<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. 1)
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 sec.240.14a-11(c) or 240.14a-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):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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:
- --------------------------------------------------------------------------------
[X] 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
LOGO [DIAMOND MULTIMEDIA LOGO]
Dear Stockholders:
The boards of directors of S3 and Diamond have unanimously approved a
merger agreement that provides for Diamond to merge with a wholly owned
subsidiary of S3. As a result, Diamond would become a wholly owned subsidiary of
S3.
If the merger is completed, Diamond stockholders will receive 0.52 share of
S3 common stock for each share of Diamond common stock they own. S3 stockholders
will continue to hold their existing shares of common stock after the merger.
Based on the capitalization of the two companies as of August 10, 1999,
18,626,707 shares of S3 common stock would be issued to Diamond securityholders
in connection with the merger, representing approximately 23% of the outstanding
shares of S3 common stock after the merger, including shares issuable upon the
exercise of options and warrants.
We cannot complete the merger unless the stockholders of both companies
approve it. We have each scheduled special meetings for our stockholders to vote
on the merger. YOUR VOTE IS VERY IMPORTANT.
The date, times and places of the special meetings are as follows:
<TABLE>
<S> <C>
For S3 stockholders: For Diamond stockholders:
September 20, 1999 September 20, 1999
10:00 a.m. 10:00 a.m.
Techmart The Marriott Hotel
5201 Great America Parkway 2700 Mission College Boulevard
Santa Clara, California Santa Clara, California
</TABLE>
This joint proxy statement/prospectus provides you with detailed
information about the proposed merger. This document is also the prospectus of
S3 for the S3 common stock that will be issued to Diamond stockholders in the
merger. We encourage you to read this entire document carefully before voting.
In addition, you may obtain information about our companies from documents that
we have filed with the Securities and Exchange Commission. See "Where You Can
Find More Information" on page 104.
YOU SHOULD READ CAREFULLY THE DISCUSSION OF RISKS ASSOCIATED WITH THE
MERGER THAT BEGINS ON PAGE 11.
<TABLE>
<S> <C>
/s/ WILLIAM J. SCHROEDER
/s/ KENNETH F. POTASHNER William J. Schroeder
Chairman of the Board,
Kenneth F. Potashner President and Chief Executive Officer
Chairman of the Board, Diamond Multimedia Systems, Inc.
President and Chief Executive Officer
S3 Incorporated
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
DOCUMENT OR DETERMINED IF THIS DOCUMENT IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This document is dated August 16, 1999 and is first being mailed to
stockholders on or about August 18, 1999.
<PAGE> 3
S3 INCORPORATED
2841 MISSION COLLEGE BOULEVARD
SANTA CLARA, CALIFORNIA 95054
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 20, 1999
------------------------
To the Stockholders of S3 Incorporated:
A special meeting of stockholders of S3 Incorporated will be held on
Monday, September 20, 1999, at 10:00 a.m., local time, at Techmart, 5201 Great
America Parkway, Santa Clara, California to consider and vote on the following
proposals:
1. To approve the issuance of shares of S3 common stock, par value
$0.0001 per share, under the terms of a merger agreement between S3 and
Diamond Multimedia Systems, Inc.;
2. Subject to the approval of proposal 1, above, and completion of the
merger contemplated by that proposal, to amend S3's restated certificate of
incorporation to increase the number of authorized shares of common stock
from 120,000,000 to 175,000,000; and
3. Subject to completion of the merger and with effect immediately
after the proposed merger, to elect three directors, who are currently
directors of Diamond, to the S3 board.
The proposed merger and the other proposals set forth above are more fully
described in the attached joint proxy statement/prospectus. Stockholders of
record at the close of business on August 10, 1999 are entitled to notice of,
and to vote at, the special meeting and any adjournment or postponement thereof.
A complete list of stockholders entitled to vote will be available at the office
of S3's corporate secretary, 2841 Mission College Boulevard, Santa Clara,
California, for ten days before the meeting.
THE S3 BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF
THE APPROVAL OF THE ISSUANCE OF S3 COMMON STOCK IN THE PROPOSED MERGER, THE
AMENDMENT TO THE S3 CERTIFICATE OF INCORPORATION AND FOR EACH OF THE THREE
NOMINEES FOR DIRECTOR.
All S3 stockholders are invited to attend the special meeting in person. If
you attend the special meeting and desire to revoke your proxy and vote in
person you may do so. In any event, you can revoke your proxy at any time before
it is voted.
TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE S3 MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE S3
MEETING. YOU CAN REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
By Order of the Board of Directors,
/s/ Walter D. Amaral
Walter D. Amaral
Secretary
Santa Clara, California
August 16, 1999
<PAGE> 4
DIAMOND MULTIMEDIA SYSTEMS, INC.
2880 JUNCTION AVENUE
SAN JOSE, CALIFORNIA 95134-1922
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 20, 1999
------------------------
To the Stockholders of Diamond Multimedia Systems, Inc.:
A special meeting of stockholders of Diamond Multimedia Systems, Inc. will
be held on Monday, September 20, 1999 at 10:00 a.m., local time, at the Marriott
Hotel, 2700 Mission College Boulevard, Santa Clara, California to consider and
vote upon a proposal to approve and adopt the Agreement and Plan of Merger,
dated as of June 21, 1999, between Diamond and S3 Incorporated. The approval of
the merger agreement requires the affirmative vote of a majority of the
outstanding shares of Diamond common stock.
The proposed merger and other related matters are more fully described in
the attached joint proxy statement/prospectus. Stockholders of record at the
close of business on August 10, 1999 are entitled to notice of, and to vote at,
the special meeting and any adjournment or postponement thereof. A complete list
of stockholders entitled to vote will be available at the Marriott Hotel, 2700
Mission College Boulevard, Santa Clara, California, for ten days before the
meeting.
THE DIAMOND BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN
FAVOR OF THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT.
All Diamond stockholders are invited to attend the special meeting in
person. If you attend the special meeting and desire to revoke your proxy and
vote in person you may do so. In any event, you can revoke your proxy at any
time before it is voted.
TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE DIAMOND MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE DIAMOND
MEETING. YOU CAN REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
By Order of the Board of Directors,
/s/ William J. Schroeder
William J. Schroeder
President and Chief Executive Officer
San Jose, California
August 16, 1999
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 3
RISK FACTORS................................................ 11
Risks Related to the Merger............................... 11
Risks Related to the Business and Operations of the
Combined Company....................................... 14
FORWARD-LOOKING STATEMENTS.................................. 31
THE S3 SPECIAL MEETING...................................... 32
General................................................... 32
Vote Required to Approve Each Proposal.................... 33
Quorum; Abstentions; Broker Non-votes..................... 33
Solicitation of Proxies and Expenses of Solicitation...... 34
THE DIAMOND SPECIAL MEETING................................. 35
General................................................... 35
Vote Required to Approve the Merger....................... 36
Quorum; Abstentions; Broker Non-votes..................... 36
Solicitation of Proxies and Expenses of Solicitation...... 37
THE MERGER AND RELATED TRANSACTIONS......................... 38
General................................................... 38
Effective Time of the Merger.............................. 38
Conversion of Diamond Securities.......................... 38
Background of the Merger.................................. 39
Reasons for the Merger.................................... 43
S3 Board Considerations................................... 44
Diamond Board Considerations.............................. 46
Board of Directors Recommendations........................ 48
Opinion of S3's Financial Advisor......................... 48
Opinion of Diamond's Financial Advisor.................... 56
Interests of Some of Diamond's Executive Officers and
Directors in the Merger................................ 60
Listing on the Nasdaq National Market of S3 Common Stock
to be Issued in the Merger............................. 61
Regulatory Filings and Approvals Required to Complete the
Merger................................................. 61
No Appraisal Rights....................................... 62
Accounting Treatment...................................... 62
Litigation Relating to the Merger......................... 62
CERTAIN PROVISIONS OF THE MERGER AGREEMENT.................. 63
Representations and Warranties............................ 63
S3's Representations and Warranties....................... 63
Diamond's Representations and Warranties.................. 64
S3's Conduct of Business Before Completion of the
Merger................................................. 65
Diamond's Conduct of Business Before Completion of the
Merger................................................. 65
No Other Negotiations Involving S3........................ 66
No Other Negotiations Involving Diamond................... 67
Certain Corporate Governance Matters...................... 68
Diamond's Employee Benefits Plans......................... 68
Treatment of Diamond Purchase Rights and Other
Securities............................................. 69
Conditions to Completion of the Merger.................... 69
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Termination of the Merger Agreement....................... 71
Payment of Termination Fee................................ 73
Waiver and Amendment of the Merger Agreement.............. 74
RELATED AGREEMENTS.......................................... 75
Credit Agreement.......................................... 75
Warrants to Purchase Diamond Common Stock................. 75
Acquisition of OneStep, LLC............................... 75
COMPARATIVE PER SHARE MARKET PRICE DATA..................... 77
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION............................................... 78
DESCRIPTION OF S3 CAPITAL STOCK............................. 86
COMPARISON OF STOCKHOLDER RIGHTS............................ 92
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF S3 PRINCIPAL
STOCKHOLDERS AND MANAGEMENT............................... 95
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF DIAMOND
PRINCIPAL STOCKHOLDERS AND MANAGEMENT..................... 96
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER.................................................... 98
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF S3
STOCKHOLDERS ONLY......................................... 100
Proposed Amendment to Increase the Number of Authorized
Shares of S3 Common Stock.............................. 100
Election of Directors..................................... 101
STOCKHOLDER PROPOSALS....................................... 102
LEGAL MATTERS............................................... 103
EXPERTS..................................................... 103
DOCUMENTS INCORPORATED BY REFERENCE......................... 103
WHERE YOU CAN FIND MORE INFORMATION......................... 104
</TABLE>
<TABLE>
<S> <C>
Appendix A Agreement and Plan of Merger
Appendix B Opinion of Lehman Brothers
Appendix C Opinion of Wasserstein Perella & Co., Inc.
Appendix D Proposed Amendment to the S3 Restated Certificate of
Incorporation to Increase the Number of Authorized Shares
</TABLE>
ii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger as quickly as possible. We hope to
complete the merger by the end of September 1999.
Q: AS A DIAMOND STOCKHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive 0.52 of a share of S3 common stock for each share of Diamond
common stock that you own. For example, if you own 1,000 shares of Diamond
common stock, you will receive 520 shares of S3 common stock. You will
receive only whole shares. You will receive cash for any fractional shares.
Q: AS AN S3 STOCKHOLDER, WILL I RECEIVE ADDITIONAL SHARES OF S3 COMMON STOCK IN
THE MERGER?
A: No, you will continue to hold the same number of shares of S3 common stock
after the merger. Shares of S3 common stock will be issued only to Diamond
stockholders in the merger. The merger will result in S3 stockholders holding
a smaller percentage of the combined company's stock than the percentage of
S3 stock they currently hold.
Q: IF I AM NOT GOING TO ATTEND THE STOCKHOLDER MEETING, SHOULD I RETURN MY PROXY
CARD INSTEAD?
A: Yes. Please fill out and sign your proxy card and return it in the enclosed
envelope as soon as possible. Returning your proxy card ensures that your
shares will be represented at your special meeting.
Q: IF MY SHARES OF STOCK ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: No. You should instruct your broker to vote your shares by following the
directions provided by your broker. The failure to instruct your broker will
have the effect of a vote against the merger.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Send in a later-dated, signed proxy card to your company's secretary before
your special meeting or attend your special meeting and vote in person.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, S3 will send Diamond stockholders a letter
of transmittal and written instructions for exchanging their stock
certificates. S3 stockholders should keep their current certificates.
Q: WILL THE MERGER BE TAX FREE TO ME?
A: The merger will be a tax-free reorganization for federal income tax purposes
for the companies and their stockholders. In general, Diamond stockholders
will not recognize gain or loss on the exchange of their stock, other than on
account of cash received for a fractional share. S3 stockholders will not
recognize any gain or loss in connection with the merger.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MERGER?
A: Yes. For example, the number of shares of S3 common stock that Diamond
stockholders will receive will not change even if the market price of S3
common stock increases or decreases before completion of the merger. WE URGE
YOU TO OBTAIN CURRENT MARKET QUOTATIONS OF S3 COMMON STOCK AND DIAMOND COMMON
STOCK. In evaluating the merger, you should carefully consider these and
other factors discussed in the section entitled "Risk Factors" on page 11.
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<PAGE> 8
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS?
A: No. Under Delaware law, holders of S3 common stock and holders of Diamond
common stock are not entitled to dissenters' or appraisal rights in the
merger. For more information regarding appraisal rights under Delaware law,
see "No Appraisal Rights" on page 62.
Q: WHO CAN ANSWER MY QUESTIONS?
A: If you have more questions about the merger, you should contact:
FOR S3:
Walter D. Amaral
Senior Vice President, Finance and
Chief Financial Officer
S3 Incorporated
2841 Mission College Boulevard
Santa Clara, CA 95054
(408) 588-8000
FOR DIAMOND:
James M. Walker
Senior Vice President and
Chief Financial Officer
Diamond Multimedia Systems, Inc.
2880 Junction Avenue
San Jose, CA 95134-1922
(408) 325-7000
2
<PAGE> 9
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
proposed merger fully and for a more complete description of the terms of the
proposed merger, you should carefully read this entire document, including the
appendices, and the other documents we have referred you to. See "Where You Can
Find More Information" (page 104). The merger agreement is attached as Appendix
A to this document. We encourage you to read the merger agreement. It is the
legal document that governs the proposed merger.
S3 INCORPORATED
2841 Mission College Boulevard
Santa Clara, California 95054
(408) 588-8000
S3 is a leading supplier of multimedia acceleration hardware, commonly
called graphics chips, and associated software for personal computers. S3's
accelerators are designed to work cooperatively with a PC's central processing
unit (also referred to as a CPU), implementing functions best suited for a
dedicated accelerator while allowing the CPU to perform the more general purpose
computing functions of today's advanced multimedia user interface and
applications. S3's families of accelerator products and software are currently
used by many of the world's leading original equipment manufacturers (or OEMs)
and add-in card and motherboard manufacturers.
For more information on S3, see "Where You Can Find More Information" on
page 104.
DIAMOND MULTIMEDIA SYSTEMS, INC.
2880 Junction Avenue
San Jose, California 95134-1922
(408) 325-7000
Diamond designs, develops, manufactures and markets multimedia and
connectivity products for PCs. Diamond is a leading supplier of graphics and
multimedia accelerator subsystems for PCs, and is expanding its position as a
leader in multimedia and connectivity products for the digital home, enabling
consumers to create, access and experience compelling new media content from
their desktops and through the Internet.
For more information on Diamond, see "Where You Can Find More Information"
on page 104.
WHAT YOU WILL RECEIVE IN THE MERGER
(see page 38)
Diamond stockholders will receive 0.52 of a share of S3 common stock for
each share of Diamond common stock they own prior to the merger.
Options to purchase shares of Diamond common stock issued under Diamond's
option plans will convert based on the exchange ratio into options to purchase
S3 common stock.
REASONS FOR THE MERGER (see page 43)
Each of our board of directors considered a number of relevant factors in
approving the merger agreement and recommending the merger to our respective
stockholders, including:
- the strategic fit between S3's 3D graphics chips and Diamond's graphics
accelerator boards, which will enable the combined company to provide its
customers with a direct source for graphics boards using S3's graphic
chips;
- the combined company should be positioned to invest in and develop
technologies for the Internet appliance, Internet connecting and home
networking markets;
- the combined company will have the opportunity to capitalize on the
complementary strengths of S3 in the OEM sales channel and Diamond in the
retail sales channel; and
3
<PAGE> 10
- the creation of a larger customer base, a higher market profile and
greater financial strength should present greater opportunities for
marketing the products and services of the combined company, including
the sale of products under the S3 brand name to Diamond's retail
customers.
For a more detailed discussion of the reasons for the merger and the
deliberations by the boards of directors of S3 and Diamond, see pages 43 to 47.
S3 STOCKHOLDERS VOTE REQUIRED
The affirmative vote of the holders of record of a majority of the shares
of S3 common stock present in person or by proxy at the S3 special meeting is
required to approve the issuance of shares of S3 common stock in the merger. In
addition, the affirmative vote of the holders of record of a majority of the
shares of S3's common stock outstanding on the record date is required to
approve the proposal to increase S3's authorized capital stock. As of the record
date, S3's directors, executive officers and their affiliates beneficially owned
in the aggregate approximately 1.0% of S3's outstanding common stock entitled to
vote at the special meeting.
RECOMMENDATION TO S3 STOCKHOLDERS
After careful consideration, the S3 board of directors has unanimously
approved the merger agreement and the merger and has determined that the terms
of the merger agreement are fair to, and that the merger is in the best
interests of, S3. The S3 board of directors unanimously recommends that you vote
for approval of the issuance of S3 common stock in the merger. The S3 board also
recommends that you vote for the proposal to increase S3's authorized capital
stock and for the election of the three nominees for director.
OPINION OF S3'S FINANCIAL ADVISOR
(see pages 48 to 56)
Lehman Brothers, as financial advisor to the S3 board, has delivered a
written opinion to the S3 board that, as of June 21, 1999, the exchange ratio to
be offered to Diamond's stockholders was fair, from a financial point of view,
to S3. The full text of the Lehman Brothers opinion is attached as Appendix B.
The opinion describes important assumptions and limitations and is not a
recommendation as to how the S3 stockholders should vote on the merger.
DIAMOND STOCKHOLDERS VOTE REQUIRED
The affirmative vote of the holders of record of a majority of the shares
of Diamond's common stock outstanding on the record date is required to approve
the merger agreement. As of the record date, Diamond's directors, executive
officers and their affiliates beneficially owned in the aggregate approximately
3.2% of Diamond's outstanding common stock entitled to vote at the special
meeting.
RECOMMENDATION TO DIAMOND STOCKHOLDERS
The Diamond board of directors has unanimously approved and declared
advisable the merger agreement and the merger and has determined that the terms
of the merger agreement are fair to, and that the merger is in the best
interests of, both you and Diamond. After careful consideration, the Diamond
board of directors recommends that you vote for approval of the merger agreement
and the merger.
OPINION OF DIAMOND'S FINANCIAL ADVISOR
(see pages 56 to 60)
In connection with the merger, the Diamond board received an opinion of
Diamond's financial advisor, Wasserstein Perella & Co., Inc., as to the
fairness, from a financial point of view, to Diamond of the exchange ratio
provided for in the merger. The full text of Wasserstein Perella's written
opinion dated June 22, 1999, which is attached to the back of this document as
Appendix C, describes the
4
<PAGE> 11
assumptions made, matters considered and limitations on the review undertaken by
Wasserstein Perella's in providing its opinion. Wasserstein Perella's opinion is
directed to the Diamond board and is not a recommendation to any stockholder
with respect to any matter relating to the proposed merger.
FEDERAL INCOME TAX CONSEQUENCES (see page 98)
The merger is intended to be tax-free to holders of Diamond common stock,
except with respect to cash received instead of fractional shares of S3 common
stock.
CONDITIONS TO THE MERGER
We will not complete the merger unless a number of conditions are satisfied
or waived. These include:
- a majority of the holders of Diamond common stock must have approved the
merger and holders of a majority of the voting power of S3's common stock
present in person or by proxy at the S3 special meeting must have
approved the issuance of shares of S3 common stock in the merger;
- the S3 board of directors is reconstituted to include Messrs. Schroeder,
Reyes and Schraith;
- each of S3 and Diamond must receive legal opinions confirming the
tax-free nature of the merger; and
- the authorized number of shares of S3 common stock is increased from
120,000,000 to 175,000,000.
See "Conditions to Completion of the Merger" on page 69 for additional
information concerning the closing conditions.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated by either S3 or Diamond if:
- both parties consent to such termination;
- the S3 or Diamond stockholders do not approve the merger at the special
meetings; or
- the merger is not completed by December 31, 1999.
The merger agreement may also be terminated under those circumstances
described on pages 71 to 73.
TERMINATION PAYMENTS
We have agreed that we will each pay our own fees and expenses in
connection with the merger, whether or not it is completed. However, we will
share equally all fees and expenses, other than attorneys' fees, in connection
with the printing and filing of this document and the registration statement of
which this document is a part.
If the merger agreement is terminated under those circumstances described
on pages 73 and 74, either S3 or Diamond, depending on the specific
circumstance, would be required to pay to the other party a termination payment
of $5.0 million.
ACCOUNTING TREATMENT (see page 62)
We intend to account for the merger as a purchase.
REGULATORY APPROVALS (see page 61)
We have made the required filings with the Antitrust Division of the
Department of Justice and the Federal Trade Commission and the waiting period
for those filings has terminated.
BOARD OF DIRECTORS AND MANAGEMENT OF S3 FOLLOWING THE MERGER (see page 68)
After the merger, S3's board of directors will consist of seven directors,
four of whom will be the directors of S3 prior to the merger, and three of whom
will be individuals designated by Diamond. The officers of S3 following the
merger will be determined by S3's board of directors after the merger, except
that Kenneth F. Potashner will serve as Chairman and Chief Executive Officer.
5
<PAGE> 12
FORWARD-LOOKING STATEMENTS (see page 31)
Statements in this document and in the documents incorporated by reference
in this document are or may be forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those expressed in such
statements, depending on a variety of factors. You should carefully review all
information, including the financial statements and the notes to the financial
statements, included or incorporated by reference into this document.
COMPARISON OF STOCKHOLDER RIGHTS (see page 92)
The certificate of incorporation and bylaws of S3 and Diamond vary. As a
result, Diamond stockholders will have different rights as S3 stockholders. In
particular, S3 has adopted a stockholder rights plan that discourages certain
types of change of control transactions.
COMPARATIVE MARKET PRICE INFORMATION (see page 77)
Shares of both S3 common stock and Diamond common stock are listed on the
Nasdaq National Market.
The following table sets forth the closing prices per share of S3 common
stock and Diamond common stock as reported on the Nasdaq National Market on (1)
June 21, 1999, the business day preceding public announcement that S3 and
Diamond had entered into the merger agreement and (2) August 13, 1999, the last
full trading day for which closing prices were available at the time of the
printing of this document.
This table also sets forth the equivalent price per share of Diamond common
stock on those dates. The equivalent price per share is equal to the closing
price of a share of S3 common stock to be issued in exchange for each share of
Diamond common stock.
<TABLE>
<CAPTION>
S3 DIAMOND EQUIVALENT
COMMON COMMON PER
STOCK STOCK SHARE PRICE
------ ------- -----------
<S> <C> <C> <C>
June 21, 1999........ $9.44 $5.69 $4.91
August 13, 1999...... 11.00 5.16 5.72
</TABLE>
We urge you to obtain current market quotations before voting on the
proposals described in this document.
CREDIT AGREEMENT AND WARRANTS ISSUED BY DIAMOND; ONESTEP ACQUISITION (see page
75)
S3 and Diamond have entered into a credit agreement, under which S3 has
made three separate loans to Diamond totaling $20.0 million. In connection with
these loans, Diamond issued to S3 three warrants to purchase an aggregate of
4,597,871 shares of Diamond common stock. Because of Diamond's liquidity
position and resulting cash constraints, which resulted from its working capital
requirements and continued investments in new product lines such as the Rio
Internet audio players and HomeFree line of networking products, Diamond
assigned its rights to acquire OneStep, LLC, to S3 and, in July 1999, S3
acquired OneStep for approximately $10.0 million. OneStep is a software
development company that supplies the Rio Audio Manager for the Rio Internet
audio players.
6
<PAGE> 13
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected historical financial data of S3 and Diamond have
been derived from their respective historical financial statements, and should
be read in conjunction with those financial statements and the related notes
incorporated by reference in this document.
SELECTED HISTORICAL FINANCIAL DATA OF S3
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- ---------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- --------- -------- -------- -------- --------
(UNAUDITED)(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales.................. $101,553 $135,806 $ 224,639 $436,359 $439,243 $316,309 $140,309
Gross margin (loss)........ 26,804 22,170 (2,072) 135,174 168,876 126,542 42,334
Other operating
expense(1)............... -- 8,000 41,335 17,180 -- -- --
Income (loss) from
operations............... (25,014) (49,334) (163,899) (16,497) 56,694 50,952 6,111
Net income (loss).......... $(12,779) $ (7,513) $(113,204) $ 8,878 $ 41,588 $ 35,374 $ 5,502
Net income (loss) per share
Basic.................. $ (0.24) $ (0.15) $ (2.22) $ 0.18 $ 0.88 $ 0.83 $ 0.15
Diluted(2)............. $ (0.24) $ (0.15) $ (2.22) $ 0.17 $ 0.81 $ 0.75 $ 0.14
BALANCE SHEET DATA
Total assets............... 339,091 456,510 325,801 492,854 485,172 321,643 89,460
Long-term obligations...... 17,821 33,257 13,837 27,070 20,852 24,761 813
Convertible subordinated
notes.................... 103,500 103,500 103,500 103,500 103,500 -- --
Stockholders' equity....... $154,787 $265,604 $ 163,530 $270,840 $260,321 $205,864 $ 68,878
</TABLE>
- -------------------------
(1) Other operating expense for 1998 includes a write-off of acquired
technologies of $8.0 million, a charge for impairment of long-lived assets
of $27.2 million and a restructuring charge of $6.1 million. Other operating
expense for 1997 includes a charge for impairment of long-lived assets of
$17.2 million.
(2) Diluted net income (loss) per share includes the effect of incremental
shares issuable upon the conversion of the convertible subordinated notes,
the dilutive effect of outstanding options and an adjustment to net income
for the interest expense (net of income taxes) related to the notes unless
the impact of such conversion is anti-dilutive. The effect of the conversion
was anti-dilutive in 1998.
7
<PAGE> 14
SELECTED HISTORICAL FINANCIAL DATA OF DIAMOND
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales......................... $272,734 $358,543 $608,581 $443,281 $598,050 $467,635 $203,297
Gross profit...................... 48,994 62,089 66,687 55,795 112,766 108,350 57,983
Write-off of in-process
technology...................... -- -- -- -- -- 76,710 --
Income (loss) from operations..... (12,987) (948) (66,418) (67,719) 22,708 (19,273) 33,137
Net income (loss)................. $ (9,423) $ (357) $(39,489) $(45,605) $ 16,337 $(41,347) $ 20,116
Net income (loss) per share
Basic........................... $ (0.27) $ (0.01) $ (1.13) $ (1.33) $ 0.48 $ (1.55) $ 1.62
Diluted......................... $ (0.27) $ (0.01) $ (1.13) $ (1.33) $ 0.46 $ (1.55) $ 1.12
BALANCE SHEET DATA
Total assets...................... $311,503 $401,601 $306,910 $337,554 $332,438 $351,729 $120,854
Current portion of long-term
debt............................ 61,563 49,954 45,516 36,455 18,068 18,077 82,664
Long-term debt, net of current
portion......................... 1,413 1,718 1,550 1,873 2,730 11,705 34,167
Mandatorily redeemable preferred
stock........................... -- -- -- -- -- -- 29,174
Total stockholders' equity
(deficit)....................... $138,537 $185,310 $146,370 $180,521 $224,295 $208,610 $(55,949)
</TABLE>
- -------------------------
No dividends have been declared in any of the periods presented. Data for 1995
include acquisitions of Supra and Spea completed during the year, and data for
1998 include the acquisitions of Micronics and DigitalCast completed during the
year, all of which were accounted for as purchase business combinations.
8
<PAGE> 15
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The selected unaudited pro forma combined financial data of S3 and Diamond
are derived from the unaudited pro forma combined condensed financial
information, which gives effect to the transaction as a purchase, and should be
read in conjunction with the unaudited pro forma condensed combined financial
information and related notes, which are included elsewhere in this document.
The unaudited pro forma combined condensed balance sheet data assume that
the Diamond merger took place as of June 30, 1999 and combine S3's and Diamond's
historical balance sheets at that date. The unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1998 and for
the six months ended June 30, 1999 assumes that the merger took place on January
1, 1998.
The total estimated purchase price of the Diamond merger has been allocated
on a preliminary basis based on management's preliminary estimates of the fair
value of the assets and liabilities acquired. The actual allocation of the
purchase price may differ from that which has been reflected in the pro forma
financial statements after valuations and other procedures to be performed after
the closing of the Diamond merger has been completed. The impact of such changes
could be material.
The unaudited pro forma combined condensed information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the times indicated, nor is it necessarily indicative of
future operating results or the future financial condition of S3. In addition,
the data does not reflect synergies that might be achieved from combining these
operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $369,961 $ 828,233
Loss from operations................................ (45,135) (246,083)
Net loss............................................ (33,125) (185,495)
Loss per common share -- basic...................... $ (0.47) $ (2.67)
Weighted average common shares outstanding.......... 71,035 69,603
BALANCE SHEET DATA (AT END OF PERIOD)
Total assets........................................ $689,957
Long-term obligations, convertible subordinated
notes, and debt.................................. 170,876
Total stockholders' equity.......................... 329,035
</TABLE>
9
<PAGE> 16
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of S3 and
Diamond and combined per share data on a pro forma basis. You should read the
information set forth below along with the selected historical financial data
and the unaudited pro forma combined financial information included elsewhere in
this document. The pro forma combined financial data are not necessarily
indicative of the operating results that would have been achieved had the merger
been consummated as of the beginning of the periods presented and you should not
construe this data as representative of future operations.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1998 1999
------------ --------------
<S> <C> <C>
Historical -- S3:
Basic net loss per share.................................. $(2.22) $(0.24)
Diluted net loss per share................................ (2.22) (0.24)
Historical -- Diamond:
Basic net income (loss) per share......................... $(1.13) $(0.27)
Diluted net income (loss) per share....................... (1.13) (0.27)
Pro forma combined diluted net loss:
Per S3 share.............................................. $(2.67) $(0.47)
Per equivalent Diamond share.............................. (1.39) (0.24)
</TABLE>
The above Diamond equivalent pro forma combined diluted net loss per share
amounts are calculated by multiplying the S3 combined pro forma diluted net loss
per share amounts by the exchange ratio of 0.52.
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------
<S> <C>
Book value per share:
Historical S3............................................. $2.92
Historical Diamond........................................ 3.89
Pro forma combined per S3 share........................... 4.60
Pro forma combined per equivalent Diamond share........... 2.39
</TABLE>
The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at June 30, 1999 for
S3 and Diamond, respectively. The pro forma combined book value per S3 share is
computed by dividing pro forma stockholders' equity by the pro forma number of
shares of common stock of S3 outstanding as of June 30, 1999, assuming the
merger had occurred as of that date. The pro forma combined book value per
Diamond share is computed by multiplying the S3 pro forma combined book value
per share by the exchange ratio of 0.52.
S3 estimates it will incur acquisition costs arising from the merger
estimated to be approximately $16.7 million, which will be included as part of
the purchase price to be allocated to Diamond assets acquired. The pro forma
combined book value per share data give effect to the estimated direct
transaction and additional costs as if such costs had been incurred as of the
respective balance sheet date. The direct transaction and additional costs are
not included in the pro forma combined net income per share data. See "Unaudited
Pro Forma Combined Condensed Financial Information" beginning on page 78.
10
<PAGE> 17
RISK FACTORS
The following factors should be considered carefully by S3 and Diamond
stockholders in evaluating whether to approve the merger. These factors should
be considered together with the other information included or incorporated by
reference in this document. This document contains and incorporates by reference
forward-looking statements within the safe harbor provisions of the Private
Securities Litigation Reform Act. Forward-looking statements are based on
current expectations that involve a number of uncertainties, including those
disclosed in the risk factors below. Actual results could differ materially from
those projected in the forward-looking statements. See "Forward-Looking
Statements" on page 31.
RISKS RELATED TO THE MERGER
DIAMOND STOCKHOLDERS WILL RECEIVE 0.52 OF A SHARE OF S3 COMMON STOCK
DESPITE CHANGES IN THE MARKET VALUE OF DIAMOND COMMON STOCK OR S3 COMMON
STOCK.
As a result of the merger, each Diamond stockholder will receive 0.52 of a
share of S3 common stock for each share of Diamond common stock held. This
exchange ratio is fixed, and as a result, Diamond stockholders will not be
compensated for decreases in the market price of S3 common stock that could
occur before the merger. In addition, neither S3 nor Diamond can terminate the
merger agreement solely because S3's stock price declines. Diamond stockholders
are advised to obtain recent market quotations for S3 common stock and Diamond
common stock. The specific dollar value of S3 common stock to be received by
Diamond stockholders upon completion of the merger will depend on the market
value of S3 common stock at that time.
THE EXPECTED BENEFITS OF THE MERGER MAY NOT BE REALIZED. IF THAT HAPPENS,
S3'S OPERATING RESULTS AND THE MARKET PRICE FOR S3 COMMON STOCK MAY
DECLINE.
S3 and Diamond entered into the merger agreement with the expectation that
the merger will result in benefits to the combined company, including faster
time to market with new products and increased cost efficiencies. If we are not
able to integrate effectively our technologies, operations and personnel in a
timely and efficient manner, then the benefits of the merger will not be
realized. The difficulties, costs and delays involved in integrating the
companies, which may be substantial, may include:
- Distracting management and other key personnel, particularly senior
engineers involved in product development and product definition, from
the business of the combined company;
- Perceived and potential adverse changes in business focus or product
offerings;
- Potential incompatibility of business cultures;
- Costs and delays in implementing common systems and procedures,
particularly in integrating different information systems; and
- Inability to retain and integrate key management, technical, sales and
customer support personnel.
AS A RESULT OF THE MERGER, DIAMOND EXPECTS THAT SOME OF ITS SUPPLIERS WILL
NOT DO BUSINESS WITH THE COMBINED COMPANY, WHICH COULD CAUSE A DECLINE IN
THE COMBINED COMPANY'S SALES.
The announcement and consummation of the merger may disrupt Diamond's
relationships with certain suppliers of graphic chips who compete with S3. If
Diamond loses one or more of these
11
<PAGE> 18
suppliers, it may lose customers that want Diamond's products to contain
components from those suppliers. For example, a significant portion of Diamond's
graphics accelerator boards incorporate graphics chips supplied by NVIDIA
Corporation. NVIDIA is a direct competitor of S3 and may not continue to supply
the combined company with its products. To the extent that these relationships
are terminated or curtailed and Diamond cannot persuade its existing customers
who purchase products containing any of those suppliers' graphics chips to
purchase products containing S3 graphics chips, then Diamond's revenue
contribution to the combined company could be reduced significantly.
AS A RESULT OF THE MERGER, S3 EXPECTS THAT SOME OF ITS SIGNIFICANT
CUSTOMERS WILL NOT DO BUSINESS WITH THE COMBINED COMPANY, WHICH COULD CAUSE
A DECLINE IN THE COMBINED COMPANY'S SALES.
The announcement and consummation of the merger is expected to cause some
of S3's add-in card and motherboard customers to end or curtail their
relationships with the combined company. The loss of these customers of S3 could
cause a decline in sales for the combined company unless new sales by the
combined company have an offsetting effect. For example, Creative Technology
Ltd., a competitor of Diamond and currently a significant customer of S3, has
publicly stated that it may discontinue its relationship with S3 in the fall of
1999. This is expected because the combined company's products will comprise
both graphics chips and graphics boards. Thus, the combined company will be
competing with many of S3's current customers, which are graphics board
manufacturers. As a result, S3 expects that sales to some of its existing
customers following the merger will be reduced significantly from prior levels
and that these customers will no longer continue to be significant customers of
the combined company.
THE COMBINED COMPANY WILL BE DEPENDENT ON A LIMITED SOURCE OF GRAPHICS
CHIPS AND GRAPHICS BOARDS BECAUSE EACH COMPANY IS A SUPPLIER TO THE OTHER,
RESULTING IN HEIGHTENED RISKS BECAUSE ONE COMPANY'S SUPPLIERS MAY NOT MEET
THE OTHER COMPANY'S REQUIREMENTS.
As a result of the merger, the combined company will become significantly
dependent on S3's graphics chip design and development capabilities and
significantly dependent on Diamond's graphics board design, manufacturing and
marketing capabilities. This will occur because both companies will be more
restricted in their ability to select and use products produced by either
company's competitors prior to the merger. If either S3's graphics chips or
Diamond's graphics boards fail to meet the requirements of the market and the
combined company's customers, the combined company's relationship with those
customers could be hurt. This could negatively affect the combined company's
financial performance. In addition, the combined company will be highly
dependent on S3's ability to provide graphics chips on a timely basis meeting
the rigid scheduling and product specification requirements of OEMs. If S3's
graphics chips are not competitive or not provided on a timely basis, the
combined company would most likely not be able to readily obtain suitable
alternative graphics chips, which would result in the loss of revenue and
customers.
RIGHTS OF HOLDERS OF DIAMOND COMMON STOCK WILL BE CHANGED BY THE MERGER
BECAUSE S3 HAS ADOPTED A STOCKHOLDER RIGHTS PLAN, WHICH MAY HAVE THE EFFECT
OF PREVENTING A CHANGE OF CONTROL.
Upon consummation of the merger, Diamond stockholders will become S3
stockholders. There are important differences between the rights of stockholders
of Diamond and stockholders of S3. For example, S3 has adopted a stockholder
rights plan that may discourage certain types of transactions involving an
actual or threatened change of control of S3 even though a majority of the
stockholders believe the change of control to be in their best interest. Diamond
has no such plan. For a more detailed description of these differences, see
"Comparison of Stockholder Rights" on page 92.
12
<PAGE> 19
THE MERGER WILL GREATLY INCREASE THE NUMBER OF FREELY TRADEABLE S3 SHARES,
WHICH COULD DRIVE DOWN THE PRICE OF S3 STOCK.
If the merger is consummated, S3 will issue to stockholders of Diamond an
aggregate of approximately 18,626,700 shares of S3 common stock, depending on
the number of shares of Diamond common stock outstanding on the effective date
of merger, and will reserve approximately 2,682,330 shares for issuance pursuant
to Diamond stock options. These calculations are based on the number of Diamond
shares and options outstanding as of August 10, 1999, the record date. Almost
all of these newly issued shares or shares issued upon exercise of vested
options will be freely tradeable upon consummation of the merger. As a result,
substantial sales of S3 common stock could occur immediately after the merger,
which could cause the price of S3 common stock to drop.
THERE WILL BE SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER THAT COULD
HURT EARNINGS OF THE COMBINED COMPANY AND DIVERT RESOURCES FROM OTHER
PRODUCTIVE USES.
S3 estimates that its acquisition costs related to the merger will result
in aggregate costs and expenses of approximately $16.7 million. These expenses
will prevent the combined company from spending those amounts on other, possibly
more productive, uses. These costs will primarily relate to costs associated
with the payment of involuntary employee separation benefits, costs associated
with facilities consolidation and the fees of financial advisors, attorneys and
accountants. Although we believe that the costs will not exceed the estimate,
the estimate may be incorrect or unanticipated contingencies may occur that
substantially increase the costs of combining our operations.
SOME OFFICERS AND DIRECTORS OF DIAMOND HAVE CONFLICTS OF INTEREST ARISING
OUT OF PERSONAL BENEFITS TO BE RECEIVED IN THE MERGER THAT COULD INFLUENCE
THEIR SUPPORT OF THE MERGER.
The directors and officers of Diamond participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, the stockholders of
Diamond. In particular, all vice presidents and executive officers of Diamond
have agreements with Diamond entitling them to severance benefits and
accelerated vesting of up to one year of their options to purchase shares of
Diamond common stock if their employment relationship is terminated following
the merger.
The personal benefits to be received in the merger by William J. Schroeder,
Diamond's President and Chief Executive Officer, and certain of Diamond's
directors, including Gregorio Reyes and James T. Schraith, may raise conflicts
of interest for each of these individuals because the receipt of these benefits
may favorably influence their support of the merger. In particular, all Diamond
options granted to the officers, directors and employees of Diamond will be
assumed by S3 and thereafter entitle the holders of those options to acquire S3
common stock, assuming their continuous status as officers, directors or
employees. Messrs. Schroeder, Reyes and Schraith will be nominated to serve as
directors on the S3 board of directors. Options held by Messrs. Reyes and
Schraith under the Diamond Director Stock Option Plan will continue to vest. See
"Interests of Some of Diamond's Executive Officers and Directors in the Merger"
on page 60.
FAILURE TO COMPLETE THE MERGER COULD HARM DIAMOND'S STOCK PRICE AND FUTURE
BUSINESS AND OPERATIONS.
If the merger is not completed for any reason, Diamond may be subject to a
number of material risks, including the following:
- Diamond may be required to pay S3 a termination fee of $5.0 million;
13
<PAGE> 20
- Diamond will owe S3 $20.0 million under the credit agreement with S3;
- the price of Diamond common stock may decline to the extent that the
current market price of Diamond common stock reflects a market assumption
that the merger will be completed; and
- costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed.
In addition, Diamond's customers may, in response to the announcement of
the merger, delay or defer purchasing decisions. Any delay or deferral in
purchasing decisions by Diamond customers could materially and adversely affect
Diamond's business, regardless of whether the merger is ultimately completed.
Similarly, current and prospective Diamond employees may experience uncertainty
about their future role with S3 until S3's strategies with regard to Diamond are
announced or executed. This may adversely affect Diamond's ability to attract
and retain key management, marketing and technical personnel.
Further, if the merger is terminated and Diamond's board of directors
determines to seek another merger or business combination, Diamond may be unable
to find a partner willing to pay an equivalent or more attractive price than the
price proposed to be paid in the merger. In addition, while the merger agreement
is in effect and subject to limited exceptions described on pages 67 and 68 of
this document, Diamond is prohibited from soliciting, initiating or inducing or
entering into certain extraordinary transactions, such as a merger, sale of
assets or other business combination, with any party other than S3. Also, if the
merger agreement is terminated, because of the warrants to purchase Diamond
common stock granted to S3, Diamond may not be able to account for future
transactions as a "pooling of interests."
Diamond's cash balances and available credit under existing bank lines may
not be sufficient to meet anticipated operating and investing requirements for
the short term and, if the merger is not completed, Diamond will have to seek
additional capital. This capital may be unavailable on reasonable terms, if at
all. For additional information, Diamond stockholders should review Diamond's
quarterly report on Form 10-Q for the quarter ended June 30, 1999, including the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations." This report has been filed with the Securities and
Exchange Commission and is incorporated by reference in this document. See
"Where You Can Find More Information" on page 104.
RISKS RELATED TO THE BUSINESS AND OPERATIONS OF THE COMBINED COMPANY
If any of the following risks occurs, the combined company's business,
operating results and financial condition would suffer. In that event, the
trading price of S3's common stock could decline, and you may lose all or part
of your investment in S3's common stock.
THE MERGER WILL COMBINE TWO COMPANIES WHOSE QUARTERLY OPERATING RESULTS ARE
SUBJECT TO FLUCTUATIONS CAUSED BY MANY FACTORS, WHICH COULD RESULT IN S3
FAILING TO ACHIEVE ITS REVENUE OR PROFITABILITY EXPECTATIONS.
Our quarterly and annual results of operations have varied significantly in
the past and are likely to continue to vary in the future due to a number of
factors, many of which are beyond our control. Any one or more of the factors
listed below or other factors could cause S3 to fail to achieve its
14
<PAGE> 21
revenue or profitability expectations. The failure to meet market expectations
could cause a sharp drop in the combined company's stock price. These factors
include:
- the industry in which the company competes is always changing with the
constant introduction of new technologies, products and methods of doing
business;
- the ability of the company to develop, introduce and market successfully
new or enhanced products;
- the ability to introduce and market products in accordance with
specialized customer design requirements and short design cycles;
- changes in the relative volume of sales of various products with
sometimes significantly different margins;
- changes in demand for the company's products and their customers'
products;
- rapid changes in electronic commerce on which the company or the
company's customers may not capitalize or which erode the company's
traditional business base;
- frequent gains or losses of significant customers or strategic
relationships;
- unpredictable volume and timing of customer orders;
- the availability, pricing and timeliness of delivery of components for
the company's products;
- the availability of wafer capacity using advanced process technologies;
- the timing of new product announcements or introductions by the combined
company or by competitors;
- product obsolescence and the management of product transitions;
- production delays;
- decreases in the average selling prices of products;
- seasonal fluctuations in sales; and
- general economic conditions, including economic conditions in Asia and
Europe in particular, that could affect the timing of customer orders and
capital spending and result in order cancellations or rescheduling.
Some or all of these factors could adversely affect demand for the
company's products and, therefore, the operating results of the combined
company, in the future.
Most of our operating expenses are relatively fixed in the short term. We
may be unable to rapidly adjust spending to compensate for any unexpected sales
shortfall, which could harm quarterly operating results. Because the lead times
of firm orders are typically short in the graphics industry, the company does
not have the ability to predict future operating results with any certainty.
Therefore, sudden changes that are outside the control of the combined company,
such as general economic conditions, the actions or inaction of competitors,
customers, third-party vendors of operating systems software, and independent
software application vendors, may materially and adversely affect the combined
company's performance.
Both S3 and Diamond have generally shipped more products in the third month
of each quarter than in either of the first two months of the quarter, with
levels of shipment in the third month higher towards the end of the month. This
pattern, which is common in the semiconductor and multimedia communication
industries, is likely to continue for the combined company and makes future
quarterly operating results less predictable.
15
<PAGE> 22
As a result of the above factors, you should not rely on period-to-period
comparisons of results of operations as an indication of future performance. The
results of any one quarter are not indicative of results to be expected for a
full fiscal year.
BOTH DIAMOND AND S3 EXPERIENCED A NET LOSS FOR SEVERAL RECENT QUARTERS AND
THE COMBINED COMPANY MAY CONTINUE TO EXPERIENCE NET LOSSES IN THE FUTURE.
S3 had a net loss of $12.8 million for the six months ended June 30, 1999
and for all of 1998. S3's net sales decreased 25% for the six months ended June
30, 1999 as compared to net sales for the six months ended June 30, 1998. These
results occurred primarily because S3 did not offer competitive products in the
high end of the graphics and multimedia accelerator market. As a result, S3's
sales consisted of primarily older generation and lower price products that were
sold into markets that had significant price competition. To the extent that S3
continues to experience net losses in the future, the operating results of the
combined company will be adversely affected.
Diamond had a net loss of $9.4 million for the six months ended June 30,
1999. Diamond's net sales decreased 24% for the six months ended June 30, 1999
as compared to the six months ended June 30, 1998. The decrease in net sales was
primarily attributable to reduced shipments of Diamond's graphics accelerator
products. The decrease was partially offset by increased shipments of sound
cards, as well as revenues from new products such as the Rio Internet music
players and the HomeFree line of home networking products. Revenues from
graphics accelerators declined in part due to continued reductions in demand for
entertainment specific products. In particular, Diamond is no longer building
and selling high performance 3D-only products. In addition, demand and pricing
for graphics accelerators that combine 2D and 3D display and are targeted
specifically for game enthusiasts declined. Further, revenue for low-end graphic
accelerators continued to decline significantly as more of these market
requirements were met by the direct installation of graphics chips onto PC
motherboards. To the extent that Diamond continues to experience net losses in
the future, the operating results of the combined company will be adversely
affected.
The combined company's pro forma net loss for the six months ended June 30,
1999 was $33.1 million, and the pro forma net loss for the year ended December
31, 1998 was $185.5 million. We may incur net losses in the short term as the
operations of the companies are integrated. We cannot assure you that the
combined company will be able to achieve or maintain profitability.
THE DEMAND FOR THE COMBINED COMPANY'S PRODUCTS HAS HISTORICALLY BEEN WEAKER
IN CERTAIN QUARTERS.
Due to industry seasonality, demand for PCs and PC related products is
strongest during the fourth quarter of each year and is generally slower in the
period from April through August. This seasonality may become more pronounced
and material in the future to the extent that:
- a greater proportion of the combined company's sales consist of sales
into the retail/mass merchant channel;
- PCs become more consumer-oriented or entertainment-driven products; or
- the combined company's net revenue becomes increasingly based on
entertainment-related products.
Also, to the extent the combined company expands its European sales, it may
experience relatively weak demand in third calendar quarters due to historically
weak summer sales in Europe.
16
<PAGE> 23
THE COMBINED COMPANY WILL OPERATE IN MARKETS THAT ARE INTENSELY AND
INCREASINGLY COMPETITIVE, AND WILL BE IN CONSTANT AND INCREASING RISK OF
LOSING CUSTOMERS AND BEING SUBJECT TO DECREASING PRODUCT PRICES AND PROFIT
MARGINS.
The personal computer multimedia and communications markets in which S3 and
Diamond compete are intensely competitive and are likely to become more
competitive in the future. Because of this competition, both companies face a
constant and increasing risk of losing customers to their competitors. The
competitive environment also creates downward pressure on prices and requires
higher spending to address the competition, both of which tend to keep profit
margins lower. S3 and Diamond believe that the principal competitive factors for
their products are:
- product performance and quality;
- conformity to industry standard application programming interfaces, or
APIs;
- access to customers and distribution channels;
- reputation for quality and strength of brand;
- manufacturing capabilities and cost of manufacturing;
- price;
- product support; and
- ability to bring new products to the market in a timely manner.
Historically, the gross profit margins on Diamond's products have been
lower than the margins on S3's products. By combining with Diamond, S3's average
gross margins will likely be lower than they were prior to the merger.
Many of S3's and Diamond's current and potential competitors have
substantially greater financial, technical, manufacturing, marketing,
distribution and other resources than S3 or Diamond. These competitors may also
have greater name recognition and market presence, longer operating histories,
greater market power and product breadth, lower cost structures and larger
customer bases than S3 and Diamond. As a result, these competitors may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements. In addition, some of S3's principal competitors offer a single
vendor solution because they maintain their own semiconductor foundries and may
therefore benefit from certain capacity, cost and technical advantages.
In some markets where Diamond is a relatively new entrant and S3 has no
presence, such as modems, home networking, sound cards and consumer electronics
Internet music players, the combined company will face dominant competitors that
include 3Com (home networking and modems), Creative Technologies (sound cards,
modems and Internet music players), Intel (home networking) and Sony (consumer
electronic music players). In addition, the markets in which Diamond competes
are expected to become increasingly competitive as PC products support
increasingly more robust multimedia functions and companies that previously
supplied products providing distinct functions (for example, companies today
primarily in the sound, modem, microprocessor or motherboard markets) emerge as
competitors across broader or more integrated product categories.
In addition to graphics board manufacturers, Diamond's competitors include
OEMs that internally produce graphics chips or integrate graphics chips on the
main computer processing board of their personal computers, commonly known as
the motherboard, and makers of other personal
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computer components and software that are increasingly providing graphics or
video processing capabilities.
THE COMBINED COMPANY WILL DEPEND ON THE PERSONAL COMPUTER AND GRAPHICS AND
VIDEO CHIP MARKETS, WHICH ARE RAPIDLY CHANGING, HIGHLY CYCLICAL AND
VULNERABLE TO SHARP CHANGES IN DEMAND.
S3 and Diamond operate in the personal computer and graphics/video chip
markets. These markets are constantly and rapidly changing and have in the past,
and may in the future, experience significant downturns. These downturns are
characterized by lower product demand and accelerated product price reductions.
In the event of a downturn, both S3 and Diamond would likely experience
significantly reduced demand for their products. Substantially all of S3's and
Diamond's revenues are currently derived from products sold for use in or with
personal computers. In the near term, the combined company expects to continue
to derive almost all of its revenues from the sale of products for use in or
with personal computers. Changes in demand in the personal computer and
graphics/video chip markets could be large and sudden. Since graphics board and
personal computer manufacturers often build inventories during periods of
anticipated growth, they may be left with excess inventories if growth slows or
if they have incorrectly forecasted product transitions. In such cases, the
manufacturers may abruptly stop purchasing additional inventory from suppliers
such as the combined company until the excess inventory has been used. This
suspension of purchases or any reduction in demand for personal computers
generally, or for particular products that incorporate the combined company's
products, would negatively impact the combined company's revenues and financial
results. The combined company may experience substantial period-to-period
fluctuations in results of operations due to these general semiconductor
industry conditions.
S3 HAS ONLY RECENTLY STARTED TO OFFER PRODUCTS INTENDED TO ADDRESS ALL
PERFORMANCE SEGMENTS OF THE COMMERCIAL AND CONSUMER PC MARKET.
The desktop graphics accelerator market has recently transitioned from 2D
acceleration to 3D acceleration and has recently added video and TV processing
capabilities. Products that compete in the high performance segment of that
market have higher gross margins than products in the mainstream PC or in the
sub-$1,000, or "segment zero," PC market. S3 commenced shipment of its Savage3D
product during the third quarter of 1998. This product was intended to address
the high performance 3D acceleration market. The Savage3D failed to achieve
significant market acceptance. As a result, S3's products only addressed the
lower margin segments of the market, which contributed to S3's net losses in
recent periods. S3 has recently commenced shipments of its Savage4 product,
which is designed to compete in multiple performance segments of the commercial
and consumer PC markets and to satisfy multiple-function market needs, such as
graphics, video and DVD support. S3 does not know whether Savage4 will be able
to compete successfully in those segments. If S3 is not able to introduce and
successfully market higher performance products, the gross margin and
profitability of the combined company could be negatively affected.
DEMAND FOR OUR PRODUCTS MAY DECREASE IF THE SAME CAPABILITIES PROVIDED BY
OUR PRODUCTS BECOME AVAILABLE IN OPERATING SYSTEMS OR EMBEDDED IN OTHER
PERSONAL COMPUTER COMPONENTS.
A majority of Diamond's net sales, and substantially all of S3's net sales,
are derived from the sale of graphics boards and multimedia accelerators for PC
subsystems. However, there is a trend within the industry for lower performance
graphics and video functionality to migrate from the graphics board to other
personal computer components or into operating systems. We expect that
additional specialized graphics processing and general purpose computing
capabilities will be integrated into future versions of Intel and other
Pentium-based microprocessors and that standard
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multimedia accelerators in the future will likely integrate memory, system
logic, audio, communications or other additional functions. In particular, Intel
and others have announced plans to develop chips that integrate graphics and
processor functions to serve the lower-cost PC market. These could significantly
reduce the demand for the company's products. Graphics boards are usually used
in higher-end personal computers offering the latest technology and performance
features. However, as graphics functionality becomes technologically stable and
widely accepted by personal computer users, it typically migrates to the
personal computer motherboard. We expect this trend to continue, especially with
respect to low-end graphics boards. In this regard, the MMX instruction set from
Intel and the expanded capabilities provided by the DirectX applications
programming interface from Microsoft have increased the capability of
Microsoft's operating systems to control display features that have
traditionally been performed by graphics boards. As a result of these trends of
technology migration, our success largely depends on our ability to continue to
develop products that incorporate new and rapidly evolving technologies that
manufacturers have not yet fully incorporated onto personal computer
motherboards or into operating systems.
S3 has not previously offered integrated graphics/core logic accelerator
products that provide these functions, which have traditionally been provided by
separate single function chips or chipsets. We have and intend to continue to
expand the scope of our research and development efforts to provide these
functions, which will require that we hire engineers skilled in these areas and
promote additional coordination among our design and engineering groups.
Alternatively, we may find it necessary or desirable to license or acquire
technology to enable us to provide these functions, and we cannot assure you
that any such technology will be available for license or purchase on terms
acceptable to us.
We believe that a large portion of the growth in the sales of personal
computers may be in sealed systems that contain most functionality on a single
systems board and are not upgradeable in the same manner as are most personal
computers. These sealed computers would contain a systems board that could
include CPU, system memory, graphics, audio and Internet or network connectivity
functionality on a single board. Although Diamond acquired Micronics Computers
in 1998 for the purposes of obtaining technical and marketing expertise and
brand acceptance in CPU motherboard design and developing integrated multimedia
system board products, we cannot assure you that a significant market will exist
for low-cost fixed system boards or that the acquisition of Micronics will
enable the combined company to compete successfully in this emerging market or
in the current motherboard market.
IF THE COMBINED COMPANY DOES NOT CONTINUE TO DEVELOP AND MARKET NEW AND
ENHANCED PRODUCTS, IT WILL NOT BE ABLE TO COMPETE SUCCESSFULLY IN ITS
MARKETS.
The markets for which our products are designed are intensely competitive
and are characterized by short product life cycles, rapidly changing technology,
evolving industry standards and declining average selling prices. As a result,
we cannot succeed unless we consistently develop and market new products. We
believe this will require expenditures for research and development in the
future consistent with our combined historical research and development
expenditures, taking into account efficiencies that may be achieved in
integrating the companies' research and development organizations. To succeed in
this environment, we must anticipate the features and functionality that
customers will demand. We must then incorporate those features and functionality
into products that meet the design, performance, quality and pricing
requirements of the personal computer market and the timing requirements of PC
OEMs and retail selling seasons. We have in the past experienced delays in
completing the development and introduction of new products, and we cannot
assure you that we will not experience similar delays in the future. In the
past, each of Diamond's and S3's
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business has been seriously harmed when we developed products that failed to
achieve significant market acceptance. This could occur in the future as well.
IF WE DO NOT CONTINUE TO DEVELOP AND MARKET NEW AND ENHANCED PRODUCTS, OUR
AVERAGE SELLING PRICES AND GROSS PROFITS WILL LIKELY DECLINE.
We must continue to develop new products in order to maintain average
selling prices and gross margins. As the markets for our products continue to
develop and competition increases, we anticipate that product life cycles will
shorten and average selling prices will decline. In particular, average selling
prices and, in some cases, gross margins for each of our products will decline
as products mature. A decline in selling prices may cause the net sales in a
quarter to be lower than those of a preceding quarter or corresponding quarter
in a prior year, even if more units were sold during that quarter than in the
preceding or corresponding quarter of a prior year. To avoid that, we must
successfully identify new product opportunities and develop and bring new
higher-end and higher-margin products to market in time to meet market demand.
The availability of new products is typically restricted in volume early in a
product's life cycle. If customers choose to wait for the new version of a
product instead of purchasing the current version, our ability to procure
sufficient volumes of these new products to meet higher customer demand will be
limited. If this happens, the revenues and operating margins of the combined
company could be harmed.
OUR PRODUCTS HAVE SHORT PRODUCT LIFE CYCLES, REQUIRING US TO MANAGE PRODUCT
TRANSITIONS SUCCESSFULLY IN ORDER TO REMAIN COMPETITIVE.
Our products have short product life cycles. If we fail to introduce new
products successfully within a given time frame, our competitors could gain
market share, which could cause us to lose revenue. Further, continued failure
to introduce competitive new products on time could also damage our brand name,
reputation and relationships with our customers and cause longer-term harm to
our financial condition. Also, we anticipate that the transition of the design
of Diamond's boards based on new graphics chip architectures by S3 will require
significant effort. Diamond's major OEM customers typically introduce new
computer system configurations as often as twice a year. The life cycles of
Diamond's graphics boards typically range from six to twelve months and the life
cycles of S3's graphic chips typically range from twelve to eighteen months.
Short product life cycles are the result of frequent transitions in the computer
market in which products rapidly incorporate new features and performance
standards on an industry-wide basis. Our products must be able to support the
new features and performance levels being required by personal computer
manufacturers at the beginning of these transitions. Otherwise, we would likely
lose business as well as the opportunity to compete for new design contracts
until the next product transition. Failing to develop products with required
features and performance levels or a delay as short as a few months in bringing
a new product to market could significantly reduce our revenues for a
substantial period.
WE WILL FACE INVENTORY RISKS THAT ARE INCREASED BY A COMBINATION OF SHORT
PRODUCT LIFE CYCLES AND LONG COMPONENT LEAD TIMES.
The short product life cycles of Diamond's board-based products also give
rise to a number of risks involving product and component inventories. These
risks are heightened by the long lead times that are necessary to acquire some
components of our products. We may not be able to reduce our production or
inventory levels quickly in response to unexpected shortfalls in sales. This
could leave us with significant and costly obsolete inventory. Long component
lead times could cause these inventory levels to be higher than they otherwise
would be. Long component lead times may also prevent us from quickly taking
advantage of an unexpected new product cycle. This can lead to costly lost sales
opportunities and loss of market share, which could result in a loss of
revenues. For
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example, the timing and speed of the PCI-to-AGP bus transition and the
SGRAM-to-SDRAM memory transition led to an excess inventory of PCI and
SGRAM-based products at Diamond and in its distribution channel, which in turn
resulted in lower average selling prices, lower gross margins, end-of-life
inventory write-offs, and higher price protection charges during the second and
third quarters of 1998. Further, declining demand for an excess supply of
Monster 3D II and competitive 3D gaming products in the channel during the third
quarter of 1998 resulted in rapidly declining revenue and prices vis-a-vis the
second quarter of 1998, and resulted in price protection charges for this class
of product in the third quarter of 1998. Diamond estimates and accrues for
potential inventory write-offs and price protection charges. We cannot assure
you that these estimates and accruals will be sufficient in future periods, or
that additional inventory write-offs and price protection charges will not be
required. The impact of these charges on Diamond's operating results in 1998 and
the first quarter of 1999 was material. Any similar occurrence in the future
could materially and adversely affect our operating results.
WE DEPEND ON THIRD PARTIES FOR THE MANUFACTURE OF OUR PRODUCTS.
S3 currently relies on two independent foundries to manufacture all of its
products either in finished form or wafer form. S3 has a "take or pay" contract
with Taiwan Semiconductor Manufacturing Company and a joint venture foundry,
United Semiconductor Corporation. S3's agreement with TSMC provides capacity
through 2002 and requires S3 to make annual advance payments to purchase
specified capacity to be applied against the following year's capacity or to
forfeit advance payments against those amounts. In the fourth quarter of 1998,
S3 wrote off approximately $4.0 million of the 1998 prepaid production capacity
because it did not fully utilize the capacity related to the advance payment. As
of June 30, 1999, S3's note payable to TSMC was $14.4 million. If S3 purchases
excess inventories of particular products or chooses to forfeit advance
payments, its operating results could be harmed.
In June 1999, S3 and United Microelectronics Corporation, the majority
owner of the USC foundry joint venture, entered into an agreement under which S3
gave up its rights to elect a director on USC's board. UMC has also announced
plans to merge USC with UMC, with USC shareholders, including S3, to receive UMC
shares. S3 will lose its ability to influence the USC board and any veto power
S3 had over actions to be taken by USC. As a result, S3's relationship with USC
will be based on its foundry capacity agreement rather than a joint venture.
Although S3 is currently unaware of any changes that UMC may propose in the
future to the foundry relationship, S3 will have less ability to influence
whether changes that could be adverse to S3 will be made in the future.
S3 conducts business with one of its current foundries by delivering
written purchase orders specifying the particular product ordered, quantity,
price, delivery date and shipping terms. This foundry is therefore not obligated
to supply products to S3 for any specific period, in any specific quantity or at
any specific price, except as may be provided in a particular purchase order. To
the extent a foundry terminates its relationship with S3 or S3's supply from a
foundry is interrupted or terminated for any other reason, such as a natural
disaster or an injunction arising from alleged violations of third party
intellectual property rights, S3 may not have a sufficient amount of time to
replace the supply of products manufactured by that foundry. S3 may be unable to
obtain sufficient advanced process technology foundry capacity to meet customer
demand in the future. From time to time, S3 may evaluate potential new sources
of supply. However, the qualification process and the production ramp-up for
additional foundries has in the past taken, and could in the future take, longer
than anticipated. Accordingly, there can be no assurance that such sources will
be able or willing to satisfy S3's requirements on a timely basis or at
acceptable quality or per unit prices.
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TSMC and USC are both located in the Science-Based Industrial Park in Hsin
Chu City, Taiwan. S3 currently expects these foundries to supply the substantial
portion of its products in 1999 and 2000. Disruption of operations at these
foundries for any reason, including work stoppages, political or military
conflicts, earthquakes or other natural disasters, could cause delays in
shipments of S3's products and could have a material adverse effect on the
combined company's operating results. In addition, as a result of the rapid
growth of the semiconductor industry based in the Science-Based Industrial Park,
severe constraints have been placed on the water and electricity supply in that
region. Any shortages of water or electricity could adversely affect S3's
foundries' ability to supply S3's products, which could have a material adverse
effect on the combined company's operating results.
Diamond relies on independent surface mount technology subcontractors to
manufacture, assemble or test its board level products, as well as its first
"finished" consumer electronics product, the Rio, an Internet music player.
Diamond typically procures its components, assembly and test services and
assembled products through purchase orders and does not have specific volume
purchase agreements with each of its subcontractors. Most of Diamond's
subcontractors could cease supplying the services, products or components at any
time with limited or no penalty. If Diamond needs to replace a key
subcontractor, Diamond could incur significant manufacturing set-up costs and
delays. Also, Diamond may be unable to find suitable replacement subcontractors.
Diamond's emphasis on maintaining low internal and channel inventory levels may
exacerbate the effects of any shortage that may result from the use of
sole-source subcontractors during periods of tight supply or rapid order growth.
Further, some of the subcontractors used by Diamond are located outside the
United States, which may present heightened process control, quality control,
political, infrastructure, transportation, tariff, regulatory, legal, import,
export, economic or supply chain management risks.
WE HAVE SIGNIFICANT PRODUCT CONCENTRATION AND SIGNIFICANTLY DEPEND ON THE
HEALTH OF THE GRAPHICS AND MULTIMEDIA ACCELERATOR MARKET, WHICH MEANS THAT
A DECLINE IN DEMAND FOR A SINGLE PRODUCT, OR IN THE GRAPHICS AND MULTIMEDIA
ACCELERATOR MARKET IN GENERAL, COULD SEVERELY IMPACT OVERALL REVENUES AND
FINANCIAL RESULTS.
S3's revenues are dependent on the markets for graphics/video chips for PCs
and on S3's ability to compete in those markets. S3's business would be
materially harmed if it were unsuccessful in selling these graphic chips.
Historically, over 75% of Diamond's net sales have come from sales of graphics
and video accelerator subsystems. Although Diamond has introduced audio
subsystems, has entered the PC modem and home networking markets, and has
entered into the PC consumer electronics market with its Rio Internet music
player, graphics and video accelerator subsystems are expected to continue to
account for the majority of the combined company's sales for the foreseeable
future. A decline in demand or average selling prices for graphics and video
accelerator subsystems, whether as a result of new competitive product
introductions, price competition, excess supply, widespread cost reduction,
technological change, incorporation of the products' functionality onto personal
computer motherboards or otherwise, would have a material adverse effect on the
combined company's sales and operating results.
S3'S SALES ARE CONCENTRATED WITHIN A LIMITED NUMBER OF CUSTOMERS.
S3 expects a significant portion of its future sales to remain concentrated
within a limited number of strategic customers. If it loses one or more of these
customers, the combined company's operating results would be harmed.
One customer, IBM Corporation, accounted for 25% of net sales for the six
months ended June 30, 1999. Two distributors, Synnex Technology, Inc. and
Promate Electronic Co., accounted for
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21% and 12% of net sales, respectively, for the six months ended June 30, 1999.
One customer, IBM Corporation, accounted for 14% of net sales in 1998. Synnex
and Promate accounted for 39% and 13% of net sales in 1998, respectively. Two
distributors and one customer, Synnex, CNW International Limited and Compaq
Computer Corporation, together accounted for a total of 45% of net sales in
1997. Diamond and Synnex together accounted for 31% of net sales in 1996. S3
expects a significant portion of its future sales to remain concentrated within
a limited number of strategic customers. S3 may be unable to retain its
strategic customers. These customers may cancel or reschedule orders. Canceled
orders may not be replaced by other sales.
THE MANUFACTURERS ON WHICH S3 DEPENDS MAY EXPERIENCE MANUFACTURING YIELD
PROBLEMS THAT COULD INCREASE S3'S PER UNIT COSTS AND OTHERWISE JEOPARDIZE
THE SUCCESS OF S3'S PRODUCTS.
S3's products are graphics chips. Graphics chips are difficult to make.
Their production requires a complex and precise process that often presents
problems that are difficult to diagnose and time-consuming or expensive to
solve. As a result, companies like S3 often experience problems in achieving
acceptable wafer manufacturing yields. S3's chips are manufactured from round
wafers made of silicon. During manufacturing, each wafer is processed to contain
numerous individual integrated circuits, or chips. S3 may reject or be unable to
sell a percentage of wafers or chips on a given wafer because of:
- minute impurities,
- difficulties in the fabrication process,
- defects in the masks used to print circuits on a wafer,
- electrical performance,
- wafer breakage, or
- other factors.
S3 refers to the proportion of final good chips that have been processed,
assembled and tested relative to the gross number of chips that could be
constructed from the raw materials as its manufacturing yields. These yields
reflect the quality of a particular wafer. Depending on the specific product, S3
has negotiated with its manufacturers to pay either an agreed upon price for all
wafers or a price that is typically higher for only wafers of acceptable
quality. If the payment terms for a specific product require us to pay for all
wafers, and if yields associated with that product are poor, we bear the risk of
those poor manufacturing yields.
WE ARE SUBJECT TO RISKS RELATING TO PRODUCT RETURNS AND PRICE PROTECTION.
Diamond often grants limited rights to customers to return unsold
inventories of Diamond's products in exchange for new purchases, also known as
"stock rotation," as well as price protection on unsold inventory, which allows
customers to receive a price adjustment on existing inventory when Diamond's
published price is reduced. Also, some of Diamond's retail customers will
readily accept returned products from their own retail customers, and these
returned products are, in turn, returned to Diamond for credit. Diamond
estimates returns and potential price protection on unsold inventory in its
distribution channel. Diamond accrues reserves for estimated returns, including
warranty returns and price protection, and since the fourth quarter of 1998,
reserves the gross margin associated with channel inventory levels that exceed
four weeks of demand. Diamond experienced significant price protection charges
due to the transition from PCI to AGP-based graphics accelerators and from SGRAM
to SDRAM-based graphics accelerators during the second, third and fourth
quarters of
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1998. Diamond may be faced with further significant price protection charges as
Diamond and its competitors move to reduce channel inventory levels of current
products, such as Diamond's Master Fusion, as new product introductions are
made.
Similarly, S3's distributors are given limited rights to return products
purchased by them, and S3 provides its distributors with price protection in the
event that it reduces the price of its products. These returns have not
historically resulted in any significant price protection charges. However, S3
may incur significant price protection charges in the future.
WE DEPEND ON SALES THROUGH DISTRIBUTORS. IF RELATIONSHIPS WITH OR SALES
THROUGH DISTRIBUTORS DECLINE, THE COMBINED COMPANY'S OPERATING RESULTS WILL
BE HARMED.
A substantial percentage of S3's products are distributed through add-in
card manufacturers that in turn sell to value-added resellers, system
integrators, OEMs and distributors. Accordingly, S3 depends on these add-in card
manufacturers to assist it in promoting market acceptance of its products. The
board manufacturers that purchase S3's products are generally not committed to
making future purchases of its products and, therefore, could discontinue
incorporating S3's products into their graphics boards in favor of a
competitor's product or for any other reason.
Diamond sells its products through a network of domestic and international
distributors, and directly to major retailers/mass merchants, value-added
resellers and OEM customers. Diamond's future success is dependent on the
continued viability and financial stability of its customer base. Computer
distribution and retail channels historically have been characterized by rapid
change, including periods of widespread financial difficulties and consolidation
and the emergence of alternative sales channels, such as direct mail order,
telephone sales by PC manufacturers and electronic commerce on the worldwide
web. The loss of, or a reduction in, sales to certain of Diamond's key
distribution customers as a result of changing market conditions, competition or
customer credit problems could materially and adversely affect Diamond's
operating results. Likewise, changes in distribution channel patterns, such as:
- increased electronic commerce via the Internet,
- increased use of mail-order catalogues,
- increased use of consumer-electronics channels for personal computer
sales or
- increased use of channel assembly to configure PC systems to fit
customers' requirements
could affect Diamond in ways not yet known. For example, the rapid emergence of
Internet-based e-commerce, in which products are sold direct to consumers at low
prices, is putting substantial strain on some of Diamond's traditional
distribution channels.
Inventory levels of Diamond's products in the two-tier distribution
channels used by Diamond generally are maintained in a range of one to two
months of customer demand. These channel inventory levels tend toward the low
end of the months-of-supply range when demand is stronger, sales are higher and
products are in short supply. Conversely, during periods when demand is slower,
sales are lower and products are abundant, channel inventory levels tend toward
the high end of the months-of-supply range. Frequently, in these situations,
Diamond attempts to ensure that distributors devote a greater degree of their
working capital, sales and logistics resources to Diamond's products than to
those of competitors. Similarly, Diamond's competitors attempt to ensure that
their own products are receiving a disproportionately higher share of the
distributors' working capital and logistics resources. In an environment of
slower demand and abundant supply of products, price declines and channel
promotional expenses are more likely to occur and, should they occur, are more
likely to have a
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significant impact on Diamond's operating results. Further, in an event like
this, high channel inventory levels may result in substantial price protection
charges. These price protection charges have the effect of reducing net sales
and gross profit. Consequently, in taking steps to bring its channel inventory
levels down to a more desirable level, Diamond may cause a shortfall in net
sales during one or more accounting periods. These efforts to reduce channel
inventory might also result in price protection charges if prices are decreased
to move product out to final consumers, having a further adverse impact on
operating results. Diamond accrues for potential price protection charges on
unsold channel inventory. We cannot assure you, however, that any estimates,
reserves or accruals will be sufficient or that any future price reductions will
not seriously harm our operating results.
Diamond's products are priced for and generally aimed at the higher
performance and higher quality segment of the market. Therefore, to the extent
that OEMs and value added resellers focus on low-cost solutions rather than
high-performance solutions, an increase in the proportion of Diamond's sales to
OEMs may result in an increase in the proportion of Diamond's revenue that is
generated by lower-selling price and lower-gross-margin products, which could
adversely affect future gross margins and operating results of Diamond.
WE RELY ON INTELLECTUAL PROPERTY AND OTHER PROPRIETARY INFORMATION THAT MAY
NOT BE ADEQUATELY PROTECTED AND THAT MAY BE EXPENSIVE TO PROTECT.
The industry in which we compete is characterized by vigorous protection
and pursuit of intellectual property rights. We rely heavily on a combination of
patent, trademark, copyright, and trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect our intellectual
property. If these efforts are not sufficient, our business may suffer from the
piracy of our technology and the associated loss of sales. Also, the protection
provided to our proprietary technology by the laws of foreign jurisdictions,
many of which offer less protection than the United States, may not be
sufficient to protect our technology. It is common in the personal computer
industry for companies to assert intellectual property infringement claims
against other companies. Therefore, our products may also become the target of
infringement claims. These infringement claims or any future ones could cause us
to spend significant time and money to defend our products, redesign our
products or develop or license a substitute technology. We may be unsuccessful
in acquiring or developing substitute technology and any required license may be
unavailable on commercially reasonable terms, if at all. In addition, an adverse
result in litigation could require us to pay substantial damages, cease the
manufacture, use, sale, offer for sale and importation of infringing products,
or discontinue the use of certain processes. Any of those events could
materially harm our business. Litigation by or against us could result in
significant expense to us and could divert the efforts of our technical and
management personnel, regardless of the outcome of such litigation. For example,
in October 1995, Brooktree alleged that some of S3's products infringed a
Brooktree patent. Defending the resulting lawsuit caused substantial expense to
S3 and diverted the efforts of S3's technical and management personnel. In a
settlement of that suit, S3 agreed to pay to Brooktree a license fee and
royalties relating to certain product revenues over a five-year period. However,
even if claims do not have merit, we may be required to dedicate significant
management time and expense to defending ourselves if we are directly sued, or
assisting our OEM customers in their defense of these or other infringement
claims pursuant to indemnity agreements. This could have a negative effect on
the combined company's financial results.
OUR PRODUCTS DEPEND UPON THIRD-PARTY CERTIFICATIONS, WHICH MAY NOT BE
GRANTED FOR FUTURE PRODUCTS, RESULTING IN PRODUCT SHIPMENT DELAYS AND LOST
SALES.
Both S3 and Diamond submit most of their products for compatibility and
performance testing to the Microsoft Windows Hardware Quality Lab because their
OEM customers typically require
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their products to have this certification prior to making volume purchases. This
certification typically requires up to several weeks to complete and entitles S3
or Diamond to claim that a particular product is "Designed for Microsoft
Windows." We may not receive this certification for future products in a timely
fashion, or at all, which could result in product shipment delays and lost
sales.
WE MAY NOT BE ABLE TO RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT
THE COMBINED COMPANY FROM SUCCEEDING.
The combined company may not be able to retain its key personnel or attract
other qualified personnel in the future. The success of the combined company
will depend upon the continued service of key management personnel of both S3
and Diamond. The loss of services of any of the key members of the combined
company's management team or the combined company's failure to attract and
retain other key personnel could disrupt the combined company's operations and
have a negative effect on employee productivity and morale, decreasing
production and harming financial results for the combined company. In addition,
the competition to attract, retain and motivate qualified technical, sales and
operations personnel is intense. We have at times experienced, and continue to
experience, difficulty recruiting qualified software and hardware development
engineers.
WE MAY ENCOUNTER YEAR 2000 COMPLIANCE PROBLEMS INVOLVING BUSINESS AND
ADMINISTRATIVE SYSTEMS, INCLUDING PHONE AND OTHER COMMUNICATIONS AND
ADMINISTRATIVE SUPPORT SYSTEMS, THAT COULD NEGATIVELY AFFECT THEIR
OPERATIONS AND FINANCIAL RESULTS.
We use a significant number of computer software programs and operating
systems in our internal operations. These include applications used in financial
business systems and various administration functions, including phone and other
communications and administrative support systems, and also software programs in
our products. If these software applications are unable to interpret
appropriately dates occurring in the upcoming calendar year 2000, some level of
modification or replacement of such software may be necessary. We believe that
all of our existing products are year 2000 compliant and we have conducted or
are conducting year 2000 compliance testing. Despite this belief, our products
may not be year 2000 compliant. If our products fail to perform, including
failures due to the onset of calendar year 2000, our product sales and financial
results will suffer. We are currently evaluating our information technology for
year 2000 compliance. This evaluation includes reviewing what actions are
required to make all internally used software systems year 2000 compliant as
well as actions necessary to make us less vulnerable to year 2000 compliance
problems associated with third parties' systems. These measures may not solve
all year 2000 problems. Any year 2000 problems could have a negative effect on
our operations and financial results. In addition, our customers and suppliers
may not be year 2000 compliant, which could also negatively affect us.
WE DEPEND ON A LIMITED NUMBER OF THIRD PARTY DEVELOPERS AND PUBLISHERS THAT
DEVELOP GRAPHICS SOFTWARE PRODUCTS THAT WILL OPERATE WITH AND FULLY UTILIZE
THE CAPABILITIES OF DIAMOND'S PRODUCTS TO GENERATE DEMAND FOR DIAMOND'S
PRODUCTS.
Only a limited number of software developers are capable of creating high
quality entertainment software. Because competition for these resources is
intense and is expected to increase, a sufficient number of high quality,
commercially successful software titles compatible with Diamond's products may
not be developed. Diamond believes that the availability of numerous high
quality, commercially successful software entertainment titles and applications
significantly affects sales of multimedia hardware to the PC-based interactive
3D entertainment market. Diamond depends on third party software developers and
publishers to create, produce and market software titles that will operate with
Diamond's 3D graphics accelerators. If a sufficient number of successful
software titles are not developed, Diamond's product sales and revenues could be
negatively impacted. In addition, the
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development and marketing of game titles that do not fully demonstrate the
technical capabilities of Diamond's products could create the impression that
Diamond's technology offers only marginal performance improvements, if any, over
competing products. Either of these effects could have an adverse effect on the
combined company's product sales and financial results.
DIAMOND DEPENDS ON A LIMITED NUMBER OF SUPPLIERS FROM WHOM DIAMOND DOES NOT
HAVE A GUARANTEE OF ADEQUATE SUPPLIES, INCREASING THE RISK THAT A LOSS OF
OR PROBLEMS WITH A SINGLE SUPPLIER COULD RESULT IN IMPAIRED MARGINS,
REDUCED PRODUCTION VOLUMES, STRAINED CUSTOMER RELATIONS AND LOSS OF
BUSINESS.
Diamond obtains several of the components used in its products from single
or limited sources. If component manufacturers do not allocate a sufficient
supply of components to meet Diamond's needs or if current suppliers do not
provide components of adequate quality or compatibility, Diamond may have to
obtain these components from distributors or on the spot market at a higher
cost. Diamond has no guaranteed supply arrangements with any of its suppliers,
and current suppliers may not be able to meet its current or future component
requirements. If Diamond is forced to use alternative suppliers of components,
Diamond may have to alter its product designs to accommodate these components.
Alteration of product designs to use alternative components could cause
significant delays and could require product recertification by Diamond's OEM
customers or reduce its production of the related products. In addition, from
time to time Diamond has experienced difficulty meeting certain product shipment
dates to customers for various reasons. These reasons include component delivery
delays, component shortages, system compatibility difficulties and component
quality deficiencies. Delays in the delivery of components, component shortages,
system compatibility difficulties and supplier product quality deficiencies will
continue to occur in the future. These delays or problems have in the past and
could in the future result in impaired margins, reduced production volumes,
strained customer relations and loss of business. Also, in an effort to avoid
actual or perceived component shortages, Diamond may purchase more of certain
components than it would otherwise require. Excess inventory resulting from such
over-purchases, obsolescence or a decline in the market value of such inventory
could result in inventory write-offs, which would have a negative effect on
Diamond's financial results. This condition existed in the first and second
quarters of 1998, and Diamond's perception of component shortages caused Diamond
to over-purchase certain components and pay surcharges for components that
subsequently declined in value in the second, third and fourth quarters of 1998.
In addition, inventory sell-offs by Diamond or its competitors could trigger
channel price protection charges, further reducing the combined company's gross
margins and profitability, as occurred with the Monster 3D II product line in
the third and fourth quarters of 1998.
WE MAY EXPERIENCE, AND HAVE FROM TIME TO TIME EXPERIENCED, PRODUCT DELIVERY
DELAYS DUE TO THE INADEQUACY OR INCOMPATIBILITY OF SOFTWARE DRIVERS, WHICH
DELAYS COULD HURT OUR SALES.
Some components of our products require software drivers in order for those
components to work properly in a PC. These software drivers are essential to the
performance of nearly all of our products and must be compatible with the other
components of the graphics board and PC in order for the product to work. Some
of these products that include software drivers are among Diamond's products
that are based on components, including software drivers, that are supplied by a
limited number of suppliers. From time to time, both S3 and Diamond have
experienced product delivery delays due to inadequacy or incompatibility of
software drivers either provided by component suppliers or developed internally
by them. These delays could cause the combined company to lose sales, revenues
and customers. Software driver problems will continue to occur in the future,
and those problems could negatively affect our operating results.
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DIAMOND'S ENTRY INTO NEW PRODUCT MARKETS COULD DIVERT RESOURCES FROM OUR
CORE BUSINESS AND EXPOSE US TO RISKS INHERENT IN THOSE NEW MARKETS.
Diamond's business historically has focused primarily on the design,
manufacture and sale of graphics boards. However, Diamond from time to time
undertakes new product initiatives, such as the Rio line of Internet music
players, the launching of the RioPort.com music website and entry into the home
networking market. There are numerous risks inherent in entering into new
product markets. These risks include the reallocation of limited management,
engineering and capital resources to unproven product ventures, a greater
likelihood of encountering technical problems and a greater likelihood that
Diamond's new products will not gain market acceptance. The failure of one or
more of such products, or any adverse effect such new products may have upon our
reputation in our core businesses as a result of such failure, could negatively
impact our financial results.
WE HAVE SIGNIFICANT EXPOSURE TO INTERNATIONAL MARKETS.
Export sales accounted for 89%, 70% and 58% of S3's net sales in 1998, 1997
and 1996, respectively, and S3 expects that export sales will continue to
represent a significant portion of net sales, although there can be no assurance
that export sales, as a percentage of net sales, will remain at current levels.
Net sales in Europe accounted for 36%, 26% and 22% of total net sales for
Diamond during 1998, 1997 and 1996, respectively. Other international net sales
accounted for 10%, 12% and 16% of total net sales for Diamond during 1998, 1997
and 1996, respectively. In addition, a substantial proportion of S3's and
Diamond's products are manufactured, assembled and tested by independent third
parties in Asia. As a result, we are subject to the risks of conducting business
internationally, including:
- unexpected changes in, or impositions of, legislative or regulatory
requirements;
- fluctuations in the U.S. dollar, which could increase the price in local
currencies of our products in foreign markets or increase the cost of
wafers and components purchased by us;
- delays resulting from difficulty in obtaining export licenses for certain
technology;
- tariffs and other trade barriers and restrictions;
- potentially longer payment cycles;
- greater difficulty in accounts receivable collection;
- potentially adverse tax treatment;
- the burdens of complying with a variety of foreign laws; and
- year 2000 computer malfunctions.
We have experienced an adverse impact associated with the economic downturn
in Asia that contributed to decreases in net sales in 1998. In addition, our
international operations are subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships. The People's Republic of China and Taiwan have in the past
experienced and are currently experiencing strained relations, and a worsening
of relations or the development of hostilities between them could disrupt
operations at S3's foundries and affect S3's Taiwanese customers.
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WE ARE PARTIES TO LEGAL PROCEEDINGS ALLEGING SECURITIES VIOLATIONS THAT
COULD HAVE A NEGATIVE FINANCIAL IMPACT ON THE COMBINED COMPANY.
Since November 1997, a number of complaints have been filed in federal and
state courts seeking an unspecified amount of damages on behalf of an alleged
class of persons who purchased shares of S3's common stock at various times
between April 18, 1996 and November 3, 1997, referred to as the "class period."
The complaints name S3 as defendant as well as some of S3's officers and former
officers and some of its directors, asserting that S3 and those individuals
violated federal and state securities laws by misrepresenting and failing to
disclose certain information about S3's business during the class period. In
addition, stockholders have filed derivative actions in the state courts of
California and Delaware seeking recovery on S3's behalf, alleging, among other
things, breach of fiduciary duties by the individual defendants. Discovery is
currently proceeding. While S3's management intends to defend the actions
against S3 vigorously, there can be no assurance that an adverse result or
settlement with regard to these lawsuits would not have a material adverse
effect on S3's financial condition or results of operations.
Diamond has been named as a defendant in several putative class action
lawsuits that were filed in June and July 1996 and June 1997 in the California
Superior Court for Santa Clara County and the U.S. District Court for the
Northern District of California. Some of Diamond's executive officers and
directors are also named as defendants. The plaintiffs purport to represent a
class of all persons who purchased Diamond common stock between October 18, 1995
and June 20, 1996, referred to as the "class period." The complaints allege
claims under the federal securities laws and California law. The plaintiffs
allege that Diamond and the other defendants made various material
misrepresentations and omissions during the class period. The complaints do not
specify the amount of damages sought. Diamond believes that it has good defenses
to the claims alleged in the lawsuits and will defend itself vigorously against
these actions. No trial date has been set for any of these actions. The ultimate
outcome of these actions cannot be presently determined. Accordingly, no
provision for any liability or loss that may result from adjudication has been
made by Diamond.
In addition, both S3 and Diamond have been named as defendants in
litigation relating to the merger. See "The Merger and Related
Transactions -- Litigation Relating to the Merger" on page 62.
WE WILL HAVE A SIGNIFICANT LEVEL OF DEBT.
At June 30, 1999, S3 had total debt outstanding of $117.9 million. At June
30, 1999, Diamond had total debt outstanding of approximately $63.0 million,
including an aggregate $10.0 million loan by S3 to Diamond prior to June 30,
1999. S3 loaned Diamond an additional $10.0 million subsequent to June 30, 1999.
The pro forma debt of the combined company will be $170.9 million.
The degree to which we are leveraged could adversely affect our ability to
obtain additional financing for working capital or other purposes and could make
us more vulnerable to economic downturns and competitive pressures. Our
significant leverage could also adversely affect our liquidity, as a substantial
portion of available cash from operations may have to be applied to meet debt
service requirements. In the event of a cash shortfall, we could be forced to
reduce other expenditures to be able to meet such debt service requirements.
OUR STOCK PRICES ARE HIGHLY VOLATILE AND WE EXPECT THAT S3'S STOCK PRICE
WILL CONTINUE TO BE HIGHLY VOLATILE AFTER THE MERGER.
The market price of both S3 common stock and Diamond common stock, like
that of the common stock of many other semiconductor companies, has been and is
likely to be highly volatile.
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We expect the S3 common stock to remain volatile, which volatility may increase
as a result of the additional shares to be issued in the merger. This volatility
may result from:
- general market conditions and market conditions affecting technology and
semiconductor stocks generally;
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of design wins, technological innovations, acquisitions,
investments or business alliances, by us or our competitors; and
- the commencement of, developments in or outcome of litigation.
The market price of S3 common stock and Diamond common stock also has been
and is likely to continue to be significantly affected by expectations of
analysts and investors, especially if our operating results do not meet those
expectations. Reports and statements of analysts do not necessarily reflect our
views. The fact that we have in the past met or exceeded analyst or investor
expectations does not necessarily mean that we will do so in the future.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought. This litigation could result in substantial costs and a diversion
of our management's attention and resources. Litigation was brought against S3
in 1994, and S3 is currently involved in securities class action litigation.
Diamond is also involved in similar proceedings.
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FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document that are subject
to risks and uncertainties. Forward-looking statements include the information
in this document relating to expected benefits of the merger such as
efficiencies, opportunities to enter new markets, cost savings, market profile
and financial strength, estimated expenses associated with the merger, the
competitive ability of the combined company, customer concentration, and plans
relating to RioPort.com, Inc.
The sections of this document that contain forward-looking statements
include: "Questions and Answers About the Merger," "Summary," "Comparative Per
Share Market Price Data," "The Merger and Related Transactions -- Background of
the Merger," "The Merger and Related Transactions -- Reasons for the Merger,"
"The Merger and Related Transactions -- S3 Board Considerations," "The Merger
and Related Transactions -- Diamond Board Considerations," "The Merger and
Related Transactions -- Opinion of S3's Financial Advisor," "The Merger and
Related Transactions -- Opinion of Diamond's Financial Advisor," and "Unaudited
Pro Forma Combined Condensed Financial Information." Our forward-looking
statements are also identified by words such as "believes," "expects,"
"anticipates," "intends," "estimates" or similar expressions.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date of this document. These
risks and uncertainties include:
- the possibility that the anticipated benefits from the merger cannot be
fully realized;
- the possibility that costs or difficulties related to the integration of
our businesses will be greater than expected;
- the impact of competition on revenues and margins;
- the introduction of new technologies and trends in the PC markets;
- the ability of the combined company to develop and market successfully
new products;
- supply disruptions;
- the factors discussed in the section entitled "Risk Factors" starting on
page 11; and
- other risk factors as may be detailed from time to time in Diamond's and
S3's public announcements and filings with the Securities and Exchange
Commission.
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THE S3 SPECIAL MEETING
GENERAL
When and where will the meeting be held?
This document is being furnished to S3 stockholders as part of the
solicitation of proxies by the S3 board of directors for use at the S3 meeting
to be held on Monday, September 20, 1999 at 10:00 a.m., local time at Techmart,
5201 Great America Parkway, Santa Clara, California, and at any adjournments or
postponements thereof. This document, and the accompanying form of proxy, are
first being mailed to holders of S3 common stock on or about August 18, 1999.
What will be voted upon?
The purpose of the S3 meeting is to consider and vote upon the following
proposals:
- to approve the issuance of shares of S3 common stock under the terms of
the merger agreement;
- subject to approval of the first proposal and to completion of the
merger, to amend the restated certificate of incorporation of S3 to
increase the number of authorized shares of S3 common stock from
120,000,000 to 175,000,000; and
- subject to approval of the first proposal and completion of the merger
and with effect immediately after the merger, to elect three directors
who are currently directors of Diamond.
Which stockholders may vote?
Only holders of record of S3 common stock at the close of business on
August 10, 1999, the S3 record date, are entitled to notice of and to vote at
the S3 meeting. As of the close of business on the S3 record date, there were
53,593,677 shares of S3 common stock outstanding and entitled to vote, held of
record by 605 stockholders. A majority, or 26,796,839 of these shares, present
in person or represented by proxy, will constitute a quorum for the transaction
of business. Each S3 stockholder is entitled to one vote for each share of S3
common stock held as of the S3 record date.
How do S3 stockholders vote?
The S3 form of proxy accompanying this document is solicited on behalf of
the S3 board of directors for use at the S3 meeting. Stockholders are requested
to complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope or otherwise mail it to S3. All proxies that are properly
executed and returned, and that are not revoked, will be voted at the S3 meeting
in accordance with the instructions indicated thereon. Executed but unmarked
proxies will give the proxy holders authority to vote FOR the issuance of shares
of S3 common stock in the merger, the amendment of the restated certificate of
incorporation of S3 to increase the number of authorized shares of S3 common
stock from 120,000,000 to 175,000,000, and the election of each of the nominees
as directors of S3.
No other business may be considered at the S3 meeting, or any adjournment
of the S3 meeting, except procedural matters that may be necessary to conduct
the meeting. The proxy holders will vote in regard to those procedural matters
according to their discretion. The proxy holders may propose and vote for one or
more adjournments or postponements of the S3 meeting to permit further
solicitation of proxies in favor of the proposals. However, no proxy that is
vested against the issuance
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of shares under the terms of the merger agreement will be voted in favor of any
adjournment or postponement.
How do I change my vote?
An S3 stockholder who has given a proxy may revoke it at any time before it
is exercised at the S3 meeting, by doing one of the following:
- filing a written notice of revocation with Walter D. Amaral, Chief
Financial Officer and Secretary, S3 Incorporated, 2841 Mission College
Boulevard, Santa Clara, California 95054;
- granting a subsequently dated proxy; or
- attending the S3 meeting and voting in person.
Attending the S3 meeting will not, by itself, revoke a proxy. You must also vote
at the meeting.
VOTE REQUIRED TO APPROVE EACH PROPOSAL
Under rules of The Nasdaq Stock Market, approval of the issuance of shares
of S3 common stock in connection with the merger requires the affirmative vote
of a majority of the shares present in person or represented by proxy at the
special meeting and entitled to vote on such matters. Under Delaware law and the
S3 restated certificate of incorporation, approval of the amendment to the
restated certificate of incorporation of S3 to increase the number of authorized
shares of S3 common stock from 120,000,000 to 175,000,000 requires the
affirmative vote of a majority of the outstanding shares of S3 common stock. S3
directors are elected by a plurality vote. Accordingly, the three nominees for
director who receive the most votes cast in their favor will be elected.
Each S3 stockholder of record as of the record date is entitled to cast one
vote per each share of S3 common stock held, on each matter properly submitted
for the vote of the stockholders of S3 at the S3 meeting. The right to vote is
exercisable in person or by properly executed proxy.
THE MATTERS TO BE CONSIDERED AT THE S3 MEETING ARE OF GREAT IMPORTANCE TO
THE STOCKHOLDERS OF S3. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND
CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT AND TO COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID
ENVELOPE.
As of the S3 record date, Diamond owned no shares of S3 common stock. As of
the S3 record date, directors and executive officers of Diamond together
beneficially owned less than 1% of the outstanding shares of S3 common stock. It
is expected that any shares of S3 common stock beneficially owned by Diamond or
Diamond's directors and executive officers will be voted for approval of the
issuance of shares of S3 common stock under the terms of the merger agreement,
approval of the amendment to the restated certificate of incorporation of S3 to
increase the number of authorized shares of S3 common stock and the election of
the nominees as directors of S3.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by properly-executed proxy, of the holders of at
least a majority of the outstanding shares of S3 common stock entitled to vote
at the S3 special meeting constitutes a quorum.
If an executed S3 proxy is returned and the stockholder has specifically
abstained from voting on any proposal, the shares represented by that proxy will
be considered present at the S3 meeting and
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counted in determining whether a quorum is present at the S3 meeting.
Abstentions with respect to any proposal will have the same effect as votes
against the proposal.
If any broker holding shares in street name returns a proxy indicating that
the broker does not have discretionary authority to vote on one or more matters
as to a number of shares, or if shares are not voted in other circumstances in
which proxy authority is defective or has been withheld, the shares in question
will be considered present at the meeting for purposes of determining a quorum.
With respect to the proposal to approve the issuance of shares of S3 common
stock in connection with the merger, these non-voted shares will not be deemed
to be present or represented for purposes of determining whether stockholder
approval of the issuance has been obtained. With respect to the proposal to
amend the restated certificate of incorporation of S3, these non-voted shares
will have the same effect as votes against the amendment.
SOLICITATION OF PROXIES AND EXPENSES OF SOLICITATION
S3 will bear the cost of the solicitation of proxies in the enclosed form
from its stockholders. S3 and Diamond will share equally the cost of printing
and mailing this document. In addition to solicitation by mail, the directors,
officers and employees of S3 may solicit proxies from stockholders by telephone,
telegram, letter, facsimile or in person. S3 will not compensate these people
for this solicitation, but S3 will reimburse them for reasonable out-of-pocket
expenses they have in connection with this solicitation. Following the original
mailing of the proxies and other soliciting materials, S3 will request that
brokers, custodians, nominees and other record holders forward copies of the
proxy and other soliciting materials to persons for whom they hold shares of S3
common stock and request authority for the exercise of proxies. S3, upon the
request of the record holders, will reimburse record holders for their
reasonable expenses. S3 has retained Morrow & Co., Inc. to assist in
solicitation of proxies at a cost of approximately $5,000.
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THE DIAMOND SPECIAL MEETING
GENERAL
When and where will the meeting be held?
This document is furnished to the holders of Diamond common stock as part
of the solicitation of proxies by the Diamond board of directors for use at the
Diamond meeting on Monday, September 20, 1999 at 10:00 a.m., local time, at the
Marriott Hotel, 2700 Mission College Boulevard, Santa Clara, California, and at
any adjournments or postponements thereof.
This document, and the accompanying proxy card, are first being mailed to
holders of Diamond common stock on or about August 18, 1999.
What will be voted upon?
The purpose of the Diamond meeting is to consider and vote upon a proposal
to approve and adopt the merger agreement and to approve the merger. If the
Diamond stockholders approve the merger agreement and the merger is completed,
holders of Diamond common stock will receive 0.52 of a share of S3 common stock
for each share of Diamond common stock they own, with cash paid for fractional
shares. In addition, as a result of the merger, each outstanding Diamond stock
option will be assumed by S3 and converted into an option to acquire shares of
S3 common stock on the same terms and conditions (including any provisions for
acceleration) as were applicable to such stock option under the applicable
Diamond stock option plan in effect prior to the merger. See "The Merger and
Related Transactions -- Conversion of Diamond Securities" on page 38.
If the merger is completed, Diamond will become a wholly owned subsidiary
of S3, and Diamond stockholders will no longer hold any interest in Diamond
other than through their interest in shares of S3 common stock. The consummation
of the merger is subject to a number of conditions, including the receipt of
required regulatory and stockholder approvals.
Which stockholders may vote?
Only holders of record of Diamond common stock at the close of business on
August 10, 1999, the Diamond record date, are entitled to notice of and to vote
at the Diamond meeting. At the close of business on the Diamond record date,
there were 35,820,591 shares of Diamond common stock outstanding and entitled to
vote, held of record by 578 stockholders. A majority, or 17,910,296, of these
shares, present in person or represented by proxy, will constitute a quorum for
the transaction of business. Each Diamond stockholder is entitled to one vote
for each share of Diamond common stock held as of the Diamond record date.
How do Diamond stockholders vote?
The Diamond proxy card accompanying this document is solicited on behalf of
the Diamond board of directors for use at the Diamond special meeting.
Stockholders are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope. All proxies that are properly
executed and returned, and that are not revoked, will be voted at the Diamond
meeting in accordance with the instructions indicated thereon. If no choice is
indicated on the proxy, the shares will be voted in favor of the approval and
adoption of the merger agreement and approval of the merger (other than
instances of broker non-votes, which shares will not be voted). The Diamond
board of directors does not presently intend to bring any other business before
the Diamond meeting other than the specific proposals referred to in this
document and specified in the notice of the Diamond meeting. The Diamond board
of directors knows of no other matters that are
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to be brought before the Diamond special meeting. If any other business properly
comes before the Diamond special meeting, including the consideration of a
motion to adjourn the meeting for purposes of soliciting additional votes for
approval and adoption of the merger agreement, it is intended that proxies will
be voted in accordance with the judgment of the persons voting such proxies.
How do I change my vote?
A Diamond stockholder who has given a proxy may revoke it at any time
before it is exercised at the Diamond special meeting by doing one of the
following:
- filing a written notice of revocation with James M. Walker, Senior Vice
President and Chief Financial Officer, Diamond Multimedia Systems, Inc.,
2880 Junction Avenue, San Jose, California 95134;
- granting a subsequently dated proxy; or
- attending the Diamond special meeting and voting in person.
Attending the Diamond special meeting will not, by itself, revoke a proxy.
You must also vote at the meeting.
VOTE REQUIRED TO APPROVE THE MERGER
Pursuant to Delaware law, Diamond's certificate of incorporation and the
rules of The Nasdaq Stock Market, approval and adoption of the merger agreement
requires the affirmative vote of the holders of at least a majority of the
issued and outstanding shares of Diamond common stock. The required vote of the
Diamond stockholders is based upon the number of outstanding shares of Diamond
common stock as of the Diamond record date and not upon the shares actually
voted.
THE MATTERS TO BE CONSIDERED AT THE DIAMOND SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE DIAMOND STOCKHOLDERS. ACCORDINGLY, STOCKHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT AND TO
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by properly executed proxy, of the holders of at
least a majority of the outstanding shares of Diamond common stock entitled to
vote at the Diamond special meeting shall constitute a quorum. If an executed
Diamond proxy is returned and the stockholder has specifically abstained from
voting on any matter, the shares represented by that proxy will be considered
present at the Diamond special meeting for purposes of determining a quorum. If
any broker holding shares in street name returns a proxy indicating that the
broker does not have discretionary authority to vote on one or matters as to a
number of shares, or if shares are not voted in other circumstances in which
proxy authority is defective or has been withheld, the shares in question will
be considered present at the meeting for purposes of determining a quorum. Since
the required vote of the Diamond stockholders is based upon the number of
outstanding shares of Diamond common stock, abstentions and broker non-votes
will have the same effect as a vote against approval and adoption of the merger
agreement.
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SOLICITATION OF PROXIES AND EXPENSES OF SOLICITATION
Diamond will bear the cost of the solicitation of proxies in the enclosed
form from its stockholders. S3 and Diamond will share equally the cost of
printing and mailing this document. In addition to solicitation by mail, the
directors, officers and employees of Diamond may solicit proxies from
stockholders by telephone, telegram, letter, facsimile or in person. Diamond
will not compensate these people for this solicitation, but Diamond will
reimburse them for reasonable out-of-pocket expenses they have in connection
with this solicitation. Following the original mailing of the proxies and other
soliciting materials, Diamond may request that brokers, custodians, nominees and
other record holders forward copies of the proxy and other soliciting materials
to persons for whom they hold shares of Diamond common stock and request
authority for the exercise of proxies. In such cases, Diamond, upon the request
of the record holders, will reimburse such record holders for their reasonable
expenses. Diamond has retained Morrow & Co., Inc. to assist in solicitation of
proxies at a cost of approximately $5,000.
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THE MERGER AND RELATED TRANSACTIONS
This section of the document summarizes material aspects of the proposed
merger. A copy of the merger agreement is attached as Appendix A. All holders of
S3 common stock and Diamond common stock are urged to read the merger agreement
and the other appendices in their entirety.
GENERAL
The merger agreement provides for the merger of Diamond with and into a
wholly owned subsidiary of S3, with Diamond surviving as a wholly owned
subsidiary of S3. The certificate of incorporation and bylaws of S3's merger
subsidiary will become the certificate of incorporation and bylaws of the
surviving corporation in the merger, but the name of the surviving corporation
will be "Diamond Multimedia Systems, Inc." The directors and executive officers
of S3's merger subsidiary will be the initial directors and executive officers
of the surviving corporation.
If the merger is completed, holders of Diamond common stock will no longer
hold any interest in Diamond other than through their interest in shares of S3
common stock. The stockholders of Diamond will become stockholders of S3, and
their rights will be governed by S3's restated certificate of incorporation and
S3's bylaws.
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware. The merger agreement
provides that S3 and Diamond will cause the certificate of merger to be filed as
soon as practicable after:
- the S3 stockholders have approved the issuance of shares of S3's common
stock in the merger;
- the Diamond stockholders have approved the merger agreement;
- all required regulatory approvals and actions have been obtained or
taken; and
- all other conditions to the consummation of the merger have been
satisfied or waived.
See "-- Regulatory Filings and Approvals Required to Complete the Merger"
on page 61 and "-- Conditions to Completion of the Merger" on page 69. We cannot
assure you that the conditions to the merger will be satisfied. Further, the
merger agreement may be terminated by either S3 or Diamond under various
circumstances as specified in the merger agreement. See "-- Termination of the
Merger Agreement" on page 71. Therefore, we cannot tell you whether or when the
merger will become effective.
CONVERSION OF DIAMOND SECURITIES
Diamond common stock
Upon the consummation of the merger, each outstanding share of Diamond
common stock will automatically be converted into the right to receive 0.52 of a
share of S3 common stock. No fractional shares of S3 common stock will be issued
in the merger. Instead, any Diamond stockholder who would otherwise be entitled
to receive a fraction of a share will receive from S3 cash equal to the per
share market value of S3 common stock of the fractional share. The value will be
calculated based on the per share closing price of S3 common stock as reported
on Nasdaq on the closing date of the merger.
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Based upon the number of shares of Diamond common stock outstanding at
August 10, 1999, an aggregate of 18,626,707 shares of S3 common stock would be
issued in connection with the merger. These shares, together with shares
reserved for issuance pursuant to outstanding Diamond stock options, would
represent approximately 23% of the total number of shares of S3 common stock,
including shares reserved for issuance pursuant to outstanding S3 stock options
and warrants.
The exchange ratio is fixed and will not increase or decrease due to
fluctuations in the market price of either S3 common stock or Diamond common
stock. If the market price of S3 common stock decreases or increases prior to
the effective time, the value at the effective time of S3 common stock to be
received by Diamond stockholders in the merger would correspondingly decrease or
increase. Diamond cannot terminate the merger agreement solely because the S3
stock price declines. The market prices of S3 common stock and Diamond common
stock as of a recent date are set forth herein under "Comparative Per Share
Market Price Data" on page 77. Diamond stockholders are advised to obtain recent
market quotations for S3 common stock and Diamond common stock. We cannot
predict the market prices of S3 common stock or Diamond common stock at any time
before the effective time or the market price of S3 common stock at any time
thereafter.
Diamond options
Upon consummation of the merger, each outstanding Diamond stock option,
whether vested or not vested, will be assumed by S3 and converted into an option
to acquire shares of S3 common stock on the same terms and conditions (including
any provisions for acceleration) as were applicable to that stock option under
the applicable Diamond stock option plan in effect prior to the merger (in
accordance with the past practice of Diamond with respect to the interpretation
and application of the terms and conditions of the relevant stock option plan).
Each outstanding Diamond stock option will be converted into an option to
acquire the number (rounded down to the nearest whole number) of shares of S3
common stock determined by multiplying (x) the number of shares of Diamond
common stock subject to such option immediately prior to the effective time of
the merger by (y) 0.52, at an exercise price per share of S3 common stock
(rounded up to the nearest whole cent) equal to (A) the exercise price per share
of Diamond common stock subject to that Diamond stock option divided by (B)
0.52.
Based upon the number of Diamond stock options outstanding at August 10,
1999, 2,682,334 additional shares of S3 common stock would be reserved for
issuance to holders of Diamond options in connection with S3's assumption of
Diamond's outstanding options. As soon as possible after the effective time, S3
will file a registration statement on Form S-8 with the SEC with respect to the
shares of S3 common stock subject to all assumed Diamond options.
BACKGROUND OF THE MERGER
The market for 3D graphics chips in which S3 competes is highly
competitive. Beginning in early 1998, S3 recognized that fundamental changes in
the 3D graphics market would impact S3 and its ability to maintain its
then-current business strategies. Among the fundamental changes was increased
competition as the relative price/performance advantages of high-end graphics
chips decreased due to the development of less expensive chips that offered
performance approaching that of the high-end graphics chips. Also, Intel entered
the market by introducing a 3D graphics accelerator targeted at the mainstream
personal computer market. S3 also believed that the increasing complexity of
high-end graphics chips as well as increasingly short product life cycles would
require S3 to work more closely with the add-in board manufacturers to timely
introduce new products having the performance characteristics necessary to meet
the design requirements of the market. In addition, the S3 board of directors
and senior management believed that consolidation within the
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industry was inevitable as industry participants sought necessary economies of
scale, control of their own retail and OEM distribution channels, development of
and control over their brands, and design, development and manufacturing control
over both the semiconductor components and final products. In seeking to enhance
S3's market position and expand S3's business in the increasingly competitive
and rapidly changing environment, S3's board of directors and senior management
analyzed and evaluated the strategic alternatives available to S3, including the
potential acquisition of an add-in board manufacturer.
Similarly, in 1998, the Diamond board of directors determined that the
shifting competitive landscape in the industry required add-in graphics board
manufacturers and graphics chip vendors to reevaluate independent business
models. The Diamond board of directors initiated a review of its strategic
position in the industry in light of the industry trends described in the
proceeding paragraph and recent discussions taking place in the industry among
graphics chip suppliers and competitors of Diamond with respect to the
establishment of various forms of strategic relationships. The board determined
that Diamond should develop one or more strategic relationships with key
graphics chip suppliers to ensure the continued availability of quality
performance graphics chips. The Diamond board reasoned that as high-end graphics
chip designs were becoming increasingly complex, as performance increased and as
product life cycles shortened, it was necessary for the chip and board engineers
to work more closely to integrate the chip, board design and software
development. The Diamond board believed that this integration would enable
Diamond to bring products to market faster and to control product obsolescence
better. In addition, as intense price competition for OEM business and channel
price protection problems were exacerbated by multiple competitors sharing the
same graphics chip architectures, the board believed that integrating with a
chip supplier would reduce certain margin pressures and channel price protection
exposure. This integration strategy was reinforced in discussions with OEM
customers. Moreover, this integration, the board determined, could allow Diamond
to capture additional margins. As a result of ongoing board discussions and
management presentations, in April 1998, Diamond formally engaged Wasserstein
Perella & Co., Inc. to assist it in evaluating a broad range of strategic
alternatives and in engaging in discussions with its primary chip suppliers
regarding more significant relationships, including a possible business
combination.
In June 1998, William Schroeder, the President and Chief Executive Officer
of Diamond, contacted Terry Holdt, S3's then President and Chief Executive
Officer, to discuss a possible business combination and to schedule a meeting.
On June 18, 1998, S3 and Diamond executed a confidentiality agreement, which
provided for, among other things, the parties' exchange of non-public
information regarding their business on a confidential basis.
On June 28, 1998, S3's senior management, Lehman Brothers, S3's financial
advisor, and Pillsbury Madison & Sutro LLP, S3's outside legal counsel, met with
members of Diamond's senior management, Wasserstein Perella, Diamond's financial
advisor, and Wilson Sonsini Goodrich & Rosati, Diamond's outside legal counsel.
At that meeting, management of S3 and Diamond each made presentations; however,
the parties decided not to pursue a business combination at that time.
On October 30, 1998, Kenneth Potashner became the President and Chief
Executive Officer of S3. In November 1998, S3 initiated a meeting with Diamond.
On December 3, 1998, Messrs. Potashner and Schroeder met at Diamond's offices in
San Jose. The primary purpose of the meeting was for Mr. Potashner, as the new
President and Chief Executive Officer of S3, to meet with Diamond, a customer of
S3, and to discuss alternatives for reinitiating and strengthening their
relationship.
On December 15, 1998, Messrs. Potashner and Schroeder met at S3's offices
in Santa Clara. They continued their prior conversations and initiated
discussions with respect to the potential
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synergies of combining their two companies. They agreed to contact their outside
financial advisors and counsel to further explore a possible combination.
In January through April 1999, Mr. Potashner and Mr. Schroeder met on
several occasions, both individually and together with their financial advisors
and outside legal counsel, to continue to discuss a potential business
combination. The parties discussed the potential strategic and operating
benefits that might be achieved through a business combination but were unable
to resolve issues related to valuation of the two companies.
On May 19, 1999, Mr. Potashner and Mr. Schroeder met again, and Mr. Reyes,
a director of Diamond, and Andrew Wolfe, S3's Chief Technology Officer, were
also present at this meeting. The parties continued to discuss a possible
combination and S3 indicated it wanted to pursue a merger with Diamond.
Following this meeting, Diamond's financial advisor contacted S3's financial
advisor and requested that they prepare a term sheet outlining the terms of the
proposed transaction. On May 20, 1999, Lehman Brothers sent Wasserstein Perella
the requested term sheet that included the material terms and conditions of a
proposed merger.
During the week of May 24, 1999, members of senior management of S3 and
Diamond, their respective financial advisors and outside counsel met to discuss
the term sheet and the material terms and conditions of the proposed merger.
Additional meetings were held among the principals regarding due diligence and
product strategy. Additionally, outside counsel for Diamond and S3 commenced due
diligence and Pillsbury Madison & Sutro LLP, outside counsel to S3, distributed
the initial draft of the merger agreement. Over the next three weeks until the
execution of the agreement, the parties held several meetings at which their
legal and financial advisors were present to negotiate a definitive merger
agreement.
On June 4, 1999, S3's management and its financial advisors reported to the
S3 board of directors on the status of the discussions with Diamond and the
financial and legal due diligence of Diamond. The S3 board of directors
discussed the rationale for and proposed terms for a merger with Diamond. The S3
board of directors determined that further discussions were desirable and
authorized management to continue discussions with Diamond and to continue
negotiating a merger agreement. The S3 board also discussed the possibility of
an interim loan to Diamond.
Also on June 4, 1999, the Diamond board of directors held a meeting to
discuss the status of due diligence and ongoing negotiations with S3. Diamond's
executive management team gave detailed presentations to its board regarding
S3's business, operations, finance, technology and the potential synergies of
the proposed merger. Wasserstein Perella also presented various financial
analyses, forecasts, reports and information concerning the proposed structure
of the merger. Representatives of Lazard Freres & Co., financial advisors to
Diamond, were also present at the meeting. In addition, representatives of
Wilson Sonsini Goodrich & Rosati reviewed the terms and conditions of the draft
merger agreement, the status of legal diligence and the fiduciary duties of the
board. The board further discussed the status of negotiations with third party
investors regarding an equity or convertible note financing. Mr. Schroeder also
advised the board that S3 has expressed a willingness to loan Diamond funds
during the pendency of negotiations and due diligence.
On June 6, 1999, the Diamond board, along with its legal and financial
advisors, met to review the status of the S3 transaction and the results of
management's continuing due diligence with respect to S3.
On June 8, 1999, senior management of S3 and Diamond met to continue due
diligence and negotiate the terms of a loan to Diamond.
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On June 9, 1999, the Diamond board met to discuss the status of ongoing
negotiations with S3 and to approve the proposed credit agreement with S3, which
included the drawdown of $5.0 million, the issuance of the first warrant to S3
and an agreement by Diamond not to solicit offers from third parties for a
limited time.
On June 11, 1999, due to Diamond's working capital needs and in light of
the ongoing discussions between the parties with a view to a possible business
combination, S3 entered into a credit agreement with Diamond under which it
agreed to make three separate loans to Diamond totaling no more than $20.0
million. In connection with the loans, Diamond agreed to issue warrants to S3
that would allow S3 to purchase Diamond common stock at specified fixed prices
and agreed not to solicit offers from third parties to acquire Diamond through
12:01 a.m. on June 15, 1999. On June 11, 1999, the S3 board met to review the
Diamond acquisition and approve the loan to Diamond.
On June 14, 1999, the Diamond board, together with legal and financial
advisors, met to review the ongoing negotiations with S3 and to approve an
amendment to the credit agreement and the drawdown of an additional $5.0 million
from S3 under the credit agreement, the issuance of the second warrant to S3 and
the extension of the non-solicit provision to 12:01 a.m. on June 22, 1999.
On June 18, 1999, the Diamond board, together with its outside counsel, met
to discuss the status of negotiations with S3. Following these discussions, Mr.
Schroeder delivered a letter to Mr. Potashner summarizing Diamond's desire to
clarify and resolve certain matters relating to the proposed merger, including
the exchange ratio and the termination provisions in the draft merger agreement.
On June 21, 1999, the S3 board of directors met and discussed with S3
management, and its legal and financial advisors, the structure of the proposed
merger, the proposed exchange ratio and the composition of the board of
directors of the combined company. In addition, the senior management and
financial and legal advisors to S3 reported on the results of the due diligence
investigation of Diamond and the potential benefits and risks of the merger and
responded to questions from members of the S3 board of directors regarding S3's
due diligence and management's views on the business and operations of Diamond.
Lehman Brothers discussed with the S3 board of directors various financial
analyses relating to the merger and responded to questions regarding those
analyses. At the conclusion of its presentation, Lehman Brothers delivered its
oral opinion, subsequently confirmed in writing, that, as of June 21, 1999, the
exchange ratio to be offered to Diamond's stockholders was fair, from a
financial point of view, to S3. At the conclusion of this meeting, the S3 board
of directors approved the merger and the form of merger agreement presented to
it.
On June 21, 1999, the Diamond board of directors met by telephone, together
with its legal and financial advisors, to review the final terms and conditions
of the proposed merger agreement. Representatives of Wilson Sonsini Goodrich &
Rosati, reviewed the terms and documentation of the proposed merger agreement,
the changes to the terms from the June 18, 1999 board meeting and the fiduciary
duties of the board of directors. At this board meeting, Wasserstein Perella
delivered its oral opinion (which opinion was subsequently confirmed by delivery
of a written opinion dated June 22, 1999) to the effect that, as of the date of
the opinion and based upon and subject to certain matters stated in the written
opinion, the merger consideration was fair, from a financial point of view, to
the holders of Diamond common stock. Following these events, the Diamond board
determined that the merger was advisable and fair to, and in the best interests
of, Diamond and its stockholders and unanimously approved the merger agreement
and the merger.
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S3 and Diamond then entered into the definitive merger agreement, dated
June 21, 1999, and the execution of the merger agreement was announced in a
joint press release on June 22, 1999.
REASONS FOR THE MERGER
The boards of directors of S3 and Diamond have determined that the combined
company will have the potential to realize long-term improved operating and
financial results and to capitalize on the two companies' multimedia business
strengths, which should result in a stronger competitive position for the
combined company in the PC graphics/video market, as compared to the two
companies individually. S3 and Diamond believe that there is a strategic fit
between S3's graphics/ video chips and Diamond's graphics/video accelerator
boards, as well as among other products of both companies. S3 and Diamond also
believe that as a combined company they should be a stronger competitor, should
be better able to react to changes in technology and in the marketplace, and
should be better able to invest in new technologies, market development and
product opportunities. Each of the board of directors of S3 and Diamond has
identified additional potential mutual benefits of the merger that they believe
will contribute to the success of the combined company. These potential benefits
include the following:
- the combined company should be able to achieve a more tightly integrated
chip, software and board-level layout and design process, allowing a
faster time to market and more cost-effective graphics solutions;
- the combined company should be positioned to invest in and develop
technologies for the Internet appliance, Internet connectivity and home
networking markets;
- the combined and integrated technological and engineering resources
should allow the combined company to enhance product development and
respond more quickly and effectively to technological change, increased
competition and customer demands;
- the combined company will have the opportunity to capitalize on the
complementary strengths of S3 in the OEM sales channel and Diamond in the
retail and value added reseller sales channels;
- the combined company should be able to combine high performance graphics
chips and boards with high-capacity, reliable and flexible manufacturing
capabilities to deliver products to both OEM, value added reseller and
retail customers through an established logistics network;
- the combined company should benefit from efficiencies associated with a
reduction in the number of chip vendors and add-in card customers with
whom Diamond and S3 currently have relationships;
- the combined company should be positioned to provide OEM, value added
reseller, retail and other customers with a direct source for graphics
boards, which should allow greater price stability and smoother product
transitions;
- the combined company should have the financial and human resources to
better diversify into emerging growth markets, such as Internet
appliances and home networking, that leverage the two companies'
strengths;
- the creation of a larger customer base, a higher market profile and
greater financial strength should present greater opportunities for
marketing the products and services of the combined company, including by
selling products based on S3 architectures to Diamond's retail and value
added reseller customers and by selling S3-based products to Diamond's
OEM customers;
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- the combined company should be able to more effectively use the skills
and resources of the companies' management teams; and
- the combined company should be able to enhance stockholder value by
achieving the benefits described above with an integrated graphics chip
and graphics board company.
Each board of directors recognizes that the potential benefits of the
merger may not be realized. See "Risk Factors" commencing on page 11.
S3 BOARD CONSIDERATIONS
The decision of the S3 board of directors to approve the merger agreement
and recommend the approval by the S3 stockholders of the issuance of S3 common
stock in connection with the merger was based upon its consultation with S3's
management, as well as its financial and legal advisors, and the potential joint
benefits described above, as well as various additional factors, including the
following:
- the financial condition, results of operations, business, technologies
and products of Diamond and S3, on both a historical and prospective
basis, as well as current industry, economic and market conditions. In
particular, the S3 board of directors considered the following factors:
- S3's perceived need to reduce its dependence on board manufacturers in
order to control and strengthen its brand in the retail market;
- the consolidation occurring in the graphics industry;
- S3's strategic objective of achieving greater scale and presence in
the 3D graphics market;
- S3's strategic goal of strengthening its position in the market for PC
OEMs; and
- S3's belief that an integrated chip and board company could achieve
significant economies of scale and control over its own retail and OEM
distribution channels;
- the presentations by S3's management, financial advisors and legal
advisors, including reports relating to the extensive due diligence
review which had been conducted regarding Diamond's business, operations,
technology and competitive position, and possible synergistic and
expansion opportunities for the two companies;
- with the assistance of S3's financial advisors, the comparative stock
prices of S3 and Diamond common stock, the premiums to market and
multiples paid in other comparable merger and acquisition transactions in
the 3D graphics industry and an analysis of the contributions to
revenues, operating income and net income of the combined companies;
- the oral opinion, subsequently confirmed in writing, of Lehman Brothers,
delivered June 21, 1999, that, as of that date, the exchange ratio to be
offered to Diamond's stockholders was fair, from a financial point of
view, to S3 (see "-- Opinion of S3's Financial Advisor" on page 48);
- the expectation that the merger will be tax free for federal income tax
purposes to S3;
- with the assistance of S3's legal counsel, the domestic antitrust review
process relating to the merger;
- a review with S3's legal counsel of the terms of the merger agreement,
including the obligation of Diamond not to solicit or encourage other
acquisition proposals, the breakup fee provisions,
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the circumstances under which either S3 or Diamond can terminate the
merger agreement and the closing conditions to the merger;
- the compatibility of the corporate cultures of S3 and Diamond, which the
S3 board of directors believed was important for the successful
integration of the companies;
- that the issuance of S3 common stock pursuant to the merger agreement is
conditioned upon approval by a majority of the votes cast at the S3
special meeting and that the merger is conditioned upon approval of the
merger agreement by the holders of a majority of the outstanding shares
of Diamond common stock;
- the accounting treatment of the merger, including the goodwill that will
be recorded on the financial statements of S3; and
- the composition of the board of directors of S3 following the merger.
S3's board of directors also considered a variety of potentially negative
factors in its deliberations concerning the merger, including the following
factors:
- the potential dilutive effect of the issuance of S3 common stock in the
merger;
- the substantial costs expected to be incurred, primarily in the current
and next few quarters in connection with the merger, including the
transaction expenses arising from the merger and costs associated with
combining the operations of the two companies;
- the risk that, despite the intentions and the efforts of the parties, the
benefits sought to be achieved in the merger will not be achieved;
- the risk that the market price of S3 common stock might be adversely
affected by the public announcement of the merger;
- the risk that, despite the intentions and efforts of the parties, the key
technical and management personnel of Diamond may not be retained by S3;
- the likelihood that S3 would lose the business of some of its customers
who are competitors of Diamond;
- the combined company would need to greatly expand its direct retail sales
channel in light of the anticipated loss of S3 board customers that
currently distribute S3 products into the retail sales channel; and
- the other risks described above under "Risk Factors" on page 11.
S3's board of directors does not intend the preceding discussion of the
information and factors considered by it to be exhaustive, but believes the
discussion includes the material factors it considered. In view of the wide
variety of factors considered in connection with its evaluation of the merger
and the complexity of these matters, the S3 board of directors did not find it
possible to and did not quantify or otherwise assign relative weights to the
specific factors it considered. In addition, individual members of the S3 board
of directors may have given different weights to different factors. The S3 board
of directors considered all these factors as a whole, and overall considered the
factors to be favorable to, and support, its determination.
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DIAMOND BOARD CONSIDERATIONS
The decision of the Diamond board of directors to approve the merger
agreement and recommend the approval and adoption of the merger agreement by
Diamond's stockholders was based upon its consultation with Diamond's
management, as well as its financial and legal advisors, and was based upon the
joint benefits described above as well as various factors, including the
following:
- the financial condition, results of operations, business, technologies
and products of Diamond and S3, on both a historical and prospective
basis, as well as current industry, economic and market conditions. In
particular, the Diamond board of directors considered the following
factors:
- a combined company could reduce graphics chip inventory investments
and possibly gain a price advantage in the market due to the
elimination of the need of both a graphics chip company and a graphics
board company to achieve acceptable profit margins;
- the consolidation occurring in the graphics industry and the belief
that the combination would create a solid, stable company, capable of
more efficiently managing the product life cycles and with cash
resources to fund new business opportunities;
- the Diamond board of directors was aware that a number of its
competitors have engaged in discussions with graphics chip suppliers
regarding various types of strategic relationships;
- the Diamond board of directors noted that integrated graphics chip and
graphics board companies had achieved strong financial performance
relative to the market in recent quarters and concluded that the
proposed combined company offered a greater opportunity for long-term
enhancement of stockholder value given current industry conditions and
trends;
- a combined company would provide greater ability to avoid communal
backlog and reduce certain margin pressures and channel price
protections;
- S3 had developed a reputation for technology leadership in the
high-volume production of reliable graphics chips; and
- S3 had the financial resources to enable Diamond to more aggressively
pursue its strategies for the Internet appliance, Internet
connectivity and home networking markets.
- the opinion of Wasserstein Perella, that the exchange ratio was fair to
the Diamond stockholders from a financial point of view, and the analysis
underlying that opinion (see "-- Opinion of Diamond's Financial Advisor"
on page 56);
- the Diamond board of directors considered as favorable to its
determination the fact that the exchange ratio would enable Diamond
stockholders to receive S3 common stock with a value of $5.07 per share
of Diamond common stock, based on the closing sales price of S3 common
stock on June 18, 1999, the last trading day prior to the negotiation of
the exchange ratio. This value represented a premium of approximately
17.0% over the average closing sales price for Diamond common stock for
the 10 trading days prior to and including June 18, 1999 of $4.33 per
share. The closing sales price of Diamond common stock on June 18, 1999
was $5.00;
- the provisions of the merger agreement, which provide for reciprocal
representations and warranties, conditions to closing, rights to
termination, mutual non-solicitation agreements and other covenants which
the Diamond board of directors believed to be reasonable;
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- the provisions contained in the merger agreement that permit the Diamond
board of directors, in the exercise of its fiduciary duties, to continue
to receive unsolicited inquiries and proposals regarding other potential
transactions, and to terminate the merger agreement, subject to certain
limitations, including the obligation to pay a termination fee in the
amount of $5,000,000;
- the commitment of $20.0 million under the credit agreement compared to
the terms of other available financing alternatives;
- the expected tax-free nature of the merger to Diamond's stockholders;
- the likelihood that the merger will be consummated;
- the fact that the market capitalization of the combined company will be
larger than Diamond's current market capitalization, providing Diamond
stockholders with enhanced liquidity; and
- the continuing role of Diamond management in S3 after the merger,
including the selection of Messrs. Schroeder, Reyes and Schraith to serve
on the S3 board of directors.
The Diamond board of directors also identified and considered a variety of
potentially negative factors in its deliberations concerning the merger,
including the risks that, despite the intentions and efforts of Diamond and S3,
the benefits sought to be achieved through the merger will not be achieved. The
Diamond board of directors also considered the following factors, among others:
- the fact that Diamond would become highly dependent upon S3's future
graphics chip design and development capabilities, because Diamond would
be restricted in its ability to select other graphics chips in the same
performance category for incorporation onto its graphics boards;
- the likely decline in Diamond's relationships with certain other graphics
chip suppliers and the prospects for Diamond's products incorporating
their graphics chips;
- the likely decline in the business of S3 with customers who are
competitors of Diamond;
- the risk that key technical, sales, support and management personnel
might not remain employees;
- the fact that the exchange ratio was fixed and that a decline in the
market price of S3 common stock prior to the effective time would
adversely affect the value received by Diamond stockholders in the
merger; and
- the risks associated with entering into a non-solicitation agreement and
agreeing to pay a termination fee under certain circumstances.
In the opinion of the Diamond board of directors, the above factors
represented the material potential negative factors associated with the merger.
In considering the merger, the Diamond board of directors considered the impact
of these factors on Diamond's existing stockholders. In the opinion of the
Diamond board of directors, however, these potential negative factors were
outweighed by the potential positive factors considered by the Diamond board of
directors that are described above. Accordingly, the Diamond board of directors
unanimously concluded that the merger is fair to, and in the best interest of,
Diamond and its stockholders, and voted to adopt, approve and declare advisable
the merger agreement and approve the merger. In view of the wide variety of
factors considered in connection with its evaluation of the merger, the Diamond
board of directors did not find it possible to, and did not, quantify or
otherwise attempt to assign relative weights to the specific factors considered
in reaching its determination.
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BOARD OF DIRECTORS RECOMMENDATIONS
THE S3 BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ISSUANCE OF S3
COMMON STOCK IN THE MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT
ARE FAIR TO, AND THAT THE MERGER IS IN THE BEST INTERESTS OF, S3. THE S3 BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE ISSUANCE
OF S3 COMMON STOCK IN CONNECTION WITH THE MERGER.
THE DIAMOND BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND HAS DETERMINED THAT THE
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, BOTH YOU AND DIAMOND. THE
DIAMOND BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER.
OPINION OF S3'S FINANCIAL ADVISOR
General. Lehman Brothers has acted as financial advisor to S3 in connection
with the merger. On June 21, 1999, Lehman Brothers rendered its opinion to the
S3 board of directors that as of such date, from a financial point of view, the
exchange ratio to be offered to the stockholders of Diamond by S3 was fair to
S3.
THE FULL TEXT OF THE LEHMAN BROTHERS OPINION DATED JUNE 21, 1999 IS
INCLUDED IN APPENDIX B TO THIS DOCUMENT AND IS INCORPORATED HEREIN BY REFERENCE.
THE SUMMARY OF THE LEHMAN BROTHERS OPINION SET FORTH IN THIS DOCUMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF LEHMAN BROTHERS'
OPINION. HOLDERS OF S3 COMMON STOCK MAY READ THE LEHMAN BROTHERS OPINION IN ITS
ENTIRETY FOR THE PROCEDURES FOLLOWED, FACTORS CONSIDERED, ASSUMPTIONS MADE AND
QUALIFICATIONS AND LIMITATIONS OF THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN
CONNECTION WITH ITS OPINION.
S3 IMPOSED NO LIMITATIONS ON THE SCOPE OF LEHMAN BROTHERS' INVESTIGATION OR
THE PROCEDURES TO BE FOLLOWED BY LEHMAN BROTHERS IN RENDERING ITS OPINION.
LEHMAN BROTHERS' ADVISORY SERVICES AND OPINION WERE PROVIDED FOR THE INFORMATION
AND ASSISTANCE OF THE S3 BOARD OF DIRECTORS IN CONNECTION WITH ITS CONSIDERATION
OF THE MERGER. THE LEHMAN BROTHERS OPINION IS NOT INTENDED TO BE AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF S3 AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE WITH RESPECT TO THE MERGER. LEHMAN BROTHERS' OPINION DOES NOT
ADDRESS S3'S UNDERLYING BUSINESS DECISION TO PROCEED WITH OR EFFECT THE MERGER.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
- the merger agreement and the specific terms of the merger;
- publicly available information concerning S3 and Diamond that it believed
to be relevant to its analysis;
- financial and operating information with respect to the business,
operations and prospects of S3 and Diamond furnished to it by S3 and
Diamond;
- publicly available estimates of the future financial performances of S3
and Diamond prepared by third party research analysts;
- a trading history of S3's common stock from June 20, 1994 to the present
and a comparison of that trading history with those of other companies
that it deemed relevant;
- a trading history of Diamond's common stock from April 13, 1995 to the
present and a comparison of that trading history with those of other
companies that it deemed relevant;
- a comparison of the historical financial results and present financial
condition of S3 with those of other companies that it deemed relevant;
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<PAGE> 55
- a comparison of the historical financial results and present financial
condition of Diamond with those of other companies that it deemed
relevant;
- a comparison of the financial terms of the merger with the financial
terms of certain other transactions that it deemed relevant;
- the potential pro forma financial effects of the merger on S3 based upon
projections of the future financial performance of the combined company
following consummation of the merger furnished to it by S3 and Diamond,
including without limitation the impact on revenues and the cost savings
expected to result from a combination of the businesses of S3 and
Diamond; and
- a comparison of the relative contributions of S3 and Diamond to the
combined company following consummation of the merger.
In addition, Lehman Brothers had discussions with the management of S3 and
Diamond concerning their respective businesses, operations, assets, financial
conditions and prospects and undertook such other studies, analyses and
investigations as Lehman Brothers deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information. Lehman Brothers also relied upon the assurances of the managements
of S3 and Diamond that they are not aware of any facts or circumstances that
would make such information inaccurate or misleading. With respect to the
financial projections of S3, upon advice of S3, Lehman Brothers assumed that
such projections were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of S3 as to the
future financial performance of S3 and that S3, on a stand alone basis, would
perform substantially in accordance with such projections. With respect to the
financial projections of Diamond, upon advice of S3 and Diamond, Lehman Brothers
assumed that such projections were reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the management of Diamond as
to the future financial performance of Diamond and that Diamond, on a stand
alone basis, would perform substantially in accordance with such projections.
With respect to the financial projections of the combined company following
consummation of the merger, upon advice of S3 and Diamond, Lehman Brothers
assumed that such projections were reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the managements of S3 and
Diamond as to the future financial performance of the combined company following
consummation of the merger and Lehman Brothers relied upon such projections in
performing its analysis. Lehman Brothers did not conduct a physical inspection
of the properties and facilities of S3 or Diamond and did not make or obtain any
evaluations or appraisals of the assets or liabilities of S3 or Diamond. Lehman
Brothers' opinion was necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of its
opinion.
In arriving at its opinion, Lehman Brothers did not ascribe a specific
range of value to S3 or Diamond, but rather made its determination as to the
fairness, from a financial point of view, of the exchange ratio to be offered to
the stockholders of Diamond by S3 in the merger on the basis of financial and
comparative analyses described below. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial and comparative analysis and the application of those methods to
the particular circumstances, and therefore, such an opinion is not readily
susceptible to summary description. Furthermore, Lehman Brothers did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Lehman Brothers believes that its analyses
must be considered as a whole and that considering any portion of
49
<PAGE> 56
such analyses and factors, without considering all analyses and factors as a
whole, could create a misleading or incomplete view of the process underlying
its opinion. In its analyses, Lehman Brothers made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of S3 and Diamond. Any
estimates contained in these analyses were not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.
The following is a summary of the material financial analyses used by
Lehman Brothers in connection with providing its opinion to the S3 board of
directors. Certain of the summaries of financial and comparative analyses
include information presented in tabular format. In order to fully understand
the methodologies used by Lehman Brothers and the results of its financial and
comparative analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial and comparative analyses. Accordingly, the information presented in
the tables and described below must be considered as a whole. Considering any
portion of such analyses and of the factors considered, without considering all
analyses and factors as a whole, could create a misleading or incomplete view of
the process underlying Lehman Brothers' opinion.
Historical Exchange Ratio Analysis. Lehman Brothers compared the exchange
ratio in the merger to the average exchange ratio obtained by dividing the price
of Diamond common stock into the price of S3 common stock over historical
periods. The historical periods included (1) June 18, 1999 and (2) 1-month,
3-months, 6-months and 12-months prior to June 18, 1999.
HISTORICAL AVERAGE EXCHANGE RATIO:
<TABLE>
<S> <C>
Merger Exchange Ratio............................ 0.520
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
EXCHANGE
RATIO
----------
<S> <C>
June 18, 1999.................................... 0.513
1-Month Average.................................. 0.619
3-Months Average................................. 0.713
6-Months Average................................. 0.845
12-Months Average................................ 1.102
</TABLE>
Stock Trading History. Lehman Brothers considered various historical data
concerning the history of the trading prices for Diamond common stock, S3 common
stock, an index of the stock prices of the circuit board graphics companies, an
index of the stock prices of the silicon circuit graphics companies, ATI
Technologies Inc. common stock and 3Dfx Interactive, Inc. common stock.
STOCK PRICE PERFORMANCE:
<TABLE>
<CAPTION>
PERCENT CHANGE
---------------------------------------------------
JUNE 20, 1994 - JUNE 18, 1996 - JUNE 18, 1998 -
JUNE 18, 1999 JUNE 18, 1999 JUNE 18, 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Diamond..................................... -74% -62% -18%
S3.......................................... +144% -20% +90%
Circuit Board Graphics Cos.................. -27% -62% -10%
Silicon Circuit Graphics Cos. .............. +26% -9% +4%
ATI Technologies Inc........................ +981% +652% +44%
3Dfx Interactive, Inc....................... NA +6% -5%
</TABLE>
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<PAGE> 57
Pro Forma Merger Analysis. Lehman Brothers analyzed the pro forma impact of
the merger on S3's earnings per share based on a management forecast for
calendar year 2000 for the combined company created jointly by the managements
of S3 and Diamond. In connection with these analyses, Lehman Brothers assumed
the merger would be treated under the purchase accounting method. Lehman
Brothers analyzed the accretion or dilution to S3's calendar year 2000 EPS under
three scenarios, which included the management forecast and two more
conservative scenarios created by Lehman Brothers. These more conservative
scenarios are identified as the moderate scenario and the downside scenario.
ACCRETION /(DILUTION) TO S3'S EARNINGS IN 2000:
<TABLE>
<CAPTION>
ACCRETION/
(DILUTION)
TO S3
----------
<S> <C>
Management Scenario...................................... 56.0%
Moderate Scenario........................................ 20.2%
Downside Scenario........................................ (15.5)%
</TABLE>
Contribution Analysis. Lehman Brothers utilized publicly available
historical financial data regarding S3 and Diamond and management estimates for
the future financial performance of S3 and Diamond to calculate the relative
contributions of S3 and Diamond to the pro forma combined company with respect
to revenues, operating income (defined as income before interest and taxes) and
net income for the calendar years 1996, 1997, 1998, 1999, and 2000 and the
latest twelve months of publicly available data as of June 18, 1999. Lehman
Brothers calculated the contributions based on S3 management estimates for the
future financial performance of S3 and on Diamond management estimates for the
future financial performance of Diamond. Lehman Brothers also reviewed the pro
forma ownership of the combined company, taking into account each company's
outstanding options and warrants on common stock treated under the treasury
stock method.
DIAMOND CONTRIBUTION:
<TABLE>
<CAPTION>
CY 1996 CY 1997 CY 1998 LTM CY 1999 CY 2000
------- ------- ------- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ 57.7% 50.4% 73.0% 75.2% 70.4% 58.6%
Operating Income........................ 28.6% NM NM NM NM 43.2%
Net Income.............................. 28.2% NM NM NM NM 37.9%
</TABLE>
PRO FORMA OWNERSHIP BASED ON EXCHANGE RATIO:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Diamond................................. 24.3%
S3...................................... 75.7%
</TABLE>
Comparable Company Analysis. Using publicly available information, Lehman
Brothers compared selected financial data of Diamond with similar data of
selected companies engaged in businesses considered by Lehman Brothers to be
comparable to that of Diamond. Specifically, Lehman Brothers included in its
review two groups of companies. The first group consisted of circuit board
graphics companies, including:
- Boca Research, Inc.;
- Creative Technology Ltd.;
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<PAGE> 58
- ELSA AG; and
- Number Nine Visual Technology Corporation.
The second group consisted of integrated graphics companies that have both
circuit board and silicon integrated circuit graphics capability, including:
- ATI Technologies Inc.; and
- 3Dfx Interactive, Inc.
For each of Diamond, the circuit board graphics companies and the
integrated graphics companies, Lehman Brothers calculated the ratio of market
price to the mean earnings per share estimates for calendar years 1999 and 2000
reported by First Call, which is a service widely used by the investment
community to gather earnings estimates from various research analysts. Projected
EPS multiples for several of the circuit board graphics companies were not
meaningful as a result of projected losses or earnings that did not yield a
meaningful multiple. Lehman Brothers also calculated the ratio of enterprise
value, or equity market value plus outstanding short- and long-term debt less
cash and cash equivalents, to the revenue estimates for calendar years 1999 and
2000, as published by third party research analysts. Lehman Brothers then
calculated the ratio of the transaction price (S3's closing share price on June
18, 1999 multiplied by 0.52 shares of S3 common stock to be exchanged for each
Diamond share in the merger) to the mean First Call earnings per share
estimates. Lehman Brothers also calculated the ratio of the enterprise value
implied by the transaction price to the revenue estimates for calendar years
1999 and 2000.
COMPARABLE COMPANY MULTIPLES:
(as of June 18, 1999)
<TABLE>
<CAPTION>
PROJECTED REVENUE PROJECTED EPS
MULTIPLES: MULTIPLES:
----------------- -----------------
CY 1999 CY 2000 CY 1999 CY 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Diamond based on June 18, 1999 Closing Price.......... 0.35x 0.32x 13.5x 11.1x
Diamond based on Transaction Price.................... 0.35x 0.32x 13.7x 11.3x
Median of Circuit Board Graphics Companies............ 0.67x 0.63x 10.3x 19.0x
Median of Integrated Graphics Companies............... 1.44x 1.16x 22.8x 16.1x
</TABLE>
Lehman Brothers also compared selected financial data of S3 with data of
selected companies engaged in businesses considered by Lehman Brothers to be
comparable to that of S3. Specifically, Lehman Brothers included in its review
two groups of companies. The first group consisted of silicon circuit graphics
companies, including:
- 3Dlabs Inc., Ltd.;
- Evans & Sutherland Computer Corporation;
- NVIDIA Corporation;
- OPTi Inc.; and
- Trident Microsystems, Inc.
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<PAGE> 59
The second group consisted of integrated graphics companies that have both
circuit board and silicon integrated circuit graphics capability, including:
- ATI Technologies Inc.; and
- 3Dfx Interactive, Inc.
For each of S3, the silicon circuit graphics companies and the integrated
graphics companies, Lehman Brothers calculated the ratio of market price to the
mean First Call earnings per share estimates for calendar years 1999 and 2000.
Projected EPS multiples for several of the silicon circuit graphics companies
were not meaningful as a result of projected losses or earnings that did not
yield a meaningful multiple. Lehman Brothers also calculated the ratio of
enterprise value to the revenue estimates for calendar years 1999 and 2000, as
published by third party research analysts.
COMPARABLE COMPANY MULTIPLES:
(as of June 18, 1999)
<TABLE>
<CAPTION>
PROJECTED REVENUE PROJECTED EPS
MULTIPLES: MULTIPLES:
----------------- -----------------
CY 1999 CY 2000 CY 1999 CY 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
S3 Based on June 18, 1999 Closing Price............... 1.65x 1.14x NM 15.7x
Median of Silicon Circuit Graphics Companies.......... 1.08x 0.85x 18.1x 13.3x
Median of Integrated Graphics Companies............... 1.44x 1.16x 22.8x 16.1x
</TABLE>
Because of the inherent differences between the businesses, operations,
financial conditions and prospects of S3 and Diamond and the businesses,
operations, financial conditions and prospects of the companies included in
their respective comparable company groups, Lehman Brothers believed that it was
inappropriate to rely solely on the quantitative results of the analysis, and
accordingly, also made qualitative judgments concerning differences between the
financial and operating characteristics of S3, Diamond and the companies in
their respective comparable company groups that would affect the public trading
values of S3, Diamond and such comparable companies.
Comparable Transactions Analysis. The comparable transactions analysis
provides a market benchmark based on the consideration paid in selected
comparable transactions. For this analysis, Lehman Brothers reviewed publicly
available information to determine the purchase prices and multiples paid in
certain transactions that were publicly announced since January 1, 1994 in the
graphics industry involving target companies which were similar to Diamond in
terms of business mix, product portfolio and/or markets served. The comparable
transactions included:
- the acquisition of STB Systems, Inc. by 3Dfx Interactive, Inc.;
- the acquisition of Micronics Computers, Inc. by Diamond Multimedia
Systems, Inc.;
- the acquisition of AccelGraphics, Inc. by Evans & Sutherland Computer
Corporation;
- the acquisition of the miro Digital Video Products division of miro
Computer Products AG by Pinnacle Systems, Inc.;
- the acquisition of SPEA Software AG by Diamond Multimedia Systems, Inc.;
- the acquisition of Supra Corporation by Diamond Multimedia Systems, Inc.;
- the acquisition of the Eagle Technology division of Artisoft, Inc. by
Microdyne Corporation; and
- the acquisition of the Eagle Technology division of Anthem Electronics,
Inc. by Artisoft, Inc.
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<PAGE> 60
Lehman Brothers calculated the enterprise value of the relevant
transactions, which is calculated as the consideration offered for the acquired
company's common equity plus the acquired company's short- and long-term debt,
less the acquired company's cash and cash equivalents. Lehman Brothers then
divided the enterprise value of the relevant transactions by the latest twelve
months or LTM revenue of the acquired business. Lehman Brothers also divided the
consideration offered for the acquired company's common equity by the LTM net
income and the publicly available next projected year EPS of the acquired
business (forward EPS). The following table presents the LTM revenue, LTM net
income and forward EPS multiples for the comparable transactions.
COMPARABLE TRANSACTIONS ANALYSIS:
<TABLE>
<CAPTION>
TRANSACTION VALUE
AS A MULTIPLE OF ENTERPRISE
------------------ VALUE AS A
LTM FORWARD MULTIPLE OF
NI EPS LTM REV.
------ -------- -----------
<S> <C> <C> <C>
S3/Diamond Merger (based on S3 June 18, 1999
closing price)................................ NM 11.3x 0.43x
Median of Comparable Transactions............... 15.2x 9.9x 0.50x
</TABLE>
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences in
the businesses, operations, financial conditions and prospects of Diamond and
the businesses, operations and financial conditions of the companies included in
the comparable transactions group, Lehman Brothers believed that a purely
quantitative comparable transaction analysis would not be particularly
meaningful in the context of the merger. Lehman Brothers believed that the
appropriate use of a comparable transaction analysis in this instance would
involve qualitative judgments concerning the differences between the
characteristics of these transactions and the merger which would affect the
acquisition values of the acquired companies and Diamond.
Premiums Paid Analysis. Using publicly available information, Lehman
Brothers reviewed the premiums paid, or proposed to be paid, in the case of
transactions pending as of the date of the Lehman Brothers opinion, in selected
acquisitions in the technology sector having transaction values between $100
million and $500 million since January 1, 1998. The technology transactions
included the following transactions:
- the acquisition of Sterigenics International, Inc. by Ion Beam
Applications, s.a.;
- the acquisition of NeoPath, Inc. by AutoCyte, Inc.;
- the acquisition of Texas Micro Inc. by RadiSys Corporation;
- the acquisition of Edify Corporation by Security First Technologies
Corporation;
- the acquisition of Mosaix, Inc. by Lucent Technologies Inc.;
- the acquisition of SEEQ Technology Incorporated by LSI Logic Corporation;
- the acquisition of SPR Inc. by Metamor Worldwide, Inc.;
- the acquisition of Pharmaceutical Marketing Services Inc. by Quintiles
Transnational Corp.;
- the acquisition of STB Systems, Inc. by 3Dfx Interactive, Inc.;
- the acquisition of Quickturn Design Systems, Inc. by Cadence Design
Systems, Inc.;
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<PAGE> 61
- the acquisition of Integrated Process Equipment Corp. by SpeedFam
International, Inc.;
- the acquisition of Integrated Systems Consulting Group, Inc. by First
Consulting Group, Inc.;
- the acquisition of Altron Incorporated by Sanmina Corporation;
- the acquisition of CKS Group, Inc. by USWeb Corporation;
- the acquisition of Innova Corporation by Digital Microwave Corporation;
- the acquisition of Eltron International, Inc. by Zebra Technologies
Corporation;
- the acquisition of Broderbund Software, Inc. by The Learning Company,
Inc.;
- the acquisition of Telco Systems, Inc. by World Access, Inc.;
- the acquisition of ATL Products, Inc. by Quantum Corporation;
- the acquisition of Award Software International, Inc. by Phoenix
Technologies Ltd.;
- the acquisition of Claremont Technology Group, Inc. by Complete Business
Solutions, Inc.;
- the acquisition of Logic Works, Inc. by PLATINUM technology
International, inc.;
- the acquisition of Benchmarq Microelectronics, Inc. by Unitrode
Corporation;
- the acquisition of Trusted Information Systems, Inc. by Network
Associates, Inc.;
- the acquisition of Mastering, Inc. by PLATINUM technology International,
inc.; and
- the acquisition of BGS Systems, Inc. by BMC Software, Inc.
Lehman Brothers calculated the premium per share paid by the acquiror
compared to the share price of the target company prevailing one day and one
month prior to the announcement of the transaction. Lehman Brothers compared the
premiums paid in the technology sector to the premium to be paid by S3 for
Diamond in the merger.
TRANSACTION PREMIUMS:
<TABLE>
<CAPTION>
1-DAY 1-MONTH
----- -------
<S> <C> <C>
S3/Diamond Merger (based on June 18, 1999
closing prices)............................... 1.4% (3.4)%
Technology Transactions (median)................ 26.9% 52.5 %
</TABLE>
Lehman Brothers' Engagement. Lehman Brothers is an internationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
The S3 board of directors selected Lehman Brothers because of its expertise,
reputation and familiarity with S3 and the technology industry generally and
because its investment banking professionals have substantial experience in
transactions comparable to the merger.
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<PAGE> 62
As compensation for its services in connection with the merger, S3 has
agreed to pay Lehman Brothers:
- a quarterly retainer fee of $50,000;
- an opinion fee of $478,600; and
- a fee upon consummation of the merger of approximately $2.4 million,
against which the retainer fee and the opinion fee would be credited.
In addition, S3 has agreed to reimburse Lehman Brothers for reasonable
out-of-pocket expenses incurred in connection with the merger and to indemnify
Lehman Brothers for certain liabilities that may arise out of its engagement by
S3 and the rendering of the Lehman Brothers opinion.
In the ordinary course of its business, Lehman Brothers actively trades in
the equity and debt securities of S3 and Diamond for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
OPINION OF DIAMOND'S FINANCIAL ADVISOR
Wasserstein Perella has acted as financial advisor to Diamond in connection
with the merger. On June 21, 1999, Wasserstein Perella delivered a financial
presentation and oral opinion to the Diamond board of directors to the effect
that, as of such date, the exchange ratio was fair from a financial point of
view to the stockholders of Diamond. Wasserstein Perella later delivered a
written opinion dated June 22, 1999 confirming its oral opinion.
ATTACHED AS APPENDIX C IS THE FULL TEXT OF THE WRITTEN OPINION OF
WASSERSTEIN PERELLA, DATED JUNE 22, 1999, WHICH SETS FORTH, AMONG OTHER THINGS,
THE OPINION EXPRESSED, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN BY WASSERSTEIN PERELLA.
DIAMOND STOCKHOLDERS ARE URGED TO READ THE WASSERSTEIN PERELLA OPINION IN ITS
ENTIRETY. THE WASSERSTEIN PERELLA OPINION DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY DIAMOND STOCKHOLDER AS TO HOW THAT STOCKHOLDER SHOULD VOTE OR OTHERWISE
ACT IN RESPECT OF THESE MATTERS. THE DISCUSSION OF THE WASSERSTEIN PERELLA
OPINION IN THIS DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE OPINION ATTACHED AS APPENDIX C.
In connection with rendering its opinion, Wasserstein Perella reviewed and
analyzed, among other things:
- the merger agreement;
- certain publicly available business and financial information relating to
Diamond and S3 for recent years and interim periods;
- certain internal financial and operating information, including financial
forecasts, analyses and projections prepared by or on behalf of Diamond
and S3 and provided to Wasserstein Perella for the purposes of their
analysis, and met with management of Diamond and S3 to review and discuss
such information and, among other matters, each of Diamond and S3's
business, operations, assets, financial condition and future prospects;
- certain financial forecasts relating to Diamond and S3 prepared by their
respective management;
- certain financial and stock market data relating to Diamond and S3, and
compared that data with similar data for certain other companies, the
securities of which are publicly traded, that
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<PAGE> 63
Wasserstein Perella believes to be relevant or comparable in certain
respects to Diamond and S3 or one or more of their respective businesses
or assets;
- the financial terms of certain recent acquisitions and business
combination transactions in the multimedia and subsystems industry and
the peripherals industry specifically, and in other industries generally,
that Wasserstein Perella believes to be reasonably comparable to the
merger or otherwise relevant to its inquiry; and
- performed other financial studies, analyses and investigations and
reviewed other information as Wasserstein Perella considered appropriate
for purposes of the Wasserstein Perella opinion.
Among the forecasts Wasserstein Perella reviewed and discussed with
management of Diamond and S3, as applicable, were forecasts of Diamond on a
stand alone basis and forecasts of Diamond and S3 on a combined basis assuming
the consummation of the Merger. Wasserstein Perella also met with management of
Diamond to discuss and review Diamond's anticipated operating expenses and other
cash needs and its liquidity constraints, including the ability of Diamond to
secure alternative sources of financing.
Wasserstein Perella also performed such other financial studies, analyses,
and investigations and reviewed such other information as it considered
appropriate for purposes of its opinion. In formulating its opinion, Wasserstein
Perella relied on (a) the fact that Diamond's decision to enter into the merger
agreement was preceded by a 14-month process during which merger proposals were
solicited by or on behalf of Diamond from potential parties which included the
parties that Diamond believed were logical merger partners, and (b) Diamond's
assessment that the merger agreement represents the only readily available
transaction to Diamond that will provide both the cash necessary to enable
Diamond to fund its ongoing operations and a reasonable opportunity to enable
Diamond to achieve its strategic objectives.
In rendering its opinion, Wasserstein Perella assumed and relied upon,
without independent verification, the accuracy and completeness of all the
financial and other information that was provided to, discussed with or publicly
available to it. Wasserstein Perella also relied upon the reasonableness and
accuracy of the financial projections, forecasts and analyses supplied to it by
Diamond's and S3's management and has assumed that they were reasonably prepared
in good faith on bases reflecting the best currently available judgments and
estimates of Diamond's and S3's management. Wasserstein Perella expresses no
opinion with respect to such financial projections, forecasts and analyses, and
did not review any of the books and records of Diamond or S3 or assume any
responsibility for conducting a physical inspection of the properties or
facilities of Diamond or S3, or for making an independent evaluation or
appraisal of the assets or liabilities of Diamond or S3. Wasserstein Perella
also assumed (1) that the merger will qualify as a tax-free reorganization for
federal income tax purposes; (2) that obtaining all regulatory and other
approvals and third party consents required for consummation of the merger will
not have an adverse impact on Diamond or S3 or on the anticipated benefits of
the merger; and (3) that the transactions described in the merger agreement will
be consummated on the terms set forth therein, without waiver or modification of
any of the material terms or conditions.
In performing its analyses for the Wasserstein Perella opinion, Wasserstein
Perella relied on numerous assumptions made by management of Diamond and S3, and
made judgments of its own with regard to the performance of Diamond and S3,
industry performance, general business and economic conditions and other
matters, many of which are beyond Diamond's and S3's ability to control. Any
estimates contained in such analyses are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested in the Wasserstein Perella opinion. In addition,
analyses relating to values of companies do not purport to be
57
<PAGE> 64
appraisals or to reflect the prices at which companies may actually be sold.
Since such estimates are inherently subject to uncertainty, none of Diamond and
S3, Wasserstein Perella nor any other person assumes responsibility for their
accuracy.
The following is a brief summary of the significant financial analyses
performed by Wasserstein Perella in preparing its opinion:
EXCHANGE RATIO ANALYSIS. Wasserstein Perella reviewed the daily closing
prices of Diamond common stock and S3 common stock to determine the implied
exchange ratio based upon the relative prices of Diamond common stock and S3
common stock. Based on the June 21, 1999 closing prices of $5.69 for Diamond and
$9.44 for S3, the implied exchange ratio was 0.6026x ($5.69 divided by $9.44).
Wasserstein Perella analyzed the implied exchange ratio between Diamond common
stock and S3 common stock for the period from July 28, 1997 to June 21, 1999.
Wasserstein Perella calculated the high, low, mean and median of the historical
implied exchange ratios for the periods shown below.
SUMMARY OF HISTORICAL IMPLIED EXCHANGE RATIOS OF
DIAMOND COMMON STOCK PRICE TO S3 COMMON STOCK PRICE
<TABLE>
<CAPTION>
HIGH LOW MEAN MEDIAN
------ ------ ------ ------
<S> <C> <C> <C> <C>
Period Ending June 21, 1999
Current.................................................. 0.6026 0.6026 0.6026 0.6026
Five Days................................................ 0.6026 0.4886 0.5213 0.5121
Ten Days................................................. 0.6026 0.4886 0.5492 0.5547
30 Days.................................................. 0.7220 0.4886 0.6158 0.6235
60 Days.................................................. 1.0325 0.4886 0.6960 0.6485
90 Days.................................................. 1.0325 0.4886 0.7583 0.8055
180 Days................................................. 1.8769 0.4886 0.9926 0.9288
</TABLE>
PREMIUM/(DISCOUNT) ANALYSIS. Wasserstein Perella compared the
premium/(discount) of Diamond's share price implied by the exchange ratio
vis-a-vis the share price of Diamond for the periods described below.
SUMMARY PREMIUM/(DISCOUNT) ANALYSIS
<TABLE>
<CAPTION>
PREMIUM (DISCOUNT)
AVERAGE S3 EXCHANGE IMPLIED DIAMOND TO CURRENT DIAMOND
STOCK PRICE RATIO STOCK PRICE STOCK PRICE
----------- -------- --------------- ------------------
<S> <C> <C> <C> <C>
As of June 18, 1999.......... $9.75 0.52 $5.07 1.4%
Period Ending June 21, 1999
Current...................... $9.44 0.52 $4.91 (14)%
Ten Days..................... $8.20 0.52 $4.26 (25)%
30 Days...................... $7.53 0.52 $3.92 (31)%
60 Days...................... $7.59 0.52 $3.95 (31)%
90 Days...................... $7.73 0.52 $4.02 (29)%
180 Days..................... $6.54 0.52 $3.40 (40)%
</TABLE>
COMPARABLE COMPANY ANALYSIS. Wasserstein Perella reviewed selected
financial data relating to Diamond to the corresponding data of selected
companies engaged in businesses considered by Wasserstein Perella to be
comparable to that of Diamond. Specifically, Wasserstein Perella included in its
review two groups of companies. The first group consisted of add-in board
vendors including Creative Technology, Ltd., Elsa AG, Boca Research, Inc. and
Number Nine Visual Technology Corporation. The second group consisted of
graphics chip vendors including NVIDIA Corporation,
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NeoMagic Corporation, Evans & Sutherland Computer Corporation, Trident
Microsystems, Inc. and 3D Labs Inc., Ltd. In its analysis, Wasserstein Perella
used closing market prices on June 21, 1999 and other publicly available
information. For each comparable company, Wasserstein Perella calculated
multiples of estimated calendar year 1999 financial results including enterprise
value (i.e. equity market value plus debt less cash) as a multiple of each of
revenues, EBITDA and EBIT. EBITDA is defined as earnings before interest, taxes,
depreciation and amortization and EBIT is defined as earnings before interest
and taxes. The results of this analysis are summarized below.
SUMMARY OF COMPARABLE COMPANY ANALYSIS
<TABLE>
<CAPTION>
IMPLIED DIAMOND TRANSACTION
MULTIPLES
--------------------------------
MULTIPLE RANGE PROJECTED 1999 PROJECTED 2000
-------- ----------- -------------- --------------
<S> <C> <C> <C>
Enterprise Value as a Multiple of revenues.... 0.4x - 0.7x 0.35x 0.32x
Enterprise Value as a Multiple of EBITDA...... 7x - 15x 9.7x 5.2x
Enterprise Value as a Multiple of EBIT........ 16x - 20x 21.5x 7.4x
</TABLE>
COMPARABLE ACQUISITION ANALYSIS. Wasserstein Perella analyzed information
relating to the following 10 selected transactions in the peripherals industry
occurring between May 21, 1992 and December 11, 1998.
- 3DFx Interactive, Inc./STB Systems, Inc.
- 3D Labs, Inc., Ltd./Dynamic Pictures, Inc.
- Micron Technology, Inc./Rendition
- Evans & Sutherland Computer Corporation/AccelGraphics, Inc.
- Access Beyond, Inc./Hayes Microcomputer Products, Inc.
- Creative Technology, Ltd./Cambridge SoundWorks, Inc.
- Seagate Technology, Inc./Conner Peripherals, Inc.
- Avid Technology, Inc./Digidesign, Inc.
- Radius, Inc./SuperMac Technology, Inc.
- RasterOps Corp./Truevision, Inc.
For each transaction, relevant transaction multiples were analyzed,
including enterprise value as a multiple of each of revenues, EBITDA and EBIT,
based on estimated 1999 financial results supplied by Diamond management. The
results of this analysis are summarized below.
SUMMARY OF COMPARABLE ACQUISITION ANALYSIS
<TABLE>
<CAPTION>
IMPLIED DIAMOND TRANSACTION
MULTIPLES
-------------------------------
MULTIPLE RANGE PROJECTED 1999 PROJECTED 2000
-------- ---------- -------------- --------------
<S> <C> <C> <C>
Enterprise Value as a Multiple of revenues......... 0.5 - 0.8x 0.35x 0.32x
Enterprise Value as a Multiple of EBITDA........... 8x - 20x 9.7x 5.2x
Enterprise Value as a Multiple of EBIT............. 18x - 25x 21.5x 7.4x
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS. Wasserstein Perella performed a discounted
cash flow analysis of Diamond for the five-year period ending with fiscal year
2004, using financial projections provided by the management of Diamond.
Wasserstein Perella used discount rates of 13% to 15% and perpetuity growth
rates for cash flows of 2.0% to 3.0%. The per share values of Diamond common
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stock implied by this analysis ranged from $0.52 to $0.74, as compared to the
implied per share transaction value of approximately $4.91, which is the product
of an S3 common stock price of $9.44 (the closing price on June 21, 1999) and an
exchange ratio of 0.52.
In addition to the above outlined analyses, Wasserstein Perella performed
such other valuation analyses as it deemed appropriate in determining the
fairness to the Diamond stockholders of the consideration to be received in the
merger. Wasserstein Perella concluded, based on the full range of its analyses,
that the merger consideration to be paid in the merger was fair from a financial
point of view to the stockholders of Diamond.
Wasserstein Perella is an investment banking firm engaged, among other
things, in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings, and
secondary distributions of listed and unlisted securities and private
placements. Wasserstein Perella was selected to render the fairness opinion
because it is a nationally recognized investment banking firm and because of its
experience in the valuation of companies. In the ordinary course of business,
Wasserstein Perella may actively trade the debt and equity securities of Diamond
and S3, for its own account and for the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Under the terms of Wasserstein Perella's engagement, Diamond has agreed to
pay Wasserstein Perella an advisory fee customary for the services provided in
connection with the merger. A substantial portion of this fee will not be paid
unless and until the merger is completed. Diamond agreed to pay Wasserstein
Perella a transaction fee equal to 1% of the aggregate consideration as
determined on the closing date of the merger. Diamond also agreed to reimburse
Wasserstein Perella for its out-of-pocket expenses, including reasonable fees
and disbursements of its counsel. Diamond agreed to indemnify Wasserstein
Perella and its affiliates, their respective directors, officers, partners,
agents and employees and each person, if any, controlling Wasserstein Perella or
any of its affiliates against certain liabilities and expenses, including
certain liabilities under the federal securities laws, relating to or arising
out of such engagement.
INTERESTS OF SOME OF DIAMOND'S EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation to approve and adopt the merger agreement
and approve the merger, the stockholders of Diamond should be aware that certain
officers and directors of Diamond may be deemed to have conflicts of interest
with respect to the merger. See "Risk Factors -- Risks Related to the
Merger -- Some officers and directors of Diamond have conflicts of interest
arising out of personal benefits to be received in the merger that could
influence their support of the merger" on page 13. Set forth below is a
description of these potential conflicts of interest.
Indemnification and Insurance. S3 has agreed to indemnify Diamond's current
and former directors and officers with respect to actions or omissions by them
on or prior to the merger to the same extent and on the same terms and
conditions provided in Diamond's organizational documents and indemnification
agreements in effect as of the date of the merger agreement. For six years after
the merger is completed, (a) the organizational documents of the surviving
corporation will contain the same provisions as to indemnification of officers
and directors as are contained in Diamond's organizational documents; and (b) S3
will provide officers' and directors' liability insurance with respect to facts
or events occurring on or prior to the merger covering Diamond's current or
former directors and officers currently covered by Diamond's officers' and
directors' liability insurance policy on terms no less favorable to those of the
policy currently in effect; provided, that, in satisfying its obligation, S3 is
not obligated to pay premiums in excess of 200% of the amount Diamond currently
pays.
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Stock Options of Diamond. The merger agreement provides that at the
effective time of the merger, each option granted by Diamond to purchase shares
of Diamond common stock which is outstanding and unexercised will be assumed by
S3 and converted into an option to purchase shares of S3 common stock in the
amount and at an exercise price as is described under "The Merger and Related
Transaction -- Conversion of Diamond Securities" on page 38, and otherwise
having the same terms and conditions as are in effect immediately prior to the
effective time of the merger.
Change of Control Severance Agreements. Each executive officer and vice
president of Diamond is a party to a change of control severance agreement with
Diamond. The agreements provide that, in the event of an involuntary termination
or termination not for cause within 12 months following a change of control of
Diamond, then the officer shall be entitled to (a) a cash severance payment in
an amount equal to 150% of the officer's annual base pay, (b) continuation of
employee benefits at 100% for a period of 12 months, (c) outplacement
assistance, including job counseling and referral services, for a period of six
months and (d) continued vesting of stock options and restricted stock for an
additional 12 months. In addition, the agreements provide that, in the event of
an involuntary termination not for cause within the period that is between 12
months and 24 months following a change of control, then the officer shall be
entitled to (a) a cash severance payment in an amount equal to 75% of the
officer's annual base pay, (b) continuation of employee benefits at 100% for a
period of six months, (c) outplacement assistance, including job counseling and
referral services, for a period of six months and (d) continued vesting of stock
options and restricted stock for an additional six months. Diamond's severance
obligations 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.
William J. Schroeder Employment Arrangements. The terms of Mr. Schroeder's
employment arrangement with S3 had not been determined as of the date of this
document. Even though Mr. Schroeder may be employed by the combined company, he
will still be entitled to the benefits of his change of control severance
agreement with Diamond described above, which includes a cash severance payment
of $600,000. This is because he will not be the chief executive officer of the
surviving company following the merger.
LISTING ON THE NASDAQ NATIONAL MARKET OF S3 COMMON STOCK TO BE ISSUED IN THE
MERGER
It is a condition to the closing of the merger that the shares of S3 common
stock to be issued in the merger be approved for listing on the Nasdaq National
Market, subject to official notice of issuance.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MERGER
The merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act, which prevents certain transactions from being
completed until required information and materials are furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and the appropriate waiting periods end or expire. We have filed the required
information and materials with the Department of Justice and the Federal Trade
Commission, and the waiting period for the filings has terminated.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the merger on antitrust grounds after expiration of the
waiting period. Accordingly, at any time before or after the completion of the
merger, either the Antitrust Division of the Department of Justice or the
Federal Trade Commission could take action under the antitrust laws. Certain
other persons could take action under the antitrust laws, including seeking to
enjoin the merger. Additionally, at any time before or after the completion of
the merger, notwithstanding that the
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applicable waiting period expired or ended, any state could take action under
the antitrust laws. A challenge to the merger could be made and if a challenge
is made, we may not prevail.
Neither of us is aware of any other material governmental or regulatory
approval required for completion of the merger, other than compliance with
applicable corporation law of Delaware.
NO APPRAISAL RIGHTS
Holders of Diamond common stock do not have appraisal rights with respect
to the merger under the General Corporation Law of the State of Delaware.
Holders of Diamond common stock are not entitled to appraisal rights because
both Diamond common stock and S3 common stock are listed on the Nasdaq National
Market.
ACCOUNTING TREATMENT
We intend to account for the merger as a purchase for financial reporting
and accounting purposes, under generally accepted accounting principles. After
the merger, the results of operations of Diamond will be included in the
consolidated financial statements of S3. The purchase price will be allocated
based on the fair values of the assets acquired and the liabilities assumed. Any
excess of cost over fair value of the net tangible assets of Diamond acquired
will be recorded as goodwill and other intangible assets and will be amortized
by charges to operations under generally accepted accounting principles. These
allocations will be made based upon valuations and other procedures that have
not yet been finalized.
LITIGATION RELATING TO THE MERGER
On August 4, 1999, two alleged stockholders of Diamond filed a lawsuit,
captioned Strum v. Schroeder, et al., in the Superior Court of the State of
California for the County of Santa Clara. Plaintiffs, on behalf of themselves
and a class of all Diamond stockholders similarly situated whom they purportedly
represent, challenge the terms of the proposed merger between S3 and Diamond.
The complaint names as defendants Diamond, the directors of Diamond and S3. The
complaint alleges generally that Diamond's directors breached their fiduciary
duties to stockholders of Diamond and seeks an injunction against the merger,
or, in the alternative, rescission and the recovery of unspecified damages, fees
and expenses. Diamond, S3 and the individual defendants believe that they have
meritorious defenses to the lawsuit and intend to defend themselves vigorously.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
This section of the document describes the merger agreement. While we
believe that the description covers the material terms of the merger agreement,
this summary may not contain all of the information that is important to you.
The merger agreement is attached to this document as Appendix A, and we urge you
to read it carefully.
REPRESENTATIONS AND WARRANTIES
We each made a number of representations and warranties in the merger
agreement regarding aspects of our respective businesses, financial condition,
structure and other facts pertinent to the merger.
S3'S REPRESENTATIONS AND WARRANTIES
S3's representations and warranties include representations as to:
- S3's corporate organization and its qualification to do business;
- S3's certificate of incorporation and bylaws;
- S3's capitalization;
- authorization of the merger agreement by S3 and Merger Sub;
- governmental authorization for S3 to complete the merger;
- regulatory approvals required to complete the merger;
- S3's compliance with applicable laws and regulations;
- S3's compliance with agreements, contracts and other binding instruments;
- S3's title to the properties it owns and leases;
- S3's filings and reports with the Securities and Exchange Commission;
- S3's financial statements;
- information supplied by S3 in this document and the related registration
statement filed by S3;
- changes in S3's business since March 31, 1999;
- S3's liabilities;
- litigation involving S3 or any of its subsidiaries;
- S3's taxes;
- S3's employee benefit plans;
- S3's financial advisors;
- environmental matters involving S3 or any of its subsidiaries;
- labor matters involving S3 or any of its subsidiaries;
- S3's leaseholds;
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- compensation paid to S3's employees or former employees;
- intellectual property used by S3;
- S3's insurance;
- S3's year 2000 compliance;
- the fairness opinion received by S3; and
- the tax treatment of the merger.
DIAMOND'S REPRESENTATIONS AND WARRANTIES
Diamond's representations and warranties include representations as to:
- Diamond's corporate organization and its qualification to do business;
- Diamond's certificate of incorporation and bylaws;
- Diamond's capitalization;
- authorization of the merger agreement by Diamond;
- governmental authorization for Diamond to complete the merger;
- regulatory approvals required to complete the merger;
- Diamond's compliance with applicable laws and regulations;
- Diamond's compliance with agreements, contracts and other binding
instruments;
- Diamond's subsidiaries;
- Diamond's title to the properties it owns and leases;
- Diamond's filings and reports with the Securities and Exchange
Commission;
- Diamond's financial statements;
- information supplied by Diamond in this document and the related
registration statement filed by S3;
- changes in Diamond's business since March 31, 1999;
- Diamond's liabilities;
- litigation involving Diamond or any of its subsidiaries;
- Diamond's taxes;
- Diamond's employee benefit plans;
- Diamond's financial advisors;
- environmental matters involving Diamond or any of its subsidiaries;
- labor matters involving Diamond or any of its subsidiaries;
- Diamond's leaseholds;
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- compensation paid to Diamond's employees or former employees;
- intellectual property used by Diamond;
- Diamond's insurance;
- Diamond's year 2000 compliance;
- the fairness opinion received by Diamond; and
- the tax treatment of the merger.
The representations and warranties in the merger agreement are complicated
and not easily summarized. You are urged to read carefully the articles of the
merger agreement entitled "Representations and Warranties of the Company" and
"Representations and Warranties of Acquirer."
S3'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
S3 agreed that until the completion of the merger or the termination of the
merger agreement or unless Diamond consents in writing, each of S3 and its
subsidiaries will use commercially reasonable efforts to:
- preserve intact its present business organization;
- keep available the services of its present officers and employees; and
- maintain satisfactory relationships with suppliers, distributors,
customers and others with which it has business relationships.
S3 also agreed that until the completion of the merger or the termination
of the merger agreement or unless Diamond consents in writing, S3 and its
subsidiaries would conduct their business in compliance with certain specific
restrictions relating to the following:
- amendment of S3's certificate of incorporation or bylaws (except as
required by the terms of the merger agreement);
- the issuance, split, reclassification, purchase and redemption of
securities;
- the issuance of dividends or other distributions;
- the incurrence of indebtedness;
- the acquisition of assets or other entities; and
- the liquidation or dissolution of, or certain mergers involving, S3.
The agreements related to the conduct of S3's business in the merger
agreement are complicated and not easily summarized. You are urged to read
carefully the sections of the merger agreement entitled "Covenants of Acquirer."
DIAMOND'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
Diamond agreed that until the completion of the merger or the termination
of the merger agreement or unless S3 consents in writing, each of Diamond and
its subsidiaries will conduct its
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operations according to its ordinary course of business consistent with past
practice and will use commercially reasonable efforts to:
- preserve intact its present business organization;
- keep available the services of its present officers and employees; and
- maintain satisfactory relationships with suppliers, distributors,
customers and others with which it has business relationships.
Diamond also agreed that until the completion of the merger or the
termination of the merger agreement or unless S3 consents in writing, Diamond
and its subsidiaries would conduct their business in compliance with certain
specific restrictions relating to the following:
- amendment of Diamond's certificate of incorporation or bylaws;
- the issuance, split, reclassification, purchase and redemption of
securities;
- the issuance of dividends or other distributions;
- the incurrence of indebtedness;
- capital expenditures or contributions and the making of loans;
- increases in compensation paid to directors, officers or other employees;
- employees and employee benefits;
- entrance into or modification of material contracts;
- the acquisition of assets or other entities;
- the liquidation or dissolution of Diamond; and
- the disposition of Diamond's assets.
The agreements related to the conduct of Diamond's business in the merger
agreement are complicated and not easily summarized. You are urged to read
carefully the sections of the merger agreement entitled "Covenants of the
Company."
NO OTHER NEGOTIATIONS INVOLVING S3
Until the merger is completed or the merger agreement is terminated, S3 has
agreed not to directly or indirectly take any of the following actions:
- initiate, solicit or otherwise induce any inquiries or the making of an
Acquirer Acquisition Proposal (as defined below);
- participate in any discussions or negotiations or provide any
confidential information or data to any party relating to an Acquirer
Acquisition Proposal; or
- take any other action to facilitate any effort or attempt to make or
implement an Acquirer Acquisition Proposal.
However, S3 may make disclosures to its stockholders regarding an Acquirer
Acquisition Proposal if, in the good faith judgment of its board of directors,
the failure so to disclose would be inconsistent with its obligations under
applicable law. Furthermore, S3 may negotiate with or furnish information to any
party that has made a bona fide written Acquirer Acquisition Proposal that did
not
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result from S3's breach of any of the prohibitions set forth above relating to
Acquirer Acquisition Proposals. Under either of those two scenarios, the S3
board may recommend the Acquirer Acquisition Proposal to its stockholders if
such Acquirer Acquisition Proposal is an Acquirer Superior Proposal (as defined
below) and Diamond is given at least two business days' notice of the existence
of such Acquirer Superior Proposal.
An ACQUIRER ACQUISITION PROPOSAL is any offer or proposal relating to any
transaction involving any of the following:
- the acquisition or purchase of more than a 50% interest in the total
outstanding voting securities of S3;
- any tender offer or exchange offer that, if consummated, would result in
any person or group beneficially owning 50% or more of the total
outstanding voting securities of S3;
- any merger, consolidation, business combination or similar transaction
involving S3 in which the stockholders of S3 immediately prior to such
transaction do not own, immediately after such transaction, at least a
majority of the outstanding securities entitled to vote generally for the
election of directors or similar managing authority of the surviving or
resulting entity in such transaction;
- any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of all or substantially all of the
assets of S3; or
- any liquidation or dissolution of S3.
An ACQUIRER SUPERIOR PROPOSAL is an unsolicited, bona fide Acquirer
Acquisition Proposal on terms that the S3 board determines, in its good faith
judgment (based on consultation with its financial advisors) to be fair to S3's
stockholders, that is not subject to a financing condition, and is from a party
that in the reasonable judgment of the S3 board (based on advice from a
nationally recognized investment bank) is financially capable of consummating
such proposal and not subject to a financing condition.
NO OTHER NEGOTIATIONS INVOLVING DIAMOND
Until the merger is completed or the merger agreement is terminated,
Diamond has agreed not to directly or indirectly take any of the following
actions:
- initiate, solicit or otherwise induce any inquiries or the making of a
Company Acquisition Proposal (as defined below);
- participate in any discussions or negotiations or provide any
confidential information or data to any party relating to a Company
Acquisition Proposal; or
- take any other action to facilitate any effort or attempt to make or
implement a Company Acquisition Proposal.
However, Diamond may make disclosures to its stockholders regarding a
Company Acquisition Proposal if, in the good faith judgment of its board of
directors, the failure so to disclose would be inconsistent with its obligations
under applicable law. Furthermore, Diamond may negotiate with or furnish
information to any party that has made a bona fide written Company Acquisition
Proposal that did not result from Diamond's breach of any of the prohibitions
set forth above relating to Company Acquisition Proposals. Under either of those
two scenarios, the Diamond board may
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recommend the Company Acquisition Proposal to its stockholders if such Company
Acquisition Proposal is a Superior Proposal (as defined below) and S3 is given
at least two business days' notice of the identity of the third party making the
Superior Proposal and all material terms and conditions of the Superior
Proposal.
A COMPANY ACQUISITION PROPOSAL is any offer or proposal other than from S3
involving any of the following:
- the acquisition or purchase of more than a 5% interest in the total
outstanding voting securities of Diamond;
- any tender offer or exchange offer that, if consummated, would result in
any person or group beneficially owning 5% or more of the total
outstanding voting securities of Diamond;
- any merger, consolidation, business combination or similar transaction
involving Diamond;
- any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of more than 5% of the assets of
Diamond; or
- any liquidation or dissolution of Diamond.
A SUPERIOR PROPOSAL is an unsolicited, bona fide Company Acquisition
Proposal for or in respect of at least a majority of the outstanding Diamond
common stock on terms that the Diamond board determines, in its good faith
judgment (based on consultation with its financial advisors), to be more
favorable to Diamond's stockholders than the terms of the merger with S3, that
is not subject to a financing condition, and is from a party that in the
reasonable judgment of the Diamond board (based on advice from a nationally
recognized investment bank) is financially capable of consummating such proposal
and not subject to a financing condition.
CERTAIN CORPORATE GOVERNANCE MATTERS
S3 board of directors. Upon the closing of the merger, S3 will cause its
board of directors to consist of seven directors, four of whom shall be current
directors of S3 and three of whom shall be individuals designated by Diamond
after consultation with S3. See "Additional Matters Being Submitted to a Vote of
S3 Stockholders Only -- Proposal No. 3 -- Election of Directors" on page 101.
S3 officers. The officers of S3 after the merger will be determined by S3's
board of directors following the merger, except that Kenneth F. Potashner will
be the Chairman and Chief Executive Officer of S3.
DIAMOND'S EMPLOYEE BENEFITS PLANS
As soon as practicable after the execution of the merger agreement, S3 and
Diamond will use their commercially reasonable efforts to confer and work
together in good faith to agree upon mutually acceptable employee benefit
arrangements (and to terminate Diamond's employee benefits plans in effect
immediately prior to the merger if appropriate) so as to provide benefits to
employees of Diamond generally equivalent in the aggregate to those provided to
similarly situated employees of S3. Diamond and its subsidiaries will terminate
any and all group severance, separation, retention and salary continuation
plans, programs or arrangements (other than contractual arrangements disclosed
to S3 under the merger agreement) prior to the closing of the merger.
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TREATMENT OF DIAMOND PURCHASE RIGHTS AND OTHER SECURITIES
Diamond purchase rights. Purchase rights with respect to all open offering
periods under Diamond's 1995 Employee Stock Purchase Plan will be assumed by S3.
Each assumed purchase right will continue to have, and be subject to, the terms
and conditions set forth in Diamond's 1995 Employee Stock Purchase Plan and the
documents governing such assumed purchase right, except that the purchase price
of shares of S3 common stock for each respective date under each assumed
purchase right will be adjusted.
Diamond awards or accounts (including restricted stock, stock equivalents
and stock units, but excluding options and purchase rights). Diamond awards or
accounts (including restricted stock, stock equivalents and stock units, but
excluding options and purchase rights) will be amended or converted into similar
instruments of S3.
CONDITIONS TO COMPLETION OF THE MERGER
Our respective obligations to complete the merger and the other
transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of each of the following conditions before completion of
the merger:
- The merger agreement must be approved and adopted and the merger must be
approved by the holders of a majority of the outstanding shares of
Diamond common stock.
- The issuance of S3 common stock in connection with the merger must be
approved by a majority of the shares of S3 common stock present in person
or represented by proxy and entitled to vote on such matters at the S3
meeting. The proposal to increase the number of authorized shares of S3
common stock from 120,000,000 to 175,000,000 must be approved by the
holders of a majority of the outstanding shares of S3 common stock. The
nominees designated by Diamond to serve on the S3 board must be duly
elected.
- S3's registration statement on Form S-4, of which this document is a part
must be effective, no stop order suspending its effectiveness will be in
effect and no proceedings for suspension of its effectiveness will be
pending before or threatened by the Securities and Exchange Commission.
- The shares of S3 common stock to be issued in the merger must be
authorized for listing on the Nasdaq National Market, subject to notice
of issuance.
- All applicable waiting periods under applicable antitrust laws must have
expired or been terminated early.
- No law, regulation or order must be enacted or issued that has the effect
of making the merger illegal or otherwise prohibiting completion of the
merger.
- Each of the parties must have received all required approvals and third
party consents listed on a certain schedule to the merger agreement.
S3's obligations and those of its wholly owned subsidiary to complete the
merger and the other transactions contemplated by the merger agreement are
subject to the satisfaction or waiver of each of the following additional
conditions before completion of the merger:
- Diamond must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement to be performed
or complied with by Diamond at or before completion of the merger.
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- Diamond's representations and warranties must be true and correct as of
the date the merger is to be completed as if made as of such time except:
- to the extent Diamond's representations and warranties address matters
only as of a particular date, they must be true and correct as of that
date,
- if any of Diamond's representations and warranties are not true and
correct but the effect in each case, or in the aggregate, of the
inaccuracies of the representations and breaches of the warranties is
not and does not have a material adverse effect on Diamond, then this
condition will be deemed satisfied, and
- changes contemplated by the merger agreement.
- S3 must have received an opinion of Pillsbury Madison & Sutro LLP to the
effect that the merger will be treated for federal income tax purposes as
a reorganization qualifying under the provisions of Section 368(a) of the
Internal Revenue Code and that each of S3, its merger subsidiary and
Diamond will be a party to the reorganization within the meaning of
Section 368(b) of the Internal Revenue Code. If such opinion is not
received by S3 from Pillsbury Madison & Sutro LLP, the condition will
nevertheless be deemed satisfied if S3 receives such opinion from Wilson
Sonsini Goodrich & Rosati, Professional Corporation, or another law firm
selected by Diamond and reasonably acceptable to S3.
Diamond's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
- S3 must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement to be performed
or complied with by S3 at or before completion of the merger.
- S3's representations and warranties must be true and correct as of the
date the merger is to be completed as if made as of such time except:
- to the extent S3's representations and warranties address matters only
as of a particular date, they must be true and correct as of that date;
- if any of these representations and warranties are not true and correct
but the effect in each case, or in the aggregate, of the inaccuracies of
these representations and breaches of these warranties is not and does
not have a material adverse effect on S3, then this condition will be
deemed satisfied; and
- changes contemplated by the merger agreement.
- Diamond must have received an opinion of Wilson Sonsini, to the effect
that the merger will be treated for federal income tax purposes as a
reorganization qualifying under the provisions of Section 368(a) of the
Internal Revenue Code and that each of S3, its merger subsidiary and
Diamond will be a party to the reorganization within the meaning of
Section 368(b) of the Internal Revenue Code. If such opinion is not
received by Diamond, the condition will nevertheless be deemed satisfied
if S3 receives such opinion from Pillsbury Madison & Sutro LLP or another
law firm selected by S3 and reasonably acceptable to Diamond.
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<PAGE> 77
A material adverse effect is any change, violation, inaccuracy,
circumstance or effect that is materially adverse to the business, properties,
assets (including intangible assets), liabilities, capitalization or financial
condition of either S3 or Diamond and its subsidiaries, taken as a whole, as the
case may be, except to the extent that any such change, violation, inaccuracy,
circumstance or effect results from any of the following:
- any occurrences relating to the economy of the United States in general
or the economies in which such entity operates or the multimedia and
connectivity products for personal computer industry in general and not
specifically relating to such party;
- the delay or cancellation of orders for such party's productions from
customers or distributors (or other resellers) directly attributable to
the announcement of this merger agreement or the pendency of the merger;
- the lack of or delay in availability of components or raw materials from
such party's suppliers directly attributable to the announcement of this
merger agreement or the pendency of the merger;
- any litigation brought or threatened against a party or any officer or
member of the board of directors of such party in respect of this merger
agreement or the merger (including any stockholder class action
litigation arising from allegations of a breach of fiduciary duty
relating to this merger agreement);
- the loss of employees as a result of reductions in force that are
mutually agreed upon by S3 and Diamond;
- the loss of employees with titles of director or officer in an amount not
in excess of 15% of the number of such employees as of the date of the
merger agreement or the loss of employees with titles other than director
or officer in an amount not in excess of 15% of the number of such
employees as of the date of the merger agreement (excluding in each case
employees lost pursuant to reductions in force described above and, in
the case of employees with titles of director or officer, losses
resulting solely from a failure by S3 to offer commercially reasonable
retention incentives to such employees prior to the closing of the
merger); or
- changes in trading prices for such party's securities.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to completion of
the merger, whether before or after approval and adoption of the merger
agreement and approval of the merger by Diamond stockholders or approval of the
issuance of shares of S3 common stock by S3 stockholders:
- by mutual consent of S3 and Diamond;
- by S3 or Diamond, if the merger is not completed on or before December
31, 1999, except that the right to terminate the merger agreement is not
available to any party whose action or failure to act has been a
principal cause of or resulted in the failure of the merger to occur on
or before December 31, 1999 and such action or failure to act constitutes
a material breach of the merger agreement;
- by S3 or Diamond, if there is any order (other than a temporary
restraining order), decree or ruling of a court or governmental authority
having jurisdiction over either of us enjoining,
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<PAGE> 78
restraining or prohibiting the completion of the merger, and such order,
decree or ruling has become final and nonappealable;
- by S3 or Diamond, if the issuance of stock pursuant to the merger, the
amendment to S3's restated certificate of incorporation to increase the
number of authorized shares of S3 common stock from 120,000,000 to
175,000,000, or the election of the nominees designated by Diamond to
become S3 directors fail to receive the requisite vote for approval or
election, as the case may be, by the stockholders of S3 at the S3
meeting, except that the right to terminate the merger agreement pursuant
to this provision by S3 is not available to S3 where the failure to
obtain S3 stockholder approval was caused by the action or failure to act
of S3 and such action or failure to act constitutes a material breach of
the merger agreement; or
- by S3 or Diamond, if the merger agreement fails to receive the requisite
vote for approval and adoption by the stockholders of Diamond at the
Diamond meeting, except that the right to terminate the merger agreement
pursuant to this provision by Diamond is not available to Diamond where
the failure to obtain Diamond stockholder approval was caused by the
action or failure to act by Diamond and such action or failure to act
constitutes a material breach of the merger agreement.
- by S3:
- if Diamond fails to comply in any material respect with any of the
covenants or agreements contained in certain provisions of the merger
agreement required to be complied with or performed by Diamond at or
prior to such date of termination, except that if such failure to comply
is capable of being cured prior to December 31, 1999, such failure shall
not have been cured within 15 days of delivery to Diamond of written
notice of such failure;
- if there exists a breach or breaches of any representation or warranty
of Diamond contained in the merger agreement, such that a closing
condition would not be satisfied, except that if such breach or breaches
are capable of being cured prior to December 31, 1999, such breach or
breaches shall not have been cured within 15 days of delivery to Diamond
of written notice of such breach or breaches;
- if a Company Triggering Event (as defined below) shall have occurred; or
- if the S3 board authorizes S3, subject to complying with the terms of
the merger agreement, to enter into a binding written agreement
concerning a transaction that constitutes an Acquirer Superior Proposal
and S3 notifies Diamond in writing in accordance with the terms of the
merger agreement that it intends to enter into such agreement, attaching
the most current version of such agreement to such notice, and S3 upon
such termination pays to Diamond the termination fee required by the
merger agreement (see below).
- by Diamond:
- if S3 fails to comply in any material respect with any of the covenants
or agreements contained in certain provisions of the merger agreement
required to be complied with or performed by S3 at or prior to such date
of termination, except that if such failure to comply is capable of
being cured prior to December 31, 1999, such failure shall not have been
cured within 15 days of delivery to S3 of written notice of such
failure;
- if there exists a breach or breaches of any representation or warranty
of S3 contained in the merger agreement, such that a closing condition
would not be satisfied, except that if such breach or breaches are
capable of being cured prior to December 31, 1999, such breach or
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<PAGE> 79
breaches shall not have been cured within 15 days of delivery to S3 of
written notice of such breach or breaches;
- if an Acquirer Triggering Event (as defined below) shall have occurred;
or
- if the Diamond board authorizes Diamond, subject to complying with the
terms of the merger agreement, to enter into a binding written agreement
concerning a transaction that constitutes a Superior Proposal and
Diamond notifies S3 in writing in accordance with the terms of the
merger agreement that it intends to enter into such agreement, attaching
the most current version of such agreement to such notice, and Diamond
upon such termination pays to S3 the termination fee required by the
merger agreement (see below).
A COMPANY TRIGGERING EVENT shall be deemed to have occurred if: (A) the
Diamond board or any committee thereof shall for any reason have withdrawn or
amended or modified in a manner adverse to S3 its recommendation in favor of the
adoption and approval of the merger agreement or the approval of the merger, (B)
Diamond shall have failed to include in this joint proxy statement/ prospectus
the recommendation of the Diamond board in favor of the adoption and approval of
the merger agreement and the approval of the merger, (C) the Diamond board or
any committee thereof shall have approved or recommended any Superior Proposal
with respect to Diamond or (D) a tender or exchange offer relating to securities
of Diamond shall have been commenced by a person or entity unaffiliated with S3,
and Diamond shall not have sent to its stockholders a statement disclosing that
Diamond recommends rejection of such tender or exchange offer.
An ACQUIRER TRIGGERING EVENT shall be deemed to have occurred if: (A) the
S3 board or any committee thereof shall for any reason have withdrawn or amended
or modified in a manner adverse to Diamond its recommendation in favor of the
adoption and approval of the merger agreement or the approval of the merger, (B)
S3 shall have failed to include in this joint proxy statement/ prospectus the
recommendation of the S3 board in favor of the adoption and approval of the
merger agreement and the approval of the merger, (C) the S3 board or any
committee thereof shall have approved or recommended any Acquirer Superior
Proposal with respect to S3 or (D) a tender or exchange offer relating to
securities of S3 shall have been commenced by a person or entity unaffiliated
with S3, and S3 shall not have sent to its stockholders a statement disclosing
that S3 recommends rejection of such tender or exchange offer.
PAYMENT OF TERMINATION FEE
We have agreed that we will each pay our own fees and expenses in
connection with the merger, whether or not it is completed. However, we will
share equally all fees and expenses, other than attorneys' fees, in connection
with the printing and filing of this document and the registration statement of
which this document is a part.
Diamond has agreed to pay S3 a breakup fee of $5.0 million upon the
termination of the merger agreement as a result of the occurrence of any of the
following events:
- Diamond accepts a Superior Proposal;
- the Diamond board withdraws its recommendation for the adoption and
approval of the merger agreement or the approval of the merger or
adversely amends or modifies such recommendation; or
- the stockholders of either S3 or Diamond fail to approve the merger and a
third party makes a proposal to acquire Diamond through a transaction
that (a) leaves the Diamond stockholders prior to such transaction with
less than 50% of the equity interest in the resulting entity, (b)
involves a sale or other disposition by Diamond of assets representing
over 50% of Diamond's fair market value prior to such sale or disposition
or (c) results in the acquisition by any party of beneficial ownership of
shares representing over 50% of the voting power of
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<PAGE> 80
Diamond's outstanding common stock, and that proposal is made prior to
the Diamond meeting and is consummated or agreed to by Diamond within one
year after the termination of the merger agreement.
S3 has agreed to pay Diamond a breakup fee of $5.0 million upon the
termination of the merger agreement as a result of the occurrence of any of the
following events:
- S3 accepts an Acquirer Superior Proposal;
- the S3 board of directors withdraws its recommendation for the adoption
and approval of the merger agreement or the approval of the merger or
adversely amends or modifies such recommendation; or
- the stockholders of either S3 or Diamond fail to approve the merger and a
third party makes a proposal to acquire S3 through a transaction that (a)
leaves the S3 stockholders prior to such transaction with less than a
majority of the equity interest in the resulting entity, (b) involves a
sale or other disposition by S3 of all or substantially all of its
assets, (c) results in the acquisition by any party of beneficial
ownership of shares representing over 50% of the voting power of S3's
outstanding common stock or (d) involves the liquidation or dissolution
of S3, and that proposal is made prior to the S3 meeting and is
consummated or agreed to by S3 within one year after the termination of
the merger agreement.
WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
We will amend the merger agreement prior to the effective time of the
merger to make Denmark Acquisition Sub, Inc, a wholly owned subsidiary of S3, a
party to the merger agreement.
In addition, we may amend the merger agreement or waive certain provisions
of the merger agreement before completion of the merger provided that such
amendment or waiver is in writing and signed, in the case of an amendment, by
S3, its merger sub and Diamond, or in the case of a waiver, by the party against
whom the waiver is to be effective. After the adoption of the merger agreement
by the stockholders of Diamond, however, no amendment or waiver shall, without
the further approval of such stockholders, alter or change (A) the amount or
kind of consideration to be received in exchange for any shares of capital stock
of Diamond, (B) any term of the certificate of incorporation of the company
surviving the merger or (C) any of the terms or conditions of the merger
agreement if such alteration or change would adversely affect the holders of any
shares of capital stock of Diamond.
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<PAGE> 81
RELATED AGREEMENTS
CREDIT AGREEMENT
In order to fund the working capital needs of Diamond, S3 agreed to loan up
to $20.0 million to Diamond. As a result, S3 and Diamond entered into a credit
agreement, under which S3 agreed to make three separate loans to Diamond -- two
loans of $5.0 million each and one loan of $10.0 million. The loans are
subordinated to Diamond's existing indebtedness with Finova Capital Corporation,
with whom Diamond has a $50 million revolving credit line, and the guarantee to
Sanwa Bank, Ltd. of obligations in the approximate amount of $2.9 million. S3
made the loans on June 11, 1999, June 15, 1999 and July 20, 1999.
The loans accrue interest at the "prime rate" as published in the "Money
Rates" section of the Wall Street Journal and interest will be payable in
arrears on the last day of each month. The principal balances of the loans are
scheduled to be repaid by June 10, 2000. However, Diamond may prepay any portion
of the loans at any time without penalty or premium.
Diamond will be required to repay the balance of the loans in the event
Diamond sells substantially all of its assets, receives cash from any equity or
subordinated debt offerings, merges with anyone other than S3 or a holder of a
majority of its voting power prior to the merger, or experiences a change of
control where more than 50% of its voting power is beneficially owned by an
entity other than S3 or an affiliate of S3. In addition, S3 has the right to
accelerate the loans upon an event of default, which includes any default under
any contract between Diamond and S3 of an aggregate amount exceeding $2.0
million.
WARRANTS TO PURCHASE DIAMOND COMMON STOCK
Diamond issued three common stock purchase warrants to S3 in connection
with the loans by S3.
The first warrant entitles S3 to purchase 1,165,501 shares of Diamond
common stock at an exercise price of $4.29 per share. This warrant terminates on
the later of June 10, 2000 or the date on which Diamond's indebtedness to S3
under the credit agreement is paid in full.
The second warrant entitles S3 to purchase 1,196,172 shares of Diamond
common stock at an exercise price of $4.18 per share. This warrant terminates on
the later of June 15, 2000 or the date on which Diamond's indebtedness to S3
under the credit agreement is paid in full.
The third warrant entitles S3 to purchase 2,236,198 shares of Diamond
common stock at an exercise price of $4.471875 per share. This warrant
terminates on the later of June 21, 2000 or the date on which Diamond's
indebtedness to S3 under the Credit Agreement is paid in full.
All three warrants will terminate earlier on the completion of transactions
described in the warrants that involve generally the acquisition of more than
50% of the outstanding voting securities of S3 or the disposition of all or
substantially all of S3's assets.
As the holder of the warrants, S3 has registration rights pertaining to the
shares of Diamond common stock issuable upon exercise of the warrants. Subject
to the terms of the warrants, S3 may require Diamond to register those shares
under the Securities Act or to include those shares in registration statements
filed by Diamond.
ACQUISITION OF ONESTEP, LLC
Because of Diamond's liquidity position and resulting cash constraints,
which has resulted from its working capital requirements and continued
investments in new product lines such as the Rio Internet audio players and
HomeFree line of home networking products, in July 1999, Diamond
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<PAGE> 82
assigned its rights to acquire OneStep, LLC, to S3 and S3 acquired OneStep for
approximately $10.0 million in cash. OneStep is a software development company
that supplies the Rio Audio Manager for Diamond's Rio Internet audio players.
Under its agreements with S3, Diamond is currently funding the operating
expenses of OneStep and S3 has licensed to Diamond's wholly owned subsidiary,
RioPort.com, Inc., OneStep's intellectual property. Diamond currently intends to
carve out RioPort as an independently managed company funded by outside
investors, while maintaining a substantial equity position in RioPort. At the
same time as RioPort's planned venture capital financing, S3 intends to sell
OneStep to RioPort in exchange for cash and shares of RioPort stock.
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<PAGE> 83
COMPARATIVE PER SHARE MARKET PRICE DATA
Diamond common stock is traded on the Nasdaq National Market under the
symbol "DIMD." S3 common stock is traded on the Nasdaq National Market under the
symbol "SIII."
The following table sets forth, for the calendar quarters indicated, the
high and low sale prices per share of S3 common stock and Diamond common stock
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
S3 DIAMOND
COMMON COMMON
STOCK STOCK
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
First Quarter............................................ 19 1/4 11 7/8 17 9 1/8
Second Quarter........................................... 13 5/8 8 7/8 9 3/8 6 5/16
Third Quarter............................................ 18 1/16 10 1/4 12 5/8 6 3/4
Fourth Quarter........................................... 13 3/8 4 3/4 13 7/8 8
Year Ended December 31, 1998:
First Quarter............................................ 8 7/16 4 3/4 16 9/16 8 13/16
Second Quarter........................................... 8 1/4 4 61/64 15 1/2 5 11/16
Third Quarter............................................ 5 9/16 2 3/4 7 3/16 3 7/16
Fourth Quarter........................................... 9 1/4 1 17/32 7 11/16 2 7/8
Year Ending December 31, 1999:
First Quarter............................................ 9 7/16 6 1/8 10 3/16 5 7/8
Second Quarter........................................... 9 15/16 6 8 1/2 3 7/8
Third Quarter (through August 13)........................ 12 7/8 9 3/16 6 1/4 4 1/2
</TABLE>
S3 and Diamond have never paid cash dividends on their respective shares of
capital stock. Under the merger agreement, each of S3 and Diamond has agreed not
to pay cash dividends pending the consummation of the merger, without written
consent of the other. If the merger is not consummated, the Diamond board
presently intends that it would continue its policy of retaining all earnings to
finance the expansion of its business. The S3 board presently intends to retain
all earnings for use in its business and has no present intention to pay cash
dividends before or after the merger.
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<PAGE> 84
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
consist of the S3 unaudited pro forma combined condensed statements of
operations for the year ended December 31, 1998 and the six months ended June
30, 1999, and the S3 unaudited pro forma combined condensed balance sheet as of
June 30, 1999.
WHAT THESE PRO FORMA STATEMENTS SHOW
The S3 unaudited pro forma combined condensed financial statements give
effect to the Diamond merger accounted for using the purchase method of
accounting. The unaudited pro forma combined condensed statements of operations
for the year ended December 31, 1998 and the six months ended June 30, 1999
assumes the Diamond merger took place on January 1, 1998. The unaudited pro
forma combined condensed balance sheet assumes the Diamond merger took place on
June 30, 1999.
BASIS OF PRESENTATION
The S3 unaudited pro forma combined condensed financial statements reflect
the Diamond merger accounted for using the purchase method of accounting and
have been prepared on the basis of assumptions described in the notes including
assumptions relating to the allocation of the consideration paid. The actual
allocation of such consideration may differ from those assumptions reflected in
the S3 unaudited pro forma combined condensed financial statements after
valuations and other procedures to be performed after the closing of the Diamond
merger is completed.
CHARGES FOR IN-PROCESS RESEARCH AND DEVELOPMENT
S3 expects to incur charges to income related to in-process research and
development currently estimated at $10.0 million as a result of the Diamond
merger.
THESE PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS SHOULD BE READ
WITH EACH COMPANY'S HISTORICAL FINANCIAL STATEMENTS
The S3 unaudited pro forma combined condensed financial statements should
be read in conjunction with the related notes included in this document and the
audited financial statements of S3 and Diamond, including the notes to each,
that are incorporated by reference in this document. The S3 unaudited pro forma
combined condensed financial statements do not necessarily indicate what the
actual operating results or financial position would have been had the Diamond
merger taken place on June 30, 1999. They also do not purport to indicate S3's
future results of operations or financial position.
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<PAGE> 85
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
S3 DIAMOND ADJUSTMENTS NOTES COMBINED
--------- -------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 224,639 $608,581 $ (4,987) (7) $ 828,233
Cost of sales........................... 226,711 541,894 (4,931) (7) 763,674
--------- -------- -------- ---------
Gross margin (loss)..................... (2,072) 66,687 (56) 64,559
Operating expenses:
Research and development.............. 78,566 29,923 108,489
Selling, marketing, and
administrative..................... 41,926 97,656 139,582
Other operating expense............... 41,335 2,939 44,274
Amortization of goodwill and other
intangibles........................ -- 2,587 (2,587) (1) --
18,297 (6) 18,297
--------- -------- -------- ---------
Total operating expenses.............. 161,827 133,105 15,710 310,642
--------- -------- -------- ---------
Loss from operations.................... (163,899) (66,418) (15,766) (246,083)
Gain on sale of joint venture........... 26,561 -- 26,561
Interest income......................... 7,253 2,930 10,183
Interest expense........................ (6,235) (2,653) (8,888)
Other expense........................... (6,309) (2,716) (9,025)
--------- -------- -------- ---------
Loss before income taxes and equity in
income of manufacturing joint
venture............................... (142,629) (68,857) (15,766) (227,252)
Benefit for income taxes................ (11,956) (29,368) 17,036 (8) (24,288)
--------- -------- -------- ---------
Loss before equity in income of
manufacturing joint venture........... (130,673) (39,489) (32,802) (202,964)
Equity in income from manufacturing
joint venture......................... 17,469 -- -- 17,469
--------- -------- -------- ---------
Net loss................................ $(113,204) $(39,489) $(32,802) $(185,495)
========= ======== ======== =========
Net loss per share amounts:
Basic................................. $ (2.22) $ (1.13) $ (2.67)
Diluted............................... (2.22) (1.13) (2.67)
Shares used in computing per share
amounts:
Basic................................. 51,078 34,863 69,603
Diluted............................... 51,078 34,863 69,603
</TABLE>
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO
PRO FORMA FORMA
S3 DIAMOND ADJUSTMENTS NOTES COMBINED
-------- -------- ----------- ----- --------
<S> <C> <C> <C> <C> <C>
Net sales................................... $101,553 $272,734 $ (4,326) (7) $369,961
Cost of sales............................... 74,749 223,740 (4,163) (7) 294,326
-------- -------- -------- --- --------
Gross margin................................ 26,804 48,994 (163) 75,635
Operating expenses:
Research and development.................. 35,487 14,222 49,709
Selling, marketing, and administrative.... 16,331 45,581 61,912
Amortization of goodwill and other
intangibles............................ -- 2,178 (2,178) (1) --
9,149 (6) 9,149
-------- -------- -------- --------
Total operating expenses.................. 51,818 61,981 6,971 120,770
-------- -------- -------- --------
Loss from operations........................ (25,014) (12,987) (7,134) (45,135)
Gain on sale of joint venture............... 7,207 -- 7,207
Other income (expense)...................... 440 (475) 250 (7) 215
-------- -------- -------- --------
Loss before income taxes and equity in
income of manufacturing joint venture..... (17,367) (13,462) (6,884) (37,713)
Benefit for income taxes.................... -- (4,039) 4,039 (8) --
-------- -------- -------- --------
Loss before equity in income of
manufacturing joint venture............... (17,367) (9,423) (10,923) (37,713)
Equity in income from manufacturing joint
venture................................... 4,588 -- 4,588
-------- -------- -------- --------
Net loss.................................... $(12,779) $ (9,423) $(10,923) $(33,125)
======== ======== ======== ========
Net loss per share amounts:
Basic..................................... $ (0.24) $ (0.27) $ (0.47)
Diluted................................... (0.24) (0.27) (0.47)
Shares used in computing per share amounts:
Basic..................................... 52,510 35,370 71,035
Diluted................................... 52,510 35,370 71,035
</TABLE>
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<PAGE> 87
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
S3 DIAMOND ADJUSTMENTS NOTES COMBINED
-------- --------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................... $ 36,628 $ 15,653 $ 52,281
Restricted cash.......................... -- 4,750 4,750
Short-term investments................... 94,795 1,001 95,796
Accounts receivable, net................. 35,845 119,607 $ (3,025) (7) 152,427
Inventories, net......................... 17,440 46,504 (163) (7) 63,781
Prepaid taxes............................ 139 6,691 6,830
Prepaid expenses and other............... 17,549 8,698 26,247
Deferred income taxes.................... -- 54,075 (33,075) (8) 21,000
-------- --------- --------- --------
Total current assets.................. 202,396 256,979 (36,263) 423,112
Property and equipment -- net............ 17,315 29,017 46,332
Investment in joint venture.............. 91,056 -- 91,056
Other assets............................. 28,324 1,350 (10,000) (7) 19,674
Goodwill, net............................ -- 24,157 (24,157) (1) --
109,783 (5) 109,783
-------- --------- --------- --------
Total assets..................... $339,091 $ 311,503 $ 39,363 $689,957
======== ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........ $ -- $ 61,563 $ (10,000) (7) $ 51,563
Accounts payable......................... 40,469 80,225 (3,025) (7) 117,669
Notes payable............................ 9,600 -- 9,600
Accrued liabilities...................... 12,211 19,437 16,677 (2) 48,325
Income taxes payable..................... -- 8,203 8,203
Deferred revenue......................... 703 2,125 2,828
-------- --------- --------- -- --------
Total current liabilities............. 62,983 171,553 3,652 -- 238,188
Long-term debt, net of current
portion.................................. -- 1,413 1,413
Notes payable.............................. 4,800 4,800
Other liabilities.......................... 13,021 -- 13,021
Convertible subordinated notes............. 103,500 -- 103,500
Stockholders' equity
Common stock............................. 5 36 (34) (3) 7
Additional paid-in capital............... 197,739 314,803 (130,394) (3) 382,148
Distributions in excess of net book
value................................. -- (56,775) 56,775 (3) --
Accumulated other comprehensive loss..... (16,816) -- (16,816)
Accumulated deficit...................... (26,141) (119,527) 109,364 (4) (36,304)
-------- --------- --------- --------
Total stockholders' equity............ 154,787 138,537 35,711 329,035
-------- --------- --------- --------
Total liabilities and stockholders'
equity.............................. $339,091 $ 311,503 $ 39,363 $689,957
======== ========= ========= ========
</TABLE>
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The S3 unaudited pro forma combined condensed financial statements give
effect to S3's acquisition of Diamond through a merger and exchange of shares.
The unaudited pro forma combined condensed statements of operations for the year
ended December 31, 1998 and the six months ended June 30, 1999 reflect this
transaction as if it had taken place on January 1, 1998. The unaudited pro forma
combined condensed balance sheet gives effect to this transaction as if it had
taken place on June 30, 1999.
The Diamond merger will be accounted for using the purchase method of
accounting. The unaudited pro forma combined condensed financial statements have
been prepared on the basis of assumptions described in the following notes and
include assumptions relating to the allocation of the consideration paid for the
assets and liabilities of Diamond based on actual fair value. The actual
allocation of such consideration may differ from that reflected in the pro forma
combined condensed financial statements after valuations and other procedures to
be performed after the closing of the Diamond acquisition has been completed.
The S3 unaudited pro forma combined condensed financial statements reflect
the issuance of 18,525,237 shares of S3 common stock to Diamond, which was based
on Diamond's outstanding equivalent shares as of June 21, 1999 converted to S3
shares based on the exchange ratio of 0.52 S3 shares for each Diamond share. The
fair value of "shares" was calculated by taking the fair value of the stock
(fair value of $9.203 per share being determined as the average price of the S3
stock for a period three days before and after announcement of the merger) times
the number of S3 shares to be issued.
With respect to stock options exchanged as part of the Diamond combination,
all vested Diamond options (2,441,939 shares) exchanged for vested S3 options
based on the exchange ratio are included as part of the purchase price are based
on their fair values. Any unvested Diamond options (3,094,867 shares) issued in
exchange for unvested S3 options based on the exchange ratio are also included
as part of the purchase price based on their fair value. The fair value of the
options to be issued by S3 in exchange for the Diamond options was determined by
estimating their fair value as of June 21, 1999 using the Black-Scholes option
pricing model with the following weighted average assumptions:
- risk free interest rate of 5.0%;
- dividend yield of 0.0%;
- expected option life of 0.5 years for vested options;
- expected option life of 2.5 years for unvested options; and
- volatility factor of the expected market price of S3 common stock of
0.83.
The unaudited pro forma combined condensed financial statements have been
prepared on the basis of assumptions described in the notes thereto and include
assumptions relating to the allocation of the consideration paid for the assets
and liabilities of Diamond based on their actual fair value. The actual
allocation of such consideration may differ from that reflected in the pro forma
financial statements after valuations and other procedures to be performed after
the closing of the Diamond
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
merger has been completed. Below is a table of the estimated acquisition cost,
purchase price allocation and annual amortization of the intangible assets
acquired (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIVES (IN YEARS) OF INTANGIBLES
---------------- --------------
<S> <C> <C> <C>
Estimated acquisition cost
Estimated value of securities to be issued
Common stock................................... $170,490
Stock options.................................. 13,921
Acquisition costs................................. 16,677
--------
Total estimated acquisition cost............. $201,088
========
Purchase price allocation
Tangible net assets acquired...................... $ 81,305
Intangible net assets acquired:
Developed technology, assembled workforce, and
goodwill..................................... 109,783 3-10 $18,297
In-process research and development............ 10,000
-------- -------
Total........................................ $201,088 $18,297
======== =======
</TABLE>
Tangible net assets of Diamond acquired principally include cash, accounts
receivable, inventory, fixed assets and deferred income taxes. Liabilities
assumed principally include accounts payable, debt, accrued liabilities and
income taxes payable.
To determine the value of the developed technology, the expected future
cash flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the technology,
existing and future markets, and assessments of the life cycle stage of the
technology. The valuation of developed technology represents amounts which have
reached technological feasibility and will therefore be capitalizable.
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting, hiring and training costs
for each category of employee.
The value allocated to projects identified as in-process research and
development of Diamond and its wholly owned subsidiaries will be charged to
expense upon consummation of the combination but has not been reflected in the
S3 unaudited pro forma combined condensed statements of operations as it is
nonrecurring in nature. However, this charge has been reflected in the S3
unaudited pro forma combined condensed balance sheet.
The write-off was necessary because the acquired in-process research and
development had not yet reached technological feasibility and had no future
alternative uses. S3 expects that the acquired in-process research and
development will be successfully developed, but these products may not achieve
commercial viability.
The nature of the efforts required to develop the purchased in-process
research and development into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements.
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<PAGE> 90
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The value of the purchased in-process research and development was
determined by estimating the projected net cash flows related to the products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products. These cash flows
were then discounted back to their net present value. The projected net cash
flows from the projects were based on management's estimates of revenues and
operating profits related to the projects.
Goodwill is determined based on the residual difference between the amount
paid and the values assigned to identified tangible and intangible assets.
NOTE 2. PRO FORMA ADJUSTMENTS
The S3 unaudited pro forma combined condensed financial statements give
effect to the following pro forma adjustments:
(1) To reflect the elimination of goodwill on Diamond's balance sheet,
including related amortization in the pro forma combined condensed
statements of operations.
(2) To reflect the accrual of acquisition costs arising from the Diamond
combination, estimated to be approximately $16.7 million consisting of:
- $6.4 million of direct transaction costs, consisting primarily of
legal, accounting and financial advisory services; and
- Management is in the process of assessing and formulating its
integration plans, which are expected to include involuntary employee
separation benefits, and facilities consolidations. While the exact
amount of the restructuring costs is not known, management believes
that the costs approximate $10.3 million, consisting of approximately
$9.3 million related to involuntary employee separation benefits and
$1.0 million in facilities consolidations.
(3) To reflect the elimination of Diamond's common stock, additional
paid-in capital and distributions in excess of net book value and the
issuance of S3 common stock and stock options of $184.4 million in
connection with the combination.
(4) To reflect the elimination of Diamond's accumulated deficit of $119.5
million, the write-off of in-process research and development of $10.0
million, and the elimination of intercompany profit in inventory of
$0.2 million.
(5) To reflect $109.8 million of other intangible assets recorded as a
result of the combination.
(6) To reflect amortization of goodwill, developed technology and assembled
workforce related to the Diamond combination.
(7) To eliminate the effect of the intercompany transactions between S3 and
Diamond.
(8) To lower net deferred tax assets to $21.0 million at June 30, 1999 and
correspondingly adjust the tax expense in the pro forma combined
condensed statements of operations. Reduction includes the impact of
establishing deferred tax liabilities for intangibles recorded as a
result of the combination and the establishment of additional valuation
allowance against tax loss carryforwards due to ownership change
restrictions imposed on the utilization of such carryforwards (Section
382 of Internal Revenue Code). The resulting net
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
deferred tax asset represents the tax benefits realizable in the near
future based on projected taxable income.
NOTE 3. PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
The unaudited pro forma basic and diluted net income (loss) per common
share are based on the weighted average number of shares of S3 common stock
outstanding during each period and the number of shares of S3 common stock to be
issued in connection with the Diamond merger. Options outstanding have not been
included in the computation of pro forma diluted net income (loss) per share
because their effect would be antidilutive.
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DESCRIPTION OF S3 CAPITAL STOCK
The following summary of the current terms of the capital stock of S3 and
the terms to be in effect assuming the approval by the S3 stockholders of the
proposal to increase the number of authorized shares of S3 common stock from
120,000,000 to 175,000,000 is not meant to be complete and is qualified by
reference to S3's restated certificate of incorporation and bylaws. Copies of
S3's restated certificate of incorporation and bylaws are available to holders
of shares of S3 common stock and Diamond common stock upon request. See "Where
You Can Find More Information," on page 104.
AUTHORIZED CAPITAL STOCK
Prior to approval of the proposal to increase the number of authorized
shares of S3 common stock. Under S3's restated certificate of incorporation,
S3's authorized capital stock consists of 120,000,000 shares of common stock,
par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value
$0.0001 per share, of which 500,000 shares are designated as series A
participating preferred stock.
Following approval of the proposal to increase the number of authorized
shares of S3 common stock. If the proposal to increase the number of authorized
shares of S3 common stock is approved by the S3 stockholders and the merger is
completed, S3's restated certificate of incorporation will be amended to
increase the authorized number of shares of S3 common stock to 175,000,000.
S3 COMMON STOCK
S3 common stock outstanding. As of August 10, 1999, there were 53,593,677
shares of S3 common stock issued and outstanding. The outstanding shares of S3
common stock are, and the shares of S3 common stock issued pursuant to the
merger will be, duly authorized, validly issued, fully paid and nonassessable.
Voting rights. Each holder of S3 common stock is entitled to one vote for
each share of S3 common stock held of record on the applicable record date on
all matters submitted to a vote of stockholders. There are no cumulative voting
rights, which means that the holders of a majority of the shares voted can elect
all of the directors then standing for election.
Dividend rights; rights upon liquidation. The holders of S3 common stock
are entitled to receive dividends out of assets legally available for dividends
at times and in amounts as the S3 board of directors may determine. These
dividend rights are subject to any preferential dividend rights granted to the
holders of any outstanding S3 preferred stock. S3 has never paid cash dividends
on shares of its capital stock. The S3 board presently intends to retain all
earnings for use in its business and has no present intention to pay cash
dividends before or after the merger.
In the event of liquidation, dissolution or winding up of S3, each share of
S3 common stock is entitled to share pro rata in any distribution of S3's assets
after payment or providing for the payment of liabilities and the liquidation
preference of any outstanding S3 preferred stock.
Preemptive and other rights. Holders of S3 common stock have no preemptive
rights to purchase, subscribe for or otherwise acquire any unissued or treasury
shares or other securities. There are no redemption or sinking fund provisions
applicable to the S3 common stock.
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<PAGE> 93
S3 PREFERRED STOCK
As of August 10, 1999, no shares of S3 preferred stock were issued or
outstanding.
S3's board of directors has the authority, without stockholder approval, to
create and issue one or more series of preferred stock and to fix the number of
shares, designations, preferences, powers and relative, participating, optional
or other special rights of the shares of that series, and the qualifications or
restrictions on those preferences or rights. The specific matters that may be
determined by the board with respect to a series of preferred stock include:
- the designation of the series;
- the number of shares of the series;
- the rate of dividends, if any;
- whether dividends, if any, are cumulative or non-cumulative;
- the terms of redemption, if any;
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of S3;
- rights and terms of conversion or exchange, if any;
- restrictions on the issuance of shares of the same series or any other
series, if any; and
- voting rights, if any.
The series A participating preferred stock described below under
"-- Stockholder Rights Plan" is a series of preferred stock that as been
authorized by the S3 board.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could
decrease the amount of earnings and assets available for distribution to holders
of S3 common stock or affect adversely the rights and powers, including voting
rights, of the holders of S3 common stock. Also, the issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in control of
S3 and may adversely affect the market price of S3 common stock. S3 has no
current plans to issue any shares of preferred stock.
WARRANT AND REGISTRATION RIGHTS
As of August 10, 1999, S3 had outstanding a warrant to purchase 1,000,000
shares of its common stock at an exercise price of $9.00 per share. The warrant
has a net exercise provision under which the holder may, in lieu of payment of
the exercise price in cash, surrender the warrant and receive a net amount of
shares, based on the fair market value of S3's common stock at the time of the
exercise of the warrant, after deducting the aggregate exercise price. The
warrant will expire in December 2000.
If S3 proposes to register any of its securities under the Securities Act
for its own account, holders of S3 common stock issued on exercise of the
warrant are entitled to notice of the registration and are entitled to include
their shares in the registration, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in the registration. In addition, holders of at least 25% of the shares
issued on exercise of the warrant may require S3 to prepare and file a
registration statement under the Securities Act at its expense covering
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at least 15% of the shares entitled to registration rights. S3 is obligated to
effect up to two of these stockholder-initiated registrations.
EFFECTS OF S3'S RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS AND THE
DELAWARE ANTI-TAKEOVER LAW
S3 is subject to the provisions of Section 203 of the General Corporation
Law of the State of Delaware, an anti-takeover law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a business
combination with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
S3's restated certificate of incorporation provides that S3's bylaws may be
repealed or amended only by a two-thirds vote of S3's board of directors or a
two-thirds stockholder vote. Further, the restated certificate of incorporation
requires that all stockholder action be taken at a stockholder' meeting. In
addition, those provisions of the restated certificate of incorporation may only
be amended or repealed by the holders of at least two-thirds of the voting power
of all the then-outstanding shares of stock entitled to vote generally for the
election of directors, voting together as a single class.
The provisions described above, together with the ability of S3's board of
directors to issue preferred stock as described above under "-- S3 Preferred
Stock" and S3's stockholder rights plan described below under "-- Stockholder
Rights Plan," could have the following effects:
- delaying, deferring or preventing a change in control;
- delaying, deferring or preventing the removal of existing management;
- deterring potential acquirers from making an offer to S3's stockholders;
and
- limiting any opportunity of S3's stockholders to realize premiums over
prevailing market prices of S3 common stock in connection with offers by
potential acquirers.
This could be the case even if a majority of S3's stockholders might benefit
from such a change in control or offer.
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. is the transfer agent and registrar for S3's common stock.
STOCKHOLDER RIGHTS PLAN
S3's board of directors has adopted a stockholder rights plan. The rights
issued under the plan are not now exercisable, and S3 does not know at this time
whether they ever will be exercisable. Except as described below, each right,
when exercisable, entitles the registered holder to purchase from the Company
one one-thousandth of a share of series A participating preferred stock at a
price of $85.00, subject to adjustment.
In general, until the rights are exercisable or are redeemed or exchanged
or expire unexercised, each right is associated with and cannot be separated
from the underlying share of S3 common stock
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on which the right was declared as a dividend. Accordingly, until the rights are
separate from the S3 common stock, (1) each holder of outstanding shares of S3
common stock is also the holder of an equal number of rights, (2) any sale or
other transfer of shares of S3 common stock by a holder thereof also will cause
a transfer of the associated rights, and (3) no certificates will be issued to
evidence ownership of the rights, but certificates for shares of S3 common stock
will refer to the associated rights. Until a right is exercised, it confers no
rights as a stockholder, including the right to vote or to receive dividends.
The rights will separate from the S3 common stock if there is a
"Distribution Date." A Distribution Date will occur on the earliest to happen of
- a public announcement that someone has become an "Acquiring Person,"
meaning that the person (which can be an entity or group and including
affiliated or associated persons or entities) has acquired, or obtained
the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of S3 common stock, other than as a result of
repurchases of stock by S3 or certain inadvertent actions by
institutional or certain other stockholders, or
- ten days, or later if determined by the S3 board, following the
commencement of or a public announcement of an intention to make a tender
offer or exchange offer that would result in someone becoming an
Acquiring Person.
If a Distribution Date occurs, the rights will become exercisable and separately
tradable, and S3 will issue certificates for the rights as soon as possible.
The rights will expire on the earliest of (1) May 14, 2007, (2)
consummation of a merger transaction with a person or group who acquired S3
common stock pursuant to a Permitted Offer (as defined below), and is offering
in the merger the same price per share and form of consideration paid in the
Permitted Offer, or (3) redemption or exchange of the rights by S3 as described
below.
The number of rights associated with each share of S3 common stock will be
proportionately adjusted to prevent dilution in the event of a stock dividend
on, or a subdivision, combination or reclassification of, the S3 common stock.
The purchase price payable, and the number of shares of preferred stock or other
securities or property issuable, upon exercise of the rights are subject to
adjustment from time to time to prevent dilution (1) in the event of a stock
dividend on, or a subdivision, combination or reclassification of the preferred
stock, (2) if holders of the preferred stock are granted certain rights or
warrants to subscribe for preferred stock, certain convertible securities or
securities having the same or more favorable rights, privileges and preferences
as the preferred stock at less than the current market price of the preferred
stock, or (3) if holders of the preferred stock are issued evidences of
indebtedness or assets, excluding regular quarterly cash dividends out of
earnings or retained earnings, or subscription rights or warrants other than
those referred to above. With certain exceptions, no adjustments in the purchase
price will be required until cumulative adjustments require an adjustment of at
least 1% in the purchase price.
The amount of preferred stock that the holder of a right is entitled to
receive upon exercise of a right and the purchase price payable upon exercise of
a right are both subject to adjustment. Initially, the purchase price is $85.00
per right. If no one has yet become an Acquiring Person, payment of the purchase
price entitles the holder of a right to receive only one one-thousandth of a
share of preferred stock. If someone has beomce become an Acquiring Person,
however, and that fact has been publicly announced by S3 or the Acquiring
Person, the rights will be adjusted as follows:
- If S3 is involved in a merger or other business combination transaction
or 50% or more of S3's assets or earning power are sold, each holder of a
right other than an Acquiring Person will have the right to receive, upon
the exercise of the right at the then current purchase price, a
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number of shares of common stock of the acquiring company which at the
time of the transaction would have a market value of two times the
purchase price.
- If someone becomes an Acquiring Person, except pursuant to a tender offer
or exchange offer approved by S3's board before the person becomes an
Acquiring Person (a "Permitted Offer"), then each holder of a right will
for a 60-day period (subject to extension under certain circumstances)
have the right to receive upon exercise that number of shares of S3
common stock or, in certain circumstances, a combination of S3 common
stock, property, other securities and/or a reduction in the exercise
price of the right, having a market value of two times the purchase
price.
If any of the events described in the prior two paragraphs occurs, any rights
that are or were at any time after the Distribution Date owned by an Acquiring
Person will immediately become null and void.
At any time before there is an Acquiring Person, the S3 board of directors
may act to redeem all of the rights at a price of $0.01 per right. After there
is an Acquiring Person, the rights may be redeemed only in very limited
circumstances. Upon redemption, the right to exercise the rights will terminate
and the only right of the holders of rights will be to receive the redemption
price.
At any time after there is an Acquiring Person, but not after that person
acquires 50% or more of the outstanding S3 common stock, the S3 board may
exchange all or part of the then outstanding and exercisable rights (except for
rights that have become void) for shares of S3 common stock at a rate of one
share of S3 common stock (or substitute consideration) per right.
The preferred stock purchasable upon exercise of the rights will be
nonredeemable and junior to any other series of preferred stock S3 may issue,
unless otherwise provided in the terms of that stock. Each share of preferred
stock will have a preferential quarterly dividend in an amount equal to 1,000
times the dividend declared on each share of S3 common stock, but in no event
less than $25.00. In the event of liquidation, the holders of shares of
preferred stock will receive a preferred liquidation payment equal to the
greater of $1,000 or 1,000 times the payment made per each share of S3 common
stock. Each share of preferred stock will have 1,000 votes, voting together with
the shares of S3 common stock. In the event of any merger, consolidation or
other transaction in which shares of S3 common stock are exchanged, each share
of preferred stock will be entitled to receive 1,000 times the amount and type
of consideration received per share of S3 common stock. The rights of the
preferred stock as to dividends, liquidation and voting, and in the event of
mergers and consolidations, are protected by customary antidilution provisions.
Fractional shares of preferred stock will be issuable; however, (1) S3 may elect
to distribute depositary receipts in lieu of fractional shares and (2) in lieu
of fractional shares other than fractions that are multiples of one
one-thousandth of a share, an adjustment in cash will be made based on the
market price of the preferred stock on the last trading date prior to the date
of exercise.
The description and terms of the rights are set forth in a rights agreement
between S3 and BankBoston, N.A., the rights agent. S3 and the rights agent
retain broad authority to amend the rights agreement; however, following any
Distribution Date any amendment may not adversely affect the interests of
holders of rights. This description of the rights in qualified in its entirety
by reference to the rights agreement, which has been filed with the Securities
and Exchange Commission. See "Where You Can Find More Information" on page 104.
The stockholder rights plan is intended to enhance the likelihood of
continuity and stability in the composition of S3's board of directors and in
the policies formulated by the board of directors and to discourage certain
types of transactions that may involve an actual or threatened change of control
of S3. The rights plan is designed to reduce the vulnerability of S3 to an
unsolicited acquisition proposal
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and, accordingly, could discourage potential acquisition proposals and could
delay or prevent a change in control of S3. The rights plan is also intended to
discourage certain tactics that may be used in proxy fights but could, however,
have the effect of discouraging others from making tender offers for S3's shares
and, consequently, may also inhibit fluctuations in the market price of S3's
shares that could result from actual or rumored takeover attempts. The rights
plan may also have the effect of preventing changes in the management of S3. In
general, the rights plan is likely to make an acquisition of S3 more difficult
and expensive and could discourage potential acquirers.
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COMPARISON OF STOCKHOLDER RIGHTS
This section of the document describes certain differences between Diamond
common stock and S3 common stock. While we believe that the description covers
the material differences between the two, this summary may not contain all of
the information that is important to you, including the certificates of
incorporation and bylaws of each company. You should read this entire document
and the other documents we refer to carefully for a more complete understanding
of the differences between Diamond common stock and S3 common stock. You may
obtain the information incorporated by reference into this document without
charge by following the instructions in the section entitled "Where you can find
more information" on page 104.
After the merger, the holders of Diamond common stock who receive S3 common
stock will become stockholders of S3. Because Diamond and S3 are both Delaware
corporations, the Delaware General Corporation Law will continue to govern the
rights of Diamond stockholders. The Diamond certificate of incorporation and the
Diamond bylaws currently govern the rights of the stockholders of Diamond. As
stockholders of S3, S3's restated certificate of incorporation and bylaws will
instead govern their rights following the merger. The following paragraphs
summarize certain differences between the rights of S3 stockholders and Diamond
stockholders under the certificates of incorporation and bylaws of S3 and
Diamond.
NUMBER OF DIRECTORS
Diamond. Diamond's certificate of incorporation provides that the number of
directors shall be fixed by the board either by a resolution or amendment to the
bylaws adopted by a majority of the entire board. Diamond's bylaws provide that
the number of directors shall be not less than six nor more than eleven. The
exact number of directors currently specified in Diamond's bylaws is six.
S3. The bylaws of S3 provide that the number of directors shall not be less
than three nor more than nine, and the actual number of directors shall be set
by resolution of the board. The S3 board currently consists of six members. The
merger agreement requires S3 to cause its board of directors to consist of
either five or seven directors upon the closing of the merger. To comply with
the merger agreement, S3 intends to fix the number of S3 directors at seven.
BOARD VACANCIES
Diamond. Vacancies may be filled by a majority of the remaining directors,
even if less than a quorum, or by a sole remaining director. However, a vacancy
created by the removal of a director by the vote or written consent of the
stockholders or by court order may be filled only by the affirmative vote of a
majority of the shares represented and voting at a duly held meeting at which a
quorum is present (which shares voting affirmatively also constitute a majority
of the required quorum), or by the unanimous written consent of all shares
entitled to vote on the matter.
S3. When vacancies or newly-created directorships result, these positions
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director.
TIMELINESS OF NOTICE TO BRING MATERIAL BEFORE ANNUAL MEETINGS OF STOCKHOLDERS
Diamond. To be timely, a stockholder's notice must be delivered to or
mailed and received by Diamond's corporate secretary not less than 90 days prior
to the meeting. However, if the stockholders receive less than 100 days notice
of the meeting, notice that a stockholder intends to bring material before the
meeting must be received by Diamond within ten days of the day on which notice
of the date of the meeting was given.
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S3. Stockholder's notice must be received at the principal executive
offices of the corporation, no later than 50 days nor earlier than 75 days prior
to the meeting; provided, however, that in the event that less than 65 days'
notice or prior public disclosure of the date of the scheduled meeting is given
or made to stockholders, S3 must receive the stockholder's notice by the earlier
of (a) the close of business on the 15th day after the earlier of the day S3
mailed notice of the annual meeting date or provided public disclosure of the
meeting date and (b) two days prior to the scheduled date of the annual meeting.
SPECIAL MEETINGS OF STOCKHOLDERS
Diamond. A special meeting of the stockholders may be called at any time
by:
- the board of directors,
- the chairman of the board,
- the president,
- the chief executive officer, or
- one or more stockholders holding shares in the aggregate entitled to cast
not less than 10% of the votes at that meeting.
A request in writing by any persons other than the board of directors must
be delivered to the chairman of the board, the president, the chief executive
officer or the secretary of the corporation. Notice will then be given to the
stockholders entitled to vote not less than 35 nor more than 60 days after the
receipt of the request. If the notice is not given within 20 days after the
receipt of the request, the person or persons requesting the meeting may give
the notice.
S3. Special meetings of the stockholders may be called only by the board of
directors, the chairman of the board or the president.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Diamond. The Diamond bylaws provide that any action which may be taken at
any annual or special meeting of stockholders may be taken without a meeting and
without prior notice if a consent in writing setting forth the action is signed
by the holders of outstanding shares representing at least the number of votes
required to take that action at a meeting.
S3. The S3 charter and bylaws provide that any action required or permitted
to be taken by the stockholders must be effected at a duly called annual or
special meeting of stockholders and not by written consent.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
Diamond. The Diamond certificate of incorporation may be amended by the
affirmative vote of a majority of the outstanding stock entitled to vote
thereon.
The Diamond bylaws may be amended by the affirmative vote of shares
representing a majority of votes present in person or by proxy and entitled to
vote at a stockholder meeting. A majority of the Diamond board may also amend
the bylaws.
S3. Generally, the S3 certificate of incorporation may be amended by the
affirmative vote of a majority of the outstanding stock entitled to vote
thereon. However, the S3 restated certificate of
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<PAGE> 100
incorporation provides that the affirmative vote of the holders of at least
two-thirds of the voting power of all of the then issued and outstanding shares
of stock entitled to vote generally, voting together as a single class, is
required to amend provisions of the S3 restated certificate of incorporation
relating to stockholder action, amendments to the bylaws and certificate of
incorporation, and director exculpation and indemnification.
The S3 bylaws may also be amended by the affirmative vote of two-thirds of
the total number of authorized directors.
STOCKHOLDER RIGHTS PLANS
Diamond. Diamond does not have a stockholder rights plan.
S3. S3 currently has a stockholder rights plan. This plan is described
above under "Description of S3 Capital Stock -- Stockholder Rights Plan" on page
88.
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<PAGE> 101
INFORMATION REGARDING BENEFICIAL OWNERSHIP
OF S3 PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of common stock of S3 as of August 10, 1999 for the following:
- each person or entity who is known by S3 to own beneficially more than 5%
of the outstanding shares of S3's common stock;
- each director of S3;
- S3's Chief Executive Officer and each of S3's five other most highly
compensated executive officers during 1998; and
- all directors and executive officers of S3 as a group.
The percentage ownership is based on 53,593,677 shares of S3 common stock
outstanding as of August 10, 1999. All shares subject to options and warrants
exercisable within 60 days after August 10, 1999 are deemed to be beneficially
owned by the person or entity holding such options or warrants and to be
outstanding solely for calculating such person's or entity's percentage
ownership. Unless otherwise indicated below, the persons and entities named in
the table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. Unless
otherwise noted, the address of each named beneficial owner is that of S3.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
---------------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT
--------------------------------------- ---------- -------
<S> <C> <C>
Kenneth F. Potashner(1)..................................... 1,453,900 2.6%
Terry N. Holdt(1)........................................... 923,696 1.7
John C. Colligan(1)......................................... 65,000 *
Robert P. Lee(1)............................................ 80,000 *
Carmelo J. Santoro(1)....................................... 68,536 *
Ronald T. Yara(1)........................................... 459,877 *
Walter D. Amaral(1)......................................... 170,738 *
Paul G. Franklin(1)......................................... 171,489 *
Daniel A. Karr(1)........................................... 73,338 *
All directors and executive officers as a group (9
persons).................................................. 3,466,574 6.1
State of Wisconsin Investment Board(2)...................... 4,165,000 7.8
P.O. Box 7842 Madison, WI 53707
</TABLE>
- ---------------
* Less than 1%.
(1) Includes shares issuable upon exercise of options within 60 days of August
10, 1999 as follows: Walter D. Amaral, 170,738; John C. Colligan, 65,000;
Paul G. Franklin, 160,091; Terry N. Holdt, 691,378; Daniel A. Karr, 71,877;
Robert P. Lee, 80,000; Kenneth F. Potashner, 1,431,900; Carmelo J. Santoro,
68,536; and Ronald T. Yara, 227,141.
(2) 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.
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<PAGE> 102
INFORMATION REGARDING BENEFICIAL OWNERSHIP
OF DIAMOND PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of common stock of Diamond as of August 10, 1999 for the following:
- each person or entity who is known by Diamond to own beneficially more
than 5% of the outstanding shares of Diamond's common stock;
- each director of Diamond;
- Diamond's Chief Executive Officer and each of Diamond's four other most
highly compensated executive officers during 1998; and
- all directors and executive officers of Diamond as a group.
The percentage ownership is based on 35,820,591 shares of Diamond common
stock outstanding as of August 10, 1999. All shares subject to options and
warrants exercisable within 60 days after August 10, 1999 are deemed to be
beneficially owned by the person or entity holding such options or warrants and
to be outstanding solely for calculating such person's or entity's percentage
ownership. Unless otherwise indicated below, the persons and entities named in
the table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. Unless
otherwise noted, the address of each named beneficial owner is that of Diamond.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
---------------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT
--------------------------------------- ---------- -------
<S> <C> <C>
Chong-Moon Lee.............................................. 1,954,757 5.5%
26549 Taaffee Road
Los Altos, California 94022
William J. Schroeder(1)..................................... 703,818 2.0
Hyung Hwe Huh(2)............................................ 317,758 *
C. Scott Holt............................................... 53,584 *
James M. Walker(3).......................................... 287,500 *
Dennis B. Praske(4)......................................... 131,729 *
Bruce C. Edwards(5)......................................... 43,125 *
Gregorio Reyes(6)........................................... 35,625 *
Jeffrey D. Saper(7)......................................... 32,767 *
James Schraith(8)........................................... 11,250 *
Carl Neun(9)................................................ 13,125 *
All executive officers and directors as a group (12
persons)(10).............................................. 1,807,735 5.0
S3 Incorporated(11)......................................... 4,597,871 11.4
2841 Mission College Boulevard
Santa Clara, CA 95054
</TABLE>
- -------------------------
* Less than 1%.
(1) Includes 95,000 shares held by trusts for the benefit of family members,
with respect to which Mr. Schroeder disclaims beneficial ownership.
(2) Includes 76,771 shares held by Mr. Huh's son, Yun Huh, which shares may be
deemed to be beneficially owned by Mr. Huh.
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<PAGE> 103
(3) Includes an option to purchase 287,500 shares which are exercisable within
sixty (60) days of August 10, 1999.
(4) Includes an option to purchase 131,729 shares which are exercisable within
sixty (60) days of August 10, 1999.
(5) Includes an option to purchase 13,125 shares which are exercisable within
sixty (60) days of August 10, 1999.
(6) Includes an option to purchase 13,125 shares which are exercisable within
sixty (60) days of August 10, 1999.
(7) Does not include an aggregate of 6,172 shares held by certain investment
partnerships associated with Mr. Saper's firm and of which he is a member.
Mr. Saper disclaims beneficial ownership of such shares, except to the
extent of his proportionate partnership interest therein. Includes an
option to purchase 13,125 shares which are exercisable within sixty (60)
days of August 10, 1999.
(8) Includes an option to purchase 11,250 shares which are exercisable within
sixty (60) days of August 10, 1999.
(9) Includes an option to purchase 13,125 shares which are exercisable within
sixty (60) days of August 10, 1999.
(10) Includes 3,216 shares held by Franz Fichtner; an option to purchase 100,000
shares held by Franz Fichtner, which are exercisable within sixty (60) days
of August 10, 1999; 1,738 shares held by Wade Meyercord; an option to
purchase 72,500 shares held by Wade Meyercord, which are exercisable within
sixty (60) days of August 10, 1999.
(11) According to the Schedule 13D dated June 25, 1999, filed by S3
Incorporated, S3 Incorporated has sole voting power and sole dispositive
power with respect to all shares listed in the table. All of these shares
are issuable upon exercise of the warrants described under "Related
Agreements -- Warrants to Purchase Diamond Common Stock" on page 75.
97
<PAGE> 104
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material United States federal
income tax consequences of the merger. The discussion does not address all
aspects of United States federal taxation that may be relevant to you, and it
may not be applicable to Diamond stockholders who, for United States federal
income tax purposes, are non-resident alien individuals, foreign corporations,
foreign partnerships, foreign trusts or foreign estates, or who acquired their
Diamond common stock pursuant to the exercise of Diamond stock options or
otherwise as compensation. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE MERGER TO YOU.
This discussion is based on the Internal Revenue Code of 1986, as amended,
regulations thereunder, current administrative rulings and practice, and
judicial precedent, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences to you as
discussed in this proxy statement-prospectus. This discussion assumes that you
hold your Diamond common stock as a capital asset within the meaning of section
1221 of the Internal Revenue Code.
Neither S3 nor its wholly owned merger subsidiary is required to complete
the merger unless S3 receives an opinion of Pillsbury Madison & Sutro LLP and
Diamond is not required to complete the merger unless Diamond receives an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, in both
cases based upon certain customary assumptions and representations made by S3
and Diamond, and to the effect that under currently applicable law for United
States federal income tax purposes:
- The merger will constitute a reorganization within the meaning of section
368(a) of the Internal Revenue Code and
- S3, S3's wholly owned merger subsidiary and Diamond will each be a party
to that reorganization within the meaning of section 368(b) of the
Internal Revenue Code.
Each of Pillsbury Madison & Sutro LLP and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, has indicated that it expects to be able to deliver
the foregoing opinion. No ruling has been or will be obtained from the Internal
Revenue Service in connection with the merger. Opinions of counsel are not
binding on the Internal Revenue Service or the courts.
Based upon those opinions, the following will be the material federal
income tax consequences of the merger:
- You will recognize no gain or loss if you receive solely S3 common stock
in exchange for shares of Diamond common stock you hold, except with
respect to cash received instead of fractional shares of S3 common stock.
- The aggregate adjusted tax basis of the shares of S3 common stock you
receive in the merger (including any fractional share of S3 common stock
deemed to be received by you, as described in paragraph 4, below), will
be equal to the aggregate adjusted tax basis of the shares of Diamond
common stock surrendered by you for the shares of S3 common stock.
- The holding period of the shares of S3 common stock you receive in the
merger (including any fractional share of S3 common stock deemed to be
received by you, as described in paragraph 4, below), will include the
holding period of the shares of Diamond common stock you exchange for the
shares of S3 common stock.
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<PAGE> 105
- If you receive cash in the merger instead of a fractional share of S3
common stock, you will be treated as if you received the fractional share
in the merger and then S3 redeemed the fractional share in exchange for
the cash. You will generally be required to recognize gain or loss equal
to the difference between the amount of cash received and the portion of
your adjusted tax basis in the shares of S3 common stock allocable to the
fractional share.
- Neither S3, S3's wholly owned merger subsidiary nor Diamond will
recognize gain or loss solely as a result of the merger.
THE DISCUSSION ABOVE IS A GENERAL DISCUSSION OF THE MATERIAL UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL
INFORMATION ONLY. THIS DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR
FACTS AND CIRCUMSTANCES OF YOUR STATUS AND ATTRIBUTES. AS A RESULT, THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THIS DISCUSSION MAY NOT
APPLY TO YOU. IN VIEW OF THE INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, YOU
ARE URGED TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THE APPLICATION AND EFFECT OF
UNITED STATES FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS
OF CHANGES IN UNITED STATES FEDERAL AND OTHER TAX LAWS.
99
<PAGE> 106
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE
OF S3 STOCKHOLDERS ONLY
PROPOSAL NO. 2
PROPOSED AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF S3 COMMON
STOCK
S3's board of directors has approved and declared advisable the amendment
of Article IV of the S3 restated certificate of incorporation to increase the
number of authorized shares of S3 common stock from 120,000,000 to 175,000,000.
S3's board of directors recommends that S3 stockholders approve this amendment.
This amendment will become effective only if the issuance of S3 common stock in
the merger is approved by S3 stockholders and the merger is completed.
S3's board of directors believes that, if the merger is completed, it is in
S3's best interests to increase the number of authorized shares of S3 common
stock in order to have additional authorized but unissued shares available for
issuance to meet business needs as they arise. The board of directors believes
that the availability of such additional shares will help S3 attract and retain
talented employees through the grant of stock options and other stock-based
incentives. The board of directors also believes that the availability of such
shares will provide S3 with the flexibility to issue S3 common stock for other
proper corporate purposes which may be identified by the board of directors in
the future, such as stock splits, stock dividends, financings or acquisitions.
The issuance of additional shares of S3 common stock may have a dilutive effect
on earnings per share and, for a person who does not purchase additional shares
to maintain his or her pro rata interest, on a stockholder's percentage voting
power.
Although the merger agreement states that the approval of the proposed
amendment to increase the number of authorized shares of S3 common stock from
120,000,000 to 175,000,000 is a condition to the closing of the merger, that
condition may be waived by Diamond, and S3 currently has a sufficient number of
authorized shares of S3 common stock to consummate the merger.
S3's board of directors does not recommend this proposed amendment with the
intent to use the ability to issue additional S3 common stock to discourage
tender offers or takeover attempts. However, the availability of authorized S3
common stock for issuance could render more difficult or discourage a merger,
tender offer, proxy contest or other attempt to obtain control of S3. Neither
the management of S3 nor the board of directors is aware of any existing or
planned effort on the part of any party to accumulate material amounts of S3
common stock or to acquire control of S3 by means of merger, tender offer, proxy
contest or otherwise, or to change S3's management, nor is S3 aware of any offer
by any person to acquire any material amount of S3 common stock or assets of S3.
Of the 120,000,000 shares of S3 common stock currently authorized for
issuance, approximately 66,400,000 shares are unissued as of August 10, 1999.
However, approximately 59,500,000 of these shares are reserved for issuance
pursuant to the merger agreement, S3's stock option and purchase plans, upon
conversion of S3's outstanding 5 3/4% convertible subordinated notes and upon
exercise of the warrant issued to Intel Corporation. The authorized shares of S3
common stock in excess of those issued will be available for issuance at such
times and for such corporate purposes as the board of directors may deem
advisable without further action by S3 stockholders, except as may be required
by applicable laws or the rules of any stock exchange or national securities
association trading system on which the securities may be listed or traded. S3's
management has no arrangements, agreements, understandings or plans at the
present time for the issuance or use of the additional shares of S3 common stock
proposed to be authorized. Upon issuance, such shares will have the same rights
as the outstanding shares of S3 common stock. Holders of S3 common stock do not
have preemptive rights. The board of directors does not intend to issue any S3
common stock except on terms that the board deems to be in the best interests of
S3 and its then-existing stockholders.
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<PAGE> 107
The full text of Article IV, as that Article is proposed to be amended
pursuant to this proposal, is set forth in Appendix D to this document.
VOTE REQUIRED AND EFFECTIVE DATE
The affirmative vote of the holders of a majority of S3's outstanding
common stock is required to approve this proposal. If the proposed amendment and
the issuance of S3 common stock in the merger are approved by the stockholders,
the proposed amendment to Article IV will become effective upon the filing of a
certificate of amendment with the Secretary of State of the State of Delaware
amending S3's restated certificate of incorporation, which will occur as soon as
reasonably practicable after completion of the merger.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND ARTICLE
IV OF S3'S RESTATED CERTIFICATE OF INCORPORATION AS SET FORTH IN APPENDIX D.
PROPOSAL NO. 3
ELECTION OF DIRECTORS
The merger agreement requires S3 to cause its board of directors to consist
of either five or seven directors upon the closing of merger. S3's board
currently consists of six directors. To comply with the merger agreement, S3
intends to fix the number of S3 directors at seven, consisting of four present
directors of S3 (namely, Kenneth F. Potashner, Terry N. Holdt, Carmelo J.
Santoro and Robert P. Lee) and three directors designated by Diamond. John C.
Colligan and Ronald T. Yara will resign from S3's board as of the closing of the
merger. You are now being asked to elect three individuals nominated by Diamond
to serve on the S3 board. These elections will take effect only if the merger is
completed. 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 S3
meeting, an event not now anticipated, proxies will be voted for any nominee
designated by Diamond (after consultation with the S3 board) to fill the
vacancy.
Names of the nominees and biographical information about them are set forth
below:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
William J. Schroeder..................... 55 Chairman of the Board, President and
Chief Executive Officer of Diamond
Gregorio Reyes........................... 58 Chairman of the Board of Sync Research
James T. Schraith........................ 41 President and Chief Executive Officer of
ShareWave, Inc.
</TABLE>
Except as indicated below, each nominee has been engaged in the principal
occupation set forth above during the past five years. There are no family
relationships between any director, nominee for director, or executive officer
of S3.
Mr. Schroeder has served as Diamond's President and Chief Executive Officer
and as a member of Diamond's board of directors since May 1994. He has served as
Chairman of the Board of Directors of Diamond since 1998. Mr. Schroeder was
employed by Conner Peripherals, Inc. 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 Chief
Executive
101
<PAGE> 108
Officer of Arcada Software, Inc. (a Conner subsidiary) from November 1993 to May
1994. Mr. Schroeder is a director of Xircom, Inc., Sync Research, Inc. and CNF
Transportation, Inc.
Mr. Reyes has been a director of Diamond 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. Mr. Reyes is a director of C-Cube
Microsystems as well as several other private companies.
Mr. Schraith has been a director of Diamond 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 Corporation. 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 and Digital Archaeology, Inc.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF MESSRS.
SCHROEDER, REYES AND SCHRAITH AS DIRECTORS OF THE COMPANY.
STOCKHOLDER PROPOSALS
Proposals of S3 stockholders that are intended to be presented by those
stockholders at S3's 2000 annual meeting of stockholders must be received by the
Secretary of S3 at its principal executive offices no later than December 14,
1999 so they may be included in S3's proxy statement and form of proxy relating
to that meeting. A stockholder proposal not included in S3's proxy statement for
the 2000 annual meeting will be ineligible for presentation at the meeting
unless the stockholder gives timely notice of the proposal in writing to the
Secretary of S3 at the principal executive offices of S3 and otherwise complies
with the provisions of S3's bylaws. To be timely, S3's bylaws provide that S3
must have received the stockholder's notice not less than 50 days nor more than
75 days prior to the 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, S3 must receive the stockholder's notice by the
earlier of (a) the close of business on the 15th day after the earlier of the
day S3 mailed notice of the annual meeting date or provided public disclosure of
the meeting date and (b) two days prior to the scheduled date of the annual
meeting.
Proposals of stockholders of Diamond that are intended to be presented by
such stockholders at Diamond's 2000 Annual Meeting of Stockholders, in the event
that the merger has not been consummated before then, must be received by the
Secretary of Diamond no later than December 19, 1999 in order that they may be
considered for inclusion in Diamond's proxy statement and form of proxy relating
to that meeting.
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<PAGE> 109
LEGAL MATTERS
Certain legal matters with respect to the validity of the S3 common stock
to be issued to Diamond stockholders pursuant to the merger and certain tax
matters will be passed upon for S3 by Pillsbury Madison & Sutro LLP, Palo Alto
and San Francisco, California. A partner of Pillsbury Madison & Sutro LLP holds
an option to purchase 16,000 shares of S3 common stock. Certain tax matters will
be passed upon for Diamond by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California, Diamond's outside legal counsel.
EXPERTS
The consolidated financial statements and schedule of S3 as of December 31,
1998, and for the year then ended have been incorporated by reference in this
document in reliance upon the report of Ernst & Young LLP, independent auditors,
incorporated by reference in this document which is based in part on the report
of PricewaterhouseCoopers LLP, independent auditors, incorporated by reference
in this document, given on the authority of said firms as experts in accounting
and auditing.
The consolidated financial statements of S3 Incorporated and its
subsidiaries, except for the financial statements of United Semiconductor
Corporation (S3's investment in which is accounted for by use of the equity
method), as of December 31, 1997 and for each of the two years in the period
ended December 31, 1997, incorporated by reference in this registration
statement, and the related financial statement schedule also incorporated by
reference in this registration statement, have been audited by Deloitte & Touche
LLP as stated in their report incorporated by reference in this registration
statement. The financial statements of United Semiconductor Corporation have
been audited by PricewaterhouseCoopers LLP, as stated in their report
incorporated by reference herein. Such consolidated financial statements of S3
and its subsidiaries are included herein in reliance upon the respective reports
of such firms given upon their authority as experts in accounting and auditing.
All of the foregoing firms are independent auditors.
The consolidated financial statements incorporated in this document by
reference to the Diamond Multimedia Systems, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998 have been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
DOCUMENTS INCORPORATED BY REFERENCE
THIS DOCUMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED IN
OR DELIVERED WITH THIS DOCUMENT.
All documents filed by S3 or Diamond under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act after the date of this document and before
the date of the S3 meeting and the Diamond meeting are incorporated by reference
into and deemed to be a part of this document from the date of filing of those
documents.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT, OR THAT
WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
103
<PAGE> 110
The following documents filed by Diamond with the Securities and Exchange
Commission are incorporated by reference into this document:
- Diamond's annual report on Form 10-K for the fiscal year ended December
31, 1998, as amended on April 28, 1999;
- Diamond's quarterly reports on Form 10-Q for the quarters ended March 31
and June 30, 1999; and
- Diamond's current report on Form 8-K filed on June 25, 1999.
The following documents that were filed by S3 with the Securities and
Exchange Commission are incorporated by reference into this document:
- S3's annual report on Form 10-K for the year ended December 31, 1998;
- S3's quarterly reports on Form 10-Q for the quarters ended March 31 and
June 30, 1999; and
- S3's current report on Form 8-K dated June 25, 1999.
WHERE YOU CAN FIND MORE INFORMATION
The documents incorporated by reference into this document are available
from us upon request. We will provide a copy of any and all of the information
that is incorporated by reference in this document not including exhibits to the
information unless those exhibits are specifically incorporated by reference
into this document, to you, without charge, upon written or oral request. YOU
SHOULD MAKE ANY REQUEST FOR DOCUMENTS BY SEPTEMBER 13, 1999 TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS.
<TABLE>
<CAPTION>
REQUESTS FOR DOCUMENTS RELATING TO S3 SHOULD BE DIRECTED REQUESTS FOR DOCUMENTS RELATING TO DIAMOND SHOULD BE
TO: DIRECTED TO:
- -------------------------------------------------------- ----------------------------------------------------
<S> <C>
S3 Incorporated Diamond Multimedia Systems, Inc.
2841 Mission College Boulevard 2880 Junction Avenue
Santa Clara, California 95054 San Jose, CA 95134
(408) 588-8000 (408) 325-7000
Attn: Walter D. Amaral Attn: James Walker
</TABLE>
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Copies of our reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York
Washington, D.C. Chicago, Illinois
</TABLE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy statements and other
information regarding each of us. The address of the SEC website is
http://www.sec.gov.
S3 has filed a registration statement under the Securities Act with the SEC
with respect to S3's common stock to be issued to Diamond stockholders in the
merger. This document constitutes the prospectus of S3 filed as part of the
registration statement. This document does not contain all of the information
set forth in the registration statement because certain parts of the
registration statement
104
<PAGE> 111
are omitted as provided by the rules and regulations of the SEC. You may inspect
and copy the registration statement at any of the addresses listed above, or may
view a copy on the SEC's website.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, THE S3 COMMON STOCK OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE
THE OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN THAT JURISDICTION.
NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY DISTRIBUTION OF SECURITIES MEANS,
UNDER ANY CIRCUMSTANCES, THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH OR INCORPORATED IN THIS DOCUMENT BY REFERENCE OR IN OUR AFFAIRS SINCE THE
DATE OF THIS DOCUMENT. THE INFORMATION CONTAINED IN THIS DOCUMENT WITH RESPECT
TO DIAMOND AND ITS SUBSIDIARIES WAS PROVIDED BY DIAMOND. THE INFORMATION
CONTAINED IN THIS DOCUMENT WITH RESPECT TO S3 AND ITS SUBSIDIARIES WAS PROVIDED
BY S3.
105
<PAGE> 112
APPENDIX A
AGREEMENT AND PLAN
OF MERGER
BETWEEN
DIAMOND MULTIMEDIA SYSTEMS, INC.
AND
S3 INCORPORATED
DATED AS OF JUNE 21, 1999
<PAGE> 113
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
THE MERGER
SECTION 1.1 The Merger.................................................. A-1
SECTION 1.2 Conversion of Shares........................................ A-2
SECTION 1.3 Surrender and Payment....................................... A-3
SECTION 1.4 Stock Options............................................... A-4
SECTION 1.5 Adjustments................................................. A-5
SECTION 1.6 Fractional Shares........................................... A-5
SECTION 1.7 Withholding Rights.......................................... A-5
SECTION 1.8 Lost Certificates........................................... A-6
ARTICLE II
CERTAIN GOVERNANCE MATTERS
SECTION 2.1 Acquirer Board of Directors................................. A-6
SECTION 2.2 Acquirer Officers........................................... A-6
SECTION 2.3 Certificate of Incorporation of the Surviving Corporation... A-6
SECTION 2.4 By-Laws of the Surviving Corporation........................ A-6
SECTION 2.5 Directors and Officers of the Surviving Corporation......... A-6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.1 Organization and Qualification.............................. A-7
SECTION 3.2 Capitalization.............................................. A-7
SECTION 3.3 Authority................................................... A-8
SECTION 3.4 Governmental Authorization.................................. A-8
SECTION 3.5 Non-Contravention........................................... A-9
SECTION 3.6 Subsidiaries................................................ A-9
SECTION 3.7 SEC Filings................................................. A-10
SECTION 3.8 Financial Statements........................................ A-10
SECTION 3.9 Disclosure Documents........................................ A-10
SECTION 3.10 Absence of Certain Changes.................................. A-11
SECTION 3.11 No Undisclosed Material Liabilities......................... A-11
SECTION 3.12 Litigation.................................................. A-12
SECTION 3.13 Taxes....................................................... A-12
SECTION 3.14 Employee Benefit Plans...................................... A-12
SECTION 3.15 Compliance with Laws........................................ A-14
SECTION 3.16 Finders' or Advisors' Fees.................................. A-14
SECTION 3.17 Environmental Matters....................................... A-14
SECTION 3.18 Labor Matters............................................... A-14
SECTION 3.19 Title to Property........................................... A-15
SECTION 3.20 Leaseholds.................................................. A-15
SECTION 3.21 Management Payments......................................... A-15
SECTION 3.22 Intellectual Property....................................... A-15
SECTION 3.23 Insurance................................................... A-16
SECTION 3.24 Year 2000 Compliance........................................ A-16
SECTION 3.25 Opinion of Financial Advisor................................ A-16
SECTION 3.26 Tax Treatment............................................... A-16
SECTION 3.27 Takeover Statutes........................................... A-16
</TABLE>
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ACQUIRER
SECTION 4.1 Organization and Qualification.............................. A-17
SECTION 4.2 Capitalization.............................................. A-17
SECTION 4.3 Authority................................................... A-18
SECTION 4.4 Governmental Authorization.................................. A-18
SECTION 4.5 Non-Contravention........................................... A-18
SECTION 4.6 Subsidiaries................................................ A-19
SECTION 4.7 SEC Filings................................................. A-19
SECTION 4.8 Financial Statements........................................ A-19
SECTION 4.9 Disclosure Documents........................................ A-20
SECTION 4.10 Absence of Certain Changes.................................. A-20
SECTION 4.11 No Undisclosed Material Liabilities......................... A-21
SECTION 4.12 Litigation.................................................. A-21
SECTION 4.13 Taxes....................................................... A-21
SECTION 4.14 Employee Benefit Plans...................................... A-22
SECTION 4.15 Compliance with Laws........................................ A-23
SECTION 4.16 Finders' or Advisors' Fees.................................. A-23
SECTION 4.17 Environmental Matters....................................... A-23
SECTION 4.18 Labor Matters............................................... A-23
SECTION 4.19 Title to Property........................................... A-23
SECTION 4.20 Leaseholds.................................................. A-24
SECTION 4.21 Management Payments......................................... A-24
SECTION 4.22 Intellectual Property....................................... A-24
SECTION 4.23 Insurance................................................... A-24
SECTION 4.24 Year 2000 Compliance........................................ A-24
SECTION 4.25 Opinion of Financial Advisor................................ A-25
SECTION 4.26 Tax Treatment............................................... A-25
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.1 Conduct of Business of the Company.......................... A-25
SECTION 5.2 No Solicitation............................................. A-26
ARTICLE VI
COVENANTS OF ACQUIRER
SECTION 6.1 Conduct of Business of Acquirer............................. A-27
SECTION 6.2 No Solicitation............................................. A-28
SECTION 6.3 Indemnification............................................. A-29
SECTION 6.4 NNM Listings................................................ A-30
ARTICLE VII
COVENANTS OF ACQUIRER AND THE COMPANY
SECTION 7.1 Access to Information....................................... A-30
SECTION 7.2 Registration Statement and Proxy Statement.................. A-30
SECTION 7.3 Stockholders' Meetings...................................... A-31
SECTION 7.4 Reasonable Efforts; Other Actions........................... A-31
SECTION 7.5 Public Announcements........................................ A-31
SECTION 7.6 Notification of Certain Matters............................. A-31
</TABLE>
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SECTION 7.7 Expenses.................................................... A-32
SECTION 7.8 Affiliates.................................................. A-32
SECTION 7.9 Certain Benefit Plans....................................... A-32
SECTION 7.10 Formation of Merger Subsidiary.............................. A-33
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.1 Conditions to the Obligations of Each Party................. A-33
SECTION 8.2 Conditions to the Obligations of Acquirer and Merger
Subsidiary.................................................. A-33
SECTION 8.3 Conditions to the Obligations of the Company................ A-34
ARTICLE IX
TERMINATION
SECTION 9.1 Termination................................................. A-35
SECTION 9.2 Termination by Acquirer..................................... A-35
SECTION 9.3 Termination by the Company.................................. A-36
SECTION 9.4 Procedure for Termination................................... A-37
SECTION 9.5 Effect of Termination....................................... A-37
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Notices..................................................... A-38
SECTION 10.2 Non-Survival of Representations and Warranties.............. A-39
SECTION 10.3 Amendments; No Waivers...................................... A-39
SECTION 10.4 Successors and Assigns...................................... A-39
SECTION 10.5 Governing Law............................................... A-39
SECTION 10.6 Jurisdiction................................................ A-39
SECTION 10.7 Waiver of Jury Trial........................................ A-40
SECTION 10.8 Counterparts; Effectiveness................................. A-40
SECTION 10.9 Entire Agreement............................................ A-40
SECTION 10.10 Captions.................................................... A-40
SECTION 10.11 Severability................................................ A-40
SCHEDULES
SCHEDULE 1.4 Company Stock Option Plans
SCHEDULE Required Third Party Consents
8.1(d)
EXHIBITS
EXHIBIT 7.8 Form of Affiliate Agreement
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 21, 1999, (the "AGREEMENT"),
by and between DIAMOND MULTIMEDIA SYSTEMS, INC., a Delaware corporation (the
"COMPANY") and S3 INCORPORATED, a Delaware corporation ("ACQUIRER").
RECITALS
WHEREAS, Acquirer will cause a wholly owned Delaware corporation to be
formed as soon as practicable following the date hereof ("MERGER SUBSIDIARY");
WHEREAS, the respective Boards of Directors of Acquirer and the Company
have approved this Agreement, and deem it advisable and in the best interests of
each corporation and its respective stockholders to consummate the merger of
Merger Subsidiary with and into the Company upon the terms and subject to the
conditions of this Agreement;
WHEREAS, pursuant to the Merger, among other things, and subject to the
terms and conditions of this Agreement, all of the issued and outstanding shares
of capital stock of the Company shall be converted into the right to receive
shares of voting common stock of Acquirer, and all outstanding options to
purchase shares of common stock of the Company shall be assumed by Acquirer;
WHEREAS, it is intended that the Merger qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "CODE") and be accounted for as a purchase transaction;
and
WHEREAS, each of the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated hereby:
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. (a) In accordance with the provisions of this
Agreement and the General Corporation Law of the State of Delaware (the
"DELAWARE LAW"), at the Effective Time, Merger Subsidiary shall be merged (the
"MERGER") with and into the Company, whereupon the separate existence of Merger
Subsidiary shall cease and the Company shall be the surviving corporation
(hereinafter sometimes called the "SURVIVING CORPORATION") in the Merger and a
wholly owned subsidiary of Acquirer.
(b) As soon as practicable after but no later than two business days
following satisfaction or, to the extent permitted hereunder, waiver of all
conditions to the Merger, the Company and Merger Subsidiary shall file a
certificate of merger with the Secretary of State of the State of Delaware and
make all other filings or recordings required by Delaware Law in connection with
the Merger. The Merger shall become effective at such time as the certificate of
merger is duly filed with the Secretary of State of the State of Delaware or at
such later time as is specified in the certificate of merger (the "EFFECTIVE
TIME").
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(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, property, powers and franchises and be
subject to all of the restrictions, disabilities, debts and duties of the
Company and Merger Subsidiary, all as provided under the Delaware Law.
(d) Unless this Agreement is earlier terminated pursuant to Section 9, the
closing of the Merger (the "CLOSING") shall take place at the offices of
Pillsbury Madison & Sutro LLP, 2550 Hanover Street, Palo Alto, California as
soon as practicable, but in any event within two business days after the day on
which the last to be fulfilled or waived of the conditions set forth in Article
VIII (other than those conditions that by their nature are to be fulfilled at
the Closing, but subject to the fulfillment or waiver of such conditions) shall
be fulfilled or waived in accordance with this Agreement or at such other time,
place and date as is mutually agreed to in writing by the parties hereto. The
date of the Closing is referred to in this Agreement as the "CLOSING DATE."
SECTION 1.2 Conversion of Shares. (a) As of the Effective Time, by virtue
of the Merger and without any action on the part of the holders thereof:
(i) Each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become
one validly issued, fully paid and nonassessable share of common stock, par
value $.001 per share, of the Surviving Corporation with the same rights,
powers and privileges as the shares so converted, and such shares shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation. From and after the Effective Time, all certificates
representing the common stock of Merger Subsidiary shall be deemed for all
purposes to represent the number of shares of common stock of the Surviving
Corporation into which they were converted in accordance with this Section
1.2(a)(i).
(ii) Each share of common stock, par value $.001 per share, of the
Company (a "COMPANY SHARE") held by the Company as treasury stock or owned
by Acquirer or any subsidiary of Acquirer, shall be cancelled, and no
payment shall be made with respect thereto.
(iii) Each Company Share outstanding immediately prior to the
Effective Time shall, except as otherwise provided in Section 1.2(a)(ii),
by virtue of the Merger and without any action on the part of the holder
thereof, be converted into the right to receive 0.52 share (the "EXCHANGE
RATIO") of validly issued, fully paid and nonassessable common stock, par
value $.0001 per share, of Acquirer ("ACQUIRER COMMON STOCK").
(b) From and after the Effective Time, all Company Shares converted in
accordance with Section 1.2(a)(iii) shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a certificate representing any such Company Shares shall cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration (as defined below), as applicable, and any dividends payable
pursuant to Section 1.3(f).
(c) The Acquirer Common Stock to be received as consideration pursuant to
the Merger by each holder of Company Shares (together with cash in lieu of
fractional shares of Acquirer Common Stock as specified below) is referred to
herein as the "MERGER CONSIDERATION."
(d) For purposes of this Agreement, the word "SUBSIDIARY" when used with
respect to any Person means any other Person, whether incorporated or
unincorporated, of which (i) more than fifty percent (50%) of the securities or
other ownership interests or (ii) securities or other interests having by their
terms ordinary voting power to elect more than fifty percent (50%) of the board
of directors or others performing similar functions with respect to such
corporation or other organization, is directly owned or controlled by such
Person or by any one or more of its Subsidiaries. For purposes of this
Agreement, "PERSON" means an individual, a corporation, a limited liability
company, a
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partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or any agency or instrumentality
thereof.
SECTION 1.3 Surrender and Payment. (a) Prior to the Effective Time,
Acquirer shall appoint an agent reasonably acceptable to the Company (the
"EXCHANGE AGENT") for the purpose of exchanging certificates representing
Company Shares (the "CERTIFICATES") for the Merger Consideration. Acquirer will
make available to the Exchange Agent, as needed, the Merger Consideration to be
paid in respect of the Company Shares. Promptly after the Effective Time,
Acquirer will send, or will cause the Exchange Agent to send, to each holder of
record at the Effective Time of Company Shares a letter of transmittal for use
in such exchange (which shall specify that the delivery shall be effected, and
risk of loss and title shall pass, only upon proper delivery of the Certificates
to the Exchange Agent) in such form as the Company and Acquirer may reasonably
agree, for use in effecting delivery of Company Shares to the Exchange Agent.
(b) Each holder of Company Shares that have been converted into a right to
receive the Merger Consideration, upon surrender to the Exchange Agent of a
Certificate, together with a properly completed letter of transmittal, will be
entitled to receive the Merger Consideration in respect of the Company Shares
represented by such Certificate. Until so surrendered, each such Certificate
shall, after the Effective Time, represent for all purposes only the right to
receive such Merger Consideration.
(c) If any portion of the Merger Consideration is to be paid to a Person
other than the Person in whose name the Certificate is registered, it shall be a
condition to such payment that the Certificate so surrendered shall be properly
endorsed or otherwise be in proper form for transfer and that the Person
requesting such payment shall pay to the Exchange Agent any transfer or other
taxes required as a result of such payment to a Person other than the registered
holder of such Certificate or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no further registration of
transfers of Company Shares. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall be canceled and exchanged for
the consideration provided for, and in accordance with the procedures set forth,
in this Article I.
(e) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 1.3(a) that remains unclaimed by the holders of
Company Shares one year after the Effective Time shall be returned to Acquirer,
upon demand, and any such holder who has not exchanged such holder's Company
Shares for the Merger Consideration in accordance with this Section 1.3 prior to
that time shall thereafter look only to Acquirer for payment of the Merger
Consideration in respect of such holder's Company Shares. Notwithstanding the
foregoing, Acquirer shall not be liable to any holder of Company Shares for any
amount paid to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(f) No dividends or other distributions with respect to Acquirer Common
Stock issued in the Merger shall be paid to the holder of any unsurrendered
Certificates until such Certificates are surrendered as provided in this Section
1.3. Subject to the effect of applicable laws, following such surrender, there
shall be paid, without interest, to the record holder of the Acquirer Common
Stock issued in exchange therefor (i) at the time of such surrender, all
dividends and other distributions payable in respect of such Acquirer Common
Stock with a record date after the Effective Time and a payment date on or prior
to the date of such surrender and not previously paid and (ii) at the
appropriate payment date, the dividends or other distributions payable with
respect to such Acquirer Common Stock with a record date after the Effective
Time but with a payment date subsequent to such surrender. For purposes of
dividends or other distributions in respect of Acquirer Common
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Stock, all Acquirer Common Stock to be issued pursuant to the Merger (but not
options therefor issued pursuant to Section 1.4 unless actually exercised at the
Effective Time) shall be entitled to dividends pursuant to the immediately
preceding sentence as if issued and outstanding as of the Effective Time.
SECTION 1.4 Stock Options. (a) At the Effective Time, each outstanding
option to purchase Company Shares (a "COMPANY STOCK OPTION") granted under the
Company's plans identified in the Schedule 1.4 as being the only compensation or
benefit plans or agreements pursuant to which Company Shares may be issued
(collectively, the "COMPANY STOCK OPTION PLANS"), whether vested or not vested,
shall be deemed assumed by Acquirer and shall thereafter be deemed to constitute
an option to acquire, on the same terms and conditions (including any provisions
for acceleration) as were applicable under such Company Stock Option prior to
the Effective Time (in accordance with the past practice of the Company with
respect to interpretation and application of such terms and conditions), the
number (rounded down to the nearest whole number) of shares of Acquirer Common
Stock determined by multiplying (x) the number of Company Shares subject to such
Company Stock Option immediately prior to the Effective Time by (y) the Exchange
Ratio, at a price per share of Acquirer Common Stock (rounded up to the nearest
whole cent) equal to (A) the exercise price per Company Share otherwise
purchasable pursuant to such Company Stock Option divided by (B) the Exchange
Ratio. The parties intend that the conversion of the Company Stock Options
hereunder will meet the requirements of Section 424(a) of the Code and this
Section 1.4(a) shall be interpreted consistent with such intention. Subject to
the terms of the Company Stock Options and the documents governing such Company
Stock Options, the Merger will not terminate or accelerate any Company Stock
Option or any right of exercise, vesting or repurchase relating thereto with
respect to Acquirer Common Stock acquired upon exercise of such assumed Company
Stock Option. Holders of Company Stock Options will not be entitled to acquire
Company Shares after the Merger. In addition, prior to the Effective Time, the
Company will make any amendments to the terms of such stock option or
compensation plans or arrangements that are necessary to give effect to the
transactions contemplated by this Section 1.4. Promptly following the Effective
Time, Acquirer will issue to each holder of an outstanding Company Stock Option
a document evidencing the foregoing assumption of such Company Stock Option by
Acquirer.
(b) Acquirer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Acquirer Common Stock for delivery
pursuant to the terms set forth in this Section 1.4.
(c) At the Effective Time, each outstanding purchase right with respect to
all open offering periods under the Company's Employee Stock Purchase Plan (each
an "ASSUMED PURCHASE RIGHT") shall be assumed by Parent. Each Assumed Purchase
Right shall continue to have, and be subject to, the terms and conditions set
forth in the Company's Employee Stock Purchase Plan and the documents governing
the Assumed Purchase Right, except that the purchase price of such shares of
Acquirer Common Stock for each respective purchase date under each Assumed
Purchase Right shall be the lower of (i) the quotient determined by dividing
eighty-five percent (85%) of the fair market value of the Company Common Stock
on the offering date of each assumed offering period by the Exchange Ratio or
(ii) eighty-five percent (85%) of the fair market value of the Acquirer Common
Stock on each purchase date of each assumed offering period occurring after the
Effective Time (with the number of shares rounded down to the nearest whole
share and the purchase price rounded up to the nearest whole cent). The Assumed
Purchase Rights shall be exercised at such times following the Effective Time as
set forth in the Company's Employee Stock Purchase Plan, and each participant
shall, accordingly, be issued shares of Acquirer Common Stock at such times. The
Company's Employee Stock Purchase Plan shall terminate with the exercise of the
last Assumed Purchase Right, and no additional purchase rights shall be granted
under the Company's Employee Stock Purchase Plan following the Effective Time.
Acquirer agrees that from and after the Effective
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Time, employees of the Company may participate in Acquirer's employee stock
purchase plan, subject to the terms and conditions of such plan.
(d) At the Effective Time, each award or account (including restricted
stock, stock equivalents and stock units, but excluding Company Stock Options
and Assumed Purchase Rights) outstanding as of the date hereof ("COMPANY AWARD")
that has been established, made or granted under any employee incentive or
benefit plans, programs or arrangements and non-employee director plans
maintained by the Company on or prior to the date hereof which provide for
grants of equity-based awards or equity-based accounts shall be amended or
converted into a similar instrument of Acquirer, in each case with such
adjustments to the terms and conditions of such Company Awards as are
appropriate to preserve the value inherent in such Company Awards with no
detrimental effects on the holders thereof. The other terms and conditions of
each Company Award, and the plans or agreements under which they were issued,
shall continue to apply in accordance with their terms and conditions, including
any provisions for acceleration (as such terms and conditions have been
interpreted and applied by the Company in accordance with its past practice).
(e) At the Effective Time, Acquirer shall file with the Securities and
Exchange Commission (the "SEC") a registration statement on an appropriate form
or a post-effective amendment to a previously filed registration statement under
the Securities Act of 1933, as amended (the "1933 ACT"), with respect to the
Acquirer Common Stock subject to options and other equity-based awards issued
pursuant to this Section 1.4, and shall use all commercially reasonable efforts
to maintain the current status of the prospectus contained therein, as well as
comply with any applicable state securities or "blue sky" laws, for so long as
such options or other equity-based awards remain outstanding.
SECTION 1.5 Adjustments. If at any time during the period between the date
of this Agreement and the Effective Time, any change in the outstanding shares
of capital stock of Acquirer or the Company (other than as contemplated in
Section 3.2 or Section 4.2 or permitted under this Agreement) shall occur,
including, without limitation, by reason of any reclassification,
recapitalization, stock split or combination, exchange or readjustment of
shares, or any stock dividend thereon with a record date during such period, the
Merger Consideration shall be appropriately adjusted.
SECTION 1.6 Fractional Shares. (a) No fractional shares of Acquirer Common
Stock shall be issued in the Merger. All fractional shares of Acquirer Common
Stock that a holder of Company Shares would otherwise be entitled to receive as
a result of the Merger shall be aggregated and if a fractional share results
from such aggregation, such holder shall be entitled to receive from the
Exchange Agent, in lieu thereof, an amount in cash determined by multiplying the
closing price of one share of Acquirer Common Stock on the Nasdaq National
Market ("NNM") on the Closing Date by the fraction of a share of Acquirer Common
Stock to which such holder would otherwise have been entitled. The parties
acknowledge that payment of the cash consideration in lieu of issuing fractional
shares was not separately bargained for consideration but merely represents a
mechanical rounding off for purposes of simplifying the corporate and accounting
problems that would otherwise be caused by the issuance of fractional shares. As
promptly as practicable after the determination of the amount of cash, if any,
to be paid to holders of fractional interests, the Exchange Agent shall so
notify Acquirer, and Acquirer shall deposit or cause to be deposited with the
Exchange Agent such amount and shall cause the Exchange Agent to make available
such amounts to such holders of fractional interests without interest.
SECTION 1.7 Withholding Rights. Each of the Surviving Corporation and
Acquirer shall be entitled to deduct and withhold from the consideration
otherwise payable to any person pursuant to this Article I such amounts as it is
required to deduct and withhold with respect to the making of such payment under
any provision of federal, state, local or foreign tax law. To the extent that
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amounts are so withheld by the Surviving Corporation or Acquirer, as the case
may be, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the Company Shares in respect of
which such deduction and withholding was made by the Surviving Corporation or
Acquirer, as the case may be.
SECTION 1.8 Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Exchange Agent, the posting by such person of a bond, in such reasonable
amount as the Exchange Agent may direct, as indemnity against any claim that may
be made against it, the Surviving Corporation or the Exchange Agent with respect
to such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration to be paid in respect
of the Company Shares represented by such Certificate as contemplated by this
Article I.
ARTICLE II
CERTAIN GOVERNANCE MATTERS
SECTION 2.1 Acquirer Board of Directors. At the Effective Time, Acquirer
shall cause the Board of Directors of Acquirer to consist of either five or
seven directors (with the total number of directors to be established by
Acquirer), a majority of one of whom shall be directors of Acquirer prior to the
Effective Time and the remainder of whom shall be directors designated by the
Company after consultation with the Acquirer (the "COMPANY BOARD DESIGNEES").
SECTION 2.2 Acquirer Officers. The officers of the Acquirer after the
Effective Time shall be determined by the Board of Directors of the Acquirer
immediately after the Effective Time, following consultation between the
respective Chief Executive Officers of Acquirer and the Company, except that Mr.
Kenneth F. Potashner shall be the Chairman and Chief Executive Officer of
Acquirer and Mr. William J. Schroeder shall be offered the position of President
and Chief Operating Officer of Acquirer, to hold office from and after the
Effective Time (assuming such individuals desire to continue in such positions
as of such date) until their respective successors are duly appointed and
qualify in the manner provided in the By-Laws of the Acquirer or as otherwise
provided by law or their earlier resignation or removal.
SECTION 2.3 Certificate of Incorporation of the Surviving Corporation. The
certificate of incorporation of Merger Subsidiary in effect at the Effective
Time shall be the certificate of incorporation of the Surviving Corporation
until amended in accordance with applicable law.
SECTION 2.4 By-Laws of the Surviving Corporation. Subject to Section 6.3,
the by-laws of Merger Subsidiary in effect at the Effective Time shall be the
by-laws of the Surviving Corporation until amended in accordance with applicable
law.
SECTION 2.5 Directors and Officers of the Surviving Corporation. Subject
to Section 6.3, from and after the Effective Time, until successors are duly
elected or appointed and qualified in accordance with applicable law, (a) the
directors of Merger Subsidiary at the Effective Time shall be the directors of
the Surviving Corporation, and (b) the officers of the Company at the Effective
Time shall be the officers of the Surviving Corporation.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in a letter delivered by the Company to Acquirer
immediately prior to the execution of this Agreement and signed by a duly
authorized officer of the Company (the "COMPANY DISCLOSURE LETTER"), the Company
represents and warrants to Acquirer as follows:
SECTION 3.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own,
lease and operate its respective properties and to carry on its business as now
being conducted.
The Company is qualified to do business as a foreign corporation and is in
good standing under the laws of each state or other jurisdiction in which the
nature of its business requires such qualification, except where the failure to
be so qualified or in good standing which, taken together with all other such
failures, would not have a Material Adverse Effect on the Company. For purposes
of this Agreement, the term "MATERIAL ADVERSE EFFECT" means, when used in
connection with the Company or Acquirer, as the case may be, any change,
violation, inaccuracy, circumstance or effect that is materially adverse to the
business, properties, assets (including intangible assets), liabilities,
capitalization or financial condition of either party and its Subsidiaries,
taken as a whole, as the case may be; provided, however, that the following
shall not be taken into account in determining whether there has been or could
or would be a "Material Adverse Effect" on or with respect to a party: (i) any
occurrences relating to the economy of the United States in general or the
economies in which such entity operates or the multimedia and connectivity
products for personal computer industry in general and not specifically relating
to such party, (ii) the delay or cancellation of orders for such party's
products from customers or distributors (or other resellers) directly
attributable to the announcement of this Agreement or the pendency of the
Merger, (iii) the lack of or delay in availability of components or raw
materials from such party's suppliers directly attributable to the announcement
of this Agreement or the pendency of the Merger, (iv) any litigation brought or
threatened against a party or any officer or member of the Board of Directors of
such party in respect of this Agreement or the Merger (including any stockholder
class action litigation arising from allegations or a breach of fiduciary duty
relating to this Agreement), (v) the loss of employees as a result of reductions
in force that are mutually agreed upon by the Company and Acquirer, (vi) the
loss of employees with titles of director or officer in an amount not in excess
of fifteen percent (15%) of the number of such employees as of the date of this
Agreement or the loss of employees with titles other than director or officer in
an amount not in excess of fifteen percent (15%) of the number of such employees
as of the date of this Agreement (excluding in each case employees lost pursuant
to reductions in force described in clause (v) and in the case of employees with
titles of director or officer losses resulting solely from a failure by Acquirer
to offer commercially reasonable retention incentives to such employees prior to
the Closing), and (vii) changes in trading prices for such party's securities.
The Company has made available to Acquirer true and complete copies of the
Company's certificate of incorporation and by-laws, as amended to the date
hereof.
SECTION 3.2 Capitalization. The authorized capital stock of the Company
consists of 75,000,000 Company Shares and 8,000,000 shares of Preferred Stock,
par value $.001 per share, all of which shares of Preferred Stock have not been
designated. As of May 31, 1999, (i) 35,573,024 Company Shares were issued and
outstanding, (ii) no shares of Preferred Stock were fissued and outstanding,
(iii) no Company Shares were held in the treasury of the Company or any of its
Subsidiaries, and (iv) 9,891,497 Company Shares are reserved for issuance
pursuant to the Company Option Plans, of which stock options to purchase
8,650,905 Company Shares have been granted (of
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which options to purchase an aggregate of 1,954,324 shares were exercisable). As
of May 31, 1999, 1,050,000 Company Shares were reserved under the Company's
Employee Stock Purchase Plan, of which 649,422 have been granted. All the
outstanding shares of the Company's capital stock are, and all Company Shares
that may be issued pursuant to the exercise of outstanding employee stock
options will be, when issued in accordance with the terms thereof, duly
authorized, validly issued, fully paid and non-assessable. Except as disclosed
in the Company Disclosure Letter and except for changes since the close of
business on May 31, 1999 resulting from the exercise of employee stock options
outstanding on such date or options granted as permitted by Section 5.1, there
are outstanding (x) no shares of capital stock or other voting securities of the
Company, (y) no securities of the Company convertible into or exchangeable for
shares of capital stock or voting securities of the Company, and (z) no options,
warrants or other rights to acquire from the Company, and no preemptive or
similar rights, subscription or other rights, convertible securities,
agreements, arrangements or commitments of any character, relating to the
capital stock of the Company, obligating the Company to issue, transfer or sell,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company or obligating
the Company to grant, extend or enter into any such option, warrant,
subscription or other right, convertible security, agreement, arrangement or
commitment (the items in clauses (x), (y) and (z) being referred to collectively
as the "COMPANY SECURITIES"). There are no outstanding obligations of the
Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any Company Securities. There are not as of the date hereof and there will not
be at the Effective Time any stockholder agreements, voting trusts or other
agreements or understandings to which the Company or any of its Subsidiaries is
a party or by which it is bound relating to the voting of any shares of the
capital stock of the Company or any agreements, arrangements, or other
understandings to which the Company or any of its Subsidiaries is a party or by
which it is bound that will limit in any way the solicitation of proxies by or
on behalf of the Company from, or the casting of votes by, the stockholders of
the Company with respect to the Merger.
SECTION 3.3 Authority. The Company has full corporate power and authority
to execute and deliver this Agreement and, subject to the requisite approval of
its stockholders, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized and
approved by the Company's Board of Directors, and other than the requisite
approval by its stockholders, no other corporate proceedings are necessary to
authorize this Agreement or the consummation of the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by the
Company and, assuming this Agreement constitutes a legal, valid and binding
agreement of the other parties hereto, it constitutes a legal, valid and binding
agreement of the Company, enforceable against it in accordance with its terms,
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally and (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.
SECTION 3.4 Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation of the Merger
by the Company require no consent of, or filing with, any governmental body,
agency, official or authority other than (a) the filing of a certificate of
merger in accordance with Delaware Law, (b) compliance with any applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR ACT"), (c) compliance with any applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder (the "EXCHANGE ACT"), (d) compliance with any applicable requirements
of the 1933 Act and state securities laws, and (e) other actions or filings
which if not taken or made would not, individually or in the aggregate, have a
Material Adverse Effect on the Company.
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SECTION 3.5 Non-Contravention. The execution, delivery and performance by
the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby do not and will not (a) assuming compliance
with the matters referred to in Section 3.3, contravene or conflict with the
certificate of incorporation or by-laws of the Company, (b) assuming compliance
with the matters referred to in Section 3.4, contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to the Company or any of
its Subsidiaries, (c) constitute a default under or give rise to a right of
termination, cancellation or acceleration of any right or obligation of the
Company or any of its Subsidiaries or to a loss of any benefit to which the
Company or any of its Subsidiaries is entitled under any provision of any
agreement, contract or other instrument binding upon the Company or any of its
Subsidiaries or any license, franchise, permit or other similar authorization
held by the Company or any of its Subsidiaries, or (d) result in the creation or
imposition of any Lien on any asset of the Company or any of its Subsidiaries,
except for such contraventions, conflicts or violations referred to in clause
(b) or defaults, rights of termination, cancellation or acceleration, or losses
or Liens referred to in clause (c) or (d) that would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. For purposes of this
Agreement, "LIEN" means, with respect to any asset of the Company or Acquirer,
as the case may be, any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind in respect of such asset other than any such mortgage,
lien, pledge, charge, security interest or encumbrance (i) for Taxes (as defined
in Section 3.13) not yet due or being contested in good faith (and for which
adequate accruals or reserves have been established on the Company Balance Sheet
or the Acquirer Balance Sheet (as such terms are defined in Sections 3.8 and
4.8, respectively), as the case may be) or (ii) which is a carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other like lien
arising in the ordinary course of business. Except as disclosed in the Company
Disclosure Letter, neither the Company nor any Subsidiary of the Company is a
party to any agreement that expressly limits the ability of the Company or any
Subsidiary of the Company, or would limit Acquirer or any Subsidiary of Acquirer
after the Effective Time, to compete in or conduct any line of business or
compete with any Person or in any geographic area or during any period of time
except to the extent that any such limitation, individually or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect on Acquirer
after the Effective Time.
SECTION 3.6 Subsidiaries. Each of the Company's Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted. Each of the Subsidiaries is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the nature
of its activities makes such qualification necessary, except where the failure
to be so qualified or in good standing would not have a Material Adverse Effect
on the Company. Exhibit 21 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (the "1998 10-K"), as filed with SEC, lists
the only Subsidiaries of the Company at December 31, 1998, and all Subsidiaries
of the Company thereafter formed or acquired are listed in the Company
Disclosure Letter. All of the outstanding shares of capital stock of the
Subsidiaries are validly issued, fully paid and nonassessable and, other than
directors' qualifying shares in the case of foreign Subsidiaries, are owned by
the Company or by a wholly owned Subsidiary of the Company free and clear of all
material liens, claims, charges or encumbrances, and there are no irrevocable
proxies with respect to such shares. Except as set forth in the Company
Disclosure Letter and except for the capital stock of its Subsidiaries, the
Company does not own, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, joint venture, limited
liability company or other entity which is material to the business of the
Company and its Subsidiaries, taken as a whole. There are no material
restrictions on the Company to vote the stock of any of its Subsidiaries.
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SECTION 3.7 SEC Filings. (a) The Company has made available to Acquirer
(i) its annual reports on Form 10-K for its fiscal years ended December 31,
1996, 1997 and 1998, (ii) its quarterly reports on Form 10-Q for its quarter
ended March 31, 1999, (iii) its proxy or information statements relating to
meetings of, or actions taken without a meeting by, the stockholders of the
Company held since December 31, 1998, and (iv) all of its other reports,
statements, schedules and registration statements filed with the SEC since
December 31, 1998 (the documents referred to in this Section 3.7(a) being
referred to collectively as the "COMPANY SEC DOCUMENTS"). The Company's
quarterly report on Form 10-Q for its fiscal quarter ended March 31, 1998 is
referred to herein as the "COMPANY 10-Q."
(b) As of its filing date, each Company SEC Document complied as to form in
all material respects with the applicable requirements of the Exchange Act and
the 1933 Act.
(c) As of its filing date, each Company SEC Document filed pursuant to the
Exchange Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
(d) Each such registration statement, as amended or supplemented, if
applicable, filed pursuant to the 1933 Act as of the date such statement or
amendment became effective did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
SECTION 3.8 Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company (including any related notes and schedules) included in its annual
reports on Form 10-K and the quarterly report on Form 10-Q referred to in
Section 3.7 fairly present in all material respects, in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent basis
(except as may be indicated in the notes thereto), the consolidated financial
position of the Company and its consolidated Subsidiaries as of the dates
thereof and their consolidated results of operations and changes in financial
position for the periods then ended (subject to normal year-end adjustments and
the absence of notes in the case of any unaudited interim financial statements).
For purposes of this Agreement, "COMPANY BALANCE SHEET" means the consolidated
balance sheet of the Company as of March 31, 1999 set forth in the Company 10-Q
and "COMPANY BALANCE SHEET DATE" means March 31, 1999.
SECTION 3.9 Disclosure Documents. (a) The joint proxy statement of the
Company and Acquirer relating to the meetings of stockholders of the Company and
Acquirer contemplated by Section 7.3 and prospectus of Acquirer relating to the
shares of Acquirer Common Stock to be issued in connection with the Merger (the
"JOINT PROXY STATEMENT/PROSPECTUS") to be filed with the SEC in connection with
the Merger and the registration statement on Form S-4 of Acquirer (the "FORM
S-4") to be filed under the 1933 Act relating to the issuance of Acquirer Common
Stock in the Merger, and any amendments or supplements thereto, will, when
filed, subject to the last sentence of Section 3.9(b), comply as to form in all
material respects with the requirements of the Exchange Act and the 1933 Act.
(b) Neither the Joint Proxy Statement/Prospectus to be filed with the SEC,
nor any amendment or supplement thereto, will, at the date the Joint Proxy
Statement/Prospectus or any such amendment or supplement is first mailed to
stockholders of Company or at the time such stockholders vote on the adoption
and approval of this Agreement and the transactions contemplated hereby, contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Neither the Form S-4
nor any amendment or supplement thereto will at the time it
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becomes effective under the 1933 Act or at the Effective Time contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading. No
representation or warranty is made by the Company in this Section 3.9 with
respect to statements made or incorporated by reference therein based on
information supplied by Acquirer for inclusion or incorporation by reference in
the Joint Proxy Statement/Prospectus or the Form S-4.
SECTION 3.10 Absence of Certain Changes. Except as set forth in the
Company Disclosure Letter, since the Company Balance Sheet Date, the Company and
its Subsidiaries have conducted their business in the ordinary course consistent
with past practice and there has not been:
(a) any event, occurrence or development of a state of circumstances
or facts which has had or reasonably would be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Company or
any repurchase, redemption or other acquisition by the Company or any of
its Subsidiaries of any outstanding shares of capital stock or other
securities of, or other ownership interests in, the Company or any of its
Subsidiaries, except for the repurchase of shares of employees at cost upon
termination of employment with the Company;
(c) any amendment of any material term of any outstanding security of
the Company or any of its Subsidiaries;
(d) any transaction or commitment made, or any contract, agreement or
settlement entered into, by (or judgment, order or decree affecting) the
Company or any of its Subsidiaries relating to its assets or business
(including the acquisition or disposition of any assets) or any
relinquishment by the Company or any of its Subsidiaries of any contract or
other right, in either case, material to the Company and its Subsidiaries
taken as a whole, other than transactions, commitments, contracts,
agreements or settlements (including without limitation settlements of
litigation and tax proceedings) in the ordinary course of business
consistent with past practice, those contemplated by this Agreement, or as
agreed to in writing by Acquirer;
(e) any change in any method of accounting or accounting practice
(other than any change for tax purposes) by the Company or any of its
Subsidiaries, except for any such change which is not significant or which
is required by reason of a concurrent change in GAAP; or
(f) any (i) grant of any severance or termination pay to (or amendment
to any such existing arrangement with) any director, officer or employee of
the Company or any of its Subsidiaries, (ii) entering into of any
employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or
employee of the Company or any of its Subsidiaries, (iii) increase in
benefits payable under any existing severance or termination pay policies
or employment agreements or (iv) increase in (or amendments to the terms
of) compensation, bonus or other benefits payable to directors, officers or
employees of the Company or any of its Subsidiaries, other than in the
ordinary course of business consistent with past practice, as permitted by
this Agreement, or as agreed to in writing by Acquirer.
SECTION 3.11 No Undisclosed Material Liabilities. There are no liabilities
of the Company or any Subsidiary of the Company of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, other
than:
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(a) liabilities disclosed or provided for in the Company Balance Sheet
or in the notes thereto;
(b) liabilities which in the aggregate would not reasonably be
expected to have a Material Adverse Effect on the Company;
(c) liabilities disclosed in the Company SEC Documents filed prior to
the date hereof or set forth in the Company Disclosure Letter; and
(d) liabilities under this Agreement.
SECTION 3.12 Litigation. Except as disclosed in the Company SEC Documents
filed prior to the date hereof, there is no action, suit, investigation or
proceeding pending against, or to the knowledge of the Company threatened
against or affecting, the Company or any of its Subsidiaries or any of their
respective properties before any court or arbitrator or any governmental body,
agency or official which would reasonably be expected to have a Material Adverse
Effect on the Company.
SECTION 3.13 Taxes. Except as set forth in the Company Balance Sheet
(including the notes thereto) or as otherwise set forth in the Company
Disclosure Letter and except as would not, individually or in the aggregate,
have a Material Adverse Effect on the Company, (i) all Company Tax Returns
required to be filed with any taxing authority by, or with respect to, the
Company and its Subsidiaries have been filed in accordance with all applicable
laws; (ii) the Company and its Subsidiaries have timely paid all Taxes shown as
due and payable on the Company Tax Returns that have been so filed, and, as of
the time of filing, the Company Tax Returns correctly reflected the facts
regarding the income, business, assets, operations, activities and the status of
the Company and its Subsidiaries (other than Taxes which are being contested in
good faith and for which adequate reserves are reflected on the Company Balance
Sheet); (iii) the Company and its Subsidiaries have made provision for all Taxes
payable by the Company and its Subsidiaries for which no Company Tax Return has
yet been filed; (iv) the charges, accruals and reserves for Taxes with respect
to the Company and its Subsidiaries reflected on the Company Balance Sheet are
adequate under GAAP to cover the Tax liabilities accruing through the date
thereof; (v) there is no action, suit, proceeding, audit or claim now proposed
or pending against or with respect to the Company or any of its Subsidiaries in
respect of any Tax where there is a reasonable possibility of an adverse
determination; and (vi) to the best of the Company's knowledge and belief,
neither the Company nor any of its Subsidiaries is liable for any Tax imposed on
any entity other than such Person, except as the result of the application of
Treas. Reg. Section 1.1502-6 (and any comparable provision of the tax laws of
any state, local or foreign jurisdiction) to the affiliated group of which the
Company is the common parent. For purposes of this Agreement, "TAXES" shall mean
any and all taxes, charges, fees, levies or other assessments, including,
without limitation, all net income, gross income, gross receipts, excise, stamp,
real or personal property, ad valorem, withholding, social security (or
similar), unemployment, occupation, use, service, service use, license, net
worth, payroll, franchise, severance, transfer, recording, employment, premium,
windfall profits, environmental (including taxes under Section 59A of the Code),
customs duties, capital stock, profits, disability, sales, registration, value
added, alternative or add-on minimum, estimated or other taxes, assessments or
charges imposed by any federal, state, local or foreign governmental entity and
any interest, penalties, or additions to tax attributable thereto. For purposes
of this Agreement, "TAX RETURNS" shall mean any return, report, form or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
SECTION 3.14 Employee Benefit Plans. (a) Prior to the date hereof, the
Company has provided Acquirer with a list (set forth in the Company Disclosure
Letter) identifying each material
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"employee benefit plan," as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974 ("ERISA"), each material employment, severance or
similar contract, plan, arrangement or policy applicable to any director, former
director, employee or former employee of the Company and each material plan or
arrangement (written or oral), providing for compensation, bonuses, profit-
sharing, stock option or other stock related rights or other forms of incentive
or deferred compensation, vacation benefits, insurance coverage (including any
self-insured arrangements), health or medical benefits, disability benefits,
workers' compensation, supplemental unemployment benefits, severance benefits
and post-employment or retirement benefits (including compensation, pension,
health, medical or life insurance benefits) which is maintained, administered or
contributed to by the Company and covers any employee or director or former
employee or director of the Company, or under which the Company has any
liability. Such material plans (excluding any such plan that is a "multiemployer
plan," as defined in Section 3(37) of ERISA) are referred to collectively herein
as the "COMPANY EMPLOYEE PLANS."
(b) Except as set forth in the Company Disclosure Letter, each Company
Employee Plan has been maintained in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations
(including but not limited to ERISA and the Code) which are applicable to such
Plan, except where failure to so comply would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
(c) Neither the Company nor any affiliate of the Company has incurred a
liability under Title IV of ERISA that has not been satisfied in full, and no
condition exists that presents a material risk to the Company or any affiliate
of the Company of incurring any such liability other than liability for premiums
due the Pension Benefit Guaranty Corporation (which premiums have been paid when
due).
(d) All Company Employee Plans that are intended to be qualified under
Section 401(a) of the Code have been the subject of determination, opinion,
notification or advisory letters from the Internal Revenue Service ("IRS") which
the Company has made available to Acquirer. Each such letter has the effect of
stating that each such Company Employee Plan is qualified and is exempt from
Federal income taxes under Section 501(a) of the Code. The remedial amendment
period with respect to each such Company Employee Plan has not expired for any
amendment to any such Company Employee Plan that was made on or after the date
of the application for the determination, opinion, notification or advisory
letter. No such determination, opinion, notification or advisory letter has been
revoked, nor has any event occurred since the date of the most recent such
letter that would adversely affect its qualification, other than as set forth in
the Company Disclosure Letter.
(e) Except as set forth in the Company Disclosure Letter, no director or
officer or other employee of the Company or any of its Subsidiaries will become
entitled to any retirement, severance or similar benefit or enhanced or
accelerated benefit (including any acceleration of vesting or lapse of
repurchase rights or obligations with respect to any employee stock option or
other benefit under any stock option plan or compensation plan or arrangement of
the Company) solely as a result of the transactions contemplated hereby.
(f) Except as set forth in the Company Disclosure Letter, no Company
Employee Plan provides post-retirement health and medical, life or other
insurance benefits for retired employees of the Company or any of its
Subsidiaries (other than benefit coverage mandated by applicable statute,
including benefits provided pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1985, as codified in Code section 4980B and ERISA sections
601 et seq., as amended from time to time ("COBRA")).
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(g) Except as set forth in the Company Disclosure Letter, there has been no
amendment to, written interpretation or announcement (whether or not written) by
the Company or any of its affiliates relating to, or change in employee
participation or coverage under, any Company Employee Plan which would increase
materially the expense of maintaining such Company Employee Plan above the level
of the expense incurred in respect thereof for the 12 months ended on the
Company Balance Sheet Date.
SECTION 3.15 Compliance with Laws. Neither the Company nor any of its
Subsidiaries is in violation of, or has since January 1, 1999 violated, any
applicable provisions of any laws, statutes, ordinances or regulations except
for any violations that, individually or in the aggregate, would not reasonably
be expected to have a Material Adverse Effect on the Company.
SECTION 3.16 Finders' or Advisors' Fees. Except for Lazard Freres & Co.
and Wasserstein Perella & Co., Inc., there is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of the Company or any of its Subsidiaries who might be entitled to any
fee or commission in connection with the transactions contemplated by this
Agreement.
Section 3.17 Environmental Matters. (a) Except with such exceptions as,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Material Adverse Effect on the Company, (i) no notice,
notification, demand, request for information, citation, summons, complaint or
order has been received by, and no investigation, action, claim, suit,
proceeding or review is pending or, to the knowledge of the Company or any of
its Subsidiaries, threatened by any Person against, the Company or any of its
Subsidiaries, and no penalty has been assessed against the Company or any of its
Subsidiaries, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) the Company and its Subsidiaries are and have
been in compliance with all Environmental Laws; and (iii) there are no
liabilities of or relating to the Company or any of its Subsidiaries relating to
or arising out of any Environmental Law of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is no
existing condition, situation or set of circumstances which could reasonably be
expected to result in such a liability.
(b) For purposes of this Section 3.17 and Section 4.17, the term
"ENVIRONMENTAL LAWS" means any federal, state, local and foreign statutes, laws
(including, without limitation, common law), judicial decisions, regulations,
ordinances, rules, judgments, orders, codes, injunctions, permits, governmental
agreements or governmental restrictions relating to human health and safety, the
environment or to pollutants, contaminants, wastes, or chemicals.
SECTION 3.18 Labor Matters. There are no controversies pending or, to the
best knowledge of each of the Company and its respective Subsidiaries,
threatened, between the Company or any of its Subsidiaries and any of their
respective employees, which controversies have or could reasonably be expected
to have a Material Adverse Effect on the Company. As of the date of this
Agreement, neither the Company nor any of its Subsidiaries is a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by the Company or its Subsidiaries nor does the Company or its
Subsidiaries know of any activities or proceedings of any labor union to
organize any such employees (i) as of the date of this Agreement and (ii) which,
as of the Closing Date, have or could reasonably be expected to have a Material
Adverse Effect on the Company and its Subsidiaries. As of the date of this
Agreement, neither the Company nor any of its Subsidiaries has any knowledge of
any strikes, slowdowns, work stoppages or lockouts, or threats thereof, by or
with respect to any employees of the Company or any of its Subsidiaries (x) as
of the date of this Agreement and (y) which, as of the Closing Date, have or
could reasonably be expected to have a Material Adverse Effect on the Company
and its Subsidiaries.
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SECTION 3.19 Title to Property. The Company and each of its Subsidiaries
has good and marketable title to all of its material properties and assets, free
and clear of all Liens, except for liens for taxes not yet due and payable and
such liens or other imperfections of title and use restrictions, if any, as do
not materially detract from the value of or interfere with the present use of
the property affected thereby or which, individually or in the aggregate, would
not have a Material Adverse Effect on the Company.
SECTION 3.20 Leaseholds. Neither the Company nor any of its Subsidiaries
has given or received notice of any material default under any material lease
under which the Company or any of its Subsidiaries is the lessee of real
property (each a "COMPANY LEASE" and collectively the "COMPANY LEASES") and, to
the knowledge of the Company, neither the Company nor any of its Subsidiaries
nor any other party thereto is in default in any material respect under any of
the Company Leases. All of the Company Leases are in full force and effect, and
are valid, binding and enforceable in accordance with their terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' or
lessors' rights generally and (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies. Except as set forth in the Company Disclosure Letter, neither the
Company nor any of its Subsidiaries has leased, subleased, licensed or assigned,
as the case may be, all or any portion of its leasehold interest under any
Company Lease to any person.
SECTION 3.21 Management Payments. Other than as set forth in the Company
Disclosure Letter, no employee or former employee of the Company will be
entitled to additional compensation or to the early vesting or acceleration of
payment of any compensation that arises out of or are related to the
consummation of the Merger and the transactions contemplated thereby.
SECTION 3.22 Intellectual Property. The Company or its Subsidiaries owns
each of the patents and patent applications referred to in the Company SEC
Documents and, except as set forth in the Company SEC Documents, (i) to the
knowledge of the Company, each of the Company and its Subsidiaries owns or
possesses, or could obtain ownership or possession of (on terms not materially
adverse to the consolidated financial position, stockholders' equity, or results
of operations of the Company and its Subsidiaries taken as a whole) adequate and
enforceable rights to use all other Intellectual Property (as defined below)
necessary for the conduct of their businesses, (ii) no claims are pending or, to
the knowledge of the Company, threatened that the Company or any Subsidiary is
infringing on or otherwise violating the rights of any Person with regard to any
Intellectual Property that, if the subject of an unfavorable decision, ruling or
finding, could reasonably be expected to (or, with respect to any pending patent
litigation, the Company does not believe will) have a Material Adverse Effect
and the Company knows of no basis therefor, and (iii) to the knowledge of the
Company, no person is infringing on or otherwise violating any right of the
Company or any Subsidiary with respect to any Intellectual Property owned by or
licensed to the Company or any Subsidiary. Except as set forth in the Company
SEC Documents, the Company has received no notice of potential indemnity claims
from customers based upon a notice of infringement any such customer has
received from a patent owner relating to an assertion of infringement of a
patent other than potential indemnity claims that individually or in the
aggregate would not reasonably be expected to have a Material Adverse Effect.
The Company's policy is to require that its employees execute agreements
assigning to the Company all rights such employees otherwise would have in
Intellectual Property developed by such employees while in the employ of the
Company.
For purposes of this Agreement, "INTELLECTUAL PROPERTY" shall mean, with
respect a Person, patents, copyrights, trademarks (registered and unregistered),
service marks, brand names, trade names, and registrations in any jurisdiction
of, and applications in any jurisdiction to register, the
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foregoing, technology, know-how, software, and tangible or intangible
proprietary information or materials and any other trade secrets related
thereto.
SECTION 3.23 Insurance. The insurance carried by the Company and its
Subsidiaries is in such types and amounts and covering such risks as are
consistent with customary practices and standards of companies engaged in
businesses and operations similar to those of the Company and its Subsidiaries.
Except as would not have a Material Adverse Effect on the Company, all such
insurance is in full force and effect and none of the Company nor any of its
Subsidiaries is in default thereunder. Except as would not have a Material
Adverse Effect on the Company, all claims thereunder have been filed in a due
and timely fashion. Except as would not have a Material Adverse Effect on the
Company, neither the Company nor any of its Subsidiaries has been notified in
writing of a refusal of any material insurance coverage relating to products
liability (including renewals of any such products liability coverage) by any
insurance carrier to which it has applied for insurance during the past three
years.
SECTION 3.24 Year 2000 Compliance. Except as would not reasonably be
expected to have a Material Adverse Effect on the Company, all of the Company's
Information Technology (as defined below) effectively addresses the Year 2000
Issues, and will not cause an interruption in the ongoing operations of the
Company's business on or after January 1, 2000. For purposes of this Agreement,
the term "INFORMATION TECHNOLOGY" shall mean and include all software, hardware,
firmware, telecommunications systems, network systems, embedded systems and
other systems, components and/or services that are owned or used by the Company
in the conduct of its business, and the term "YEAR 2000 ISSUES" shall mean the
question of whether product or software accurately processes and stores
date/time data (including, but not limited to calculating, comparing,
displaying, recording and sequencing operations involving date/time data)
during, from and into and between the twentieth and twenty-first centuries, and
the years 1999 and 2000, including correct processing of leap year data.
SECTION 3.25 Opinion of Financial Advisor. The Company has received the
opinion of Wasserstein Perella & Co., Inc. to the effect that, as of the date of
such opinion, the Exchange Ratio is fair from a financial point of view to the
holders of Company Shares (other than Acquirer or any of its Subsidiaries or
affiliates), and, as of the date hereof, such opinion has not been withdrawn.
SECTION 3.26 Tax Treatment. Neither the Company nor, to the Company's
knowledge, any of its affiliates has taken or agreed to take any action or is
aware of any fact or circumstance that would prevent the Merger from qualifying
as a reorganization within the meaning of Section 368 of the Code (a "368
REORGANIZATION").
SECTION 3.27 Takeover Statutes. The Board of Directors of the Company has
taken the necessary action to make inapplicable Section 203 of the Delaware Law
and any other applicable antitakeover or similar statute or regulation to this
Agreement and the transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ACQUIRER
Except as disclosed in a letter delivered by Acquirer to the Company
immediately prior to the execution of this Agreement and signed by a duly
authorized officer of Acquirer (the "ACQUIRER DISCLOSURE LETTER"), Acquirer
represents and warrants to the Company as follows (provided, that the
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following representations and warranties relating to Merger Subsidiary shall
instead be made as of such time as Merger Subsidiary becomes a party hereto):
SECTION 4.1 Organization and Qualification. Each of Acquirer and Merger
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite corporate
power and authority to own, lease and operate its respective properties and to
carry on its business as now being conducted.
Each of Acquirer and Merger Subsidiary is qualified to do business as a
foreign corporation and is in good standing under the laws of each state or
other jurisdiction in which the nature of its business requires such
qualification, except where the failure to be so qualified or in good standing
which, taken together with all other such failures, would not have a Material
Adverse Effect on Acquirer.
Since the date of its incorporation, Merger Subsidiary has not engaged in
any activities other than in connection with or as contemplated by this
Agreement. Acquirer has made available to the Company true and complete copies
of Acquirer's and Merger Subsidiary's certificate of incorporation and by-laws,
as amended to the date hereof.
SECTION 4.2 Capitalization. The authorized capital stock of Acquirer
consists of 120,000,000 shares of Acquirer Common Stock and 5,000,000 shares of
preferred stock, par value $.0001 per share, of which there are designated
500,000 shares of Series A Participating Preferred Stock and the remaining
shares of which have not been designated. As of May 31, 1999, (i) 52,752,810
shares of Acquirer Common Stock were issued and outstanding, (ii) no shares of
Series A Participating Preferred Stock (all of which are reserved for issuance
in accordance with the Rights Agreement (the "ACQUIRER RIGHTS AGREEMENT") dated
as of May 14, 1997, between Acquirer and The First National Bank of Boston, as
Rights Agent, pursuant to which Acquirer has issued Rights (the "ACQUIRER
RIGHTS") to purchase Series A Participating Preferred Stock) were issued and
outstanding, and (iii) no shares of Acquirer Common Stock were held in the
treasury of Acquirer or any of its Subsidiaries. As of June 21, 1999, 30,734,468
shares of Acquirer Common Stock are reserved for issuance pursuant to Acquirer's
plans identified in the Acquirer Disclosure Letter as being the only
compensation or benefit plans or agreements pursuant to which shares of Acquirer
Common Stock may be issued (collectively, the "ACQUIRER STOCK OPTION PLANS"), of
which stock options to purchase 15,730,732 shares of Acquirer Common Stock have
been granted and are outstanding (of which options to purchase an aggregate of
6,283,522 shares were exercisable). All the outstanding shares of Acquirer's
capital stock are, and all shares of Acquirer Common Stock that may be issued
pursuant to the exercise of outstanding employee stock options and convertible
securities will be, when issued in accordance with the terms thereof, duly
authorized, validly issued, fully paid and non-assessable. Except as disclosed
in the Acquirer Disclosure Letter and except for changes since the close of
business on May 31, 1999, there are outstanding (x) no shares of capital stock
or other voting securities of Acquirer, (y) no securities of Acquirer
convertible into or exchangeable for shares of capital stock or voting
securities of Acquirer, and (z) no options, warrants or other rights to acquire
from Acquirer, and no preemptive or similar rights, subscription or other
rights, convertible securities, agreements, arrangements or commitments of any
character, relating to the capital stock of Acquirer, obligating Acquirer to
issue, transfer or sell, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of
Acquirer or obligating Acquirer to grant, extend or enter into any such option,
warrant, subscription or other right, convertible security, agreement,
arrangement or commitment (the items in clauses (x), (y) and (z) being referred
to collectively as the "ACQUIRER SECURITIES"). Except as set forth in the
Acquirer Disclosure Letter, there are no outstanding obligations of Acquirer or
any of its Subsidiaries to repurchase, redeem or otherwise acquire any Acquirer
Securities. There are not as of the date hereof and there will not be at the
Effective Time any stockholder agreements, voting trusts or other
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agreements or understandings to which Acquirer or any of its Subsidiaries is a
party or by which it is bound relating to the voting of any shares of the
capital stock of Acquirer or any agreements, arrangements, or other
understandings to which Acquirer or any of its Subsidiaries is a party or by
which it is bound that will limit in any way the solicitation of proxies by or
on behalf of Acquirer from, or the casting of votes by, the stockholders of
Acquirer with respect to the Merger.
SECTION 4.3 Authority. Each of Acquirer and Merger Subsidiary has full
corporate power and authority to execute and deliver this Agreement and, subject
to the requisite approval of its stockholders, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized and approved by the respective Boards of Directors of Acquirer and
Merger Subsidiary, and except for any required approval by Acquirer's
stockholders of (i) the Merger, (ii) the amendment of Acquirer's certificate of
incorporation to increase the number of authorized shares of Acquirer Common
Stock to 175,000,000, (iii) the issuance of Acquirer Common Stock in connection
with the Merger, and (iv) the election of the Company Board Designees to
Acquirer's Board of Directors (clauses (i), (ii), (iii) and (iv) being the
"ACQUIRER STOCKHOLDER APPROVAL"), no other corporate proceedings are necessary
to authorize this Agreement or the consummation of the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
Acquirer and Merger Subsidiary and, assuming this Agreement constitutes a legal,
valid and binding agreement of the other parties hereto, it constitutes a legal,
valid and binding agreement of Acquirer, enforceable against it in accordance
with its terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief or other
equitable remedies.
SECTION 4.4 Governmental Authorization. The execution, delivery and
performance by Acquirer and Merger Subsidiary of this Agreement and the
consummation of the Merger by Acquirer and Merger Subsidiary require no consent
of, or filing with, any governmental body, agency, official or authority other
than (a) the filing of a certificate of merger in accordance with Delaware Law,
(b) compliance with any applicable requirements of the HSR Act, (c) compliance
with any applicable requirements of the Exchange Act, (d) compliance with any
applicable requirements of the 1933 Act and state securities laws, and (e) other
actions or filings which if not taken or made would not, individually or in the
aggregate, have a Material Adverse Effect on Acquirer.
SECTION 4.5 Non-Contravention. The execution, delivery and performance by
Acquirer and Merger Subsidiary of this Agreement and the consummation by
Acquirer and Merger Subsidiary of the transactions contemplated hereby do not
and will not (a) assuming compliance with the matters referred to in Section
4.3, contravene or conflict with the certificate of incorporation or by-laws of
Acquirer or Merger Subsidiary, (b) assuming compliance with the matters referred
to in Section 4.4, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to Acquirer or any of its Subsidiaries, (c) constitute a
default under or give rise to a right of termination, cancellation or
acceleration of any right or obligation of Acquirer or any of its Subsidiaries
or to a loss of any benefit to which Acquirer or any of its Subsidiaries is
entitled under any provision of any agreement, contract or other instrument
binding upon Acquirer or any of its Subsidiaries or any license, franchise,
permit or other similar authorization held by Acquirer or any of its
Subsidiaries, or (d) result in the creation or imposition of any Lien on any
asset of Acquirer or any of its Subsidiaries, except for such contraventions,
conflicts or violations referred to in clause (b) or defaults, rights of
termination, cancellation or acceleration, or losses or Liens referred to in
clause (c) or (d) that would not, individually or in the aggregate, have a
Material Adverse Effect on Acquirer. Except as disclosed in the Acquirer
Disclosure Letter, neither Acquirer nor any Subsidiary of Acquirer is a party to
any
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agreement that expressly limits the ability of Acquirer or any Subsidiary of
Acquirer to compete in or conduct any line of business or compete with any
Person or in any geographic area or during any period of time except to the
extent that any such limitation, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on Acquirer after the
Effective Time.
SECTION 4.6 Subsidiaries. Each of Acquirer's Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted. Each of the Subsidiaries is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the nature
of its activities makes such qualification necessary, except where the failure
to be so qualified or in good standing would not have a Material Adverse Effect
on Acquirer. Exhibit 21 to Acquirer's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (the "ACQUIRER 10-K"), as filed with the SEC, lists
the only Subsidiaries of Acquirer at December 31, 1998, and, except for Merger
Subsidiary, all Subsidiaries of Acquirer thereafter formed or acquired are
listed in the Acquirer Disclosure Letter. All of the outstanding shares of
capital stock of the Subsidiaries are validly issued, fully paid and
nonassessable and, other than directors' qualifying shares in the case of
foreign Subsidiaries, are owned by Acquirer or by a wholly owned Subsidiary of
Acquirer free and clear of all material liens, claims, charges or encumbrances,
and there are no irrevocable proxies with respect to such shares. Except as set
forth in the Acquirer Disclosure Letter and except for the capital stock of its
Subsidiaries, Acquirer does not own, directly or indirectly, any capital stock
or other ownership interest in any corporation, partnership, joint venture,
limited liability company or other entity which is material to the business of
Acquirer and its Subsidiaries, taken as a whole. There are no material
restrictions on Acquirer to vote the stock of any of its Subsidiaries.
SECTION 4.7 SEC Filings. (a) Acquirer has made available to the Company
(i) its annual reports on Form 10-K for its fiscal years ended December 31,
1996, 1997 and 1998, (ii) its quarterly reports on Form 10-Q for its quarter
ended March 31, 1999, (iii) its proxy or information statements relating to
meetings of, or actions taken without a meeting by, the stockholders of Acquirer
held since December 31, 1998, and (iv) all of its other reports, statements,
schedules and registration statements filed with the SEC since December 31, 1998
(the documents referred to in this Section 4.7(a) being referred to collectively
as the "ACQUIRER SEC DOCUMENTS"). Acquirer's quarterly report on Form 10-Q for
its fiscal quarter ended March 31, 1998 is referred to herein as the "ACQUIRER
10-Q."
(b) As of its filing date, each Acquirer SEC Document complied as to form
in all material respects with the applicable requirements of the Exchange Act
and the 1933 Act.
(c) As of its filing date, each Acquirer SEC Document filed pursuant to the
Exchange Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
(d) Each such registration statement, as amended or supplemented, if
applicable, filed pursuant to the 1933 Act as of the date such statement or
amendment became effective did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
SECTION 4.8 Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Acquirer
(including any related notes and schedules) included in its annual reports on
Form 10-K and the quarterly report on Form 10-Q referred to in Section 4.7
fairly present in all material respects, in conformity with GAAP applied on
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a consistent basis (except as may be indicated in the notes thereto), the
consolidated financial position of Acquirer and its consolidated Subsidiaries as
of the dates thereof and their consolidated results of operations and changes in
financial position for the periods then ended (subject to normal year-end
adjustments and the absence of notes in the case of any unaudited interim
financial statements). For purposes of this Agreement, "ACQUIRER BALANCE SHEET"
means the consolidated balance sheet of Acquirer as of March 31, 1999 set forth
in Acquirer 10-Q and "ACQUIRER BALANCE SHEET DATE" means March 31, 1999.
SECTION 4.9 Disclosure Documents. (a) The Joint Proxy Statement/Prospectus
to be filed with the SEC in connection with the Merger and the Form S-4 to be
filed under the 1933 Act relating to the issuance of Acquirer Common Stock in
the Merger, and any amendments or supplements thereto, will, when filed, subject
to the last sentence of Section 4.9(b), comply as to form in all material
respects with the requirements of the Exchange Act and the 1933 Act.
(b) Neither the Joint Proxy Statement/Prospectus to be filed with the SEC,
nor any amendment or supplement thereto, will, at the date the Joint Proxy
Statement/Prospectus or any such amendment or supplement is first mailed to
stockholders of Acquirer or at the time such stockholders vote on the adoption
and approval of this Agreement and the transactions contemplated hereby, contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Neither the Form S-4
nor any amendment or supplement thereto will at the time it becomes effective
under the 1933 Act or at the Effective Time contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. No representation or
warranty is made by Acquirer in this Section 4.9 with respect to statements made
or incorporated by reference therein based on information supplied by the
Company for inclusion or incorporation by reference in the Joint Proxy
Statement/Prospectus or the Form S-4.
SECTION 4.10 Absence of Certain Changes. Except as set forth in the
Acquirer Disclosure Letter, since Acquirer Balance Sheet Date, Acquirer and its
Subsidiaries have conducted their business in the ordinary course consistent
with past practice and there has not been:
(a) any event, occurrence or development of a state of circumstances
or facts which has had or reasonably would be expected to have,
individually or in the aggregate, a Material Adverse Effect on Acquirer;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of Acquirer or any
repurchase, redemption or other acquisition by Acquirer or any of its
Subsidiaries of any outstanding shares of capital stock or other securities
of, or other ownership interests in, Acquirer or any of its Subsidiaries;
(c) any amendment of any material term of any outstanding security of
Acquirer or any of its Subsidiaries;
(d) any transaction or commitment made, or any contract, agreement or
settlement entered into, by (or judgment, order or decree affecting)
Acquirer or any of its Subsidiaries relating to its assets or business
(including the acquisition or disposition of any assets) or any
relinquishment by Acquirer or any of its Subsidiaries of any contract or
other right, in either case, material to Acquirer and its Subsidiaries
taken as a whole, other than transactions, commitments, contracts,
agreements or settlements (including without limitation settlements of
litigation and tax proceedings) in the ordinary course of business
consistent with past practice, those contemplated by this Agreement, or as
agreed to in writing by the Company;
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(e) any change in any method of accounting or accounting practice
(other than any change for tax purposes) by Acquirer or any of its
Subsidiaries, except for any such change which is not significant or which
is required by reason of a concurrent change in GAAP; or
(f) any (i) grant of any severance or termination pay to (or amendment
to any such existing arrangement with) any director, officer or employee of
Acquirer or any of its Subsidiaries, (ii) entering into of any employment,
deferred compensation or other similar agreement (or any amendment to any
such existing agreement) with any director, officer or employee of Acquirer
or any of its Subsidiaries, (iii) increase in benefits payable under any
existing severance or termination pay policies or employment agreements or
(iv) increase in (or amendments to the terms of) compensation, bonus or
other benefits payable to directors, officers or employees of Acquirer or
any of its Subsidiaries, other than in the ordinary course of business
consistent with past practice, as permitted by this Agreement, or as agreed
to in writing by the Company.
SECTION 4.11 No Undisclosed Material Liabilities. There are no liabilities
of Acquirer or any Subsidiary of Acquirer of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, other
than:
(a) liabilities disclosed or provided for in Acquirer Balance Sheet or
in the notes thereto;
(b) liabilities which in the aggregate would not reasonably be
expected to have a Material Adverse Effect on Acquirer;
(c) liabilities disclosed in Acquirer SEC Documents filed prior to the
date hereof or set forth in the Acquirer Disclosure Letter; and
(d) liabilities under this Agreement.
SECTION 4.12 Litigation. Except as disclosed in Acquirer SEC Documents
filed prior to the date hereof, there is no action, suit, investigation or
proceeding pending against, or to the knowledge of Acquirer threatened against
or affecting, Acquirer or any of its Subsidiaries or any of their respective
properties before any court or arbitrator or any governmental body, agency or
official which would reasonably be expected to have a Material Adverse Effect on
Acquirer.
SECTION 4.13 Taxes. Except as set forth in the Acquirer Balance Sheet
(including the notes thereto) or as otherwise set forth in the Acquirer
Disclosure Letter and except as would not, individually or in the aggregate,
have a Material Adverse Effect on Acquirer, (i) all Acquirer Tax Returns
required to be filed with any taxing authority by, or with respect to, Acquirer
and its Subsidiaries have been filed in accordance with all applicable laws;
(ii) Acquirer and its Subsidiaries have timely paid all Taxes shown as due and
payable on Acquirer Tax Returns that have been so filed, and, as of the time of
filing, Acquirer Tax Returns correctly reflected the facts regarding the income,
business, assets, operations, activities and the status of Acquirer and its
Subsidiaries (other than Taxes which are being contested in good faith and for
which adequate reserves are reflected on the Acquirer Balance Sheet); (iii)
Acquirer and its Subsidiaries have made provision for all Taxes payable by
Acquirer and its Subsidiaries for which no Acquirer Tax Return has yet been
filed; (iv) the charges, accruals and reserves for Taxes with respect to
Acquirer and its Subsidiaries reflected on the Acquirer Balance Sheet are
adequate under GAAP to cover the Tax liabilities accruing through the date
thereof; (v) there is no action, suit, proceeding, audit or claim now proposed
or pending against or with respect to Acquirer or any of its Subsidiaries in
respect of any Tax where there is a reasonable possibility of an adverse
determination; and (vi) to the best of Acquirer's knowledge and belief, neither
Acquirer nor any of its Subsidiaries is liable for any Tax imposed on any entity
other than such Person, except as the result of the application of Treas. Reg.
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Section 1.1502-6 (and any comparable provision of the tax laws of any state,
local or foreign jurisdiction) to the affiliated group of which Acquirer is the
common parent.
SECTION 4.14 Employee Benefit Plans. (a) Prior to the date hereof,
Acquirer has provided the Company with a list (set forth in the Acquirer
Disclosure Letter) identifying each material "employee benefit plan," as defined
in Section 3(3) of ERISA, each material employment, severance or similar
contract, plan, arrangement or policy applicable to any director, former
director, employee or former employee of Acquirer and each material plan or
arrangement (written or oral), providing for compensation, bonuses,
profit-sharing, stock option or other stock related rights or other forms of
incentive or deferred compensation, vacation benefits, insurance coverage
(including any self-insured arrangements), health or medical benefits,
disability benefits, workers' compensation, supplemental unemployment benefits,
severance benefits and post-employment or retirement benefits (including
compensation, pension, health, medical or life insurance benefits) which is
maintained, administered or contributed to by Acquirer and covers any employee
or director or former employee or director of Acquirer, or under which Acquirer
has any liability. Such material plans (excluding any such plan that is a
"multiemployer plan," as defined in Section 3(37) of ERISA) are referred to
collectively herein as the "ACQUIRER EMPLOYEE PLANS."
(b) Except as set forth in the Acquirer Disclosure Letter, each Acquirer
Employee Plan has been maintained in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations
(including but not limited to ERISA and the Code) which are applicable to such
Plan, except where failure to so comply would not, individually or in the
aggregate, have a Material Adverse Effect on Acquirer.
(c) Neither Acquirer nor any affiliate of Acquirer has incurred a liability
under Title IV of ERISA that has not been satisfied in full, and no condition
exists that presents a material risk to Acquirer or any affiliate of Acquirer of
incurring any such liability other than liability for premiums due the Pension
Benefit Guaranty Corporation (which premiums have been paid when due).
(d) All Acquirer Employee Plans that are intended to be qualified under
Section 401(a) of the Code have been the subject of determination, opinion,
notification or advisory letters from the IRS which Acquirer has made available
to the Company. Each such letter has the effect of stating that each such
Acquirer Employee Plan is qualified and is exempt from Federal income taxes
under Section 501(a) of the Code. The remedial amendment period with respect to
each such Acquirer Employee Plan has not expired for any amendment to any such
Acquirer Employee Plan that was made on or after the date of the application for
the determination, opinion, notification or advisory letter. No such
determination, opinion, notification or advisory letter has been revoked, nor
has any event occurred since the date of the most recent such letter that would
adversely affect its qualification, other than as set forth in the Acquirer
Disclosure Letter.
(e) Except as set forth in the Acquirer Disclosure Letter, no director or
officer or other employee of Acquirer or any of its Subsidiaries will become
entitled to any retirement, severance or similar benefit or enhanced or
accelerated benefit (including any acceleration of vesting or lapse of
repurchase rights or obligations with respect to any employee stock option or
other benefit under any stock option plan or compensation plan or arrangement of
Acquirer) solely as a result of the transactions contemplated hereby.
(f) Except as reflected in Acquirer SEC Documents filed prior to the date
hereof, no Acquirer Employee Plan provides post-retirement health and medical,
life or other insurance benefits for retired employees of Acquirer or any of its
Subsidiaries (other than benefit coverage mandated by applicable statute,
including benefits provided pursuant to COBRA).
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(g) Except as set forth in the Acquirer Disclosure Letter, there has been
no amendment to, written interpretation or announcement (whether or not written)
by Acquirer or any of its affiliates relating to, or change in employee
participation or coverage under, any Acquirer Employee Plan which would increase
materially the expense of maintaining such Acquirer Employee Plan above the
level of the expense incurred in respect thereof for the 12 months ended on the
Acquirer Balance Sheet Date.
SECTION 4.15 Compliance with Laws. Neither Acquirer nor any of its
Subsidiaries is in violation of, or has since January 1, 1999 violated, any
applicable provisions of any laws, statutes, ordinances or regulations except
for any violations that, individually or in the aggregate, would not reasonably
be expected to have a Material Adverse Effect on Acquirer.
SECTION 4.16 Finders' or Advisors' Fees. Except for Lehman Brothers Inc.,
there is no investment banker, broker, finder or other intermediary which has
been retained by or is authorized to act on behalf of Acquirer or any of its
Subsidiaries who might be entitled to any fee or commission in connection with
the transactions contemplated by this Agreement.
SECTION 4.17 Environmental Matters. Except for such exceptions as,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Material Adverse Effect on Acquirer, (i) no notice,
notification, demand, request for information, citation, summons, complaint or
order has been received by, and no investigation, action, claim, suit,
proceeding or review is pending or, to the knowledge of Acquirer or any of its
Subsidiaries, threatened by any Person against, Acquirer or any of its
Subsidiaries, and no penalty has been assessed against Acquirer or any of its
Subsidiaries, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) Acquirer and its Subsidiaries are and have
been in compliance with all Environmental Laws; and (iii) there are no
liabilities of or relating to Acquirer or any of its Subsidiaries relating to or
arising out of any Environmental Law of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is no
existing condition, situation or set of circumstances which could reasonably be
expected to result in such a liability.
SECTION 4.18 Labor Matters. There are no controversies pending or, to the
best knowledge of each of Acquirer and its respective Subsidiaries, threatened,
between Acquirer or any of its Subsidiaries and any of their respective
employees, which controversies have or could reasonably be expected to have a
Material Adverse Effect of the Acquirer. As of the date of this Agreement,
neither Acquirer nor any of its Subsidiaries is a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by Acquirer or its Subsidiaries nor does Acquirer or its Subsidiaries
know of any activities or proceedings of any labor union to organize any such
employees (i) as of the date of this Agreement and (ii) which, as of the Closing
Date, have or could reasonably be expected to have a Material Adverse Effect on
Acquirer and its Subsidiaries. As of the date of this Agreement, neither
Acquirer nor any of its Subsidiaries has any knowledge of any strikes,
slowdowns, work stoppages or lockouts, or threats thereof, by or with respect to
any employees of Acquirer or any of its Subsidiaries (x) as of the date of this
Agreement and (y) which, as of the Closing Date, have or could reasonably be
expected to have a Material Adverse Effect on Acquirer and its Subsidiaries.
SECTION 4.19 Title to Property. Acquirer and each of its Subsidiaries has
good and marketable title to all of its material properties and assets, free and
clear of all Liens, except for liens for taxes not yet due and payable and such
liens or other imperfections of title and use restrictions, if any, as do not
materially detract from the value of or interfere with the present use of the
property affected thereby or which, individually or in the aggregate, would not
have a Material Adverse Effect on Acquirer.
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SECTION 4.20 Leaseholds. Neither Acquirer nor any of its Subsidiaries has
given or received notice of any material default under any material lease under
which Acquirer or any of its Subsidiaries is the lessee of real property (each
an "ACQUIRER LEASE" and collectively the "ACQUIRER LEASES") and, to the
knowledge of Acquirer, neither Acquirer nor any of its Subsidiaries nor any
other party thereto is in default in any material respect under any of the
Acquirer Leases. All of the Acquirer Leases are in full force and effect, and
are valid, binding and enforceable in accordance with their terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' or
lessors' rights generally and (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies. Except as set forth in the Acquirer Disclosure Letter, neither
Acquirer nor any of its Subsidiaries has leased, subleased, licensed or
assigned, as the case may be, all or any portion of its leasehold interest under
any Acquirer Lease to any person.
SECTION 4.21 Management Payments. Other than as set forth in the Acquirer
Disclosure Letter, no employee or former employee of Acquirer will be entitled
to additional compensation or to the early vesting or acceleration of payment of
any compensation that arises out of or are related to the consummation of the
Merger and the transactions contemplated thereby.
SECTION 4.22 Intellectual Property. Acquirer or its Subsidiaries owns each
of the patents and patent applications referred to in the Acquirer SEC Documents
and, except as set forth in the Acquirer SEC Documents, (i) to the knowledge of
Acquirer, each of Acquirer and its Subsidiaries owns or possesses, or could
obtain ownership or possession of (on terms not materially adverse to the
consolidated financial position, stockholders' equity, or results of operations
of Acquirer and its Subsidiaries taken as a whole) adequate and enforceable
rights to use all other Intellectual Property necessary for the conduct of their
businesses, (ii) no claims are pending or, to the knowledge of Acquirer,
threatened that Acquirer or any Subsidiary is infringing on or otherwise
violating the rights of any Person with regard to any Intellectual Property
that, if the subject of an unfavorable decision, ruling or finding, could
reasonably be expected to (or, with respect to any pending patent litigation,
Acquirer does not believe will) have a Material Adverse Effect and Acquirer
knows of no basis therefor, and (iii) to the knowledge of Acquirer, no person is
infringing on or otherwise violating any right of Acquirer or any Subsidiary
with respect to any Intellectual Property owned by or licensed to Acquirer or
any Subsidiary. Except as set forth in the Acquirer SEC Documents, Acquirer has
received no notice of potential indemnity claims from customers based upon a
notice of infringement any such customer has received from a patent owner
relating to an assertion of infringement of a patent other than potential
indemnity claims that individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect. Acquirer's policy is to require that
its employees execute agreements assigning to Acquirer all rights such employees
otherwise would have in Intellectual Property developed by such employees while
in the employ of Acquirer.
SECTION 4.23 Insurance. The insurance carried by Acquirer and its
Subsidiaries is in such types and amounts and covering such risks as are
consistent with customary practices and standards of companies engaged in
businesses and operations similar to those of Acquirer and its Subsidiaries.
Except as would not have a Material Adverse Effect on Acquirer, all such
insurance is in full force and effect and none of Acquirer nor any of its
Subsidiaries is in default thereunder. Except as would not have a Material
Adverse Effect on Acquirer, all claims thereunder have been filed in a due and
timely fashion. Except as would not have a Material Adverse Effect on Acquirer,
neither Acquirer nor any of its Subsidiaries has been notified in writing of a
refusal of any material insurance coverage relating to products liability
(including renewals of any such products liability coverage) by any insurance
carrier to which it has applied for insurance during the past three years.
SECTION 4.24 Year 2000 Compliance. Except as would not reasonably be
expected to have a Material Adverse Effect on Acquirer, all of Acquirer's
Information Technology effectively addresses
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the Year 2000 Issues, and will not cause an interruption in the ongoing
operations of Acquirer's business on or after January 1, 2000.
SECTION 4.25 Opinion of Financial Advisor. Acquirer has received the
opinion of Lehman Brothers Inc. to the effect that, as of the date of such
opinion, the Exchange Ratio is fair from a financial point of view to Acquirer,
and, as of the date hereof, such opinion has not been withdrawn.
SECTION 4.26 Tax Treatment. Neither Acquirer nor, to Acquirer's knowledge,
any of its affiliates has taken or agreed to take any action or is aware of any
fact or circumstance that would prevent the Merger from qualifying as a 368
Reorganization.
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.1 Conduct of Business of the Company. Except as contemplated by
this Agreement or as expressly agreed to in writing by Acquirer, during the
period from the date of this Agreement to the earlier of the termination of this
Agreement in accordance with Article IX (the "TERMINATION DATE") and the
Effective Time, each of the Company and its Subsidiaries will conduct its
operations according to its ordinary course of business consistent with past
practice, and will use all commercially reasonable efforts to preserve intact
its business organization, to keep available the services of its officers and
employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would materially adversely affect the ability of the
parties to consummate the transactions contemplated by this Agreement. Without
limiting the generality of the foregoing, and except as otherwise expressly
provided in this Agreement, prior to earlier of the Termination Date and the
Effective Time, the Company will not nor will it permit any of its Subsidiaries
to, without the prior written consent of Acquirer:
(a) amend its certificate of incorporation or by-laws;
(b) authorize for issuance, issue, sell, deliver, grant any options
for, or otherwise agree or commit to issue, sell or deliver any shares of
any class of its capital stock or any securities convertible into shares of
any class of its capital stock, except (i) pursuant to and in accordance
with the terms of currently outstanding convertible securities and options,
and (ii) options granted under the Company Stock Option Plans, in the
ordinary course of business consistent with past practice (but in no event
shall options be granted covering more than 5,000 Company Shares per
individual or 100,000 Company Shares in the aggregate);
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property (including stock of any Subsidiary) or any
combination thereof) in respect of its capital stock or purchase, redeem or
otherwise acquire any shares of its own capital stock or any of its
Subsidiaries, other than the repurchase at cost of shares of employees upon
termination of their employment with the Company or its Subsidiaries;
(d) except in the ordinary course of business, consistent with past
practice (i) create, incur, assume, maintain or permit to exist any
long-term debt or any short-term debt for borrowed money other than under
existing lines of credit, except for any loans to be made by Acquirer to
the Company pursuant to the Credit Agreement dated as of June 11, 1999, as
amended; (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other person except its wholly owned
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Subsidiaries in the ordinary course of business and consistent with past
practices; or (iii) make any loans, advances or capital contributions to,
or investments in, any other person;
(e) except as otherwise expressly contemplated by this Agreement or in
the ordinary course of business, consistent with past practice, (i)
increase in any manner the compensation of any of its directors, officers
or other employees; (ii) pay or agree to pay any pension, retirement
allowance or other employee benefit not required, or enter into or agree to
enter into any agreement or arrangement with such director, officer or
employee, whether past or present, relating to any such pension, retirement
allowance or other employee benefit, except as required under currently
existing agreements, plans or arrangements; (iii) grant any severance or
termination pay to, or enter into any employment or severance agreement
with any of its directors, officers or other employees; or (iv) except as
may be required to comply with applicable law, become obligated (other than
pursuant to any new or renewed collective bargaining agreement) under any
new pension plan, welfare plan, multiemployer plan, employee benefit plan,
benefit arrangement, or similar plan or arrangement, which was not in
existence on the date hereof, including any bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right, group
insurance, severance pay, retirement or other benefit plan, agreement or
arrangement, or employment or consulting agreement with or for the benefit
of any person, and to amend any of such plans or any of such agreements in
existence on the date hereof;
(f) except as otherwise expressly contemplated by this Agreement and
except with respect to commitments or liabilities incurred in connection
with this Agreement and the transactions contemplated hereby, including the
incurrence of legal, accounting and investment banking fees and expenses,
enter into any other material agreements, commitments or contracts, other
than agreements, commitments or contracts for the purchase, sale or lease
of goods or services in the ordinary course of business, consistent with
past practice;
(g) except in the ordinary course of business, consistent with past
practice, or as contemplated by this Agreement authorize, recommend,
propose or announce an intention to authorize, recommend or propose, or
enter into any agreement in principle or an agreement with respect to, any
plan of liquidation or dissolution, any acquisition of a material amount of
assets or securities, any sale, transfer, lease, license, pledge, mortgage,
or other disposition or encumbrance of a material amount of assets or
securities or any material change in its capitalization, or any entry into
a material contract or any amendment or modification of any material
contract or any release or relinquishment of any material contract rights;
or
(h) agree to do any of the foregoing.
SECTION 5.2 No Solicitation. The Company agrees that, from and after the
date of this Agreement until the earlier of the Termination Date and the
Effective Time, neither it nor any of its Subsidiaries nor any of the officers
or directors of it or its Subsidiaries, nor its or their employees, investment
bankers, attorneys, accountants, financial advisors, agents or other
representatives (collectively, "REPRESENTATIVES"), shall directly or indirectly,
initiate, solicit or otherwise induce any inquiries or the making of a Company
Acquisition Proposal (as defined below). The Company further agrees that neither
it nor any of its Subsidiaries nor any of its or its Subsidiaries' officers or
directors shall, and that it shall direct and use its best reasonable efforts to
cause its Representatives not to, directly or indirectly, have any discussions
with or provide any confidential information or data to any Person relating to a
Company Acquisition Proposal or engage in any negotiations concerning a Company
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement a Company Acquisition Proposal; provided, however, that nothing
contained in this Agreement shall prevent the Company or its Board of Directors
from (i) making any disclosure to its stockholders if,
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in the good faith judgment of its Board of Directors, failure so to disclose
would be inconsistent with its obligations under applicable law; (ii)
negotiating with or furnishing information to any Person who has made a bona
fide written Company Acquisition Proposal which did not result from a breach of
this Section 5.2; or (iii) recommending such Company Acquisition Proposal to its
stockholders, if and only to the extent that, in the case of actions referred to
in clause (ii) or clause (iii), such Company Acquisition Proposal is a Superior
Proposal (as defined below) and Acquirer is given at least two business days'
notice of the identity of the third party and all material terms and conditions
of the Superior Proposal to respond to such Superior Proposal. The Company
agrees that it will, on the date hereof, immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any Person
conducted heretofore with respect to any Company Acquisition Proposal. Nothing
contained in this Agreement shall prevent the Board of Directors of the Company
from complying with Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act
with regard to a Company Acquisition Proposal; provided that the Board of
Directors of the Company shall not recommend that the stockholders of the
Company tender their shares in connection with a tender offer except to the
extent the Board of Directors of the Company determines in its good faith
judgment that such a recommendation is required to comply with the fiduciary
duties of the Board of Directors of the Company to stockholders under applicable
law, after receiving the advice of outside legal counsel.
For purposes of this Agreement, "COMPANY ACQUISITION PROPOSAL" shall mean
any offer or proposal (other than an offer or proposal by Acquirer) relating to
any transaction or series of related transactions involving: (A) any purchase
from the Company or acquisition by any Person or "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder) of
more than a five percent (5%) interest in the total outstanding voting
securities of the Company or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder) beneficially
owning five percent (5%) or more of the total outstanding voting securities of
the Company or any merger, consolidation, business combination or similar
transaction involving the Company; (B) any sale, lease (other than in the
ordinary course of business), exchange, transfer, license (other than in the
ordinary course of business), acquisition or disposition of more than five
percent (5%) of the assets of the Company; or (C) any liquidation or dissolution
of the Company. For purposes of this Agreement, a "SUPERIOR PROPOSAL" means, in
respect of the Company, an unsolicited, bona fide Company Acquisition Proposal
for or in respect of at least a majority of the outstanding Company Shares on
terms that the Board of Directors of the Company determines, in its good faith
judgment (based on consultation with its financial advisors) to be more
favorable to the Company's stockholders than the terms of the Merger, that is
not subject to a financing condition, and is from a Person that in the
reasonable judgment of the Company's Board of Directors (based on advice from a
nationally recognized investment bank) is financially capable of consummating
such proposal.
ARTICLE VI
COVENANTS OF ACQUIRER
SECTION 6.1 Conduct of Business of Acquirer. Except as contemplated by
this Agreement or as expressly agreed to in writing by the Company, during the
period from the date of this Agreement to the earlier of the Termination Date
and the Effective Time, each of Acquirer and its Subsidiaries will use all
commercially reasonable efforts to preserve intact its business organization, to
keep available the services of its officers and employees and to maintain
satisfactory relationships with suppliers, distributors, customers and others
having business relationships with it and will take no action which would
materially adversely affect the ability of the parties to consummate the
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transactions contemplated by this Agreement. Notwithstanding anything to the
contrary herein, Acquirer may (subject to Section 6.2 and paragraph (d) below)
issue, sell or deliver, grant any options for, or commit to issue, sell or
deliver any shares of any class of its capital stock or other securities
convertible into any class of its capital stock prior to the Closing Date and
may (subject to Section 6.1(d) below) purchase or acquire the securities or
assets of other entities. Without limiting the generality of the foregoing, and
except as otherwise expressly provided in this Agreement, prior to the Effective
Time, Acquirer will not nor will it permit any of its Subsidiaries to, without
the prior written consent of the Company:
(a) amend its certificate of incorporation or by-laws, except as
required by the terms of this Agreement;
(b) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or any of its Subsidiaries, other than the repurchase at
cost of shares of employees upon termination of their employment with
Acquirer or its Subsidiaries;
(c) except in the ordinary course of business, consistent with past
practice, create, incur, assume, maintain or permit to exist any long-term
debt or any short-term debt for borrowed money other than under existing
lines of credit or in an amount in excess of $50,000,000;
(d) except in the ordinary course of business, consistent with past
practice, or as contemplated by this Agreement, authorize, recommend,
propose or announce an intention to authorize, recommend or propose, or
enter into any agreement in principle or an agreement with respect to, any
plan of liquidation or dissolution, or any acquisition of a material amount
of assets or securities that individually or in the aggregate would require
Acquirer's stockholders' approval or the acquisition of assets for
consideration in excess of $50,000,000 or the acquisition, by merger or
otherwise, of all the outstanding securities of any entity whose securities
are listed and publicly traded on the Nasdaq Stock Market, the New York or
American Stock Exchange or an equivalent foreign stock exchange; or
(e) agree to do any of the foregoing.
SECTION 6.2 No Solicitation. Acquirer agrees that, from and after the date
of this Agreement until the earlier of the Termination Date and the Effective
Time, neither it nor any of its Subsidiaries nor any of the officers or
directors of it or its Subsidiaries or its or their Representatives shall,
directly or indirectly, initiate, solicit or otherwise facilitate any inquiries
or the making of an Acquirer Acquisition Proposal (as defined below). Acquirer
further agrees that neither it nor any of its Subsidiaries nor any of its or its
Subsidiaries' officers or directors shall, and that it shall direct and use its
best reasonable efforts to cause its Representatives not to, directly or
indirectly, have any discussions with or provide any confidential information or
data to any Person relating to an Acquirer Acquisition Proposal or engage in any
negotiations concerning an Acquirer Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquirer Acquisition
Proposal; provided, however, that nothing contained in this Agreement shall
prevent Acquirer or its Board of Directors from (i) making any disclosure to its
stockholders if, in the good faith judgment of its Board of Directors, failure
so to disclose would be inconsistent with its obligations under applicable law;
(ii) negotiating with or furnishing information to any Person who has made a
bona fide written Acquirer Acquisition Proposal which did not result from a
breach of this Section 6.2; or (iii) recommending such Acquirer Acquisition
Proposal to its stockholders, if and only to the extent that, in the case of
actions referred to in clause (ii) or clause (iii), such Acquirer Acquisition
Proposal is a Superior Proposal (as defined below) and the Company is given at
least two business
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days' notice of the existence of such Superior Proposal. Acquirer agrees that it
will, on the date hereof, immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any Person conducted
heretofore with respect to any Acquirer Acquisition Proposal. Nothing contained
in this Agreement shall prevent the Board of Directors of Acquirer from
complying with Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquirer Acquisition Proposal; provided that the Board of Directors
of Acquirer shall not recommend that the stockholders of Acquirer tender their
shares in connection with a tender offer except to the extent the Board of
Directors of Acquirer determines in its good faith judgment that such a
recommendation is required to comply with the fiduciary duties of the Board of
Directors of Acquirer to stockholders under applicable law, after receiving the
advice of outside legal counsel.
For purposes of this Agreement, "ACQUIRER ACQUISITION PROPOSAL" shall mean
any offer or proposal relating to any transaction or series of related
transactions involving: (A) any purchase from Acquirer or acquisition by any
person or "group" (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) of more than a fifty percent (50%) interest in
the total outstanding voting securities of Acquirer or any tender offer or
exchange offer that if consummated would result in any Person or "group" (as
defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) beneficially owning fifty percent (50%) or more of the total
outstanding voting securities of Acquirer or any merger, consolidation, business
combination or similar transaction involving Acquirer in which the stockholders
of Acquirer immediately prior to such transaction do not own, immediately after
such transaction, at least a majority of the outstanding securities entitled to
vote generally for the election of directors or similar managing authority of
the surviving or resulting entity in such transaction; (B) any sale, lease
(other than in the ordinary course of business), exchange, transfer, license
(other than in the ordinary course of business), acquisition or disposition of
all or substantially all of the assets of Acquirer; or (C) any liquidation or
dissolution of Acquirer. For purposes of this Agreement, a "SUPERIOR PROPOSAL"
means, in respect of Acquirer, an unsolicited, bona fide Acquirer Acquisition
Proposal on terms that the Board of Directors of Acquirer determines, in its
good faith judgment (based on consultation with its financial advisors) to be
fair to Acquirer's stockholders, that is not subject to a financing condition,
and is from a Person that in the reasonable judgment of Acquirer's Board of
Directors (based on advice from a nationally recognized investment bank) is
financially capable of consummating such proposal.
SECTION 6.3 Indemnification. (a) Acquirer shall indemnify, defend and hold
harmless the present and former officers, directors, employees and agents of the
Company and its Subsidiaries against all losses, claims, damages, expenses or
liabilities arising out of actions or omissions or alleged actions or omissions
occurring at or prior to the Effective Time to the same extent and on the same
terms and conditions (including with respect to advancement of expenses)
provided for in the Company's certificate of incorporation and by-laws and
agreements in effect at the date hereof (to the extent consistent with
applicable law). The certificate of incorporation and by-laws of the Surviving
Corporation shall contain the provisions with respect to indemnification and
exculpation from liability set forth in the Company's certificate of
incorporation and by-laws on the date of this Agreement, which provisions shall
not be amended, repealed or otherwise modified for a period of six years after
the Effective Time in any manner that would adversely affect the rights
thereunder of any person who, immediately prior to the Effective Time, was an
indemnified party under such provisions.
(b) For a period of six years after the Effective Time, Acquirer shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by the Company (provided that Acquirer
may substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are no less advantageous) with respect to
claims arising from facts or events which occurred on or before the Effective
Time; provided, however, that Acquirer shall not be obligated to make annual
premium payments for such insurance to the extent such
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premiums exceed two hundred percent (200%) of the premiums paid as of the date
hereof by the Company for such insurance.
(c) The provisions of this Section 6.3 are intended to be for the benefit
of, and shall be enforceable by each indemnified party hereunder, his or her
heirs and his or her representatives.
SECTION 6.4 NNM Listings. Acquirer shall promptly following the execution
of this Agreement prepare and submit to The Nasdaq Stock Market a listing
application covering the shares of Acquirer Common Stock (and associated
Acquirer Rights) issuable in the Merger and upon exercise of the Company Stock
Options, and shall use all commercially reasonable efforts to obtain, prior to
the Effective Time, approval for the listing of such Acquirer Common Stock (and
associated Acquirer Rights), subject to official notice of issuance.
ARTICLE VII
COVENANTS OF ACQUIRER AND THE COMPANY
SECTION 7.1 Access to Information. (a) From the date of this Agreement
until the earlier of the Termination Date and the Effective Time, each of the
Company and Acquirer will give the other party and their authorized
representatives (including counsel, environmental and other consultants,
accountants and auditors) access during normal business hours to all facilities,
personnel and operations and to all books and records of it and its
Subsidiaries, will permit the other party to make such inspections as it may
reasonably require and will cause its officers and those of its Subsidiaries to
furnish the other party with such financial and operating data and other
information with respect to its business and properties as such party may from
time to time reasonably request.
(b) Each of the parties hereto will hold and will cause its consultants and
advisors to hold in strict confidence pursuant to the Confidentiality Agreement
previously entered into by the parties (the "CONFIDENTIALITY AGREEMENT") all
documents and information furnished to the other in connection with the
transactions contemplated by this Agreement as if each such consultant or
advisor was a party thereto.
SECTION 7.2 Registration Statement and Proxy Statement. (a) Acquirer and
the Company shall file with the SEC as soon as is reasonably practicable after
the date hereof the Joint Proxy Statement/Prospectus and Acquirer shall file the
Registration Statement in which the Joint Proxy Statement/Prospectus shall be
included. Acquirer and the Company shall use all commercially reasonable efforts
to have the Registration Statement declared effective by the SEC as promptly as
practicable. Acquirer shall also take any action required to be taken under
applicable state blue sky or securities laws in connection with the issuance of
shares of Acquirer Common Stock pursuant to this Agreement. Acquirer and the
Company shall promptly furnish to each other all information, and take such
other actions, as may reasonably be requested in connection with any action by
any of them in connection with this Section 7.2(a).
(b) If at any time prior to the Effective Time any event shall occur which
is required to be described in the Joint Proxy Statement/Prospectus or Form S-4,
such event shall be so described, and an amendment or supplement shall be
promptly filed with the SEC and, as required by law, disseminated to the
stockholders of Acquirer and the Company; provided that no amendment or
supplement to the Joint Proxy Statement/Prospectus or the Form S-4 will be made
by Acquirer or the Company without the approval of the other party. To the
extent applicable, each of Acquirer and the Company will advise the other,
promptly after it receives notice thereof, of the time when the Form S-4 has
become effective or any supplement or amendment has been filed, the issuance of
any stop order, the suspension of the qualification of the shares of Acquirer
Common Stock issuable in
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connection with the Merger for offering or sale in any jurisdiction, or any
request by the SEC for amendment of the Joint Proxy Statement/Prospectus or the
Form S-4 or comments thereon and responses thereto or requests by the SEC for
additional information.
(c) Acquirer and the Company shall each use all commercially reasonable
efforts to cause to be delivered to the other a comfort letter of its
independent auditors, dated a date within two business days of the effective
date of the Form S-4, in form reasonably satisfactory to the other party and
customary in scope and substance for such letters in connection with similar
registration statements.
Section 7.3 Stockholders' Meetings. The Company and Acquirer each shall
call a meeting of its respective stockholders (the "COMPANY STOCKHOLDER MEETING"
and the "ACQUIRER STOCKHOLDER MEETING," respectively, and together, the
"STOCKHOLDERS MEETINGS") to be held as promptly as practicable in accordance
with applicable law and each company's certificate of incorporation and by-laws
for the purpose of voting upon (i) in the case of the Company, the adoption and
approval of this Agreement and the transactions contemplated hereby (the
"COMPANY STOCKHOLDER APPROVAL"), and (ii) in the case of Acquirer, the items
contemplated by the Acquirer Stockholder Approval. Except as otherwise required
by the fiduciary duties of its Board of Directors (as determined in good faith
by such Board following the receipt of advice of its outside legal counsel to
such effect) and in accordance with Sections 5.2 and 6.2, as the case may be, of
this Agreement, (i)(A) the Company will, through its Board of Directors,
recommend to its stockholders the approval and adoption of this Agreement and
the Merger and (B) Acquirer will, through its Board of Directors, recommend to
its stockholders the approval of the issuance of Acquirer Common Stock in the
Merger and the approval of the amendments to Acquirer's certificate of
incorporation to increase the authorized number of shares of Acquirer Common
Stock to 175,000,000 shares and (ii) each of the Company and Acquirer will use
all commercially reasonable efforts to obtain the foregoing approval of their
respective stockholders. Acquirer and the Company shall coordinate and cooperate
with respect to the timing of the Stockholders Meetings and shall each use all
commercially reasonable efforts to hold Stockholders Meetings on the same day as
soon as practicable after the date on which the Form S-4 becomes effective.
SECTION 7.4 Reasonable Efforts; Other Actions. Subject to the terms and
conditions herein provided and applicable law, the Company and Acquirer shall
use all commercially reasonable efforts promptly to take, or cause to be taken,
all other actions and do, or cause to be done, all other things necessary,
proper or appropriate under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement, including,
without limitation, (i) the filing of Notification and Report Forms under the
HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division
of the Department of Justice (the "ANTITRUST DIVISION") and using their
reasonable best efforts to respond as promptly as practicable to all inquiries
received from the FTC or the Antitrust Division for additional information or
documentation, (ii) the taking of any actions required to qualify the Merger as
a 368 Reorganization, (iii) the obtaining of all necessary consents, approvals
or waivers under its material contracts, and (iv) the lifting of any legal bar
to the Merger.
SECTION 7.5 Public Announcements. Before issuing any press release or
otherwise making any public statements with respect to the Merger, Acquirer and
the Company will consult with each other as to its form and substance and shall
not issue any such press release or make any such public statement prior to such
consultation, except as may be required by law.
Section 7.6 Notification of Certain Matters. Each of the Company and
Acquirer shall give prompt notice to the other party of (i) any notice of, or
other communication relating to, a breach of this Agreement or event which, with
notice or lapse of time or both, would become a breach, received by it or any of
its Subsidiaries subsequent to the date of this Agreement and prior to the
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Effective Time, under any contract to which it or any of its Subsidiaries is a
party or it, any of its Subsidiaries or any of its or their respective
properties is subject, which breach would be reasonably likely to have a
Material Adverse Effect on it, or (ii) any notice or other communication from
any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Agreement.
SECTION 7.7 Expenses. Except as set forth in Section 9.5, Acquirer, and
the Company, shall bear their respective expenses incurred in connection with
the Merger, including, without limitation, the preparation, execution and
performance of this Agreement and the transactions contemplated hereby, and all
fees and expenses of investment bankers, finders, brokers, agents,
representatives, counsel and accountants, except that expenses incurred in
printing, mailing and filing (including without limitation, SEC filing fees and
stock exchange listing application fees) Form S-4 and the Joint Proxy
Statement/Prospectus shall be shared equally by the Company and Acquirer.
SECTION 7.8 Affiliates. Each of the Company and Acquirer shall deliver to
the other a letter identifying all persons who, as of the date hereof, may be
deemed to be "affiliates" thereof for purposes of Rule 145 under the Securities
Act (the "AFFILIATES") and shall advise the other in writing of any persons who
become an Affiliate prior to the Effective Time. The Company shall cause each
person who is so identified as an Affiliate to deliver to Acquirer, no later
than the earlier of July 8, 1999 or the date such person becomes an Affiliate, a
written agreement substantially in the form of Exhibit 7.8 hereto.
SECTION 7.9 Certain Benefit Plans. As soon as practicable after the
execution of this Agreement, the Company and Acquirer shall use their
commercially reasonable efforts to confer and work together in good faith to
agree upon mutually acceptable employee benefit arrangements (and terminate
Company Employee Plans immediately prior to the Effective Time if appropriate)
so as to provide benefits to employees of the Company generally equivalent in
the aggregate to those provided to similarly situated employees of Acquirer. In
addition, the Company agrees that it and its Subsidiaries shall terminate any
and all group severance, separation, retention and salary continuation plans,
programs or arrangements (other than contractual agreements disclosed on the
Company Disclosure Letter) prior to the Effective Time. Years of service with
the Company or any of its Subsidiaries or predecessor organizations thereof (and
service otherwise credited by the Company or any of its Subsidiaries or
predecessor organizations thereof) prior to the Effective Time shall be credited
under the Acquirer Employee Plans listed under Items 3, 11 and 12 of Schedule
4.14(a) to the Acquirer Disclosure Letter to the same extent as service with
Acquirer is credited under such Acquirer Employee Plans (including for purposes
of eligibility, vesting and benefit accrual). Employees of the Company who
participate in an Acquirer Employee Plan listed under Items 3, 11 and 12 of
Schedule 4.14(a) to the Acquirer Disclosure Letter shall participate in such
Acquirer Employee Plan on terms no less favorable than those offered by Acquirer
to employees of Acquirer (including those provisions relating to the coverage of
dependents). Acquirer shall use its commercially reasonable efforts to cause any
and all pre-existing condition limitations, eligibility waiting periods and
evidence of insurability requirements under any group plans to be waived with
respect to Employees of the Company who participate in any Acquirer Employee
Plan listed under Items 3, 11 and 12 of Schedule 4.14(a) to the Acquirer
Disclosure Letter, and their eligible dependents, and shall provide each such
participant and dependent with credit for any co-payments and deductibles paid
prior to the Effective Time for purposes of satisfying any applicable
deductible, out-of-pocket, or similar requirements under all such Acquirer
Employee Plans in which such participants are eligible to participate after the
Effective Time. Notwithstanding any of the foregoing to the contrary, none of
the provisions contained herein shall operate to duplicate any benefit provided
to any employee of the Company or the funding of any such benefit.
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SECTION 7.10 Formation of Merger Subsidiary. As soon as practicable
following the execution of this Agreement, but no later than one week following
such date, Acquirer shall cause Merger Subsidiary to be formed in the State of
Delaware and to take all corporate action necessary to approve and to become a
party to this Agreement. Each of the parties hereto agrees that upon formation
of Merger Subsidiary it shall execute an amendment to this Agreement and such
other documents as may be necessary to cause Merger Subsidiary to become a party
to this Agreement.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.1 Conditions to the Obligations of Each Party. The obligations
of the Company, Acquirer and Merger Subsidiary to consummate the Merger are
subject to the satisfaction (or, to the extent legally permissible, waiver) at
or prior to the Closing of the following conditions:
(a) this Agreement shall have been adopted by the stockholders of the
Company in accordance with Delaware Law;
(b) any applicable waiting period under the HSR Act relating to the
Merger shall have expired or terminated early;
(c) no provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit or enjoin the consummation of
the Merger;
(d) the parties shall have received all required approvals and third
party consents listed on Schedule 8.1(d);
(e) the matters constituting the Acquirer Stockholder Approval shall
have been approved by the stockholders of Acquirer in accordance with
applicable law or regulation;
(f) the Form S-4 shall have been declared effective under the 1933 Act
and no stop order suspending the effectiveness of the Form S-4 shall be in
effect and no proceedings for such purpose shall be pending before or
threatened by the SEC; and
(g) the shares of Acquirer Common Stock to be issued in the Merger
shall have been approved for listing on the NNM, subject to official notice
of issuance.
SECTION 8.2 Conditions to the Obligations of Acquirer and Merger
Subsidiary. The obligations of Acquirer and Merger Subsidiary to consummate the
Merger are subject to the satisfaction (or, to the extent legally permissible,
waiver) of the following further conditions:
(a)(i) the Company shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to
the Effective Time, (ii) the representations and warranties of the Company
contained in this Agreement shall be true and correct as of the Closing
Date with the same force and effect as if made on the Closing Date
(provided that any such representation and warranty made as of a specific
date shall be true and correct as of such specific date), except for such
inaccuracies that individually or in the aggregate do not have a Material
Adverse Effect on the Company as of the Closing Date and except for changes
contemplated by this Agreement (it being understood that, for purposes of
determining the accuracy of such representations and warranties, all
"Material Adverse Effect" qualifications and other qualifications based on
the word "material" or similar phrases contained in such representations
and warranties shall be disregarded, and any update of or modification to
the Company Disclosure Letter made or proposed to have been made after the
execution of this
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Agreement shall be disregarded), and (iii) Acquirer shall have received a
certificate signed by the chief executive officer of the Company to the
foregoing effect; and
(b) Acquirer shall have received an opinion of Pillsbury Madison &
Sutro LLP in form and substance reasonably satisfactory to Acquirer, on the
basis of certain facts, representations and assumptions set forth in such
opinion, dated the Effective Time, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization qualifying
under the provisions of Section 368(a) of the Code and that each of
Acquirer, Merger Subsidiary and the Company will be a party to the
reorganization within the meaning of Section 368(b) of the Code. In
rendering such opinion, such counsel shall be entitled to rely upon certain
representations of officers of Acquirer and the Company reasonably
requested by counsel. If the opinion referred to in this Section 8.2(b) is
not delivered, such condition shall be deemed to be satisfied if the
Acquirer shall have received an opinion from Wilson Sonsini Goodrich &
Rosati, Professional Corporation, or another law firm selected by the
Company and reasonably acceptable to Acquirer. Acquirer will cooperate in
obtaining such opinion, including, without limitation, making (and
requesting from affiliates) appropriate representations with respect to
relevant matters.
SECTION 8.3 Conditions to the Obligations of the Company. The obligation
of the Company to consummate the Merger is subject to the satisfaction (or, to
the extent legally permissible, waiver) of the following further conditions:
(a)(i) Acquirer shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or prior to the
Effective Time, (ii) the representations and warranties of Acquirer
contained in this Agreement shall be true and correct as of the Closing
Date with the same force and effect as if made on the Closing Date
(provided that any such representation and warranty made as of a specific
date shall be true and correct as of such specific date), except for such
inaccuracies that individually or in the aggregate do not have a Material
Adverse Effect on Acquirer as of the Closing Date and except for changes
contemplated by this Agreement (it being understood that, for purposes of
determining the accuracy of such representations and warranties, all
"Material Adverse Effect" qualifications and other qualifications based on
the word "material" or similar phrases contained in such representations
and warranties shall be disregarded, and any update of or modification to
the Acquirer Disclosure Letter made or proposed to have been made after the
execution of this Agreement shall be disregarded), and (iii) the Company
shall have received a certificate signed by the chief executive officer of
Acquirer to the foregoing effect; and
(b) the Company shall have received an opinion of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, in form and substance
reasonably satisfactory to the Company, on the basis of certain facts,
representations and assumptions set forth in such opinion, dated the
Effective Time, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization qualifying under the provisions of
Section 368(a) of the Code and that each of the Company, Merger Subsidiary
and Acquirer will be a party to the reorganization within the meaning of
Section 368(b) of the Code. In rendering such opinion, such counsel shall
be entitled to rely upon certain representations of officers of the Company
and Acquirer reasonably requested by counsel. If the opinion referred to in
this Section 8.3(b) is not delivered, such condition shall be deemed to be
satisfied if the Acquirer shall have received an opinion from Pillsbury
Madison & Sutro LLP or another law firm selected by Acquirer and reasonably
acceptable to the Company. The Company will cooperate in obtaining such
opinion, including, without limitation, making (and requesting from
affiliates) appropriate representations with respect to relevant matters.
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ARTICLE IX
TERMINATION
SECTION 9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
stockholders of the Company or Acquirer:
(a) by mutual consent of Acquirer and the Company;
(b) by either Acquirer or the Company if the Merger shall not have
been consummated on or before December 31, 1999 (the "END DATE"), which
date may be extended by mutual written consent of the parties hereto;
provided, however, that the right to terminate this Agreement under this
Section 9.1(b) shall not be available to any party prior to February 28,
2000 whose action or failure to act has been a principal cause of or
resulted in the failure of the Merger to occur on or before such date and
such action or failure to act constitutes a material breach of this
Agreement.
(c) by either Acquirer or the Company, if any court of competent
jurisdiction in the United States or other governmental body in the United
States shall have issued an order (other than a temporary restraining
order), decree or ruling or taken any other action restraining, enjoining
or otherwise prohibiting the Merger, and such order, decree, ruling or
other action shall have become final and nonappealable; provided that the
party seeking to terminate this Agreement shall have used all commercially
reasonable efforts to avoid, remove or lift such order, decree or ruling;
or
(d) by either Acquirer or the Company, if the requisite stockholder
approvals of the stockholders of either Acquirer or the Company are not
obtained at the meeting of stockholders duly called and held therefor;
provided, however, that the right to terminate this Agreement under this
Section 9.1(d) shall not be available to a Person where the failure to
obtain stockholder approval of such Person shall have been caused by the
action or failure to act of such Person and such action or failure to act
constitutes a material breach by such Person of this Agreement.
SECTION 9.2 Termination by Acquirer. This Agreement may be terminated by
action of the Board of Directors of Acquirer, at any time prior to the Effective
Time, before or after the approval by the stockholders of Acquirer or the
Company, if (a) the Company shall have failed to comply in any material respect
with any of the covenants or agreements contained in Articles I, V and VII of
this Agreement to be complied with or performed by the Company at or prior to
such date of termination; provided, however, that if such failure to comply is
capable of being cured prior to the End Date, such failure shall not have been
cured within 15 days of delivery to the Company of written notice of such
failure, (b) there exists a breach or breaches of any representation or warranty
of the Company contained in this Agreement such that the closing condition set
forth in Section 8.2(a) would not be satisfied; provided, however, that if such
breach or breaches are capable of being cured prior to the End Date, such
breaches shall not have been cured within 15 days of delivery to the Company of
written notice of such breach or breaches, (c) a Company Triggering Event (as
defined below) shall have occurred, or (d)(i) the Board of Directors of Acquirer
authorizes Acquirer, subject to complying with the terms of this Agreement, to
enter into a binding written agreement concerning a transaction that constitutes
a Superior Proposal with respect to Acquirer and Acquirer notifies the Company
in writing in accordance with Section 6.2 that it intends to enter into such an
agreement, attaching the most current version of such agreement (or a
description of all material terms and conditions thereof) to such notice and
(ii) Acquirer upon such termination pursuant to this clause (d) pays to the
Company in immediately available funds the fees required to be paid pursuant to
Section 9.5. Acquirer agrees to notify the Company promptly if its
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intention to enter into a written agreement referred to in its notification
pursuant to clause (d) above shall change at any time after giving such
notification.
For the purposes of this Agreement, a "COMPANY TRIGGERING EVENT" shall be
deemed to have occurred if: (i) the Board of Directors of the Company or any
committee thereof shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Acquirer its recommendation in favor of, the
adoption and approval of the Agreement or the approval of the Merger; (ii) the
Company shall have failed to include in the Joint Proxy Statement/Prospectus the
recommendation of the Board of Directors of the Company in favor of the adoption
and approval of the Agreement and the approval of the Merger; (iii) the Board of
Directors of the Company or any committee thereof shall have approved or
recommended any Superior Proposal with respect to the Company; or (iv) a tender
or exchange offer relating to securities of the Company shall have been
commenced by a Person unaffiliated with Acquirer and the Company shall not have
sent to its securityholders pursuant to Rule 14e-2 promulgated under the
Exchange Act, within ten business days after such tender or exchange offer is
first published, sent or given, a statement disclosing that the Company
recommends rejection of such tender or exchange offer.
SECTION 9.3 Termination by the Company. This Agreement may be terminated
at any time prior to the Effective Time, before or after the approval by the
stockholders of Acquirer or the Company, by action of the Board of Directors of
the Company, if (a) Acquirer shall have failed to comply in any material respect
with any of the covenants or agreements contained in Articles I, II, VI and VII
of this Agreement to be complied with or performed by Acquirer at or prior to
such date of termination; provided, however, that if such failure to comply is
capable of being cured prior to the End Date, such failure shall not have been
cured within 15 days of delivery to Acquirer of written notice of such failure,
(b) there exists a breach or breaches of any representation or warranty of
Acquirer contained in this Agreement such that the closing condition set forth
in Section 8.3(a) would not be satisfied; provided, however, that if such breach
or breaches are capable of being cured prior to the End Date, such breaches
shall not have been cured within 15 days of delivery to Acquirer of written
notice of such breach or breaches, (c) an Acquirer Triggering Event (as defined
below) shall have occurred, or (d)(i) the Board of Directors of the Company
authorizes the Company, subject to complying with the terms of this Agreement,
to enter into a binding written agreement concerning a transaction that
constitutes a Superior Proposal with respect to the Company and the Company
notifies Acquirer in writing in accordance with Section 5.2 that it intends to
enter into such an agreement, attaching the most current version of such
agreement (or a description of all material terms and conditions thereof) to
such notice and (ii) the Company upon such termination pursuant to this clause
(d) pays to Acquirer in immediately available funds the fees required to be paid
pursuant to Section 9.5.
For the purposes of this Agreement, an "ACQUIRER TRIGGERING EVENT" shall be
deemed to have occurred if: (i) the Board of Directors of Acquirer or any
committee thereof shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to the Company its recommendation in favor of, the
adoption and approval of the Agreement or the approval of the Merger; (ii)
Acquirer shall have failed to include in the Joint Proxy Statement/Prospectus
the recommendation of the Board of Directors of Acquirer in favor of the
adoption and approval of the Agreement and the approval of the Merger; (iii) the
Board of Directors of Acquirer or any committee thereof shall have approved or
recommended any Superior Proposal with respect to Acquirer; or (iv) a tender or
exchange offer relating to securities of Acquirer shall have been commenced by a
Person unaffiliated with Acquirer and Acquirer shall not have sent to its
securityholders pursuant to Rule 14e- promulgated under the Exchange Act, within
ten business days after such tender or exchange offer is first published, sent
or given, a statement disclosing that Acquirer recommends rejection of such
tender or exchange offer.
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SECTION 9.4 Procedure for Termination. In the event of termination by
Acquirer or the Company pursuant to this Article IX, written notice thereof
shall forthwith be given to the other.
SECTION 9.5 Effect of Termination. (a) In the event of termination of this
Agreement pursuant to this Article IX, no party hereto (or any of its directors
or officers) shall have any liability or further obligation to any other party
to this Agreement, except as provided in this Section 9.5 and Section 7.1(b)
hereof.
(b) If
(i) the Company shall terminate this Agreement pursuant to Section
9.3(d);
(ii) Acquirer shall terminate this Agreement pursuant to Section
9.2(c), unless at the time of such Company Triggering Event, any of the
conditions set forth in Section 8.3(a) would not have been satisfied as of
such date and would not be reasonably capable of being satisfied; or
(iii) either the Company or Acquirer shall terminate this Agreement
pursuant to Section 9.1(d) in circumstances where the Company Stockholder
Approval was not been obtained at the Company Stockholder Meeting and prior
to the Company Stockholder Meeting a Company Acquisition Proposal was made
by any Person and within twelve months after termination of this Agreement
the Company consummates a Company Acquisition or enters into a definitive
agreement with respect to such Company Acquisition Proposal that provides
for a Company Acquisition;
then in any case as described in clause (i), (ii) or (iii) the Company shall pay
to Acquirer (by wire transfer of immediately available funds not later than the
date of termination of this Agreement or, in the case of clause (iii), the date
of such definitive agreement) an amount equal to $5,000,000. Except as provided
in Section 9.5(d), the fees provided for in this Section 9.5(b) are intended to
be liquidated damages and, as such, the sole and exclusive remedy for any and
all claims on any theory that might be asserted with respect to any of the
matters discussed in this Article IX, and no party hereto shall seek any
additional damages or remedies at law or in equity as a result or consequence of
any such matter. Acceptance by Acquirer of the payment referred to in the
foregoing sentence shall constitute conclusive evidence that this Agreement has
been validly terminated and upon acceptance of payment of such amount the
Company shall be fully released and discharged from any liability or obligation
resulting from or under this Agreement. For purposes of this Agreement, the term
"COMPANY ACQUISITION" shall mean (i) a merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving the Company pursuant to which the stockholders of the Company
immediately preceding such transaction hold less than fifty percent (50%) of the
aggregate equity interests in the surviving or resulting entity of such
transaction, (ii) a sale or other disposition by the Company of assets
representing in excess of fifty percent (50%) of the aggregate fair market value
of the Company's business immediately prior to such sale, or (iii) the
acquisition by any person or group (including by way of a tender offer or an
exchange offer or issuance by the Company), directly or indirectly, of
beneficial ownership or a right to acquire beneficial ownership of shares
representing in excess of fifty percent (50%) of the voting power of the then
outstanding shares of capital stock of the Company.
(c) If
(i) Acquirer shall terminate this Agreement pursuant to Section
9.2(d);
(ii) the Company shall terminate this Agreement pursuant to Section
9.3(c), unless at the time of such Acquirer Triggering Event, any of the
conditions set forth in Section 8.2(a) would not have been satisfied as of
such date and would not be reasonably capable of being satisfied;
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(iii) either the Company or Acquirer shall terminate this Agreement
pursuant to Section 9.1(d) in circumstances where the Acquirer Stockholder
Approval was not been obtained at the Acquirer Stockholder Meeting and
prior to the Acquirer Stockholder Meeting an Acquirer Acquisition Proposal
was made by any Person and within twelve months after termination of this
Agreement Acquirer consummates the transaction contemplated by such
Acquirer Acquisition Proposal or enters into a definitive agreement with
respect to such Acquirer Acquisition Proposal;
then in any case as described in clause (i), (ii) or (iii) Acquirer shall pay to
the Company (by wire transfer of immediately available funds not later than the
date of termination of this Agreement or, in the case of clause (iii), the date
of such definitive agreement) an amount equal to $5,000,000. Except as provided
in Section 9.5(d), the fees provided for in this Section 9.5(c) are intended to
be liquidated damages and, as such, the sole and exclusive remedy for any and
all claims on any theory that might be asserted with respect to any of the
matters discussed in this Article IX, and no party hereto shall seek any
additional damages or remedies at law or in equity as a result or consequence of
any such matter. Acceptance by the Company of the payment referred to in the
foregoing sentence shall constitute conclusive evidence that this Agreement has
been validly terminated and upon acceptance of payment of such amount Acquirer
shall be fully released and discharged from any liability or obligation
resulting from or under this Agreement.
(d) Notwithstanding anything to the contrary, payment of the fees provided
for in Section 9.5 shall not be in lieu of damages incurred in the event of a
willful or intentional breach of this Agreement by either party.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Notices. Any notice, request, instruction or other document
to be given hereunder by any party to the other shall be in writing and
delivered personally or sent by certified mail, postage prepaid, by telecopy
(with receipt confirmed and promptly confirmed by personal delivery, U.S. first
class mail, or courier), or by courier service, as follows:
(a) If to Acquirer or Merger Subsidiary to:
S3 Incorporated
2801 Mission College Boulevard
Santa Clara, CA 95052-8058
Attn: Chief Executive Officer
Telecopier: (408) 588-8050
with a copy to:
Pillsbury Madison & Sutro LLP
2550 Hanover Street
Palo Alto, CA 94304
Attn: Jorge A. del Calvo
Telecopier: (650) 233-4545
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(b) If to the Company to:
Diamond Multimedia Systems, Inc.
2880 Junction Avenue
San Jose, CA 95134
Attention: Chief Executive Officer
Telecopier: (408) 325-7145
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94306
Attn: Jeffrey D. Saper
Telecopier: (650) 493-6811
SECTION 10.2 Non-Survival of Representations and Warranties. The
representations and warranties contained herein and in any certificate or other
writing delivered pursuant hereto shall not survive the Effective Time or the
termination of this Agreement.
SECTION 10.3 Amendments; No Waivers. (a) Any provision of this Agreement
(including the Exhibits and Schedules hereto) may be amended or waived prior to
the Effective Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company, Acquirer and Merger
Subsidiary, or in the case of a waiver, by the party against whom the waiver is
to be effective; provided that after the adoption of this Agreement by the
stockholders of the Company, no such amendment or waiver shall, without the
further approval of such stockholders, alter or change (i) the amount or kind of
consideration to be received in exchange for any shares of capital stock of the
Company, (ii) any term of the certificate of incorporation of the Surviving
Corporation or (iii) any of the terms or conditions of this Agreement if such
alteration or change would adversely affect the holders of any shares of capital
stock of the Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 10.4 Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto except that Merger Subsidiary
may transfer or assign, in whole or from time to time in part, to one or more of
its affiliates, its rights under this Agreement, but any such transfer or
assignment will not relieve Merger Subsidiary of its obligations hereunder.
SECTION 10.5 Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware, without regard
to principles of conflicts of law.
SECTION 10.6 Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby shall be brought
exclusively in the Court of Chancery of the State of Delaware, and each of the
parties hereby consents to the jurisdiction of such court (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such suit,
action or proceeding in any such court or that any such suit, action or
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proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 10.1 shall be deemed
effective service of process on such party.
SECTION 10.7 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 10.8 Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
SECTION 10.9 Entire Agreement. This Agreement (including the Exhibits and
Schedules hereto) and the Confidentiality Agreement constitute the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersede all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter hereof and
thereof. Except as provided in Section 6.3(c), no provision of this Agreement or
any other agreement contemplated hereby is intended to confer on any Person
other than the parties hereto any rights or remedies.
SECTION 10.10 Captions. The captions herein are included for convenience
of reference only and shall be ignored in the construction or interpretation
hereof.
SECTION 10.11 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon such
a determination, the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner in order that the transactions contemplated
hereby be consummated as originally contemplated to the fullest extent possible.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed,
all as of the date first above written.
S3 INCORPORATED
By /s/ KENNETH F. POTASHNER
--------------------------------------------
Kenneth F. Potashner
President and Chief Executive Officer
DIAMOND MULTIMEDIA SYSTEMS, INC.
By /s/ WILLIAM J. SCHROEDER
--------------------------------------------
William J. Schroeder
President and Chief Executive Officer
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APPENDIX B
LEHMAN BROTHERS
June 21, 1999
Board of Directors
S3 Incorporated
2841 Mission College Boulevard
Santa Clara, CA 95054
Members of the Board:
We understand that S3 Incorporated ("S3" or the "Company") has entered into
an agreement with Diamond Multimedia Systems, Inc. ("Diamond") pursuant to which
a wholly owned subsidiary of S3 will be merged with Diamond and all outstanding
shares of common stock of Diamond will be exchanged for shares of common stock
of S3 at an exchange ratio of 0.52 shares of S3 common stock for each share of
Diamond common stock (the "Exchange Ratio") (the "Proposed Transaction"). In
addition, all outstanding options to purchase shares of common stock of Diamond
will be exchanged for options to purchase shares of common stock of S3 at the
Exchange Ratio. The terms and conditions of the Proposed Transaction are set
forth in more detail in the Agreement and Plan of Merger dated June 21, 1999
between S3 and Diamond (the "Agreement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company of the Exchange Ratio to be offered to Diamond's stockholders in the
Proposed Transaction. We have not been requested to opine as to, and our opinion
does not in any manner address, the Company's underlying business decision to
proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning the Company and Diamond that we believe to be relevant to
our analysis, (3) financial and operating information with respect to the
business, operations and prospects of the Company and Diamond furnished to us by
the Company and Diamond, (4) publicly available estimates of the future
financial performances of the Company and Diamond prepared by third party
research analysts, (5) a trading history of the Company's common stock from June
20, 1994 to the present and a comparison of that trading history with those of
other companies that we deemed relevant, (6) a trading history of Diamond's
common stock from April 13, 1995 to the present and a comparison of that trading
history with those of other companies that we deemed relevant, (7) a comparison
of the historical financial results and present financial condition of the
Company with those of other companies that we deemed relevant, (8) a comparison
of the historical financial results and present financial condition of Diamond
with those of other companies that we deemed relevant, (9) a comparison of the
financial terms of the Proposed Transaction with the financial terms of certain
other transactions that we deemed relevant, (10) the potential pro forma
financial effects of the Proposed Transaction on the Company based upon
projections of the future financial performance of the combined company
following consummation of the Proposed Transaction furnished to us by the
Company and Diamond, including without limitation the impact on revenues and the
cost savings expected to result from a combination of the businesses of the
Company and Diamond, and (11) a comparison of the relative contributions of the
Company and Diamond to the combined company following
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consummation of the Proposed Transaction. In addition, we have had discussions
with the management of the Company and Diamond concerning their respective
businesses, operations, assets, financial conditions and prospects and have
undertaken such other studies, analyses and investigations as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of the managements of the Company and
Diamond that they are not aware of any facts or circumstances that would make
such information inaccurate or misleading. With respect to the financial
projections of the Company, upon advice of the Company, we have assumed that
such projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of the Company as
to the future financial performance of the Company and that the Company, on a
stand alone basis, would perform substantially in accordance with such
projections. With respect to the financial projections of Diamond, upon advice
of the Company and Diamond, we have assumed that such projections have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of Diamond as to the future financial
performance of Diamond and that Diamond, on a stand alone basis, would perform
substantially in accordance with such projections. With respect to the financial
projections of the combined company following consummation of the Proposed
Transaction, upon advice of the Company and Diamond, we have assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the managements of the Company
and Diamond as to the future financial performance of the combined company
following consummation of the Proposed Transaction and we have relied upon such
projections in arriving at our opinion. We have not conducted a physical
inspection of the properties and facilities of the Company or Diamond and have
not made or obtained any evaluations or appraisals of the assets or liabilities
of the Company or Diamond. Our opinion necessarily is based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Exchange Ratio to be
offered to the stockholders of Diamond by the Company in the Proposed
Transaction is fair to the Company.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. In the ordinary course of our business, we actively
trade in the debt and equity securities of the Company and Diamond for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
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APPENDIX C
WASSERSTEIN PERELLA & CO.
June 22, 1999
Board of Directors
Diamond Multimedia Systems, Inc.
2880 Junction Avenue
San Jose, CA 95134
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the stockholders of Diamond Multimedia Systems, Inc.
(the "Company") of the Exchange Ratio (as defined below) provided for pursuant
to the terms of the Agreement and Plan of Merger, dated as of June 22, 1999 (the
"Merger Agreement"), between the Company and S3 Incorporated ("Parent"). The
Merger Agreement provides for, among other things, a merger of a wholly owned
subsidiary of Parent ("Sub") with and into the Company (the "Merger") pursuant
to which each outstanding share of common stock, par value $.001 per share, of
the Company (other than any such shares held in the treasury of the Company or
owned by Parent, Sub or their respective subsidiaries) will be converted into
0.52 shares of common stock, par value $.0001 per share, of Parent (the
"Exchange Ratio") subject to adjustment as set forth in the Merger Agreement. In
connection with the Merger Agreement, Parent has agreed to loan up to $20
million to the Company to enable it to fund its current operations. The terms
and conditions of the Merger are set forth in more detail in the Merger
Agreement.
In connection with rendering our opinion, we have reviewed the Merger
Agreement. We have also reviewed and analyzed certain publicly available
business and financial information relating to the Company and Parent for recent
years and interim periods to date, as well as certain internal financial and
operating information, including financial forecasts, analyses and projections
prepared by or on behalf of the Company and Parent and provided to us for
purposes of our analysis, and we have met with management of the Company and
Parent to review and discuss such information and, among other matters, each of
the Company's and Parent's business, operations, assets, financial condition and
future prospects. Among the forecasts we reviewed and discussed with management
of the Company and Parent, as applicable, in connection with rendering our
opinion were forecasts of the Company on a stand alone basis and forecasts of
the Company and Parent on a combined basis assuming consummation of the Merger
(the "Business Plans"). We have also met with management of the Company to
discuss and review the Company's anticipated operating expenses and other cash
needs and its liquidity constraints, including the ability of the Company to
secure alternative sources of financing (the "Liquidity Analysis").
We have reviewed and considered certain financial and stock market data
relating to the Company and Parent, and we have compared that data with similar
data for certain other companies, the securities of which are publicly traded,
that we believe may be relevant or comparable in certain respects to the Company
and Parent or one or more of their respective businesses or assets, and we have
reviewed and considered the financial terms of certain recent acquisitions and
business combination transactions in the multimedia and subsystems industry and
the peripherals industry specifically, and in other industries generally, that
we believe to be reasonably comparable to the merger or otherwise relevant to
our inquiry. We have also performed such other financial studies,
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analyses, and investigations and reviewed such other information as we
considered appropriate for purposes of this opinion. In formulating our opinion,
we relied on (i) the fact that the Company's decision to enter into the Merger
Agreement was preceded by a 14-month process during which merger proposals were
solicited by or on behalf of the Company from potential parties which included
parties that the Company believed were logical merger partners, and (ii) the
Company's assessment that the Merger Agreement represents the only transaction
reasonably available to the Company that will provide both the cash necessary to
enable the Company to fund its ongoing operations and a reasonable opportunity
to enable the Company to achieve its strategic objectives.
In our review and analysis and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to or discussed with us or publicly available, and we have
not assumed any responsibility for independent verification of any of such
information. We have also assumed and relied upon the reasonableness and
accuracy of the financial projections, forecasts and analyses provided to us,
including the Liquidity Analysis, and the Business Plans, and specifically the
strategic and financial benefits anticipated to result from the consummation of
the Merger as well as estimates of certain cost savings and other operating
efficiencies expected to result from consummation of the Merger, and we have
assumed that such projections, forecasts and analyses were reasonably, prepared
in good faith and on bases reflecting the best currently available judgments and
estimates of the Company's and Parent's management. We express no opinion with
respect to such projections, forecasts and analyses, including the Liquidity
Analysis and Business Plans, or the assumptions upon which they were based. In
addition, we have not reviewed any of the books and records of the properties or
facilities of the Company or Parent, or assumed any responsibility for
conducting a physical inspection of the properties or facilities of the Company
or Parent, or for making or obtaining an independent valuation or appraisal of
the assets or liabilities of the Company or Parent, and no such independent
valuation or appraisal was provided to us. We note that the Merger is intended
to qualify as a tax-free reorganization for United States federal tax purposes,
and we have assumed that the Merger will so qualify. We have assumed that
obtaining all regulatory and other approvals and third party consents required
for consummation of the Merger will not have an adverse impact on the Company or
Parent or on the anticipated benefits of the Merger, and we have assumed that
the transactions described in the Merger Agreement will be consummated without
waiver or modification of any of the material terms or conditions contained
therein by any party thereto. Furthermore, we have assumed that there is no
adjustment to the Exchange Ratio. Our opinion is necessarily based on economic
and market conditions and other circumstances as they exist and can be evaluated
by us as of the date hereof. We are not expressing any opinion herein as to the
prices at which any securities of Parent or the Company will actually trade at
any time.
In the ordinary course of our business, we may actively trade the debt and
equity securities of the Company and Parent for our own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
Our opinion addresses only the fairness from a financial point of view to
the shareholders of the Company of the Exchange Ratio provided for pursuant to
the Merger Agreement, and we do not express any views on any other term of the
Merger. Specifically, our opinion does not address the Company's underlying
business decision to effect the transactions contemplated by the Merger
Agreement. In addition, our opinion does not address the solvency of the Company
or the Parent following consummation of the Merger or at any time.
It is understood that this letter is for the benefit and use of the Board
of Directors of the Company in its consideration of the Merger and except for
inclusion in its entirety in any registration statement or proxy statement
required to be circulated to shareholders of the Company relating to the Merger,
may not be quoted, referred to or reproduced at any time or in any manner
without our prior
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written consent. This opinion does not constitute a recommendation to any
shareholder or as to how such holder should vote with respect to the Merger, and
should not be relied upon by any shareholder as such.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date hereof
the Exchange Ratio provided for pursuant to the Merger Agreement is fair to the
shareholders of the Company from a financial point of view.
Very truly yours,
WASSERSTEIN PERELLA & CO., INC.
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APPENDIX D
PROPOSED AMENDMENT TO THE S3 RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES
ARTICLE IV
A. Number and Classes of Stock. This Corporation is authorized to issue two
classes of stock, designated "Preferred Stock" and "Common Stock," respectively.
The total number of shares which this Corporation shall have authority to issue
is one hundred eighty million (180,000,000). The number of shares of Common
Stock authorized to be issued is one hundred seventy-five million (175,000,000)
with a par value of $0.0001. The number of shares of Preferred Stock authorized
to be issued is five million (5,000,000) with a par value of $0.0001. The number
of authorized shares of Common Stock or Preferred Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the then outstanding shares of
Common Stock, without a vote of the holders of the Preferred Stock, or of any
series thereof, unless a vote of any such Preferred Stock holders is required
pursuant to the provisions established by the Board of Directors of this
Corporation (the "Board of Directors") in the resolution or resolutions
providing for the issue of such Preferred Stock, and if such holders of such
Preferred Stock are so entitled to vote thereon, then, except as may otherwise
be set forth in this Restated Certificate of Incorporation, the only stockholder
approval required shall be the affirmative vote of a majority of the combined
voting power of the Common Stock and the Preferred Stock so entitled to vote.
B. Preferred Stock. The Preferred Stock may be issued from time to time in
one or more series. The Board of Directors is expressly authorized to provide
for the issue, in one or more series, of all or any of the remaining shares of
Preferred Stock and, in the resolution or resolutions providing for such issue,
to establish for each such series the number of its shares, the voting powers,
full or limited, of the shares of such series, or that such shares shall have no
voting powers, and the designations, preferences and relative, participating,
optional or other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof. The Board of Directors is
also expressly authorized (unless forbidden in the resolution or resolutions
providing for such issue) to increase or decrease (but not below the number of
shares of the series then outstanding) the number of shares of any series
subsequent to the issuance of shares of that series. In case the number of
shares of any such series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
C. Common Stock.
1. Relative Rights of Preferred Stock and Common Stock. All
preferences, voting powers, relative, participating, optional or other
special rights and privileges, and qualifications, limitations or
restrictions of the Common Stock are expressly made subject and subordinate
to those that may be fixed with respect to any shares of the Preferred
Stock.
2. Voting Rights. Except as otherwise required by law or this Restated
Certificate of Incorporation, each holder of Common Stock shall have one
vote in respect of each share of stock held by such holder of record on the
books of the corporation for the election of directors and on all matters
submitted to a vote of stockholders of the corporation.
3. Dividends. Subject to the preferential rights of the Preferred
Stock, the holders of shares of Common Stock shall be entitled to receive,
when and if declared by the Board of
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Directors, out of the assets of this Corporation which are by law available
therefor, dividends payable either in cash, in property or in shares of
capital stock.
4. Dissolution, Liquidation or Winding Up. In the event of any
dissolution, liquidation or winding up of the affairs of this Corporation,
after distribution in full of the preferential amounts, if any, to be
distributed to the holders of shares of the Preferred Stock, holders of
Common Stock shall be entitled, unless otherwise provided by law or this
Restated Certificate of Incorporation, to receive all of the remaining
assets of the corporation of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of Common Stock
held by them respectively.
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<PAGE> 164
PROXY S3 INCORPORATED EXHIBIT 99.1
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby authorizes KENNETH F. POSTASHNER, TERRY N. HOLDT,
WALTER D. AMARAL AND RONALD T. YARA, as proxies with full power in each to act
without the other and with the power of substitution in each, to represent and
to vote all the shares of stock of S3 Incorporated (the "Company") the
undersigned is entitled to vote with respect to the proposals set forth below
and in the discretion of such proxies on all other matters that may properly be
presented for action at the Special Meeting of Stockholders of the Company to be
held on September 20, 1999, or at any postponement or adjournment thereof.
[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, the proxies will have
authority to vote FOR Proposals 1, 2 and 3.
(1) Proposal to approve the issuance of shares of common stock, par value
$0.0001 per share, of the Company under the terms of the merger agreement
between the Company and Diamond Multimedia Systems, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) Proposal to amend, subject to approval of proposal 1 above and the
completion of the merger contemplated thereby, the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock of the Company from 120,000,000 to 175,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) Proposal to elect, subject to completion of the merger and with effect
immediately after the merger, Mr. William J. Schroeder, Mr. Gregorio Reyes
and Mr. James T. Schraith as directors of the Company to serve until the
next Annual Meeting of Stockholders or until their successors are duly
elected and qualified.
[ ] FOR all nominees [ ] WITHHELD from all nominees
- -------------------------------------------------------
[ ] FOR ALL NOMINEES EXCEPT AS NOTED
ABOVE
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.
Dated:
-----------------------------
--------------------------------
Signature
Dated:
-----------------------------
--------------------------------
Signature
<PAGE> 165
PROXY DIAMOND MULTIMEDIA SYSTEMS, INC. EXHIBIT 99.2
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby authorizes WILLIAM J. SCHROEDER and JAMES M. WALKER,
as Proxies with full power in each to act without the other and with the power
of substitution in each, to represent and to vote all the shares of stock the
undersigned is entitled to vote at the Special Meeting of Stockholders of
Diamond Multimedia Systems, Inc. to be held on September 20, 1999, or at any
postponement or adjournment thereof on the following matters set forth on the
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 Proposal 1.
(1) Proposal to approve the merger between Diamond Multimedia Systems, Inc. and
a wholly owned subsidiary of S3 Incorporated.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on reverse side)
(2) In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting and any
adjournments thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
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.
Dated:
-----------------------------
--------------------------------
Signature
Dated:
-----------------------------
--------------------------------
Signature
