawaiian Bank Custodian Hotel
Union Pension Trust Fund............. 255,000 * 13,267 *
Gershon Partners, L.P.................. 135,000 * 7,023 *
Glen Eagles Fund Ltd................... 820,000 * 42,663 *
Hartford Fire Insurance Company........ 395,000 * 20,551 *
The HCA Foundation (4)................. 170,000 * 8,884 *
Hillside Capital Incorporated Corporate
Account.............................. 190,000 * 9,885 *
Hospital Corp. of America Money
Purchase Plan (4)..................... 485,000 * 25,234 *
The Hotel Union - ILWU Pension
Trust (4)............................. 75,000 * 3,902 *
12
<PAGE>
Principal Amount
of Notes Number of
Beneficially Percentage of Conversion Shares Percentage of
Owned Notes That Common Stock
Name That May be Sold Outstanding May be Sold (1) Outstanding (2)
---- ---------------- ----------- --------------- ---------------
The Hotel Union & Industry of Hawaii (4) 215,000 * 11,186 *
Hudson River Trust Balanced
Account (4).......................... 650,000 * 33,818 *
Hudson River Trust Growth &
Income (4)........................... 395,000 * 20,551 *
Hudson River Trust Growth
Investors (4)........................ 520,000 * 27,055 *
Lipper Convertibles, L.P. (3).......... 5,000,000 5.3 260,145 *
Mackay Shields Financial Corp. -
Brown & Williamson Convertible....... 150,000 * 7,804 *
Mackay Shields Financial Corp. -
Mainstay V.P. Convertible Fund....... 200,000 * 10,405 *
Mackay Shields Financial Corp. - New
York Life Separate Account #7........ 500,000 * 26,014 *
Memphis Light, Gas & Water Retirement
Fund (4).............................. 645,000 * 33,558 *
Millennium Trading Co.................. 1,500,000 1.6 78,043 *
Museum of Fine Arts, Boston............ 80,000 * 4,162 *
New Hampshire State Retirement
System............................... 490,000 * 25,494 *
Pacific Mutual Life Insurance Co....... 500,000 * 26,014 *
Palladin Partners, L.P................. 440,000 * 22,892 *
Phoenix Convertible Fund............... 1,500,000 1.6 78,043 *
Promutual.............................. 410,000 * 21,331 *
Putnam Balanced Retirement Fund........ 200,000 * 10,405 *
Putnam Convertible Income - Growth
Trust................................ 3,100,000 3.3 161,290 *
Putnam Convertible Opportunities and
Income Trust......................... 365,000 * 18,990 *
Ramius Fund Ltd........................ 1,045,000 1.1 54,370 *
Robertson Stephens & Co. LLP (5)....... 134,000 * 6,971 *
Shepherd Investments International, Ltd. 1,625,000 1.7 84,547 *
Stark International.................... 1,425,000 1.5 74,141 *
Thermo Electron Balanced Investment
Fund................................. 400,000 * 20,811 *
Toronto Dominion (New York), Inc....... 5,855,000 6.2 304,630 *
Any other holder of Notes or future
transferee, pledgee, donee or successor
of or from any such other
holder (6)(7)........................ 51,527,000 54.7 2,680,905 5.2
- -------------
* Less than 1%.
(1) Assumes conversion of the full amount of Notes held by such holder at
the initial conversion price of $19.22 per share; such conversion price
is subject to adjustment as described under "Description of the
Notes--Conversion." Accordingly, the number of shares of Common Stock
issuable upon conversion of the Notes may increase or decrease from time
to time.
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<PAGE>
Under the terms of the Indenture, fractional shares will not be issued
upon conversion of the Notes; cash will be paid in lieu of fractional
shares, if any.
(2) Computed in accordance with Rule 13d-3(d)(i) promulgated under the
Exchange Act and based upon 49,004,094 shares of Common Stock
outstanding as of April 16, 1997, treating as outstanding the number of
Conversion Shares shown as being issuable upon the assumed conversion by
the named holder of the full amount of such holder's Notes but not
assuming the conversion of the Notes of any other holder.
(3) Information as to the holdings of this entity is based on information
provided by such entity on January 28, 1997.
(4) Information as to the holdings of this entity is based on information
provided by such entity on February 6, 1997.
(5) Information as to the holdings of this entity is based on information
provided by such entity on April 9, 1997.
(6) Information concerning other Selling Securityholders will be set forth
in supplements to this Prospectus from time to time, if required.
(7) Assumes that any other holders of Notes, or any future transferees,
pledgees, donees or successors of or from any such other holders of
Notes, do not beneficially own any Common Stock other than the Common
Stock issuable upon conversion of the Notes at the initial conversion
rate.
</TABLE>
The preceding table has been prepared based upon the information
furnished to the Company by the Selling Securityholders named therein.
The Selling Securityholders identified above may have sold, transferred
or otherwise disposed of, in transactions exempt from the registration
requirements of the Securities Act, all or a portion of their Notes since the
date on which the information in the preceding table is presented. Information
concerning the Selling Securityholders may change from time to time and any such
changed information will be set forth in supplements to this Prospectus if and
when necessary. Because the Selling Securityholders may offer all or some of the
Notes that they hold and/or Conversion Shares pursuant to the offering
contemplated by this Prospectus, no estimate can be given as to the amount of
the Notes or Conversion Shares that will be held by the Selling Securityholders
upon the termination of this offering. See "Plan of Distribution."
DESCRIPTION OF THE NOTES
The Notes have been issued under an indenture, dated as of September 12,
1996, between the Company and State Street Bank and Trust Company of California,
N.A., as trustee (the "Indenture"). The following summaries of certain
provisions of the Notes and the Indenture do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Notes and the Indenture, including the definitions therein of
certain terms that are not otherwise defined in this Prospectus. Wherever
particular provisions or defined terms of the Indenture (or of the form of Note
that is a part thereof) are referred to, such provisions or defined terms are
incorporated herein by reference.
General
The Notes are unsecured general obligations of the Company subordinate
in right of payment to certain other obligations of the Company as described
under "--Subordination," and convertible into Common Stock as described under
"--Conversion." The Notes are limited to $103,500,000 aggregate principal
amount, and will mature on October 1, 2003, unless earlier redeemed at the
option of the Company or repurchased by the Company at the option of the holder
upon the occurrence of a Designated Event (as defined).
The Notes bear interest from the most recent date that interest has been
paid, or if no interest has been paid, from September 18, 1996, at 5 3/4% per
annum. Interest is payable semi-annually on April 1 and October 1, commencing on
April 1, 1997, to holders of record at the close of business on the preceding
March 15 and September 15, respectively. Interest may, at the Company's option,
be paid by check mailed to such holders, provided that a holder of Notes with an
aggregate principal amount in excess of $5,000,000 will be paid by wire
14
<PAGE>
transfer in immediately available funds at the election of such holder. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Principal will be payable, and the Notes may be presented for
conversion, registration of transfer and exchange, without service charge, at
the office of the Company maintained by the Company for such purposes in New
York, New York, which shall initially be the office or agency of the State
Street Bank and Trust Company of California, N.A. (the "Trustee") in New York,
New York.
The Indenture does not contain any financial covenants or any
restrictions on the payment of dividends, the repurchase of securities of the
Company or the incurrence of Senior Indebtedness or other indebtedness. The
Indenture contains no covenants or other provisions to afford protection to
holders of Notes in the event of a highly leveraged transaction or a change in
control of the Company except to the extent described under "--Repurchase at
Option of Holders" below.
Conversion
The holders of Notes are entitled at any time through the close of
business on the final maturity date of the Notes, subject to prior redemption or
repurchase, to convert any Notes or portions thereof (in denominations of $1,000
or multiples thereof) into Common Stock of the Company, initially at the
conversion price of $19.22 per share (equal to a conversion rate of 52.0291
shares per $1,000 principal amount of Notes), subject to adjustment as described
below. Except as described below, no adjustment will be made on conversion of
any Notes for interest accrued thereon or for dividends on any Common Stock
issued.
If Notes are converted after a record date for the payment of interest
and prior to the next succeeding interest payment date, such Notes, other than
Notes called for redemption during such period, must be accompanied by funds
equal to the interest payable on such succeeding interest payment date on the
principal amount so converted. No such payment will be required if the Company
exercises its right to redeem such Notes on a redemption date that is an
interest payment date. The Company is not required to issue fractional shares of
Common Stock upon conversion of Notes and, in lieu thereof, will pay a cash
adjustment based upon the market price of the Common Stock on the last business
day prior to the date of conversion. In the case of Notes called for redemption,
conversion rights will expire at the close of business on the fifth business day
preceding the date fixed for redemption, unless the Company defaults in payment
of the redemption price.
The right of conversion attaching to any Note may be exercised by the
holder by delivering the Note at the specified office of a conversion agent,
accompanied by a duly signed and completed notice of conversion, together with
any funds that may be required as described in the preceding paragraph. The
conversion date shall be the date on which the Note, the duly signed and
completed notice of conversion, and any funds that may be required as described
in the preceding paragraph shall have been so delivered. A holder delivering a
Note for conversion will not be required to pay any taxes or duties payable in
respect of the issue or delivery of Common Stock on conversion, but will be
required to pay any tax or duty which may be payable in respect of any transfer
involved in the issue or delivery of the Common Stock in a name other than the
holder of the Note. Certificates representing shares of Common Stock will not be
issued or delivered unless all taxes and duties, if any, payable by the holder
have been paid.
The initial conversion price is subject to adjustment in certain events,
including: (i) the issuance of Common Stock as a dividend or distribution on
Common Stock of the Company; (ii) certain subdivisions and combinations of the
Common Stock; (iii) the issuance to all holders of Common Stock of certain
rights or warrants to purchase Common Stock at less than the current market
price of the Common Stock; (iv) the dividend or other distribution to all
holders of Common Stock of shares of capital stock of the Company (other than
Common Stock) or evidences of indebtedness of the Company or assets (including
securities, but excluding those rights, warrants, dividends and distributions
referred to above and dividends and distributions in connection with the
consolidation or merger of the Company or paid exclusively in cash); (v)
dividends or other distributions consisting exclusively of cash (excluding any
cash portion of distributions referred to in clause (iv)) to all holders of
Common Stock to the extent that such distributions, combined together with (A)
all other such
15
<PAGE>
all-cash distributions made within the preceding 12 months in respect of which
no adjustment has been made plus (B) any cash and the fair market value of other
consideration payable in respect of any tender offers by the Company or any of
its subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 10% of the Company's
market capitalization (being the product of the then current market price of the
Common Stock times the number of shares of Common Stock then outstanding) on the
record date for such distribution; and (vi) the purchase of Common Stock
pursuant to a tender offer made by the Company or any of its subsidiaries to the
extent that the same involves an aggregate consideration that, together with (X)
any cash and the fair market value of any other consideration payable in any
other tender offer by the Company or any of its subsidiaries for Common Stock
expiring within the 12 months preceding such tender offer in respect of which no
adjustment has been made plus (Y) the aggregate amount of any such all-cash
distributions referred to in clause (v) above to all holders of Common Stock
within the 12 months preceding the expiration of such tender offer in respect of
which no adjustments have been made, exceeds 10% of the Company's market
capitalization on the expiration of such tender offer. The Company is entitled,
in lieu of making certain adjustments under clause (v) above, to provide that,
subject to satisfying certain conditions, upon conversion of the Notes, the
holders of the Notes will receive, in addition to the Common Stock issuable upon
conversion of such Notes, the amount of such distribution referred to in clause
(v).
The Indenture provides that if the Company implements a stockholders'
rights plan, such rights plan must provide that upon conversion of the Notes the
holders will receive, in addition to the Common Stock issuable upon such
conversion, such rights whether or not such rights have separated from the
Common Stock at the time of such conversion.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least l% in the conversion price then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
In the case of (i) any reclassification or change of the Common Stock
(other than changes resulting from a subdivision or combination) or (ii) a
consolidation, merger or combination involving the Company or a sale or
conveyance to another corporation of the property and assets of the Company as
an entirety or substantially as an entirety, in each case as a result of which
holders of Common Stock shall be entitled to receive stock, other securities,
other property or assets (including cash) with respect to or in exchange for
such Common Stock, the holders of the Notes then outstanding will be entitled
thereafter to convert such Notes into the kind and amount of shares of stock,
other securities or other property or assets which they would have owned or been
entitled to receive upon such reclassification, change, consolidation, merger,
combination, sale or conveyance had such Notes been converted into Common Stock
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance (assuming, in a case in which the Company's
stockholders may exercise rights of election, that a holder of Notes would not
have exercised any rights of election as to the stock, other securities or other
property or assets receivable in connection therewith and received per share the
kind and amount received per share by a plurality of non-electing shares).
In the event of a taxable distribution to holders of Common Stock (or
other transaction) which results in any adjustment of the conversion price, the
holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain Federal Income Tax
Considerations."
The Company from time to time may, to the extent permitted by law,
reduce the conversion price of the Notes by any amount for any period of at
least 20 days, in which case the Company shall give at least 15 days' notice of
such decrease, if the Board of Directors has made a determination that such
decrease would be in the best interests of the Company, which determination
shall be conclusive. See "Certain Federal Income Tax Considerations." The
Company may, at its option, make such reductions in the conversion price, in
addition to those set forth above, as the Board of Directors deems advisable to
avoid or diminish any income tax to holders
16
<PAGE>
of Common Stock resulting from any dividend or distribution of stock (or rights
to acquire stock) or from any event treated as such for income tax purposes.
Optional Redemption by the Company
The Notes are not redeemable at the option of the Company prior to
October 8, 1999. At any time on or after that date the Notes may be redeemed at
the Company's option on at least 20 but not more than 60 days' notice, as a
whole or, from time to time in part, at the following prices (expressed in
percentages of the principal amount), together with accrued interest to, but
excluding, the date fixed for redemption; provided that if a redemption date is
an interest payment date, the semi-annual payment of interest becoming due on
such date shall be payable to the holder of record as of the relevant record
date.
<TABLE>
If redeemed during the 12-month period beginning October 1 (October 8 in
the case of 1999):
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
1999................................................. 102%
2000................................................. 101
2001 and thereafter.................................. 100
</TABLE>
If fewer than all the Notes are to be redeemed, the Trustee will select
the Notes to be redeemed in principal amounts of $1,000 or multiples thereof by
lot or, in its discretion, on a pro rata basis. If any Note is to be redeemed in
part only, a new Note or Notes in principal amount equal to the unredeemed
principal portion thereof will be issued. If a portion of a holder's Notes is
selected for partial redemption and such holder converts a portion of such
Notes, such converted portion shall be deemed to be taken from the portion
selected for redemption.
No sinking fund is provided for the Notes.
Repurchase at Option of Holders
The Indenture provides that if a Designated Event (as defined below)
occurs, each Holder of Notes shall have the right, at the Holder's option, to
require the Company to repurchase all of such Holder's Notes, or any portion
thereof that is an integral multiple of $1,000, on the date (the "Repurchase
Date") fixed by the Company that is not less than 30 days nor more than 45
calendar days after the date of the Company Notice (as defined below), for cash
at a price equal to 100% of the principal amount of such Notes to be repurchased
(the "Repurchase Price"), together with accrued interest, if any, to the
Repurchase Date.
The Company may, at its option, in lieu of paying the Repurchase Price
in cash, pay the Repurchase Price in Common Stock valued at 95% of the average
of the closing prices of the Common Stock for the five consecutive trading days
ending on and including the third trading day preceding the Repurchase Date.
Such payment may not be made in Common Stock unless the Company satisfies
certain conditions with respect to such payment as provided in the Indenture.
Within 15 calendar days after the occurrence of a Designated Event, the
Company is obligated to mail to all Holders of record of such Notes a notice
(the "Company Notice") of the occurrence of such Designated Event and of the
repurchase right arising as a result thereof. The Company must deliver a copy of
the Company Notice to the Trustee and cause a copy or a summary of such notice
to be published in a newspaper of general circulation in The City of New York.
To exercise the repurchase right, a Holder of such Notes must deliver on or
before the Repurchase Date irrevocable written notice to the Trustee of the
Holder's exercise of such right, together with the Notes with respect to which
the right is being exercised, duly endorsed for transfer to the Company.
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<PAGE>
"Designated Event" means a Change of Control (as defined below) or a
Termination of Trading (as defined below).
"Change of Control" means an event or series of events as a result of
which (i) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act) of shares representing more
than 50% of the combined voting power of the then outstanding securities
entitled to vote generally in elections of directors of the Company ("Voting
Stock"); (ii) the Company consolidates with or merges into any other
corporation, or conveys, transfers or leases all or substantially all of its
assets to any person, or any other corporation merges into the Company, and in
the case of any such transaction, the outstanding common stock of the Company is
changed or exchanged into or for other assets or securities as a result, unless
the stockholders of the Company immediately before such transaction own,
directly or indirectly immediately following such transaction, at least a
majority of the combined voting power of the outstanding voting securities of
the corporation resulting from such transaction in substantially the same
proportion as their ownership of the Voting Stock immediately before such
transaction; or (iii) any time Continuing Directors (as defined below) do not
constitute a majority of the Board of Directors of the Company (or, if
applicable, a successor corporation to the Company); provided, however, that a
Change of Control shall not be deemed to have occurred if either (x) the closing
price per share of the Common Stock for any five trading days within the period
of ten consecutive trading days ending immediately before the Change of Control
shall equal or exceed 105% of the conversion price of the Notes in effect on
each such trading day, or (y) at least 90% of the consideration (excluding cash
payments for dissenting and fractional shares) in the transaction or
transactions constituting the Change of Control consists of shares of common
stock or securities convertible into common stock that are, or immediately upon
issuance will be, listed on a national securities exchange or The Nasdaq Stock
Market and as a result of the transaction or transactions such Notes become
convertible solely into such common stock.
"Continuing Director" means at any date a member of the Company's Board
of Directors (i) who was a member of such board on September 12, 1996 or (ii)
who was nominated or elected by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Company's Board of Directors was recommended or endorsed by at
least a majority of the directors who were Continuing Directors at the time of
such nomination or election. (Under this definition, if the current Board of
Directors of the Company were to approve a new director or directors and then
resign, no Change of Control would occur even though the current Board of
Directors would thereafter cease to be in office.)
No quantitative or other established meaning has been given to the
phrase "all or substantially all" (which appears in the definition of Change of
Control) by courts which have interpreted this phrase in various contexts. In
interpreting this phrase, courts, among other things, make a subjective
determination as to the portion of assets conveyed, considering such factors as
the value of assets conveyed, the proportion of an entity's income derived from
the assets conveyed and the significance of those assets to the ongoing business
of the entity. To the extent the meaning of such phrase is uncertain,
uncertainty will exist as to whether or not a Change of Control may have
occurred (and, accordingly, as to whether or not the holders of Notes will have
the right to require the Company to repurchase their Notes).
A "Termination of Trading" shall have occurred if the Common Stock (or
other common stock into which the Notes are then convertible) is neither listed
for trading on a United States national securities exchange nor approved for
trading on an established automated over-the-counter trading market in the
United States.
The right to require the Company to repurchase Notes as a result of the
occurrence of a Designated Event could create an event of default under Senior
Indebtedness as a result of which any repurchase could, absent a waiver, be
blocked by the subordination provisions of the Notes. See "--Subordination."
Failure of the Company to repurchase the Notes when required could result in an
Event of Default with respect to the Notes whether or not such repurchase is
permitted by the subordination provisions. The Company's ability to pay cash to
the holders of Notes upon a repurchase may be limited by certain financial
covenants contained in the Company's revolving credit loan agreement.
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<PAGE>
Certain leveraged transactions sponsored by the Company's management or
an affiliate of the Company could constitute a Change of Control that would give
rise to the repurchase right. The Indenture does not provide the Company's Board
of Directors with the right to limit or waive the repurchase right in the event
of any such leveraged transaction. Conversely, the Company could, in the future,
enter into certain transactions, including certain recapitalizations of the
Company, that would not constitute a Change of Control but that would increase
the amount of Senior Indebtedness (or other indebtedness) outstanding at such
time. There are no restrictions in the Indenture or the Notes on the creation of
additional Senior Indebtedness (or any other indebtedness) of the Company or any
of its subsidiaries and the incurrence of significant amounts of additional
indebtedness could have an adverse impact on the Company's ability to service
its debt, including the Notes. The Notes are subordinate in right of payment to
all existing and future Senior Indebtedness as described under "--Subordination"
below.
The right to require the Company to repurchase Notes as a result of a
Designated Event could have the effect of delaying, deferring or preventing a
Change of Control or other attempts to acquire control of the Company unless
arrangements have been made to enable the Company to repurchase all of the Notes
at the repurchase date. Consequently, the right may render more difficult or
discourage a merger, consolidation or tender offer (even if such transaction is
supported by the Company's Board of Directors or is favorable to the
stockholders), the assumption of control by a holder of a large block of the
Company's shares and the removal of incumbent management.
Rule 13e-4 under the Exchange Act requires, among other things, the
dissemination of certain information to security holders in the event of an
issuer tender offer and may apply in the event that the repurchase option
becomes available to holders of the Notes. The Company will comply with this
rule to the extent applicable at that time.
Subordination
The payment of principal of and interest on the Notes (including,
without limitation, the payment of the redemption or repurchase price with
respect to the Notes) is, to the extent provided in the Indenture, subordinate
to the prior payment in full of all Senior Indebtedness (as defined).
Upon any payment or distribution of assets of the Company to creditors
resulting from any liquidation, dissolution, winding-up, reorganization or any
insolvency proceedings of the Company, the holders of all Senior Indebtedness
will first be entitled to receive payment in full before the holders of the
Notes will be entitled to receive any payment upon the principal of or premium,
if any, or interest on the Notes (including, without limitation, the payment of
the redemption price or repurchase price with respect to the Notes).
Upon the happening and during the continuance of an event of default in
any payment with respect to any Senior Indebtedness, no payment may be made by
the Company on or in respect of the Notes. Upon the happening and during the
continuance of a default on any Senior Indebtedness (other than a payment event
of default) that occurs and is continuing that permits the holders of such
Senior Indebtedness to accelerate its maturity, and following receipt by the
Company and the Trustee of the notice provided for by the Indenture, no payment
may be made on the Notes for a period of up to 179 days after receipt of such
notice, unless such default is cured or waived.
By reason of the subordination, in the event of the Company's
bankruptcy, dissolution or reorganization, holders of Senior Indebtedness may
receive more, ratably, and holders of the Notes may receive less, ratably, than
the other creditors of the Company. Such subordination will not prevent the
occurrence of an Event of Default under the Indenture.
Subject to the qualifications described below, the term "Senior
Indebtedness" means the principal of, premium, if any, interest on, and any
other payment due pursuant to, any of the following, whether outstanding on the
date of the Indenture or thereafter incurred or created: (a) all indebtedness of
the Company for money borrowed or evidenced by notes, debentures, bonds or other
securities (including, but not limited to, those which
19
<PAGE>
are convertible or exchangeable for securities of the Company); (b) all
indebtedness of the Company due and owing with respect to letters of credit
(including, but not limited to, reimbursement obligations with respect thereto);
(c) all indebtedness or other obligations of the Company due and owing with
respect to interest rate and currency swap agreements, cap, floor and collar
agreements, currency spot and forward contracts and other similar agreements and
arrangements; (d) all indebtedness consisting of commitment or standby fees due
and payable to lending institutions with respect to credit facilities or letters
of credit available to the Company; (e) all obligations of the Company under
leases required or permitted to be capitalized under generally accepted
accounting principles; (f) all indebtedness or obligations of others of the
kinds described in any of the preceding clauses (a), (b), (c), (d) or (e)
assumed by or guaranteed in any manner by the Company or in effect guaranteed
(directly or indirectly) by the Company through an agreement to purchase,
contingent or otherwise, and all obligations of the Company under any such
guarantee or other arrangements; and (g) all renewals, extensions, refundings,
deferrals, amendments or modifications of indebtedness or obligations of the
kinds described in any of the preceding clauses (a), (b), (c), (d), (e) or (f);
unless in the case of any particular indebtedness, obligation, renewal,
extension, refunding, amendment, modification or supplement, the instrument or
other document creating or evidencing the same or the assumption or guarantee of
the same expressly provides that such indebtedness, renewal, extension,
refunding, amendment, modification or supplement is subordinate to, or is not
superior to, or is pari passu with, the Notes; provided that Senior Indebtedness
shall not include (i) any indebtedness of any kind of the Company to any
subsidiary of the Company, a majority of the voting stock of which is owned,
directly or indirectly, by the Company and (ii) indebtedness for trade payables
or constituting the deferred purchase price of assets or services incurred in
the ordinary course of business.
In the event that notwithstanding any of the foregoing prohibitions, the
Trustee or the holders of the Notes receive any payment or distribution on
account of or in respect of the Notes, such payment or distribution will be paid
over and delivered to the holders of Senior Indebtedness or, in the case of a
bankruptcy, insolvency or similar proceeding of the Company, to the trustee,
receiver or other person making payment or distribution of the assets of the
Company. For purposes of the subordination provisions, the payment, issuance or
delivery of cash property or securities (other than stock and certain
subordinated securities of the Company) upon conversion of a Note will be
determined to constitute payment on account of the principal of such Note.
As of September 30, 1996, the principal amount of the Company's
outstanding indebtedness that would have constituted Senior Indebtedness was
approximately $42.9 million. The Indenture does not limit the amount of
additional indebtedness, including Senior Indebtedness, which the Company can
create, incur, assume or guarantee, nor will the Indenture limit the amount of
indebtedness which any subsidiary of the Company can create, incur, assume or
guarantee.
Events of Default and Remedies
An Event of Default is defined in the Indenture as the following: (i) a
default in payment of the principal of, or premium, if any, on the Notes whether
or not such payment is prohibited by the subordination provisions of the
Indenture; (ii) default for 30 days in payment of any installment of interest on
the Notes whether or not such payment is prohibited by the subordination
provisions of the Indenture; (iii) failure by the Company to comply with any of
its other agreements in the Notes or the Indenture upon the receipt by the
Company of notice of such default by the Trustee or by holders of not less than
25% in aggregate principal amount at maturity of the Notes then outstanding and
the Company's failure to cure such default within 60 days after receipt by the
Company of such notice; (iv) default in the payment of the repurchase price in
respect of any Note on the repurchase date therefor (whether or not such payment
is prohibited by the subordination provisions of the Indenture); (v) a default
under certain indebtedness for money borrowed by the Company, which default
shall constitute a failure to pay any portion of such indebtedness in an amount
exceeding $15,000,000 when due and payable after the expiration of any
applicable grace period with respect thereto or shall have resulted in such
indebtedness in an amount exceeding $15,000,000 becoming or being declared due
and payable prior to the date on which it would otherwise have become due and
payable, if such indebtedness is not discharged, or such acceleration is not
annulled, within 30 days after written notice as provided in the Indenture; or
(vi) certain events involving bankruptcy, insolvency or reorganization of the
Company or any Significant Subsidiary, as defined in the Indenture.
20
<PAGE>
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of a default, give to the registered holders of the Notes notice of
all uncured defaults known to it, but the Trustee shall be protected in
withholding such notice if it in good faith determines that the withholding of
such notice is in the best interest to such registered holders, except in the
case of a default in the payment of the principal of, or premium, if any, or
interest on, any of the Notes when due or in the payment of any redemption or
repurchase obligation. The Indenture provides that if any Event of Default shall
have occurred and be continuing, the Trustee or the holders of not less than 25%
in principal amount of the Notes then outstanding may declare the principal of
and premium, if any, on the Notes to be due and payable immediately, but if the
Company shall cure all defaults (except the nonpayment of interest on, premium,
if any, and principal of any Notes which shall have become due by acceleration)
and certain other conditions are met, such declaration may be canceled and past
defaults may be waived by the holders of a majority in principal amount of Notes
then outstanding. If an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization were to occur, all unpaid principal of
and accrued interest on the outstanding Notes will become due and payable
immediately without any declaration or other act on the part of the Trustee or
any holders of Notes, subject to certain limitations.
The Indenture provides that the holders of a majority in principal
amount of the outstanding Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee, subject to certain limitations
specified in the Indenture. Before proceeding to exercise any right or power
under the Indenture at the direction of such holders, the Trustee shall be
entitled to receive from such holders reasonable security or indemnity against
the costs, expenses and liabilities which might be incurred by it in complying
with any such direction. The right of a holder to institute a proceeding with
respect to the Indenture is subject to certain conditions precedent, including
the written notice by such holder of an Event of Default and an offer to
indemnify to the Trustee, along with the written request by the holders of not
less than 25% in principal amount of the outstanding Notes that such a
proceeding be instituted, but the holder has an absolute right to institute suit
for the enforcement of payment of the principal of, and premium, if any, and
interest on, such holder's Notes when due and to convert such Notes.
The holders of not less than a majority in principal amount of the
outstanding Notes may on behalf of the holders of all Notes waive any past
defaults, except (i) a default in payment of the principal of, or premium, if
any, or interest on, any Note when due, (ii) a failure by the Company to convert
any Notes into Common Stock or (iii) in respect of certain provisions of the
Indenture which cannot be modified or amended without the consent of the holder
of each outstanding Note affected thereby.
The Company is required to furnish to the Trustee annually a statement
of certain officers of the Company stating whether or not to the best of their
knowledge the Company is in default in the performance and observation of
certain terms of the Indenture and, if they have knowledge that the Company is
in default, specifying such default.
Consolidation or Merger
The Company may, without the consent of holders of the Notes,
consolidate with, merge into, or convey or transfer all or substantially all of
its assets to any other corporation organized under the laws of the United
States or any political subdivision thereof or therein, provided that (i) the
successor corporation assumes all obligations of the Company under the Indenture
and the Notes, (ii) after giving effect to the transaction no Event of Default,
and no event which, after notice or lapse of time, would become an Event of
Default, shall have occurred and be continuing and (iii) certain other
conditions are met.
Modifications of the Indenture
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Notes at the time outstanding, to modify the Indenture
or any supplemental indenture or the rights of the holders of the Notes, except
that no such modification shall (i) extend the fixed maturity of any Note,
reduce the rate or extend the time of payment of interest thereon, reduce the
principal amount thereof or premium, if any, thereon, reduce any amount payable
21
<PAGE>
upon redemption or repurchase thereof, impair or change in any respect adverse
to the holders of Notes, the obligation of the Company to repurchase any Note
upon the happening of a Designated Event, impair or adversely affect the right
of a holder to institute suit for the payment thereof, change the currency in
which the Notes are payable, or impair or change the right to convert the Notes
into Common Stock subject to the terms set forth in the Indenture or modify the
provisions of the Indenture with respect to the subordination of the Notes in a
manner adverse to the holders of the Notes, without the consent of the holder of
each Note so affected, or (ii) reduce the aforesaid percentage of Notes the
holders of which are required to consent to any such supplemental indenture,
without the consent of the holders of all of the Notes then outstanding.
Concerning the Trustee
State Street Bank and Trust Company of California, N.A., the Trustee
under the Indenture, has been appointed by the Company as the initial paying
agent, conversion agent, registrar and custodian with regard to the Notes. The
Company may maintain deposit accounts and conduct other banking transactions
with the Trustee or its affiliates in the ordinary course of business, and the
Trustee and its affiliates may from time to time in the future provide banking
and other services to the Company in the ordinary course of their business.
During the existence of an Event of Default, the Trustee will exercise
such rights and powers vested in it under the Indenture and use the same degree
and care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. The Indenture
contains limitations of the rights of the Trustee, should it become a creditor
of the Company, to obtain payment of claims in certain cases or to realize on
certain property received by it in respect of any such claim or otherwise.
Book-Entry
The Notes have been issued in fully registered form, without coupons, in
denominations of $1,000 principal amount and multiples thereof. Except as
otherwise provided in the Indenture, Notes will be evidenced by one or more
global Notes ("Global Notes") deposited with the Trustee as custodian for The
Depository Trust Company ("DTC") and registered in the name of Cede & Co.
("Cede") as DTC's nominee. Record ownership of the Global Notes may be
transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.
Owners of beneficial interests in the Notes may hold their interests in
the Global Notes directly through DTC if they are participants in DTC
("Participants"), indirectly through Participants, through the Euroclear System
("Euroclear") or Cedel Bank, societe anonyme ("Cedel"), if they are participants
in such systems, or indirectly through organizations that clear through or
maintain a custodial relationship with a Participant ("Indirect Participants").
Euroclear and Cedel will hold interests in the Global Notes on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective depositaries, which, in turn, will hold such
interests in the Global Notes in customers' securities accounts in the
depositaries' names on the books of DTC. All interests in Global Notes,
including those held through Euroclear or Cedel, may be subject to the
procedures and requirements of DTC. Those interests held through Euroclear and
Cedel may also be subject to the procedures and requirements of such systems.
Payment of principal of and interest on the Global Notes will be made to
Cede, the nominee for DTC, as the registered owner of the Global Notes by wire
transfer of immediately available funds. Neither the Company, the Trustee nor
any paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company has been informed by DTC that, with respect to any payment
of principal of and interest on the Global Notes, DTC's practice is to credit
Participants' accounts on the payment date therefor with payments in amounts
proportionate to their respective beneficial interests in the Notes represented
by the Global Notes, as shown on the records of DTC, unless DTC has reason to
believe that it will not receive payment on such payment date. Payments by
Participants to owners of beneficial interests in Notes represented by the
22
<PAGE>
Global Notes held through such Participants will be the responsibility of such
Participants, as is now the case with securities held for the accounts of
customers registered in "street name."
Holders who desire to convert their Notes into Common Stock pursuant to
the terms of the Notes should contact their brokers or other Participants or
Indirect Participants to obtain information on procedures, including proper
forms and cut-off times, for submitting such requests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in Notes represented by the Global Notes to pledge
such interest to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised the Company that it will take any action permitted
to be taken by a holder of Notes (including, without limitation, the
presentation of Notes for exchange as described below) only at the direction of
one or more Participants to whose account with DTC interests in the Global Notes
are credited and only in respect of the principal amount of the Notes
represented by the Global Notes as to which such Participant or Participants has
or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes to accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Certain of such Participants (or their representatives), together
with other entities, own DTC. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through,
or maintain a custodial relationship with a Participant, either directly or
indirectly.
Although DTC, Euroclear and Cedel have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Global Notes
among Participants of DTC, Euroclear and Cedel, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. If DTC is at any time unwilling or unable to continue
as depositary and a successor depositary is not appointed by the Company within
90 days, the Company will cause Notes to be issued in definitive form in
exchange for the Global Notes. None of the Company, the Trustee nor any of their
respective agents will have any responsibility for the performance by DTC,
Euroclear and Cedel, their Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records relating
to, or payments made on account of, beneficial ownership interests in Global
Notes.
PLAN OF DISTRIBUTION
Pursuant to a Registration Rights Agreement dated as of September 12,
1996 (the "Registration Rights Agreement") between the Company and the initial
purchasers named therein entered into in connection with the offering of the
Notes, the Registration Statement of which this Prospectus forms a part was
filed with the Commission covering the resale of the Notes and the Common Stock
issuable upon conversion of the Notes (the "Securities"). The Company has agreed
to use all reasonable efforts to keep the Registration Statement effective until
September 20, 1999 (or such earlier date when the holders of the Securities are
able to sell all such Securities immediately without restriction pursuant to
Rule 144(k) under the Securities Act or any successor rule thereto or
otherwise). The Company will be permitted to suspend the use of this Prospectus
(which is a part of
23
<PAGE>
the Registration Statement) in connection with sales of Securities by holders
during certain periods of time under certain circumstances relating to pending
corporate developments and public filings with the Commission and similar
events. The specific provisions relating to the registration rights described
above are contained in the Registration Rights Agreement, and the foregoing
summary is qualified in its entirety by reference to the provisions of such
agreement.
Sales of the Notes and the Conversion Shares may be effected by or for
the account of the Selling Securityholders from time to time in transactions
(which may include block transactions in the case of the Conversion Shares) on
any exchange or market on which such securities are listed or quoted, as
applicable, in negotiated transactions, through a combination of such methods of
sale, or otherwise, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices,
or at negotiated prices. The Selling Securityholders may effect such
transactions by selling the Notes or Conversion Shares directly to purchasers,
through broker-dealers acting as agents for the Selling Securityholders, or to
broker-dealers who may purchase Notes or Conversion Shares as principals and
thereafter sell the Notes or Conversion Shares from time to time in transactions
(which may include block transactions in the case of the Conversion Shares) on
any exchange or market on which such securities are listed or quoted, as
applicable, in negotiated transactions, through a combination of such methods of
sale, or otherwise. In effecting sales, broker-dealers engaged by Selling
Securityholders may arrange for other broker-dealers to participate. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Notes or Conversion Shares for whom such broker-dealers may
act as agents or to whom they may sell as principals, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions).
The Selling Securityholders and any broker-dealers, agents or
underwriters that participate with the Selling Securityholders in the
distribution of the Notes or Conversion Shares may be deemed to be
"underwriters" within the meaning of the Securities Act. Any commissions paid or
any discounts or concessions allowed to any such persons, and any profits
received on the resale of the Notes or Conversion Shares offered hereby and
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
At the time a particular offering of the Notes and/or the Conversion
Shares is made and to the extent required, the aggregate principal amount of
Notes and number of Conversion Shares being offered, the name or names of the
Selling Securityholders, and the terms of the offering, including the name or
names of any underwriters, broker-dealers or agents, any discounts, concessions
or commissions and other terms constituting compensation from the Selling
Securityholders, and any discounts, concessions or commissions allowed or
reallowed or paid to broker-dealers, will be set forth in an accompanying
Prospectus Supplement.
Pursuant to the Registration Rights Agreement, the Company has agreed to
pay all expenses incident to the offer and sale of the Notes and Conversion
Shares offered by the Selling Securityholders hereby, except that the Selling
Securityholders will pay all underwriting discounts and selling commissions, if
any. The Company has agreed to indemnify the Selling Securityholders against
certain liabilities, including liabilities under the Securities Act, and to
contribute to payments the Selling Securityholders may be required to make in
respect thereof.
To comply with the securities laws of certain jurisdictions, if
applicable, the Notes and Conversion Shares offered hereby will be offered or
sold in such jurisdictions only through registered or licensed brokers or
dealers.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Notes or the Conversion Shares may be
limited in its ability to engage in market activities with respect to such Notes
or Conversion Shares. In addition and without limiting the foregoing, each
Selling Securityholder will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, which provisions may limit the
timing of purchase and sales of any of the Notes and Conversion Shares by the
Selling Securityholders. The foregoing may affect the marketability of the Notes
and the Conversion Shares.
24
<PAGE>
From time to time, Lehman Brothers Inc. or its affiliates have provided,
and may continue to provide, investment banking services to the Company, for
which they received or will receive customary fees. See "Selling
Securityholders."
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro
LLP, Menlo Park and San Francisco, California. A member of Pillsbury Madison &
Sutro LLP holds an option to purchase 16,000 shares of Common Stock.
EXPERTS
The consolidated financial statements and related financial statement
schedules incorporated in this Prospectus by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports, which
are incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
25
<PAGE>
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No person has been authorized to
give any information or to make any
representations other than those
contained in this Prospectus, and,
if given or made, such information
and representations must not be
relied upon as having been
authorized by the Company. This
Prospectus does not constitute an S3 INCORPORATED
offer to sell or a solicitation of
any offer to buy the securities
described herein by anyone in any
jurisdiction in which such offer or
solicitation is not authorized, or $103,500,000
in which the person making the 5 3/4% Convertible Subordinated Notes
offer or solicitation is not due 2003
qualified to do so, or to any and
person to whom it is unlawful to Shares of Common Stock
make such offer or solicitation. Issuable upon Conversion Thereof
Under no circumstances shall the
delivery of this Prospectus or any
sale made pursuant to this
Prospectus create any implication
that the information contained in
this Prospectus is correct as of
any time subsequent to the date of
this Prospectus.
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PROSPECTUS
----------------
TABLE OF CONTENTS
Page
Available Information............2
Incorporation of Certain
Documents by Reference.........2
The Company......................3
Risk Factors.....................3
Use of Proceeds.................11
Ratio of Earnings to
Fixed Charges.................11
Selling Securityholders.........11
Description of the Notes........14
Plan of Distribution............23
Legal Matters...................24
Experts.........................24 April 18, 1997
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