<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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 a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] 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 Rule 14a-11(c) or Rule 14a-12
</TABLE>
DIAMOND MULTIMEDIA SYSTEMS, INC.
- --------------------------------------------------------------------------------
(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> 2
[DIAMOND LOGO]
DIAMOND MULTIMEDIA SYSTEMS, INC.
2880 JUNCTION AVENUE
SAN JOSE, CA 95134-1922
April 17, 1998
Dear Stockholder,
You are cordially invited to attend the Company's 1998 Annual Meeting
on Friday, May 22, 1998.
The meeting will begin promptly at 10:00 a.m., local time, at The
Marriott Hotel, 2700 Mission College Boulevard, Santa Clara, CA 95054. Please
note that a map has been provided for your convenience.
The official Notice of Meeting, proxy statement and form of proxy are
included with this letter. The matters listed in Notice of Meeting are described
in detail in the proxy statement.
The vote of every stockholder is important. Mailing your completed
proxy will not prevent you from voting in person at the meeting if you wish to
do so. Please complete, sign, date and promptly mail your proxy. Your
cooperation will be greatly appreciated.
Your Board of Directors and management look forward to greeting
personally those stockholders who are able to attend.
Sincerely,
/s/ WILLIAM J. SCHROEDER
-------------------------------------
William J. Schroeder
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 3
[DIAMOND LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 22, 1998
TO THE STOCKHOLDERS OF DIAMOND MULTIMEDIA SYSTEMS, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Diamond Multimedia
Systems, Inc., a Delaware corporation (the "Company"), will be held on Friday,
May 22, 1998, at 10:00 a.m., local time, at The Marriott Hotel, 2700 Mission
College Boulevard, Santa Clara, California 95054, for the following purposes:
1. To elect six directors to serve for the ensuing year or until their
successors are elected and duly qualified;
2. To approve the 1998 Stock Option Plan which reserves 1,200,000 shares of
Common Stock for issuance thereunder;
3. To approve an amendment to the 1995 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 400,000 shares;
4. To approve certain amendments to the 1995 Director Option Plan,
including an increase in the automatic First Option grant to 40,000
shares, an increase in the Subsequent Option grant to 10,000 shares, and
a special grant to certain existing outside directors of 7,500 shares
vesting over three years.
5. To ratify the appointment of Coopers & Lybrand L.L.P. as independent
accountants of the Company for the fiscal year ending December 31, 1998;
and
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on April 1, 1998
are entitled to notice of and to vote at the meeting and any
continuation or adjournment thereof.
For the Board of Directors
/s/ JEFFREY D. SAPER
---------------------
Jeffrey D. Saper
Secretary
San Jose, California
April 17, 1998
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
All stockholders are cordially invited to attend the Annual Meeting in
person. However, to ensure your representation at the meeting, you are urged to
mark, sign, date, and return the enclosed Proxy as promptly as possible in the
postage-paid envelope enclosed for that purpose. Returning your proxy will help
the Company assure a quorum and avoid the additional expense of duplicate proxy
solicitations. Any stockholder attending the meeting may vote in person even if
he or she has returned the proxy.
- --------------------------------------------------------------------------------
<PAGE> 4
DIAMOND MULTIMEDIA SYSTEMS, INC.
------------------
PROXY STATEMENT
1998 ANNUAL MEETING OF STOCKHOLDERS
MAY 22, 1998
------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Diamond Multimedia Systems, Inc. (the "Company") for use at the Annual Meeting
of Stockholders to be held on Friday, May 22, 1998, at 10:00 a.m., local time,
(the "Annual Meeting"), or at any continuation or adjournment thereof, for the
purposes set forth herein and in the accompanying Notice of Annual Meeting of
Stockholders. The Annual Meeting will be held at The Marriott Hotel, located at
2700 Mission College Boulevard, Santa Clara, CA 95054. The telephone number at
this address is (408) 988-1500.
These proxy solicitation materials and the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1997, including financial
statements, were mailed on or about April 17, 1998 to all the stockholders
entitled to vote at the Annual Meeting.
RECORD DATE AND SHARE OWNERSHIP
Only stockholders of record at the close of business April 1, 1998 (the
"Record Date") are entitled to receive notice of and to vote at the Annual
Meeting. As of the Record Date, the Company had 34,742,293 shares of Common
Stock outstanding. For information regarding holders of more than 5% of the
outstanding Common Stock, see "Security Ownership of Certain Beneficial Owners
and Management."
REVOCABILITY OF PROXIES
Any person giving a proxy in the form accompanying this statement has
the power to revoke it at any time before it is voted. It may be revoked by
filing, with the Secretary of the Company at the Company's principal executive
office, 2880 Junction Avenue, San Jose, California 95134, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the Annual Meeting and voting in person.
VOTING AND SOLICITATION
Each stockholder is entitled to one vote for each share of Common Stock
in all matters presented at the Annual Meeting. Stockholders do not have the
right to cumulate their vote in the election of directors.
The cost of this solicitation will be borne by the Company. In addition,
the Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitations by
directors, officers or employees of the Company. No additional compensation will
be paid for any such services.
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<PAGE> 5
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual
Meeting is a majority of the shares of Common Stock issued and outstanding on
the Record Date. Shares that are voted "FOR," "AGAINST" or "ABSTAIN" with
respect to a matter are treated as being present at the meeting for purposes of
establishing a quorum and are also treated as shares "represented and voting"
(the "Votes Cast") at the Annual Meeting with respect to such matter.
While there is no definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
The Delaware Supreme Court has held that, while broker non-votes should
be counted for purposes of determining the presence or absence of a quorum for
the transaction of business, broker non-votes should not be counted for purposes
of determining the number of Votes Cast with respect to the particular proposal
on which the broker has expressly not voted. The Company intends to treat broker
non-votes in a similar manner. Thus, a broker non-vote will not affect the
outcome of the voting on a proposal.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's 1999 Annual Meeting of
Stockholders must be received by the Company no later than December 18, 1998, in
order that they may be considered for inclusion in the proxy statement and form
of proxy relating to that meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
At the Annual Meeting, the number of directors authorized by the
Company's bylaws will be six (6). Six directors are to be elected at the Annual
Meeting. Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the Company's nominees named below. All nominees are
currently directors of the Company. In the event that any nominee of the Company
is unable or declines to serve as a director at the time of the Annual Meeting,
the proxies will be voted for any nominee who shall be designated by the present
Board of Directors to fill the vacancy. It is not expected that any nominee will
be unable or will decline to serve as a director. The term of office of each
person elected as director will continue until the next Annual Meeting of
Stockholders or until a successor has been duly elected and qualified.
NOMINEES FOR DIRECTOR
Set forth below is certain information regarding the nominees:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
- ------------------------- ----- ------------------------------------------------------------- -----
<S> <C> <C> <C>
William J. Schroeder 53 Chairman of the Board, President and Chief Executive Officer 1994
Bruce C. Edwards (2) 44 President and CEO of Powerwave Technologies, Inc. 1995
Carl W. Neun (2) 54 Senior Vice President and Chief Financial Officer of 1998
Tektronix, Inc.
Gregorio Reyes (1) 57 Chairman of the Board of Sync Research 1995
Jeffrey D. Saper (2) 49 Partner in the law firm of Wilson Sonsini Goodrich & Rosati 1992
James T. Schraith (1) 40 President and Chief Executive Officer of ShareWave, Inc. 1998
</TABLE>
- -----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
2
<PAGE> 6
Except as indicated below, each nominee or incumbent director has been
engaged in the principal occupation set forth above during the past five years.
There are no family relationships between any director or executive officer of
the Company.
Mr. Schroeder has served as the Company's President and Chief Executive
Officer and as a member of the Board of Directors since May 1994. Mr. Schroeder
was employed by Conner Peripherals, Inc. ("Conner") from 1986 to 1994, initially
as President and from 1989 as Vice Chairman of the Board of Directors. He was
also President of Conner's New Products Group from 1989 to 1990, President of
Archive Corporation (a Conner subsidiary) from January 1993 to November 1993,
and CEO of Arcada Software, Inc. (a Conner subsidiary) from November 1993 to May
1994. Mr. Schroeder is a director of Xircom, Inc. and CNF Transportation, Inc.
Mr. Edwards has been a director of the Company since January 1995. Since
February 1996, he has served as President and Chief Executive Officer of
Powerwave Technologies, Inc., a manufacturer of power amplifiers for wireless
telecommunications applications. Previously, Mr. Edwards was employed by AST
Research, Inc. as Senior Vice President, Chief Financial Officer from 1988 until
July 1994 and as Executive Vice President, Chief Financial Officer and a
director from July 1994 to December 1995. Mr. Edwards is also a director of HMT
Technology Corporation and Powerwave Technologies, Inc.
Mr. Neun has been a director of the Company since January 1998. Mr. Neun
was employed by Tektronix in March 1993 initially as Vice President and Chief
Financial Officer, and as Senior Vice President from 1995 to the present.
Previously, Mr. Neun was Senior Vice President of Administration and Chief
Financial Officer at Conner Periperhals, Inc. from 1987 to 1993.
Mr. Reyes has been a director of the Company since January 1995. Mr.
Reyes is Chairman of the Board of Sync Research. Mr. Reyes was Chairman of the
Board and Chief Executive Officer of Sunward Technologies, Inc. from 1985 to
August 1994. From 1986 to August 1990, Mr. Reyes was Chairman and CEO of
American Semiconductor Equipment Technologies (ASET). Mr. Reyes is a director at
C-Cube Microsystems and StorMedia Inc. as well as several other private
companies.
Mr. Saper has served as a director and as Secretary of the Company since
December 1992. He has been a partner of the law firm Wilson Sonsini Goodrich &
Rosati, Professional Corporation, since 1980. Mr. Saper is also a director of
Proxim, Inc.
Mr. Schraith has been a director of the Company since March 1998. Mr.
Schraith is currently President and Chief Executive Officer of ShareWave, Inc.,
a company developing wireless home networking products. From October 1996 to
January 1998, Mr. Schraith was Vice-President and General Manager of the North
America Division of Compaq Computer. Previously, Mr. Schraith was Chief
Executive Officer and a director of the Cerplex Group, Inc. From 1987 to 1995,
Mr. Schraith was employed at AST Research, Inc., most recently serving as
President, Chief Operating Officer and Director. Mr. Schraith is also a director
of Semtech Corporation.
BOARD MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 1997 (the "Last Fiscal Year"),
the Board of Directors held seven (7) meetings. Each of the directors during the
Last Fiscal Year attended at least 75% of the aggregate of all meetings of the
Board of Directors except for former director Chong-Moon Lee who attended 4
meetings of the 7 meetings.
The Board of Directors has two standing committees: a Compensation
Committee and an Audit Committee.
During the Last Fiscal Year, the Compensation Committee consisted of
director Reyes and Jeffrey T. Chambers and Walter G. Kortschak. Messrs. Chambers
and Kortschak are not standing for re-election as directors of the Company. The
Compensation Committee currently consists of directors Reyes and Schraith. The
Compensation Committee makes recommendations to the Board concerning salaries
and incentive compensation
3
<PAGE> 7
for the Company's officers and administers the Company's 1994 and 1992 Stock
Plan. The Compensation Committee met one (1) time during 1997.
During the Last Fiscal Year, the Audit Committee consisted of directors
Saper, Edwards, Kortschak and Chambers. The Audit Committee currently consists
of directors Edwards, Neun and Saper. The Audit Committee reviews the results
and scope of the audit and other accounting related services and evaluates the
Company's internal audit and control functions. The Audit Committee met two (2)
times during 1997: Directors Edwards, Chambers and Kortschak attended both
meetings; Director Saper attended one meeting.
The Board of Directors also has designated a Stock Option Committee of
Management, which consists of Mr. Schroeder and Mr. James M. Walker. The Stock
Option Committee of Management approves stock option grants to non-elected
officer employees of the Company in amounts not to exceed 25,000 shares, in
accordance with guidelines established by the Board of Directors. The Stock
Option Committee met four (4) times during 1997.
The Company does not have a nominating committee or a committee
performing the functions of a nominating committee.
DIRECTOR COMPENSATION
Directors who are not compensated as employees or consultants to the
Company receive a retainer of $15,000 per year for serving on the Board of
Directors, plus fees of $1,000 per board meeting and $500 per committee meeting,
provided such committee meeting does not occur on the same day as a board
meeting. Effective April 1, 1998, the annual retainer was increased to $20,000.
On January 3, 1995, following the leveraged recapitalization of the
Company effected on January 1, 1995 (the "Reorganization"), Messrs. Reyes,
Edwards and Saper were granted restricted stock purchase rights to purchase
30,000, 30,000 and 7,500 shares, respectively, of Common Stock at a purchase
price of $0.07 per share. Messrs. Reyes' and Edwards' shares are fully vested
and one forty-eighth of Mr. Saper's subject shares vest on the first day of each
month commencing on February 1, 1995. The purchase price of all such restricted
stock purchase rights was equal to the fair market value of the shares on the
date of grant as determined by the Board of Directors.
On January 1, 1995, former Chairman of the Board of Directors Mr.
Chong-Moon Lee entered into a consulting agreement with the Company pursuant to
which Mr. Lee earned $300,000 in the Last Fiscal Year. The consulting agreement
expired on December 31, 1997. Mr. Lee subsequently resigned from the Board of
Directors of the Company, and in connection with his resignation he was given
the honorary title of Lifetime Founder and Chairman Emeritus of the Board of
Directors.
In January 1995, the 1995 Director Option Plan (the "Director Plan") was
adopted by the Board of Directors. The Director Plan provides for the grant of
options to purchase the Company's Common Stock to directors who are not
employees of the Company. A total of 175,000 shares of Common Stock have been
authorized for issuance under the Director Plan. Each nonemployee director who
does not beneficially own, or whose affiliates do not beneficially own more than
5% of the Company's outstanding shares of Common Stock who has joined the board
has been automatically be granted an option to purchase 30,000 shares of Common
Stock at a price equal to the fair market value on the date of grant. The
initial grants vest at the rate of 25% of the option shares upon the first
anniversary of the date of grant and 1/48th of the option shares per month
thereafter, unless terminated sooner upon the termination of the optionee's
status as a director or otherwise pursuant to the Director Plan. Upon each
reelection to the Board the nonemployee outside directors have been granted an
additional option to purchase 7,500 shares of Common Stock at a price equal to
the fair market value on the date of grant. The subsequent grants vest in full
on the date that is four (4) years after the date of grant. In the event of a
merger of the Company with or into another corporation or a consolidation,
acquisition of assets or other change in control transaction involving the
Company, each option becomes exercisable in full or will be assumed for an
equivalent option substituted by the successor corporation. The Director Plan
expires in 2005, unless terminated earlier by the Board of Directors.
4
<PAGE> 8
VOTE REQUIRED AND RECOMMENDATION
The six (6) nominees receiving the highest number of affirmative votes
shall be elected as directors. Votes withheld from any director are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, but have no other legal effect in the election of directors under
Delaware law.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
SLATE OF NOMINEES SET FORTH ABOVE.
5
<PAGE> 9
PROPOSAL 2
APPROVAL OF THE 1998 STOCK PLAN
On January 21, 1998, the Board of Directors adopted the 1998 Stock Plan
(the "Plan") and reserved 1,200,000 shares of Common Stock for issuance
thereunder subject to stockholder approval. As of April 1, 1998, no options or
rights to purchase stock had been granted pursuant to the Plan.
At the Annual Meeting, the stockholders are being asked to approve the
Plan and the reservation of shares thereunder.
SUMMARY OF THE 1998 PLAN
General. The purpose of the Plan is to attract and retain the best
available personnel for positions of substantial responsibility with the
Company, to provide additional incentive to the employees, directors and
consultants of the Company and to promote the success of the Company's business.
Options and stock purchase rights may be granted under the Plan. Options granted
under the Plan may be either "incentive stock options," as defined in Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonstatutory stock options.
Administration. The Plan may generally be administered by the Board or
the Committee appointed by the Board (as applicable, the "Administrator"). The
Administrator may make any determinations deemed necessary or advisable for the
Plan.
Eligibility. Nonstatutory stock options and stock purchase rights may be
granted under the Plan to employees, directors and consultants of the Company
and any parent or subsidiary of the Company. Incentive stock options may be
granted only to employees. The Administrator, in its discretion, selects the
employees, directors and consultants to whom options and stock purchase rights
may be granted, the time or times at which such options and stock purchase
rights shall be granted, and the number of shares subject to each such grant.
Limitations. Section 162(m) of the Code places limits on the
deductibility for federal income tax purposes of compensation paid to certain
executive officers of the Company. In order to preserve the Company's ability to
deduct the compensation income associated with options and stock purchase rights
granted to such persons, the Plan provides that no employee, director or
consultant may be granted, in any fiscal year of the Company, options and stock
purchase rights to purchase more than 500,000 shares of Common Stock.
Notwithstanding this limit, however, in connection with such individual's
initial employment with the Company, he or she may be granted options or stock
purchase rights to purchase up to an additional 500,000 shares of Common Stock.
Terms and Conditions of Options. Each option is evidenced by a stock
option agreement between the Company and the optionee, and is subject to the
following additional terms and conditions:
(a) Exercise Price. The Administrator determines the exercise price of
options at the time the options are granted. The exercise price of an incentive
stock option may not be less than 100% of the fair market value of the Common
Stock on the date such option is granted; provided, however, the exercise price
of an incentive stock option granted to a 10% shareholder may not be less than
110% of the fair market value of the Common Stock on the date such option is
granted. The fair market value of the Common Stock is generally determined with
reference to the closing sale price for the Common Stock (or the closing bid if
no sales were reported) on the last market trading day prior to the date the
option is granted.
(b) Exercise of Option; Form of Consideration. The Administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. The means of payment for
shares issued upon exercise of an option is specified in each option agreement.
The Plan permits payment to be made by cash, check, promissory note, other
shares of Common Stock of the Company (with some restrictions), cashless
exercises, a reduction in the amount of any Company liability to the optionee,
any other form of consideration permitted by applicable law, or any combination
thereof.
6
<PAGE> 10
(c) Term of Option. The term of an incentive stock option may be no more
than ten (10) years from the date of grant; provided that in the case of an
incentive stock option granted to a 10% shareholder, the term of the option may
be no more than five (5) years from the date of grant. No option may be
exercised after the expiration of its term.
(d) Termination of Employment. If an optionee's employment or consulting
relationship terminates for any reason (including death or disability), then all
options held by the optionee under the Plan expire on the earlier of (i) the
date set forth in his or her notice of grant or (ii) the expiration date of such
option. The Plan and the option agreement may provide for a longer period of
time for the option to be exercised after the optionee's death or disability
than for other terminations. To the extent the option is exercisable at the time
of such termination, the optionee (or the optionee's estate or the person who
acquires the right to exercise the option by bequest or inheritance) may
exercise all or part of his or her option at any time before termination.
(e) Nontransferability of Options: Unless otherwise determined by the
Administrator, options granted under the Plan are not transferable other than by
will or the laws of descent and distribution, and may be exercised during the
optionee's lifetime only by the optionee.
(f) Other Provisions: The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Administrator.
Stock Purchase Rights. In the case of SPRs, unless the Administrator
determines otherwise, the Restricted Stock Purchase Agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). The purchase price for Shares repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate determined
by the Administrator.
Adjustments Upon Changes in Capitalization. In the event that the stock
of the Company changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of the Company effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of shares of stock
subject to the Plan, the number and class of shares of stock subject to any
option or stock purchase right outstanding under the Plan, and the exercise
price of any such outstanding option or stock purchase right.
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The Administrator may, in its discretion
provide that each optionee shall have the right to exercise all of the
optionee's options and stock purchase rights, including those not otherwise
exercisable, until the date ten (10) days prior to the consummation of the
liquidation or dissolution.
In connection with any merger, consolidation, acquisition of assets or
like occurrence involving the Company, each outstanding option or stock purchase
right shall be assumed or an equivalent option or right substituted by the
successor corporation. If the successor corporation refuses to assume the
options and stock purchase rights or to substitute substantially equivalent
options and stock purchase rights, the optionee shall have the right to exercise
the option or stock purchase right as to all the optioned stock, including
shares not otherwise exercisable. In such event, the Administrator shall notify
the optionee that the option or stock purchase right is fully exercisable for
fifteen (15) days from the date of such notice and that the option or stock
purchase right terminates upon expiration of such period.
Amendment and Termination of the Plan. The Board may amend, alter, suspend
or terminate the Plan, or any part thereof, at any time and for any reason.
However, the Company shall obtain stockholder approval for any amendment to the
Plan to the extent necessary and desirable to comply with applicable law. No
such action by the Board or shareholders may alter or impair any option or stock
purchase right previously granted under the Plan without the written consent of
the optionee. Unless terminated earlier, the Plan shall terminate ten years from
the date of its approval by the shareholders or the Board of the Company,
whichever is earlier.
7
<PAGE> 11
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise is an adjustment item for alternative
minimum tax purposes and may subject the optionee to the alternative minimum
tax. Upon a disposition of the shares more than two years after grant of the
option and one year after exercise of the option, any gain or loss is treated as
long-term capital gain or loss. Net capital gains on shares held between 12 and
18 months may be taxed at a maximum federal rate of 28%, while net capital gains
on shares held for more than 18 months may be taxed at a maximum federal rate of
20%. Capital losses are allowed in full against capital gains and up to $3,000
against other income. If these holding periods are not satisfied, the optionee
recognizes ordinary income at the time of disposition equal to the difference
between the exercise price and the lower of (i) the fair market value of the
shares at the date of the option exercise or (ii) the sale price of the shares.
Any gain or loss recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income is treated as long-term or
short-term capital gain or loss, depending on the holding period. A different
rule for measuring ordinary income upon such a premature disposition may apply
if the optionee is also an officer, director, or 10% shareholder of the Company.
Unless limited by Section 162(m) of the Code, the Company is entitled to a
deduction in the same amount as the ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by an employee
of the Company is subject to tax withholding by the Company. Unless limited by
Section 162(m) of the Code, the Company is entitled to a deduction in the same
amount as the ordinary income recognized by the optionee. Upon a disposition of
such shares by the optionee, any difference between the sale price and the
optionee's exercise price, to the extent not recognized as taxable income as
provided above, is treated as long-term or short-term capital gain or loss,
depending on the holding period. Net capital gains on shares held between 12 and
18 months may be taxed at a maximum federal rate of 28%, while net capital gains
on shares held for more than 18 months may be taxed at a maximum federal rate of
20%. Capital losses are allowed in full against capital gains and up to $3,000
against other income.
Stock Purchase Rights. Stock purchase rights will generally be taxed in
the same manner as nonstatutory stock options. However, restricted stock is
generally purchased upon the exercise of a stock purchase right. At the time of
purchase, restricted stock is subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code, because the Company may repurchase
the stock when the purchaser ceases to provide services to the Company. As a
result of this substantial risk of forfeiture, the purchaser will not recognize
ordinary income at the time of purchase. Instead, the purchaser will recognize
ordinary income on the dates when the stock is no longer subject to a
substantial risk of forfeiture (i.e., when the Company's right of repurchase
lapses). The purchaser's ordinary income is measured as the difference between
the purchase price and the fair market value of the stock on the date the stock
is no longer subject to right of repurchase.
The purchaser may accelerate to the date of purchase his or her
recognition of ordinary income, if any, and begin his or her capital gains
holding period by timely filing, (i.e, within thirty days of the purchase), an
election pursuant to Section 83(b) of the Code. In such event, the ordinary
income recognized, if any, is measured as the difference between the purchase
price and the fair market value of the stock on the date of purchase, and the
capital gain holding period commences on such date. The ordinary income
recognized by a purchaser who is an employee will be subject to tax withholding
by the Company. Different rules may apply if the purchaser is also an officer,
director, or 10% shareholder of the Company.
8
<PAGE> 12
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES, HOLDERS OF STOCK PURCHASE RIGHTS, AND THE COMPANY WITH RESPECT
TO THE GRANT AND EXERCISE OF OPTIONS AND STOCK PURCHASE RIGHTS UNDER THE PLAN.
IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF
THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF
ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE EMPLOYEE OR CONSULTANT
MAY RESIDE.
VOTE REQUIRED AND RECOMMENDATION
At the Annual Meeting, the stockholders are being asked to approve the
adoption of the 1998 Plan. The affirmative vote of the holders of a majority of
the shares entitled to vote at the Annual Meeting will be required to approve
the adoption of the 1998 Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE COMPANY'S 1998 PLAN.
9
<PAGE> 13
PROPOSAL 3
AMENDMENT TO THE 1995 EMPLOYEE STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors in January 1995 and approved by the stockholders later
that year. A total of 250,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan by the stockholders. In May 1997, because the
Company did not have a sufficient number of shares reserved for issuance under
the Purchase Plan to allow for employee participation, the Board of Directors
increased the number of shares authorized under the Purchase Plan by 200,000
shares subject to certain special offering periods (as described below).
At the Annual Meeting, the stockholders are being requested to consider
and approve the proposed amendment to the Purchase Plan to increase the number
of shares of Common Stock reserved for issuance thereunder by 400,000 shares
(including the 200,000 shares reserved for issuance by the Board of Directors in
May 1997), bringing the total number of shares issuable under the Purchase Plan
to 650,000. Of the additional reserved shares under the Purchase Plan, up to
200,000 shares will be purchased by Company employees through certain special
offering periods (as described below) whether or not stockholder approval of the
share addition is obtained. The stockholders are being asked to approve the
reservation of these 200,000 additional shares solely for the purpose of
qualifying such shares for special tax treatment under Internal Revenue Code
Section 423.
SUMMARY OF THE PURCHASE PLAN
General. The purpose of the Purchase Plan is to provide employees with
an opportunity to purchase Common Stock of the Company through payroll
deductions in a manner that qualifies under Section 423 of the Internal Revenue
Code (the "Code").
Administration. The Purchase Plan may be administered by the Board of
Directors (the "Board") or a committee appointed by the Board. All questions of
interpretation or application of the Purchase Plan are determined by the Board
or its appointed committee, and its decisions are final, conclusive and binding
upon all participants.
Eligibility. Any regular employee of the Company, employed throughout
the Offering Period, is eligible to participate in an Offering Period (as
defined below); provided, however, that no employee shall be granted an option
under the Purchase Plan (i) to the extent that, immediately after the grant,
such employee would own 5% of either the voting power or value of the stock of
the Company, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company accrues at a rate which
exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the
fair market value of the shares at the time such option is granted) for each
calendar year. Eligible employees become participants in the Purchase Plan by
filing with the Company a subscription agreement authorizing payroll deductions
prior to the beginning of each Offering Period unless a later time for filing
the subscription agreement has been set by the Board.
Participation in an Offering. The Purchase Plan is implemented by
offering periods usually lasting for six (6) months (an "Offering Period") with
a new Offering Period commencing on or about November 1 and May 1 of each year.
In 1997, the Purchase Plan had three special Offering Periods. The "First
Special Offering Period" began May 26, 1997, and ends on May 31, 1998, the
"Second Special Offering Period" begins June 1, 1998 and ends on October 31,
1998, and the "Third Special Offering Period" began on November 1, 1997 and ends
May 31, 1998. Beginning November 1, 1998 the Company intends for the Purchase
Plan to have six month Offering Periods. The Board may change the length or date
of commencement of an Offering Period. To participate in the Purchase Plan, each
eligible employee must authorize payroll deductions pursuant to the Purchase
Plan. Such payroll deductions may not exceed 15% of a participant's
compensation. Once an employee becomes a participant in the Purchase Plan, the
employee will automatically participate in each successive Offering Period until
such time as the employee withdraws from the Purchase Plan or the employee's
employment with the Company terminates. At the beginning of each Offering
Period, each participant is automatically granted options to purchase shares of
the Company's Common Stock. The option expires at the end of the Offering Period
or upon termination of employment, whichever is earlier, but is exercised at the
end of each Offering Period to the extent of the payroll deductions accumulated
during such Offering Period.
10
<PAGE> 14
Purchase Price, Shares Purchased. Shares of Common Stock may be
purchased under the Purchase Plan at a price not less than 85% of the lesser of
the fair market value of the Common Stock on (i) the first day of the Offering
Period or (ii) the last day of Offering Period. The "fair market value" of the
Common Stock on any relevant date will be the closing price per share as
reported on The Nasdaq National Market System. The number of shares of Common
Stock a participant purchases in each Offering Period is determined by dividing
the total amount of payroll deductions withheld from the participant's
compensation during that Offering Period by the purchase price. No more than
100,000 shares may be purchased during any single offering period; provided
however, that in the case of the special offering periods ending May 31, 1998, a
total of no more than 200,000 shares may be purchased.
Termination of Employment. Termination of a participant's employment for
any reason, including disability or death, cancels his or her option and
participation in the Purchase Plan immediately. In such event, the payroll
deductions credited to the participant's account will be returned to him or her
or, in the case of death, to the person or persons entitled thereto as provided
in the Purchase Plan.
Adjustment Upon Change in Capitalization, Change in Control. In the
event that the stock of the Company is changed by reason of any stock split,
reverse stock split, stock dividend, combination, reclassification or other
change in the capital structure of the Company effected without the receipt of
consideration, appropriate proportional adjustments shall be made in the number
and class of shares of stock subject to the Purchase Plan, the number and class
of shares of stock subject to options outstanding under the Purchase Plan, and
the exercise price of any such outstanding options. Any such adjustment shall be
made by the Board, whose determination shall be conclusive. Notwithstanding the
above, in connection with any merger or acquisition of assets involving the
Company, each option shall be assumed or an equivalent option substituted by
such successor corporation unless the Board determines, in lieu of such
assumption or substitution, to shorten the Offering Period then in progress to a
new exercise date or to cancel each outstanding right to purchase and refund all
sums collected. In the event the Board sets a new exercise date, the Board will
notify each participant at least 10 business days prior to the new exercise date
that his or her option shall be exercised automatically on the new exercise
date, unless prior to such date the participant has withdrawn from the Offering
Period.
Amendment and Termination of the Plan. The Board of Directors may at any
time terminate or amend the Purchase Plan. An Offering Period may be terminated
by the Board of Directors at the end of any Purchase Period if the Board
determines that termination of the Purchase Plan is in the best interests of the
Company and its shareholders. No amendment shall be effective unless it is
approved by the holders of a majority of the votes cast at a duly held
shareholders' meeting, if such amendment would require shareholder approval in
order to comply with Section 423 of the Code.
Withdrawal. Generally, a participant may withdraw from an Offering Period
at any time without affecting his or her eligibility to participate in future
Offering Periods. However, once a participant withdraws from a particular
offering, that participant may not participate again in the same offering.
Federal Tax Information for Purchase Plan. The Purchase Plan, and the
right of participants to make purchases thereunder, is intended to qualify under
the provisions of Sections 421 and 423 of the Code. Under these provisions, no
income will be taxable to a participant until the shares purchased under the
Purchase Plan are sold or otherwise disposed of. Upon sale or other disposition
of the shares, the participant will generally be subject to tax and the amount
of the tax will depend upon the holding period. If the shares are sold or
otherwise disposed of more than two (2) years from the first day of the Offering
Period or more than one (1) year from the date of transfer of the stock to the
participant, then the participant will recognize ordinary income measured as the
lesser of (i) the excess of the fair market value of the shares at the time of
such sale or disposition over the purchase price, or (ii) an amount equal to 15%
of the fair market value of the shares as of the first day of the Offering
Period. Any additional gain will be treated as long-term capital gain. If the
shares are sold or otherwise disposed of before the expiration of this holding
period, the participant will recognize ordinary income generally measured as the
excess of the fair market value of the shares on the date the shares are
purchased over the purchase price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
the holding period. The Company is not entitled to a deduction for amounts taxed
as ordinary income or capital gain to a participant except to the extent of
ordinary income is recognized by
11
<PAGE> 15
participants upon a sale or disposition of shares prior to the expiration of the
holding period(s) described above and except to the extent permitted under
Section 162(m) of the Code.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED UNDER
THE PURCHASE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE
CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF A
PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE OR FOREIGN COUNTRY IN
WHICH THE PARTICIPANT MAY RESIDE.
VOTE REQUIRED AND RECOMMENDATION
At the Annual Meeting, the stockholders are being asked to approve an
amendment to increase the number of shares available under the Purchase Plan.
The affirmative vote of a majority of the votes cast at the Annual Meeting will
be required to approve the amendment to the Purchase Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
AMENDMENT TO THE COMPANY'S PURCHASE PLAN.
12
<PAGE> 16
PROPOSAL 4
AMENDMENT TO THE 1995 DIRECTOR OPTION PLAN
In January 1995, the Board of Directors adopted the 1995 Director Option
Plan (the "Director Plan") and reserved 175,000 shares of Common Stock for
issuance thereunder. As of April 1, 1998, a total of 105,000 options to purchase
stock had been granted pursuant to the Director Plan.
At the Annual Meeting, the stockholders are being asked to approve the
proposed amendment to the Director Plan to increase the number of shares of
Common Stock reserved (i) for initial grants thereunder to non-employee
directors from 30,000 shares to 40,000 shares and (ii) for subsequent annual
grants to non-employee directors from 7,500 shares to 10,000 shares. Further,
the stockholders are being asked to approve one special annual grant of 7,500
shares to each existing non-employee director (Messrs. Edwards, Reyes and
Saper). The Director Plan, after amendments, is described in further detail
below.
SUMMARY OF THE DIRECTOR PLAN
General. The purpose of the Director Plan is to attract and retain the
best available personnel for positions for service as non-employee directors of
the Company, to provide additional incentive to the non-employee directors of
the Company and to encourage their continued service on the Board of Directors
(the "Board").
Administration. The Director Plan provides for grants of options to be
made in two ways:
a. Each non-employee director is automatically granted an option
to purchase 40,000 shares (the "First Option") upon the date such
individual first becomes a director, whether through election by the
stockholders of the Company or by appointment by the Board in order to
fill a vacancy; and
b. Each non-employee director is automatically granted an option
to purchase 10,000 shares (the "Subsequent Option") on the day of the
annual stockholder meeting at which the director is reelected to an
additional term, if on such date he or she shall have served on the
Board for at least six (6) months.
c. Each existing non-employee director as of the 1998 Annual
Meeting shall be automatically granted a single option to purchase 7,500
shares (the "Special Option") on the day of the Annual Meeting at which
the director is re-elected to an additional term. The Special Option's
purpose is to provide current non-employee directors with the same level
of option grant as new non-employee directors.
The Board has the authority, in its discretion, to: (i) determine the
fair market value of the Common Stock; (ii) interpret the Director Plan; (iii)
prescribe, amend and rescind rules and regulations relating to the Director
Plan; (iv) authorize any person to execute, on behalf of the Company, any
instrument required to effectuate the grant of an option previously granted
under the Director Plan; and (v) make all other determinations deemed necessary
or advisable for the administration of the Director Plan. All decisions,
determinations and interpretations of the Board shall be final.
Eligibility; Limitations. Only non-employee directors of the Board of
Directors of the Company are eligible to receive nonstatutory stock options
under the Director Plan. Non-employee directors do not include any director who
owns individually or represents an entity which owns at least five percent of
the Company's outstanding shares (as determined by vote or value).
Terms and Conditions of Options. Each option is evidenced by a director
option agreement between the Company and the optionee, and is subject to the
following additional terms and conditions:
(a) Exercise Price. The exercise price of options granted under the
Director Plan is 100% of the fair market value per share of the Common Stock on
the date of grant, generally determined with reference to the closing sale price
for the Common Stock (or the closing bid if no sales were reported) on the date
of grant.
13
<PAGE> 17
(b) Exercise of Option. The First Option shall vest as to 25% of the
optioned stock one year from the date of grant, and 1/48th of the optioned stock
each month thereafter, provided the person is a director on such dates. The
Subsequent Option shall vest as to 100% of the optioned stock on the date that
is four years after the date of grant, provided the person is a director on such
date. The Special Option shall vest as to 1/3 of the optioned stock each year
from the date of grant, so that 100% of the optioned stock subject to the
Special Option shall be fully vested and exercisable three (3) years after the
date of grant, provided the person is a director on such dates.
(c) Forms of Consideration. The means of payment for shares issued upon
exercise of an option is specified in each option agreement. The Director Plan
permits payment to be made by cash, check, other shares of Common Stock of the
Company (with some restrictions), cashless exercises or any combination thereof.
(d) Term of Option. The term of any option shall be ten (10) years from
the date of grant. No option may be exercised after the expiration of its term.
(e) Termination of Directorship. If an optionee's status as a director
terminates for any reason (including death or disability), then all options held
by the optionee under the Director Plan expire on the earlier of (i) the date
set forth in his or her notice of grant or (ii) the expiration date of such
option. The notice of grant provides for a twelve month period to exercise an
option if the optionee's status as a director terminates due to death or
disability. To the extent the option is exercisable at the time of such
termination, the optionee (or the optionee's estate or the person who acquires
the right to exercise the option by bequest or inheritance) may exercise all or
part of his or her option for up to three (3) months following the termination
or for such other period of time as determined by the Board.
(f) Nontransferability of Options: Options granted under the Director
Plan are not transferable other than by will or the laws of descent and
distribution, and may be exercised during the optionee's lifetime only by the
optionee.
(g) Other Provisions: The director option agreement may contain other
terms, provisions and conditions not inconsistent with the Director Plan as may
be determined by the Administrator.
Adjustments Upon Changes in Capitalization. In the event that the stock
of the Company changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of the Company effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of shares of stock
subject to the Director Plan, the number and class of shares of stock subject to
any option outstanding under the Director Plan, and the exercise price of any
such outstanding option.
In the event of a proposed liquidation or dissolution, any unexercised
options will terminate prior to such action. The Board may give the optionee the
right to exercise any unexercised options prior to their termination.
In the event of a merger of the Company or the sale of substantially all
of the assets of the Company, each option may be assumed or an equivalent option
substituted for by the successor corporation. If an option is assumed or
substituted for by the successor corporation, it shall continue to vest as
provided in the Director Plan. If the successor corporation does not agree to
assume or substitute for the option, each option shall become fully vested and
exercisable for a period of thirty (30) days from the date the Board notifies
the optionee of the option's full exercisability, after which period the option
shall terminate.
Amendment and Termination of the Director Plan. The Board may amend,
alter, suspend or terminate the Director Plan, or any part thereof, at any time
and for any reason. However, the Company shall obtain stockholder approval for
any amendment to the Director Plan to the extent necessary to comply with
applicable laws or regulations. No such action by the Board or stockholders may
alter or impair any option previously granted under the Director Plan without
the written consent of the optionee. Unless terminated earlier, the Director
Plan shall terminate ten years from the date of its approval by the stockholders
or the Board of the Company, whichever is earlier.
14
<PAGE> 18
FEDERAL INCOME TAX CONSEQUENCES
An optionee does not recognize any taxable income at the time he or she
is granted a nonstatutory stock option. Upon exercise, the optionee recognizes
taxable income generally measured by the excess of the then fair market value of
the shares over the exercise price. The Company is entitled to a deduction in
the same amount as the ordinary income recognized by the optionee. Upon a
disposition of such shares by the optionee, any difference between the sale
price and the optionee's exercise price, to the extent not recognized as taxable
income as provided above, is treated as long-term or short-term capital gain or
loss, depending on the holding period.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS
UNDER THE DIRECTOR PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT
DISCUSS THE TAX CONSEQUENCES OF THE DIRECTOR'S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
DIRECTOR MAY RESIDE.
VOTE REQUIRED AND RECOMMENDATION
At the Annual Meeting, the stockholders are being asked to approve an
amendment to increase the number of shares for applicable grants under the
Director Option Plan. The affirmative vote of the holders of a majority of the
shares which vote at the Annual Meeting will be required to approve the
amendment to the Director Option Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
AMENDMENT TO THE COMPANY'S 1995 DIRECTOR OPTION PLAN.
15
<PAGE> 19
PROPOSAL 5
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Coopers & Lybrand L.L.P.,
independent accountants, to audit the financial statements of the Company for
the current fiscal year ending December 31, 1998. Coopers & Lybrand L.L.P. has
audited the Company's financial statements annually since 1989. In the event
that a majority of the Votes Cast are against the ratification, the Board of
Directors will reconsider its selection.
A representative of Coopers & Lybrand L.L.P. will be present at the
Annual Meeting to make a statement if such representative desires to do so and
to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE RATIFICATION OF
COOPERS & LYBRAND L.L.P. AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE FISCAL
YEAR ENDING DECEMBER 31, 1998.
16
<PAGE> 20
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's Chief
Executive Officer and the four other most highly paid executive officers of the
Company whose salary plus bonus exceeded $100,000 in the Last Fiscal Year
(collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company during the fiscal years ended December 31, 1997, 1996
and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION (1) COMPENSATION
------------------------------------------------ ------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUSES AWARDS OPTIONS COMPENSATION(2)
- --------------------------- ---- ------- --------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
William J. Schroeder (3) 1997 $300,000 - - - $3,764
Chief Executive Officer 1996 297,115 - - - 4,082
and President 1995 275,000 $175,000 - - 2,927
Hyung Hwe Huh 1997 $223,462 $20,000 - - $674
Senior Vice President and 1996 213,766 - - - 928
Chief Technical Officer 1995 200,000 142,000 - - 761
James M. Walker (4) 1997 $250,000 $125,000 - - $3,705
Senior Vice President and 1996 19,231 - - 300,000(5) 74
Chief Financial Officer
Dennis B. Praske (6) 1997 $227,692 $20,000 - - $3,678
Senior Vice President, 1996 213,750 20,000 - 50,000 800
Worldwide Operations 1995 50,000 40,000 - 120,000 203
C. Scott Holt 1997 $227,692 $20,000 - - $3,678
Senior Vice President, 1996 213,766 - - - 3,928
Worldwide Sales 1995 200,200 $128,000 -(7) - 2,768
</TABLE>
- ---------
(1) No other annual compensation exceeded the lesser of $50,000 or 10% of the
total salary and bonuses of any Named Executive Officer.
(2) Except as noted, represents 401(K) matching contributions and life and
long-term disability insurance premiums paid by the Company.
(3) Mr. Schroeder joined the Company in May 1994 at a 1994 annual base salary
of $250,000 which base salary was increased to $275,000 effective January
1995, to $300,000 effective January 1996. No salary adjustment was granted
in 1997.
(4) Mr. Walker joined the Company in November 1996 at an annual base salary of
$250,000 and earned a bonus equal to 50% of his base salary for his first
twelve months of employment.
(5) On November 5, 1996, Mr. Walker was granted an option to purchase 75,000
shares pursuant to the 1994 Stock Plan, and an option to purchase an
additional 225,000 shares outside the 1994 Stock Plan, each at an exercise
price of $11.50 per share, which was the fair market value for such shares
on the date of grant. These options were subsequently repriced to $7.625
per share in connection with the Company's stock option repricing on April
16, 1997. The option to purchase 75,000 shares pursuant to the 1994 Stock
Option Plan and 75,000 shares granted outside of the 1994 Stock Plan were
vested in full as of December 1, 1997. The option to purchase the
remaining 150,000 shares will vest as to 6,250 shares subject to the
option on the first day of each month thereafter beginning January 1,
1998.
(6) Mr. Praske joined the Company in September 1995 and was elected as an
executive officer of the Company on May 1, 1997.
17
<PAGE> 21
(7) On January 1, 1995, Mr. Holt was granted restricted stock purchase rights
for an aggregate of 375,000 shares at a purchase price of $0.07 per share,
which was the fair market value for such shares on the date of grant as
determined by the Board of Directors. Mr. Holt exercised these rights in
full on January 3, 1995. Such shares vest in 48 equal monthly increments.
OPTION GRANTS IN FISCAL YEAR 1997
The following table provides information with respect to options granted in
the Last Fiscal Year to the Named Executive Officers.
<TABLE>
<CAPTION>
% of Total Potential Realizable Value
Number of Options at Assumed Annual Rates
Securities Granted to Exercise of Stock Price Appreciation for
Underlying Employees in Price ($/sh) Expiration Option Term
Name Options Fiscal 1997 (1) Date 5% ($)(2) 10% ($)(2)
---- ---------- --------------- ------------ ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
William J. Schroeder - - -
- - -
James M. Walker 300,000 8.86% $7.625 11/5/06 $1,438,596 $3,645,686
Hyung Hwe Huh - - -
- - -
Dennis B. Praske - -
- - -
C. Scott Holt
</TABLE>
- -----------------
(1) Based on options granted to purchase an aggregate of 3,386,000 shares
under all option plans to employees during the Last Fiscal Year.
(2) Potential realizable value is based on an assumption that the market price
of the stock appreciates at the stated rate, compounded annually, from the
date of grant until the end of the 10-year term. These values are
calculated based on requirements promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate or
projection of future stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of the Common Stock.
TEN-YEAR OPTION/SAR REPRICINGS
The following table sets forth certain information with respect to the
Company's exchange of outstanding options with certain of its officers in April
1997. For further information with respect to such option exchanges, see "Report
of the Compensation Committee of the Board of Directors on Executive
Compensation."
<TABLE>
<CAPTION>
Number of Number of Market Exercise Length of
Securities Securities Price of Price of Original
Underlying Underlying Stock at Stock at New Option Term
Repricing Options Options Time of Time of Exercise Remaining at Date
Name Date Exchanged Issued Repricing Repricing Price of Exchange
---- ------- --------- -------- --------- --------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James M. Walker 4/16/97 75,000 75,000 $7.625 $11.50 $7.625 9 Years 203 days
James M. Walker 4/16/97 225,000 225,000 $7.625 $11.50 $7.625 9 Years 203 days
------- -------
Total 300,000 300,000
</TABLE>
18
<PAGE> 22
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND
FISCAL YEAR END OPTION VALUES
The following table provides information with respect to option
exercises in the Last Fiscal Year by the Named Executive Officers and the value
of their unexercised options at Fiscal Year End.
<TABLE>
<CAPTION>
Value of
Number of Securities Underlying Unexercised
Unexercised Options In-the-Money Options
Shares at Fiscal Year End(#) at Fiscal Year End ($)(2)
Acquired Value ------------------------------ ----------------------------
Name on Exercise Realized ($) (1) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Schroeder - - - - - -
James M. Walker - - 150,000 150,000 $187,500 $187,500
Hyung Hwe Huh - - - - - -
Dennis B. Praske 14,000 $103,488 63,812 92,188 $79,765 $115,235
C. Scott Holt - - - - - -
</TABLE>
- -----------------
(1) Market value of the shares on date of exercise, less the exercise price.
Value is based on fair market value of the Company's stock of $8.875 on December
31, 1997 (the last trading day of the Last Fiscal Year), less the exercise
price.
MANAGEMENT EMPLOYMENT ARRANGEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
In May 1994, Mr. William J. Schroeder joined the Company as Chief
Executive Officer and President. Mr. Schroeder's employment offer contemplated
the grant of an option to purchase 1,125,000 shares of Common Stock at a
purchase price of $2.67 per share which was determined by the Board of Directors
to be the fair market value of the Common Stock on the date of grant. The option
agreement relating to this grant provided that an aggregate of 281,250 of such
shares would vest upon a change in control of the Company, which vesting was
triggered by the Reorganization. On September 9, 1994, Mr. Schroeder exercised
his option with respect to 150,000 shares of Common Stock, at an aggregate
exercise price of $400,000. In connection with such exercise, the Company loaned
$200,000 to Mr. Schroeder, which loan bore interest at the rate of 7.05% per
annum, was secured by the shares purchased thereby, and was payable upon demand.
In connection with the Reorganization, and in order to facilitate such
transaction, Mr. Schroeder agreed not to receive the $8.00 per share offered to
the other stockholders in the transaction, and on December 31, 1994, rescinded
the exercise of the option by resale of the shares to the Company at cost. In
connection with this rescission, Mr. Schroeder's indebtedness (including accrued
interest) to the Company was canceled. On January 3, 1995, Mr. Schroeder
exercised in full his option to purchase 975,000 shares of Common Stock, at an
aggregate exercise price of $65,000. On January 1, 1995, Mr. Schroeder was
granted a stock purchase right to purchase 270,000 shares of Common Stock at a
purchase price of $0.07 per share, which was determined by the Board of
Directors to be the fair market value of the Common Stock on the date of grant.
Mr. Schroeder exercised this stock purchase right in full on January 3, 1995,
pursuant to a restricted stock purchase agreement providing for the right of the
Company to repurchase all unvested shares at cost upon termination of
employment. An aggregate of 1,222,500 of the 1,245,000 shares acquired by Mr.
Schroeder were vested as of April 1, 1998 and the balance will vest in equal
monthly increments through January 1, 1999.
On January 1, 1995, Mr. C. Scott Holt joined the Company as Senior Vice
President, Sales and Strategic Alliances. On January 3, 1995, Mr. Holt was
granted a stock purchase right to purchase 375,000 shares of Common Stock at a
purchase price of $0.07 per share, which was determined by the Board of
Directors to be the fair market value of the Common Stock on the date of grant.
Mr. Holt exercised this stock purchase right in full on January 3, 1995,
pursuant to a restricted purchase agreement providing for the repurchase of
unvested shares at cost upon termination of employment. As of April 1, 1998,
296,875 of such shares had vested, and the balance will vest in equal monthly
increments through January 3, 1999.
19
<PAGE> 23
On January 1, 1995, Mr. Hyung Hwe Huh entered into an employment
agreement with the Company pursuant to which he is entitled to a base salary of
$190,000 per year and an annual bonus equal to the bonus awarded to the
Company's second highest ranked employee (other than Mr. Huh, the Company's CEO
or any of the Company's sales executives). Mr. Huh's base salary was increased
to $215,000 in 1996 and to $225,000 in 1997. In addition, pursuant to the terms
of his employment agreement, Mr. Huh purchased 375,000 shares of Common Stock at
a purchase price per share of $0.07, which was the fair market value of the
Common Stock on the date of grant as determined by the Board of Directors,
pursuant to a restricted stock purchase agreement providing for certain
repurchase rights in favor of the Company. In the event that Mr. Huh's
employment is terminated involuntarily, the Company shall be obligated to him or
his heirs (or other legal representative) (i) to pay all amounts accrued but
unpaid under the terms of his employment agreement, (ii) for a period of two
years commencing on the date of termination, to provide all benefits provided by
the Company to Mr. Huh during his last full year of employment with the Company
and (iii) for a period of two years commencing on the date of termination, to
pay, in equal semi-monthly installments, an amount equal to Mr. Huh's base
salary paid by the Company during Mr. Huh's last full year of employment with
the Company.
On November 5, 1996, Mr. James M. Walker joined the Company and on
December 2, 1996 he assumed the duties of Senior Vice President and Chief
Financial Officer. On November 5, 1996, Mr. Walker was granted an option to
purchase 75,000 shares pursuant to the 1994 Stock Plan, and an option to
purchase an additional 225,000 shares outside the 1994 Stock Plan, each at an
exercise price of $11.50 per share, which was the fair market value for such
shares on the date of grant. These options were subsequently repriced to $7.625
per share in connection with the Company's stock option repricing on April 16,
1997. The option to purchase 75,000 shares pursuant to the 1994 Stock Option
Plan and 75,000 shares granted outside of the 1994 Stock Plan were vested in
full as of December 1, 1997 and the option to purchase the remaining 150,000
shares will vest 6,250 shares subject to the option vest on the first day of
each month thereafter beginning January 1, 1998.
In May 1996 the Company's Board of Directors approved the Company's
entering into a Change of Control Severance Agreement (the "Agreement") with
certain vice presidents of the Company, including Messrs. Holt, Praske and
Walker and excluding Mr. Huh, who has a separate agreement as described above.
Each covered vice president has signed a copy of this Agreement with the
Company. The Agreement provides that in the event of an involuntary termination
or termination not for cause within twelve (12) months following change of
control, then, the vice president shall be entitled to (i) a cash severance
payment in an amount equal to one hundred fifty percent (150%) of the vice
president's annual base pay, (ii) continuation of employee benefits at one
hundred percent (100%) for a period of twelve (12) months, (iii) outplacement
assistance, including job counseling and referral services, for a period of six
(6) months, and (iv) continued vesting of stock options and restricted stock for
an additional twelve (12) months. In addition the Agreement provides that, in
the event of an involuntary termination or termination not for cause within the
period that is between twelve (12) months and twenty-four (24) months following
a change of control then, the vice president shall be entitled to (i) a cash
severance payment in an amount equal to seventy-five percent (75%) of the vice
president's annual base pay, (ii) continuation of employee benefits at one
hundred percent (100%) for a period of six (6) months, (iii) outplacement
assistance, including job counseling and referral services, for a period of six
(6) months, and (iv) continued vesting of stock options and restricted stock for
an additional six (6) months. The severance obligations of the Company are
subject to certain limitations in the event that such payments would constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended.
20
<PAGE> 24
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
is composed only of non-employee directors. The Committee is responsible for
reviewing and recommending for approval by the Board of Directors the Company's
compensation practices, executive pay levels and variable compensation programs.
The Committee also grants stock options within Board of Directors approved
guidelines.
COMPENSATION PHILOSOPHY
The Company's compensation philosophy is that cash compensation should
vary with performance of the Company and long-term incentives should be closely
aligned with the interests of the stockholders.
Cash compensation for the executives consists of base salary and a
variable compensation segment based on the achievement of specified income goals
and strategic objectives.
Long-term incentives are provided through the granting of stock options
to key employees, including the Named Executive Officers. The level of stock
options and stock purchase rights granted (i.e., the number of shares subject to
each stock option grant or purchase grant) is based on the employee's current
and anticipated future performance, skill set and ability to affect achievement
of strategic goals and objectives. Grants generally vest ratably over a
four-year period from the date of hire or date of grant, thus providing an
incentive to remain in the Company's employ.
The Company maintains a qualified employee stock purchase plan, pursuant
to which employees can purchase Company stock through payroll deductions, which
is generally available to all employees. This plan allows participants to buy
Company stock at a discount from the market price on certain specified dates
with up to 15% of their base salaries.
In setting compensation levels for executives, the Compensation
Committee reviews specific information gathered by the Company from proxy
statements of particular companies that are considered generally comparable to
the Company in that they are high-technology, high-growth, and similar in
revenue size. Recommendations by management are examined in light of this
information, but there is no special attempt to set cash compensation in any
particular relationship to the survey data. The final 1997 base salary levels
for the Named Executive Officers fall within the industry standards for
comparable positions.
INCENTIVE COMPENSATION
The Diamond Multimedia Bonus Plan is designed to motivate and reward
executives and employees by making a portion of their cash compensation directly
dependent upon achieving predetermined corporate and/or business unit income
levels and objectives. A cash payment for up to target performance is made on a
quarterly basis during the quarter following each three month period of the year
for services rendered the previous three months. A further cash payment for
above target performance on an annual basis is made annually. During fiscal
1997, there was no bonus award made to the Chief Executive Officer. Otherwise,
during fiscal 1997, bonus amounts were earned by Mr. Holt, Mr. Huh and Mr.
Praske which averaged approximately 8% of total cash compensation. The bonus
earned by Mr. Walker was approximately 33% of total compensation and consisted
of $125,000 earned by James M. Walker per his employment offer letter.
21
<PAGE> 25
STOCK OPTIONS
Stock options are granted to aid in the retention of key employees and
to align the interest of key employees with those of the stockholders. Stock
options are generally granted at a price equal to the fair market value on the
date of grant and generally vest over four years from the date of hire or date
of grant. Options are granted to key employees, including executives, based on
such employee's skills, the current marketability of those skills, the
employee's current performance and anticipated future contribution based on that
performance, and the employee's ability to have an effect on corporate and/or
business unit results.
In April 1997, the Company's Board of Directors approved an option
exchange program whereby Mr. James M. Walker as well as non-executive officer
employees that held options with exercise prices in excess of $7.625 were
offered the opportunity to exchange such options for new options at $7.625 per
share, which was the fair market value of the Common Stock on April 16, 1997,
the date of the exchange program. The new options are on the same terms as the
surrendered options except for the exercise price and the required vesting
adjustments. For the non-executive officer employees, the exercise price of the
new options is $7.625 if exercised on or after March 31, 1998, and the exercise
price of the old option if exercised prior to such date. For Mr. Walker, the
exercise price is $7.625 if exercised after June 30, 1997, and the exercise
price of the old option if exercised on or prior to such date. The Board of
Directors undertook these actions in light of the then recent reduction in the
trading price of the Company's Common Stock and in consideration of the
importance to the Company of retaining its employees and officers by offering
them appropriate equity incentives. The Board of Directors also considered the
highly competitive environment for obtaining and retaining qualified employees
and officers and the overall benefit to the Company's stockholders from a highly
motivated group of employees and officers.
CEO COMPENSATION
As described above, the Company's executive pay program is leveraged
toward achieving corporate goals and objectives. This principle of
pay-for-performance is exemplified by the pay package of the Company's Chief
Executive Officer.
The Compensation Committee reviews Mr. Schroeder's base salary annually,
considering Company performance, individual performance, and external pay
practices. In January 1997, Mr. Schroeder's base salary was maintained at
$300,000. His total cash compensation for 1997 was $300,000.
Mr. Schroeder received no variable compensation for fiscal year 1997
performance because the targeted financial results were not achieved.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors during the Last
Fiscal Year consisted of director Reyes and Jeffrey T. Chambers and Walter G.
Kortschak. Messrs. Chambers and Kortschak are not standing for re-election as
directors of the Company. The Compensation Committee currently consists of
directors Reyes and Schraith. No member of the Compensation Committee or
executive officer of the Company has a relationship that constitutes an
interlocking relationship with executive officers or directors of another
entity.
22
<PAGE> 26
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of the Record Date by (i) each
stockholder (or group of affiliated persons) who is known by the Company to own
beneficially 5% or more of the Company's Common Stock; (ii) each of the
Company's directors, (iii) each of the Named Executive Officers and (iv) all
directors and executive officers of the Company as a group. Except as indicated
in the footnotes to the table, 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES
5% BENEFICIAL OWNERS, DIRECTORS ---------------------------
AND NAMED EXECUTIVE OFFICERS NUMBER PERCENT(1)
------------------------------- --------- ----------
<S> <C> <C>
Chong-Moon Lee 1,962,157 5.65
26549 Taaffee Road
Los Altos, California 94022
TA Associates, Inc. (2) 1,488,092 4.28
125 High Street
Boston, Massachusetts 02110
William J. Schroeder (3) 832,018 2.39
Hyung Hwe Huh (4) 332,350 *
C. Scott Holt (5) 305,541 *
James M. Walker (6) 187,500 *
Dennis B. Praske (7) 75,062 *
Bruce C. Edwards (8) 35,625 *
Gregorio Reyes (9) 28,125 *
Wade Meyercord (10) 10,000 *
Jeffrey D. Saper (11) 21,465 *
All executive officers and directors as a
group (11 persons) 5,277,935 15.19
</TABLE>
- --------------------
* Less than one percent.
(1) Percentage calculation is based upon 34,742,293 shares outstanding as of
April 1, 1998.
(2) Consists of 810,920, 426,120, 81,091, 153,633 and 16,328 shares of Common
Stock held of record by Advent VII L.P., Advent Atlantic and Pacific II
L.P., Advent New York L.P., Advent Industrial II L.P., and TA Venture
Investors Limited Partnership, respectively. TA Associates VI L.P. is the
General Partner of Advent Industrial II L.P. and Advent New York L.P. TA
Associates VII L.P. is the General Partner of Advent VII L.P. and TA
Associates AAP II Partners is the General Partner of Advent Atlantic and
Pacific II L.P. TA Associates, Inc. is the General Partner of TA
Associates VI L.P., TA Associates VII L.P. and TA Associates AAP II
Partners. Jeffrey T. Chambers, a former director of the Company, is a
Managing Director of TA Associates, Inc. and a General Partner of TA
Venture Investors Limited Partnership.
(3) Includes 22,500 shares subject to repurchase by the Company upon the
termination of Mr. Schroeder's employment, based on shares not yet vested
as of April 1, 1998, which vest over approximately nine (9) months,
commencing in May 1998. Also includes 125,000 shares held by trusts for
the benefit of family members, with respect to which Mr. Schroeder
disclaims beneficial ownership.
(4) Includes 70,313 shares subject to repurchase by the Company upon the
termination of Mr. Huh's employment, based on shares not yet vested as of
April 1, 1998. Such shares vest over approximately nine (9) months
commencing in May 1998. Also includes 91,771 shares held by Mr. Huh's son,
Yun Huh, which shares may be deemed to be beneficially owned by Mr. Huh.
(5) Includes 70,313 shares subject to repurchase by the Company upon the
termination of Mr. Holt's employment, based on shares not yet vested as of
April 1, 1998. Such shares vest over approximately nine (9) months
commencing in May 1998.
(6) Includes an option to purchase 187,500 shares, which are exercisable
within sixty (60) days of April 1, 1998.
(7) Includes an option to purchase 75,062 shares, which are exercisable within
sixty (60) days of April 1, 1998.
23
<PAGE> 27
(8) Includes an option to purchase 5,625 shares, which are exercisable within
sixty (60) days of April 1, 1998.
(9) Includes an option to purchase 5,625 shares, which are exercisable within
sixty (60) days of April 1, 1998.
(10) Includes an option to purchase 10,000 shares, which are exercisable within
sixty (60) days of April 1, 1998.
(11) Does not include an aggregate of 11,235 shares held by certain investment
partnerships associated with Mr. Saper's firm and of which he is a
partner. Mr. Saper disclaims beneficial ownership of such shares, except
to the extent of his proportionate partnership interest therein.
24
<PAGE> 28
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
Cumulative Total Return
-------------------------------------
4/12/95 12/95 12/96 12/97
------- ------ ------ ------
<S> <C> <C> <C> <C>
DIAMOND MULTIMEDIA SYS INC 100.00 211.03 69.85 52.21
S & P 500 100.00 125.38 154.16 205.60
NASDAQ STOCK MARKET (U.S.) 100.00 129.73 159.56 195.80
S & P ELECTRONICS (SEMICONDUCTORS) 100.00 117.08 210.83 226.87
NASDAQ COMPUTER MANUFACTURER 100.00 149.41 200.63 242.75
</TABLE>
* $100 INVESTED ON 4/12/95 IN STOCK OR ON 3/31/95 IN INDEX - INCLUDING
REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 3.
The above graph shows a comparison of cumulative total stockholder
return, calculated on a dividend reinvested basis, from the effective date of
the initial public offering of the Company's Common Stock (April 12, 1995)
through 1997 fiscal year end (December 31, 1997) for Diamond Multimedia Systems,
Inc., the S&P 500 Composite Index (the "S&P 500"), the NASDAQ Stock Market
index, the S&P Computer Peripherals Index, and the NASDAQ Computer Manufacturer
Index. The graph assumes that $100 was invested in the Company's Common Stock on
April 12, 1995 at the initial public offering price and in the S&P 500, the
NASDAQ Stock Market, the S&P Computer Peripherals, and the NASDAQ Computer
Manufacturers Index on March 31, 1995. Note that historic stock price
performance is not necessarily indicative of future stock price performance.
The information contained above under the captions "Report of the
Compensation Committee of the Board of Directors on Executive Compensation" and
"Performance Graph" shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Securities Act of 1934, as amended, except to the
extent that the Company specifically incorporates it by reference into such
filing.
25
<PAGE> 29
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934 requires the Company's
executive officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file an initial report of
ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities
and Exchange Commission (the SEC). Executive Officers, directors and greater
than ten percent stockholders are also required by SEC rules to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by it, or written representation
from certain reporting persons, the Company believes that except for the
following exceptions during the Last Fiscal Year, all filing requirements
applicable to its officers, directors, and ten percent stockholders were
complied with: Messrs. Jeffrey D. Saper, Bruce C. Edwards and Gregorio Reyes,
directors of the Company, did not timely file a Form 4 relating to grants of
options for such directors to purchase 7,500 shares of Common Stock. Messrs.
Saper, Edwards and Reyes each filed a Form 4 in October 1997.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
person named in the accompanying proxy to vote the shares represented thereby on
such matters in accordance with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ JEFFREY D. SAPER
--------------------
Jeffrey D. Saper,
Secretary
San Jose, California
April 17, 1998
26
<PAGE> 30
PROXY
DIAMOND MULTIMEDIA SYSTEMS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Diamond Multimedia Systems, Inc. (the
"Company"), a Delaware corporation, hereby appoints William J. Schroeder and
James M. Walker and each of them, with power of substitution to each, true and
lawful attorneys, agents and proxyholders of the undersigned, and hereby
authorizes them to represent and vote, as specified herein, all the shares of
Common Stock of the Company held of record by the undersigned on April 1, 1998,
at the 1998 Annual Meeting of Stockholders of the Company to be held on Friday,
May 22, 1998 at 10:00 a.m., local time, at The Marriott Hotel, 2700 Mission
College Boulevard, Santa Clara, California 95054, and any adjournment or
postponement thereof.
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
<PAGE> 31
YOUR VOTE IS IMPORTANT
All stockholders are cordially invited to attend the Annual Meeting in person.
However, to ensure your representation at the meeting, you are urged to mark,
sign, date, and return the enclosed Proxy as promptly as possible in the
postage-paid envelope enclosed for that purpose. Returning your proxy will help
the Company assure a quorum and avoid the additional expense of duplicate proxy
solicitations. Any stockholder attending the meeting may vote in person even if
he or she has returned the proxy.
DETACH HERE
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
1. To elect six directors to serve for the ensuing year or until their
successors are elected and duly qualified:
NOMINEES: William J. Schroeder, Bruce C. Edwards, Carl W. Neun,
Gregorio Reyes, Jeffrey D. Saper, James T. Schraith
FOR WITHHELD
[ ] [ ]
[ ]
--------------------------------------- MARK HERE [ ]
For all nominees except as noted above FOR ADDRESS
CHANGE AND NOTE
BELOW.
FOR AGAINST ABSTAIN
2. To approve the 1998 Stock Option Plan [ ] [ ] [ ]
which reserves 1,200,000 shares of
Common Stock for issuance thereunder;
3. To approve an amendment to the 1995 [ ] [ ] [ ]
Employee Stock Purchase Plan to increase
the number of shares of Common Stock
reserved for issuance thereunder by
400,000 shares;
4. To approve certain amendments to the [ ] [ ] [ ]
1995 Director Option Plan, including
an increase in the automatic First
Option grant to 40,000 shares, an
increase in the Subsequent Option grant
to 10,000 shares, and a special grant
to certain existing outside directors
of 7,500 shares vesting over three
years;
FOR AGAINST ABSTAIN
5. To ratify the appointment of Coopers & [ ] [ ] [ ]
Lybrand L.L.P. as independent accountants
of the Company for the fiscal year
ending December 31, 1998;
6. To transact such other business as may properly come before the meeting or
any adjournment thereof.
Signature Date
------------------------------------- ------------------------
Signature Date
------------------------------------- ------------------------
