<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Diamond Multimedia Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[DIAMOND MULTIMEDIA LOGO]
DIAMOND MULTIMEDIA SYSTEMS, INC.
2880 JUNCTION AVENUE
SAN JOSE, CA 95134-1922
April 26, 1999
Dear Stockholder,
You are cordially invited to attend the Company's 1999 Annual Meeting on
Friday, May 21, 1999.
The meeting will begin promptly at 9:00 a.m., local time, at The Marriott
Hotel, 2700 Mission College Boulevard, Santa Clara, CA 95054. Please note that a
map has been provided for your convenience.
The official Notice of Meeting, proxy statement and form of proxy are
included with this letter. The matters listed in Notice of Meeting are described
in detail in the proxy statement.
The vote of every stockholder is important. Mailing your completed proxy
will not prevent you from voting in person at the meeting if you wish to do so.
Please complete, sign, date and promptly mail your proxy. Your cooperation will
be greatly appreciated.
Your Board of Directors and management look forward to greeting personally
those stockholders who are able to attend.
Sincerely,
/s/ William J. Schroeder
William J. Schroeder
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 3
[DIAMOND MULTIMEDIA LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1999
TO THE STOCKHOLDERS OF DIAMOND MULTIMEDIA SYSTEMS, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Diamond Multimedia
Systems, Inc., a Delaware corporation (the "Company"), will be held on Friday,
May 21, 1999, at 9:00 a.m., local time, at The Marriott Hotel, 2700 Mission
College Boulevard, Santa Clara, California 95054, for the following purposes:
1. To elect six directors to serve for the ensuing year or until their
successors are elected and duly qualified;
2. To approve an amendment to the 1995 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 400,000 shares;
3. To approve an amendment to the 1995 Director Option Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
150,000;
4. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal year ending December 31, 1999;
and
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on April 1, 1999 are
entitled to notice of and to vote at the meeting and any continuation or
adjournment thereof.
For the Board of Directors
/s/ Jeffrey D. Saper
Jeffrey D. Saper
Secretary
San Jose, California
April 26, 1999
YOUR VOTE IS IMPORTANT
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON.
HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK,
SIGN, DATE, AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE
POSTAGE-PAID ENVELOPE ENCLOSED FOR THAT PURPOSE. RETURNING YOUR PROXY WILL HELP
THE COMPANY ASSURE A QUORUM AND AVOID THE ADDITIONAL EXPENSE OF DUPLICATE PROXY
SOLICITATIONS. ANY STOCKHOLDER ATTENDING THE MEETING MAY VOTE IN PERSON EVEN IF
HE OR SHE HAS RETURNED THE PROXY.
<PAGE> 4
DIAMOND MULTIMEDIA SYSTEMS, INC.
------------------------
PROXY STATEMENT
------------------------
1999 ANNUAL MEETING OF STOCKHOLDERS
MAY 21, 1999
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Diamond Multimedia Systems, Inc. (the "Company") for use at the Annual Meeting
of Stockholders to be held on Friday, May 21, 1999, at 9:00 a.m., local time,
(the "Annual Meeting"), or at any continuation or adjournment thereof, for the
purposes set forth herein and in the accompanying Notice of Annual Meeting of
Stockholders. The Annual Meeting will be held at The Marriott Hotel, located at
2700 Mission College Boulevard, Santa Clara, CA 95054. The telephone number at
this address is (408) 988-1500.
These proxy solicitation materials and the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1998, including financial
statements, were mailed on or about April 26, 1999 to all the stockholders
entitled to vote at the Annual Meeting.
RECORD DATE AND SHARE OWNERSHIP
Only stockholders of record at the close of business April 1, 1999 (the
"Record Date") are entitled to receive notice of and to vote at the Annual
Meeting. As of the Record Date, the Company had 35,286,652 shares of Common
Stock outstanding. For information regarding holders of more than 5% of the
outstanding Common Stock, see "Security Ownership of Certain Beneficial Owners
and Management."
REVOCABILITY OF PROXIES
Any person giving a proxy in the form accompanying this statement has the
power to revoke it at any time before it is voted. It may be revoked by filing,
with the Secretary of the Company at the Company's principal executive office,
2880 Junction Avenue, San Jose, California 95134, a written notice of revocation
or a duly executed proxy bearing a later date, or it may be revoked by attending
the Annual Meeting and voting in person.
VOTING AND SOLICITATION
Each stockholder is entitled to one vote for each share of Common Stock in
all matters presented at the Annual Meeting. Stockholders do not have the right
to cumulate their vote in the election of directors.
The cost of this solicitation will be borne by the Company. In addition,
the Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitations by
directors, officers or employees of the Company. No additional compensation will
be paid for any such services.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting
is a majority of the shares of Common Stock issued and outstanding on the Record
Date. Shares that are voted "FOR," "AGAINST" or "ABSTAIN" with respect to a
matter are treated as being present at the meeting for purposes of establishing
a quorum and are also treated as shares "represented and voting" (the "Votes
Cast") at the Annual Meeting with respect to such matter.
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<PAGE> 5
While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
The Delaware Supreme Court has held that, while broker non-votes should be
counted for purposes of determining the presence or absence of a quorum for the
transaction of business, broker non-votes should not be counted for purposes of
determining the number of Votes Cast with respect to the particular proposal on
which the broker has expressly not voted. The Company intends to treat broker
non-votes in a similar manner. Thus, a broker non-vote will not affect the
outcome of the voting on a proposal.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be presented
by such stockholders at the Company's 2000 Annual Meeting of Stockholders must
be received by the Company no later than December 19, 1999, in order that they
may be considered for inclusion in the proxy statement and form of proxy
relating to that meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
The number of directors authorized by the Company's bylaws is six (6). Six
directors are to be elected at the Annual Meeting. Unless otherwise instructed,
the proxy holders will vote the proxies received by them for the Company's
nominees named below. All nominees are currently directors of the Company. In
the event that any nominee of the Company is unable or declines to serve as a
director at the time of the Annual Meeting, the proxies will be voted for any
nominee who shall be designated by the present Board of Directors to fill the
vacancy. It is not expected that any nominee will be unable or will decline to
serve as a director. The term of office of each person elected as director will
continue until the next Annual Meeting of Stockholders or until a successor has
been duly elected and qualified.
NOMINEES FOR DIRECTOR
Set forth below is certain information regarding the nominees:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
William J. Schroeder................. 54 Chairman of the Board, President 1994
and Chief Executive Officer
Bruce C. Edwards(2).................. 45 President and CEO of Powerwave 1995
Technologies, Inc.
Carl W. Neun(2)...................... 55 Senior Vice President and Chief 1998
Financial Officer of Tektronix, Inc.
Gregorio Reyes(1).................... 58 Chairman of the Board of Sync 1995
Research
Jeffrey D. Saper(2).................. 50 Partner in the law firm of Wilson 1992
Sonsini Goodrich & Rosati
James T. Schraith(1)................. 41 President and Chief Executive Officer 1998
of ShareWave, Inc.
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Except as indicated below, each nominee or incumbent director has been
engaged in the principal occupation set forth above during the past five years.
There are no family relationships between any director or executive officer of
the Company.
2
<PAGE> 6
Mr. Schroeder has served as the Company's President and Chief Executive
Officer and as a member of the Board of Directors since May 1994. He has served
as Chairman of the Board of Directors of the Company since 1998. Mr. Schroeder
was employed by Conner Peripherals, Inc. ("Conner") from 1986 to 1994, initially
as President and from 1989 as Vice Chairman of the Board of Directors. He was
also President of Conner's New Products Group from 1989 to 1990, President of
Archive Corporation (a Conner subsidiary) from January 1993 to November 1993,
and CEO of Arcada Software, Inc. (a Conner subsidiary) from November 1993 to May
1994. Mr. Schroeder is a director of Xircom, Inc., Sync Research, Inc. and CNF
Transportation, Inc.
Mr. Edwards has been a director of the Company since January 1995. Since
February 1996, he has served as President and Chief Executive Officer of
Powerwave Technologies, Inc., a manufacturer of RF power amplifiers for the
wireless communications industry. Previously, Mr. Edwards was employed by AST
Research, Inc. as Senior Vice President, Chief Financial Officer from 1988 until
July 1994 and as Executive Vice President, Chief Financial Officer and a
director from July 1994 to December 1995. Mr. Edwards is also a director of HMT
Technology Corporation and Powerwave Technologies, Inc.
Mr. Neun has been a director of the Company since January 1998. Mr. Neun
has been employed by Tektronix since March 1993 initially as Vice President and
Chief Financial Officer, and as Senior Vice President from 1995 to the present.
Previously, Mr. Neun was Senior Vice President of Administration and Chief
Financial Officer at Conner Periperhals, Inc. from 1987 to 1993.
Mr. Reyes has been a director of the Company since January 1995. Mr. Reyes
is Chairman of the Board of Sync Research. Mr. Reyes was Chairman of the Board
and Chief Executive Officer of Sunward Technologies, Inc. from 1985 to August
1994. From 1986 to August 1990, Mr. Reyes was Chairman and CEO of American
Semiconductor Equipment Technologies (ASET). Mr. Reyes is a director at C-Cube
Microsystems as well as several other private companies.
Mr. Saper has served as a director and as Secretary of the Company since
December 1992. He has been a partner of the law firm Wilson Sonsini Goodrich &
Rosati, Professional Corporation, since 1980. Mr. Saper is also a director of
Aspec Technology, Inc., and Proxim, Inc.
Mr. Schraith has been a director of the Company since March 1998. Mr.
Schraith is currently President and Chief Executive Officer of ShareWave, Inc.,
a company developing wireless home networking products. From October 1996 to
January 1998, Mr. Schraith was Vice-President and General Manager of the North
America Division of Compaq Computer. Previously, Mr. Schraith was Chief
Executive Officer and a director of the Cerplex Group, Inc. From 1987 to 1995,
Mr. Schraith was employed at AST Research, Inc., most recently serving as
President, Chief Operating Officer and Director. Mr. Schraith is also a director
of Semtech Corporation and Digital Archaeology, Inc.
BOARD MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 1998 (the "Last Fiscal Year"),
the Board of Directors held eight (8) meetings. Each of the directors during the
Last Fiscal Year attended at least 75% of the aggregate of all meetings of the
Board of Directors.
The Board of Directors has two standing committees: a Compensation
Committee and an Audit Committee.
The Compensation Committee consists of directors Reyes and Schraith. The
Compensation Committee makes recommendations to the Board concerning salaries
and incentive compensation for the Company's officers and administers the
Company's 1998, 1994 and 1992 Stock Plans. The Compensation Committee met one
(1) time during 1998.
The Audit Committee consists of directors Edwards, Neun and Saper. The
Audit Committee reviews the results and scope of the audit and other accounting
related services and evaluates the Company's internal audit and control
functions. The Audit Committee met three (3) times during 1998.
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<PAGE> 7
The Board of Directors also has designated a Stock Option Committee of
Management, which consists of Mr. Schroeder and Mr. James M. Walker. The Stock
Option Committee of Management approves stock option grants to non-elected
officer employees of the Company in amounts not to exceed 25,000 shares, in
accordance with guidelines established by the Board of Directors. The Stock
Option Committee met five (5) times during 1998.
The Company does not have a nominating committee or a committee performing
the functions of a nominating committee.
DIRECTOR COMPENSATION
Directors who are not compensated as employees or consultants to the
Company receive a retainer of $20,000 per year for serving on the Board of
Directors, plus fees of $1,000 per board meeting and $500 per committee meeting,
provided such committee meeting does not occur on the same day as a board
meeting.
On January 3, 1995, following the leveraged recapitalization of the Company
effected on January 1, 1995 (the "Reorganization"), Messrs. Reyes, Edwards and
Saper were granted restricted stock purchase rights to purchase 30,000, 30,000
and 7,500 shares, respectively, of Common Stock at a purchase price of $0.07 per
share. Messrs. Reyes', Edwards' and Saper's shares are fully vested. The
purchase price of all such restricted stock purchase rights was equal to the
fair market value of the shares on the date of grant as determined by the Board
of Directors.
In January 1995, the 1995 Director Option Plan (the "Director Plan") was
adopted by the Board of Directors. The Director Plan provides for the grant of
options to purchase the Company's Common Stock to directors who are not
employees of the Company. A total of 175,000 shares of Common Stock have been
authorized for issuance under the Director Plan, subject to amendment under
Proposal 3, below. Each nonemployee director who does not beneficially own, or
whose affiliates do not beneficially own more than 5% of the Company's
outstanding shares of Common Stock who has joined the board is automatically
granted an option to purchase 40,000 shares of Common Stock at a price equal to
the fair market value on the date of grant. The initial grants vest at the rate
of 25% of the option shares upon the first anniversary of the date of grant and
1/48th of the option shares per month thereafter, unless terminated sooner upon
the termination of the optionee's status as a director or otherwise pursuant to
the Director Plan. Upon each reelection to the Board the nonemployee outside
director is granted an additional option to purchase 10,000 shares of Common
Stock at a price equal to the fair market value on the date of grant. The
subsequent grants vest in full on the date that is four (4) years after the date
of grant. In the event of a merger of the Company with or into another
corporation or a consolidation, acquisition of assets or other change in control
transaction involving the Company, each option becomes exercisable in full or
will be assumed for an equivalent option substituted by the successor
corporation. The Director Plan expires in 2005, unless terminated earlier by the
Board of Directors.
VOTE REQUIRED AND RECOMMENDATION
The six (6) nominees receiving the highest number of affirmative votes
shall be elected as directors. Votes withheld from any director are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, but have no other legal effect in the election of directors under
Delaware law.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
THE SLATE OF NOMINEES SET FORTH ABOVE.
PROPOSAL 2
AMENDMENT TO THE 1995 EMPLOYEE STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board of Directors in January 1995 and approved by the stockholders later
that year. A total of 650,000 shares of Common Stock
4
<PAGE> 8
has been reserved for issuance under the Purchase Plan by the stockholders. As
of April 1, 1999, a total of 100,474 shares remained available for issuance
under the Purchase Plan.
At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment to the Purchase Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by 400,000 shares,
bringing the total number of shares issuable under the Purchase Plan to
1,050,000.
SUMMARY OF THE PURCHASE PLAN
General. The purpose of the Purchase Plan is to provide employees with an
opportunity to purchase Common Stock of the Company through payroll deductions
in a manner that qualifies under Section 423 of the Internal Revenue Code (the
"Code").
Administration. The Purchase Plan may be administered by the Board of
Directors (the "Board") or a committee appointed by the Board. All questions of
interpretation or application of the Purchase Plan are determined by the Board
or its appointed committee, and its decisions are final, conclusive and binding
upon all participants.
Eligibility. Any regular employee of the Company, employed throughout the
Offering Period, is eligible to participate in an Offering Period (as defined
below); provided, however, that no employee shall be granted an option under the
Purchase Plan (i) to the extent that, immediately after the grant, such employee
would own 5% of either the voting power or value of the stock of the Company, or
(ii) to the extent that his or her rights to purchase stock under all employee
stock purchase plans of the Company accrues at a rate which exceeds Twenty-Five
Thousand Dollars ($25,000) worth of stock (determined at the fair market value
of the shares at the time such option is granted) for each calendar year.
Eligible employees become participants in the Purchase Plan by filing with the
Company a subscription agreement authorizing payroll deductions prior to the
beginning of each Offering Period unless a later time for filing the
subscription agreement has been set by the Board.
Participation in an Offering. The Purchase Plan is implemented by offering
periods usually lasting for six (6) months (an "Offering Period") with a new
Offering Period commencing on or about November 1 and May 1 of each year. In
1997, the Purchase Plan had three special Offering Periods. The "First Special
Offering Period" began May 26, 1997, and ended on May 31, 1998, the "Second
Special Offering Period" began June 1, 1998 and ended on October 31, 1998, and
the "Third Special Offering Period" began on November 1, 1997 and ended May 31,
1998. Beginning November 1, 1998 the Purchase Plan had six month Offering
Periods. The Board may change the length or date of commencement of an Offering
Period. To participate in the Purchase Plan, each eligible employee must
authorize payroll deductions pursuant to the Purchase Plan. Such payroll
deductions may not exceed 15% of a participant's compensation. Once an employee
becomes a participant in the Purchase Plan, the employee will automatically
participate in each successive Offering Period until such time as the employee
withdraws from the Purchase Plan or the employee's employment with the Company
terminates. At the beginning of each Offering Period, each participant is
automatically granted options to purchase shares of the Company's Common Stock.
The option expires at the end of the Offering Period or upon termination of
employment, whichever is earlier, but is exercised at the end of each Offering
Period to the extent of the payroll deductions accumulated during such Offering
Period.
Purchase Price, Shares Purchased. Shares of Common Stock may be purchased
under the Purchase Plan at a price not less than 85% of the lesser of the fair
market value of the Common Stock on (i) the first day of the Offering Period or
(ii) the last day of Offering Period. The "fair market value" of the Common
Stock on any relevant date will be the closing price per share as reported on
The Nasdaq National Market System. The number of shares of Common Stock a
participant purchases in each Offering Period is determined by dividing the
total amount of payroll deductions withheld from the participant's compensation
during that Offering Period by the purchase price. No more than 100,000 shares
may be purchased during any single offering period.
5
<PAGE> 9
Termination of Employment. Termination of a participant's employment for
any reason, including disability or death, cancels his or her option and
participation in the Purchase Plan immediately. In such event, the payroll
deductions credited to the participant's account will be returned to him or her
or, in the case of death, to the person or persons entitled thereto as provided
in the Purchase Plan.
Adjustment Upon Change in Capitalization, Change in Control. In the event
that the stock of the Company is changed by reason of any stock split, reverse
stock split, stock dividend, combination, reclassification or other change in
the capital structure of the Company effected without the receipt of
consideration, appropriate proportional adjustments shall be made in the number
and class of shares of stock subject to the Purchase Plan, the number and class
of shares of stock subject to options outstanding under the Purchase Plan, and
the exercise price of any such outstanding options. Any such adjustment shall be
made by the Board, whose determination shall be conclusive. Notwithstanding the
above, in connection with any merger or acquisition of assets involving the
Company, each option shall be assumed or an equivalent option substituted by
such successor corporation unless the Board determines, in lieu of such
assumption or substitution, to shorten the Offering Period then in progress to a
new exercise date or to cancel each outstanding right to purchase and refund all
sums collected. In the event the Board sets a new exercise date, the Board will
notify each participant at least 10 business days prior to the new exercise date
that his or her option shall be exercised automatically on the new exercise
date, unless prior to such date the participant has withdrawn from the Offering
Period.
Amendment and Termination of the Plan. The Board of Directors may at any
time terminate or amend the Purchase Plan. An Offering Period may be terminated
by the Board of Directors at the end of any Purchase Period if the Board
determines that termination of the Purchase Plan is in the best interests of the
Company and its shareholders. No amendment shall be effective unless it is
approved by the holders of a majority of the votes cast at a duly held
shareholders' meeting, if such amendment would require shareholder approval in
order to comply with Section 423 of the Code.
Withdrawal. Generally, a participant may withdraw from an Offering Period
at any time without affecting his or her eligibility to participate in future
Offering Periods. However, once a participant withdraws from a particular
offering, that participant may not participate again in the same offering.
Federal Tax Information for Purchase Plan. The Purchase Plan, and the right
of participants to make purchases thereunder, is intended to qualify under the
provisions of Sections 421 and 423 of the Code. Under these provisions, no
income will be taxable to a participant until the shares purchased under the
Purchase Plan are sold or otherwise disposed of. Upon sale or other disposition
of the shares, the participant will generally be subject to tax and the amount
of the tax will depend upon the holding period. If the shares are sold or
otherwise disposed of more than two (2) years from the first day of the Offering
Period or more than one (1) year from the date of transfer of the stock to the
participant, then the participant will recognize ordinary income measured as the
lesser of (i) the excess of the fair market value of the shares at the time of
such sale or disposition over the purchase price, or (ii) an amount equal to 15%
of the fair market value of the shares as of the first day of the Offering
Period. Any additional gain will be treated as long-term capital gain. If the
shares are sold or otherwise disposed of before the expiration of this holding
period, the participant will recognize ordinary income generally measured as the
excess of the fair market value of the shares on the date the shares are
purchased over the purchase price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
the holding period. The Company is not entitled to a deduction for amounts taxed
as ordinary income or capital gain to a participant except to the extent of
ordinary income is recognized by participants upon a sale or disposition of
shares prior to the expiration of the holding period(s) described above and
except to the extent permitted under Section 162(m) of the Code.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED UNDER
THE PURCHASE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE
CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF A
PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE OR FOREIGN COUNTRY IN
WHICH THE PARTICIPANT MAY RESIDE.
6
<PAGE> 10
VOTE REQUIRED AND RECOMMENDATION
At the Annual Meeting, the stockholders are being asked to approve an
amendment to increase the number of shares available under the Purchase Plan.
The affirmative vote of a majority of the votes cast at the Annual Meeting will
be required to approve the amendment to the Purchase Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
AMENDMENT TO THE COMPANY'S PURCHASE PLAN.
PROPOSAL 3
AMENDMENT TO THE 1995 DIRECTOR OPTION PLAN
In January 1995, the Board of Directors adopted the 1995 Director Option
Plan (the "Director Plan") and reserved 175,000 shares of Common Stock for
issuance thereunder. As of April 1, 1999, a total of 157,500 options to purchase
stock had been granted pursuant to the Director Plan.
At the Annual Meeting, the stockholders are being asked to approve the
proposed amendment to the Director Plan to increase the number of shares of
Common Stock reserved for issuance thereunder by 150,000, bringing the total
number of shares issuable under the Director Plan to 325,000.
SUMMARY OF THE DIRECTOR PLAN
General. The purpose of the Director Plan is to attract and retain the best
available personnel for positions for service as non-employee directors of the
Company, to provide additional incentive to the non-employee directors of the
Company and to encourage their continued service on the Board of Directors (the
"Board").
Administration. The Director Plan provides for grants of options to be made
in two ways:
a. Each non-employee director is automatically granted an option to
purchase 40,000 shares (the "First Option") upon the date such individual
first becomes a director, whether through election by the stockholders of
the Company or by appointment by the Board in order to fill a vacancy; and
b. Each non-employee director is automatically granted an option to
purchase 10,000 shares (the "Subsequent Option") on the day of the annual
stockholder meeting at which the director is reelected to an additional
term, if on such date he or she shall have served on the Board for at least
six (6) months.
The Board has the authority, in its discretion, to: (i) determine the fair
market value of the Common Stock; (ii) interpret the Director Plan; (iii)
prescribe, amend and rescind rules and regulations relating to the Director
Plan; (iv) authorize any person to execute, on behalf of the Company, any
instrument required to effectuate the grant of an option previously granted
under the Director Plan; and (v) make all other determinations deemed necessary
or advisable for the administration of the Director Plan. All decisions,
determinations and interpretations of the Board shall be final.
Eligibility; Limitations. Only non-employee directors of the Board of
Directors of the Company are eligible to receive nonstatutory stock options
under the Director Plan. Non-employee directors do not include any director who
owns individually or represents an entity which owns at least five percent of
the Company's outstanding shares (as determined by vote or value).
Terms and Conditions of Options. Each option is evidenced by a director
option agreement between the Company and the optionee, and is subject to the
following additional terms and conditions:
(a) Exercise Price. The exercise price of options granted under the
Director Plan is 100% of the fair market value per share of the Common Stock on
the date of grant, generally determined with reference to the closing sale price
for the Common Stock (or the closing bid if no sales were reported) on the date
of grant.
(b) Exercise of Option. The First Option shall vest as to 25% of the
optioned stock one year from the date of grant, and 1/48th of the optioned stock
each month thereafter, provided the person is a director on such
7
<PAGE> 11
dates. The Subsequent Option shall vest as to 100% of the optioned stock on the
date that is four years after the date of grant, provided the person is a
director on such date. The Special Option shall vest as to 1/3 of the optioned
stock each year from the date of grant, so that 100% of the optioned stock
subject to the Special Option shall be fully vested and exercisable three (3)
years after the date of grant, provided the person is a director on such dates.
(c) Forms of Consideration. The means of payment for shares issued upon
exercise of an option is specified in each option agreement. The Director Plan
permits payment to be made by cash, check, other shares of Common Stock of the
Company (with some restrictions), cashless exercises or any combination thereof.
(d) Term of Option. The term of any option shall be ten (10) years from the
date of grant. No option may be exercised after the expiration of its term.
(e) Termination of Directorship. If an optionee's status as a director
terminates for any reason (including death or disability), then all options held
by the optionee under the Director Plan expire on the earlier of (i) the date
set forth in his or her notice of grant or (ii) the expiration date of such
option. The notice of grant provides for a twelve month period to exercise an
option if the optionee's status as a director terminates due to death or
disability. To the extent the option is exercisable at the time of such
termination, the optionee (or the optionee's estate or the person who acquires
the right to exercise the option by bequest or inheritance) may exercise all or
part of his or her option for up to three (3) months following the termination
or for such other period of time as determined by the Board.
(f) Nontransferability of Options: Options granted under the Director Plan
are not transferable other than by will or the laws of descent and distribution,
and may be exercised during the optionee's lifetime only by the optionee.
(g) Other Provisions: The director option agreement may contain other
terms, provisions and conditions not inconsistent with the Director Plan as may
be determined by the Administrator.
Adjustments Upon Changes in Capitalization. In the event that the stock of
the Company changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of the Company effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of shares of stock
subject to the Director Plan, the number and class of shares of stock subject to
any option outstanding under the Director Plan, and the exercise price of any
such outstanding option.
In the event of a proposed liquidation or dissolution, any unexercised
options will terminate prior to such action. The Board may give the optionee the
right to exercise any unexercised options prior to their termination.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted for by the successor corporation. If an option is assumed or
substituted for by the successor corporation, it shall continue to vest as
provided in the Director Plan. If the successor corporation does not agree to
assume or substitute for the option, each option shall become fully vested and
exercisable for a period of thirty (30) days from the date the Board notifies
the optionee of the option's full exercisability, after which period the option
shall terminate.
Amendment and Termination of the Director Plan. The Board may amend, alter,
suspend or terminate the Director Plan, or any part thereof, at any time and for
any reason. However, the Company shall obtain stockholder approval for any
amendment to the Director Plan to the extent necessary to comply with applicable
laws or regulations. No such action by the Board or stockholders may alter or
impair any option previously granted under the Director Plan without the written
consent of the optionee. Unless terminated earlier, the Director Plan shall
terminate ten years from the date of its approval by the stockholders or the
Board of the Company, whichever is earlier.
8
<PAGE> 12
FEDERAL INCOME TAX CONSEQUENCES
An optionee does not recognize any taxable income at the time he or she is
granted a nonstatutory stock option. Upon exercise, the optionee recognizes
taxable income generally measured by the excess of the then fair market value of
the shares over the exercise price. The Company is entitled to a deduction in
the same amount as the ordinary income recognized by the optionee. Upon a
disposition of such shares by the optionee, any difference between the sale
price and the optionee's exercise price, to the extent not recognized as taxable
income as provided above, is treated as long-term or short-term capital gain or
loss, depending on the holding period.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS
UNDER THE DIRECTOR PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT
DISCUSS THE TAX CONSEQUENCES OF THE DIRECTOR'S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
DIRECTOR MAY RESIDE.
VOTE REQUIRED AND RECOMMENDATION
At the Annual Meeting, the stockholders are being asked to approve an
amendment to increase the number of shares reserved for issuance under the
Director Plan. The affirmative vote of the holders of a majority of the shares
which vote at the Annual Meeting will be required to approve the amendment to
the Director Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
AMENDMENT TO THE COMPANY'S 1995 DIRECTOR OPTION PLAN.
PROPOSAL 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected PricewaterhouseCoopers LLP, independent
accountants, to audit the financial statements of the Company for the current
fiscal year ending December 31, 1999. PricewaterhouseCoopers, or its
predecessor, Coopers & Lybrand L.L.P., have audited the Company's financial
statements annually since 1989. In the event that a majority of the Votes Cast
are against the ratification, the Board of Directors will reconsider its
selection.
A representative of PricewaterhouseCoopers LLP will be present at the
Annual Meeting to make a statement if such representative desires to do so and
to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE RATIFICATION
OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1999.
9
<PAGE> 13
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the four other most highly paid executive officers
of the Company whose salary plus bonus exceeded $100,000 in the Last Fiscal Year
(collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company during the fiscal years ended December 31, 1998, 1997
and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
------------------------------- ----------------------------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUSES($) AWARDS OPTIONS COMPENSATION($)(2)
- --------------------------- ---- --------- ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
William J. Schroeder(3).... 1998 347,308 40,385 -- -- 4,178
Chief Executive Officer 1997 300,000 -- -- -- 3,764
and President 1996 297,115 -- -- -- 4,082
Hyung Hwe Huh.............. 1998 229,788 30,288 -- -- 4,120
Senior Vice President and 1997 223,462 20,000 -- -- 674
Chief Technical Officer 1996 213,766 -- -- -- 928
James M. Walker(4)......... 1998 266,656 33,655 -- -- 4,178
Senior Vice President and 1997 250,000 125,000 -- -- 3,705
Chief Financial Officer 1996 19,231 -- -- 300,000(5) 74
Dennis B. Praske(6)........ 1998 246,577 30,962 -- -- 4,178
Senior Vice President, 1997 227,692 20,000 -- -- 3,678
Worldwide Operations 1996 213,750 20,000 -- 50,000 800
C. Scott Holt.............. 1998 246,577 30,962 -- -- 4,178
Senior Vice President, 1997 227,692 20,000 -- -- 3,678
Worldwide Sales 1996 213,766 -- -- -- 3,928
</TABLE>
- ---------------
(1) No other annual compensation exceeded the lesser of $50,000 or 10% of the
total salary and bonuses of any Named Executive Officer.
(2) Except as noted, represents 401(K) matching contributions and life and
long-term disability insurance premiums paid by the Company.
(3) Mr. Schroeder joined the Company in May 1994 at a 1994 annual base salary of
$250,000 which base salary was increased to $275,000 effective January 1995,
to $300,000 effective January 1996, to $400,000 effective March 1998, and
which was reduced to $300,000 effective September 1998.
(4) Mr. Walker joined the Company in November 1996 at an annual base salary of
$250,000 and earned a bonus equal to 50% of his base salary for his first
twelve months of employment.
(5) On November 5, 1996, Mr. Walker was granted an option to purchase 75,000
shares pursuant to the 1994 Stock Plan, and an option to purchase an
additional 225,000 shares outside the 1994 Stock Plan, each at an exercise
price of $11.50 per share, which was the fair market value for such shares
on the date of grant. These options were subsequently repriced to $7.625 per
share in connection with the Company's stock option repricing on April 16,
1997 and to $3.0625 per share in connection with the Company's stock option
repricing on October 14, 1998. The option to purchase 75,000 shares pursuant
to the 1994 Stock Option Plan and 75,000 shares granted outside of the 1994
Stock Plan were vested in full as of December 1, 1996 and December 1, 1997,
respectively. The option to purchase the remaining 150,000 shares vest as to
6,250 shares subject to the option on the first day of each month thereafter
beginning January 1, 1998.
(6) Mr. Praske joined the Company in September 1995 and was elected as an
executive officer of the Company on May 1, 1997.
OPTION GRANTS IN FISCAL YEAR 1998
There were no options granted in the Last Fiscal Year to the Named
Executive Officers.
10
<PAGE> 14
TEN-YEAR OPTION/SAR REPRICINGS
The following table sets forth certain information with respect to the
Company's exchange of outstanding options with certain of its officers in
October 1998, and with respect to previous option repricings for certain
officers in the past ten years. For further information with respect to such
option exchanges, see "Report of the Compensation Committee of the Board of
Directors on Executive Compensation."
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF NUMBER OF MARKET EXERCISE ORIGINAL
SECURITIES SECURITIES PRICE OF PRICE OF OPTION TERM
UNDERLYING UNDERLYING STOCK AT STOCK AT NEW REMAINING AT
REPRICING OPTIONS OPTIONS TIME OF TIME OF EXERCISE DATE OF
NAME DATE EXCHANGED ISSUED REPRICING(1) REPRICING PRICE EXCHANGE
---- --------- ---------- ---------- ------------ --------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis B. Praske.......... 10/14/98 25,000 25,000 $3.0625 $ 7.625 $3.0625 7 Years 276 days
Dennis B. Praske.......... 10/14/98 10,000 10,000 $3.0625 $ 7.625 $3.0625 7 Years 3 days
Dennis B. Praske.......... 10/14/98 86,000 86,000 $3.0625 $ 7.625 $3.0625 7 Years 3 days
Dennis B. Praske.......... 10/14/98 25,000 25,000 $3.0625 $ 7.625 $3.0625 7 Years 185 days
James M. Walker........... 10/14/98 225,000 225,000 $3.0625 $ 7.625 $3.0625 8 Years 22 days
James M. Walker........... 10/14/98 75,000 75,000 $3.0625 $ 7.625 $3.0625 8 Years 22 days
Dennis B. Praske.......... 7/17/96 25,000 25,000 $ 7.625 $ 15.00 $ 7.625 9 Years 274 days
Dennis B. Praske.......... 7/17/96 20,000 20,000 $ 7.625 $17.875 $ 7.625 9 Years 92 days
Dennis B. Praske.......... 7/17/96 100,000 100,000 $ 7.625 $17.875 $ 7.625 9 Years 92 days
Dennis B. Praske.......... 1/19/96 20,000 20,000 $17.875 $ 32.25 $17.875 9 Years 271 days
Dennis B. Praske.......... 1/19/96 100,000 100,000 $17.875 $ 21.75 $17.875 9 Years 271 days
James M. Walker........... 4/16/97 75,000 75,000 $ 7.625 $ 11.50 $ 7.625 9 Years 203 days
James M. Walker........... 4/16/97 225,000 225,000 $ 7.625 $ 11.50 $ 7.625 9 Years 203 days
</TABLE>
- ---------------
(1) The market price of the Company's Common Stock at time of repricing is the
new exercise price of each such option.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR END OPTION
VALUES
The following table provides information with respect to option exercises
in the Last Fiscal Year by the Named Executive Officers and the value of their
unexercised options at Fiscal Year End.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Schroeder......... -- -- -- -- -- --
James M. Walker.............. -- -- 225,000 75,000 745,313 248,438
Hyung Hwe Huh................ -- -- -- -- -- --
Dennis B. Praske............. 10,000 66,875 96,312 49,688 319,034 164,592
C. Scott Holt................ -- -- -- -- -- --
</TABLE>
- ---------------
(1) Market value of the shares on date of exercise, less the exercise price.
(2) Value is based on fair market value of the Company's stock of $6.375 on
December 31, 1998 (the last trading day of the Last Fiscal Year), less the
exercise price.
MANAGEMENT EMPLOYMENT ARRANGEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
In May 1994, Mr. William J. Schroeder joined the Company as Chief Executive
Officer and President. Mr. Schroeder's employment offer contemplated the grant
of an option to purchase 1,125,000 shares of Common Stock at a purchase price of
$2.67 per share which was determined by the Board of Directors to be the fair
market value of the Common Stock on the date of grant. The option agreement
relating to this grant provided that an aggregate of 281,250 of such shares
would vest upon a change in control of the Company, which vesting was triggered
by the Reorganization. On September 9, 1994, Mr. Schroeder exercised his option
with respect to 150,000 shares of Common Stock, at an aggregate exercise price
of $400,000. In connection with such exercise, the Company loaned $200,000 to
Mr. Schroeder, which loan bore interest at the rate of 7.05% per annum, was
secured by the shares purchased thereby, and was payable upon demand. In
connection with the Reorganization, and in order to facilitate such transaction,
Mr. Schroeder agreed not to receive the
11
<PAGE> 15
$8.00 per share offered to the other stockholders in the transaction, and on
December 31, 1994, rescinded the exercise of the option by resale of the shares
to the Company at cost. In connection with this rescission, Mr. Schroeder's
indebtedness (including accrued interest) to the Company was canceled. On
January 3, 1995, Mr. Schroeder exercised in full his option to purchase 975,000
shares of Common Stock, at an aggregate exercise price of $65,000. On January 1,
1995, Mr. Schroeder was granted a stock purchase right to purchase 270,000
shares of Common Stock at a purchase price of $0.07 per share, which was
determined by the Board of Directors to be the fair market value of the Common
Stock on the date of grant. Mr. Schroeder exercised this stock purchase right in
full on January 3, 1995, pursuant to a restricted stock purchase agreement
providing for the right of the Company to repurchase all unvested shares at cost
upon termination of employment. All of the shares acquired by Mr. Schroeder were
vested as of January 1, 1999.
On January 1, 1995, Mr. C. Scott Holt joined the Company as Senior Vice
President, Sales and Strategic Alliances. On January 3, 1995, Mr. Holt was
granted a stock purchase right to purchase 375,000 shares of Common Stock at a
purchase price of $0.07 per share, which was determined by the Board of
Directors to be the fair market value of the Common Stock on the date of grant.
Mr. Holt exercised this stock purchase right in full on January 3, 1995,
pursuant to a restricted purchase agreement providing for the repurchase of
unvested shares at cost upon termination of employment. As of January 3, 1999,
all of such shares had vested.
On January 1, 1995, Mr. Hyung Hwe Huh entered into an employment agreement
with the Company pursuant to which he is entitled to a base salary of $190,000
per year and an annual bonus equal to the bonus awarded to the Company's second
highest ranked employee (other than Mr. Huh, the Company's CEO or any of the
Company's sales executives). Mr. Huh's base salary was increased to $215,000 in
1996 and to $225,000 in 1997. In addition, pursuant to the terms of his
employment agreement, Mr. Huh purchased 375,000 shares of Common Stock at a
purchase price per share of $0.07, which was the fair market value of the Common
Stock on the date of grant as determined by the Board of Directors, pursuant to
a restricted stock purchase agreement providing for certain repurchase rights in
favor of the Company. In the event that Mr. Huh's employment is terminated
involuntarily, the Company shall be obligated to him or his heirs (or other
legal representative) (i) to pay all amounts accrued but unpaid under the terms
of his employment agreement, (ii) for a period of two years commencing on the
date of termination, to provide all benefits provided by the Company to Mr. Huh
during his last full year of employment with the Company and (iii) for a period
of two years commencing on the date of termination, to pay, in equal
semi-monthly installments, an amount equal to Mr. Huh's base salary paid by the
Company during Mr. Huh's last full year of employment with the Company.
On November 5, 1996, Mr. James M. Walker joined the Company and on December
2, 1996 he assumed the duties of Senior Vice President and Chief Financial
Officer. On November 5, 1996, Mr. Walker was granted an option to purchase
75,000 shares pursuant to the 1994 Stock Plan, and an option to purchase an
additional 225,000 shares outside the 1994 Stock Plan, each at an exercise price
of $11.50 per share, which was the fair market value for such shares on the date
of grant. These options were subsequently repriced to $7.625 per share in
connection with the Company's stock option repricing on April 16, 1997 and to
$3.0625 per share in connection with the Company's stock option repricing on
October 14, 1998. The option to purchase 75,000 shares pursuant to the 1994
Stock Option Plan and 75,000 shares granted outside of the 1994 Stock Plan were
vested in full as of December 1, 1996 and December 1, 1997, respectively, and
the option to purchase the remaining 150,000 shares vests as to 6,250 shares
subject to the option on the first day of each month thereafter beginning
January 1, 1998.
On September 29, 1995, Mr. Dennis B. Praske joined the Company, and on May
1, 1997, he was elected as an executive officer of the Company. On August 4,
1995, while a consultant to the Company, Mr. Praske was granted an option to
purchase 100,000 shares pursuant to the 1994 Stock Plan at an exercise price of
$21.75 per share, which was the fair market value for such shares on the date of
grant. On September 29, 1995, he was granted options to purchase 20,000 shares
pursuant to the 1994 Stock Plan at an exercise price of $32.25 per share, which
was the fair market value for such shares on the date of grant. All unexercised
options held by Mr. Praske were repriced to $17.875 per share in connection with
the Company's stock option repricing on January 19, 1996, which was the fair
market value for such shares on that date. On April 4, 1996, he was granted an
option to purchase 25,000 shares pursuant to the 1994 Stock Plan at an exercise
price of
12
<PAGE> 16
$15.00 per share, which was the fair market value for such shares on the date of
grant. All unexercised options held by Mr. Praske were repriced to $7.625 per
share in connection with the Company's stock option repricing on July 17, 1996,
which was the fair market value for such shares on that date. On July 17, 1996,
Mr. Praske was granted an option to purchase 25,000 shares pursuant to the 1994
Stock Plan at an exercise price of $7.625 per share, which was the fair market
value for such shares on the date of grant. All unexercised options held by Mr.
Praske were repriced to $3.0625 per share in connection with the Company's stock
option repricing on October 14, 1998, which was the fair market value for such
shares on that date.
In May 1996, the Company's Board of Directors approved the Company's
entering into a Change of Control Severance Agreement (the "Agreement") with
certain vice presidents of the Company, including Messrs. Holt, Praske and
Walker and excluding Mr. Huh, who has a separate agreement as described above.
Each covered vice president has signed a copy of this Agreement with the
Company. The Agreement provides that in the event of an involuntary termination
or termination not for cause within twelve (12) months following change of
control, then, the vice president shall be entitled to (i) a cash severance
payment in an amount equal to one hundred fifty percent (150%) of the vice
president's annual base pay, (ii) continuation of employee benefits at one
hundred percent (100%) for a period of twelve (12) months, (iii) outplacement
assistance, including job counseling and referral services, for a period of six
(6) months, and (iv) continued vesting of stock options and restricted stock for
an additional twelve (12) months. In addition the Agreement provides that, in
the event of an involuntary termination or termination not for cause within the
period that is between twelve (12) months and twenty-four (24) months following
a change of control then, the vice president shall be entitled to (i) a cash
severance payment in an amount equal to seventy-five percent (75%) of the vice
president's annual base pay, (ii) continuation of employee benefits at one
hundred percent (100%) for a period of six (6) months, (iii) outplacement
assistance, including job counseling and referral services, for a period of six
(6) months, and (iv) continued vesting of stock options and restricted stock for
an additional six (6) months. The severance obligations of the Company are
subject to certain limitations in the event that such payments would constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended.
13
<PAGE> 17
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") is
composed only of non-employee directors. The Committee is responsible for
reviewing and recommending for approval by the Board of Directors the Company's
compensation practices, executive pay levels and variable compensation programs.
The Committee also grants stock options within Board of Directors approved
guidelines.
COMPENSATION PHILOSOPHY
The Company's compensation philosophy is that cash compensation should vary
with performance of the Company and long-term incentives should be closely
aligned with the interests of the stockholders.
Cash compensation for the executives consists of base salary and a variable
compensation segment based on the achievement of specified income goals and
strategic objectives.
Long-term incentives are provided through the granting of stock options to
key employees, including the Named Executive Officers. The level of stock
options and stock purchase rights granted (i.e., the number of shares subject to
each stock option grant or purchase grant) is based on the employee's current
and anticipated future performance, skill set and ability to affect achievement
of strategic goals and objectives. Grants generally vest ratably over a
four-year period from the date of hire or date of grant, thus providing an
incentive to remain in the Company's employ.
The Company maintains a qualified employee stock purchase plan, pursuant to
which employees can purchase Company stock through payroll deductions, which is
generally available to all employees. This plan allows participants to buy
Company stock at a discount from the market price on certain specified dates
with up to 15% of their base salaries.
In setting compensation levels for executives, the Compensation Committee
reviews specific information gathered by the Company from proxy statements of
particular companies that are considered generally comparable to the Company in
that they are high-technology, high-growth, and similar in revenue size.
Recommendations by management are examined in light of this information, but
there is no special attempt to set cash compensation in any particular
relationship to the survey data. The final 1998 base salary levels for the Named
Executive Officers fall within the industry standards for comparable positions.
INCENTIVE COMPENSATION
The Diamond Multimedia Bonus Plan is designed to motivate and reward
executives and employees by making a portion of their cash compensation directly
dependent upon achieving predetermined corporate and/or business unit income
levels and objectives. A cash payment for up to target performance is made on a
quarterly basis during the quarter following each three month period of the year
for services rendered the previous three months. A further cash payment for
above target performance on an annual basis is made annually. During fiscal
1998, bonus payments for the named executives averaged 11% of total cash
compensation.
STOCK OPTIONS
Stock options are granted to aid in the retention of key employees and to
align the interest of key employees with those of the stockholders. Stock
options are generally granted at a price equal to the fair market value on the
date of grant and generally vest over four years from the date of hire or date
of grant. Options are granted to key employees, including executives, based on
such employee's skills, the current marketability of those skills, the
employee's current performance and anticipated future contribution based on that
performance, and the employee's ability to have an effect on corporate and/or
business unit results.
In October 1998, the Company's Board of Directors approved an option
exchange program whereby Mr. James M. Walker and Mr. Dennis B. Praske, as well
as non-executive officer employees that held options with exercise prices in
excess of $3.0625, were offered the opportunity to exchange such options for new
14
<PAGE> 18
options at $3.0625 per share, which was the fair market value of the Common
Stock on October 14, 1998, the date of the exchange program. The new options are
on the same terms as the surrendered options except for the exercise price. The
exercise price of the new options is $3.0625, and the options may not be
exercised prior to April 19, 1999. The Board of Directors undertook these
actions in light of the then recent reduction in the trading price of the
Company's Common Stock and in consideration of the importance to the Company of
retaining its employees and officers by offering them appropriate equity
incentives. The Board of Directors also considered the highly competitive
environment for obtaining and retaining qualified employees and officers and the
overall benefit to the Company's stockholders from a highly motivated group of
employees and officers.
CEO COMPENSATION
As described above, the Company's executive pay program is leveraged toward
achieving corporate goals and objectives. This principle of pay-for-performance
is exemplified by the pay package of the Company's Chief Executive Officer.
The Compensation Committee reviews Mr. Schroeder's base salary annually,
considering Company performance, individual performance, and external pay
practices. In March 1998, Mr. Schroeder's base salary was increased to $400,000,
and in September 1998, Mr. Schroeder's base salary was reduced to $300,000.
Mr. Schroeder's variable compensation for fiscal year 1998 performance was
$40,385. His total cash compensation for 1998 was $387,693.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors during the Last Fiscal
Year consisted of directors Reyes and Schraith. No member of the Compensation
Committee or executive officer of the Company has a relationship that
constitutes an interlocking relationship with executive officers or directors of
another entity.
15
<PAGE> 19
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of the Record Date by (i) each
stockholder (or group of affiliated persons) who is known by the Company to own
beneficially 5% or more of the Company's Common Stock; (ii) each of the
Company's directors, (iii) each of the Named Executive Officers and (iv) all
directors and executive officers of the Company as a group. Except as indicated
in the footnotes to the table, persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
Unless otherwise indicated, the following officers, directors and shareholders
can be reached at the principal offices of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES
5% BENEFICIAL OWNERS, DIRECTORS ----------------------
AND NAMED EXECUTIVE OFFICERS NUMBER PERCENT(1)
------------------------------- --------- ----------
<S> <C> <C>
Chong-Moon Lee.......................................... 1,954,757 5.54
26549 Taaffee Road
Los Altos, California 94022
William J. Schroeder(2)................................. 755,818 2.14
Hyung Hwe Huh(3)........................................ 232,350 *
C. Scott Holt........................................... 301,466 *
James M. Walker(4)...................................... 256,250 *
Dennis B. Praske(5)..................................... 114,022 *
Bruce C. Edwards(6)..................................... 41,875 *
Gregorio Reyes(7)....................................... 34,375 *
Jeffrey D. Saper(8)..................................... 31,517 *
James Schraith(9)....................................... 8,750 *
Carl Neun(10)........................................... 10,000 *
All executive officers and directors
as a group (14 persons)(11)........................... 2,093,656 5.93
</TABLE>
- ---------------
* Less than one percent.
(1) Percentage calculation is based upon 35,286,652 shares outstanding as of
April 1, 1999.
(2) Includes 95,000 shares held by trusts for the benefit of family members,
with respect to which Mr. Schroeder disclaims beneficial ownership.
(3) Includes 76,771 shares held by Mr. Huh's son, Yun Huh, which shares may be
deemed to be beneficially owned by Mr. Huh.
(4) Includes an option to purchase 256,250 shares, which are exercisable within
sixty (60) days of April 1, 1999.
(5) Includes an option to purchase 114,022 shares, which are exercisable within
sixty (60) days of April 1, 1999.
(6) Includes an option to purchase 11,875 shares, which are exercisable within
sixty (60) days of April 1, 1999.
(7) Includes an option to purchase 11,875 shares, which are exercisable within
sixty (60) days of April 1, 1999.
(8) 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 partner.
Mr. Saper disclaims beneficial ownership of such shares, except to the
extent of his proportionate partnership interest therein. Includes an
option to purchase 11,875 shares, which are exercisable within sixty (60)
days of April 1, 1999.
(9) Includes an option to purchase 8,750 shares, which are exercisable within
sixty (60) days of April 1, 1999.
16
<PAGE> 20
(10) Includes an option to purchase 10,000 shares, which are exercisable within
sixty (60) days of April 1, 1999.
(11) Includes 2,188 shares held by Franz Fichtner; an option to purchase 79,167
shares held by Franz Fichtner, which are exercisable within sixty (60) days
of April 1, 1999; an option to purchase 62,500 shares held by Wade
Meyercord, which are exercisable within sixty (60) days of April 1, 1999;
an option to purchase 80,878 shares held by James Cady, which are
exercisable within sixty (60) days of April 1, 1999; and an option to
purchase 82,500 shares held by David Vance Watkins, which are exercisable
within sixty (60) days of April 1, 1999;
17
<PAGE> 21
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
DIAMOND
MULTIMEDIA NASDAQ STOCK NASDAQ COMPUTER
SYSTEMS, INC. MARKET (U.S.) MANUFACTURER
------------- ------------- ---------------
<S> <C> <C> <C>
'4/12/95' 100.00 100.00 100.00
'12/95' 211.00 130.00 149.00
'12/96' 70.00 160.00 200.00
'12/97' 52.00 195.00 242.00
'12/98' 38.00 275.00 527.00
</TABLE>
The above graph shows a comparison of cumulative total stockholder return,
calculated on a dividend reinvested basis, from the effective date of the
initial public offering of the Company's Common Stock (April 12, 1995) through
1998 fiscal year end (December 31, 1998) for Diamond Multimedia Systems, Inc.,
the S&P 500 Composite Index (the "S&P 500"), the NASDAQ Stock Market index, the
S&P Computer Peripherals Index, and the NASDAQ Computer Manufacturer Index. The
graph assumes that $100 was invested in the Company's Common Stock on April 12,
1995 at the initial public offering price and in the S&P 500, the NASDAQ Stock
Market, the S&P Computer Peripherals, and the NASDAQ Computer Manufacturers
Index on March 31, 1995. Note that historic stock price performance is not
necessarily indicative of future stock price performance.
The information contained above under the captions "Report of the
Compensation Committee of the Board of Directors on Executive Compensation" and
"Performance Graph" shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Securities Act of 1934, as amended, except to the
extent that the Company specifically incorporates it by reference into such
filing.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934 requires the Company's executive
officers and directors and persons who own more than ten percent of a registered
class of the Company's equity securities to file an initial report of ownership
on Form 3 and changes in ownership on Form 4 or 5 with the Securities and
Exchange Commission (the SEC). Executive Officers, directors and greater than
ten percent stockholders are also required by SEC rules to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on its review of
the copies of such forms received by it, or written representation from certain
reporting persons,
18
<PAGE> 22
the Company believes that except for the following exceptions during the Last
Fiscal Year, all filing requirements applicable to its officers, directors, and
ten percent stockholders were complied with: Messrs. Jeffrey D. Saper, Bruce C.
Edwards and Gregorio Reyes, directors of the Company, did not timely file a Form
4 relating to grants of stock options for such directors to purchase 17,500
shares of Common Stock. Messrs. Saper, Edwards and Reyes Filed a Form 4 in July
1998. Mr. William J. Schroeder, an officer and director of the Company, did not
timely file a Form 4 relating to the disposition of 5,000 shares of Common
Stock. Mr. Schroeder filed a Form 4 in January 1999. Mr. Hyung Hwe Huh, an
officer of the Company, did not timely file a Form 4 relating to the disposition
of 100,000 shares of Common Stock. Mr. Huh filed a Form 4 in February 1999.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
person named in the accompanying proxy to vote the shares represented thereby on
such matters in accordance with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Jeffrey D. Saper
Jeffrey D. Saper,
Secretary
San Jose, California
April 26, 1999
19
<PAGE> 23
MAP
DIRECTIONS AND MAP
Diamond Multimedia
Annual Shareholders Meeting
Santa Clara Marriot
2700 Mission College Blvd.
Santa Clara, CA 95054
408-988-1500
FROM SOUTH BAY
- Take Hwy 101 North to Santa
Clara.
- Exit Great America Pkwy.
- Turn right on Mission College
Blvd.
- - The Marriot is on the right.
FROM NORTH BAY
- Take 101 South to Santa Clara.
- Exit Great America Pkwy.
- Turn right on Mission College
Blvd.
- - The Marriot is on the right.
FROM EAST BAY
- Take Interstate 880 South to
San Jose.
- Take Hwy 101 North to Santa
Clara.
- Exit Great America Pkwy.
- Turn right on Mission College
Blvd.
- - The Marriot is on the right.
DIAMOND MULTIMEDIA SYSTEMS, INC.
2880 Junction Ave.
San Jose, CA 95134-1922
408-325-7000
Fax: 408-325-7070
Sales Info: 1-800-4-MULTIMEDIA
www.diamondmm.com
DIAMOND LOGO
<PAGE> 24
[DIAMOND LETTERHEAD]
YOUR VOTE IS IMPORTANT
All stockholders are cordially invited to attend the Annual Meeting in
person. However, to ensure your representation at the meeting, you are urged to
mark, sign, date, and return the enclosed Proxy as promptly as possible in the
postage-paid envelope enclosed for that purpose. Returning your proxy will help
the Company assure a quorum and avoid the additional expense of duplicate proxy
solicitations. Any stockholder attending the meeting may vote in person even if
he or she returned the proxy.
SUBMIT YOUR PROXY BY PHONE
1-800-590-5902
Use any touch-tone telephone to submit your proxy 24 hours a day, 7 days a
week. Have your proxy card in hand when you call. You will be prompted to enter
the 12-digit Control Number which is located to the right. Your voting
instructions will be repeated to you and you will be asked to confirm them.
SUBMIT YOUR PROXY BY INTERNET
www.proxyvote.com
Use the internet to submit your proxy 24 hours a day, 7 days a week. Have your
proxy card in hand when you access the website. You will be prompted to enter
the 12-digit Control Number which is located to the right to obtain your
records and create an electronic ballot. You will then be asked to confirm your
submission.
SUBMIT YOUR PROXY BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to Diamond Multimedia Systems, Inc., c/o ADP, 51
Mercedes Way, Edgewood, NY 11717.
123,456,789,012.00000
CONTROL NUMBER 101010101010
ACCOUNT NUMBER 123456789023456789
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: X
DIAMOND KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
DIAMOND MULTIMEDIA SYSTEMS, INC.
VOTE ON DIRECTORS
1. To elect six directors to serve for the ensuing year or until their
successors are elected and duly qualified;
01) William J. Schroeder, 02) Bruce C. Edwards, 03) Carl W. Neun,
04) Gregorio Reyes, 05) Jeffrey D. Saper and 06) James T. Schraith
For Withhold For All
All All Except
[ ] [ ] [ ]
To withhold authority to vote, mark "For All Except" and write the
nominee's number on the line below.
---------------------------------
VOTE ON PROPOSALS
2. To approve an amendment to the 1995 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 400,000 shares;
For Against Abstain
[ ] [ ] [ ]
3. To approve an amendment to the 1995 Director Option Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
150,000;
For Against Abstain
[ ] [ ] [ ]
4. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal year ending December 31, 1999;
and
For Against Abstain
[ ] [ ] [ ]
5. To transact such other business as may properly come before the meeting or
any adjournment thereof.
---------------------------------- -------------------
Signature [PLEASE SIGN WITHIN BOX] Date
---------------------------------- -------------------
Signature (Joint Owners) Date
252714100
1
123,456,789,012
<PAGE> 25
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 21, 1999
TO THE STOCKHOLDERS OF
DIAMOND MULTIMEDIA SYSTEMS, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Diamond Multimedia
Systems, Inc., a Delaware corporation (the "Company"), will be held on Friday,
May 21, 1999 at 9:00 a.m., local time, at The Marriott Hotel, 2700 Mission
College Boulevard, Santa Clara, California 95054, for the following purposes:
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on April 1, 1999 are
entitled to notice of and to vote at the meeting and any continuation or
adjournment thereof.
For the Board of Directors
Jeffrey D. Saper
Secretary
- --------------------------------------------------------------------------------
