<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [x]
Filed by Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
S3 Incorporated
- -------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
\ 0-11.
(1) Title of each class of securities to which transaction applies:
- -------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
- -------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- -------------------------------------------------------------------------------
(5) Total fee paid:
- -------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- -------------------------------------------------------------------------------
(3) Filing Party:
- -------------------------------------------------------------------------------
(4) Date Filed:
- -------------------------------------------------------------------------------
<PAGE>
[Company Logo]
S3 INCORPORATED
2841 Mission College Boulevard
Santa Clara, CA 95054
(408) 588-8000
April 12, 1999
Dear Stockholder:
I am pleased to invite you to S3 Incorporated's Annual Meeting of
Stockholders. The meeting will be held at 9:00 a.m. on Monday, May 17, 1999,
at Techmart, 5201 Great America Parkway, Santa Clara, California.
The formal notice of the Annual Meeting and the Proxy Statement have
been made a part of this invitation.
After reading the Proxy Statement, please mark, date, sign and return,
at an early date, the enclosed proxy in the prepaid envelope addressed to Boston
EquiServe, our agent, to ensure that your shares will be represented. Your
shares cannot be voted unless you sign, date and return the enclosed proxy or
attend the annual meeting in person. Your vote is important, so please return
your proxy promptly.
A copy of the Company's 1998 Annual Report to Stockholders is also
enclosed.
The Board of Directors and management look forward to seeing you at the
meeting.
Sincerely,
/s/ Kenneth F. Potashner
Kenneth F. Potashner
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
S3 INCORPORATED
------------
Notice Of Annual Meeting Of Stockholders
To Be Held May 17, 1999
------------
To the Stockholders of S3 Incorporated:
S3 Incorporated will hold its Annual Meeting of Stockholders at 9:00
a.m. on Monday, May 17, 1999, at Techmart, 5201 Great America Parkway, Santa
Clara, California.
We are holding this meeting:
o to elect six directors;
o to ratify the appointment of Ernst & Young LLP as our independent
auditors;
o to amend certain provisions of our 1989 Stock Plan to secure the
availability of Incentive Stock Option tax treatment for shares
that have been previously authorized under the Plan, without
increasing the number of shares authorized under the Plan, and to
extend the term of the Plan; and
o to transact such other business as may properly come before the
Annual Meeting and any adjournment of the Annual Meeting.
Your Board of Directors has selected March 31, 1999 as the record date
for determining stockholders entitled to vote at the meeting. A complete list of
stockholders entitled to vote will be available at the Secretary's office, 2841
Mission College Boulevard, Santa Clara, California, for ten days before the
meeting.
It is important that your shares are represented at this meeting. Even
if you plan to attend the meeting, we hope that you will promptly mark, sign,
date and return the enclosed proxy. This will not limit your rights to attend or
vote at the meeting.
By Order of the Board of Directors
/s/ Ronald T. Yara
Ronald T. Yara
Secretary
Santa Clara, California
April 12, 1999
<PAGE>
S3 INCORPORATED
------------
PROXY STATEMENT
------------
Information Concerning Solicitation And Voting
This Proxy Statement is being furnished to you in connection with the
solicitation by the Board of Directors of S3 Incorporated, a Delaware
corporation (the "Company"), of proxies in the accompanying form to be used at
the Annual Meeting of Stockholders to be held at Techmart, 5201 Great America
Parkway, Santa Clara, California, at 9:00 a.m. California time on Monday, May
17, 1999 and any adjournment thereof (the "Annual Meeting"). You may vote your
shares at the Annual Meeting either in person or by proxy. To vote by proxy, you
should mark, date, sign and mail the enclosed proxy in the prepaid envelope.
Giving a proxy will not affect your right to vote your shares if you attend the
Annual Meeting and want to vote in person. By voting in person, you
automatically revoke your proxy. You also may revoke your proxy at any time
before the voting by giving the Secretary written notice of your revocation or
by submitting a later-dated proxy. If you return your proxy but do not mark your
voting preference, the individuals named as proxies will vote your shares FOR
the election of the nominees for director, FOR the ratification of the selection
of independent auditors and FOR the proposed amendments to the 1989 Stock Plan.
Only those who owned the Company's Common Stock at the close of
business on March 31, 1999, the record date for the Annual Meeting, can vote. As
of the close of business on such date, the Company had 52,102,897 shares of
Common Stock outstanding and entitled to vote. The presence in person or by
proxy of the holders of a majority of the Company's outstanding shares
constitutes a quorum for the transaction of business at the Annual Meeting. Each
holder of Common Stock is entitled to one vote for each share held as of the
record date.
Directors are elected by a plurality vote. Accordingly, the six
nominees for director who receive the most votes cast in their favor will be
elected. The other matters submitted for stockholder approval will be decided by
the affirmative vote of a majority of shares present in person or represented by
proxy and entitled to vote on each such matter. Abstentions with respect to any
matter are treated as shares present or represented and entitled to vote on that
matter and thus have the same effect as a vote against such matter. If a broker
who is the record holder of certain shares indicates on a proxy that he or she
does not have discretionary authority to vote on a particular matter as to such
shares, or if shares are not voted in other circumstances in which proxy
authority is defective or has been withheld with respect to any matter, these
non-voted shares will be counted for quorum purposes but are not deemed to be
present or represented for purposes of determining whether stockholder approval
of a particular matter has been obtained.
The Company will pay the cost of printing and mailing proxy materials.
In addition to the solicitation of proxies by mail, solicitation may be made by
certain directors, officers and other employees of the Company by personal
interview, telephone or facsimile. No additional compensation will be paid to
such persons for such solicitation. The Company will reimburse brokerage firms
and others for their reasonable expenses in forwarding solicitation materials to
beneficial owners of the Company's Common Stock. The Company has retained Morrow
& Co. to assist in the solicitation of proxies at a cost of approximately
$2,500.
This Proxy Statement and the accompanying form of proxy are being
mailed to stockholders on or about April 14, 1999.
-1-
<PAGE>
IMPORTANT
Please mark, sign and date the enclosed proxy and return it at your
earliest convenience in the enclosed postage-prepaid return envelope so
that, whether you intend to be present at the Annual Meeting or not,
your shares can be voted. This will not limit your rights to attend or
vote at the Annual Meeting.
-2-
<PAGE>
Proposal 1 - Election Of Directors
Directors and Nominees
Since last year's annual meeting of stockholders, the Board of
Directors has adopted a resolution increasing the number of authorized directors
from five to six directors. Accordingly, six directors of the Company will be
elected at the Annual Meeting for a term of one year. Directors are elected to
serve until the next annual meeting of stockholders and until their successors
are elected and qualified. If any nominee is unable or declines to serve as
director at the time of the Annual Meeting, an event not now anticipated,
proxies will be voted for any nominee designated by the Board of Directors to
fill the vacancy. Nominations for the Board of Directors may be made by
stockholders of the Company following the procedures set forth in the Bylaws no
later than the seventh day following the day notice of the Annual Meeting was
mailed.
Names of the nominees and certain biographical information about them
are set forth below:
Mr. Kenneth F. Potashner, age 41, joined the Company on October 30,
1998 and was elected Chairman of the Board on November 2, 1998. Mr. Potashner
also serves as the Chief Executive Officer and President of the Company.
Mr. Potashner has been a director of Maxwell Technologies, Inc. since April
1996 and became Chairman of the Board of Maxwell Technologies in April 1997.
From the time he joined Maxwell Technologies in April 1996 until October 1998,
Mr. Potashner served as the President, Chief Executive Officer and Chief
Operating Officer. From 1991 through 1994, Mr. Potashner was Vice President,
Product Engineering, for Quantum Corporation. From 1994 to April of 1996, he
served as Executive Vice President, Operations for Conner Peripherals, Inc.
Mr. Terry N. Holdt, age 55, has served as Vice Chairman of the Board
since November 2, 1998 and previously served as Chairman of the Board from
December 1997 to November 1998, and as a director since January 1992. Mr. Holdt
also served as Chief Executive Officer and President of the Company from
December 1997 to October 1998. Mr. Holdt served as Vice Chairman of the Board
from August 1996 to December 1997, and from January 1992 to August 1996, served
as President and Chief Executive Officer of the Company. Mr. Holdt was Chairman
of the Board of Paradigm Technology, Inc., a semiconductor company, from June
1991 to January 1992 and was its President and Chief Executive Officer from June
1988 to May 1991. From September 1986 to June 1988, Mr. Holdt held various
executive positions at Linear Corporation, a manufacturer of electronic
telemetry systems, where he was most recently President. From 1981 to 1985, he
held various executive positions at Western Digital Corporation, a manufacturer
of computer peripherals, where he was most recently Executive Vice President and
Chief Operating Officer. Mr. Holdt holds a B.S.E.E. and an M.S.E.E. from the
University of Illinois. Mr. Holdt is also a member of the Board of Directors of
SenDEC Corporation, Maxoptix Corporation, Tropian Corp., Entridia Corp. and ISE
Labs, Inc.
Mr. John C. Colligan, age 44, has been a director of the Company since
March 1993. Since March 1998, Mr. Colligan has been a partner with Accel
Partners, a venture capital firm in Palo Alto, California. From November 1996
until August 1998, Mr. Colligan served as Chairman of Macromedia, Inc., a
multimedia software company. From January 1993 until November 1996, Mr. Colligan
served as Chief Executive Officer of Macromedia, and from April 1992 to January
1993, was President and Chief Operating Officer of Macromedia. From January 1989
to March 1992, Mr. Colligan was President and Chief Executive Officer of
Authorware, a multimedia software
-3-
<PAGE>
company that merged with Macromind Paracomp to form Macromedia in March 1992.
He also held various positions with Apple Computer, Inc. from May 1983 to
December 1988. Mr. Colligan is presently a director of C|NET, Inc. He holds
a B.S. in International Economics from Georgetown University and an M.B.A.
from the Stanford Graduate School of Business.
Dr. Robert P. Lee, age 46, has been a director of the Company since
April 1994. Since February 1999, Mr. Lee has served as President and Chief
Executive Officer of Inxight Software, Inc., a Xerox New Enterprise Company.
From July 1997 to April 1998, Mr. Lee served as President and Chief Executive
Officer of Formulab Neuronetics Corporation, a computer technology company. From
March to May 1997, he served as Vice Chairman of Insignia Solutions plc, which
provides Windows compatibility software for personal computers and workstations.
From April 1995 to March 1997, Dr. Lee served as Chairman of Insignia Solutions,
and from December 1993 to March 1997, he served as President and Chief Executive
Officer of Insignia Solutions. From June 1990 to August 1992, Dr. Lee was
Executive Vice President at Symantec Corporation, and from April 1988 to June
1990, he served as Senior Vice President at Shared Medical Systems, a supplier
of software and computer services to the healthcare industry. Prior to April
1988, he worked at IBM for 11 years in technical and business management
positions. Dr. Lee holds a B.A. in computer science from the University of
California at Berkeley and an M.S. and a Ph.D. in computer science from the
University of California at Los Angeles.
Dr. Carmelo J. Santoro, age 56, has been a director of the Company
since May 1992. He was the Chairman of the Board of Silicon Systems, Inc. from
1984 to 1995, and served as President and Chief Executive Officer of Silicon
Systems, Inc. from 1982 through 1991. Dr. Santoro is currently a director of
Dallas Semiconductor Corporation and Techniclone Corporation. He holds a B.S.
in Science, Physics from Manhattan College and a Ph.D. in Solid State Physics
from Rensselaer Polytechnic Institute.
Mr. Ronald T. Yara, age 52, co-founded the Company and has served as a
director of the Company since July 1995. Mr. Yara served as a Senior Vice
President of the Company through December 31, 1998, and is currently Secretary
of the Company. From September 1996 to April 1997, Mr. Yara also served as
Senior Vice President of Corporate Marketing. From the inception of the Company
in 1989 until December 1993, he served as Vice President, Marketing. From
December 1984 to December 1989, Mr. Yara held various positions at Chips &
Technologies, Inc., a semiconductor company he co-founded, most recently as Vice
President of Business Development. From February 1975 to 1984, Mr. Yara served
in various positions at Intel Corporation, most recently as Product Marketing
Manager of Communication Products. He earned a B.S.E.E. from Purdue University
and an M.S.E.E. from the University of Santa Clara.
The Board of Directors recommends a vote FOR the election of
------------------------------------------------------------
Mr. Kenneth F. Potashner, Mr. Terry N. Holdt, Mr. John C. Colligan,
- -------------------------------------------------------------------
Dr. Robert P. Lee, Dr. Carmelo J. Santoro and Mr. Ronald T. Yara as directors
- -----------------------------------------------------------------------------
of the Company.
- --------------
Board Meetings and Committees
The Board of Directors held 16 meetings during the year ended December
31, 1998. During that period, each director attended at least 75% of the
aggregate number of meetings of the Board of Directors and of the committees on
which such director serves held during the period for which he has been a
director.
-4-
<PAGE>
The Board of Directors has appointed a Compensation Committee and an
Audit Committee. The Compensation Committee and Audit Committee are comprised
entirely of independent directors. The Board of Directors has not appointed a
standing nominating committee.
The members of the Compensation Committee during 1998 were John C.
Colligan, Robert P. Lee and Carmelo J. Santoro. The Compensation Committee held
two meetings during 1998. The Compensation Committee's functions are to assist
in the administration of, and the grant of options under, the 1989 Stock Plan
and to assist in the implementation of, and provide recommendations with respect
to, general and specific compensation policies and practices of the Company.
The members of the Audit Committee during 1998 were John C. Colligan,
Robert P. Lee and Carmelo J. Santoro. The Audit Committee held 4 meetings during
1998. The Audit Committee's functions are to review the scope of the annual
audit, monitor the independent auditor's relationship with the Company, advise
and assist the Board of Directors in evaluating the auditor's examination,
supervise the Company's financial and accounting organization and financial
reporting, and nominate for stockholder approval at the annual meeting, with the
approval of the Board of Directors, a firm of certified public accountants whose
duty it is to audit the financial records of the Company for the fiscal year for
which it is appointed.
Directors' Compensation
Employee directors (presently consisting of Messrs. Potashner, Holdt
and Yara) receive no additional compensation for service on the Board of
Directors, except that Mr. Yara is entitled to receive an option to purchase
20,000 shares of Common Stock at each regular annual meeting of the Company's
stockholders at which he is re-elected as a director. See "Executive
Compensation --- Employment Agreements" for a full description of the
compensation arrangements with Mr. Yara. Non-employee directors of the Company
(presently consisting of Messrs. Colligan, Lee and Santoro) receive an annual
retainer fee of $24,000, plus $1,000 for each Board meeting attended. Non-
employee directors and Mr. Yara are reimbursed for their expenses for each
meeting attended.
Under the terms of the Company's 1989 Stock Plan, upon appointment to
the Board, each non-employee director receives an option to purchase 40,000
shares of Common Stock at an exercise price of 100% of the fair market value of
the stock on the date of grant, which option vests ratably over the next four
anniversary dates of the date of grant. In addition, following each annual
meeting of the Company's stockholders, each non-employee director who will
continue to serve as a member of the Board will automatically receive an option
to purchase 20,000 shares of Common Stock at an exercise price of 100% of the
fair market value of the stock on the date of grant, which option vests ratably
over the next four anniversary dates of the date of grant. See "Executive
Compensation -- Employment Agreements" for a description of the compensation
arrangements with Messrs. Potashner and Holdt (officers of the Company, who are
also directors).
In December 1998, each non-employee director who was serving as such on
December 14, 1998 (consisting of Messrs. Colligan, Lee and Santoro) was granted
an option to purchase 100,000 shares of Common Stock (the "100,000 Share
Option"). Such option grants were in lieu of the options that such directors
would otherwise have been granted before the 2005 annual meeting of the
Company's stockholders as described in the immediately preceding paragraph. Each
100,000 Share Option shall vest according to the following schedule: 20,000
shares vest and become exercisable at the rate of 25% upon each one year
anniversary of the regular annual meeting of the Company's stockholders
occurring in calendar year 1999; 20,000 shares vest and become exercisable at
the rate of 25% upon each one year anniversary of the regular annual meeting of
the Company's stockholders
-5-
<PAGE>
occurring in calendar year 2000; 20,000 shares vest and become exercisable at
the rate of 25% upon each one year anniversary of the regular annual meeting of
the Company's stockholders occurring in calendar year 2001; 20,000 shares vest
and become exercisable at the rate of 25% upon each one year anniversary of the
regular annual meeting of the Company's stockholders occurring in calendar year
2002; and 20,000 shares vest and become exercisable at the rate of 25% upon each
one year anniversary of the regular annual meeting of the Company's stockholders
occurring in calendar year 2003. No shares shall vest for any non-employee
director after that director has stopped serving on the Board. All options
granted to a non-employee director as described in this paragraph or the
immediately preceding paragraph shall become exercisable in full in the event of
the termination of such director's service because of death or total and
permanent disability or upon a change in control of the Company.
-6-
<PAGE>
Security Ownership Of
Certain Beneficial Owners And Management
The following table sets forth certain information as of March 1, 1999,
as to shares of the Company's Common Stock beneficially owned by: (i) each of
the Company's executive officers, (ii) each of the Company's directors, (iii)
all directors and executive officers of the Company as a group, and (iv) each
person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock.
<TABLE>
<CAPTION>
Shares Percentage
Beneficially Beneficially
Owned(1) Owned(1)(2)
------------ ------------
<S> <C> <C>
Kenneth F. Potashner(3) ........................................... 1,520,000 2.8%
Terry N. Holdt(3).................................................. 913,153 1.7
John C. Colligan(3)................................................ 45,000 *
Robert P. Lee(3)................................................... 60,000 *
Carmelo J. Santoro(3).............................................. 48,536 *
Ronald T. Yara(3).................................................. 450,448 *
Walter D. Amaral(3)................................................ 128,581 *
Paul G. Franklin(3)................................................ 135,464 *
Daniel A. Karr(3) ................................................. 55,381 *
All directors and executive officers
as a group (9 persons)........................................... 3,356,563 6.1
State of Wisconsin Investment Board(4)............................. 4,165,000 8.0
P.O. Box 7842
Madison, WI 53707
- ------------------------
<FN>
* Amount represents less than 1% of the Company's Common Stock.
(1) To the Company's knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable and the information contained in the footnotes to this
table.
(2) For purposes of computing the percentage of outstanding shares held by
each person or group of persons named above on a given date, shares
which such person or group has the right to acquire within 60 days
after such date are deemed to be outstanding, but are not deemed to be
outstanding for the purposes of computing the percentage ownership of
any other person.
(3) Includes shares issuable upon exercise of options within 60 days of
March 1, 1999 as follows: Walter D. Amaral, 128,581; John C. Colligan,
45,000; Paul G. Franklin, 126,066; Terry N. Holdt, 682,493; Daniel A.
Karr, 53,920; Robert P. Lee, 60,000; Kenneth F. Potashner, 1,500,000;
Carmelo J. Santoro, 48,536; and Ronald T. Yara, 217,712.
-7-
<PAGE>
(4) According to the Schedule 13G (Amendment No. 1), dated January 16,
1999, filed by the State of Wisconsin Investment Board, the State of
Wisconsin Investment Board has sole voting power and sole dispositive
power with respect to all shares listed in the table.
</FN>
</TABLE>
-8-
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth compensation for services rendered in
all capacities to the Company for the three fiscal years ended December 31, 1998
of (i) the Company's Chief Executive Officer as of December 31, 1998, (ii) the
Company's four other most highly compensated executive officers as of December
31, 1998 and (iii) the Company's former Chief Executive Officer, who was no
longer serving as such as of December 31, 1998 (the "Named Officers").
<TABLE>
<CAPTION>
Long-Term
Compensation
------------------------
Awards
Annual Compensation ------------------------
Name and ------------------- Securities Underlying
Principal Position Year Salary($) Bonus($) Options(#)
- ------------------ ---- ----------------------- ------------------------
<S> <C> <C> <C> <C>
Kenneth F. Potashner(1) 1998 69,231 0 4,500,000
Chairman, President and
Chief Executive Officer
Terry N. Holdt (2) 1998 456,338 0 500,000
Vice Chairman 1997 166,212 0 20,000
1996 258,840 97,333 35,000
Walter D. Amaral(3) 1998 250,001 0 30,000
Senior Vice President 1997 80,770 41,666 640,000
and Chief Financial Officer
Paul G. Franklin 1998 259,210 0 130,000
Senior Vice President 1997 236,479 75,000 219,631
of Operations 1996 169,982 78,197 90,000
Daniel A. Karr 1998 240,308 0 50,000
Vice President of 1997 226,340 21,000 181,225
Sales 1996 123,077 3,750 2,500
Ronald T. Yara 1998 182,462 0 0
Senior Vice President 1997 215,200 0 50,000
and Secretary 1996 113,723 80,000 35,000
- --------------------
<FN>
(1) Mr. Potashner joined the Company as President and Chief Executive Officer in October 1998 and was elected
Chairman of the Board in November 1998. He currently earns a base salary of $500,000 per year. See
"Executive Compensation --- Employment Agreements."
(2) Mr. Holdt served as President and Chief Executive Officer until October 1998 and as Chairman of the Board until
November 1998. He currently serves as Vice Chairman of the Board.
(3) Mr. Amaral joined the Company in August 1997 as Senior Vice President and Chief Financial Officer.
</FN>
</TABLE>
-9-
<PAGE>
Stock Options
The following tables summarize option grants to, and exercises by, the
Named Officers during fiscal 1998, and the value of the options held by each
such person at the end of fiscal 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(4)
------------------------------------------------------------ -------------------------
Number of % of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted(1) Fiscal Year ($/Sh)(2) Date(3) 5%($) 10%($)
- ---- ---------- ------------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kenneth F. Potashner 1,500,000(5) 16.32 3.16 10/30/01 746,256 1,567,078
3,000,000(6) 32.65 3.16 10/30/08 5,954,846 15,090,749
Terry N. Holdt 500,000 5.44 5.44 1/2/08 1,709,807 4,332,987
Walter D. Amaral 30,000 .33 4.38 11/20/08 82,542 209,179
Paul G. Franklin 100,000 1.09 5.44 1/2/08 341,961 866,597
30,000 .33 4.38 11/20/08 82,542 209,179
Daniel A. Karr 30,000 .33 4.38 11/20/08 82,542 209,179
20,000 .22 5.44 1/2/08 68,392 173,319
Ronald T. Yara 0 0 n/a n/a 0 0
- ------------
<FN>
(1) Unless otherwise noted, options vest ratably on a daily basis over a
four-year period commencing on the date of grant and become exercisable as
to vested options beginning six months from the date of grant.
(2) The exercise price on the date of grant was equal to 100% of the fair
market value on the date of grant.
(3) Unless otherwise noted, the options have a term of 10 years, subject to
earlier termination in certain events related to termination of employment.
(4) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.
(5) These options vest upon the earlier of (i) April 30, 1999, (ii) a change in
control of the Company, (iii) the termination of the Potashner Employment
Agreement without cause or (iv) the termination of the Potashner Employment
Agreement following the occurrence of, among other things, a diminution in
Mr. Potashner's duties or a reduction in Mr. Potashner's compensation. See
"Executive Compensation --- Employment Agreements."
(6) These options vest over a four-year period in accordance with the following
schedule: 750,000 shares shall vest on the first anniversary of Mr.
Potashner's employment with the Company; thereafter, the options shall vest
in equal monthly installments of 62,500 shares. See "Executive Compensation
--- Employment Agreements."
</FN>
</TABLE>
-10-
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Securities Underlying Value of
Unexercised Unexercised
Options at In-the-Money Options at
December 31, 1998(#) December 31, 1998($)(2)
------------------------- ------------------------
Shares Acquired Value
Name on Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ------------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth F. Potashner 0 0 0 4,500,000 0 18,914,063
Terry N. Holdt 0 0 676,876 28,124 1,204,890 5,266
Walter D. Amaral 0 0 102,289 247,711 228,552 575,979
Daniel A. Karr 0 0 45,552 105,673 100,221 253,922
Paul G. Franklin 0 0 109,897 164,687 253,846 367,017
Ronald T. Yara 0 0 210,727 37,609 657,357 0
- ------------
<FN>
(1) Calculated on the basis of the fair market value of the underlying securities at the exercise date minus the exercise
price.
(2) Calculated on the basis of the fair market value of the underlying securities at December 31, 1998 ($7.36 per share)
minus the exercise price.
</FN>
</TABLE>
-11-
<PAGE>
Pension and Long-Term Incentive Plans
The Company has no pension or long-term incentive plans.
Employment Agreements
In October 1998, the Company entered into an agreement with Kenneth F.
Potashner (the "Potashner Employment Agreement"), pursuant to which Mr.
Potashner is employed as the President, Chief Executive Officer and Chairman of
the Board at a base salary of $500,000 per year. The agreement has a three year
term. Mr. Potashner is eligible to receive an annual cash bonus of up to 200% of
his base salary, with the cash bonus payable after the first year of the
Potashner Employment Agreement guaranteed to be at least $250,000. Mr. Potashner
also received two options to purchase an aggregate of 4,500,000 shares of Common
Stock of the Company. One option for 1,500,000 shares (the "1,500,000 Share
Option") vests upon the earliest of (i) six months from the date Mr. Potashner
was hired by the Company, (ii) a change in control of the Company, (iii) the
termination of Mr. Potashner's employment without cause or (iv) the termination
of Mr. Potashner's employment following the occurrence of, among other things, a
diminution in Mr. Potashner's duties or a reduction in Mr. Potashner's
compensation, each of which is deemed a "constructive termination" and treated
similarly to a termination without cause. The second option for 3,000,000 shares
(the "3,000,000 Share Option") vest over a four-period in accordance with the
following schedule: 750,000 shares shall vest on the first anniversary of Mr.
Potashner's employment with the Company; thereafter, the options shall vest in
equal monthly installments of 62,500 shares. In addition, Mr. Potashner is
eligible for a one-time "special cash bonus" on the third anniversary of the
date of his employment in the event that the Company's Common Stock has not
achieved a $4.67 per share increase in value as determined from the date of Mr.
Potashner's employment. The one-time special cash bonus, if payable, will be
equal to $7,000,000 less an amount which adjusts for any increase in the share
price of the Company's Common Stock above the exercise price per share of the
1,500,000 Share Option. Such one-time special cash bonus may also be payable in
the event Mr. Potashner's employment is terminated without cause. The Potashner
Employment Agreement also provides that, in the event that Mr. Potashner's
employment is terminated without cause, the special cash bonus described above
shall be calculated and paid as of the date of Mr. Potashner's termination, and
the Company will continue to pay Mr. Potashner his salary and maximum bonus for
twelve months following his termination. During such twelve-month period, Mr.
Potashner's employee benefits and the vesting on the 3,000,000 Share Option will
continue. If termination without cause occurs following a change in control of
the Company, the twelve-month period for compensation and benefit continuation
will be extended to eighteen months, and Mr. Potashner will receive an
additional cash payment to the extent that the sum of his continued
compensation, special cash payment and the net exercise value of the 3,000,000
Share Option does not exceed $10,000,000. In addition, if the post-change in
control termination occurs after October 31, 2000, the 3,000,000 Share Option
will be vested as to any shares that cannot vest during the eighteen-month
period.
In November 1998, the Company entered into an agreement with Ronald T.
Yara, pursuant to which the Company agreed to pay Mr. Yara a salary of not less
than $2,000 per month for services to be performed by Mr. Yara from his
residence. Such salary may be increased by the Board but may not be decreased
without Mr. Yara's consent. The Company also agreed to pay Mr. Yara certain
additional amounts in the event that his duties require him to perform services
away from his residence or in excess of 20 hours in any month. The agreement
also provides that Mr. Yara shall receive an option to purchase 20,000 shares of
Common Stock of the Company at each regular annual meeting of the Company's
stockholders at which he is re-elected as a director. Each such option shall
vest and become exercisable at the rate of 25% on each one year anniversary of
the date of grant. The agreement may be terminated by either Mr. Yara or the
Company at any time with or without cause.
In December 1997, the Company entered into an agreement with Terry N.
Holdt, pursuant to which Mr. Holdt was employed as the President, Chief
Executive Officer and Chairman of the Board at a salary of approximately $42,000
per month, which amount may be increased but not decreased. Mr. Holdt continued
in his capacity as President, Chief Executive Officer and Chairman of the Board
until Mr. Potashner assumed these positions in October 1998. At that time, Mr.
Holdt became Vice Chairman of the Company and currently receives a salary of
$2,000 per month or, in the event the time he spends on company business exceeds
20 hours a month, $3,000 per single day, $5,000 for a consecutive two-day period
and $10,000 per week of continuous service.
-12-
<PAGE>
Pursuant to the agreement, in January 1998 Mr. Holdt received a non-qualified
stock option of 500,000 shares with a vesting period of one year and
participation in the Executive Bonus Plan. In addition, in his capacity as Vice
Chairman, Mr. Holdt is entitled under the agreement to receive a non-qualified
stock option of 20,000 shares at each regular annual meeting of the Company's
stockholders at which he is re-elected as a director, which option shall vest
and become exercisable at the rate of 25% on each one year anniversary of the
date of grant. The agreement may be terminated by either Mr. Holdt or the
Company at any time with or without cause.
In September 1998, the Company entered into an Involuntary Termination
Agreement with each of Messrs. Amaral, Karr and Franklin which provides for a
severance payment by the Company to each of those individuals in the event that
they are involuntarily terminated other than for cause. Each severance payment
would be paid in a lump sum amount equal to six months of the individual's base
salary plus one month of base salary for every full year of that individual's
service to the Company. In addition, each Involuntary Termination Agreement
provides that the term for exercise of any outstanding options will be extended
until six months after the date of termination (although vesting shall cease as
of that date).
-13-
<PAGE>
Report Of The Compensation Committee
Of The Board Of Directors On Executive Compensation
The Company's compensation programs and policies applicable to its
executive officers are administered by the Compensation Committee of the Board
of Directors. The Compensation Committee is made up entirely of non-employee
directors. It is the philosophy of the Company that executive compensation be
directly linked to the interests of the Company's stockholders and therefore to
financial objectives that the Company believes are primary determinants of
long-term stockholder value. The compensation policies of the Company are
designed to set its executive compensation, including salary and short-term and
long-term incentive programs, at a level consistent with amounts paid to
executive officers of companies of similar size and marketplace orientation.
It is the Company's policy generally to qualify compensation paid to
executive officers for deductibility under section 162(m) of the Internal
Revenue Code. Section 162(m) generally prohibits the Company from deducting the
compensation of executive officers that exceeds $1,000,000 unless that
compensation is based on the satisfaction of objective performance goals. The
Company's 1989 Stock Option Plan and the Executive Bonus Plan are structured to
permit awards under such plans to qualify as performance-based compensation and
to maximize the tax deductibility of such awards. However, the Company reserves
the discretion to pay compensation to its executive officers that may not be
deductible and, in the case of Mr. Potashner's options, has determined that such
options shall not qualify as performance-based compensation.
In October 1998, Mr. Kenneth F. Potashner joined the Company as
President and Chief Executive Officer. In November 1998, he was elected Chairman
of the Board. Simultaneously, Mr. Terry N. Holdt resigned his positions as
Chairman of the Board, Chief Executive Officer and President of the Company. Mr.
Holdt then became the Vice Chairman of the Board of Directors.
There are four primary components of executive compensation:
Base Salary, Bonus, Employee Profit Sharing Plan and Stock Options.
Base Salary
Base salaries for fiscal 1998 reported herein were determined by the
Compensation Committee. The Compensation Committee reviews salaries recommended
by the Chief Executive Officer for executive officers other than the Chief
Executive Officer. In conducting its review, the Compensation Committee takes
into consideration the overall performance of the Company, the Chief Executive
Officer's evaluation of individual executive officer performance and independent
compensation surveys such as the Radford Survey for Fabless Semiconductor
Companies in the $500 million revenue range. Final decisions on base salary
adjustments for executives other than the Chief Executive Officer are made with
the Chief Executive Officer's involvement. The Compensation Committee
independently determines the base salary for the Chief Executive Officer by: (a)
examining the Company's performance against its preset goals, (b) examining the
Company's performance within the semiconductor industry, (c) evaluating the
overall performance of the Chief Executive Officer and (d) comparing the base
salary of the Chief Executive Officer to that of other chief executive officers
in the semiconductor, computer graphics and personal computer software
industries. In 1998, Mr. Holdt was paid a base salary of $456,338 in his
capacity as President and Chief Executive Officer through November 2, 1998. In
1998, Mr. Potashner was paid a total salary of $69,231 in his capacity as
President and Chief Executive Officer, which represents the pro rata portion of
his $500,000 annual base salary from the date he commenced his employment with
the Company to the end of 1998.
Bonuses
The Executive Bonus Plan is a cash-based incentive bonus program
providing for the payment to each named executive officer of cash bonuses that
are directly related to the earnings per share (EPS), profitability and gross
revenues of the Company. No bonuses were paid in 1998 as the Company did not
meet the EPS, profitability and revenue performance goals set for 1998.
-14-
<PAGE>
Employee Profit Sharing Plan
The Employee Profit Sharing Plan is a nonqualified current cash profit
sharing plan under which all employees of the Company, including officers, are
eligible to receive, on an annual basis, an equal amount of pre-tax profits,
prorated for service with the Company during 1998, as a cash bonus. For fiscal
1998, there were no payments under the plan.
Stock Options
The Compensation Committee grants options under the 1989 Stock Plan
with an exercise price equal to the fair market value on the date of grant. The
grants are intended to be competitive in order to retain and motivate key
executives and to provide a direct link with the interests of the stockholders
of the Company. The Compensation Committee, in making its determination as to
grant levels, takes into consideration: (i) prior award levels, (ii) award
levels necessary to replace particular executives, (iii) the total stock award
to be made and the executive's percentage participation in that award, (iv) the
executive's direct ownership of the Company's shares, (v) the number of options
vested and nonvested, and (vi) the options outstanding as a percentage of total
shares outstanding. The 1989 Stock Plan limits the total number of shares
subject to options that may be granted to a participant during any fiscal year
to 1,500,000 shares. That fiscal year limit was raised to 4,500,000 shares for
1998 only.
Stock Purchase Plan
The Company maintains a qualified employee stock purchase plan to
encourage employees to own Company stock, which is generally available to all
employees. This plan allows participants to buy Company stock at a discount to
market price with up to 10% of their salaries, not to exceed 2,000 shares, per
six month period. The number of shares that may be purchased by each participant
is limited by applicable tax laws.
Compensation of Chief Executive Officer
In October 1998, the Company entered into the Potashner Employment
Agreement with Kenneth F. Potashner, the Company's Chairman, President and
Chief Executive Officer. The terms of the Potashner Employment Agreement were
negotiated with and approved by the Compensation Committee and the Board of
Directors. See "Executive Compensation --- Employment Agreements."
The foregoing report has been furnished by the Compensation Committee
of the Board of Directors of S3 Incorporated:
Carmelo J. Santoro, Ph.D., Chairman
John C. Colligan
Robert P. Lee, Ph.D.
-15-
<PAGE>
Stock Price Performance Graph
The following graph compares the cumulative total stockholder return of
the Company's Common Stock with The Nasdaq Stock Market Index (U.S.) and The
Nasdaq Electronic Components Stock Index. The comparison assumes the investment
of $100 on December 31, 1993 (the last trading day before the beginning of the
Company's fifth preceding fiscal year) based on the closing price of the
Company's Common Stock on that date and that dividends were reinvested when
paid. The comparisons in the graph are required by the Securities and Exchange
Commission and are not intended to forecast or be indicative of possible future
performance of the Company's Common Stock.
Comparison of Cumulative Total Return Among S3 Incorporated,
The Nasdaq Stock Market Index (U.S.) and The Nasdaq
Electronic Components Stock Index
[Line graph appears below]
<TABLE>
<CAPTION>
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12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nasdaq U.S. 249.861 244.244 345.448 424.801 521.159 732.615
Nasdaq Electronic 372.156 411.197 681.024 1177.737 1234.605 1908.666 0.25
Component Index
S3 Incorporated 16.875 15.75 17.625 16.25 5 7.359375 0.3125
0.34375
S3 Incorporated 8.4375 7.875 17.625 16.25 5 7.359375 0.359375
0.375
Nasdaq U.S. $100 $98 $138 $170 $209 $293 0.390625
Nasdaq Electronic $100 $110 $183 $316 $332 $513 0.40625
Component Index
S3 Incorporated $100 $93 $209 $193 $59 $87 0.4375
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 1/0/00 1/0/00
Nasdaq U.S. $100 $98 $138 $170 $209 $293 $- $-
Nasdaq Electronic $100 $110 $183 $316 $332 $513 $- $-
Component Index
S3 Incorporated $100 $93 $209 $193 $59 $87 $- $-
</TABLE>
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<PAGE>
Proposal 2 - To Ratify The Appointment Of Independent Auditors
Upon the recommendation of the Audit Committee, the Board of Directors
has appointed the firm of Ernst & Young LLP ("Ernst & Young") as the Company's
independent auditors for the fiscal year ended December 31, 1999, subject to
ratification by the stockholders. Ernst & Young has audited the Company's
financial statements since April 13, 1998. Representatives of Ernst & Young are
expected to be present at the Company's Annual Meeting. They will have an
opportunity to make a statement, if they desire to do so, and will be available
to respond to appropriate questions.
On March 31, 1998, the Company informed Deloitte & Touche LLP
("Deloitte"), its former independent accountants, that effective immediately
they had been dismissed as the Company's principal independent accountants.
Representatives of Deloitte are not expected to be present at the Company's
Annual Meeting.
Deloitte's Report dated January 23, 1998 on the Company's financial
statements for the year ended December 31, 1997 did not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
The decision to dismiss was recommended by the Audit Committee, and
approved by the Board of Directors, of the Company.
During the Company's fiscal year ended December 31, 1997, and through
March 31, 1998, there were no disagreements with Deloitte on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Deloitte's satisfaction, would have
caused them to make reference to the subject matter of such disagreement in
connection with their Report on the financial statements for such periods,
except as follows: In connection with the audit of the Company's financial
statements for the year ended December 31, 1997, there was a disagreement
between Deloitte and the Company regarding the appropriate period in which to
recognize the gain on the sale of stock of an investee. Deloitte believed that
recognition of such gain should be deferred until the period in which the
exchange actually occurred (first quarter of 1998) while the Company initially
believed that recognition of such gain was appropriate in the period the
irrevocable contract was signed (fourth quarter of 1997). Recognition of the
gain was deferred as proposed by Deloitte. On January 21, 1998, Deloitte
discussed this disagreement with the Audit Committee of the Company. The Company
has authorized Deloitte to respond fully to the inquiries of the successor
accountant concerning the subject matter of such disagreement.
During the Company's fiscal years ended December 31, 1997 and 1998
there were no reportable events.
During the fiscal year ended December 31, 1997 and the subsequent
interim period to the date Ernst & Young was engaged, the Company did not
consult Ernst & Young regarding: (i) the application of accounting principles to
a specified transaction either completed or proposed; (ii) the type of audit
opinion that might be rendered on financial statements; or (iii) any matter that
was the subject of a disagreement.
The Board of Directors recommends a vote FOR ratification of Ernst &
--------------------------------------------------------------------
Young LLP as the Company's independent auditors.
- -----------------------------------------------
-17-
<PAGE>
Proposal 3 - To Amend Certain Provisions Of The 1989 Stock Plan To Secure The
Availability Of Incentive Stock Option Tax Treatment For Shares That Have Been
Previously Authorized Under The Plan And To Extend The Term Of The Plan
The 1989 Stock Plan was amended and restated effective December 14,
1998. The 1989 Stock Plan provides for the issuance of stock options or stock to
those employees, directors, independent contractors and advisors who are
selected by the Non-Insider Option Committee and the Compensation Committee of
the Board of Directors. There are approximately 425 individuals (other than
outside directors) eligible for awards of options or shares under the 1989 Stock
Plan. The fair market value of the Company's Common Stock subject to such awards
on March 1, 1999 was $8.19 per share.
As of January 1, 1999, 27,934,468 shares had been authorized for
issuance. The number of shares authorized for issuance is increased each January
1st by 3.25% of the number of shares of Common Stock outstanding at the prior
calendar year end. As of March 1, 1999, approximately 3,068,560 shares of the
authorized shares remained available for grant.
The Board of Directors has approved amendments to the 1989 Stock Plan.
The first amendment would secure the availability of incentive stock option tax
treatment for all options granted to employees under the 1989 Stock Plan,
including those options covering shares which will be added to the 1989 Stock
Plan in future years each January 1, up to a total of 36,000,000. The second
amendment would extend the term of the 1989 Stock Plan until December 13, 2008.
Stockholders are requested in this Proposal 3 to approve these two amendments.
Stockholders are not being requested to approve an increase in the overall
number of shares authorized for issuance under the Plan, but instead are only
being asked to approve amendments to the 1989 Stock Plan that would secure the
availability of Incentive Stock Option tax treatment for shares that have been
previously authorized under the Plan and extend the term of the Plan.
Summary of the 1989 Stock Plan
The following is a summary of the material features of the 1989 Stock
Plan and does not purport to be complete. Stockholders are urged to read the
1989 Stock Plan in its entirety. This summary is subject to and qualified in its
entirety by reference to the 1989 Stock Plan, a copy of which may be obtained by
contacting the Secretary of the Company. Alternatively, a copy of the 1989 Stock
Plan can be found at Exhibit 10.1 to the Company's Form 10-K for the fiscal year
ended December 31, 1998. Any capitalized terms which are used in this summary
description but not defined here or elsewhere in this Proxy Statement have the
meanings assigned to them in the 1989 Stock Plan.
Purpose. The purpose of the 1989 Stock Plan is to offer selected
employees, directors, independent contractors and advisers an opportunity to
acquire a proprietary interest in the success of the Company or to increase such
interest. The Plan is administered by the Non-Insider Option Committee and the
Compensation Committee of the Board. As of January 1, 1999, 27,934,468 shares
had been authorized for issuance. This number is increased each January 1st by
3.25% of the number of shares of Common Stock outstanding at the prior calendar
year end. Subject to stockholder approval of this Proposal 3, the number of
shares that may qualify for ISO tax treatment shall be increased to 36,000,000.
Options. The 1989 Stock Plan provides for the grant of NSOs and ISOs.
However, eligibility for the grant of ISOs is limited to common law employees,
and outside directors are eligible only for the formula option grants referenced
below. Options need not have identical terms with respect to each optionee.
Options shall have such terms and be exercisable in such manner and at such
times as the applicable Committee may determine. Each option must expire within
10 years from the grant date.
In no event will the exercise price for ISOs be less than 100% of the
fair market value of the stock on the date of grant. The exercise price of ISOs
granted an employee who owns 10% or more of the total combined voting power of
all classes of outstanding stock of the Company, its parent or any subsidiary of
the Company must equal at least 110% of the fair market value of the Common
Stock on the date of grant and the term of such an
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<PAGE>
ISO may not be greater than five years. The 1989 Stock Plan defines "fair market
value" as (i) the closing price of a share on the principal exchange which the
shares are trading, or (ii) if the shares are not traded on an exchange but are
quoted on the Nasdaq National Market or a successor quotation system, the
closing price or (iii) if the shares are not traded on an exchange or quoted on
the Nasdaq National Market or a successor quotation system, the fair market
value of a share, as determined by the Committee in good faith.
Upon exercise of an option, payment of the exercise price shall be made
in lawful money of the United States. If an option agreement so provides,
payment may be made by delivery of shares owned by the optionee at least 12
months or via an irrevocable direction to a securities broker to sell shares and
to deliver all or part of the sale proceeds to the Company. Each option shall be
transferable only by will or the law of descent and distribution and shall only
be exercisable by the optionee during his or her lifetime.
No person shall be granted options to purchase more than 1,500,000
shares in any fiscal year of the Company (4,500,000 shares for fiscal year
1998).
Each outside director (meaning each member of the Company's Board of
Directors who is not a common-law employee of the Company) is automatically
granted NSOs upon his or her appointment as an outside director and following
each annual meeting of the Company's stockholders, provided that certain grants
were made in 1998 in lieu of certain annual NSO grants to outside directors.
See "Director's Compensation."
Stock Awards. The terms of each award or sale of shares are determined
by the Committee. Such awards or sales may be subject to forfeiture, rights of
repurchase, rights of first refusal or other transfer restrictions, and may not
be transferred. A right to acquire shares shall automatically expire if not
exercised within 30 days after the grant of the right is communicated to the
offeree. The purchase price of any share may be paid in lawful money of the
United States or services previously rendered.
Amendment and Termination. The 1989 Stock Plan shall remain in effect
until December 13, 2008 or, if earlier, it is terminated by the Board. An
amendment of the 1989 Stock Plan shall be subject to the approval of the
stockholders of the Company only to the extent required by applicable laws,
regulations or rules. Rights and obligations under any option may not be
materially altered or impaired without the optionee's consent.
Federal Income Tax Consequences of Options. The following discussion of
the principal current federal income tax consequences of options granted under
the 1989 Stock Plan is intended to be a summary of applicable federal law. This
summary does not describe all federal tax consequences, nor does it describe
state, local or foreign tax consequences, which consequences may differ. Because
the federal income tax rules governing options are complex and subject to
change, optionees are advised to consult their tax advisors prior to exercise of
options or dispositions of stock acquired pursuant to option exercise.
ISOs and NSOs are treated differently for federal income tax purposes.
ISOs are intended to comply with the requirements of Section 422 of the Internal
Revenue Code. NSOs do not comply with such requirements. An employee is not
taxed on the grant or exercise of an ISO, except that the difference between the
exercise price and the fair market value of the shares on the exercise date will
be added to alternative minimum taxable income for purposes of the alternative
minimum tax. If an optionee holds the shares acquired upon exercise of an ISO
for at least two years following grant and at least one year following exercise,
the optionee's gain, if any, upon a subsequent disposition of such shares is
long-term capital gain. The measure of the gain is the difference between the
proceeds received on disposition and the optionee's basis in the shares (which
generally equals the exercise price). If an optionee disposes of stock acquired
pursuant to exercise of an ISO before satisfying the one- and two-year holding
periods described above, the optionee will recognize both ordinary income and
capital gain in the year of disposition. The amount of the ordinary income will
be the lesser of (i) the amount realized on disposition less the optionee's
adjusted basis in the stock (usually the option price) or (ii) the difference
between the fair market value of the stock on the exercise date and the option
price. The balance of the consideration received on such a disposition will be
long-term capital gain if the stock has been held for more than one year
following exercise of the ISO. The Company is not entitled to an income tax
deduction on the grant or exercise of an ISO or on the optionee's disposition of
the shares after satisfying the holding period requirement described above. If
the holding
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<PAGE>
periods are not satisfied, the Company will be entitled to a deduction in the
year the optionee disposes of the shares, in an amount equal to the ordinary
income recognized by the optionee, subject to the deduction limitation of
Internal Revenue Code Section 162(m) and the satisfaction of a reporting
obligation. An employee is not taxed on the grant of an NSO. On exercise,
however, the optionee recognizes ordinary income equal to the difference between
the option price and the value of the shares on the date of exercise. The
Company is entitled to an income tax deduction in the year of exercise in the
amount recognized by the optionee as ordinary income, subject to the deduction
limitation of Internal Revenue Code Section 162(m) and the satisfaction of a
reporting obligation. Any gain on subsequent disposition of the shares is
long-term capital gain if the shares are held for more than one year following
exercise. The Company does not receive a deduction for this gain.
Plan Benefits. The Committee has full discretion to determine the
number and amount of awards to be granted to Key Employees under the 1989 Stock
Plan. Therefore, the benefits and amounts that will be received by each of the
executive officers named in the Summary Compensation Table, the executive
officers as a group and all other key management employees under the 1989 Stock
Plan are not presently determinable. Details on stock options granted during the
last two years to the executive officers named in the Summary Compensation Table
are presented herein in the table entitled "Summary Compensation Table."
Stockholder Approval. Only stockholders of record on the books of the
Company at the close of business on March 31, 1999 are entitled to vote with
respect to approval of the proposed amendments to the 1989 Stock Plan. The
affirmative vote of a majority of the shares present in person or represented by
proxy and entitled to vote is required for approval of the increase in the
number of shares that may be issued pursuant to ISOs and the extension of the
term of the 1989 Stock Plan.
The Board of Directors recommends a vote FOR the amendment of certain
---------------------------------------------------------------------
provisions of the 1989 Stock Plan to allow additional shares to receive
- -----------------------------------------------------------------------
Incentive Stock Option tax treatment and to extend the term of the Plan.
- -----------------------------------------------------------------------
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<PAGE>
Stockholder Proposals For The 2000 Annual Meeting
The deadline for submitting stockholder proposals to be included in
this Proxy Statement and form of Proxy for the 1999 Annual Meeting of
Stockholders was January 18, 1999. A stockholder proposal may still be eligible
for presentation at that meeting if the stockholder gives timely notice of the
proposal in writing to the Secretary of the Company at the principal executive
offices of the Company and otherwise complies with the applicable provisions of
the Company's Bylaws. To be timely, the Company's Bylaws provide that the
Company must have received the stockholder's notice not less than 50 days nor
more than 75 days prior to such meeting. However, if notice or prior public
disclosure of the date of the annual meeting is given or made to stockholders
less than 65 days prior to the meeting date, the Company must receive the
stockholder's notice by the earlier of (i) the close of business on the 15th day
after the earlier of the day the Company mailed notice of the annual meeting
date or provided such public disclosure of the meeting date and (ii) two days
prior to the scheduled date of the annual meeting. The Secretary should be
contacted in writing at the address on the first page of this Proxy Statement to
obtain additional information as to the proper form and content of notices of
stockholder proposals.
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's 2000 Annual Meeting of
Stockholders must be received by the Secretary of the Company no later than
December 14, 1999 in order that they may be included in the Company's proxy
statement and form of proxy relating to that meeting.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who own
more than 10 percent of a registered class of the Company's equity securities,
to file reports of ownership on Forms 3, 4 and 5 with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than 10 percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received and written representations from certain reporting persons that they
were not required to file Form 5 for specified fiscal years, the Company
believes that all of its officers, directors and greater than 10 percent
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during fiscal year 1998.
Other Matters
The Company knows of no other business that will be presented at the
Annual Meeting. If any other business is properly brought before the Annual
Meeting, it is intended that proxies in the enclosed form will be voted in
accordance with the judgment of the persons voting the proxies, unless otherwise
instructed.
Whether or not you intend to be present at the Annual Meeting, we urge
you to return your signed proxy promptly.
By Order of the Board of Directors.
/s/ Ronald T. Yara
Ronald T. Yara
Secretary
Santa Clara, California
April 12, 1999
Upon written request of any stockholder entitled to receive this Proxy
Statement, the Company will provide, without charge, a copy of its annual report
on Form 10-K as filed with the Securities and Exchange Commission. Any such
request should be addressed to the Company at 2841 Mission College Boulevard,
Santa Clara, California 95054, Attention: Investor Relations Department. The
request must include a representation by the stockholder that as of March 31,
1999, the stockholder was entitled to vote at the Annual Meeting.
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<PAGE>
S3 Incorporated's Annual Meeting Of Stockholders
Techmart
5201 Great America Parkway
Santa Clara, California
(408) 562-6111
(408) 562-5703 (fax)
[map appears here]
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<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
Page
INFORMATION CONCERNING SOLICITATION AND VOTING................................................................ 1
PROPOSAL 1 - ELECTION OF DIRECTORS.................................................................................. 2
Directors and Nominees................................................................................. 2
Board Meetings and Committees.......................................................................... 3
Directors' Compensation................................................................................ 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 5
EXECUTIVE COMPENSATION........................................................................................ 6
Summary Compensation Table............................................................................. 6
Option Grants in Last Fiscal Year...................................................................... 7
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values...................... 8
Pension and Long-Term Incentive Plans.................................................................. 9
Employment Agreements.................................................................................. 9
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION................................................................................. 11
Base Salary............................................................................................ 11
Bonuses ............................................................................................... 11
Employee Profit Sharing Plan........................................................................... 12
Stock Options.......................................................................................... 12
Stock Purchase Plan.................................................................................... 12
Compensation of Chief Executive Officer................................................................ 12
STOCK PRICE PERFORMANCE GRAPH................................................................................. 13
PROPOSAL 2 - TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS................................................ 14
PROPOSAL 3 - TO AMEND CERTAIN PROVISIONS OF THE 1989 STOCK PLAN TO SECURE THE
AVAILABILITY OF INCENTIVE STOCK OPTION TAX TREATMENT FOR SHARES THAT HAVE
BEEN PREVIOUSLY AUTHORIZED UNDER THE PLAN AND TO EXTEND THE
TERM OF THE PLAN....................................................................................... 15
Summary of the 1989 Stock Plan......................................................................... 15
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING............................................................. 18
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE....................................................... 18
</TABLE>
============================================
For directions to the meeting, you
will find a map on the back cover of
this Proxy Statement
============================================
<PAGE>
S3 INCORPORATED
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
P The undersigned hereby authorizes KENNETH F. POTASHNER, TERRY N. HOLDT,
R WALTER D. AMARAL AND RONALD T. YARA, as Proxies with full power in each to
O act without the other and with the power of substitution in each, to
X represent and to vote all the shares of stock the undersigned is entitled
Y to vote at the Annual Meeting of Stockholders of S3 Incorporated to be held
on May 17, 1999, or at any postponement or adjournment thereof on the
following matters set forth on the reverse side.
------------
(Continued and to be signed on reverse side) SEE REVERSE
SIDE
------------
[X] Please mark
votes as in
this example
This proxy when properly executed will be voted in the manner directed herein by
the undersigned stockholder. If no direction is made, this proxy will be voted
FOR Proposals 1, 2 and 3.
- ---
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1. Proposal To Elect Mr. Kenneth F. Potashner, 2. Proposal to Ratify the Appointment FOR AGAINST ABSTAIN
Mr. Terry N. Holdt, Mr. John C. Colligan, of Ernst & Young LLP as the Company's ____ ____ ____
Dr. Robert P. Lee, Dr. Carmelo J. Santoro and Independent Auditors.
Mr. Ronald T. Yara as Directors of the Company to
Serve Until the Next Annual Meeting of Stockholders
or Until Their Successors Are Duly Elected and
Qualified.
FOR WITHHELD 3. Proposal to Amend Certain Provisions of ____ ____ ____
ALL FROM ALL the Company's 1989 Stock Plan to Secure
NOMINEES _____ _____ NOMINEES the Availability of Incentive Stock Option
Tax Treatment for Shares that Have Been
_______ ______________________________________ Previously Authorized Under the Plan, and
For all nominees except as noted above to Extend the Term of the Plan.
4. In their discretion, the proxies are ____ ____ ____
authorized to vote upon such other
business as may properly come before the
Annual Meeting and any adjournments
thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT ____
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE.
Please sign where indicated below. When shares are held by
joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full
corporate name by an authorized officer. If a partnership,
please sign in full partnership name by an authorized person.
Signature: _________________________ Date: _________Signature: _________________________ Date: ________________
</TABLE>
