<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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:
[_] 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 Section 240.14a-11(c) or Section 240.14a-12
ACCELGRAPHICS, 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.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
ACCELGRAPHICS, INC.
1873 BARBER LANE
MILPITAS, CA 95035
Dear Fellow Stockholder: May 15, 1998
You are cordially invited to attend the Annual Meeting of stockholders of
AccelGraphics Inc. ("AGI") to be held on June 26, 1998, at 9:30 a.m. at the
Sheraton San Jose, 1801 Barber Lane, Milpitas, California 95035.
As you may be aware, AGI and Evans & Sutherland Computer Corporation ("E&S")
have entered into an Agreement and Plan of Merger providing for the
acquisition of AGI by E&S in a merger transaction that values your AGI shares
at approximately $5.75 per share. The consideration to be received by AGI
stockholders in the merger will be payable, at the election of each
stockholder and subject to certain limitations that are described in the
accompanying materials, in (i) cash, (ii) shares of E&S Common Stock, or (iii)
a combination of the two. The parties have agreed, however, that in aggregate
48% of the total merger consideration will be paid by E&S in cash with the
remaining 52% being paid in E&S Common Stock. If you make no election, you
will receive 48% of the merger consideration you receive in cash and 52% in
E&S Common Stock. These limits may result in there being a pro rata adjustment
with respect to your election to the extent that either form of merger
consideration is oversubscribed.
A Form of Election which you can use to make an election to receive the cash
consideration or the stock consideration is not enclosed with the Proxy
Statement/Prospectus that accompanies these materials, but will be sent to you
shortly in a separate envelope. The enclosed Proxy Statement/Prospectus
describes in detail the procedures and timing for properly submitting your
Form of Election. AGI has retained Georgeson & Company to serve as Information
Agent in connection with the merger. QUESTIONS REGARDING THE MERGER AND THE
ELECTION PROCESS AS WELL AS REQUESTS FOR ADDITIONAL COPIES OF THE DOCUMENTS
REFERENCED HERE AND IN THE ACCOMPANYING MATERIALS CAN BE DIRECTED TO GEORGESON
& COMPANY AT (800) 223-2064.
At the Annual Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the Merger Agreement. A majority of the
outstanding shares of AGI Common Stock entitled to vote at the Annual Meeting
must approve the adoption of the Merger Agreement for the acquisition to be
completed. You will also be asked to elect two directors to the AGI Board of
Directors at the Annual Meeting. These directors will only serve their terms
of office if the merger is not approved by the AGI stockholders.
After careful consideration, your Board of Directors has unanimously
determined that the Merger is fair to and in the best interests of AGI and its
stockholders and unanimously recommends that you vote to adopt the Merger
Agreement.
In the materials accompanying this letter you will find a Notice of Annual
Meeting of Stockholders, a Proxy Statement/Prospectus relating to the
proposals to be voted upon and a Proxy Card. The Proxy Statement/Prospectus
more fully describes the merger and the proposals before the stockholders.
I urge you to read the enclosed materials carefully. Whether or not you plan
to attend the Annual Meeting, and regardless of the number of shares you own,
please complete, sign and date your Proxy Card and promptly return it in the
envelope provided.
Sincerely,
/s/ Jeffrey W. Dunn
Jeffrey W. Dunn
Chairman, President and Chief
Executive Officer
<PAGE>
ACCELGRAPHICS, INC.
1873 BARBER LANE
MILPITAS, CA 95035
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 26, 1998
TO THE STOCKHOLDERS OF ACCELGRAPHICS, INC.:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders (the "Annual
Meeting") of AccelGraphics, Inc., a Delaware corporation ("AGI"), will be held
on June 26, 1998, at the Sheraton San Jose, 1801 Barber Lane, Milpitas,
California 95035, commencing at 9:30 a.m., for the following purposes:
(1) To consider and vote on a proposal to adopt the Agreement and Plan of
Merger, dated April 22, 1998 (the "Merger Agreement"), by and among AGI,
Evans & Sutherland Computer Corporation, a Utah corporation ("E&S"), and
E&S Merger Corp., a Utah corporation and a wholly owned subsidiary of E&S
("Merger Sub"), a copy of which is attached as Annex I to the Proxy
Statement/Prospectus accompanying this Notice. The Merger Agreement
provides for the merger of AGI with and into Merger Sub (the "Merger"),
with Merger Sub being the surviving corporation. In the Merger, each AGI
stockholder will be entitled to receive, in exchange for each share of AGI
Common Stock, par value $0.001 per share (the "AGI Common Stock"), held by
such stockholder at the time of the Merger and at the election of each such
stockholder, (i) that number of shares of common stock, par value $0.20 per
share, of E&S (the "E&S Common Stock") as shall be determined by dividing
$5.75 by the Average E&S Share Price (as defined below) (the "Stock
Consideration"); (ii) cash in an amount equal to $5.75 per share of AGI
Common Stock (the "Cash Consideration"); or (iii) a combination of cash and
stock. The "Average E&S Share Price" is defined as the average of the last
sale price per share of E&S Common Stock on The Nasdaq National Market for
the 10 consecutive trading days ending on the second trading day prior to
the closing date of the Merger. The mix of Merger consideration elected to
be received by each AGI stockholder may be subject, under the terms of the
Merger Agreement, to potential proration and adjustment in order to ensure
that in aggregate 48% of the total Merger consideration is paid in the form
of Cash Consideration and 52% of the total Merger consideration is paid in
the form of Stock Consideration. Failure by a stockholder to make a proper
election of Cash Consideration and Stock Consideration will result in such
stockholder receiving 48% Cash Consideration and 52% Stock Consideration
for each share of AGI Common Stock held by such stockholder;
(2) To elect the Class I Directors of the Board of Directors to serve
until the earlier of the expiration of their term or consummation of the
Merger; and
(3) To consider and transact such other business as may properly be
brought before the Annual Meeting or any adjournment thereof.
The proposed Merger and other related matters are more fully described in
the accompanying Proxy Statement/Prospectus.
The affirmative vote of the holders of a majority of the outstanding shares
of AGI Common Stock entitled to vote at the Annual Meeting is required to
adopt the Merger Agreement. Certain of the stockholders of AGI who own or
control approximately 37% of the outstanding shares of AGI Common Stock have
agreed, among other things, to vote all of their shares of AGI Common Stock in
favor of the Merger Agreement at the Annual Meeting.
Only holders of AGI Common Stock of record at the close of business on May
11, 1998 will be entitled to notice of, and to vote at, the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, please complete, sign,
date and return the enclosed Proxy Card promptly in the enclosed postage-paid
envelope. Stockholders who attend the Annual Meeting may revoke their proxies
and vote in person if they desire.
By Order of the Board of Directors,
Michael W. Hall,
Secretary
Milpitas, California
May 15, 1998
<PAGE>
LOGO LOGO
ACCELGRAPHICS, INC.
PROXY STATEMENT
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EVANS & SUTHERLAND COMPUTER CORPORATION
PROSPECTUS
----------
Evans & Sutherland Computer Corporation, a Utah corporation ("E&S"),
AccelGraphics, Inc., a Delaware Corporation ("AGI") and E&S Merger Corp., a
Utah corporation and wholly owned subsidiary of E&S ("Merger Sub"), have
entered into an Agreement and Plan of Merger, dated April 22, 1998 (the "Merger
Agreement"). In accordance with the Merger Agreement, AGI will merge with and
into Merger Sub, with Merger Sub being the surviving entity, and all
outstanding shares of common stock of AGI, $.001 par value per share ("AGI
Common Stock"), will be converted, at the election of each AGI stockholder,
into either cash or shares of common stock of E&S, $.20 par value per share
("E&S Common Stock"), all as more fully set forth herein (all such actions
being collectively referred to herein as the "Merger").
Upon consummation of the Merger, each issued and outstanding share of AGI
Common Stock will be converted into the right to receive either (i) that
fraction of a share of E&S Common Stock as is determined by dividing $5.75 by
the average closing price of E&S Common Stock (as reported on the Nasdaq
National Market), for the ten consecutive trading days ending on the second
trading day prior to the Effective Date as defined herein (ii) $5.75 in cash,
or (iii) a combination of cash and stock, at the election of the holder thereof
(collectively, the "Merger Consideration"). The Merger Consideration will be
subject to adjustment as described herein, so that the stockholders of AGI are
entitled to receive in the aggregate 48% of the total Merger Consideration in
cash and 52% of the total Merger Consideration in E&S Common Stock. The mix of
Merger Consideration elected to be received by each AGI stockholder may be
subject, under the terms of the Merger Agreement, to potential proration and
adjustment in order to ensure that in aggregate 48% of the total Merger
consideration is paid in the form of Cash Consideration and 52% of the total
Merger consideration is paid in the form of Stock Consideration. Failure by a
stockholder to make a proper election of Cash Consideration and Stock
Consideration will result in such stockholder receiving 48% Cash Consideration
and 52% Stock Consideration for each share of AGI Common Stock held by such
stockholder. On the Effective Date, all outstanding options to purchase AGI
Common Stock under the stock option plans of AGI (other than options which have
an exercise price in excess of $6.00 per share which shall be cancelled) shall
be assumed by E&S and deemed to constitute an option to acquire E&S Common
Stock on the same terms and conditions as the holder of such option would have
been entitled to receive pursuant to the Merger had such holder exercised such
option in full immediately prior to the Effective Date.
(Cover continued on following page)
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THE MATTERS DESCRIBED ABOVE ARE DISCUSSED IN DETAIL IN THIS PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION.
STOCKHOLDERS OF AGI ARE URGED TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED
TO BEGINNING ON PAGE 13 UNDER "RISK FACTORS."
----------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
(THE "SEC") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY, AND, IF GIVEN, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY E&S, AGI OR ANY OTHER PERSON. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BY ANY SECURITIES OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER
SHALL CREATE UNDER ANY CIRCUMSTANCES ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF E&S OR AGI SINCE THE DATE HEREOF, OR THAT ANY
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE AS OF WHICH
SUCH INFORMATION IS PROVIDED.
----------
The date of this Proxy Statement/Prospectus is May 15, 1998.
<PAGE>
E&S Common Stock is listed on the Nasdaq National Market under the symbol
"ESCC." It is a condition to the Merger that the shares of E&S Common Stock to
be issued in the Merger be approved for listing on the Nasdaq National Market.
Following consummation of the Merger, AGI Common Stock will be removed from
registration under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and will no longer be listed on the Nasdaq National Market.
This Proxy Statement/Prospectus is being furnished to stockholders of AGI in
connection with the solicitation of proxies by the AGI Board of Directors for
use at the Annual Meeting of AGI stockholders to be held on June 26, 1998 at
the Sheraton San Jose, 1801 Barber Lane, Milpitas, California 95035 commencing
at 9:30 a.m., local time, and any adjournment or postponement thereof.
This Proxy Statement/Prospectus constitutes the prospectus of E&S for use in
connection with the issuance of shares of E&S Common Stock to be issued in the
Merger in exchange for the AGI Common Stock. This Proxy Statement/Prospectus
and the accompanying proxy card are first being mailed to stockholders of AGI
on or about May 18, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION.... 1
INCORPORATION BY
REFERENCE............... 2
SUMMARY.................. 3
THE COMPANIES........... 3
WHAT YOU WILL RECEIVE IN
THE MERGER............. 4
THE ANNUAL MEETING...... 4
FAIRNESS OPINION........ 5
RISK FACTORS............ 5
REASONS FOR THE MERGER;
RECOMMENDATION OF THE
AGI BOARD.............. 5
INTERESTS OF CERTAIN
PERSONS IN THE MERGER.. 6
ELECTION PROCEDURES..... 7
TREATMENT OF STOCK
OPTIONS IN THE MERGER.. 7
REGULATORY APPROVALS.... 7
CONDITIONS TO THE
MERGER................. 8
TERMINATION OF THE
MERGER AGREEMENT....... 8
TERMINATION FEE......... 8
NO SOLICITATION OF
COMPETING TRANSACTIONS. 9
APPRAISAL RIGHTS........ 9
MATERIAL FEDERAL INCOME
TAX CONSEQUENCES....... 9
ANTICIPATED ACCOUNTING
TREATMENT.............. 9
FORWARD-LOOKING
STATEMENTS MAY PROVE
INACCURATE............. 9
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL
DATA................... 10
FORWARD-LOOKING
STATEMENTS MAY PROVE
INACCURATE.............. 13
RISK FACTORS............. 13
RISK FACTORS REGARDING
THE MERGER............. 13
RISK FACTORS REGARDING
E&S.................... 14
RISK FACTORS REGARDING
AGI.................... 17
THE ANNUAL MEETING....... 24
GENERAL................. 24
MATTERS TO BE CONSIDERED
AT THE ANNUAL MEETING.. 24
VOTING AND PROXIES...... 24
SOLICITATION OF PROXIES. 25
COMPARATIVE PER SHARE
DATA.................... 26
MARKET PRICE DATA........ 27
THE MERGER............... 28
BACKGROUND OF THE
MERGER................. 28
AGI REASONS FOR THE
MERGER; RECOMMENDATION
OF THE AGI BOARD OF
DIRECTORS.............. 30
E&S REASONS FOR THE
MERGER................. 31
INTERESTS OF CERTAIN
PERSONS IN THE MERGER;
CONFLICTS OF INTEREST.. 32
FAIRNESS OPINION OF
COWEN & COMPANY........ 33
STRUCTURE OF THE MERGER;
EFFECTIVE TIME......... 37
MERGER CONSIDERATION.... 37
DESCRIPTION OF ELECTION
PROCEDURES............. 38
PROCEDURES FOR EXCHANGE
OF AGI COMMON STOCK
CERTIFICATES........... 40
ANTICIPATED ACCOUNTING
TREATMENT.............. 41
PLANS FOR AGI AFTER THE
MERGER................. 41
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CERTAIN OTHER EFFECTS OF THE MERGER...................................... 41
SOURCE AND AMOUNT OF FUNDS AND OTHER CONSIDERATION....................... 42
MATERIAL FEDERAL INCOME TAX CONSEQUENCES................................. 42
REGULATORY MATTERS....................................................... 44
BLUE SKY LAWS............................................................ 45
APPRAISAL RIGHTS......................................................... 45
THE MERGER AGREEMENT...................................................... 46
CERTAIN REPRESENTATIONS AND WARRANTIES................................... 46
CONDUCT OF BUSINESS PENDING THE MERGER................................... 46
NO SOLICITATION OF COMPETING TRANSACTIONS................................ 47
INDEMNIFICATION AND INSURANCE............................................ 48
STOCK EXCHANGE LISTING................................................... 48
CONDITIONS TO CONSUMMATION OF THE MERGER................................. 48
TERMINATION; EFFECTS OF TERMINATION...................................... 48
EXPENSES................................................................. 50
AMENDMENT; WAIVER........................................................ 51
VOTING AGREEMENT AND IRREVOCABLE PROXY.................................... 51
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS............................... 52
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS............................ 53
PRO FORMA CONSOLIDATED BALANCE SHEET...................................... 55
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...................... 56
DESCRIPTION OF E&S........................................................ 57
DESCRIPTION OF E&S CAPITAL STOCK.......................................... 57
DESCRIPTION OF AGI........................................................ 58
BUSINESS OVERVIEW........................................................ 58
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.......................... 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 60
PRODUCTS................................................................. 66
TECHNOLOGY AND CORE COMPETENCIES......................................... 68
STRATEGIC RELATIONSHIPS.................................................. 68
3D PROFESSIONAL MARKETS AND APPLICATIONS................................. 69
CUSTOMERS, SALES AND MARKETING........................................... 69
RESEARCH AND DEVELOPMENT................................................. 70
MANUFACTURING............................................................ 71
PROPRIETARY RIGHTS....................................................... 72
COMPETITION.............................................................. 72
EMPLOYEES................................................................ 73
DESCRIPTION OF PROPERTIES................................................ 73
MANAGEMENT............................................................... 73
EXECUTIVE COMPENSATION................................................... 75
EMPLOYEE BENEFIT PLANS................................................... 76
COMPENSATION COMMITTEE REPORT............................................ 77
PERFORMANCE GRAPH........................................................ 79
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT.............. 80
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 82
LEGAL PROCEEDINGS........................................................ 82
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
COMPARISON OF RIGHTS OF AGI STOCKHOLDERS AND E&S STOCKHOLDERS............. 83
AUTHORIZED CAPITAL STOCK................................................. 83
STOCKHOLDER VOTING RIGHTS................................................ 83
SPECIAL MEETINGS OF STOCKHOLDERS......................................... 84
BUSINESS COMBINATIONS.................................................... 84
BUSINESS CONDUCTED AT STOCKHOLDERS' MEETINGS............................. 86
SHAREHOLDERS CONSENT WITHOUT A MEETING................................... 86
DISSENTERS' RIGHTS....................................................... 86
QUORUM OF DIRECTORS...................................................... 87
DERIVATIVE SUITS......................................................... 87
AMENDMENTS TO THE CHARTER................................................ 88
NOTICE, ADJOURNMENT AND PLACE OF STOCKHOLDERS' MEETINGS.................. 88
DIRECTORS................................................................ 89
ELECTION AND REMOVAL OF DIRECTORS........................................ 89
INSPECTION OF BOOKS AND RECORDS.......................................... 89
TRANSACTIONS WITH OFFICERS AND DIRECTORS................................. 90
LIMITATION ON LIABILITY OF DIRECTORS; INDEMNIFICATION OF OFFICERS AND
DIRECTORS............................................................... 90
ELECTION OF CLASS I DIRECTORS............................................. 92
LEGAL MATTERS............................................................. 93
EXPERTS................................................................... 93
ACCELGRAPHICS, INC. CONSOLIDATED FINANCIAL STATEMENTS..................... F-1
</TABLE>
<TABLE>
<C> <S>
ANNEX I AGREEMENT AND PLAN OF MERGER
ANNEX II OPINION OF COWEN & COMPANY
ANNEX III VOTING AGREEMENT AND IRREVOCABLE PROXY
</TABLE>
<PAGE>
AVAILABLE INFORMATION
AccelGraphics, Inc. ("AGI") and Evans & Sutherland Computer Corporation
("E&S") file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information filed by E&S or AGI at the SEC's public reference rooms in
Washington, D.C. at 450 5th Street, Mail Stop 1-2, NW, Washington, D.C. 20549,
in New York at 7 World Trade Center, Suite 1300, New York, New York 10048 and
in Chicago, Illinois at Citicorp Center, 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. SEC filings of E&S and AGI are also
available to the public from commercial document retrieval services. The
website maintained by the SEC is "http://www.sec.gov."
If you are a stockholder of E&S, E&S may have sent you some of the documents
incorporated by reference, but you can obtain any of them through E&S or the
SEC. Documents incorporated by reference are available from E&S without
charge, excluding all exhibits unless such exhibits have been specifically
incorporated by reference in this Proxy Statement/Prospectus. Stockholders may
obtain documents incorporated by reference in this Proxy Statement/Prospectus
by requesting them in writing or by telephone from the appropriate party at
the following address:
Evans & Sutherland Computer
Corporation
Attn: Mark C. McBride
600 Komas Drive
Salt Lake City, Utah 84108
(801) 588-1000
If you would like to request documents from E&S, please do so by June 10,
1998 to receive them before the Annual Meeting.
E&S has filed with the SEC a Registration Statement on Form S-4 to register
the E&S Common Stock to be issued pursuant to the Merger Agreement. This Proxy
Statement/Prospectus is a part of that Registration Statement and constitutes
a prospectus of E&S in addition to being a proxy statement of AGI for the
Annual Meeting. As allowed by SEC rules, this Proxy Statement/Prospectus does
not contain all the information you can find in the Registration Statement and
the exhibits to the Registration Statement.
1
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The E&S Annual Report on Form 10-K for the fiscal year ended December 31,
1997, proxy statement dated April 20, 1998, Quarterly Report on Form 10-Q for
the quarter ended March 27, 1998, and Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997, previously filed with the SEC pursuant to
the Exchange Act, are incorporated by reference in this Proxy
Statement/Prospectus.
All documents and reports filed by E&S pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act between the date of this Proxy
Statement/Prospectus and the date of the AGI Annual Meeting shall be deemed to
be incorporated by reference in this Proxy Statement/Prospectus and to be part
hereof from the dates of filing of such documents and reports. Statements
contained in this Proxy Statement/Prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or incorporation by
reference therein, each such statement being qualified in all respects by such
reference.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY DOCUMENT. NEITHER E&S NOR AGI HAS AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS. ALL INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS WITH RESPECT TO AGI AND ITS SUBSIDIARIES HAS BEEN
PROVIDED BY AGI, AND ALL INFORMATION CONTAINED (OR INCORPORATED BY REFERENCE)
IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO E&S AND ITS SUBSIDIARIES
HAS BEEN PROVIDED BY E&S. NEITHER E&S NOR AGI WARRANTS THE ACCURACY OF
INFORMATION RELATING TO THE OTHER PARTY. THIS PROXY STATEMENT/PROSPECTUS IS
DATED MAY 15, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH
DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT/PROSPECTUS NOR THE
ISSUANCE OF E&S COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
2
<PAGE>
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
Merger fully. For a more complete description of the legal terms of the Merger,
you should read carefully this entire document and the documents to which we
have referred you. See "Available Information" (page 1).
In the Merger, AccelGraphics, Inc. ("AGI") will merge with and into E&S
Merger Corp. E&S Merger Corp. will be the surviving corporation in the Merger
and will continue as a subsidiary of Evans & Sutherland Computer Corporation
("E&S"). As part of the Merger, E&S Merger Corp. will change its name to
AccelGraphics, Inc.
The Merger Agreement is attached as Annex I to this document. We encourage
you to read the Merger Agreement, as it is the legal document that governs the
Merger.
THE COMPANIES
ACCELGRAPHICS, INC.
1873 BARBER LANE
MILPITAS, CA 95035
(408) 546-2100
AGI is a leading provider of high-performance, cost-effective, 3-dimensional
("3D") graphics subsystem products for the professional Windows NT and Windows
95 markets. AGI pioneered the development of professional 3D graphics
subsystems for use with Microsoft's Windows NT operating system ("NT"). A 3D
graphics subsystem integrates graphics acceleration chip(s), specialized
hardware, firmware, software and memory. AGI's 3D graphics subsystems, when
included in an Intel Pentium, Pentium Pro, Pentium Pro II or Digital Alpha
based computer, create a class of computer system called a "Personal
Workstation." Personal Workstations, which often sell for less than $10,000,
provide capabilities and performance comparable to more expensive 3D graphics
RISC/UNIX workstations. In January 1995, AGI shipped what it believes was the
first 3D graphics subsystem for NT and currently offers three distinct 3D
graphics subsystem product lines.
AGI's products include a family of 3D graphics subsystems for applications
based on OpenGL and other 3D application programming interfaces ("APIs"), such
as Autodesk's Heidi and Microsoft's DirectX. Through AGI's extensive experience
in 3D algorithms, the interaction of 3D applications with OpenGL and overall 3D
graphics system integration, AGI delivers robust, well-integrated subsystem
solutions to the professional 3D graphics market.
AGI sells its products through original equipment manufacturers ("OEMs") and
a worldwide network of value added resellers ("VARs") and distributors.
EVANS & SUTHERLAND COMPUTER CORPORATION
600 KOMAS DRIVE
SALT LAKE CITY, UTAH 84108
(801) 588-1000
E&S develops and manufactures hardware and software to produce highly
realistic 3D synthetic worlds. E&S's business units deliver high-quality visual
systems for simulation and training in defense and commercial applications as
well as high-performance systems for desktop graphics, digital studio, and
digital theater applications throughout the world. E&S's REALimage graphics
technology has been selected by at least twelve major OEMs for their NT
workstation products since E&S began shipping in June 1997. Customers include
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Compaq, Hewlett-Packard, Digital Equipment, Siemens Nixdorf, Micron, NEC, Acer
and others using both Intel and Alpha processors. REALimage technology is
implemented on boards such as AGI's AccelECLIPSE II for sale to computer
makers. REALimage-based boards provide the industry's fastest, most powerful
graphics rendering for OpenGL-based applications such as Pro/E, Softimage, 3D
Studio MAX, EDS/Unigraphics, SDRC, Lightwave, and Lightscape. Founded in 1968,
E&S is headquartered in Salt Lake City, Utah. E&S also has offices in Boston,
Massachusetts; Dallas, Texas; Orlando, Florida; Beijing, China; Dubai, United
Arab Emirates; Horsham, England; and Munich, Germany.
E&S MERGER CORP.
600 KOMAS DRIVE
SALT LAKE CITY, UTAH 84108
(801) 588-1000
E&S Merger Corp. is a company formed by E&S on April 21, 1998 for use in the
Merger. This is the only business of E&S Merger Corp.
WHAT YOU WILL RECEIVE IN THE MERGER
In the Merger you will receive for each share of AGI Common Stock you own
immediately prior to the Merger, at your election, either a fraction of a share
of E&S Common Stock with a value of approximately $5.75, $5.75 in cash or a
combination of E&S Common Stock and cash with an aggregate value of $5.75. You
will also receive cash in lieu of fractional shares of E&S Common Stock. The
parties have agreed that in aggregate 48% of the total Merger Consideration
will be paid by E&S in cash with the remainder of the Merger Consideration to
be paid in E&S Common Stock. Therefore, if AGI stockholders elect to receive
cash in the Merger in an amount that exceeds 48% of the total Merger
Consideration or if AGI stockholders elect to receive a number of shares of E&S
Common Stock with an aggregate value in excess of 52% of the total Merger
Consideration, then in such case the AGI stockholder who shall have elected to
receive the form of Merger Consideration that was oversubscribed will be
subject to a pro rata adjustment in order to achieve the agreed upon mix of
consideration. AGI stockholders who fail to make any election as to the form of
Merger Consideration to be received will be presumed to have made an election
to receive for each of their shares of AGI Common Stock a Merger Consideration
mix of 48% in cash and 52% in E&S Common Stock. See "THE MERGER--Merger
Consideration."
If you elect to receive all E&S Common Stock, the number of fractional shares
of E&S Common Stock you will receive for each of your Shares of AGI Common
Stock will be determined by dividing $5.75 by the "Average E&S Share Price,"
and multiplying the fraction by the number of shares of AGI Common Stock you
own. The "Average E&S Share Price" is defined as the average of the last sale
price per share of E&S Common Stock for the 10 consecutive trading days ending
on the second trading day prior to the completion of the Merger.
Because of the need for regulatory review with respect to the Merger, the
valuation period for determining the number of shares of E&S Common Stock
issued in the Merger could occur after the Annual Meeting. As a result, the
exact number of shares of E&S Common Stock issuable for each share of AGI
Common Stock may not be known at the time you are asked to consider and vote on
the Merger.
THE ANNUAL MEETING
At the Annual Meeting, the holders of AGI Common Stock will be asked to adopt
the Merger Agreement and to elect the Class I Directors to AGI's Board of
Directors to serve until the earlier of the end of their term or consummation
of the Merger. Each share is entitled to one vote at the Annual Meeting.
The close of business on May 11, 1998 is the record date for determining if
you are entitled to vote at the Annual Meeting.
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As a condition to E&S's willingness to enter into the Merger Agreement, E&S
and certain stockholders of AGI entered into a Voting Agreement and Irrevocable
Proxy (the "Voting Agreement"). Each of these stockholders, without any
additional consideration being paid to them:
. has agreed to vote all of his or her shares in favor of the Merger, and
. has granted E&S an irrevocable proxy to vote his or her shares in favor
of the Merger.
The Voting Agreement covers a total of 3,159,963 shares of AGI Common Stock
which represents approximately 37% of such shares outstanding on the record
date.
FAIRNESS OPINION
Cowen & Company has delivered to the AGI Board of Directors its written
opinion, dated April 22, 1998, to the effect that, as of such date, and subject
to the limits and qualifications therein, the financial terms of the Merger
were fair from a financial point of view to the holders of AGI Common Stock.
The full text of the opinion of Cowen & Company, which sets forth the
assumptions made and matters considered, is attached as Annex II to this Proxy
Statement/Prospectus, and is incorporated herein by reference. Holders of AGI
Common Stock are urged to, and should, read such opinion in its entirety. See
"THE MERGER--Fairness Opinion of Cowen & Company."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the businesses of AGI and E&S.
REASONS FOR THE MERGER; RECOMMENDATION OF THE AGI BOARD
E&S management believes that the Merger will benefit E&S for a number of
reasons, including that it:
. provides E&S a solid OEM distribution channel, and an established
capability to manufacture and distribute high volume/high performance PC
boards;
. allows E&S to leverage its core graphics expertise into the NT
workstation environment;
. establishes E&S as a supplier of workstation-level graphics systems with
a larger market share more rapidly than on a stand-alone basis; and
. allows E&S to address the particular needs of major OEM customers more
directly.
The AGI Board unanimously approved the Merger Agreement and the Merger and
recommends that you vote to adopt the Merger Agreement. The AGI Board believes
that the Merger is in the best interests of AGI and its stockholders. In
reaching its decision, the AGI Board considered a number of factors, including
the following:
. the opinion of Cowen & Company to the AGI Board that, as of the date of
the opinion, the financial terms of the Merger were fair, from a
financial point of view, to the holders of AGI Common Stock. The full
text of Cowen & Company's opinion is attached as Annex II to this
document, and you are urged to read it carefully and in its entirety. See
"THE MERGER--Fairness Opinion of Cowen & Company";
. the AGI Board's belief that the Merger is in the best interests of the
AGI stockholders, both in terms of the immediate financial consideration
to be received and the potential for future appreciation in value of the
E&S Common Stock;
. the relative trading prices and volumes (as well as the perceived
prospects for future growth in value) of AGI Common Stock and E&S Common
Stock;
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. the price certainty of the proposed Merger--$5.75 per share regardless of
stock market fluctuations prior to the closing of the Merger;
. the belief that the Merger would result in the creation of a vertically
integrated provider of high-performance, cost-effective 3D graphics
subsystems for the professional Windows NT and Windows 95 markets;
. the past price stability and relatively low volatility of E&S Common
Stock, in contrast to the perceived greater volatility and risk to
holders of AGI Common Stock;
. the likelihood of consummation of the Merger, including the terms and
conditions of the Merger Agreement and the limited conditions to the
consummation of the Merger;
. the perception that the Merger would permit the combined company to more
accurately forecast costs and, in turn, to be more competitive on price
in the 3D graphics board market than AGI as an independent company;
. the structure of the Merger, which, subject to certain limits, permits
AGI stockholders to exchange their AGI Common Stock solely for E&S Common
Stock on a tax-free basis, with taxable gain recognized only to the
extent that they elect to receive cash; and
. the fact that, although AGI did not conduct a formal auction, it did hold
discussions with a number of other likely prospective buyers, and none of
them expressed interest in acquiring AGI at a price per share equal to or
greater than that offered by E&S.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the AGI Board regarding the Merger, you
should be aware of the interests which certain officers and directors of AGI
have in the Merger that may be different from yours and their interests as
stockholders.The AGI Board recognized all the interests described below and
concluded that these interests did not detract from the fairness of the Merger
to AGI stockholders who are not officers or directors of AGI.
At the time of signing the Merger Agreement, Jeffrey W. Dunn, President and
Chief Executive Officer, and Nancy E. Bush, Vice President and Chief Financial
Officer, agreed to enter into employment agreements (the "Employment
Agreements") with E&S which will become effective at the time of the Merger. If
the Merger is completed, 100% and 50% of the unvested stock and stock options,
issued prior to April 22, 1998 for Mr. Dunn and Ms. Bush, respectively, will
become vested. E&S will pay Mr. Dunn and Ms. Bush a salary of $210,000 and
$140,000 per year, respectively. In addition, both Mr. Dunn and Ms. Bush will
be eligible for annual bonuses up to approximately (i) $210,000 and $135,000,
respectively, for the fiscal year ended December 31, 1998 upon achieving
certain incentive program targets and revenue and profit criteria and (ii)
$313,000 and $235,000, respectively, for the fiscal year ended December 31,
1999, if still employed, upon achieving certain incentive program targets and
revenue and profit criteria. These Employment Agreements also provide for
additional consideration if the incentive targets and revenue profit criteria
are substantially exceeded.
AGI has previously entered into retention agreements with a number of AGI
executives. Under retention agreements with AGI officers other than Mr. Dunn
and Ms. Bush, if the Merger is completed, 50% of the unvested stock and stock
options granted to these executives will become vested and AGI or its successor
in the Merger will pay these executives severance benefits in the event that
they are discharged without cause during the eighteen-month period after the
Merger is completed. The Employment Agreements referred to in the preceding
paragraph for Mr. Dunn and Ms. Bush will have the effect of superseding and
replacing the AGI retention agreements presently in place with them.
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Pursuant to the Merger Agreement, E&S has agreed that, after the time of the
Merger, it will cause E&S to provide certain indemnification and liability
insurance benefits to certain indemnified parties, including directors and
officers of AGI. See "THE MERGER AGREEMENT--Indemnification and Insurance."
ELECTION PROCEDURES
Shortly following the mailing of this Proxy Statement/Prospectus, you will be
sent a Form of Election for use in electing to receive in the Merger cash,
shares of E&S Common Stock, or a combination of the two. In order to make such
election:
. properly complete and sign the Form of Election;
. enclose your AGI stock certificates along with the Form of Election; and
. return the form of election to American Stock Transfer & Trust Company,
40 Wall Street, New York, NY 10005 no later than the business day that is
two trading days before the completion of the Merger (which date will be
publicly announced by AGI in advance thereof).
If stockholders of AGI elect to receive in aggregate more than 48% of the
total Merger Consideration in cash, or more than 52% of the total Merger
Consideration in E&S Common Stock, E&S will pay for each share electing cash
and/or E&S Common Stock, as the case may be, with a mixture of cash and E&S
Common Stock so that the total amount of cash paid will be equal to 48% of the
total Merger Consideration and/or the amount of E&S Common Stock paid will be
equal to 52% of the total Merger Consideration. E&S may further adjust this
percentage if necessary to ensure that the Merger qualifies as a reorganization
under Section 368(a) of the Internal Revenue Code of 1986 (the "Code"). If you
fail to make an election or to return the Form of Election, you will receive
48% of your Merger Consideration in cash and the remaining 52% in E&S Common
Stock.
AGI has retained Georgeson & Company to serve as Information Agent in
connection with the Merger. QUESTIONS REGARDING THE MERGER AND THE ELECTION
PROCESS AS WELL AS REQUESTS FOR ADDITIONAL COPIES OF THE DOCUMENTS REFERENCED
HERE AND ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS CAN BE DIRECTED TO
GEORGESON & COMPANY AT (800) 223-2064.
TREATMENT OF STOCK OPTIONS IN THE MERGER
Each AGI employee stock option outstanding at the time of the Merger, whether
or not vested, will be assumed by E&S and deemed to constitute an option to
acquire, under the same terms and conditions, the same number of shares of E&S
Common Stock as the holder of such option would have been entitled to receive
pursuant to the Merger had such holder exercised such option in full
immediately prior to the Merger. However, any AGI employee stock option with an
exercise price greater than $6.00 per share will be terminated and cancelled at
the time of the Merger.
REGULATORY APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act")
prohibits AGI and E&S from completing the Merger until E&S and AGI have
furnished certain information and materials to the Antitrust Division of the
Department of Justice and the Federal Trade Commission and the required waiting
period have been satisfied. E&S and AGI each filed the required notification
and report forms with the FTC and the Antitrust Division on May 4, 1998 and
received clearance under the HSR Act on May 13, 1998.
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CONDITIONS TO THE MERGER
E&S and AGI will not be obligated to complete the Merger unless a number of
conditions are satisfied or waived by them. These include the following:
. the holders of a majority of the shares of AGI Common Stock must approve
the Merger;
. the waiting period applicable to the Merger under the HSR Act must expire
or be terminated;
. there must be no injunction or order that prohibits the Merger;
. the registration statement registering the shares of E&S Common Stock to
be issued in the Merger must have been declared effective by the SEC;
. the shares of E&S Common Stock to be issued in the Merger must be
authorized for listing on the Nasdaq National Market;
. AGI, E&S and E&S Merger Corp. must perform all of their obligations under
the Merger Agreement;
. AGI and E&S must each certify to the other that its representations and
warranties contained in the Merger Agreement are true and correct in all
material respects;
. E&S must receive a "cold comfort" letter from Price Waterhouse LLP in
such form and substance as is reasonably customary;
. AGI and E&S must receive opinions from their tax counsel that the Merger
will qualify as a reorganization so that AGI Stockholders will recognize
taxable income only to the extent of cash received in the Merger;
. E&S must receive an agreement from any person who may be deemed to be an
affiliate of AGI pursuant to Rule 145 under the Securities Act of 1933
stating that such affiliate will comply with Rules 144 and 145 under the
Securities Act; and
. E&S must receive certain executed lock-up agreements, employment
agreements and certain option acceleration waiver agreements from certain
officers of AGI.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated by either AGI or E&S if any of the
following occurs:
. the waiting period under the HSR Act does not end or is not terminated by
September 15, 1998;
. a court or other governmental authority permanently prohibits the Merger;
. the Merger is not completed by September 15, 1998;
. the holders of AGI Common Stock do not approve the Merger; or
. either party materially breaches the Merger Agreement and does not cure
such breach within 30 days of receiving notice of it.
AGI will also have the right to terminate the Merger Agreement in the event
that AGI receives an unsolicited proposal to acquire AGI for a purchase price
in excess of $7.65 per share (a "Superior Proposal") and AGI wishes to pursue
the proposal.
TERMINATION FEE
The Merger Agreement requires AGI to pay E&S a termination fee of $4 million
plus reimbursement of out of pocket expenses up to $100,000 if the Merger
Agreement is terminated by AGI in order to pursue a Superior Proposal.
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NO SOLICITATION OF COMPETING TRANSACTIONS
The Merger Agreement restricts AGI's ability to entertain or encourage any
alternative acquisition transactions with third parties beyond what is required
by the AGI Board's fiduciary duties.
APPRAISAL RIGHTS
AGI stockholders have no right to an appraisal of the value of their shares
in connection with the Merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
It is a condition to the completion of the merger that AGI and E&S each
receive a tax opinion from their outside counsel that the Merger will
constitute a "reorganization" under Section 368(a) of the Code in which case
AGI stockholders will generally recognize taxable income from the exchange of
AGI shares only to the extent of the cash received.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX
ADVISORS TO UNDERSTAND FULLY THE TAX CONSEQUENCES OF THE MERGER TO YOU.
ANTICIPATED ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for by E&S under the
purchase method of accounting in accordance with generally accepted accounting
principles. See "THE MERGER--Anticipated Accounting Treatment."
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
E&S and AGI have made forward-looking statements in this document and in
documents to which we have referred you. These statements are subject to risks
and uncertainties, and there can be no assurance that these statements will
prove to be correct. Forward-looking statements include assumptions as to how
E&S and AGI may perform in the future. See "Risk Factors." You will find many
of these statements in the following sections:
--"THE MERGER--Reasons for the Merger; Recommendation of the AGI Board of
Directors."
--"THE MERGER--Fairness Opinion of Cowen & Company."
Also, when we use words like "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements. For those statements,
E&S and AGI claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
You should understand that the following important factors, in addition to
those discussed elsewhere in this document and in the documents which we have
referred you, could affect the future results of E&S and AGI and could cause
those results to differ materially from those expressed in our forward-looking
statements. In addition to the factors set forth under "Risk Factors," these
factors include: materially adverse changes in economic conditions and in the
markets served by E&S and AGI; the failure of certain of AGI's customers to
renew their contracts with AGI; and a significant delay in the expected
completion of the Merger. See "Risk Factors."
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical consolidated financial
data of AGI for each of the three years and of E&S for each of the five years
in the respective periods ended December 31, 1997 and for the three month
periods ended March 31, 1997 and 1998. This selected historical consolidated
financial data has been derived from and should be read in conjunction with the
consolidated financial statements of AGI provided herein, the consolidated
financial statements of E&S incorporated herein by reference and the
consolidated financial statements of E&S contained in the annual reports and
other information that E&S and AGI have filed with the Securities and Exchange
Commission (the "Commission"). See "AVAILABLE INFORMATION" on page 1.
During 1997, E&S prepared its consolidated financial statements on the basis
of a fiscal year ending on December 31. Prior to 1997 E&S prepared its
consolidated financial statements on the basis of a 52-53 week fiscal year
ending on the last Friday of December. AGI prepares its consolidated financial
statements on the basis of a 52-53 week fiscal year with quarters ending on the
Friday closest to the calendar quarter end. Fiscal 1997 was a 53 week year. For
convenience of presentation, the following financial information is shown as
ending on the last date of the calendar quarter or year.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF AGI
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- ---------------
1995(1) 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR/QUARTER:
Revenues........................... $ 3,911 $18,671 $33,509 $11,832 $10,479
Gross profit....................... 1,410 6,594 10,338 4,248 2,718
Total operating expenses........... 5,811 7,429 11,217 3,041 2,734
Income (loss) from operations...... (4,401) (835) (879) 1,207 (16)
Net income (loss).................. (4,465) (932) (96) 834 136
Basic net income (loss) per share.. (9.15) (1.09) (0.02) 0.80 0.02
Number of shares used in basic per
share calculation................. 488 854 6,103 1,039 8,415
Diluted net income (loss) per
share............................. (9.15) (1.09) (0.02) 0.13 0.02
Number of shares used in diluted
per share calculation............. 488 854 6,103 6,648 8,973
AT END OF YEAR/QUARTER:
Working capital.................... $ 2,530 $ 5,030 $21,876 $21,183
Total assets....................... 3,951 8,439 28,309 28,850
Long-term obligations, net of
current portion................... 1,748 1,782 482 448
Mandatorily redeemable convertible
preferred stock................... 5,745 8,930 -- --
Total stockholders' equity
(deficit)......................... (4,528) (5,170) 24,265 24,526
</TABLE>
- --------
(1) AGI commenced operations in late 1994; accordingly, its results of
operations prior to the year ended December 31, 1995 were insignificant.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF E&S
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
MARCH 28, MARCH 27,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR/QUARTER:
Net sales............... $142,253 $113,090 $113,194 $130,564 $159,353 $33,642 $ 42,421
Gross profit............ 76,575 52,464 50,426 64,629 75,214 15,128 17,125
Operating expenses...... 79,811 68,976 50,825 53,110 60,825 13,690 15,318
Gain from sale of
business unit.......... -- -- 23,506 -- -- -- --
Operating earnings
(loss)................. (3,236) (16,512) 23,107 11,519 14,389 1,438 1,807
Earnings (loss) before
income taxes,
extraordinary gain, and
accounting change...... 2,831 (11,384) 33,580 16,029 6,838 2,015 2,353
Earnings (loss) before
extraordinary gain and
accounting change...... 1,826 (5,559) 20,484 10,352 5,080 1,411 1,589
Net earnings (loss)..... 4,093 (3,700) 20,811 10,352 5,080 1,411 1,589
Diluted number of shares
used in per common
share calculation...... 8,287 8,520 8,785 9,222 9,502 9,440 9,460
Diluted earnings (loss)
per common share:
Earnings (loss) before
extraordinary gain
and accounting
change............... 0.22 (0.65) 2.33 1.12 0.53 0.15 0.17
Net earnings (loss)... 0.49 (0.43) 2.37 1.12 0.53 0.15 0.17
AT END OF YEAR/QUARTER:
Working capital......... $120,672 $ 96,071 $118,411 $126,923 $128,957 $126,008
Total assets............ 216,187 180,764 211,002 210,891 234,390 229,438
Long-term debt.......... 37,066 20,375 18,015 18,015 18,015 18,015
Stockholders' equity.... 137,030 127,118 148,491 160,472 165,634 162,617
</TABLE>
SIGNIFICANT FACTORS AFFECTING OPERATING RESULTS
Sometimes financial results include unusual or infrequent events and factors
which are not expected to occur regularly in the future. Examples of these
events and factors include gains or losses on the sale of businesses, the costs
of completing major acquisitions and of other business development activities,
and the costs of business restructurings. Certain unusual or infrequent events
and transactions, as well as other significant factors and trends, which may be
helpful in understanding the past performance and future prospects of AGI and
E&S, are described briefly below. The following discussion should be read with
the "SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA" of AGI and E&S included
above and on the previous pages and with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of AGI contained
herein and the "Management, Discussion and Analysis of Financial Condition" of
E&S contained in the annual reports and other information that E&S has filed
with the Commission. See "AVAILABLE INFORMATION" on page 1.
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AGI. In considering the selected historical consolidated financial data of
AGI, you should be aware that:
. data is presented on the basis of a 52-53 week fiscal year with quarters
ending on the Friday closest to the calendar quarter end. Fiscal 1997 was
a 53 week year. For convenience of presentation, the financial
information is shown as ending on the calendar quarter end; and
. the information presented for 1997 includes AGI's initial public offering
of common stock.
E&S. In considering the selected historical consolidated financial data of
E&S, you should be aware that:
. prior to 1997, data is presented on the basis of a 52-53 week fiscal year
which ends on the last Friday of December. During 1997 E&S changed its
fiscal year end to December 31. For convenience of presentation, the
financial information is shown as ending on December 31 of each year;
. the information shown in 1995 includes a one-time gain from sale of a
business unit;
. the information shown in 1995, 1994 and 1993 includes extraordinary gains
from the repurchase of convertible debentures; and
. data as of March 28, 1997 and March 27, 1998 is presented on the basis of
thirteen and twelve week quarters, respectively which end on the Friday
closest to the calendar quarter end.
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FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
E&S and AGI have made forward-looking statements, as such term is used in
the Private Securities Litigation Reform Act of 1995, in this document and
those documents to which we have referred you that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of E&S and AGI set forth
under "THE MERGER -- Reasons for the Merger; Recommendation of the AGI Board
of Directors" and "THE MERGER -- Fairness Opinion of Cowen & Company" and
those preceded by, followed by or that include the words "believes,"
"expects," "anticipates" or similar expressions. You should understand that
the following important factors, in addition to those discussed elsewhere in
this document and in the documents which are incorporated by reference, could
affect the future results of AGI and E&S, and could cause those results to
differ materially from those expressed in the forward-looking statements of
AGI and E&S: materially adverse changes in economic conditions and in the
markets served by AGI and E&S; the failure of certain of AGI's customers to
continue to purchase products from AGI; and a significant delay in the
expected closing of the Merger.
RISK FACTORS
Each AGI Stockholder should carefully consider and evaluate the following
factors, among others, before voting.
RISK FACTORS REGARDING THE MERGER
Uncertainty Relating to Integration. The Merger involves the integration of
two companies that have previously operated independently. The successful
combination of the two companies will require significant effort from each
company, including the coordination of their research and development,
utilization and successful commercialization of in-process research and
development, integration of the companies' product offerings, coordination of
their sales and marketing efforts and business development efforts. Following
the Merger, in order to maintain and increase profitability, E&S will need to
integrate and streamline overlapping functions successfully. Costs generally
associated with this type of integration that may be incurred by E&S include
the integration of product lines, sales force cross-training and market
positioning of products. While these costs have not been currently identified,
any such costs may have an adverse effect on operating results in the periods
in which they are incurred. Each of E&S and AGI has different systems and
procedures in many operational areas that must be rationalized and integrated.
There may be substantial difficulties associated with integrating two separate
companies, and there can be no assurance that such integration will be
accomplished smoothly, expeditiously or successfully. The integration of
certain operations following the Merger will require the dedication of
management resources that may distract attention from normal operations. The
business of E&S may also be disrupted by employee uncertainty and lack of
focus during such integration. Failure to quickly and effectively accomplish
the integration of the operations of E&S and AGI could have a material adverse
effect on the consolidated business, financial condition and results of
operations of E&S. Moreover, uncertainty in the marketplace or customer
concern regarding the impact of the Merger and related transactions could have
a material adverse effect on the consolidated business, financial condition
and results of operations of E&S.
Effect of the Merger on Customers and Existing Agreements. Certain of E&S's
and AGI's existing customers may view the Merger as disadvantageous to them.
As a consequence, the future relationship with these customers could be
adversely affected. The Merger will require the consent of certain parties who
have entered into contracts with AGI. There can be no assurance that such
consents will be given and, if not given, that such contracts will not
terminate.
Retention of Employees. The success of E&S and AGI will be dependent in part
on the retention and integration of management, technical, marketing, sales
and customer support personnel. There can be no assurance that the companies
will be able to retain such personnel or that the companies will be able to
attract,
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hire and retain replacements for employees that leave following consummation
of the Merger. The failure to attract, hire, retain and integrate such skilled
employees could have a material adverse effect on the business, operating
results and financial condition of E&S and AGI.
Rights of Holders of AGI Common Stock Following the Merger. Following the
Merger, holders of AGI Common Stock outstanding as of the Effective Time may
become holders of E&S Common Stock. Certain differences exist between the
rights of stockholders of AGI under Delaware law, the AGI Certificate of
Incorporation and the AGI Bylaws, and the rights of stockholders of E&S under
Utah law, the Articles of Incorporation of E&S and the Bylaws of E&S. See
"Comparison of Rights of AGI Stockholders and E&S Stockholders."
Effect of Merger on Distributors. Certain of E&S's existing distributors may
view themselves as competitors of the combined entity formed by the Merger,
and therefore determine that the Merger is competitively disadvantageous to
them. As a consequence, the combined entity's relationship with these
distributors could be adversely affected.
Potential Dilutive Effect to Stockholders. Although the companies believe
that beneficial synergies will result from the Merger, there can be no
assurance that the combining of the two companies' businesses, even if
achieved in an efficient, effective and timely manner, will result in combined
results of operations and financial condition superior to what would have been
achieved by each company independently, or as to the period of time required
to achieve such result. The issuance of E&S Common Stock in connection with
the Merger may have the effect of reducing E&S's net income per share from
levels otherwise expected and could reduce the market price of the E&S Common
Stock unless revenue growth or cost savings and other business synergies
sufficient to offset the effect of such issuance can be achieved. See "Risk
Factors Regarding AGI."
Loss of Opportunity for AGI as a Stand-Alone Entity. As a consequence of the
Merger, AGI stockholders will lose the chance to invest in the development and
exploitation of AGI's products on a stand-alone basis. It is possible that
AGI, if it were to remain independent, could achieve economic performance
superior to that which it could achieve as a subsidiary of E&S. Consequently,
there can be no assurance that stockholders of AGI would not achieve greater
returns on investment if AGI were to remain an independent company.
RISK FACTORS REGARDING E&S
Overview. The high-tech nature of E&S's business is subject to both national
and worldwide economic and political influences such as recession, political
instability, the economic strength of governments, and rapid changes in
technology. E&S's operating results are dependent on its ability to rapidly
develop, manufacture, and market innovative products that meet customer needs.
Inherent in this process is a number of risks that E&S must manage in order to
achieve favorable operating results. The process of developing new high
technology products is complex, expensive, and uncertain, requiring innovative
designs and features that anticipate customer needs, competing solutions, and
technological trends. The products, once developed, must be manufactured and
distributed in sufficient volumes and quality at acceptable costs and
competitive prices. Furthermore, portions of the manufacturing operations are
dependent on the ability of suppliers to deliver high quality components and
subassemblies in time to meet critical manufacturing and distribution
schedules. Constraints in these supply lines and insufficient quality could
adversely affect E&S's operating results until alternate sourcing can be
developed. In accordance with the provisions of the Private Securities
Litigation Reform Act of 1995, the cautionary statements set forth below
identify important factors that could cause actual results to differ
materially from those in the forward-looking statements contained in this
report.
Competitive Environment. The computer industry is highly competitive, with
rapid technological advances and constantly improving price/performance. As
most areas in which E&S operates continue to grow, E&S is experiencing
increased competition, and it expects this trend to continue. In recent years,
domestic and worldwide political, economic, and technological developments
have strongly affected these markets, requiring adaptation by market
participants. Since 1994, E&S has followed a three-point growth strategy,
consisting of growing existing businesses, developing new businesses
internally, and selectively acquiring businesses. This
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strategy has broadened E&S's business portfolio, creating opportunities for
increased efficiency and market competitiveness, improved access to new
markets, and reduced exposure to airline industry and defense budget
reductions. In addition, E&S continues to undertake cost reduction efforts
throughout all business units while monitoring and adjusting employment levels
consistent with changing business requirements.
E&S's executive management and Board of Directors continue to review and
monitor E&S's strategic plans in connection with its three-point growth
strategy. These plans include assessing business combinations and joint
ventures with companies engaged in similar or closely related businesses,
building market share in core businesses, and divesting less well-positioned
and non-core businesses to remain competitive.
Period To Period Fluctuations. E&S's operating results may fluctuate for a
number of reasons. Delivery cycles and contract lengths are typically long for
its core simulation-related businesses, which make up the largest share of
E&S's revenues and earnings. Well over half of each quarter's revenues result
from orders received in previous quarters. Because E&S plans its operating
expenses, many of which are relatively fixed in the short term, on expected
revenue, even a small revenue shortfall or shift may cause a period's results
to be below expectations. Such a revenue shortfall could arise from any number
of factors, including delays in the availability of products, delays from chip
suppliers, discontinuance of key components from suppliers, other supply
constraints, transit interruptions, overall economic conditions, or natural
disasters. The timing of customer acceptance of certain large-scale commercial
or government contracts may also have a significant effect on periodic
operating results. U.S. and international government defense budgets may
require E&S to delay or even cancel production due to lack of available
funding.
Gross margins are heavily influenced by mix considerations, including the
mix of lower-margin prime contracts versus sub-contracts, new products and
markets versus established products and markets, the mix of high-end products
versus low-end products, as well as the mix of configurations within these
product categories. Future margins may not duplicate historical margins or
growth rates.
E&S's stock price, like that of other technology companies, is subject to
significant volatility. If revenues or earnings in any quarter fail to meet
the investment community's expectations, there could be an immediate impact on
E&S's stock price. The stock price may also be affected by broader market
trends unrelated to E&S's performance.
Research and Development. E&S commits a significant investment in long-term
research and development. Developing new products and software is expensive
and the investment in product development often involves a long payback cycle.
While E&S has every reason to believe these investments will ultimately be
rewarded with revenue-generating products, customer acceptance ultimately
dictates the success of development and marketing efforts. E&S's plans to
continue significant investments in software research and development and
related product opportunities from which significant revenue is not
anticipated for a number of years. Management expects total spending for
research and development in 1998 to increase over spending in 1997 in absolute
dollars, but not to increase as a percentage of sales.
Product Development and Introduction. E&S's continued success depends on its
ability to develop technologically complex and innovative products. Product
transitions are a recurring part of E&S's business. A number of risks are
inherent in this process. During fiscal 1998, for example, E&S is heavily
committed to meeting delivery schedules for its Harmony and iNTegrator
products. While E&S has every expectation to meet these schedules, it has
customer contracts that include liquidated damages if delivery schedules are
not met.
The development of new technology and products is increasingly complex and
uncertain, which increases the risk of delays. The introduction of a new
product requires close collaboration and continued technological advancement
involving multiple hardware and software design and manufacturing teams within
E&S as well as teams at outside suppliers of key components, such as chipsets.
The failure of any one of these elements could cause E&S's new products to
fail to meet specifications or to miss the aggressive timetables that E&S
establishes. As the variety and complexity of E&S's product families increase,
the process of planning production and
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inventory levels also becomes increasingly complex. In addition, the extent to
which a new product gains rapid acceptance is strongly affected by the
availability of key applications optimized for the new systems. There is no
assurance that acceptance of E&S's new systems will not be affected by delays
in this process.
Product life-cycles place a premium on E&S's ability to manage the
transition from current products to new products. E&S may announce new
products, while the product is in the final stages of development. E&S's
results could be adversely affected by such factors as development delays, the
release of products late to manufacturing, quality or yield problems
experienced by production or suppliers, variations in product costs, delays in
customer purchases of existing products in anticipation of the introduction of
new products, and excess inventories of older products and components.
U.S. Government Contracts. In 1997, 29% of E&S's sales were made to agencies
of the U.S. government, either directly or through prime contractors or
subcontractors, for which there is intense competition. Accordingly, a
significant portion of E&S's sales are subject to inherent risks, including
uncertainty of economic conditions, changes in government policies and
requirements that may reflect rapidly changing military and political
developments, and the availability of funds. These risks also include
technological uncertainties and obsolescence, and dependence on annual
Congressional appropriation and allotment of funds. In the past, some of E&S's
programs have been delayed, curtailed, or terminated. Although E&S cannot
predict such uncertainties, in the opinion of management there are no spending
reductions or funding limitations pending that would impact its contracts.
Other characteristics of the industry are complexity of designs, the
difficulty of forecasting costs and schedules when bidding on developmental
and highly sophisticated technical work, and the rapidity with which product
lines become obsolete due to technological advances and other factors
characteristic of the industry. Earnings may vary materially on some contracts
depending upon the types of government long-term contracts undertaken, the
costs incurred in their performance, and the achievement of other performance
objectives. Due to the intense competition for available U.S. government
business, maintaining or expanding government business increasingly requires
E&S to commit additional working capital for long-term programs and additional
investments in E&S-funded research and development.
As a U.S. government contractor or sub-contractor, E&S's contracts and
operations are subject to government oversight. The government may investigate
and make inquiries of E&S's business practices and conduct audits of contract
performance and cost accounting. These investigations may lead to claims
against E&S. Under U.S. government procurement regulations and practices, an
indictment of a government contractor could result in that contractor being
fined and/or suspended for a period of time from eligibility for bidding on,
or for award of, new government contracts; a conviction could result in
debarment for a specified period of time. Although the outcome of such
investigations and inquiries cannot be predicted, in the opinion of management
there are no claims, audits, or investigations pending against E&S that are
likely to have a material adverse effect on either its business or its
consolidated financial position or results of operations.
International Business. E&S's international business accounted for 59% of
its 1997 sales. International business involves additional risks, such as
exposure to currency fluctuations and changes in foreign economic and
political environments, such as those currently affecting Asian markets.
International transactions frequently involve increased financial and legal
risks arising from stringent contractual terms and conditions and widely
differing legal systems, customs, and mores in foreign countries. In addition,
international sales often include sales to various foreign government armed
forces, with many of the same inherent risks associated with U.S. government
sales identified above. E&S expects that international sales will continue to
be a significant portion of E&S's overall business in the foreseeable future.
Commercial Airline Business. E&S's commercial simulation (airline) business
has strengthened since its decision in 1994 to pursue a new strategy of
supplying complete systems instead of just components. Characteristics of the
commercial simulation market include uncertainty of economic conditions,
dependence upon the strength of the commercial airline industry, air pilot
training requirements, competition, timely performance by subcontractors on
contracts in which E&S is the prime contractor, and changes in technology.
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New Businesses. As E&S develops and grows its new businesses, there are
certain uncertainties and risks associated with each business unit. These
risks include: (a) developing strong partner relationships with board
manufacturers, as well as intense competitive pressures for the Desktop
Graphics business; (b) acceptance of new technology and increasing market size
and demand in a developing new market for the Digital Theater business; (c)
the technical feasibility and uncertain market acceptance in a developing new
market for the Digital Studio business; and (d) changes in technology and
intense competition for the Board Products business. Risks also include
technological uncertainties and obsolescence, uncertainty of economic
conditions, commitment of working capital, market acceptance, and other risks
inherent in new businesses.
Private Finance Initiative. The Private Finance Initiative (PFI) is designed
to increase the involvement of the private sector in the provision of services
which have traditionally been provided by the public sector. PFI requires the
private sector to use its own capital to invest in assets which then are used
to provide a long term service such as simulation training to a public sector
customer. The number of programs being developed as PFIs is increasing
worldwide. E&S is currently involved in proposals to international military
customers where it would be an equity partner of the PFI prime contractor and
program manager. PFI programs, however, are subject to inherent risks,
including the commitment of working capital and fixed assets, long cycles in
which to receive a return on investment, and termination or default of
contracts. These risks also include technological uncertainties and
obsolescence, uncertainty of economic conditions, changes in U.S. and
international government policies and requirements that may reflect rapidly
changing military and political developments, and the availability of funds.
Year 2000. The "Year 2000" issue arises because many computer systems and
programs were designed to handle only a two-digit year, not a four-digit year.
These computers may interpret "00" as the year 1900 and could either stop
processing date-related computations or could process them incorrectly. E&S
has been informed by its information systems vendors that E&S's information
systems are able to process the Year 2000 accurately and accordingly does not
anticipate any Year 2000 issues from its own information systems, databases or
programs. However, E&S could be adversely impacted by Year 2000 issues faced
by major distributors, suppliers, customers, vendors and financial service
organizations with which E&S interacts. E&S is in the process of developing a
plan to determine the impact that third parties which are not Year 2000
compliant may have on the operations of E&S. There can be no assurance that
such plan will be able to address fully, or at all, the impact of the Year
2000 issue on E&S, which could have a material adverse effect upon E&S's
business, financial condition and results of operations.
RISK FACTORS REGARDING AGI
Rapid Technological Change. The computer industry in general, and the
markets for AGI's products in particular, are characterized by ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. Customer preferences can change rapidly and new
technology can quickly render existing products obsolete. In order to keep
pace with this rapidly changing market environment, AGI must continually
develop and incorporate into its products technological advances and new
features desired by customers at competitive prices. There can be no assurance
that AGI will be successful in developing and marketing, on a timely basis or
at all, competitive products, product enhancements and new products that
respond to technological changes or changes in customer requirements and
industry standards, or that AGI's enhanced or new products will adequately
address the changing needs of the marketplace.
Additionally, application programming interfaces ("APIs") have evolved and
changed over time. Although OpenGL has developed into a leading industry
standard API for professional 3D graphics development, it is likely that
industry standards will continue to evolve to meet rapidly changing customer
requirements. There can be no assurance that AGI will be successful in
developing and marketing product enhancements or new products that respond to
these evolving standards. In addition, Intel has introduced the Accelerated
Graphics Port ("AGP") bus structure, an alternative to the existing PCI bus
structure, which is currently gaining acceptance as an acceptable graphics bus
structure. Recently, Microsoft and Silicon Graphics, Inc. ("SGI") have
announced
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the Fahrenheit project to create a new suite of APIs. Fahrenheit is expected
to incorporate Microsoft's Direct3D and DirectDraw APIs and SGI's OpenGL
technology. Fahrenheit is expected to become available in the first half of
1999. Failure by AGI to respond effectively to changes in the 3D graphics
market, to develop or acquire new technology or to successfully conform to
industry standards would have a material adverse effect on the business,
financial condition and results of operations of AGI.
Operating systems and independent software vendor ("ISV") applications are
updated from time to time. AGI must constantly monitor these changes and
upgrade its products to remain compatible with any upgrades in operating
systems and ISV applications. There can be no assurance that AGI will be
successful in developing new versions or enhancements to its products or that
AGI will not experience delays in the upgrade of its products. In the event
that there are delays in the completion of any upgrade to its products, AGI's
business, financial condition and results of operations would be materially
adversely affected. In addition, AGI strives to achieve compatibility between
AGI's products and 3D graphics applications AGI believes are or will become
popular and widely adopted. AGI invests substantial resources in development
efforts aimed at achieving such compatibility. Any failure by AGI to
anticipate or respond adequately to changes in applications could result in a
loss of competitiveness and could adversely affect AGI's business, financial
condition and results of operations.
Competition. The market for 3D graphics accelerators is extremely
competitive and subject to rapid change. AGI expects competition to increase
in the future from existing competitors and from new market entrants with
products that may be less costly than AGI's products or provide better
performance or additional features not currently provided by AGI's products.
AGI competes with the following three major groups: professional 3D graphics
board companies (including Intergraph Corporation and Dynamic Pictures, Inc.),
RISC/UNIX workstation companies (including Sun Microsystems, Inc. and SGI) and
traditional volume personal computer ("PC") board suppliers (including ELSA
GmbH, Diamond Multimedia Systems, Inc., Matrox Electronic Systems Ltd. and STB
Systems, Inc.). A variety of potential actions by any of AGI's competitors
could have a material adverse effect on AGI's business, financial condition
and results of operations. Such actions may include reduction of product
prices, increased promotion, announcement or accelerated introduction of new
or enhanced products, product giveaways, product bundling or other competitive
actions.
Many of the companies that currently compete with AGI or that may compete
with AGI have longer operating histories and significantly greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and larger customer bases, than AGI. As a result, these
competitors may be able to respond more quickly and effectively to new or
emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion, sale and support of their
products than AGI. Some of these companies also purchase their components from
AGI's suppliers. Consequently, AGI expects to continue to experience increased
competition, which could result in significant price reductions, loss of
market share and lack of acceptance of new products, any of which could have a
material adverse effect on AGI's business, financial condition and results of
operations. There can be no assurance that AGI will be able to compete against
current or future competitors successfully or that competitive pressures faced
by AGI will not have a material adverse effect upon its business, financial
condition and results of operations.
Limited History of Product Development. AGI's products are complex, are
based on relatively new technology and have a limited history of reliability.
AGI generally provides a three-year warranty for its products. In general,
AGI's return policy permits return within five days after receipt of products
that do not meet product specifications. Companies engaged in the development
and production of new, complex technologies and products often encounter
difficulties in performance and reliability and delays in product introduction
and volume shipments. Additionally, products as complex as those offered by
AGI may contain undetected errors or "bugs" when introduced that, despite
testing by AGI, are discovered only after a product has been installed and
used by customers. There can be no assurance that AGI will be successful in
resolving any problems with AGI's existing or future products. Failure by AGI
to resolve manufacturing or operational problems with any existing product or
any new product in a timely manner would have a material adverse effect on
AGI's business, financial condition and results of operations.
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The success of AGI will likely depend on its ability to develop and market
new products that provide superior performance at competitive prices. Any
quality, reliability or performance problems with such products, regardless of
materiality, or any other actual or perceived problems with AGI's products,
could have a material adverse effect on market acceptance of such products and
AGI's reputation. There can be no assurance that such problems or perceived
problems will not arise or that, even in the absence of such problems, AGI's
products will receive market acceptance. A failure of AGI's products to
receive market acceptance for any reason would have a material adverse effect
on AGI's business, financial condition and results of operations. In addition,
the announcement by AGI of new products and technologies could cause customers
to defer purchases of AGI's existing products, which would have a material
adverse effect on AGI's business, financial condition and results of
operations.
Short Product Life Cycles. The market for AGI's products is characterized by
frequent new product introductions and rapid product obsolescence. The life
cycles of AGI's products are difficult to estimate. Generally, life cycles of
personal computer 3D graphics subsystems are relatively short, approximately
six to fifteen months. AGI must constantly monitor industry trends and select
new technologies and features for its products, as well as monitor the timing
of introduction of new products. Moreover, short product life cycles, coupled
with single-source supply of components used in AGI's products, may prevent
AGI from being able, in a timely manner, to reduce its procurement
commitments, production or inventory levels in response to obsolescence,
unexpected shortfalls in orders, revenues or declines in prices or,
conversely, to increase production in response to unexpected increases in
demand. Failure to respond to the market adequately could have a material
adverse effect on AGI's business, financial condition and results of
operations. The timing of the end of a product's life cycle is difficult to
predict and is typically characterized by steep declines in unit sales,
pricing and margins. As new products are planned and introduced, AGI may not
be able to control the inventory levels of older products and phase out
production, potentially resulting in excess inventory and the expenses
associated therewith. AGI could experience unexpected reductions in revenues
from older generation products as customers anticipate new products. To the
extent AGI is unsuccessful in managing product transitions, its business,
financial condition and results of operations would be adversely affected.
Reliance on Third Party Distribution and Major OEMs. AGI relies on OEMs,
distributors and VARs for both domestic and international revenues. In
particular, revenues from HP and its former customer, Digital, accounted for
36.4% and 22.4%, respectively, of revenues in 1997, and 22.8% and 27.9%,
respectively, of revenues in 1996. AGI believes that its future success
depends upon its ability to broaden its customer base and attract new
significant customers. There can be no assurance that a major customer will
not reduce, delay or eliminate its purchases from AGI, which could have a
material adverse effect on AGI's business, financial condition and results of
operations. For example, in the third quarter of 1997, revenues from Digital
declined to 4.2% of total revenues from 20.8% of revenues in the second
quarter of 1997 and from 44.7% in the first quarter of 1997. In connection
with the OEM agreement with HP, HP has a non-exclusive manufacturing license
pursuant to which it is granted the right to manufacture or have manufactured
AGI's products in the event of AGI's bankruptcy, receivership or failure to
supply HP with specified quantities of products due to a cause not associated
with the negligence of either party for the term of the agreement or until AGI
is out of bankruptcy or receivership. In the event AGI were required to grant
such nonexclusive manufacturing rights to HP or any other OEM that
subsequently may obtain such rights, such grant could have the effect of
decreasing the value of AGI's ownership rights with respect to such products
and/or decrease AGI's revenues, either of which could have an adverse effect
on AGI's business, financial condition or results of operations.
AGI's customer agreements are short term and automatically renew each year
and generally may be canceled for convenience upon written notice by either
party. Generally, there are no minimum purchase requirements for AGI's OEMs,
distributors and VARs. Some of AGI's OEMs, distributors and VARs offer
competitive products manufactured internally or by third parties. There can be
no assurance that AGI's OEMs, distributors and VARs will give a priority to
the marketing of AGI's products as compared to competing products or
alternative solutions or that such OEMs, distributors and VARs will continue
to offer AGI's products. Moreover, there can be no assurance that AGI will
continue to sell substantial quantities of its products to these
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OEMs, distributors and VARs, or that upon any termination of AGI's
relationships with any of these OEMs, VARs or distributors, AGI would be able
to obtain suitable alternate distribution channels, or that OEMs will not
internally manufacture 3D graphics subsystems rather than purchase them from
AGI. The inability to attract new significant OEM customers or the loss of one
or more of AGI's OEMs, VARs or distributors could have a material adverse
effect on AGI's business, financial condition and results of operations.
Additionally, AGI's southern and northern European distributor maintains a
credit limit with AGI for the purchase of a certain amount of AGI's products.
In the event that the demand for AGI's products exceeds this credit limit, AGI
may be unable to supply this distributor with additional quantities of
products. Accordingly, AGI may experience significant backlog and delays in
the supply of additional products to this distributor, which could have a
material adverse effect on AGI's business, financial condition and results of
operations.
Although AGI seeks information from end users who purchase AGI's products
from OEMs, distributors and VARs, AGI generally does not sell directly to end
users and cannot directly observe their experience with AGI's products. AGI
also does not have direct control over the marketing and support efforts of
its OEMs, distributors and VARs. This lack of direct control may result in the
inability of AGI to identify potential opportunities with these customers and
may cause a potential delay by AGI in the recognition and correction of any
problems with such OEM, distributor or VARs sales or support organizations.
Failure of AGI to respond to customer preferences or experience with its
products or the failure of OEMs, distributors or VARs to market and support
AGI's products successfully, could have a material adverse effect on AGI's
business, financial condition and results of operations.
International Revenues. International revenues accounted for approximately
50% of AGI's revenues during the first quarter of 1998 and 46%, 31% and 22% of
AGI's 1997, 1996 and 1995 revenues, respectively, and primarily consisted of
sales to the European and Asia-Pacific operations of HP and Digital as well as
to the Company's Japanese distributor, which sells to Hitachi Ltd., and to
other distributors based in Germany and Japan. AGI expects that international
revenues will continue to account for a significant portion of its total
revenues in future periods. International revenues are subject to certain
inherent risks, including unexpected changes in regulatory requirements and
tariffs, government controls, political instability, longer payment cycles,
difficulties in collecting accounts receivable, difficulties in staffing and
managing foreign operations and potentially adverse tax consequences. AGI's
inability to obtain foreign regulatory approvals on a timely basis could have
a material adverse effect on AGI's business, financial condition and results
of operations. Fluctuations in currency exchange rates could cause AGI's
products to become relatively more expensive to end users in a particular
country, leading to a reduction in sales in that country. The impact of future
exchange rate fluctuations cannot be predicted adequately. To date, AGI has
not found it appropriate to hedge the risks associated with fluctuations in
exchange rates, as substantially all of AGI's foreign sales have been
denominated in U.S. dollars. However, if future transactions are denominated
in foreign currencies, AGI may undertake to hedge transactions. There can be
no assurance that any hedging techniques implemented by AGI would be
successful or that AGI's results of operations would not be materially
adversely affected by exchange rate fluctuations. In general, certain seasonal
factors and patterns impact the level of business activities at different
times in different regions of the world. For example, sales in Europe are
adversely affected in the third quarter of each year as many customers and end
users reduce their business activities during the summer months. These
seasonal factors and currency fluctuation risks could have a material adverse
effect on AGI's business, financial condition and results of operations.
Further, because AGI operates in different countries, AGI's management must
address differences in regulatory environments and cultures. Failure to
address these differences successfully could be disruptive to AGI's operations
and could have a material adverse effect on AGI's business, financial
condition and results of operations.
Dependence on Subcontractors and Sole-Source Suppliers. AGI relies on
subcontractors to manufacture, subassemble, test and ship AGI's products. AGI
relies on sole-source suppliers for certain critical components, such as
3Dlabs for its graphics acceleration chips, Mitsubishi for its graphics
acceleration chips and 3DRAM/CDRAM chips, Texas Instruments Incorporated for
its RAMDAC chips, Cirrus Logic Inc. for its VGA chips and Elec & Eltek Co.,
Ltd. for its printed circuit boards. In addition, there is a limited
availability of certain
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application specific integrated circuit chipsets that provide VRAM and DRAM
memory. AGI procures its components and products through purchase orders and
does not have specific requirement agreements with any of its subcontractors
or suppliers. Each of AGI's subcontractors and suppliers can cease supplying
the services, products or components at any time with no penalty. In the event
it becomes necessary for AGI to replace a key subcontractor or supplier, AGI
could incur significant manufacturing set-up costs and delays while new
sources are located and alternate components are integrated into the design of
AGI's products. There can be no assurance that AGI will be able to maintain
its current subcontractor and supplier relationships or that AGI will be able
to find suitable replacement subcontractors and suppliers, if necessary.
Although AGI maintains ongoing efforts to obtain required quantities of
products, component shortages may exist from time to time, and there can be no
assurance that AGI's current subcontractors and suppliers will continue to
provide sufficient quantities of suitable quality product components at
acceptable prices. AGI's emphasis on maintaining low inventory may accentuate
the effects of any shortages that may result from sole source products or
subcontractors. The inability of AGI to obtain product components at their
historical cost levels would directly affect the cost of AGI's products. Also,
product components may contain undetected errors or "bugs" when first supplied
to AGI that, despite testing by AGI, are discovered only after AGI's product
has been installed and used by customers. There can be no assurance that
errors will not be found in AGI's products due to errors in the product
components, or that any such errors will not impair the market acceptance of
these products or require significant product recalls. Problems encountered by
customers and product recalls could have a material adverse effect on AGI's
business, financial condition and results of operations. In addition, AGI's
ability to respond to greater than anticipated market demand may be
constrained by availability of services, products or components. The loss of
subcontractors or suppliers or the failure of subcontractors or suppliers to
meet AGI's price, quality, quantity and delivery requirements would have a
material adverse effect on AGI's business, financial condition and results of
operations.
Dependence on Key Personnel; Need to Attract and Retain Highly Skilled
Personnel. The success of AGI depends to a large extent upon its ability to
continue to attract and retain highly skilled personnel. Competition for
employees in the high technology sector in general, and in the graphics
industry in particular, is intense, and there can be no assurance that AGI
will be able to attract and retain sufficient numbers of qualified employees.
AGI has recently experienced a significant expansion in the overall level of
its business and the scope of its operations, including research and
development, marketing, sales, technical support and administration. It may
become increasingly difficult to hire, train and assimilate the new employees
needed given the market conditions. If AGI is unable to continue to attract
and retain sufficient numbers of qualified employees, it may be required to
rely on more expensive consultants. AGI has entered into employment agreements
with certain of its key personnel. Such agreements provide, in the event of
certain changes in control, for the acceleration of vesting of stock options
held by such personnel. In addition, if such employee is terminated within 18
months after the change of control transaction, such employee is to receive
certain termination benefits. Such agreements may have the effect of
discouraging a third party from acquiring AGI. Additionally, AGI has not
required its key personnel to enter into noncompetition agreements with AGI.
AGI's inability to retain, attract and assimilate certain members of the
executive management team or key employees would have a material adverse
effect on AGI's business, financial condition and results of operations.
Dependence on ISV Relationships. AGI's business strategy includes developing
strategic relationships with major ISVs that serve the 3D graphics market. AGI
has devoted substantial engineering and management resources to developing
relationships with its ISV partners. If any of AGI's current or future ISV
partners were to cease supporting AGI's products, such action could have a
material adverse effect on AGI's business, financial condition and results of
operations. Further, there can be no assurance that AGI will be able to
successfully sustain its relationships or enter into new relationships with
major ISVs on terms acceptable to AGI or at all.
Uncertainty Regarding Development of 3D Graphics Market. The 3D graphics
market on NT workstations has recently begun to develop and is rapidly
evolving. AGI's future financial performance will depend in large part on the
continued growth of this market and the demand for 3D graphics for
professional 3D applications. The failure of the 3D graphics market to achieve
anticipated growth levels or a substantial change in 3D graphics
21
<PAGE>
customer preferences would have a material adverse effect on AGI's business,
financial condition and results of operations. Additionally, demand for AGI's
products is also dependent upon the widespread development of 3D graphics
applications by ISVs, the success of AGI's customers in effectively developing
a market for AGI's products and the willingness of end users to pay for
enhanced 3D capabilities on NT workstations. AGI's products currently are
designed for use on NT and/or Windows 95 workstations. In the event that end
users, and particularly businesses, delay their adoption of or fail to adopt
NT or Windows 95, the market for AGI's products would be diminished and AGI's
business, financial condition and results of operations could be materially
adversely affected.
Risk of Migration to the Motherboard. As technology becomes more widely
utilized, it may become economically feasible to incorporate certain 3D
graphics capabilities onto PC motherboards or into microprocessors. AGI
recognizes that migration could occur with respect to the functionality
provided by AGI's current products. AGI's success is largely dependent on its
ability to continue to develop products which incorporate higher performance
technologies and additional functionality which system manufacturers have not
yet fully incorporated into PC motherboards or microprocessors. While AGI
believes that a market will continue to exist for add-in subsystems that
provide additional performance and advanced functionality and that offer
flexibility in systems configuration, there can be no assurance that the
incorporation of certain 3D and 2D capabilities onto PC motherboards or
microprocessors will not adversely affect the market for AGI's products and
consequently, AGI's business, financial condition and results of operations
could be materially adversely affected.
New Operating Systems. The PC industry has recently been characterized by
significant operating system changes, such as the introduction of Windows 95
in 1995 and Windows NT 4.0 in 1996, and the introduction of significant new
operating systems components, such as Microsoft's DirectX and ActiveX for
Windows 95. Microsoft has also announced new versions of its operating
systems, Windows 98 and Windows NT 5.0, which are scheduled for release in
1998 and 1999, respectively. New operating systems and operating systems
components may require that AGI expend a significant amount of engineering
resources to develop software that is compatible with the new operating
systems. In addition, AGI may be required to update its existing software for
products sold prior to the release of the new operating system to be
compatible with the new operating systems in order to maintain customer
satisfaction. This effort involves substantial investment in software
engineering, compatibility testing and customer technical support investment
with limited or no incremental revenue return since these software driver
updates are usually provided via electronic distribution free to AGI's
installed customer base. In addition, the installation of this software may
result in increased customer support calls, thereby generating expenses that
do not have offsetting revenue. Moreover, during the introductory period of a
major new operating system release, the effort required to support AGI's
installed customer base will reduce the research and development and customer
technical support resources available for new products. Furthermore, new
operating systems for which AGI prospectively develops driver support may not
be successful, or the drivers themselves may not be successful or accepted by
customers, and a reasonable financial return on the corollary research and
development investment may never be achieved.
Market Anticipation of New Products, New Technologies or Lower Prices. The
environment in which AGI operates is characterized by rapid new product and
technology introductions and generally falling prices for existing products.
AGI's customers may from time to time postpone purchases in anticipation of
such new product introductions or lower prices. If such anticipated changes
are viewed as significant by the market, such as the introduction of a new
operating system or microprocessor architecture, this may have the effect of
delaying customers' purchases of AGI's products thereby negatively impacting
AGI's operating results. The substantial publicity of Microsoft's Windows NT
5.0 upgrade to Windows NT 4.0, which is expected to be publicly available in
the first quarter of 1999, Microsoft's Windows 98 upgrade to Windows 95, which
is expected to be publicly available in the third quarter of 1998, and Intel's
release of newer high performance CPUs and associated chipset supporting the
AGP architectures, among other products, may cause a delay in customers'
purchasing decisions and thereby result in lower revenues and an adverse
effect on AGI's operating results.
22
<PAGE>
The potential negative impact on AGI's operating results as a result of
customer decisions to postpone purchases in favor of new and "publicized"
technology can be further magnified if products or components based on such
new technology are not available in a timely manner or in sufficient supply to
meet the demand caused by the market's shift to the new technology from an
older technology. For example, AGI's operating results could be adversely
affected if AGI makes poor selections of chip architectures or chip suppliers
to pursue its 3D graphics subsystems and, as a result, may be unable to
achieve market acceptance of new products or unable to secure a sufficient
supply of such components.
Also, if AGI, one of its competitors or its chip vendors announces a product
that the market views as having more desirable features or pricing than AGI's
existing products, demand for AGI's existing products may decline even though
the new product is not yet available. Similarly, if AGI's customers anticipate
that AGI may reduce its prices in the near term, they may postpone their
purchases until such price reductions are effected, reducing AGI's near-term
shipments and revenue. In general, market anticipation of new products, new
technologies or lower prices, even though potentially positive in the longer
term, can negatively impact AGI's operating results in the short term.
Software Defects. AGI's software products, and its hardware products
incorporating any software, are extremely complex as a result of such factors
as advanced functionality, the diverse operating environments in which they
may be deployed, the need for interoperability and the multiple versions of
such products that must be supported for diverse operating platforms,
languages and standards. These products may contain undetected errors or
failures when first introduced or as new versions are released. AGI generally
provides a three-year warranty for its products. In general, AGI's return
policy permits return within five days after receipt of products that do not
meet product specifications. There can be no assurance that, despite testing
by AGI and by current and potential customers, errors will not be found in new
products after commencement of commercial shipments, resulting in loss of or
delay in market acceptance. Such loss or delay would likely have a material
adverse effect on AGI's business, financial condition and results of
operations. Additionally, new versions or upgrades to operating systems and
ISV applications may require upgrades to AGI's software products to maintain
compatibility with these new versions or upgrades. There can be no assurance
that AGI will be successful in developing new versions or enhancements to its
software or that AGI will not experience delays in the upgrade of its software
products. In the event AGI experiences delays or is unable to maintain
compatibility with operating systems and ISV applications, AGI's business,
financial condition and results of operations would be materially adversely
affected.
Risks Associated With Intellectual Property. Although AGI has three patent
applications filed in the United States, these claims are not related to AGI's
current product lines. Instead, AGI relies exclusively on trade secret and
copyright protection for its proprietary technology. Despite AGI's
precautions, it may be possible for a third party to copy or otherwise obtain
and use AGI's technologies without authorization or to develop competing
technologies independently. Furthermore, the laws of certain countries in
which AGI does business, including countries in which AGI does a significant
amount of business, such as the United Kingdom and Germany, may not protect
AGI's software and intellectual property rights to the same extent as the laws
of the United States. There can be no assurance that AGI's means of protecting
its proprietary rights will be adequate or that AGI's competitors will not
independently develop similar technology. If unauthorized copying or misuse of
AGI's products were to occur to any substantial degree, or if a competitor of
AGI were to effectively duplicate AGI's proprietary technology, AGI's
business, financial condition and results of operations would be materially
adversely affected. Furthermore, while AGI requires employees and consultants
to enter into confidentiality agreements, there can be no assurance that
proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to AGI's trade secrets or disclose such
technology, or that AGI can meaningfully protect its trade secrets. Certain
technology used by AGI's products is licensed from third parties, generally on
a non-exclusive basis. The termination of any such license, or the failure of
any third party licensor to adequately maintain or update its product, could
result in delay in AGI's ability to ship its products while it seeks to
implement technology offered by alternative sources, if any. Any required
replacement licenses could prove to be either unavailable or costly.
23
<PAGE>
Although AGI has not received notices from third parties alleging
infringement claims that AGI believes would have a material adverse effect on
AGI's business, there can be no assurance that third parties will not claim
that AGI's current or future products or manufacturing processes infringe the
proprietary rights of others. Any such claim, with or without merit, could
result in costly litigation or might require AGI to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to AGI, or at all, which could have a
material adverse effect upon AGI's business, financial condition and results
of operations.
THE ANNUAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors (the "AGI Board") of AGI for
use at the annual meeting of AGI stockholders (the "Annual Meeting"). This
Proxy Statement/Prospectus, the attached Notice of Annual Meeting of
Stockholders and the enclosed form of proxy are first being mailed to
stockholders of AGI on or about May 18, 1998.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the Annual Meeting, holders of AGI Common Stock (as defined below) will
be asked to consider and vote on a proposal to adopt the Agreement and Plan of
Merger, dated April 22, 1998, among AGI, E&S and E&S Merger Corp., a wholly
owned subsidiary of E&S (the "Merger Agreement") and to elect the Class I
Directors to serve on AGI's Board of Directors until the earlier of the end of
their term or consummation of the Merger.
AFTER CAREFUL CONSIDERATION, THE AGI BOARD HAS UNANIMOUSLY DETERMINED THAT
THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF AGI AND ITS STOCKHOLDERS.
THE AGI BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT HOLDERS OF AGI COMMON STOCK VOTE TO ADOPT IT AND TO VOTE FOR
THE ELECTION OF CLASS I DIRECTORS AT THE ANNUAL MEETING.
VOTING AND PROXIES
The AGI Board has fixed the close of business on May 11, 1998 as the record
date ("Record Date") for the determination of the stockholders entitled to
notice of, and to vote at, the Annual Meeting. At that date, there were
outstanding 8,473,232 shares of AGI Common Stock, par value $0.001 per share
(the "AGI Common Stock"), the holders of which will be entitled to one vote
per share on each matter submitted to the Annual Meeting. No other voting
securities of AGI are outstanding.
The presence at the Annual Meeting, in person or by proxy, of the holders of
a majority of the shares entitled to vote constitutes a quorum for the
transaction of business at the Annual Meeting. If a quorum should not be
present, the Annual Meeting may be adjourned from time to time until a quorum
is obtained. Assuming a quorum is present, the affirmative vote of the holders
of a majority of the outstanding shares of AGI Common Stock entitled to vote
at the Annual Meeting is required to adopt the Merger Agreement and to elect
the Class I directors.
As a condition to E&S's willingness to enter into the Merger Agreement,
certain stockholders of AGI, representing approximately 37% of the outstanding
capital stock of AGI, have agreed, pursuant to a Voting Agreement and
Irrevocable Proxy dated April 22, 1998 (the "Voting Agreement"), and without
any additional consideration being paid to the Controlling Stockholders, among
other things, to vote all of their shares of AGI Common Stock in favor of
adopting the Merger Agreement at the Annual Meeting.
24
<PAGE>
Shares of AGI Common Stock represented by properly executed proxies will,
unless such proxies have been revoked, be voted in accordance with the
instructions indicated on such proxies or, if no instructions are indicated,
will be voted for adoption of the Merger Agreement, for the election of the
Class I directors and in the best judgment of the individuals named in the
accompanying proxy on any other matters which may properly come before the
Annual Meeting. Any proxy may be revoked by the stockholder giving it, at any
time prior to its being voted, by filing a notice of revocation or a duly
executed proxy bearing a later date with the Secretary of AGI at the address
given on the Notice of Annual Meeting of Stockholders accompanying this Proxy
Statement/Prospectus. Any proxy may also be revoked by the stockholder's
attendance at the Annual Meeting and voting in person. A notice of revocation
need not be on any specific form. Abstentions may be specified with respect to
the adoption of the Merger Agreement by properly marking the "ABSTAIN" box on
the proxy for such proposal, and will be counted as present for the purpose of
determining the existence of a quorum. Under the rules of the National
Association of Securities Dealers, Inc. (the "NASD"), while brokers who hold
shares in street name have the authority to vote on certain items when they
have not received instructions from beneficial owners, brokers will not be
entitled to vote on the adoption of the Merger Agreement without instructions.
Brokers who do not receive instructions but who are present, in person or by
proxy, at the Annual Meeting will be counted as present for quorum purposes (a
"broker nonvote"). Abstentions and broker nonvotes will have the same effect
as a vote against the adoption of the Merger Agreement and against the
election of the Class I Directors at the Annual Meeting.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the AGI Board. E&S and AGI
will share equally all expenses related to printing, filing and mailing the
Proxy Statement/Prospectus and all SEC and other regulatory filing fees
incurred in connection with the Proxy Statement/Prospectus. See "THE MERGER
AGREEMENT -- EXPENSES." In addition to soliciting proxies by mail, officers,
directors and employees of AGI, without receiving additional compensation
therefor, may solicit proxies by telephone, telegraph, in person or by other
means. Arrangements also will be made with brokerage firms and other
custodians, nominees and fiduciaries to forward proxy solicitation material to
the beneficial owners of AGI Common Stock held of record by such persons, and
E&S and AGI will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in
connection therewith. AGI has retained a proxy soliciting firm, Georgeson &
Company, to serve as Information Agent in connection with the Merger and to
assist in the solicitation of proxies and will pay a fee of approximately
$7,000, plus reimbursement of expenses.
25
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain historical per share data of AGI and
E&S and combined per share data on an unaudited pro forma basis after giving
effect to the Merger as a purchase of AGI by E&S assuming the Merger had been
effected during the periods presented. This data should be read in conjunction
with the Selected Historical Consolidated Financial Data of E&S and AGI, the
unaudited Evans & Sutherland Computer Corporation and AccelGraphics, Inc. Pro
Forma Consolidated Financial Statements and the separate historical
consolidated financial statements of AGI provided herein, and historical
consolidated financial statements of E&S incorporated herein by reference. The
comparative per share data is not necessarily indicative of the operating
results that would have been achieved had the Merger been consummated as of
the beginning of the periods indicated nor is such data necessarily indicative
of future financial condition or results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 27, 1998 DECEMBER 31,
AND APRIL 3, 1998 1997
-------------------- -------------
E&S AGI E&S AGI
COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK
--------- --------- ------ ------
<S> <C> <C> <C> <C>
HISTORICAL EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share........... $ 0.18 $ 0.02 $0.56 $(0.02)
Diluted earnings (loss) per share......... 0.17 0.02 0.53 (0.02)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 27, 1998 YEAR ENDED
AND APRIL 3, 1998 DECEMBER 31, 1997
--------------------------- ---------------------------
PER E&S PER AGI PER E&S PER AGI
SHARE EQUIVALENT SHARE(1) SHARE EQUIVALENT SHARE(1)
------- ------------------- ------- -------------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED
EARNINGS PER SHARE:
Basic earnings per
share.................. $0.10 $0.02 $0.21 $0.04
Diluted earnings per
share.................. 0.10 0.02 0.19 0.04
</TABLE>
<TABLE>
<CAPTION>
MARCH 27 AND
APRIL 3, 1998
--------------
E&S AGI
------- ------
<S> <C> <C>
BOOK VALUE DATA:
Book value per share(2)......................................... $ 18.20 $ 2.90
Pro forma book value per share(3)............................... 17.48 3.50
</TABLE>
- --------
(1) The AGI equivalent pro forma earnings per share amounts are calculated by
multiplying the pro forma earnings per E&S share by an assumed exchange
factor of 0.2. Such assumed exchange factor is based on the $5.75 price
per AGI share and an estimated E&S Common Stock Price of $28.75 per share.
(2) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at March 27 and
April 3, 1998 for E&S and AGI, respectively.
(3) The pro forma book value per share for E&S is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of E&S's
common stock outstanding at March 27, 1998. The pro forma book value per
share for AGI is computed by multiplying the assumed exchange factor of
0.2 by the pro forma book value per share.
26
<PAGE>
MARKET PRICE DATA
The following table presents certain historical trading information for E&S
Common Stock and AGI Common Stock.
<TABLE>
<CAPTION>
E&S AGI
COMMON STOCK COMMON STOCK
---------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1998
Second Quarter (through May 13,
1998)............................. $ 30 $ 26 5/8 $ 5 5/8 $ 4 7/16
First Quarter...................... 31 1/4 26 1/2 5 5/8 4 5/8
1997
Fourth Quarter..................... 37 28 1/4 6 5/8 3 1/8
Third Quarter...................... 33 1/2 26 9 3/4 4 1/8
Second Quarter..................... 29 3/4 22 1/8 13 7/8 4 1/8
First Quarter...................... 28 3/8 22 * *
1996
Fourth Quarter..................... 26 1/4 20 * *
Third Quarter...................... 23 3/4 19 * *
Second Quarter..................... 29 21 * *
First Quarter...................... 25 19 * *
1995
Fourth Quarter..................... 25 1/4 16 1/2 * *
Third Quarter...................... 20 14 3/4 * *
Second Quarter..................... 17 3/4 13 * *
First Quarter...................... 16 1/4 11 1/4 * *
</TABLE>
- --------
* Not publicly traded.
E&S Common Stock is principally traded in the United States on the Nasdaq
National Market under the symbol "ESCC." AGI Common Stock is currently traded
on the Nasdaq National Market under the symbol "ACCL."
On April 21, 1998, the last trading day before the public announcement of
the Merger, the closing bid price of E&S Common Stock, as quoted on the Nasdaq
National Market was $29.00, and the closing bid price of AGI Common Stock as
quoted on the Nasdaq National Market, was $5.06 per share. On May 13, 1998,
the last trading day prior to the date of this Proxy Statement/Prospectus, the
closing bid price of E&S Common Stock was $26.75 per share and the closing bid
price of AGI Common Stock was $5.44 per share.
Neither AGI nor E&S has ever paid a cash dividend on their Common Stock,
retaining their earnings for the operation and expansion of their respective
businesses. E&S intends for the foreseeable future to continue the policy of
retaining its earnings to finance the development and growth of its business.
As of December 31, 1997, E&S had purchased and retired a total of 173,000
shares of Common Stock for an aggregate cost of $4,625,312 under a share
repurchase program begun in 1996. Such shares are from time to time reissued
upon the exercise of employee stock options, conversion of convertible
securities and for other corporate purposes.
27
<PAGE>
THE MERGER
BACKGROUND OF THE MERGER
In mid-June 1997, Jeffrey Dunn, Chief Executive Officer of AGI, received a
call from representatives of an investment banking firm representing a
privately held graphics board company ("Company A") regarding the general
merits of a merger of Company A with AGI. Later that day Mr. Dunn had a brief
meeting with the President of Company A to discuss their interest. Another
meeting between these two gentleman to discuss a possible transaction occurred
on July 1, 1997.
On July 18, 1997, as a result of the inquiries from Company A, AGI retained
Cowen & Company ("Cowen") to serve as its financial advisor to assist it in
its review and evaluation of potential strategic alternatives. Over the next
several months, at the request of AGI, Cowen contacted a number of potential
acquisition partners for AGI to assess their level of interest in a possible
transaction with AGI.
During the week of July 20, 1997, Mr. Dunn was contacted by the President of
a publicly traded graphics board company ("Company B") indicating that he had
been contacted by Cowen regarding the fact that AGI was potentially interested
in a possible business combination transaction.
On July 30, 1997, Mr. Dunn met with the President of Company B. The two
discussed the merits of a possible merger of the two companies in very general
terms.
On August 2, 1997, there was a conference call with several of the officers
of another graphics board company ("Company C"), which had been previously
contacted by Cowen, and representatives of AGI, to discuss the merits of a
possible merger with AGI.
On August 6, 1997, there was a meeting with the Company A President,
representatives of Cowen, Company A's legal counsel, Company A's investment
banker, and Mr. Dunn. There was a general discussion about the possibility of
a merger. At the end of this discussion, it was concluded that a transaction
with Company A was most likely not going to be a realistic possibility until
early 1998, and therefore discussions with Company A were temporarily
suspended.
On September 9, 1997, the President of Company B telephoned Mr. Dunn and
indicated that Company B was potentially interested in acquiring AGI and that
Company B would like to conduct preliminary due diligence.
On September 10, 1997, there was a meeting at Company B with certain
officers of both companies. There was a general discussion about the merits of
a merger and Company B indicated that its investment bankers would begin
analyzing the possibility of a transaction between the two companies.
On September 18, 1997 there was a meeting at Company C between certain
officers of Company C and Mr. Dunn. The group discussed complementary matters,
engineering and products.
On September 25, 1997, there was a meeting at the offices of Venture Law
Group, AGI's corporate legal counsel, with Company B's investment bankers, Mr.
Dunn, Nancy Bush (Chief Financial Officer of AGI), and representatives of
Cowen. The group reviewed various due diligence topics, strategy and benefits.
On September 30, 1997, there was a meeting at the offices of Venture Law
Group between Nancy Bush and certain officers of Company C. The group reviewed
financial models and discussed possible valuations.
On October 3, 1997, talks with Company A resumed. On that date a meeting
between certain officers of Company A and AGI occurred, during which the group
discussed benefits of combining the two organizations, personnel issues,
marketing issues, timing issues and other matters.
On October 4, 1997, another meeting took place between officers of Company A
and AGI. The group discussed the possible benefits of a merger and
presentations were made regarding changes in the market and business.
28
<PAGE>
On October 20, 1997, Company B indicated that Company B's Board of Directors
was not interested in a merger at that time due to the fact that Company B's
stock trading price was too low, thereby making a stock-for-stock transaction
too dilutive.
On October 20, 1997, Company C also indicated that it was not interested in
pursuing an offer at that time, stating that Company's C stock trading price
was also too low and therefore a stock transaction would be too dilutive to
Company C's stockholders.
On November 7, 1997, Mr. Dunn spoke with the President of Company A who
indicated that there was still some interest in a transaction, but that since
Company A was considering a public offering, it would delay any proposal to
purchase AGI for at least several weeks.
On December 15, 1997, Rick Maule, Vice President and General Manager of E&S,
during a routine business meeting with Mr. Dunn, expressed interest in
exploring how E&S could enter the 3D graphics board business.
On January 20, 1998, Mr. Dunn had a dinner meeting with James R. Oyler,
President and Chief Executive Officer of E&S. The two discussed the merits of
a possible merger of the two companies.
On January 21, 1998, Mr. Dunn, Ms. Bush, Mr. Oyler and Mr. Maule met and
discussed the benefits and challenges of a merger of the two companies and
decided to meet the following week to review financials and organization.
On January 22, 1998, Company B indicated to Mr. Dunn that there was renewed
interest in acquiring AGI.
On January 23, 1998, there was a meeting at the offices of E&S with Mr.
Dunn, Ms. Bush, Mr. Oyler, Mr. Maule, John Lemley (Chief Financial Officer of
E&S) and Mark McBride (Vice President and Corporate Controller of E&S). The
group reviewed organizational matters, potential structures, financials and
made plans to meet again the following week.
On January 26, 1998, there was a meeting at Company B's outside lawyer's
offices with officers of Company B, Company B's lawyers and investment
bankers, Mr. Dunn, Ms. Bush and representatives of Cowen. There was a general
discussion of the potential synergies between the two companies and timing.
On January 30, 1998, Ms. Bush met with Mr. Lemley and reviewed the proposed
1998 Plan for the two companies and possible opportunities for synergies and
cost advantages.
On February 2, 1998, Mr. Dunn had a discussion with representatives of
Company B regarding financial information, 1997 results and future general
synergies.
On February 5, 1998, Company B made a proposal to AGI pursuant to which
Company B would merge with AGI. AGI's Board of Directors promptly informed
Company B that it had rejected the offer as being too low.
During the second half of February and beginning of March, there were
numerous telephone calls, teleconferences and meetings between E&S and AGI to
discuss joint plans, financials, merger structure and related matters.
On March 17, 1998, Mr. Oyler gave a presentation to the AGI Board of
Directors regarding the benefits of a merger with E&S and the proposed plans
for the two businesses. In this presentation Mr. Oyler indicated that E&S
would be willing to consider a possible transaction with AGI at a price per
share of $5.50.
On March 26, 1998, the AGI Board of Directors met and reviewed E&S's
proposed offer of $5.50 per share for the AGI stock. After substantial
deliberation, the Board concluded that the offer was too low.
On March 26, 1998, the President of Company B made a presentation to the AGI
Board of Directors about the benefits of a merger with Company B. Later in the
day, AGI indicated that they were potentially interested in a transaction with
Company B.
29
<PAGE>
On March 27, 1998, the President of Company B met with Mr. Dunn and
indicated that Company B would agree to acquire AGI based on the same stock
exchange ratio that had been previously offered at the February 5th meeting,
which reflected a higher implied valuation for AGI as the stock trading price
for Company B's stock price had risen since such date.
On March 30, 1998, E&S increased its offer to $5.75 per share of AGI stock,
to be paid approximately half in E&S stock and half in cash. As a condition to
this proposal, AGI would be required to execute a letter agreement (the
"exclusivity agreement") pursuant to which it would agree to terminate
discussions regarding a possible acquisition with all other parties.
On March 31, 1998, the AGI Board of Directors met, considered the competing
offers from E&S and Company B, and agreed to pursue a possible transaction
with E&S on the terms outlined on March 30th, subject to the negotiation of
acceptable definitive transaction documents. In so agreeing, the AGI Board
authorized the AGI management representatives to begin negotiation of
definitive agreements for the transaction with E&S. The AGI Board further
authorized AGI management to execute the exclusivity agreement with E&S and to
inform representatives of Company B that discussions with Company B were to
terminate.
From April 2, 1998 to April 22, 1998, E&S representatives and AGI
representatives discussed and conducted various due diligence procedures and
analyses, discussed various employee issues such as retention, compensation,
benefits and communications, and negotiated the terms of the Merger Agreement
and the ancillary documents.
A meeting of the AGI Board was convened on April 22, 1998 to consider the
proposed transaction with E&S. At the meeting representatives of Venture Law
Group, together with representatives of AGI management, reviewed with the AGI
Board the terms of the proposed merger as set forth in the definitive
acquisition agreement. In addition, representatives of Cowen provided their
oral opinion to the AGI Board (which was subsequently confirmed in writing as
of the same date) to the effect that, as of that date, and subject to certain
limitations and assumptions, the financial terms of the Merger were fair, from
a financial point of view, to the holders of AGI Common Stock. See "Fairness
Opinion of Cowen & Company." The AGI Board thereafter approved the Merger
Agreement and authorized AGI management to execute the agreement.
After the AGI Board meeting, AGI and E&S executed the Merger Agreement in
its definitive form and issued a joint press release announcing the
transaction.
AGI REASONS FOR THE MERGER; RECOMMENDATION OF THE AGI BOARD OF DIRECTORS
The AGI Board has approved and adopted the Merger Agreement, believes that
the Merger is in the best interests of AGI and its stockholders and
unanimously recommends adoption of the Merger Agreement by the holders of AGI
Common Stock at the Annual Meeting.
At a meeting held on April 22, 1998, the AGI Board of Directors, with the
assistance of AGI's outside financial and legal advisors, considered the
legal, financial and other terms of the Merger.
The AGI Board concluded that the Merger is in the best interests of AGI and
its stockholders. In reaching its decision to enter into and to recommend the
adoption of the Merger Agreement, the AGI Board considered the following
material factors:
. Cowen & Company's opinion to the AGI Board that, as of the date of the
opinion, and subject to the limits and qualifications therein, the
financial terms of the Merger were fair, from a financial point of view,
to the holders of AGI Common Stock. See "-- Fairness Opinion of Cowen &
Company";
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. the AGI Board's belief that the Merger is in the best interests of the
AGI stockholders, both in terms of the immediate financial consideration
to be received and the potential for future appreciation in value of the
E&S Common Stock;
. the relative trading prices and volumes (as well as the perceived
prospects for future growth in value) of AGI Common Stock and E&S Common
Stock;
. the price certainty of the proposed Merger -- $5.75 per share regardless
of stock market fluctuations prior to the closing of the Merger;
. the belief that the Merger would result in the creation of a vertically
integrated provider of high-performance, cost-effective 3D graphics
subsystems for the professional Windows NT and Windows 95 markets;
. the past price stability and relatively low volatility of E&S Common
Stock in contrast to the perceived greater volatility and attendant risk
to holders of AGI Common Stock;
. the structure of the Merger, which, subject to certain limits, permits
AGI stockholders to exchange their AGI Common Stock solely for E&S Common
Stock on a tax-free basis, with taxable gain recognized only to the
extent they receive cash. See "-- Material Federal Income Tax
Consequences;"
. the perception that the Merger would permit the combined company to more
accurately forecast costs and, in turn, to be more competitive on price
in the 3D graphics board market than AGI as an independent company;
. the fact that, although AGI did not conduct a formal auction, it did hold
discussions with a number of other likely prospective buyers, and none of
them expressed interest in acquiring AGI at a price per share equal to or
greater than that offered by E&S; and
. the likelihood of consummation of the Merger, including the terms and
conditions of the Merger Agreement and the limited conditions to the
consummation of the Merger.
The AGI Board also considered the following potentially negative material
factors in its deliberations concerning the Merger: (i) the loss of control
over the future operations of AGI following the Merger; (ii) the risk that the
benefits sought to be achieved in the Merger may not be achieved; and (iii)
the other risks described above under "Risk Factors." After reviewing these
potentially negative factors, the AGI Board concluded that they were
outweighed by the positive factors described above and accordingly determined
that the Merger is fair to, and in the best interests of, AGI and its
stockholders.
In view of the variety of factors considered by the AGI Board in connection
with its evaluation of the Merger, the AGI Board did not find it practicable
to, and did not, quantify or otherwise assign relative weights to such
factors.
The AGI Board concluded, in light of these factors, that the Merger is fair
to and in the best interests of AGI and its stockholders. THE AGI BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF AGI COMMON STOCK VOTE TO ADOPT IT AT THE ANNUAL MEETING.
E&S REASONS FOR THE MERGER
The E&S management believes that the Merger will benefit E&S for the
following reasons:
. the addition of AGI provides E&S a solid OEM distribution channel, and an
established capability to manufacture and distribute high volume/high
performance PC boards;
. the acquisition of AGI allows E&S to leverage its core graphics expertise
into the NT workstation environment;
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. integration of chip and board R&D efforts should allow for reduced
product lead times, improved time to market and more rapid product
refresh cycles;
. the acquisition establishes E&S as a supplier of workstation-level
graphics systems with a larger market share more rapidly than on a stand-
alone basis;
. the combined operations of E&S and AGI should allow E&S to capture market
share more quickly by delivering a fully-integrated product to OEM
customers;
. the combination allows E&S to address the particular needs of major OEM
customers more directly;
. the integration of chip board operations should provide E&S with higher
predictability of costs and greater flexibility in pricing; and
. E&S believes there are cost synergies available by reducing duplicative
expenses in R&D, sales and marketing and finance and administration.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
In considering the Merger, holders of shares of AGI Common Stock should be
aware of the interests certain officers and directors of AGI have in the
Merger that are in addition to the interests of holders of AGI Common Stock
generally. The AGI Board of Directors has considered these interests, among
other matters, in approving the Merger Agreement and the Merger.
Employment Agreements. Upon completion of the Merger, Jeffrey W. Dunn and
Nancy E. Bush have agreed to enter into Employment Agreements, pursuant to
which, among other things, Mr. Dunn and Ms. Bush agree that they will not
compete with the business of AGI or the desktop graphics business of E&S for
one year after termination of their employment with E&S. Under the terms of
these Employment Agreements, if the Merger is completed, 100% and 50% of the
unvested stock and stock options issued prior to April 22, 1998 for Mr. Dunn
and Ms. Bush, respectively, will become vested. Following the Merger, E&S will
pay Mr. Dunn and Ms. Bush an annual salary of $210,000 and $140,000,
respectively. In addition, both Mr. Dunn and Ms. Bush will be eligible for
annual bonuses up to approximately (i) $210,000 and $135,000, respectively,
for the fiscal year ending December 31, 1998 upon achieving certain incentive
program targets and specified revenue and profit criteria and (ii) $313,000
and $235,000, respectively, for the fiscal year ending December 31, 1999 upon
achieving certain incentive program targets and specified revenue and profit
criteria. The Employment Agreements provide additional consideration if the
incentive targets and revenue and profit criteria are substantially exceeded.
The Employment Agreements for Mr. Dunn and Ms. Bush also provide similar
severance benefits to those described below for the officer Retention
Agreements, except that the Severance Period (as described below) for Mr. Dunn
extends for one year after the effective date of any termination.
Retention Agreements. AGI entered into retention agreements (the "Retention
Agreements") in November 1997 with the following officers: Jeffrey W. Dunn,
Nancy E. Bush, Lew Epstein, Greg Milliken, and Niraj Swarup and in April 1998
with Hiroki Kato and Arthur Yan. The execution of the Employment Agreements
described in the preceding subsection by Mr. Dunn and Ms. Bush will have the
effect of replacing and superseding the rights and benefits that they might
otherwise have had under their Retention Agreements. The Retention Agreements
are intended to induce these executives to remain in the employ of AGI during
and after a change of control of AGI, thereby avoiding disruption of AGI's
business. Under the terms of the Retention Agreements for AGI officers
excluding Mr. Dunn and Ms. Bush, if the Merger is completed, 50% of the
unvested stock and stock options issued prior to April 22, 1998 for each such
officer will become vested. Furthermore, AGI agreed to pay the executives the
severance benefits set forth below in the event an executive's employment with
AGI is terminated without Cause (as defined in the Retention Agreements) or
pursuant to an "Involuntary Termination" (as defined in the Retention
Agreements) during the 18-month period following the Merger (the "Covered
Period").
Upon such termination without Cause or pursuant to an Involuntary
Termination during the Covered Period, an officer will receive the following
benefits: (i) severance payments during the period from the date of the
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executive's termination until the date six (6) months after the effective date
of the termination (the "Severance Period") equal to the base salary which the
executive was receiving at the time of such termination ("Base Salary"), (ii)
monthly severance payments during the Severance Period equal to 1/12th of the
executive's "target bonus" (which bonus shall equal twenty percent (20%) of
the Base Salary) (iii) continuation of all health and life insurance benefits
through the end of the Severance Period (iv) full and immediate vesting of
each unvested stock and stock option held by the officer and (v) outplacement
services with a total value not to exceed $15,000. The Severance Period shall
be extended for up to an additional six (6) months if the executive has not,
during such six (6) month period, obtained comparable employment (as defined
in the Retention Agreements). The extended Severance Period shall thereafter
terminate on the date of commencement of the comparable employment.
Indemnification and Insurance. Pursuant to the Merger Agreement, E&S agreed
that, after the Effective Time, it will cause E&S to provide certain
indemnification and liability insurance benefits to certain indemnified
parties, including directors and officers of AGI. See "The Merger Agreement--
Indemnification and Insurance."
FAIRNESS OPINION OF COWEN & COMPANY
Pursuant to an engagement letter dated July 18, 1997 (the "Cowen Engagement
Letter"), AGI retained Cowen to serve as its financial advisor with respect to
the Merger. As part of this assignment, Cowen was asked to render an opinion
to the AGI Board as to the fairness, from a financial point of view, of the
financial terms of the Merger to the holders of AGI Common Stock. The amount
of consideration was determined through negotiations between AGI and E&S and
not pursuant to recommendations of Cowen.
On April 22, 1998, Cowen delivered certain of its written analyses and its
oral opinion to the AGI Board, subsequently confirmed in writing as of the
same date, to the effect that, as of such date, and subject to the limitations
and assumptions set forth therein, the financial terms of the Merger were
fair, from a financial point of view, to the holders of AGI Common Stock. THE
FULL TEXT OF THE WRITTEN OPINION OF COWEN, DATED APRIL 22, 1998, IS ATTACHED
HERETO AS ANNEX II AND IS INCORPORATED BY REFERENCE. HOLDERS OF AGI COMMON
STOCK ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY
COWEN. THE SUMMARY OF THE WRITTEN OPINION OF COWEN SET FORTH HEREIN IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
COWEN'S ANALYSES AND OPINION WERE PREPARED FOR AND ADDRESSED TO THE AGI BOARD
AND ARE DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
FINANCIAL TERMS OF THE MERGER PURSUANT TO THE MERGER AGREEMENT. COWEN'S
ANALYSES AND OPINION DO NOT CONSTITUTE AN OPINION AS TO THE MERITS OF THE
MERGER OR A RECOMMENDATION TO ANY HOLDERS OF AGI COMMON STOCK AS TO HOW TO
VOTE AT THE AGI ANNUAL MEETING OR AS TO WHETHER TO ELECT CASH CONSIDERATION OR
STOCK CONSIDERATION.
Cowen was selected by the AGI Board as its financial advisor, and to render
an opinion to the AGI Board, because Cowen is a nationally recognized
investment banking firm and because certain principals of Cowen have
substantial experience in transactions similar to the Merger and are familiar
with AGI and its businesses. As part of its investment banking business, Cowen
is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and in valuations for corporate and
other purposes. Cowen served as lead manager for AGI's April 1997 initial
public offering, for which Cowen received a customary fee. In addition, in the
ordinary course of its business, Cowen and its affiliates trade the equity
securities of AGI and E&S for their own accounts and for the accounts of their
customers, and accordingly, may at any time hold a long or short position in
such securities. At the request of AGI, Cowen solicited third party
indications of interest in acquiring all or substantially all of the stock or
assets of the Company. See "Background of the Merger."
In arriving at its opinion, Cowen (i) reviewed AGI's audited financial
statements for the fiscal years ended December 31, 1995, 1996 and 1997 and
unaudited financial statements for the fiscal quarter ended March 31, 1998,
certain publicly available filings with the Securities and Exchange Commission
and certain other relevant
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financial and operating data for AGI furnished to Cowen by management of AGI;
(ii) reviewed E&S's audited financial statements for the fiscal years ended
December 31, 1995, 1996 and 1997 and unaudited financial statements for the
fiscal quarter ended March 31, 1998, certain publicly available filings with
the Securities and Exchange Commission and certain other relevant financial
and operating data of E&S furnished to Cowen by management of E&S; (iii)
reviewed the April 21, 1998 draft of the Merger Agreement; (iv) held meetings
and discussions with management and senior personnel of both AGI and E&S to
discuss the business, operations, historical financial results and future
prospects of AGI and E&S; (v) reviewed, with management and senior personnel
of both AGI and E&S, First Call consensus earnings per share estimates of
financial institutions (the "First Call Estimates") for AGI and E&S,
respectively, and financial projections provided in currently available Wall
Street analyst reports (the "Analyst Projections") for AGI and E&S,
respectively, including, among other things, the capital structure, sales, net
income, cash flow, capital requirements and other data of AGI and E&S Cowen
deemed relevant; (vi) reviewed the operating results of AGI and the valuation
of AGI implied by the Merger in comparison to other similar publicly traded
companies; (vii) reviewed the historical prices and trading activity of AGI
Common Stock from April 11, 1997 through April 21, 1998 and of E&S Common
Stock for the periods April 21, 1995 to April 21, 1998 and April 21, 1997 to
April 21, 1998, respectively; (viii) based on the Analyst Projections,
analyzed the potential pro forma financial effects of the Merger;
(ix) compared the financial terms of the Merger with other similar
transactions in which control of an entity was acquired; and (x) conducted
such other studies, analysis, inquiries and investigations as Cowen deemed
appropriate.
In rendering its opinion, upon the advice of AGI's management and with the
consent of the AGI Board, Cowen assumed and relied upon the accuracy and
completeness of the financial and other information that was available to it
from public sources, that was provided to it by AGI and E&S or that was
otherwise reviewed by it. Cowen did not assume any responsibility for
independent verification of such information, including financial information.
In addition, with respect to the First Call Estimates and Analyst Projections,
Cowen assumed, based on discussions with management of AGI and E&S and with
the consent of the AGI Board, that such estimates and projections provided a
reasonable basis for its opinion. Because such estimates and projections are
inherently subject to uncertainty, none of Cowen, AGI, E&S or any other person
assumes responsibility for their accuracy. Cowen did not make any independent
valuation or appraisal of the assets or liabilities of AGI or E&S, nor was
Cowen furnished with any such valuations or appraisals. Cowen also assumed,
with the consent of the AGI Board, that the Merger will qualify as a tax-free
transaction under the provisions of Section 368 of the Internal Revenue Code
of 1986, as amended. With respect to all legal matters relating to AGI, E&S
and the Merger, Cowen has relied on the advice of legal counsel of AGI. Cowen
rendered no opinion with respect to such legal matters.
Cowen did not express any opinion as to what the value of the E&S Common
Stock actually will be when issued to holders of AGI Common Stock, or the
prices at which E&S Common Stock will trade subsequent to the Merger. Cowen's
opinion was necessarily based on general economic, market, financial and other
conditions as they existed on, and could be evaluated as of, April 22, 1998.
It should be understood that, although subsequent developments may affect
Cowen's opinion, Cowen does not have any obligation to update, revise or
reaffirm its opinion. Cowen's opinion is limited to the fairness, from a
financial point of view, of the financial terms of the Merger to the holders
of AGI Common Stock. Cowen expressed no opinion with respect to any other
reasons, legal, business or otherwise, that may support the decision of the
AGI Board to approve, or AGI's decision to enter into, the Merger Agreement.
For purposes of rendering its opinion Cowen assumed, in all respects
material to its analysis, that the representations and warranties of each
party contained in the Merger Agreement are true and correct, that each party
will perform all of the covenants and agreements required to be performed by
it under the Merger Agreement and that all conditions to the consummation of
the Merger will be satisfied without waiver thereof. Cowen also assumed that
all governmental, regulatory or other consents and approvals contemplated by
the Merger Agreement will be obtained and that in the course of obtaining any
of those consents no restrictions will be imposed or waivers made that would
have an adverse effect on the contemplated benefits of the Merger.
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The following is a summary of certain financial analyses performed by Cowen
to arrive at its opinion. Cowen performed certain procedures, including each
of the financial analyses described below, and reviewed with the AGI Board the
assumptions on which such analyses were based and other factors, including the
First Call Estimates and Analyst Projections available for each of AGI and
E&S. No limitations were imposed by the AGI Board with respect to the
investigations made or procedures followed by Cowen in rendering its opinion.
STOCK TRADING HISTORY. Cowen reviewed the historical market prices of AGI
Common Stock from its initial public offering date of April 11, 1997 to April
21, 1998 (the last trading day prior to announcement of the Merger) and of E&S
Common Stock from April 21, 1995 to April 21, 1998 and from April 21, 1997 to
April 21, 1998. This information was presented solely to provide the AGI Board
with background information regarding the stock prices of AGI and E&S over the
periods indicated. Cowen noted that since AGI's initial public offering, the
high and low trading prices for shares of AGI Common Stock were $14.25 and
$3.06, respectively, and over the last twelve months, the high and low trading
prices of E&S Common Stock were $37.00 and $22.13, respectively. Cowen also
noted that for the period April 21, 1995 to April 21, 1998, the high and low
trading prices of E&S Common Stock were $37.00 and $13.00, respectively.
Cowen noted that the consideration being offered in the Merger represented
premiums of 13.6%, 22.7% and 21.1% over the closing trading prices of AGI
Common Stock on April 21, 1998 ($5.06), April 15, 1998 ($4.69) and March 24,
1998 ($4.75), respectively. Cowen also noted that, after reducing the
consideration being offered in the Merger and the applicable closing trading
price of AGI Common Stock by the amount per share of cash on the balance sheet
of AGI as of March 31, 1998, the corresponding premiums for such dates were
24.7%, 44.2% and 40.5%, respectively.
ANALYSIS OF CERTAIN PUBLICLY TRADED COMPANIES. To provide contextual data
and comparative market information, Cowen compared selected historical
operating and financial ratios for AGI to the corresponding data and ratios of
certain companies which Cowen deemed comparable to AGI. Such companies
included companies in the graphics accelerator industry, including ATI
Technologies, Inc., Creative Technology Ltd., Diamond Multimedia Systems,
Inc., Intergraph Corporation, Number Nine Visual Technology Corporation and
STB Systems, Inc (the "Accelerator Companies"), and other companies in the
graphics chipset and other graphics industries, including Cirrus Logic, Inc.,
Engineering Animation, Inc., E&S, 3D Labs Inc., Ltd., 3Dfx Interactive, Inc.,
S3 Incorporated, Silicon Graphics, Inc., Splash Technology Holdings Inc. and
Trident Microsystems Inc. (such companies, together with the Accelerator
Companies, the "Graphics Companies"). Such data and ratios included the market
capitalization of common stock plus total debt less cash and cash equivalents
("Enterprise Value") of such companies as a multiple of the latest reported
twelve month ("LTM") revenues and the market capitalization of common stock of
such companies as a multiple of the book value of common shareholders' equity.
Cowen also examined the ratios of the current prices of such companies to
their estimated 1998 calendar year earnings per share ("EPS") (as estimated by
Institutional Brokers Estimating System ("IBES") and First Call) and estimated
EPS for the following (1999) calendar year (as estimated by IBES and First
Call).
Such analysis indicated that, for the Accelerator Companies, the Enterprise
Value as a multiple of LTM revenues ranged from 0.43x to 1.43x, with a median
of 0.83x and a mean of 0.89x, and that, for the Graphics Companies, the
Enterprise Value as a multiple of LTM revenues ranged from 0.39x to 8.71x,
with a median of 0.85x and a mean of 1.90x. Cowen noted that the corresponding
multiple of LTM revenues implied by E&S's offer is 1.02x.
Such analysis also indicated that, for the Accelerator Companies, the equity
value as a multiple of book value ranged from 1.14x to 5.66x, with a median of
3.07x and a mean of 3.30x; and that the price per share ranged from 8.8x to
58.3x estimated 1998 calendar year EPS, with a median of 16.3x and a mean of
23.3x (excluding one of the Accelerator Companies for which there were no
estimated 1998 calendar year earnings available), and from 10.3x to 17.4x
estimated 1999 calendar year EPS, with a median of 13.8x and a mean of 13.8x
(excluding four of the Accelerator Companies for which there were no estimated
1999 calendar year earnings available). Such analysis also indicated that, for
the Graphics Companies, the equity value as a multiple of book value ranged
from 0.94x to 6.90x, with a median of 2.60x and a mean of 3.18x; and that the
price per
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share ranged from 8.8x to 58.3x estimated 1998 calendar year EPS, with a
median of 17.8x and a mean of 23.4x (excluding one of the Accelerator
Companies for which there were no estimated 1998 calendar year earnings
available and two other Graphics Companies for which the estimated 1998
calendar year earnings were negative), and from 7.5x to 37.0x estimated 1999
calendar year EPS, with a median of 15.7x and a mean of 17.7x (excluding four
of the Accelerator Companies and three other Graphics Companies for which
there were no estimated 1999 calendar year earnings available). Cowen noted
that the corresponding multiples implied by E&S's offer are 2.14x book value
and, based on the First Call Estimates and Analyst Projections, 30.8x
estimated 1998 calendar year EPS and 19.0x estimated 1999 calendar year EPS.
Although the Selected Companies were used for comparison purposes, none of
such companies are directly comparable to AGI. Accordingly, an analysis of the
results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the Selected Companies
and other factors that could affect the public trading value of the Selected
Companies or AGI to which they are being compared.
ANALYSIS OF CERTAIN MERGERS. Cowen reviewed the financial terms, to the
extent publicly available, of 6 selected transactions (collectively, the
"Selected Mergers") involving the acquisition of companies in the PC
multimedia industry, which were announced or completed since May 27, 1993. The
Selected Mergers consisted of the following (listed as acquiror/target): STB
Systems, Inc./Symmetric Simulation Systems, Inc., Diamond Multimedia Systems,
Inc./Spea Software AG, Diamond Multimedia Systems, Inc./Supra Corporation, US
Robotics, Inc./Megahertz Holding Corporation, Radius Inc./SuperMac Technology
Inc. and Telebit Corporation/Octocom Systems, Inc. Cowen reviewed the
Enterprise Value paid in the Selected Mergers as a multiple of LTM revenue,
and also examined the multiples of equity value paid in the Selected Mergers
to book value and tangible assets.
Such analysis indicated that the Enterprise Value paid in each of the
Selected Mergers ranged from 0.30x to 1.25x LTM revenues, with a median of
0.67x and a mean of 0.78x (excluding one of the Selected Mergers for which
information was not available). Cowen noted that the corresponding multiple of
LTM revenues implied by E&S's offer is 1.02x.
Such analysis also indicated that the equity value paid in each of the
Selected Mergers ranged from 1.22x to 8.36x book value, with a median of 3.04x
and a mean of 3.91x (excluding two of the Selected Mergers for which
information was not available or where the target company had a negative book
value); and from 0.74x to 2.59x tangible assets, with a median of 1.84x and a
mean of 1.85x (excluding one of the Selected Mergers for which information was
not available). The corresponding multiples of book value and tangible assets
implied by E&S's offer are 2.14x and 1.82x.
Although the Selected Mergers were used for comparison purposes, none of
such transactions is directly comparable to the Merger, and none of the
companies in such transactions are directly comparable to AGI or E&S.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the companies involved and other factors that could affect
the acquisition value of such companies or AGI to which they are being
compared.
PRO FORMA EARNINGS ANALYSIS. Cowen analyzed the potential effect of the
Merger on the projected combined income statement of AGI and E&S for E&S's
fiscal years ending December 31, 1998 and 1999, respectively. This analysis
was based on: a) the Analyst Projections; and b) E&S's prevailing market price
of $29.00 per share as of April 21, 1998. This analysis indicated that for the
six month period ended December 31, 1998 the Merger would decrease E&S's
projected earnings per share by approximately $0.15. This analysis also
indicated that for the fiscal year ended December 31, 1999 the Merger would
decrease E&S's projected earnings per share by approximately $0.18. This pro
forma earnings analysis excluded the possible effect of cost savings and
synergies that could result from the Merger.
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The summary set forth above does not purport to be a complete description of
the analyses performed by Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant
methods of financial analyses and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. Cowen 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, notwithstanding the separate factors
summarized above, Cowen believes, and has advised the AGI Board, that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the process underlying its
opinion. In performing its analyses, Cowen made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of AGI and E&S. These analyses
performed by Cowen are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. In addition, analyses relating to the value of businesses do
not purport to be appraisals or to reflect the prices at which businesses or
securities may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty and none of AGI, E&S, Cowen or
any other person assumes responsibility for their accuracy. As mentioned
above, the analyses supplied by Cowen and its opinion were among several
factors taken into consideration by the AGI Board in making its determination
to approve the Merger Agreement. The analyses of Cowen and its opinion should
not be considered as determinative of the decision of AGI to enter into the
Merger Agreement.
Pursuant to the Cowen Engagement Letter, AGI has agreed to pay certain fees
to Cowen for its financial advisory services provided in connection with the
Merger, a significant portion of which is contingent upon the consummation
thereof. If the Merger is consummated, Cowen will be entitled to receive an
aggregate transaction fee in an amount equal to approximately $650,000, less a
retainer fee of $50,000 paid upon execution of the Cowen Engagement Letter.
Additionally, AGI has agreed to reimburse Cowen for its out-of-pocket expenses
(including the reasonable fees and expenses of its counsel) incurred or
accrued during the period of, and in connection with, Cowen's engagement. AGI
has also agreed to indemnify Cowen against certain liabilities, including
liabilities under the federal securities laws, relating to or arising out of
services performed by Cowen as financial advisor to the AGI Board in
connection with the Merger, unless it is finally judicially determined that
such liabilities arose out of Cowen's gross negligence or willful misconduct.
The terms of the fee arrangement with Cowen, which are customary in
transactions of this nature, were negotiated at arm's length between AGI and
Cowen, and the AGI Board was aware of such arrangement, including the fact
that a significant portion of the aggregate fee payable to Cowen is contingent
upon consummation of the Merger.
STRUCTURE OF THE MERGER; EFFECTIVE TIME
In the Merger, AGI will be merged with and into Merger Sub, with Merger Sub
being the surviving corporation after the Merger (the "Surviving Corporation")
and a wholly owned subsidiary of E&S. The name of the Surviving Corporation
will be changed to AccelGraphics, Inc. The date on which the closing of the
Merger shall occur is referred to herein as the "Closing Date." E&S and AGI
anticipate that the Closing Date will occur as promptly as practicable after
the Annual Meeting, and in no event later than one (1) business day after the
satisfaction or, if permissible, waiver of each of the conditions to the
Merger. The term "Effective Time" means the date and time of the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware (or
such later time as may be agreed by the parties hereto and specified in the
Certificate of Merger) and the date and time of the filing of the Articles of
Merger with the Division of Corporations of the State of Utah (or such later
time as may agreed by the parties hereto and specified in the Articles of
Merger).
MERGER CONSIDERATION
At the Effective Time, each share of AGI Common Stock issued and outstanding
immediately prior to the Effective Time (other than any shares held in
treasury by AGI or its wholly owned subsidiaries or shares owned by E&S or its
wholly owned subsidiaries) will be converted into the right to receive the
Stock Consideration (as
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defined below), $5.75 in cash (the "Cash Consideration"), or a combination
thereof, at the election of the holder thereof, subject to adjustment as
described herein. As used in this Proxy Statement/Prospectus, the "Stock
Consideration" refers to that fraction of a share of E&S Common Stock equal to
the quotient determined by dividing $5.75 by the Average E&S Share Price. The
"Average E&S Share Price" refers to the average of the last sale price per
share of E&S Common Stock on the Nasdaq National Market for the 10 consecutive
trading days ending on the second trading day prior to the Closing Date (the
"Valuation Period"). The actual cash and/or shares of E&S Common Stock payable
in respect of any share of AGI Common Stock is referred to herein as the
"Merger Consideration." The parties have agreed in the Merger Agreement that
the total Stock Consideration issued to the AGI stockholders in the Merger
will equal 52% of the total Merger Consideration to be issued by E&S in the
Merger and that the total Cash Consideration to be issued in the Merger will
equal 48% of the total Merger Consideration issued. In the event that AGI
stockholders elect to receive Stock Consideration that exceeds 52% of the
total Merger Consideration, such elections will be subject to a pro rata
adjustment in accordance with the procedures described below in "--Description
of Election Procedures." Similarly, in the event that AGI stockholders elect
to receive Cash Consideration that exceeds the 48% limit, such elections will
also be subject to a pro rata adjustment such that following the adjustment
the total Merger Consideration will be allocated 48% to Cash Consideration and
52% to Stock Consideration. Any AGI stockholder who fails to duly make an
election as to the form of Merger Consideration desired to be received will
automatically be deemed to have made an election to receive 48% of the Merger
Consideration to be received by the stockholder as Cash Consideration, with
the remaining 52% of the Merger Consideration to the stockholder in the form
of Stock Consideration.
The Stock Consideration generally is intended to yield for each share of AGI
Common Stock a fraction of a share of E&S Common Stock with a value of $5.75,
based upon the Average E&S Share Price, and, therefore, a higher Average E&S
Share Price would result in fewer shares of E&S Common Stock constituting the
Stock Consideration, and a lower Average E&S Share Price would result in more
shares of E&S Common Stock constituting the Stock Consideration.
The Merger Agreement provides that the Valuation Period will end two days
prior to the Closing Date, and therefore the number of shares of E&S Common
Stock constituting the Stock Consideration will be fixed at that time. The
market price of E&S Common Stock and hence the value of the Stock
Consideration may fluctuate with the performance of E&S and general market
conditions during the two-day period between the end of the Valuation Period
and the Closing Date. Thus, the last sale price of E&S Common Stock on the
Closing Date may be higher or lower than the Average E&S Share Price and, as a
result, the value of the Stock Consideration at the Closing Date may be more
or less than $5.75.
If the Annual Meeting occurs prior to the end of the Valuation Period which
is not expected to be the case, the precise number of shares of E&S Common
Stock constituting the Stock Consideration will not be known at the time the
vote on the approval of the Merger Agreement is held.
In lieu of fractional shares of E&S Common Stock, E&S shall pay to each
holder who would otherwise be entitled to receive a fractional share an amount
in cash equal to the product of (i) the fractional share interest to which
such holder would otherwise be entitled and (ii) the Average E&S Share Price.
If counsel to either AGI or E&S cannot render the required tax opinion as a
result of the Merger potentially failing to satisfy continuity of interest
requirements under applicable federal income tax principles relating to
reorganizations under Section 368(a) of the Code, then E&S shall reduce the
percentage of shares of AGI Common Stock which can be exchanged for Cash
Consideration to the minimum extent necessary to enable the relevant tax
opinion to be rendered.
DESCRIPTION OF ELECTION PROCEDURES
Election Procedures. Subject to the allocation procedures described below,
each holder of record of AGI Common Stock as of the Effective Time will be
entitled, with respect to the Merger Consideration to be received for each
share of AGI Common Stock held by such holder, to elect (an "Election") to
receive (i) the Cash
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Consideration (a "Cash Election"); (ii) the Stock Consideration (a "Stock
Election"); (iii) a combination thereof or (iv) to indicate that such record
holder has no preference as to the receipt of Cash Consideration or Stock
Consideration for such shares (a "Non-Election"). IF A HOLDER OF AGI COMMON
STOCK MAKES A NON-ELECTION, SUCH HOLDER SHALL RECEIVE MERGER CONSIDERATION
CONSISTING OF 48% CASH CONSIDERATION AND 52% STOCK CONSIDERATION.
Shortly following the mailing of this Proxy Statement/Prospectus, E&S and
AGI will be sending a yellow form of election (a "Form of Election") to each
holder of record of AGI Common Stock as of the Record Date for the Annual
Meeting or such other date as E&S and AGI shall mutually agree. E&S and AGI
will make available Forms of Election and copies of the Proxy
Statement/Prospectus to all persons who become holders (or beneficial owners)
of AGI Common Stock between the record date for the Annual Meeting and the
close of business on the day prior to the Election Deadline (as defined
below). Persons who acquire ownership of shares of AGI Common Stock following
the Election Deadline will automatically be deemed to have made a Non-Election
with respect to their shares and accordingly will receive 48% of their Merger
Consideration in cash and the remaining 52% in E&S Common Stock.
All Elections shall be made on a Form of Election. To make an effective
Election with respect to shares of AGI Common Stock, the holder thereof must,
in accordance with the Form of Election, complete properly, sign and return
the Form of Election to American Stock Transfer & Trust Company, 40 Wall
Street, New York, NY 10005 (the "Exchange Agent"), accompanied by his or her
certificates representing the shares of AGI Common Stock (the "Certificates")
as to which the Election is being made (or an appropriate guarantee of
delivery by an appropriate trust company in the United States or a member of a
registered national securities exchange or the NASD), prior to 5:00 p.m. EDT
on the business day that is two (2) trading days prior to the Closing Date
(the "Election Deadline"). Under the terms of the Merger Agreement, AGI is
obligated to publicly announce at least five (5) trading days in advance of
the Closing, the date on which the Closing of the Merger is scheduled to
occur. If all other conditions set forth in the Merger Agreement have been met
or, if permissible, waived, the Closing Date is expected to occur as soon as
practicable after the Annual Meeting.
AGI has retained Georgeson & Company to serve as Information Agent in
connection with the Merger. QUESTIONS REGARDING THE MERGER AND THE ELECTION
PROCESS AS WELL AS REQUESTS FOR ADDITIONAL COPIES OF THE DOCUMENTS REFERENCED
HERE AND ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS CAN BE DIRECTED TO
GEORGESON & COMPANY AT (800) 223-2064.
IF E&S OR THE EXCHANGE AGENT DETERMINES THAT ANY PURPORTED ELECTION WAS NOT
PROPERLY MADE OR WAS RECEIVED AFTER THE ELECTION DEADLINE, SUCH PURPORTED
ELECTION SHALL BE DEEMED TO BE OF NO FORCE AND EFFECT AND THE STOCKHOLDER
MAKING SUCH PURPORTED ELECTION SHALL BE DEEMED TO HAVE MADE A NON-ELECTION AND
SHALL RECEIVE 48% OF SUCH STOCKHOLDERS' MERGER CONSIDERATION IN THE FORM OF
CASH CONSIDERATION AND THE REMAINDER AS STOCK CONSIDERATION.
Any holder of AGI Common Stock may (i) change such holder's election by
submitting a revised Form of Election, properly completed and signed, that is
received by the Exchange Agent prior to the Election Deadline, or (ii) revoke
such stockholder's election and withdraw his or her Certificates deposited
with the Exchange Agent by written notice to the Exchange Agent received prior
to the Election Deadline. Holders of AGI Common Stock who transfer ownership
of their shares after making an election will be deemed to have revoked their
election at the time of the transfer. Provided that the transfer is made prior
to the Election Deadline, the new owner of the shares will, however, be
entitled to make their own election with respect to the shares. E&S will have
the discretion, which it may delegate in whole or in part to the Exchange
Agent, reasonably to determine whether Forms of Election have been properly
completed, signed and submitted or revoked and to disregard immaterial defects
in Forms of Election. The decision of E&S (or the Exchange Agent) in such
matters shall be conclusive and binding. The Exchange Agent shall make a good
faith effort to notify any person of any defect in a Form of Election not
waived by E&S.
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NEITHER AGI NOR THE AGI BOARD MAKES ANY RECOMMENDATION AS TO WHETHER
STOCKHOLDERS SHOULD ELECT TO RECEIVE THE CASH CONSIDERATION OR STOCK
CONSIDERATION IN THE MERGER. EACH HOLDER OF AGI COMMON STOCK MUST MAKE HIS OR
HER OWN DECISION WITH RESPECT TO SUCH ELECTION.
Subject to possible adjustment as described herein, 48% of the aggregate
Merger Consideration will be paid in cash and 52% of the aggregate Merger
Consideration will be paid in the form of Stock Consideration. Accordingly,
there can be no assurance that each holder of AGI Common Stock will receive
the amount of Cash Consideration or Stock Consideration, as the case may be,
that such holder elects with respect to all shares of AGI Common Stock held by
such holder.
Allocation; Proration. In the event that the aggregate number of shares in
respect of which Cash Elections have been made (collectively, the "Requested
Cash Election Shares") exceeds the Cash Election Maximum Number (as defined
below), all shares in respect of which Stock Elections have been made (the
"Stock Election Shares") shall receive Stock Consideration, and all Requested
Cash Election Shares shall be converted into the right to receive Stock
Consideration or Cash Consideration such that each holder making a Cash
Election shall receive, for each share of AGI Common Stock for which a Cash
Election has been made, (x) cash in an amount equal to the product of (1) the
Cash Consideration multiplied by (2) a fraction, the numerator of which is the
Cash Election Maximum Number (as defined below) and the denominator of which
is the number of Requested Cash Election Shares (such product, the "Prorated
Cash Amount") and (y) a portion of a share of E&S Common Stock equal to a
fraction, the numerator of which is equal to the Cash Consideration minus the
Prorated Cash Amount and the denominator of which is equal to the E&S Common
Stock Price. In the event that the aggregate number of shares in respect of
which Stock Elections have been made (collectively, the "Requested Stock
Election Shares") exceeds the Stock Election Maximum Number (as defined
below), all shares in respect of which Cash Elections have been made (the
"Cash Election Shares") shall receive Cash Consideration, and all requested
Stock Election Shares shall be converted into the right to receive Stock
Consideration or Cash Consideration such that each holder making a Stock
Election shall receive, for each share of AGI Common Stock for which a Stock
Election has been made, (x) E&S Common Stock in an amount equal to the product
of (1) the Stock Consideration multiplied by (2) a fraction, the numerator of
which is the Stock Election Maximum Number and the denominator of which is the
number of Requested Stock Election Shares (such product the "Prorated Stock
Amount"), and (y) cash consideration equal to the total Merger Consideration
available for such holder, reduced by the value of the Prorated Stock Amount.
The maximum number of shares of AGI Common Stock to be converted in the
Merger into the right to receive Cash Consideration (the "Cash Election
Maximum Number") will be equal to the product of (w) 0.48 (as adjusted to
reflect any cash payments for fractional shares) multiplied by (x) the total
number of shares of AGI Common Stock outstanding at the Effective Time. The
maximum number of shares to be converted in the Merger into the right to
receive Stock consideration (the "Stock Election Maximum Number") will be
equal to the product of (y) 0.52 multiplied by (z) the total number of shares
of AGI Common Stock outstanding at the Effective Time.
AS A RESULT OF THE PRORATION AND OTHER LIMITATIONS, HOLDERS OF SHARES OF AGI
COMMON STOCK MAY RECEIVE A COMBINATION OF SHARES OF E&S COMMON STOCK AND CASH,
NOTWITHSTANDING THE CASH ELECTION OR STOCK ELECTION MADE BY SUCH HOLDERS. SUCH
HOLDERS WILL NOT BE ABLE TO CHANGE THE AMOUNTS OF E&S COMMON STOCK OR THE CASH
CONSIDERATION ALLOCATED TO THEM.
PROCEDURES FOR EXCHANGE OF AGI COMMON STOCK CERTIFICATES
At the Effective Time, E&S will make available to the Exchange Agent for the
benefit of the holders of shares of AGI Common Stock, for exchange,
certificates evidencing shares of E&S Common Stock and cash in amounts
required to be exchanged for shares of AGI Common Stock in the Merger.
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As promptly as practicable after the Effective Time, the Exchange Agent will
mail to each holder of Certificates (to the extent such Certificates have not
already been submitted with Forms of Election) (i) a letter of transmittal
(which specifies that delivery will be effected, and risk of loss and title to
the Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for the Merger Consideration.
Upon surrender to the Exchange Agent of a Certificate for cancellation,
together with a letter of transmittal, duly executed and completed in
accordance with the instructions thereto, and such other documents as may be
reasonably required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange therefor the appropriate
Merger Consideration.
No dividends or other distributions with respect to E&S Common Stock
declared or made after the Effective Time with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate
with respect to the shares of E&S Common Stock represented thereby, and no
cash payment in lieu of any fractional shares will be paid to any such holder,
until the holder of such Certificate surrenders such Certificate. Subject to
the effect of escheat, tax or other applicable laws, following the surrender
of any such Certificate, the holder of such Certificate representing whole
shares of E&S Common Stock issued in exchange therefor will be paid, without
interest, (i) the amount of any cash payable with respect to a fractional
share of E&S Common Stock to which such holder is entitled and the amount of
dividends or other distributions with a record date after the Effective Time
and theretofore paid with respect to such whole shares of E&S Common Stock and
(ii) at the appropriate payment date, the amount of dividends or other
distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect
to such whole shares of E&S Common Stock.
At the Effective Time, the stock transfer books of AGI will be closed and
there shall be no further registration of transfers of shares of AGI Common
Stock thereafter on the records of AGI. From and after the Effective Time,
holders of Certificates will cease to have any rights with respect to shares
of AGI Common Stock, except as otherwise provided in the Merger Agreement or
by law.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for by E&S under the "purchase" method of
accounting in accordance with generally accepted accounting principles.
Therefore, the aggregate Merger Consideration paid by E&S in connection with
the Merger will be allocated to AGI's identifiable tangible and intangible
assets and liabilities based on their fair values with the excess being
treated as goodwill. The assets and liabilities of AGI will be consolidated
into the assets and liabilities of E&S at the effective date of the Merger.
Thereafter the results of operations of AGI and E&S will be reported on a
consolidated basis.
PLANS FOR AGI AFTER THE MERGER
After the Merger, the Surviving Corporation will be renamed "AccelGraphics,
Inc." and will be a wholly owned subsidiary of E&S. E&S does not have any
present plans or proposals which relate to or would result in an extraordinary
corporate transaction, such as a merger, reorganization or liquidation,
involving AGI, a sale or transfer of a material amount of assets of AGI or any
of its subsidiaries or any other material changes in AGI's business.
CERTAIN OTHER EFFECTS OF THE MERGER
If the Merger is consummated, shares of AGI Common Stock will cease to be
listed on the Nasdaq National Market.
After the Merger, stockholders of AGI will become stockholders of E&S, to
the extent such stockholders elect to receive the Stock Consideration. Upon
consummation of the Merger, the rights of all such former
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stockholders of AGI will be governed by applicable Utah law (rather than the
DGCL), including the Utah Revised Business Corporation Act (the "URBCA"), and
by the articles of incorporation and bylaws of E&S. For a description of the
differences between the rights of E&S and AGI stockholders, see "COMPARISON OF
RIGHTS OF AGI STOCKHOLDERS AND E&S STOCKHOLDERS."
SOURCE AND AMOUNT OF FUNDS AND OTHER CONSIDERATION
Assuming there has been no exercise of AGI stock options prior to the
Effective Time, and assuming that the maximum amount of Cash Consideration is
paid to AGI stockholders, approximately $23.3 million will be required to pay
the cash portion of the Merger Consideration to the holders of AGI Common
Stock, and it is expected that approximately $900,000 will be required to pay
the expenses of E&S in connection with the Merger, all of which will be
furnished from available general funds of E&S. It is currently expected that
approximately $1,000,000 will be required to pay the expenses of AGI related
to the Merger, which amount will be furnished from available general funds of
AGI. See "THE MERGER AGREEMENT -- Expenses."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER THAT ARE GENERALLY APPLICABLE TO AGI STOCKHOLDERS. THIS SUMMARY
DOES NOT DISCUSS ALL FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE RELEVANT TO
PARTICULAR HOLDERS AND DOES NOT ADDRESS TAX CONSEQUENCES TO CATEGORIES OF
HOLDERS ENTITLED TO SPECIAL TREATMENT UNDER THE CODE INCLUDING, WITHOUT
LIMITATION, FOREIGN PERSONS, TAX-EXEMPT ORGANIZATIONS, INSURANCE COMPANIES,
FINANCIAL INSTITUTIONS AND DEALERS IN STOCKS AND SECURITIES AND HOLDERS WHO
ACQUIRED THEIR AGI STOCK UPON EXERCISE OF STOCK OPTIONS OR IN OTHER
COMPENSATORY TRANSACTIONS. FURTHERMORE, NO STATE, LOCAL OR FOREIGN TAX
CONSIDERATIONS ARE ADDRESSED. NO RULINGS WILL BE SOUGHT FROM THE INTERNAL
REVENUE SERVICE WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER. THIS SUMMARY IS BASED UPON FEDERAL INCOME TAX LAWS, REGULATIONS,
RULINGS AND DECISIONS IN EFFECT AS OF THE DATE HEREOF, ALL OF WHICH ARE
SUBJECT TO CHANGE, RETROACTIVELY OR PROSPECTIVELY, AND TO DIFFERING
INTERPRETATION. AGI STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING THE APPLICABILITY OF FEDERAL,
STATE, LOCAL AND FOREIGN INCOME OF OTHER TAX LAWS.
Consummation of the Merger is conditioned upon the receipt by E&S and AGI of
the opinions of their respective counsels, Snell & Wilmer, L.L.P. in the case
of E&S and Venture Law Group, a Professional Corporation in the case of AGI,
each dated as of the Closing Date, to the effect that, on the basis of the
facts, representations and assumptions set forth in such opinions and/or in
certificates furnished to counsel by AGI, E&S and Merger Sub, the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, and that each of E&S, Merger Sub and
AGI will be a party to that reorganization within the meaning of Section
368(b) of the Code. If such opinions cannot be issued because of a concern
that the aggregate fair market value of the E&S Common Stock to be issued to
AGI stockholders represents a percentage of the aggregate consideration paid
to AGI stockholders in the Merger that is insufficient to satisfy the
"continuity of interest" requirement for reorganization treatment, the number
of shares of E&S Common Stock to be issued in the Merger will be further
increased to the minimum extent necessary to enable such opinion to be issued
and the amount of Cash Consideration will accordingly be reduced. Opinions of
counsel only represent counsel's best legal judgement and have no binding
effect or official status of any kind, and no assurance can be given that
contrary positions may not be taken by the Internal Revenue Service ("IRS") or
by any court of law. In addition, no assurance can be given that the factual
assumptions on which such opinions are based will be true, including in
particular the assumption that any purchases by E&S or its affiliates of E&S
Common Stock from former AGI stockholders following the Merger will not
violate the continuity of interest requirement for reorganization treatment.
See "-- Description of Election Procedures."
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If, in accordance with the opinions referred to above, the Merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code,
and E&S, Merger Sub and AGI will each be a party to that reorganization under
Section 368(b) of the Code, then (i) no gain or loss will be recognized by E&S
or AGI as a result of the Merger; (ii) no gain or loss will be recognized by
the stockholders of AGI upon the exchange of AGI Common Stock SOLELY for Stock
Consideration except in respect of cash received in lieu of a fractional share
of E&S Common Stock (as discussed below); (iii) the adjusted tax basis of the
E&S Common Stock to be received by the stockholders of AGI will be the same as
such holders' adjusted tax basis in the AGI Common Stock surrendered in
exchange therefor increased by the amount of any gain recognized and by any
amount treated as a dividend each as described below and decreased by the
amount of any cash received; (iv) the holding period of the E&S Common Stock
to be received by the stockholders of AGI in connection with the Merger will
include the holding period of the AGI Common Stock surrendered in exchange
therefor, PROVIDED that such shares of AGI Common Stock are held as capital
assets at the Effective Time of the Merger; (v) stockholders of AGI will
recognize gain or loss upon the exchange of AGI Common Stock solely for Cash
Consideration in amounts equal to the difference between such Cash
Consideration and the adjusted tax basis of the AGI Common Stock exchanged
therefore; and (vi) a stockholder of AGI who receives a combination of Cash
Consideration and Stock Consideration in exchange for his AGI Common Stock
will not recognize loss but will recognize gain, if any, to the extent of the
lesser of (a) the Cash Consideration and (b) the excess of the sum of the Cash
Consideration and the fair market value of the Stock Consideration received
over such stockholder's adjusted tax basis in the exchanged AGI Common Stock.
If a stockholder has differing bases and/or holding periods in respect of his
shares of AGI Common Stock, he should consult his own tax advisors prior to
the exchange with regard to identifying the bases and/or holding periods of
the particular shares of E&S Common Stock received in the exchange.
In general, any gain or loss recognized by a holder of AGI Common Stock
under clause (v) above will be capital gain or loss and will be long-term
capital gain or loss if, as of the date of the exchange, such stockholder has
held such AGI Common Stock for more than twelve months. If, however, any such
stockholder constructively owns shares of AGI Common Stock under Section 318
of the Code (which generally deems a person to own stock that is owned by
certain family members or related entities or that is the subject of any
option or options owned or deemed owned by such person) that are exchanged for
shares of E&S Common Stock in the Merger, or, possibly, actually or
constructively owns shares of E&S Common Stock, in unusual circumstances the
consequences to him may be similar to the consequences described below where
Cash Consideration is received under clause (vi), except that the amount of
consideration, if any, treated as a dividend would not be limited to the
amount of his gain. Stockholders of AGI who constructively own shares of AGI
Common Stock that are exchanged for shares of E&S Common Stock in the Merger,
or actually or constructively own shares of E&S Common Stock are accordingly
advised to consult their own tax advisors concerning the U.S. federal income
tax consequences of exchanging their AGI Common Stock in the Merger for the
Cash Consideration.
In general, any gain recognized by a holder of AGI Common Stock under clause
(vi) above will be capital gain and will be long-term capital gain if, as of
the date of the exchange, such stockholder held such AGI Common Stock for more
than twelve months. In certain instances, however, the receipt of the Cash
Consideration under clause (vi) may have the effect of the distribution of a
dividend for U.S. federal income tax purposes, in which case any recognized
gain will be treated as ordinary dividend income to the extent of such
stockholder's ratable share of AGI's accumulated or current year earnings and
profits. Stockholders of AGI who exchange their AGI Common Stock for a
combination of Cash Consideration and Stock Consideration are accordingly
advised to consult their own tax advisors concerning the U.S. federal income
tax consequences of exchanging their AGI Common Stock for such a combination
of consideration.
Cash received in lieu of a fractional share of E&S Common Stock will
generally be treated as received in redemption of such fractional share and
gain or loss will be recognized, measured by the difference between the amount
of cash received and the portion of the basis of the share of AGI Common Stock
allocable to such fractional interest. Such gain or loss will constitute
capital gain or loss, and will be long-term capital gain or loss
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if the holding period for such shares of AGI Common Stock was greater than
twelve months as of the date of the exchange.
In the case of an AGI Stockholder who is an individual and whose holding
period of shares of AGI Common Stock held as capital assets exceeds eighteen
months, a maximum federal rate of 20% will apply to any capital gain
recognized by such shareholder. In the case of an AGI Stockholder who is an
individual and whose holding period of shares of AGI Common Stock held as
capital assets exceeds twelve months but not more than eighteen months, a
maximum federal rate of 28% will apply to any capital gain recognized by such
AGI stockholder.
A successful IRS challenge to the status of the Merger as a "reorganization"
within the meaning of Section 368(a) of the Code would result in AGI
stockholders being treated as if they sold their AGI Common Stock in a fully
taxable transaction. In such event, each AGI Stockholder would be required to
reorganize gain or loss with respect to the disposition of his AGI Common
Stock equal to the difference between the adjusted tax basis in such shares
and the sum of the Cash Consideration plus the fair market value, as of the
date the Merger becomes effective, of the E&S Common Stock received in
exchange therefor. Such gain or loss would be treated as capital gain or
capital loss for each such shareholder if he held his AGI Common Stock as a
capital asset at the time of the Merger. In such event, an AGI Stockholder's
aggregate basis in the E&S Common Stock so received would equal their fair
market value as of the Effective Time of the Merger and the capital asset
holding period for such E&S Common Stock would begin the day after the Merger.
Even if the Merger qualifies as a "reorganization" within the meaning of
Section 368(a) of the Code, a recipient of E&S Common Stock would recognize
gain to the extent that such shares were considered to be received in exchange
for services or property (other than solely in exchange for E&S Common Stock).
Gain would also have to be recognized to the extent that an AGI Stockholder
was treated as receiving (directly or indirectly) consideration other than E&S
Common Stock in exchange for AGI Common Stock. All or a portion of such gain
amounts may be taxable as ordinary income.
Backup Withholding. Under the backup withholding rules, a holder of AGI
Common Stock may be subject to backup withholding at the rate of 31% with
respect to dividends and redemption proceeds, unless such stockholder (a) is a
corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. Any amount withheld under these rules will be
credited against the stockholder's federal income tax liability. E&S may
require holders of AGI Common Stock to establish an exemption from backup
withholding or to make arrangements satisfactory to E&S with respect to the
payment of backup withholding. A stockholder who does not provide E&S with his
or her correct taxpayer identification number or who otherwise does not
establish an exemption may, in addition to being subject to backup withholding
at the rate of 31% with respect to dividends and redemption proceeds, be
subject to penalties imposed by the Internal Revenue Service.
REGULATORY MATTERS
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the U.S. Department of Justice (the "Antitrust
Division") and specified waiting periods have been terminated or have expired.
AGI and E&S each filed notification and report forms under the HSR Act with
the FTC and the Antitrust Division on May 4, 1998 and received clearance under
the HSR Act on May 13, 1998. Notwithstanding clearance under the HSR Act, at
any time before or after consummation of the Merger, the Antitrust Division or
the FTC could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the
consummation of the Merger or seeking divestiture of substantial assets of AGI
or E&S.
E&S and AGI are not aware of any material governmental or regulatory
approvals required to be obtained in order to consummate the Merger, other
than compliance with the HSR Act and applicable federal and state securities
and corporate laws.
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<PAGE>
BLUE SKY LAWS
As of the date of this Proxy Statement/Prospectus, E&S intends to register
or qualify the shares of E&S Common Stock offered by this Proxy
Statement/Prospectus under the securities laws of all states where it is not
exempt. Certain states require notice filings or other filings. E&S either has
complied with these filing requirements or intends to comply with them in a
timely fashion.
APPRAISAL RIGHTS
There are no rights of appraisal available in connection with the Merger.
45
<PAGE>
THE MERGER AGREEMENT
The following is a summary of certain material provisions of the Merger
Agreement not summarized elsewhere in this Proxy Statement/Prospectus. The
summary is qualified in all respects by reference to the complete text of the
Merger Agreement, which is incorporated by reference in its entirety and
attached to this Proxy Statement/Prospectus as Annex I.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties of AGI
with respect to AGI and its subsidiaries as to, among other things: (i) due
organization, valid existence and good standing; (ii) the completeness and
correctness of organizational documents; (iii) AGI's capital structure; (iv)
AGI's power and authority to execute and deliver the Merger Agreement, to
perform its obligations thereunder and to consummate the Merger; (v) the
absence, other than as disclosed, of any conflict between the execution and
performance of the Merger Agreement and AGI's organizational documents,
applicable law and certain contracts; (vi) the absence of any required consent
or permit of, or filing with any governmental or regulatory authority, except
as provided in the Merger Agreement; (vii) the accuracy of AGI's recent
reports filed with the Securities and Exchange Commission and the financial
statements contained therein; (viii) the absence of material adverse changes
or events; (ix) the absence of material pending or threatened litigation
against AGI; (x) the absence of changes to, and the qualification of,
operation and liability under, certain employee benefit plans; (xi) AGI's
labor relations; (xii) title to and sufficiency of AGI's assets; (xiii) AGI's
right to use intellectual property; (xiv) certain tax matters and the payment
of taxes; (xv) certain environmental matters; (xvi) the existence, legality
and effect of material contracts; (xvii) AGI's relationships with significant
suppliers; (xviii) the absence of actions that would prevent the Merger from
constituting a transaction qualifying under Section 368(a) of the Code; (xix)
AGI's insurance coverage; (xx) the approval of the Merger Agreement by the AGI
Board; (xxi) the vote required by AGI's stockholders; (xxii) the accuracy of
information supplied to E&S by AGI; (xxiii) except as disclosed, the absence
of transactions between AGI and its affiliates; (xxiv) the adequacy of AGI's
management information systems; (xxv) the receipt of an opinion of AGI's
financial advisor as to the fairness of the financial terms of the Merger;
(xxvi) the absence of any brokerage, finder's or similar fee in connection
with the Merger, except for the fee to be paid AGI's financial advisor; and
(xvii) the absence of certain business practices.
The Merger Agreement also contains certain representations and warranties of
E&S with respect to E&S and Merger Sub as to, among other things: (i) due
organization, valid existence and good standing; (ii) the completeness and
correctness of organizational documents; (iii) the authority and validity of
the E&S Common Stock to be issued in the Merger; (iv) the power and authority
of E&S and Merger Sub to execute and deliver the Merger Agreement, to perform
their obligations thereunder and to consummate the Merger; (v) the absence,
other than as disclosed, of any conflict with E&S's organizational documents,
applicable law and certain contracts; (vi) the absence of any required consent
or permit of, or filing with any governmental authority, except as provided in
the Merger Agreement; (vii) the accuracy of E&S's recent reports filed with
the Securities and Exchange Commission and the financial statements contained
therein; (viii) the absence of material pending or threatened litigation
against E&S; (ix) the absence of actions that would prevent the Merger from
constituting a transaction qualifying under Section 368(a) of the Code; (x)
the absence of material adverse changes or events; (xi) the receipt of an
opinion from E&S's financial advisor as to the fairness of the Merger
Consideration; and (xi) the absence of any brokerage, finder's or similar fee
in connection with the Merger, except for the fee to be paid E&S's financial
advisor.
CONDUCT OF BUSINESS PENDING THE MERGER
During the period from the date of the Merger Agreement and continuing until
the Effective Time, AGI has agreed as to itself and its subsidiaries that
(except as expressly contemplated or permitted by the Merger Agreement or as
otherwise indicated on the disclosure schedule delivered by AGI to E&S or to
the extent that E&S otherwise consents in writing) AGI and its subsidiaries
will carry on their respective businesses in the ordinary course and in a
manner consistent in all material respects with past practices and will use
all reasonable
46
<PAGE>
efforts to preserve intact their business organizations, to keep available the
services of their current officers, employees and consultants and to preserve
their relationships with customers, distributors, suppliers, licensors,
licensees, contractors and others with which AGI and its subsidiaries have
significant business relations. By way of amplification and without limiting
the foregoing, except as contemplated by the Merger Agreement or as disclosed
by AGI, the Merger Agreement places restrictions on the ability of AGI to: (i)
amend its charter or bylaws; (ii) issue or sell capital stock, any related
options or warrants or any material assets; (iii) pay a dividend, other than
its regularly scheduled periodic cash dividends; (iv) effect a stock split,
combination or reclassification; (v) make material acquisitions of other
entities or enter into or amend material contracts; (vi) incur indebtedness or
authorize material capital expenditures; (vii) increase compensation to
officers or employees or adopt or amend any collective bargaining agreements
or employee benefit plans; (viii) acquire or dispose of real estate or other
material assets; (ix) accelerate the collection of accounts receivable or
delay the payment of accounts payable; (x) make any material tax election or
settle any tax liability; (xi) take any action that is likely to result in the
covenants, agreements or conditions of the Merger Agreement not being
satisfied as of the Closing Date; (xii) make any material changes in its
accounting policies; (xiii) knowingly act in a way that could reasonably be
expected to prevent the Merger from constituting a transaction qualifying
under Section 368(a) of the Code; or (xiv) make any material payments not in
the ordinary course of business, except as disclosed in the Merger Agreement.
During the period from the date of the Merger Agreement and continuing until
the Effective Time, E&S has agreed to: (i) conduct its business in the
ordinary course; (ii) not knowingly take any action that could reasonably be
expected to prevent the Merger from constituting a transaction qualifying
under Section 368(a) of the Code; and (iii) not take any action or fail to
take any action that is reasonably likely to result in a material delay in the
declaration of effectiveness of the Registration Statement (as defined in
Section 6.01 of the Merger Agreement) by the SEC.
NO SOLICITATION OF COMPETING TRANSACTIONS
Pursuant to the Merger Agreement, AGI has agreed that neither it nor any of
its subsidiaries will directly or indirectly initiate, solicit or knowingly
encourage (including by way of furnishing nonpublic information or
assistance), or take any other action to facilitate knowingly any inquiries or
the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Competing Transaction (as defined below), or enter into or
maintain or continue discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain a Competing Transaction, or agree
to or endorse any Competing Transaction, or authorize or permit any of the
officers, directors or employees of AGI or any of its subsidiaries or any
investment banker, financial advisor, attorney, accountant or other agent or
representative of AGI or its subsidiaries to take any such action, and AGI
will notify E&S orally (within one business days) and in writing (within 24
hours of notification) of all of the relevant details relating to such inquiry
or proposal and, if such inquiry or proposal is in writing, AGI must deliver
to E&S a copy of such inquiry or proposal.
"Competing Transaction" means any of the following involving AGI or any of
its subsidiaries: (i) any merger, consolidation, share exchange,
recapitalization, business combination or other similar transaction; (ii) any
sale, lease, exchange, mortgage, pledge, transfer or other disposition of 15%
or more of the assets of AGI and its subsidiaries, taken as a whole, in a
single transaction or series of related transactions; (iii) any tender offer
or exchange offer for 15% or more of the shares of AGI Common Stock or the
filing of a registration statement under the Securities Act of 1933 (the
"Securities Act") in connection therewith; (iv) any person having acquired
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder) having been formed which
beneficially owns or has the right to acquire beneficial ownership of, 15% or
more of the shares of AGI Common Stock; or (v) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
If at any time prior to the Effective Time, the Board of Directors of AGI is
advised in writing by AGI's legal counsel that it is necessary to do so in
order to comply with its fiduciary duties to AGI's stockholders under
47
<PAGE>
applicable law, AGI may, in response to an unsolicited inquiry, proposal or
offer for a Competing Transaction (so long as the Board of Directors of AGI in
good faith determines (in consultation with its Financial Advisor) the
proposal or offer represents a financially superior transaction for the
stockholders of AGI as compared to the Merger) (x) furnish only such
information with respect to AGI to any such person pursuant to a customary
confidentiality agreement as was delivered to E&S prior to the execution of
the Merger Agreement, and (y) participate in the discussions and negotiations
regarding such inquiry, proposal or offer. Nothing contained in the Merger
Agreement shall prevent AGI or its Board of Directors from complying with Rule
14d-9 and 14e-2 promulgated under the Exchange Act with regard to any proposed
Competing Transaction.
If the Board of Directors of AGI determines in its good faith judgment,
after consultation with outside counsel, that it has received a Superior
Proposal (as described below), the Board of Directors may terminate the Merger
Agreement by providing written notice to E&S (a "Notice of Superior Proposal")
advising E&S that the Board of Directors has received a Superior Proposal,
specifying the material terms and conditions of such Superior Proposal and
providing notice of termination of the Merger Agreement. For purposes of the
Merger Agreement, a "Superior Proposal" means any proposal made by a third
party to acquire, directly or indirectly, including pursuant to a merger,
liquidation, dissolution or other similar transaction, 100% of the aggregate
voting power or capital stock of AGI then outstanding or all or substantially
all the assets of AGI for a price per share in excess of $7.65, or, in the
case of an asset sale, an aggregate consideration (consisting of cash and/or
securities) in excess of the product of (i) the total issued and outstanding
shares of AGI Common Stock on a fully diluted basis, and (ii) $7.65.
INDEMNIFICATION AND INSURANCE
In the Merger Agreement, AGI and E&S have agreed that (i) E&S and the
Surviving Corporation will maintain, for a period of six (6) years after the
Effective Time, the current provisions regarding indemnification of directors
and officers contained in AGI's Certificate of Incorporation and Bylaws and
(ii) the Surviving Corporation will maintain, for a period of three (3) years
after the Effective Time, directors' and officers' liability insurance
policies covering persons who are currently covered in their capacities by
AGI's current directors' and officers' policies and on terms not materially
less favorable than the existing insurance coverage.
STOCK EXCHANGE LISTING
The shares of E&S Common Stock to be issued in the Merger are to be listed
on the Nasdaq National Market.
CONDITIONS TO CONSUMMATION OF THE MERGER
Conditions To Each Party's Obligations To Consummate The Merger. The
obligations of E&S, AGI and Merger Sub to effect the Merger are subject to the
satisfaction or waiver of the following conditions on or prior to the Closing
Date of the Merger:
. STOCKHOLDER APPROVAL. Approval of the Merger Agreement and all of the
transactions contemplated thereby by a majority of the outstanding shares
of AGI Common Stock;
. HSR ACT. The waiting period applicable to the Merger under the HSR Act
having expired or terminated;
. NO PROCEEDINGS. No order, statute, rule, regulation, executive order,
stay, decree, judgment or injunction having been enacted, entered,
issued, promulgated or enforced by any governmental authority or a court
of competent jurisdiction which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger;
. EFFECTIVE REGISTRATION STATEMENT. The Registration Statement being
declared effective and no stop order issued by the SEC suspending the
effectiveness of the Registration Statement being in effect and no
proceeding for that purpose pending or being then threatened by the SEC;
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. STOCK EXCHANGE LISTING. The shares of E&S Common Stock to be issued in
the Merger having been authorized for listing on the Nasdaq National
Market, subject to official notice of issuance;
. OTHER REGULATORY APPROVALS. All other necessary and material governmental
and regulatory clearances, consents or approvals having been received;
and
. TAX OPINION. E&S and AGI having each received the opinion, to be provided
at Closing from their respective counsel, Snell & Wilmer L.L.P. for E&S
and Venture Law Group, A Professional Corporation for AGI, 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 E&S, Merger Sub and AGI will be a party to the
reorganization within the meaning of Section 368(b) of the Code.
ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF E&S AND MERGER SUB. The
obligations of E&S and Merger Sub to consummate the Merger are subject to the
satisfaction or waiver of the following additional conditions:
. COMPLIANCE WITH OBLIGATIONS. AGI having performed in all material
respects all of its obligations required to be performed by it at or
prior to the Effective Time, and E&S having received a certificate signed
by an executive officer of AGI to such effect;
. REPRESENTATIONS AND WARRANTIES TRUE; CONSENTS. Each of the
representations and warranties of AGI set forth in the Merger Agreement
having been true and correct when made and on and as of the Closing Date
of the Merger as if made on and as of such date (this condition is
satisfied unless the failure to be true and correct would have a material
adverse effect on AGI), AGI having received all the necessary consents
from third parties and E&S having received a certificate signed by an
executive officer of AGI to such effect;
. COLD COMFORT. E&S having received "cold comfort" letters of Price
Waterhouse LLP, dated the date on which the Registration Statement shall
become effective and the Effective Time, respectively, and addressed to
E&S in form and substance customary for letters delivered by public
accountants in connection with registration statements similar to the
Registration Statement;
. AGREEMENTS WITH AFFILIATES. E&S having received a signed agreement from
any person who may be deemed to have become an affiliate of AGI, as
reasonably determined by AGI, pursuant to Rule 145 under the Securities
Act, after the date of the Merger Agreement and on or prior to the
Effective Time, in a form specified in the Merger Agreement;
. LOCK-UP AGREEMENTS. E&S having received signed lock-up agreements from
Jeffrey W. Dunn and Nancy Bush in the form specified in the Merger
Agreement;
. EMPLOYMENT AGREEMENTS. E&S having received signed employment agreements
from Jeffrey W. Dunn and Nancy Bush in the form specified in the Merger
Agreement; and
. OPTION ACCELERATION WAIVERS. E&S having received signed waivers of
certain option acceleration rights from certain officers of AGI.
ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF AGI. The obligations of AGI to
consummate the Merger are subject to the satisfaction or, if permitted by
applicable law, waiver of the following additional conditions:
. COMPLIANCE WITH OBLIGATIONS. E&S and Merger Sub having performed in all
material respects all of their respective obligations required to
performed by them at or prior to the Effective Time and AGI having
received a certificate signed by an executive officer of E&S to such
effect; and
. REPRESENTATIONS AND WARRANTIES TRUE. Each of the representations and
warranties of E&S set forth in the Merger Agreement having been true and
correct when made and on and as of the Closing Date of the Merger as if
made on and as of such date (this condition is satisfied unless the
failure to be
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true and correct would have a material adverse effect on E&S), and AGI
having received a certificate signed by an executive officer of E&S to
such effect.
TERMINATION; EFFECTS OF TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of AGI:
. by written consent duly authorized by the Boards of Directors of each of
E&S and AGI;
. by either E&S or AGI, if the waiting period under the HSR Act does not
expire or is not terminated prior to September 15, 1998;
. by either E&S or AGI, if any court or U.S. governmental entity has issued
an order (other than a temporary restraining order), decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting
the Merger, except that the Merger Agreement may not be terminated prior
to September 15, 1998 if the party subject to such order is using its
reasonable best efforts to have such order removed, unless the order is
final and nonappealable;
. by either E&S or AGI, if the Effective Time has not occurred on or before
September 15, 1998, except that the right to terminate will not be
available to any party whose willful, deliberate or knowing failure to
fulfill any obligation under the Merger Agreement has been the cause of,
or resulted in, the nonoccurrence of the Effective Date;
. by either E&S or AGI, if the holders of AGI Common Stock do not adopt the
Merger Agreement at the Annual Meeting;
. by AGI, upon any breach of any representation, warranty or agreement set
forth in the Merger Agreement such that the conditions to the obligations
of AGI (described above under "-- CONDITIONS TO THE CONSUMMATION OF THE
MERGER -- ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF AGI") would not be
satisfied, except that, if such breach is curable by E&S, and E&S uses
its best efforts to cure such breach, AGI must wait 30 days after
delivering written notice to E&S to terminate the Merger Agreement;
. by E&S, upon any breach of any representation, warranty or agreement set
forth in the Merger Agreement such that the conditions to the obligations
of E&S (described above under "-- CONDITIONS TO THE CONSUMMATION OF THE
MERGER -- ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF E&S AND MERGER
SUB") would not be satisfied, except that, if such breach is curable by
AGI, and AGI uses its best efforts to cure such breach, E&S must wait 30
days after delivering written notice to AGI to terminate the Merger
Agreement; and
. by AGI, if AGI shall have delivered to E&S a Notice of Superior Proposal
(described above under "--NO SOLICITATION OF COMPETING TRANSACTIONS").
Effect Of Termination. Upon termination, the Merger Agreement becomes void
and there will be no liability on the part of E&S, Merger Sub or AGI and all
rights and obligations under the Merger Agreement will cease, except that any
liability for the willful breach by any party will still exist after
termination.
Termination Fees Payable By AGI. Pursuant to the Merger Agreement, if the
Merger Agreement is terminated due to delivery by AGI to E&S of a Notice of
Superior Proposal then AGI shall reimburse E&S for actual expenses of the
Merger (up to a maximum of $100,000) and also pay to E&S a break up fee of $4
million.
EXPENSES
Except as described above, each party is responsible for the expenses that
it incurs in connection with the Merger.
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E&S and AGI will share equally all expenses related to printing, filing and
mailing the Proxy Statement/Prospectus and all Commission and other regulatory
filing fees incurred in connection with the Proxy Statement/Prospectus.
AMENDMENT; WAIVER
The Merger Agreement may be amended by the parties thereto at any time prior
to the Effective Time, except that after the adoption of the Merger Agreement
by AGI stockholders, no amendment may be made which would reduce the amount or
change the type of consideration to be received by AGI stockholders. The
Merger Agreement may not be amended, except by an instrument in writing signed
by the parties to the Merger Agreement.
Pursuant to the Merger Agreement, at any time prior to the Effective Time,
the parties to the Merger Agreement may (i) extend the time for the
performance of any obligation or other act of any other party to the Merger
Agreement; (ii) waive any inaccuracy in the representations and warranties
contained in the Merger Agreement or in any document delivered pursuant to the
Merger Agreement; and (iii) waive compliance with any agreement or condition
contained in the Merger Agreement. Any such extension or waiver will be valid
only if set forth in a written instrument signed by the party or parties to be
bound by the waiver.
VOTING AGREEMENT AND IRREVOCABLE PROXY
As a condition to the willingness of E&S to enter into the Merger Agreement,
certain stockholders of AGI, representing approximately 37% of the outstanding
capital stock of AGI (the "Controlling Stockholders"), entered into a Voting
Agreement and Irrevocable Proxy (the "Voting Agreement") with E&S dated April
22, 1998. Pursuant to the Voting Agreement, each Controlling Stockholder has
agreed that, at any meeting of the AGI stockholders, however called, and in
any action by consent of the AGI stockholders, such Controlling Stockholder
will vote (or cause to be voted) such Controlling Stockholder's shares of AGI
Common Stock: (a) in favor of the adoption of the Merger Agreement, the Merger
and all the transactions contemplated by the Merger Agreement and otherwise in
such manner as may be necessary to consummate the Merger; (b) except as
otherwise agreed to in writing in advance by E&S, against any action,
proposal, agreement or transaction that would result in a breach of any
covenant, obligation, agreement, representation or warranty of AGI contained
in the Merger Agreement or of the Controlling Stockholder contained in the
Voting Agreement; and (c) against any action, proposal, agreement or
transaction (other than the Merger Agreement or the transactions contemplated
thereby) that could result in any of the conditions to AGI's obligations under
the Merger Agreement not being fulfilled or that is intended, or could
reasonably be expected, to impede, interfere or be inconsistent with, delay,
postpone, discourage or adversely affect the Merger Agreement, the Merger or
the Voting Agreement. In addition, each Controlling Stockholder has revoked
all other proxies and powers of attorney, and no subsequent proxies or powers
of attorney will be granted. The Voting Agreement will terminate and no party
will have any rights or obligations upon the earlier of (i) the Effective Time
of the Merger, or (ii) the termination of the Merger Agreement.
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EVANS & SUTHERLAND COMPUTER CORPORATION AND ACCELGRAPHICS, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
E&S was formed in May 1968 to develop and manufacture hardware and software
for visual systems that produce vivid and highly realistic 3D (three-
dimensional) graphics and synthetic environments. E&S has entered into a
definitive agreement to acquire AGI, pursuant to which AGI will merge with and
into an acquisition subsidiary of E&S. Pursuant to the Merger, each
outstanding share of AGI common stock will be converted into a right to
receive cash and/or a fraction of a share of E&S $0.20 par value common stock.
Based on 8,451,088 common shares of AGI outstanding at March 31, 1998, the
cash paid would be approximately $24,225,000 (includes estimated acquisition
costs of $900,000) and E&S would issue approximately 878,913 common shares
valued at approximately $25,269,000, assuming a transaction stock price of
$28.75 per common share. E&S will also assume outstanding AGI stock options
with an estimated fair value of $3,960,000. The fair value of these options
was estimated using the Black-Scholes option pricing model. The following
unaudited pro forma consolidated financial statements reflect the proposed
acquisition, which will be accounted for under the purchase method of
accounting.
The unaudited pro forma consolidated financial statements give effect to the
Merger as if it occurred on March 27, 1998* for balance sheet purposes, and
January 1, 1997 for statements of operations purposes.
The total of the excess of the deemed purchase price over the fair value of
the net assets of AGI has been allocated and classified as described in note
(a) of the Notes to Pro Forma Consolidated Financial Statements.
Unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions management deems appropriate.
The unaudited pro forma consolidated financial data presented herein is not
necessarily indicative of the results E&S would have obtained had such events
occurred at the beginning of such period, as assumed, or of the future results
of E&S. The pro forma consolidated financial statements should be read in
conjunction with the historical financial statements (and related notes) of
AGI provided herein and the historical financial statements (and related
notes) of E&S incorporated herein by reference.
- --------
* In preparing the pro-forma consolidated financial statements, the balances
for E&S and AGI were as of March 27, 1998 and April 3, 1998, respectively.
The E&S and AGI operations data for the first quarter of 1998 covered
twelve and thirteen weeks respectively. The different dates resulted from
the different quarter ends that the two companies utilize and do not have a
material impact on the pro-forma consolidated financial statements.
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EVANS & SUTHERLAND COMPUTER CORPORATION AND ACCELGRAPHICS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 27, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
E&S AGI ADJUSTMENTS CONSOLIDATED
------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales.......................... $42,421 $10,479 $52,900
Cost of sales...................... 25,296 7,761 33,057
------- ------- -------
Gross profit..................... 17,125 2,718 19,843
------- ------- -------
Expenses:
Marketing, general and adminis-
trative......................... 8,641 1,700 10,341
Research and development......... 6,677 1,034 7,711
Amortization of goodwill......... -- -- $ 481 (d) 481
------- ------- ----- -------
Total operating expenses....... 15,318 2,734 481 18,533
------- ------- ----- -------
Operating earnings (loss).......... 1,807 (16) (481) 1,310
Other income (expense):
Interest income.................. 646 230 (325)(e) 551
Interest expense................. (303) (16) (319)
Other, net....................... 203 (52) 151
------- ------- ----- -------
Earnings before income taxes....... 2,353 146 (806) 1,693
Provision for income taxes......... 764 10 (106)(e) 668
------- ------- ----- -------
Net earnings................... $ 1,589 $ 136 $(700) $ 1,025
======= ======= ===== =======
Basic earnings per common share.... $ 0.18 $ 0.02 $ 0.10
Shares used in computing basic
earnings per common share......... 9,079 8,415 9,957
Diluted earnings per common share.. $ 0.17 $ 0.02 $ 0.10
Shares used in computing diluted
earnings per common share......... 9,460 8,973 10,451
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Financial Statements
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EVANS & SUTHERLAND COMPUTER CORPORATION AND ACCELGRAPHICS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
E&S AGI ADJUSTMENTS CONSOLIDATED
-------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales........................ $159,353 $33,509 $192,862
Cost of sales.................... 84,139 23,171 107,310
-------- ------- --------
Gross profit................... 75,214 10,338 85,552
-------- ------- --------
Expenses:
Marketing, general and adminis-
trative....................... 35,333 6,724 42,057
Research and development....... 25,492 4,493 29,985
Amortization of goodwill....... -- -- $ 1,978 (d) 1,978
-------- ------- ------- --------
Total operating expenses..... 60,825 11,217 1,978 74,020
-------- ------- ------- --------
Operating earnings (loss)........ 14,389 (879) (1,978) 11,532
Other income (expense):
Interest income................ 3,239 855 (1,300)(e) 2,794
Interest expense............... (1,300) (72) (1,372)
Loss on write down of invest-
ment securities............... (9,575) -- (9,575)
Other, net..................... 85 -- 85
-------- ------- ------- --------
Earnings (loss) before income
taxes........................... 6,838 (96) (3,278) 3,464
Provision for income taxes....... 1,758 -- (334)(e) 1,424
-------- ------- ------- --------
Net earnings (loss).......... $ 5,080 $ (96) $(2,944) $ 2,040
======== ======= ======= ========
Basic earnings (loss) per common
share........................... $ 0.56 $ (0.02) $ 0.21
Shares used in computing basic
earnings (loss) per
common share.................... 9,060 6,103 9,938
Diluted earnings (loss) per com-
mon share....................... $ 0.53 $ (0.02) $ 0.19
Shares used in computing diluted
earnings (loss) per
common share.................... 9,502 6,103 10,493
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Financial Statements
54
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND ACCELGRAPHICS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
AS OF MARCH 27, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
E&S AGI ADJUSTMENTS CONSOLIDATED
-------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 11,596 $10,732 $(22,328)(a) $ --
Marketable securities........... 31,419 6,729 (1,897)(a) 36,251
Accounts receivable, net........ 34,735 5,776 40,511
Inventories..................... 28,354 1,513 29,867
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 59,679 -- 59,679
Deferred income taxes........... 5,163 -- 5,163
Prepaid expenses and deposits... 3,868 309 4,177
-------- ------- -------- --------
Total current assets.......... 174,814 25,059 (24,225) 175,648
-------- ------- -------- --------
Property, plant, and equipment,
net.............................. 44,202 792 44,994
Investment securities............. 5,230 2,999 8,229
Goodwill.......................... -- -- 9,628 (a) 9,628
Deferred income taxes............. 3,687 -- 3,687
Other assets...................... 1,505 -- 1,505
-------- ------- -------- --------
Total assets.................. $229,438 $28,850 $(14,597) $243,691
======== ======= ======== ========
Current liabilities:
Current portion of long-term ob-
ligations...................... $ -- $ 332 $ -- $ 332
Accounts payable................ 13,635 2,316 1,000 (a) 16,951
Accrued expenses................ 16,616 1,228 17,844
Customer deposits............... 8,818 -- 8,818
Income taxes payable............ 3,233 -- 3,233
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 6,504 -- 6,504
-------- ------- -------- --------
Total current liabilities..... 48,806 3,876 1,000 53,682
-------- ------- -------- --------
Long-term debt, net of current
portion.......................... 18,015 448 18,463
-------- ------- -------- --------
Stockholders' equity:
Common Stock.................... 1,787 8 176 (a)
(8)(b) 1,963
Additional paid-in capital...... 3,213 30,138 (30,138)(b)
29,053 (a) 32,266
Notes receivable from stockhold-
ers............................ -- (48) 48 (b) --
Retained earnings (deficit)..... 157,164 (5,426) (20,300)(c)
5,426 (b) 136,864
Deferred stock compensation..... (126) 126 (b) --
Net unrealized gain on
marketable and investment
securities..................... 110 -- 110
Cumulative translation adjust-
ment........................... 343 (20) 20 (b) 343
-------- ------- -------- --------
Total stockholders' equity.... 162,617 24,526 (15,597) 171,546
-------- ------- -------- --------
Total liabilities and stock-
holders' equity............ $229,438 $28,850 $(14,597) $243,691
======== ======= ======== ========
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Financial Statements
55
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND ACCELGRAPHICS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The adjustments to arrive at the unaudited pro forma consolidated financial
statements are as follows:
(a) The Merger will be accounted for under the purchase method of
accounting. In accordance with generally accepted accounting
principles, the portion of the purchase price allocable to in-
process research and development projects of AGI will be expensed
at the consummation of the Merger. The amount of the one-time non-
recurring charge for in-process research and development is
expected to be approximately $20.3 million. Since this charge is
directly related to the Merger and will not recur, the pro forma
consolidated statements of operations have been prepared excluding
this charge. To come up with the cash portion of the purchase
price, E&S plans on liquidating marketable securities of
approximately $1.9 million, the fair value of which at March 27,
1998 approximates book value, and accordingly, no material gain or
loss will be reflected. E&S has not yet determined the final
allocation of the purchase price, and accordingly, the amount shown
below may differ significantly from the ultimate allocation.
Goodwill in the amount of $9,628,000 was calculated as follows:
<TABLE>
<S> <C>
Total estimated purchase price ($24,225,000 cash, which
includes E&S's estimated Merger costs of $900,000, plus
$25,269,000 representing the estimated market value of
878,913 shares of E&S common stock issued as
consideration, plus $3,960,000 in fair value for E&S
stock options issued in exchange for outstanding options
of AGI)................................................... $ 53,454,000
Less:
Estimated fair value of net assets acquired other than
in-process research and development, less $1,000,000
of estimated AGI Merger costs............................ (23,526,000)
Expensed in-process research and development.............. (20,300,000)
------------
Goodwill................................................... $ 9,628,000
============
</TABLE>
(b) Elimination of AGI's stockholders' equity accounts.
(c) Retained earnings adjustments for non-recurring charges related to
the write-off of in-process research and development projects
acquired.
(d) Amortization of goodwill recognized in the purchase of AGI will be
recognized over 5 years.
(e) Decrease in interest income and the corresponding tax effect as a
result of the reduction in cash and marketable securities that
would have occurred to acquire AGI.
56
<PAGE>
DESCRIPTION OF E&S
The SEC allows E&S to "incorporate by reference" information into this Proxy
Statement/ Prospectus with regard to E&S, which means that E&S can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed
to be part of this Proxy Statement/Prospectus, except for any information
superseded by information in this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that E&S has previously filed with the SEC. These documents contain important
information about E&S and its finances.
<TABLE>
<CAPTION>
E&S COMMISSION FILINGS PERIOD
---------------------- ------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1997
Proxy Statement Dated April 20, 1998
Quarterly Report on Form
10-Q Quarter ended March 27, 1998
Annual Report on Form 10-
K/A Year ended December 31, 1997
</TABLE>
E&S also hereby incorporates by reference all additional documents that E&S
files with the SEC between the date of this Proxy Statement/Prospectus and the
date of the Special Meeting.
DESCRIPTION OF E&S CAPITAL STOCK
Set forth below is a description of the E&S Common Stock. The following
statements are summaries of, and are subject to the detailed provisions of,
the E&S Charter and Bylaws, and to the relevant provisions of the URBCA.
E&S currently is authorized to issue up to 30,000,000 shares of Common
Stock, par value $0.20 per share. E&S is also authorized to issue up to
5,000,000 shares of Class A Preferred Stock, without par value and 5,000,000
shares of Class B Preferred Stock without par value, but has not issued any
such shares.
The holders of Common Stock are entitled to such dividends, if any, as may
be declared by the Board of Directors of the Company at its discretion out of
funds legally available for that purpose, and to participate pro rata in any
distribution of the Company's assets upon liquidation after the payment of all
debts and payment to owners of preferred stock. The holders of Common Stock
have no preemptive or conversion rights, nor are there any redemption of
sinking fund rights with respect to Common Stock. There is no cumulative
voting with respect to the election of directors, which means that the holders
of a majority of the shares can elect all of the directors if they choose to
do so, and the holders of the remaining shares would not be able to elect any
directors. The outstanding shares of Common Stock are validly issued, fully
paid, and nonassessable.
E&S has reserved 300,000 shares of the Class A Preferred Stock as Series A
Junior Preferred Stock under a shareholder rights plan. The Preferred Stock
entitles holders to 100 votes per share and to receive the greater of $2.00
per share or 100 times the common dividend declared. Upon voluntary or
involuntary liquidation, dissolution, or winding up of the Company, holders of
the preferred stock would be entitled to be paid, to the extent assets are
available for distribution, an amount of $100 per share plus any accrued and
unpaid dividends before payment is made to common stockholders.
In connection with this Preferred Stock, the Company issued one warrant to
each common stockholder that would be exercisable contingent upon certain
conditions and would allow the holder to purchase 1/100th of a preferred share
per warrant. The warrants attached to the shares outstanding on November 30,
1988 and to all new shares issued after that date; the warrants outstanding at
December 31, 1997 and December 31, 1996 are equal to the shares outstanding of
9,066,743 and 9,056,871 respectively. At December 31, 1997 and December 31,
1996, the warrants were not exercisable, and no shares of preferred stock have
been issued.
57
<PAGE>
DESCRIPTION OF AGI
BUSINESS OVERVIEW
AGI is a leading provider of high-performance, cost-effective, 3-dimensional
("3D") graphics subsystem products for the professional Windows NT and Windows
95 markets. AGI pioneered the development of professional 3D graphics
subsystems for use with Microsoft's Windows NT operating system ("NT"). A 3D
graphics subsystem integrates graphics acceleration chip(s), specialized
hardware, firmware, software and memory. AGI's 3D graphics subsystems, when
included in an Intel Pentium, Pentium Pro, Pentium Pro II or Digital Alpha
based computer, create a class of computer system called a "Personal
Workstation." Personal Workstations, which often sell for less than $10,000,
provide capabilities and performance comparable to more expensive 3D graphics
RISC/UNIX workstations. In January 1995, AGI shipped what it believes was the
first 3D graphics subsystem for NT and currently offers three distinct 3D
graphics subsystem product lines.
AGI's products include a family of 3D graphics subsystems for applications
based on OpenGL and other 3D application programming interfaces ("APIs"), such
as Autodesk's Heidi and Microsoft's DirectX. Through AGI's extensive
experience in 3D algorithms, the interaction of 3D applications with OpenGL
and overall 3D graphics system integration, AGI delivers robust, well-
integrated subsystem solutions to the professional 3D graphics market.
AGI sells its products through original equipment manufacturers ("OEMs") and
a worldwide network of value added resellers ("VARs") and distributors.
Gateway 2000, Inc. ("Gateway"), Hewlett-Packard Company ("HP"), Hitachi, Ltd.,
NEC Corporation ("NEC") and Tri-Star Computer Corporation purchase AGI's
fully-integrated 3D graphics subsystems for use in high- performance Personal
Workstations. AGI also has technical relationships with Intel Corporation
("Intel") and Microsoft Corporation ("Microsoft"), as well as with key
component suppliers including 3Dlabs, Inc., Ltd. ("3Dlabs"), E&S and
Mitsubishi Corporation ("Mitsubishi"). To enhance the performance of
applications which use AGI's 3D graphics subsystems, AGI has developed
relationships, some of which include joint engineering projects, with many
leading Independent Software Vendors ("ISVs") such as Autodesk, Inc.
("Autodesk") and Autodesk's Kinetix Division ("Kinetix"), Computer Associates
International, Inc., Electronic Data System Corporation's ("EDS") Unigraphics
division, Matra Datavision S.A., Microsoft Corporation's Softimage, Parametric
Technology Corporation ("PTC"), Ricoh Corporation, Structural Dynamics
Research Corporation ("SDRC") and Visible Decisions, Inc.
58
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF AGI--UNAUDITED
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31 MARCH 31,
------------------------- ---------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................... $ 3,911 $18,671 $33,509 $11,832 $10,479
Cost of Revenues.............. 2,501 12,077 23,171 7,584 7,761
------- ------- ------- ------- -------
Gross Profit.................. 1,410 6,594 10,338 4,248 2,718
------- ------- ------- ------- -------
Operating Expenses:
Research and Development.... 2,618 2,663 4,493 1,055 1,034
Sales and Marketing......... 2,154 3,635 4,815 1,511 1,174
General and Administrative.. 1,039 1,131 1,909 475 526
------- ------- ------- ------- -------
Total Operating Expenses.. 5,811 7,429 11,217 3,041 2,734
------- ------- ------- ------- -------
Income/(Loss) from Operations. (4,401) (835) (879) 1,207 (16)
Interest Expense.............. (183) (145) (72) (40) (16)
Interest and Other Income,
Net.......................... 119 48 855 37 178
------- ------- ------- ------- -------
Income (Loss) before Income
Tax Provision................ (4,465) (932) (96) 1,204 146
Income Tax Provision........ -- -- -- 370 10
------- ------- ------- ------- -------
Net Income (Loss)............. $(4,465) $ (932) $ (96) $ 834 $ 136
======= ======= ======= ======= =======
Basic Net Income (Loss) Per
Share........................ $ (9.15) $ (1.09) $ (0.02) $ 0.80 $ 0.02
======= ======= ======= ======= =======
Diluted Net Income (Loss) Per
Share........................ $ (9.15) $ (1.09) $ (0.02) $ 0.13 $ 0.02
======= ======= ======= ======= =======
Shares Used to Compute Basic
Net Income (Loss) Per Share
(1).......................... 488 854 6,103 1,039 8,415
======= ======= ======= ======= =======
Shares Used to Computed
Diluted Net Income (Loss) Per
Share........................ 488 854 6,103 6,648 8,973
======= ======= ======= ======= =======
</TABLE>
- --------
(1) See Note 1 of Notes to AGI's Consolidated Financial Statements for an
explanation of the determination of shares used in computing net loss per
share.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------- -----------
1996 1997 1998
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and Cash Equivalents........................... $2,979 $9,367 $10,732
Short-Term Investments.............................. -- 6,526 6,729
Working Capital..................................... 5,030 21,876 21,183
Total Assets........................................ 8,439 28,309 28,850
Long-Term Obligations............................... 1,782 482 448
Mandatory Redeemable Convertible Preferred Stock.... 8,930 -- --
Total Stockholders' Equity (Deficit)................ (5,170) 24,265 24,526
</TABLE>
59
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
AGI, Inc. designs, develops and markets high-performance, cost-effective, 3-
dimensional ("3D") graphics subsystems, software accelerators and application
utility software products for the professional Windows NT and Windows 95
markets. AGI commenced operations in late 1994.
AGI's graphic subsystems include the AccelECLIPSE, AccelPRO, and AccelSTAR
product lines, while AGI's application utility software includes the AccelVIEW
product.
AGI's customers include OEMs, distributors and VARs. Revenues from product
sales are generally recognized upon shipment, less an allowance for estimated
future returns and exchanges. AGI's gross margin has varied with the mix of
revenues by sales channel, as OEM revenues generally yield lower gross
margins, and because of competitive pricing pressures.
AGI has increased its research and development, sales and marketing and
administrative capabilities since its inception and expects to expand such
capabilities in the future. The anticipated increase in the Company's
operating expenses caused by this expansion could have a material adverse
effect on AGI's operating results if revenues and gross profit do not increase
at an equal or greater rate. Also, AGI's expenses for these and other
activities are based in significant part on its expectations regarding future
revenues and are fixed to a large extent in the short term. Accordingly, AGI
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall, which would have a material adverse effect on
AGI's business, financial condition and results of operations.
AGI has a limited operating history upon which an evaluation of AGI and its
prospects can be based. AGI's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in the
early stages of development, particularly companies in new and rapidly
evolving markets. To address these risks, AGI must, among other things,
respond to competitive developments, attract, retain and motivate qualified
persons, continue to upgrade its technologies and commercialize its products.
There can be no assurance that AGI will be successful in addressing these and
other risks.
Although AGI has experienced significant annual revenue growth since its
inception, AGI does not believe that such growth rates are sustainable. In the
third quarter of 1997, revenues declined by 58% from the second quarter of
1997 and revenues for the fourth quarter of 1997 were 16% lower than revenues
in the fourth quarter of 1996; consequently, past or current revenue growth
rates may not be indicative of future revenue growth, if any, or future
operating results. AGI has incurred losses in each year since its inception.
Although AGI has been profitable on a quarterly basis, it has incurred losses
during the last two quarters of 1997 and there can be no assurance that AGI
will regain profitability on a quarterly basis or will achieve profitability
on an annual basis. AGI's limited operating history makes the prediction of
future operating results difficult if not impossible.
60
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected items of AGI's consolidated
statement of operations as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------- -------------
1995 1996 1997 1997 1998
-------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Revenues................ 63.9 64.7 69.1 64.1 74.1
-------- ------- ------- ----- -----
Gross Profit.................... 36.1 35.3 30.9 35.9 25.9
-------- ------- ------- ----- -----
Operating Expenses:
Research and Development...... 66.9 14.3 13.4 8.9 9.9
Sales and Marketing........... 55.1 19.5 14.4 12.8 11.2
General and Administrative.... 26.6 6.0 5.7 4.0 5.0
-------- ------- ------- ----- -----
Total Operating Expenses........ 148.6 39.8 33.5 25.7 26.1
-------- ------- ------- ----- -----
Income (Loss) from Operations... (112.5) (4.5) (2.6) 10.2 (0.2)
Interest Expense................ (4.7) (0.8) (0.2) (0.3) (0.1)
Interest and Other Income, Net.. 3.0 0.3 2.5 0.3 1.7
-------- ------- ------- ----- -----
Income (Loss) Before Provision
For Income Tax ................ (114.2) (5.0) (0.3) 10.2 1.4
Provision For Income Tax........ -- -- -- (3.2) (0.1)
-------- ------- ------- ----- -----
Net Income (Loss)............... (114.2)% (5.0)% (0.3)% 7.0 % 1.3 %
======== ======= ======= ===== =====
</TABLE>
QUARTERS ENDED MARCH 31, 1998 AND 1997
REVENUES
Revenues decreased by 11% to $10.5 million during the first quarter of 1998
from $11.8 million during the first quarter of 1997. Revenues for first
quarter of 1998 primarily consisted of sales of AGI's AccelECLIPSE II,
AccelPRO MX and AccelSTAR II products, while revenues in the first quarter of
1997 primarily consisted of
sales of AGI's AccelPRO TX product. This decrease in revenue is primarily due
to increased unit sales of AGI's current products at lower average selling
prices, offset in part by an increase in revenue from software licenses and
royalty agreements ("License Revenue").
Revenues from product sales are generally recognized upon product shipment,
less an allowance for estimated future returns and exchanges. Provisions for
the costs of technical support services for AGI's hardware products and
estimated future warranty claims are recorded as a cost of revenues upon
recognition of related revenues.
International revenues decreased by 10% to $5.3 million during the first
quarter of 1998 from $5.9 million during the first quarter of 1997,
representing 50.5% and 49.9%, respectively, of revenues. The decrease in
international revenues is primarily a result of decreased sales of AGI's
products to its OEM customers in Europe and Asia-Pacific and its distributors
in Europe, offset in part by increased sales to its distributors in Asia-
Pacific. Revenues from AGI's international customers are generally denominated
in United States dollars. Although the effects of currency fluctuations have
been insignificant to date, there can be no assurance that such fluctuations
will not be significant in the future.
Revenues from Hewlett-Packard Company ("HP") and TechnoGraphy Inc. ("TGI"),
AGI's Japanese distributor that sells to Hitachi, Ltd. accounted for 50.5% and
11.7%, respectively, of revenues during the first quarter of 1998. Revenues
from HP, TGI and AGI's former customer, Digital Equipment Corporation
("Digital"), accounted for 44.7%, 6.6% and 20.8%, respectively, of revenues
during the first quarter of 1997. AGI had no sales to Digital in the first
quarter of 1998. The loss of any major customer, or the delay in or reduction
of orders from such customers could have a material adverse effect on AGI's
business, financial condition and results of operations.
61
<PAGE>
GROSS PROFIT
Gross profit decreased 36% to $2.7 million during the first quarter of 1998
from $4.2 during the first quarter of 1997, representing 25.9% and 35.9%,
respectively, of revenues. Gross margins in the first quarter of 1998 were
negatively impacted by increased sales to OEMs, which generally carry lower
margins, and by competitive pricing pressures. Gross profit was also impacted
by expenses related to expediting fees on OEM orders and collection issues
related to the bankruptcy of AGI's European distributor. Gross profit in the
first quarter of 1998 was favorably impacted by License Revenue. The absolute
dollar decrease in gross profit resulted from decreased revenues, and lower
per unit margins.
AGI's gross margin is affected by many factors, including the sales channel
mix, the mix of products sold, License Revenue generated during the period,
increased competition and related decreases in unit average selling prices,
introductions of new products and the availability, reliability and cost of
components and products from AGI's subcontractors and suppliers. In addition,
AGI orders products in advance of planned shipments and, due to rapid
technological changes or other factors such as customers curtailing or
changing timing or mix of orders, there is a risk that AGI will forecast
incorrectly and produce excess or insufficient inventories of particular
products. AGI's customers' ability to reschedule or cancel orders without
significant penalty could adversely affect AGI's operating results, as AGI may
be unable to adjust its purchases from its subcontractors and suppliers to
match such customers' changes and cancellations.
OPERATING EXPENSES
Research and Development. Research and development expenses decreased 2% to
$1.0 million during the first quarter of 1998 from $1.1 million during the
first quarter of 1997, representing 9.9% and 8.9%, respectively, of revenues.
Research and development expenses consist primarily of personnel costs and
other personnel-related expenses, including the services of outside
consultants. AGI anticipates that research and development expenses will
increase in absolute dollars as AGI continues to add research and development
personnel and support for new product development activities.
Sales and Marketing. Sales and marketing expenses decreased 22% to $1.2
million during the first quarter of 1998 from $1.5 million during the first
quarter of 1997, representing 11.2% and 12.8%, respectively, of revenues.
Sales and marketing expenses consist primarily of salaries, commissions,
marketing expenses and technical support for the sales organization. The
absolute dollar decrease in sales and marketing expenses was due primarily to
higher personnel related costs in the first quarter of 1997, including
commissions. AGI anticipates that sales and marketing expenses may increase in
absolute dollars due to expansion of AGI's sales efforts in Europe and the
Asia-Pacific, as well as increased marketing and public relations activities.
General and Administrative. General and administrative expenses increased
11% to $530,000 during the first quarter of 1998 from $480,000 during the
first quarter of 1997, representing 5.0% and 4.0%, respectively, of revenues.
Increased general and administrative expenses were due primarily to increased
staffing and other costs incurred to support AGI's growth as well as costs
associated with operating as a public company. AGI anticipates that general
and administrative expenses may increase in absolute dollars due to costs
associated with AGI's pending merger with E&S.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net is comprised of primarily of
interest income on AGI's cash and investments, net of interest expense on
AGI's borrowings. Interest expense decreased to $16,000 in the first quarter
of 1998 from $40,000 during the first quarter of 1997 primarily due to the
repayment of the subordinated convertible note payable to Kubota Corporation
in April 1997. Interest income increased to $230,000 in the first quarter of
1998 from $50,000 during the first quarter of 1997 primarily due to the
increased level of cash and investments as a result of AGI's Initial Public
Offering in April 1997.
62
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes reflects estimated annualized effective tax
rates of 6% and 31%, for the first quarter of 1998 and 1997, respectively,
applied to income before provision for income taxes, and includes
consideration of AGI's anticipated annual taxable income, tax rates and
changes in its valuation allowance.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenues
Revenues increased by 79% to $33.5 million in 1997 from $18.7 million in
1996 and by 377% from $3.9 million in 1995. The increases were primarily due
to increased sales of its AccelPRO and AccelPRO TX product lines in 1996 and
1997 and sales of its AccelECLIPSE and AccelSTAR products, which were
introduced in 1997.
Revenues from product sales are generally recognized upon product shipment,
less an allowance for estimated future returns and exchanges. Provision for
the estimated costs of providing technical support services and future
warranty obligations for AGI's products are recorded as a cost of revenues
upon recognition of related revenues.
Revenue from software licenses and royalty agreements ("License Revenues"),
which were 3% of AGI's revenues in 1997, are generally the result of one-time
or short-term agreements and generally do not extend beyond one year. License
Revenues generally yield high gross margins. To the extent that AGI is unable
to sustain current levels of License Revenues, or if License Revenues were to
increase, this would have an accentuated impact on AGI's gross margins.
International revenues increased by 165% to $15.4 million in 1997 from $5.8
million in 1996 and by 582% from $850,000 in 1995, representing 45.8%, 31.0%,
and 21.7%, respectively, of revenues. The increase in international revenues
is primarily a result of an increase in sales of AGI's products in Europe and,
to a lesser extent, in Asia Pacific. Revenues from AGI's international
customers are generally denominated in United States dollars. Although the
effects of currency fluctuations have been insignificant to date, there can be
no assurance that such fluctuations will not be significant in the future. See
"Risk Factors Regarding AGI -- International Revenues."
Revenues from HP and AGI's former customer, Digital, accounted for 36.4% and
22.4%, respectively, of revenues in 1997, and 22.8% and 27.9%, respectively,
of revenues in 1996. Revenues from AGI's former customer, NeTpower, Inc.
("NeTpower"), accounted for 16.6% of revenues in 1995. Revenues from NeTpower
have been insignificant subsequent to 1995. The inability to obtain major
customer relationships, the loss of any major customer, or the delay in or
reduction of orders from such customers could have a material adverse effect
on AGI's business, financial condition and results of operations. See "Risk
Factors Regarding AGI -- Reliance on Third Party Distribution and Major OEMs."
Gross Profit
Gross profit increased by 57% to $10.3 million in 1997 from $6.6 million in
1996 and by 368% from $1.4 million in 1995, representing 30.9%, 35.3% and
36.1%, respectively, of revenues in 1997, 1996 and 1995. The absolute dollar
increase in gross profit resulted from increased revenues, while the decline
in gross margin is primarily due to an increased proportion of sales to OEMs,
which generally yield lower margins, competitive pricing pressures and
significantly lower gross margins during 1997 on AGI's maturing AccelPRO TX
product. AGI expects that gross margins may decrease over time as a result of
competitive pricing pressures and changes in sales channel and product mix.
AGI's gross margin is affected by many factors, including the sales channel
mix, sales to OEMs which generally yield lower gross margins, the mix of
products sold, competitive pricing pressures, introductions of
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new products and the availability, reliability and cost of components and
products from AGI's subcontractors and suppliers. In addition, AGI orders
products in advance of planned shipments and, due to rapid technological
changes or other factors such as customers curtailing or changing timing or
mix of orders, there is a risk that AGI will forecast incorrectly and produce
excess or insufficient inventories of particular products. AGI's customers'
ability to reschedule or cancel orders without significant penalty could
adversely affect AGI's operating results, as AGI may be unable to adjust its
purchases from its subcontractors and suppliers to match such customers'
changes and cancellations. See "Risk Factors Regarding AGI -- Dependence on
Subcontractors and Sole-Source Suppliers."
Operating Expenses
Research and Development. Research and development expenses increased by 69%
to $4.5 million in 1997 from $2.7 million in 1996 and by 4% from $2.6 million
in 1995, representing 13.4%, 14.3% and 66.9%, respectively, of 1997, 1996 and
1995 revenues. Research and development expenses consist primarily of
personnel costs and other personnel-related expenses, including the services
of outside consultants. The increase in research and development expenses in
1997 was primarily due to increased personnel and related costs to support new
product development activities. In 1996, research and development expenses
were positively impacted by the receipt of a $190,000 non-recurring
engineering fee from a technical partner to facilitate the development of
AGI's AccelPRO product line. Research and development expenses during 1995
were negatively impacted by a heavy reliance on consultants, who are generally
more expensive than employees. AGI anticipates that research and development
expenses will increase in absolute dollars as AGI continues to add research
and development personnel and support for new product development activities.
Sales And Marketing. Sales and marketing expenses increased by 32% to $4.8
million in 1997 from $3.6 million in 1996 and by 68.8% from $2.2 million in
1995, representing 14.4%, 19.5% and 55.1%, respectively, of 1997, 1996 and
1995 revenues. Sales and marketing expenses consist primarily of salaries,
commissions, marketing expenses and technical support for the sales
organization. The absolute dollar increase in sales and marketing expenses was
due primarily to the expansion of AGI's sales efforts in the United States,
Europe and the Asia Pacific, as well as increased marketing and public
relations activities related to AGI's products. AGI anticipates that sales and
marketing expenses will continue to increase in absolute dollars as AGI
expands its sales force and marketing activities in both Europe and Asia
Pacific as well as within the Americas.
General And Administrative. General and administrative expenses increased by
69% to $1.9 million from $1.1 million in 1996 and by 8.9% from $1.0 million in
1995, representing 5.7%, 6.0% and 26.6%, respectively, of 1997, 1996 and 1995
revenues. Increased general and administrative expenses were due primarily to
increased staffing and other costs incurred to support AGI's growth and the
added cost of being a public company. AGI anticipates that general and
administrative expenses may increase in absolute dollars to support the
Company's expansion.
Interest Expense
Interest expense decreased to $72,000 in 1997 from $145,000 in 1996 and from
$183,000 in 1995. This expense is primarily attributable to the Subordinated
Convertible Note Payable to Kubota (the "Kubota Note"), as well as capital
leases and AGI's term loan with a bank. The decrease in 1997 was the result of
the repayment of the Kubota Note in April 1997 and in 1996 was primarily
related to the conversion to preferred stock, which was converted in Common
Stock at the initial public offering, of one half of the original principal
balance on the Kubota Note in June 1995. AGI anticipates that interest expense
will increase as AGI continues to borrow under the term loan.
Interest and Other Income, Net
Interest and other income, net increased to $855,000 in 1997 from $48,000 in
1996 and from $119,000 in 1995. Interest and other income, net is primarily
comprised of interest income on AGI's cash, cash equivalents
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and investments. The increase in 1997 is attributable to increased levels of
cash, cash equivalents and investments, primarily due to proceeds from AGI's
initial public offering in April 1997.
AGI recorded state minimum tax expense of $5,000 for 1997 and no provision
for income taxes in 1996 or 1995 as it incurred losses. At December 31, 1997,
AGI had approximately $1.8 million of federal net operating loss carry
forwards available to offset future taxable income. Future annual use of these
carry forwards may be limited as a result of ownership change limitations.
At December 31, 1997, AGI had approximately $2.2 million of deferred tax
assets, comprised primarily of reserves not currently deductible for tax
purposes and net operating loss and credit carry forwards. AGI believes the
available objective evidence creates sufficient uncertainty regarding the
realizability of such deferred tax assets; therefore, a full valuation
allowance has been recorded. The factors considered include AGI's history of
losses, the lack of carryback capacity to realize deferred tax assets, the
limitation on the annual utilization of net operating loss carry forwards, the
uncertainty of the development of the products and markets in which AGI
competes and the fact that the market in which AGI competes is intensely
competitive and characterized by rapidly changing technology. AGI believes
that based on the currently available evidence, it is more likely than not
that AGI will not generate sufficient taxable income to realize AGI's deferred
tax assets.
LIQUIDITY AND CAPITAL RESOURCES
In April 1997, AGI completed an initial public offering of 2,535,000 shares
of AGI's common stock at $9.00 per share for net proceeds of $20.3 million.
Prior to the initial public offering, AGI financed its operations primarily
through private sales of $7.3 million of Redeemable Convertible Preferred
Stock and Common Stock, the issuance of $3.3 million of convertible debt and,
to a lesser extent, credit lines. Cash provided by operating activities was
$2.5 million in the first quarter of 1998, primarily due to decreases in
accounts receivable and inventory of $770,000 and $1.1 million, respectively.
Cash used in operations was $3.6 million, $1.3 million and $4.6 million in
1997, 1996 and 1995, respectively. Net cash used in operations for 1997 was
primarily due to increases in accounts receivable of $2.2 million and
inventory of $2.1 million, offset in part by an increase in accounts payable
of $600,000. Net cash used in operations for 1996 was primarily due to the net
loss of approximately $930,000 and a $3.3 million increase in accounts
receivable which was partially offset by a decrease in inventories and
increases in accounts payable, accrued liabilities and customer deposits. For
1995, net cash used in operations was due primarily to the net loss of $4.5
million and increases in accounts receivable and inventories associated with
higher revenues, which were partially offset by an increase in accounts
payable and other liabilities.
Net cash used in investing activities was approximately $1.2 million during
the first quarter of 1998 due primarily to the purchase of investments. Net
cash used in investing activities was $9.2 million in 1997, comprised
primarily of purchases of $8.5 million of investments and $700,000 of property
and equipment. In each of 1996 and 1995, cash of approximately $250,000 was
used primarily for the purchase of property and equipment. AGI has no
significant capital spending or purchase commitments other than normal
purchase commitments and commitments under leases. Net cash provided by
financing activities was $170,000, $19.2 million, $3.2 million and $4.1
million during the first quarter of 1998, and for 1997, 1996 and 1995,
respectively, due primarily to proceeds from the issuance of Common and
Preferred Stock.
AGI has not invested in derivative securities or any other financial
instrument that involves a high level of complexity or risk. Management
expects that, in the future, cash in excess of current requirements will
continue to be invested in investment-grade, interest- bearing securities.
At March 31, 1998, AGI had $20.5 million in cash, cash equivalents and
investments. AGI has available borrowing facilities of $3.4 million with a
bank, of which $600,000 in loans are outstanding. The borrowings bear interest
at rates between 8.75% and 9.0%, are secured by all of AGI's assets and
require that AGI maintain certain financial ratios and levels of tangible net
worth and profitability and also restrict AGI's ability to pay cash dividends.
AGI was in violation of its debt service covenant at the end of the first
quarter of 1998; however,
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the bank waived such covenant. The $3 million line of credit portion of the
borrowing facilities expires in December 1998.
AGI believes that existing cash, cash equivalents and short-term investments
of $17.5 million and its available borrowing facilities will be sufficient to
finance its working capital and capital expenditure requirements for at least
the next 12 months. In the event that the Company's proposed merger with E&S
is not concluded, AGI may require additional funds to support its working
capital requirements or for other purposes and may seek to raise such
additional funds through bank borrowings and public or private sales of its
securities, including equity and debt securities. AGI's future capital
requirements will depend on numerous factors, including, without limitation,
the success of marketing, sales and distribution efforts, market acceptance of
AGI's products, the progress of its research and development programs, the
costs involved in defending and enforcing intellectual property rights,
competition, competing technological and market developments, and the
effectiveness of product commercialization activities and arrangements. There
can be no assurance that additional funds, if required, will be available to
AGI on favorable terms or at all.
PRODUCTS
AGI's product offerings include a range of professional 3D graphics
subsystems and accelerator software. Today, a majority of AGI's revenues are
derived from the AccelSTAR, AccelPRO MX and AccelECLIPSE product lines. AGI's
products support the PCI and AGP buses, and major professional 3D graphics
APIs including OpenGL and Direct 3D. AGI's products support NT and in some
cases Windows 95. AGI's products have been incorporated into systems that use
Intel Pentium, Pentium Pro, Pentium Pro II or Digital Alpha processors. In
addition, AGI has developed accelerator software and software utilities that
improve the 3D graphics capabilities of ISV applications, including Autodesk's
AutoCAD and Mechanical Desktop.
AGI's principal product lines are summarized below. Estimated Street Prices
(United States) prices vary depending on system configuration.
Hardware
<TABLE>
<CAPTION>
ESTIMATED
INTRODUCTION STREET
PRODUCT LINE DATE DESCRIPTION PRICE
------------ --------------- --------------------------- --------------
<C> <C> <S> <C>
AccelECLIPSE II November 1997 3D graphics subsystems with $2,495--$2,995
advanced texture, overlay
and anti-aliasing support
AccelPRO MX May 1997 High-performance 3D $1,495
graphics subsystems with
hardware texture support
AccelSTAR II October 1997 Entry-level 2D/3D graphics $279
subsystems
Software
<CAPTION>
INTRODUCTION SUGGESTED END
PRODUCT LINE DATE DESCRIPTION USER PRICE
------------ --------------- --------------------------- --------------
<C> <C> <S> <C>
AccelVIEW 3D March 1996 Software add-on to $199
Autodesk's AutoCAD to
deliver interactive 3D
graphics
</TABLE>
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AccelECLIPSE II--The AccelECLIPSE subsystem is available on either the PCI
or Accelerated Graphics Port ("AGP") bus and supports up to 1280 x 1024
resolution, integrated VGA, advanced tri-linear texture MIP mapping hardware,
overlays and anti-aliasing. The subsystem incorporates Mitsubishi's 3DPRO
chipset, which includes the REALimage architecture from E&S, 15 MB of 3DRAM,
an advanced graphics memory chip architected by Mitsubishi, and up to 16 MB of
optional texture memory. The AccelECLIPSE subsystem targets high-end visual
simulation users, professional animators and CAD designers.
AccelPRO MX--The AccelPRO MX subsystem supports OpenGL features such as
Gouraud shading, anti-aliasing, transparency and advanced features such as
hardware texture mapping. The product incorporates the GLINT MX and GLINT
Delta chips from 3Dlabs, up to 16 MB of combined VRAM and DRAM memory
supporting up to 1280 x 1024 resolution and on-board VGA and requires a PCI
bus. The subsystem is targeted to customers who seek a full featured 3D
graphics subsystem solution for CAD design, animation and network management
applications. The AccelPRO MX replaces AGI's AccelPRO TX product, which AGI
stopped manufacturing in the third quarter of 1997.
AccelSTAR II--The AccelSTAR II is an entry level 2D/3D graphics subsystem
that provides competitive 2D capabilities along with leading OpenGL
performance and functionality including features such as Gouraud shading,
texture mapping and transparency. It includes an on-board VGA and triangle set
up capabilities. The 2D/3D graphics subsystem sells for a price comparable to
a high-end 2D graphics subsystems. The AccelSTAR II incorporates the Permedia2
chip from 3Dlabs and up to 8 MB of total memory and is available on either the
PCI or AGP bus.
AccelVIEW 3D--AccelVIEW 3D enables users of AutoCAD Release 13c4 on NT or
Windows 95 to perform dynamic interactive design and viewing on any database
that has been created with AutoCAD. With AccelVIEW 3D, users are able to
quickly render single parts or assemblies, as well as dynamically manipulate
and seamlessly interact with and edit wireframe, hidden-line and shaded
models. AccelVIEW 3D is tightly integrated with AutoCAD and operates as if it
were a standard part of the application. AccelVIEW 3D can work either with or
without an add-on 3D subsystem card.
The following is a glossary of product terms:
Anti-Aliasing: a technique used to reduce the jagged or stair-step
appearance of lines displayed on the screen.
API (Application Program Interface): the language and message format used
by a program to activate and interact with functions in another program or
in the hardware.
Bits of Color: related data that provides the information to identify the
color in the display.
Gouraud Shading: a display technique used to create a continuous
transition of color across a surface as well as create a smoother overall
appearance of an illuminated surface.
Hidden-Line Removal: the portions of a wireframe object which are hidden
from view when looking at an object.
Overlay: multiple layers of images displayed on top of each other.
Pixels: the smallest unit of a computer screen image; dots.
Render: the act of displaying on the screen the solid 3D image calculated
by the software application.
Texture Mapping: the process of applying a pre-determined image to a
surface (i.e. applying a picture of a brick building facade to a shape
representing a wall).
Tri-Linear MIP (Multi In Partem-Latin) Mapping: a rendering technique
used to improve the appearance of a textured surface when viewed at a given
distance combined with a technique for improving the appearance of a
textured surface.
Tri-Linear Texture: 3-dimensional images that are used to modify the
color of fragments.
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VRML (Virtual Reality Model Language): a universal description language
which allows navigation through 3-dimensional sites that are placed on the
World Wide Web.
Wireframe: an outline of a solid image.
Z-Buffer: a memory storage area used to keep depth information for every
pixel on the display.
TECHNOLOGY AND CORE COMPETENCIES
AGI invests in several key technologies and believes it possesses skills in
the various disciplines and technology areas which are necessary for
developing professional 3D computing products. These competencies include:
OpenGL 3D Expertise. AGI enhances its products by combining its proprietary
high-performance 3D OpenGL software technology with the OpenGL software
provided by its suppliers of 3D graphic processors. AGI has invested thousands
of engineering hours in its version of the OpenGL software library, which
currently contains four times more lines of code than the original sample
implementation made available by Silicon Graphics, Inc. ("SGI"). AGI optimizes
the performance of its OpenGL software library by eliminating much of the
testing and branching required to process data and instruction streams, while
adding routines optimized for various application profiles.
Software Systems Integration. AGI has invested in the development and
expansion of the "transport layer" of software that manages the direct
interfaces associated with various parts of the overall system. Such parts of
the system include the virtual memory manager, the CPU and its timing, the PCI
bus implementation, the graphic board and chips, data buffer size
specifications and management, specific system configuration issues, NT
register settings and other device driver components. To ensure error-free
operation with maximum performance, AGI continually modifies and optimizes its
software to properly integrate with the various systems and applications that
utilize AGI's 3D graphics subsystems.
3D Development Tools. AGI has developed tools to determine how applications
operate and how they utilize the 3D graphics pipeline. Using these proprietary
development tools, AGI' engineers gain an understanding of the structure and
function of an application enabling them to optimize the API, graphics
libraries and hardware to efficiently process commands from each application.
AGI has developed specific features for, and optimized the performance of, its
software and its hardware with the goal that key applications will perform
better with its 3D graphics subsystems than with competitive solutions.
Hardware Design and Systems Engineering. AGI's three distinct 3D graphics
subsystem product lines have been designed and introduced in the past two
years. An in-depth understanding of the importance of layout, trace lines,
memory interaction, chip characteristics, software implementation, BIOS
technologies and bus technology all contribute to building products and
systems that deliver reliable performance. By focusing on system level design,
AGI's 3D graphics subsystems integrate easily into Personal Workstations.
2D and 3D Expertise. In addition to AGI's 3D expertise, AGI has extensive
experience and maintains active software development efforts in 2D graphics.
AGI believes experience and competency in the smooth implementation and
interaction of 2D with 3D delivers a more robust solution to a broader range
of users.
STRATEGIC RELATIONSHIPS
The NT workstation market is comprised of many vendors collaborating to
produce a complete solution for end users. AGI has developed close strategic
relationships with key companies in this market and participates in industry
consortiums from several market segments. AGI believes these relationships
provide access to the leading-edge information and technology that it needs to
remain at the forefront of this rapidly changing market.
AGI has technical relationships with Intel and Microsoft, as well as with
key component suppliers, including 3Dlabs, Mitsubishi, Cirrus Logic, Inc. and
Evans and Sutherland. These relationships include joint engineering
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development and have often resulted in modifications to suppliers' product
features and performance through architectural review and early product
evaluation.
AGI maintains relationships, some of which include joint engineering
projects, with many leading ISVs such as AliasWavefront, Autodesk and Kinetix,
Dassault Systemes S.A., EDS Unigraphics, Matra Datavision S.A., Microsoft's
Softimage, PTC, SDRC, Sense8 Corporation, SolidWorks Corporation and Visible
Decisions, Inc. Examples of such joint engineering products include support of
OpenGL graphics extensions for PTC's Pro/ENGINEER, developing Windows NT
"overlay plane" support with engineers from Microsoft's Softimage group,
software development and engineering assistance with SDRC's migration from
UNIX to NT, and developing and then licensing 3D technology to power
Autodesk's Mechanical Desktop. By providing resources and assisting its ISV
partners in their transition to NT, AGI has often gained a period of market
advantage for new NT applications. This advantage results from AGI's 3D
graphics subsystems often being the first subsystem certified by the ISV and
sometimes the only subsystem supported by the application for an exclusive
period of time.
To develop advanced knowledge and influence the direction of new
technologies and products, AGI is actively involved in various technology
consortiums, industry standards organizations and special interest groups.
AGI's engineers are active in the OpenGL Architectural Review Board, the VRML
Consortium, the PCI Special Interest Group, the AGP Implementors Forum and the
Video Electronics Standards Association ("VESA").
3D PROFESSIONAL MARKETS AND APPLICATIONS
AGI focuses on the professional 3D graphics market and has engineered 3D
solutions to support its ISV partners. In many cases, AGI's products were the
first NT-based products supported by these ISVs. AGI sells products in the
following 3D market segments:
. Mechanical Computer Aided Design--Design of products prior to
manufacturing
. Engineering Analysis--Verification of structural, vibration and thermal
integrity.
. Animation and Multimedia Authoring--Video games, commercials
. Architectural, Engineering and Construction -- Plant design, maintenance
and architectural design
. Visualization--Representation of complex data such as that from Medical,
Geospatial, or Oil and Gas Applications
. Financial Visualization--Decision support for financial analysis
. Simulation and Training Systems--Flight training, driver education and
corporate training
CUSTOMERS, SALES AND MARKETING
Sales. AGI's sales efforts consist of a combination of direct sales to OEMs
and a worldwide network of distributors and VARs. AGI maintains a wholly owned
subsidiary, AGI Deutschland GmbH, to market its products in Europe. As of
December 31, 1997, direct sales, marketing and support staff totaled 22 people
located in Northern California, Southern California, New Jersey, Ohio and
Wiesbaden, Germany. Asia Pacific sales are directed by the Vice President of
Asia Pacific Sales out of AGI's Milpitas headquarters. Revenues from HP and
AGI's former customer, Digital Equipment Corporation ("Digital"), accounted
for 36% and 22%, respectively, of revenues in 1997, and 23% and 28%,
respectively, of revenues in 1996. Since the second quarter of 1997, Digital
has not purchased any of AGI's products. AGI does not expect that revenues
from Digital, if any, will comprise a significant portion of AGI's future
revenue. International sales revenues represented approximately 46% and 31% of
revenues in 1997 and 1996, respectively. The Product Purchase Agreement with
HP provides for HP to supply the Company non-binding forecasts of HP's
requirements for products, and AGI to provide HP product warranty and product
support, indemnification and certain manufacturing rights in the event AGI is
declared bankrupt or goes into receivership or is unable to supply HP with
specified quantities of products due to a cause not associated with the
negligence of either party.
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AGI works closely with its OEM customers to ensure the complete testing of
AGI's 3D graphics subsystems within their Personal Workstations to achieve
maximum system performance and error-free integration. Revenues from OEMs
accounted for approximately 68% and 57% of AGI's revenues in 1997 and 1996,
respectively.
Distributors and VARs. AGI distributes its products in 32 countries through
a network of distributors and VARs. AGI sells its products in the United
States through large VARs such as JAR Associates and Rand Technologies.
Distributors include Ingram Micro, MicroSouth, Inc., Pioneer-Standard
Electronics, Inc. and Wyle Electronics in the United States, Pedensia and
Noesse Datentechnik in Europe and Memorex Telex Japan, Ltd. in Asia Pacific.
Revenues from distributors and VARs accounted for 32% and 43% of AGI's
revenues in 1997 and 1996, respectively.
AGI grants certain of its distributors price protection and limited rights
of return with respect to products purchased by them. The short product life
cycles of AGI's products and the difficulty in predicting future sales
increase the risk that new product introductions, price reductions by AGI or
its competitors, or other factors affecting the 3D graphics subsystems market
could result in significant product returns or price protection claims.
Marketing. AGI's marketing efforts consist primarily of advertising in
targeted trade publications, exhibiting at industry trade shows and joint
marketing activities with ISVs. AGI's collaborative marketing efforts include
mailings by the ISVs to their customers on the behalf of AGI and inclusion of
AGI's promotional literature with the ISVs software distributions. AGI also
participates in joint demonstrations and pilot programs and seeks to obtain
reviews of its products in leading trade publications such as Pro/E The
Magazine, NT Studio and CADalyst.
Customer Support. AGI utilizes the Sutherland Group ("SG") for initial
support within the United States for VARs, distributors and end users. AGI
maintains its own in-house pre- and post-sale support staff to provide support
for the rest of the world, OEM support and extended support for the United
States. In addition, AGI utilizes its Internet site as well as e-mail exchange
to support its customers. AGI generally provides a three-year warranty for its
products. In general, AGI's return policy permits return within five days
after receipt of products that do not meet product specifications.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $4.5 million in 1997 from
$2.7 million in 1996, representing approximately 13% and 14% of revenues,
respectively. AGI believes that continued investment in research and
development is critical to AGI's success. AGI's research and development
organization consisted of 20 employees as of December 31, 1997.
AGI's hardware development efforts are focused on the design and testing of
new products incorporating advanced components into high performance
accelerators that make efficient use of the PCI and AGP busses, system BIOS
architectures, and graphic libraries. The hardware development team combines
2D and 3D graphic processors, RAMDACS, graphic memory chips and firmware into
integrated, efficient graphics accelerators.
Software development efforts are focused on development of software and
firmware drivers to enhance the performance of applications and support for
new graphics accelerator chips that may be incorporated in future products.
From time to time, AGI also employs outside consultants to assist with the
development of specific projects.
AGI dedicates certain engineering personnel to its ISV partners to optimize
their applications with AGI's accelerator products. The dedicated engineering
personnel may work directly on-site with the ISV engineering development team
on development of the next generation of ISV products. AGI also works with
suppliers of graphics chip sets to specify the next generation of requirements
and components for AGI's new products. AGI coordinates with leading personal
computer and NT workstation hardware and operating system vendors to remain
abreast of emerging industry trends and opportunities.
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The markets for AGI's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions
and rapid product obsolescence. AGI's success will be substantially dependent
upon its ability to continue to develop and introduce competitive products and
technologies on a timely basis with features and functionality that meet
changing customer requirements. AGI's business would be adversely affected if
AGI were to incur delays in developing new products or enhancements, or if
such products or enhancements did not gain widespread market acceptance. AGI's
business would also be adversely affected if it were to select new chipsets
from among those chipsets offered by its various semiconductor vendors, new
chipsets that do not perform favorably on a price-performance basis compared
to competing products or if a vendor experiences delays in the production of a
chipset which AGI has selected for one of its products. In addition, there can
be no assurance that products or technologies developed by others will not
render AGI's products or technologies noncompetitive or obsolete. AGI must
continually assess emerging technologies and standards, and evolving market
needs, and must continually decide which technologies and product directions
to pursue. If AGI were to focus its efforts on technologies, standards or
products that do not meet emerging end user needs and do not achieve market
acceptance, AGI could miss one or more product cycles. In such an event, AGI's
business, financial conditions and results of operations would be adversely
affected.
MANUFACTURING
All manufacturing and testing is completed by contract manufacturers,
located in Singapore and Chicago, Illinois, on a turnkey basis. This turnkey
assembly enables AGI to avoid the cost of owning and operating a manufacturing
facility while adding flexibility to the manufacturing process. AGI does not
have contractual commitments with these subcontractors and therefore these
subcontractors are not obligated to supply assemblies, products or services to
AGI for any specific time or at any specific price, except as provided for by
specific purchase orders. Although at present there is an abundance of turnkey
manufacturing in the world, there is no guarantee this situation will
continue. Some long lead time and sole-sourced items are forecasted and
purchased by AGI and are sold to the turnkey vendors upon demand. Quality
auditing and root cause failure analysis are performed by AGI to maintain
quality. AGI generally negotiates prices with vendors on key components and
assigns such pricing to its contract manufacturers, while receiving the
benefit of the subcontractors' volume purchase prices on the more standard
parts.
AGI relies on subcontractors to manufacture, subassemble, test and ship
AGI's products. AGI relies on sole-source suppliers for certain critical
components, such as Mitsubishi and 3Dlabs for its graphics acceleration chips,
Mitsubishi for its graphics acceleration chips and 3DRAM/CDRAM chips, Texas
Instruments Incorporated for its RAMDAC chips, Cirrus Logic Inc. for its VGA
chips and Elec & Eltek Co., Ltd. for its printed circuit boards. In addition,
there is a limited availability of certain application specific integrated
circuit chipsets that provide SGRAM, VRAM and DRAM memory. AGI procures its
components and products through purchase orders and does not have specific
requirement agreements with any of its subcontractors or suppliers. Each of
AGI's subcontractors and suppliers can cease supplying the services, products
or components at any time with no penalty. In the event it becomes necessary
for AGI to replace a key subcontractor or supplier, AGI could incur
significant manufacturing set-up costs and delays while new sources are
located and alternate components are integrated into the design of AGI's
products. There can be no assurance that AGI will be able to maintain its
current subcontractor and supplier relationships or that AGI will be able to
find suitable replacement subcontractors and suppliers, if necessary. Although
AGI maintains ongoing efforts to obtain required quantities of products,
component shortages may exist from time to time, and there can be no assurance
that AGI's current subcontractors and suppliers will continue to provide
sufficient quantities of suitable quality product components at acceptable
prices. AGI's emphasis on maintaining low inventory may accentuate the effects
of any shortages that may result from sole source products or subcontractors.
The inability of AGI to obtain product components at their historical cost
levels would directly affect the cost of AGI's products. Also, product
components may contain undetected errors or "bugs" when first supplied to AGI
that, despite testing by AGI, are discovered only after AGI's product has been
installed and used by customers. There can be no assurance that errors will
not be found in AGI's products due to errors in the product components, or
that any such errors will not impair the
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market acceptance of these products or require significant product recalls.
Problems encountered by customers and product recalls could have a material
adverse effect on AGI's business, financial condition and results of
operations. In addition, AGI's ability to respond to greater than anticipated
market demand may be constrained by availability of services, products or
components. The loss of subcontractors or suppliers or the failure of
subcontractors or suppliers to meet AGI's price, quality, quantity and
delivery requirements would have a material adverse effect on AGI's business,
financial condition and results of operations.
PROPRIETARY RIGHTS
Although AGI has three patent applications filed in the United States, these
claims are not related to AGI's current product lines. Instead, AGI relies
exclusively on trade secret and copyright protection for its proprietary
technology. Despite AGI's precautions, it may be possible for a third party to
copy or otherwise obtain and use AGI's technologies without authorization or
to develop competing technologies independently. Furthermore, the laws of
certain countries in which AGI does business, including countries in which AGI
does a significant amount of business, such as the United Kingdom and Germany,
may not protect AGI's software and intellectual property rights to the same
extent as the laws of the United States. There can be no assurance that AGI's
means of protecting its proprietary rights will be adequate or that AGI's
competitors will not independently develop similar technology. If unauthorized
copying or misuse of AGI's products were to occur to any substantial degree,
or if a competitor of AGI were to effectively duplicate AGI's proprietary
technology, AGI's business, financial condition and results of operations
would be materially adversely affected. Furthermore, while AGI requires
employees and consultants to enter into confidentiality agreements, there can
be no assurance that proprietary information will not be disclosed, that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to AGI's trade secrets or
disclose such technology, or that AGI can meaningfully protect its trade
secrets. Certain technology used in AGI's products is licensed from third
parties, generally on a non-exclusive basis. The termination of any such
license, or the failure of any third party licensor to adequately maintain or
update its product, could result in delay in AGI's ability to ship its
products while it seeks to implement technology offered by alternative
sources, if any. Any required replacement licenses could prove to be either
unavailable or costly.
While AGI has not received notices from third parties alleging infringement
claims that AGI believes would have a material adverse effect on AGI's
business, there can be no assurance that third parties will not claim that
AGI's current or future products or manufacturing processes infringe the
proprietary rights of others. Any such claim, with or without merit, could
result in costly litigation or might require AGI to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to AGI, or at all, which could have a
material adverse effect upon AGI's business, financial condition and results
of operations.
COMPETITION
The market for 3D graphic accelerators is extremely competitive and subject
to rapid change. AGI expects competition to increase in the future from
existing competitors and from new market entrants with products that may be
less costly than AGI's products or provide better performance or additional
features not currently provided by AGI. For example, SGI has recently
announced its intention to develop products which operate under the Windows NT
operating system; Intel has recently entered into an agreement with Digital to
purchase Digital's semiconductor manufacturing operations cross-license
certain patents; and Compaq and Digital are in the process of combining into
one company. AGI competes with the following three major groups: professional
3D graphics board companies (including Intergraph Corporation and Dynamic
Pictures, Inc.), RISC/UNIX workstation companies (including Sun Microsystems,
Inc. ("Sun") and SGI) and traditional volume PC board suppliers (including
ELSA GmbH, Diamond Multimedia Systems, Inc., Matrox Electronic Systems Ltd.
and STB Systems Inc.). A variety of potential actions by any of AGI's
competitors could have a material adverse effect on AGI's business, financial
condition and results of operations. Such actions may include reduction of
product prices, increased promotion, announcement or accelerated introduction
of new or enhanced products, product giveaways, product bundling or other
competitive actions.
72
<PAGE>
Many of the companies that currently compete with AGI or that may compete
with AGI have longer operating histories and significantly greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and larger customer bases, than AGI. As a result, these
competitors may be able to respond more quickly and effectively to new or
emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion, sale and support of their
products than AGI. Consequently, AGI expects to continue to experience
increased competition, which could result in significant price reductions,
loss of market share and lack of acceptance of new products, any of which
could have a material adverse effect on AGI's business, financial condition
and results of operations. There can be no assurance that AGI will be able to
compete against current or future competitors successfully or that competitive
pressures faced by AGI will not have a material adverse effect upon its
business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1997, AGI had 60 employees, including 22 in sales,
marketing and customer support, 22 in research and development and 16 in
finance, administration and operations. AGI has entered into employment
agreements with certain of its officers, which provisions include acceleration
of vesting of stock options and termination benefits, in the event of certain
changes in control of AGI's ownership. None of AGI's employees are represented
by a labor union. AGI has not experienced work stoppages and believes it has a
good relationship with its employees. As competition for qualified personnel
in the industry in which AGI competes is intense, AGI believes that its future
success will depend in part on its continued ability to attract, hire and
retain qualified personnel. See "Risk Factors Regarding AGI--Dependence on Key
Personnel; Need to Attract and Retain Highly Skilled Personnel."
DESCRIPTION OF PROPERTIES
AGI's principal facilities occupy approximately 25,000 square feet in
Milpitas, California, pursuant to a lease which expires in May 1999. In
addition, AGI subleases a sales and support facility in Wiesbaden, Germany.
AGI believes its current facilities are adequate to meet its needs through the
next 12 months.
MANAGEMENT
The names of officers and directors of AGI and their ages, as of May 8,
1998, and certain other information about them are set forth below:
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE POSITION WITH THE COMPANY
---------------- --- -------------------------
<C> <C> <S>
Jeffrey W. Dunn.......... 43 President, Chief Executive Officer and Chairman
of the Board of the Company
Nancy E. Bush............ 40 Vice President, Finance and Administration,
Chief Financial Officer, Assistant Secretary
and Director
Lew S. Epstein........... 50 Vice President, Sales
Hiroki Kato.............. 56 Vice President, Asia-Pacific Sales
Niraj Swarup............. 37 Vice President, Marketing
Arthur Yan............... 47 Vice President, Operations
David E. Gold(1)......... 54 Director
Jos C. Henkens(1)(2)..... 45 Director
David W. Pidwell(2)...... 50 Director
Peter L. Wolken(1)(2).... 63 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
73
<PAGE>
Ms. Bush co-founded AGI in November 1994 and serves as Chief Financial
Officer and Director and has been Vice President, Finance and Administration
and Assistant Secretary since December 1996. From January 1991 to November
1994, Ms. Bush was employed with ATG Cygnet Inc., formerly Cygnet Systems,
Inc. Her positions at ATG Cygnet, Inc. included MIS Manager from January 1991
to February 1992, Controller from February 1992 to October 1992, Director of
Finance from October 1992 to October 1993, Chief Financial Officer and Vice
President of Operations from October 1993 to September 1994 and Chief
Executive Officer from September 1994 to November 1994. In June 1993, Cygnet
Systems, Inc. declared Chapter 11 bankruptcy and became ATG Cygnet Inc. Prior
to 1991, she held finance and manufacturing positions at Spectra Physics Inc.
and Corning Incorporated.
Mr. Dunn co-founded AGI in November 1994 and serves as Chairman, President
and Chief Executive Officer. From February 1993 to November 1994, Mr. Dunn was
Vice President of Marketing at Kubota Graphics. From October 1988 to January
1993, Mr. Dunn was Vice President of Worldwide Sales and Support for Cygnet
Systems, Inc., a manufacturer of robotic mass storage devices. Mr. Dunn has
also held sales and/or sales management positions at Xerox Corporation, Avnet
Computer Technologies, Inc. and Microcon Software Centers, Inc.
Mr. Epstein joined AGI in August 1995 as Vice President, Sales. From January
1994 to September 1995, Mr. Epstein was Vice President of Sales and Support
for Los Altos Technologies. From January 1993 to June 1994, he was Vice
President of Sales for Centric Engineering. From May 1990 to December 1992,
Mr. Epstein was Vice President of Sales and Support for Intergraph
Corporation.
Dr. Kato joined AGI in July 1996 as Vice President, Asia-Pacific Sales. From
1992 to June 1996, Dr. Kato was Vice President of Asian Development for Iomega
Corporation.
Mr. Swarup joined AGI in April 1996 as Director, Marketing and was elected
Vice President, Marketing in December 1996. Prior to joining AGI, Mr. Swarup
held various project manager and group marketing manager positions at Sun from
May 1990 to April 1996.
Mr. Yan joined AGI in November 1994 as Director of Operations and was
promoted to Vice President, Operations in April 1998. From 1989 to 1994, he
was the Manufacturing Engineering Manager for Ardent Computer, Stardent
Computer, and Kubota Computer Company.
Mr. Gold has served as a director of AGI since June 1995. Since February
1985, he has been a General Partner at IndoSuez Ventures, a venture capital
firm. Mr. Gold is also a director of several private companies.
Mr. Henkens has served as a director of AGI since June 1995. Since January
1983, Mr. Henkens has been associated with Advanced Technology Ventures, a
venture capital firm. Mr. Henkens is also a director of Actel Corporation,
Credence Systems Corporation and ObjectShare, Inc. as well as, a number of
private technology companies.
Mr. Pidwell has served as a director of AGI since February 1996. Since March
1996, Mr. Pidwell has been a private investor in AGI. From December 1987 to
January 1996, Mr. Pidwell founded and was President and Chief Executive
Officer of Rasna Corporation, a mechanical design automation software company.
Mr. Pidwell is also a director of several private technology companies.
Mr. Wolken has been a director of AGI since June 1995. Mr. Wolken is a
General Partner of AVI Management Partners I, II and III which managed various
private venture capital limited partnerships, having co-founded AVI in 1981.
He serves as a director of a number of private technology companies in Silicon
Valley and has served as a director of Qualix Group, Inc. since 1990. Mr.
Wolken received a B.S. in Mechanical Engineering from the University of
California, Berkeley in 1959 and a B.F.T. in International Marketing from the
American Graduate School for International Management in 1960.
74
<PAGE>
EXECUTIVE COMPENSATION
The following table shows the compensation received in the fiscal years
ended December 31, 1996 and December 31, 1997 by (a) AGI's Chief Executive
Officer and (b) the four most highly compensated executive officers of AGI who
earned in excess of $100,000 during the fiscal year ended December 31, 1997
(the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL BONUS AND UNDERLYING ALL
POSITION YEAR(1) SALARY($) COMMISSION($) OPTIONS (#) OTHER($)(2)
- ------------------ ------- --------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Jeffrey W. Dunn......... 1997 $193,269 $76,250 46,091 $511
Chairman of the Board, 1996 181,192 27,599 65,500 --
President and Chief
Executive Officer
Stephen L. Bartlett(3).. 1997 109,135 39,535 17,333 511
Vice President, Opera- 1996(4) 45,384 3,370 85,000 --
tions
Nancy E. Bush........... 1997 116,796 46,875 20,333 511
Vice President, Finance 1996 102,692 22,999 22,000 --
and Administration and
Chief Financial Offi-
cer
Lew E. Epstein.......... 1997 120,000 77,365 17,333 511
Vice President, Sales 1996 126,006 61,049 23,500 --
Niraj Swarup............ 1997 106,700 64,470 17,333 511
Vice President, Market- 1996(5) 63,461 7,926 85,580 --
ing
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission, no
information is provided for fiscal years prior to fiscal year 1996 because
AGI became a reporting company pursuant to Section 13(a) or 15(d) of the
Exchange Act of 1934, as amended, in 1997 and AGI was not required to
provide such information in response to a Commission filing requirement
prior to that time.
(2) Except as otherwise set forth, represents premiums paid by AGI for group
term life insurance in fiscal 1997.
(3) Mr. Bartlett resigned as Vice President, Operations on April 1, 1998 and
currently works on a part-time basis as Assistant to the Vice President,
Operations.
(4) Represents salary and bonus for a partial fiscal year. Mr. Bartlett
joined AGI on July 10, 1996.
(5) Represents salary and bonus for a partial fiscal year. Mr. Swarup joined
AGI on May 6, 1996.
75
<PAGE>
EMPLOYEE BENEFIT PLANS
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997
The following table provides certain information with respect to stock
options granted to the Named Executive Officers in the last fiscal year. In
addition, as required by the SEC rules, the table sets forth the hypothetical
gains that would exist for the options based on assumed rates of annual
compound stock price appreciation during the option term. These amounts are
based on certain assumed rates of appreciation and do not represent AGI's
estimate of future stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of AGI's Common Stock.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
PRICE
APPRECIATION
FOR OPTION
INDIVIDUAL GRANTS(1) TERM(2)
---------------------------------------------- -----------------
PERCENT
OF TOTAL
NUMBER OF OPTIONS/
SECURITIES SARS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES OR BASE
OPTIONS/SARS IN FISCAL PRICE EXPIRATION
NAME GRANTED(#) YEAR(%)(3) ($/SH)(4) DATE 5%($) 10%($)
- ---- ------------ ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey W. Dunn......... 46,091 6.16% $9.50 4/11/07 $275,371 $697,843
Stephen L. Bartlett..... 17,333 2.31% $9.50 4/11/07 103,556 262,431
Nancy E. Bush........... 20,333 2.72% $9.50 4/11/07 121,479 307,853
Lew S. Epstein.......... 17,333 2.31% $9.50 4/11/07 103,556 262,431
Niraj Swarup............ 17,333 2.31% $9.50 4/11/07 103,556 262,431
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------
(1) No stock appreciation rights were granted to the Named Executive Officers
in the last fiscal year. Consists of stock options granted pursuant to
AGI's 1995 Stock Plan. AGI's options generally become exercisable at a
rate of 12.5% after six months following the date of grant and
approximately 2% per month thereafter, as long as the optionee remains an
employee of or consultant to AGI. The maximum term of each option granted
is ten years from the date of grant. The exercise price is equal to the
fair market value of the stock on the grant date as determined by the
Board of Directors. The grants include a grant in the amount of 25,000
shares for Mr. Dunn and 8,333 shares for each of the other Named
Executives which vest on the sixth anniversary of the date of grant. Such
options also include a provision for accelerated vesting upon the
attainment of certain performance goals.
(2) The 5% and 10% assumed compounded annual rates of stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price appreciation over the ten-year
option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants
made to the persons named in the Summary Compensation Table.
(3) AGI granted stock options representing 747,139 shares to employees during
the fiscal year ended December 31, 1997.
(4) The exercise price may be paid in cash, in shares of Common Stock valued
at fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares.AGI may also
finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares and the federal and state
income tax liability incurred by the optionee in connection with such
exercise.
76
<PAGE>
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED
DECEMBER 31, 1997 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information for the executive officers named
in the Summary Compensation Table with respect to exercises in fiscal year
1997 of options to purchase Common Stock of AGI.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY-OPTIONS AT
SHARES VALUE JANUARY 2, 1998(#) JANUARY 2, 1998($)(1)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE(#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey W. Dunn......... -- $ -- 34,901 76,690 $131,817 $143,283
Stephen L. Bartlett..... 19,479 128,827 12,125 70,729 44,625 230,563
Nancy E. Bush........... -- -- 12,542 29,791 44,276 48,097
Lew S. Epstein.......... 5,622 50,992 52,878 62,958 220,757 201,956
Niraj Swarup............ 20,016 172,044 15,359 67,538 58,208 217,161
</TABLE>
- --------
(1) Calculated by determining the difference between the estimated fair market
value of AGI Common Stock as of January 2, 1998 ($4.50 per share) and the
exercise price of the securities underlying the options.
(2) Calculated by determining the difference between the fair market value of
the AGI Common Stock as of the date of exercise and the exercise price of
the securities underlying the exercised options.
COMPENSATION COMMITTEE REPORT
The following is a report of the Compensation Committee of the Board of
Directors (the "Committee") describing the compensation policies applicable to
AGI executive officers during the fiscal year ended January 2, 1998. The
Committee recommends salaries, incentives and other forms of compensation for
directors, officers and other employees of AGI, administers the AGI's various
incentive compensation and benefit plans (including stock plans) and
recommends policies relating to such incentive compensation and benefit plans.
Executive officers who are also directors have not participated in
deliberations or decisions involving their own compensation.
Compensation Policy
AGI's executive officer compensation philosophies are designed to attract,
motivate and retain senior management by providing an opportunity for
competitive, performance-based compensation. Executive officer compensation
consists of competitive base salaries and stock-based incentive opportunities
in the form of options to purchase AGI's Common Stock. AGI's executive
compensation program consists of three main components: (1) base salary, (2)
potential for bonus based on overall AGI performance, (3) stock options/grants
that provide the executive officers with the opportunity to build a meaningful
stake in AGI, with the objective of aligning executive officers' long-range
interests with those of the stockholders and encouraging the achievement of
superior results over time. The second and third elements of the compensation
program constitute the "at risk" components. The Committee annually evaluates
AGI's performance, actual compensation and stock ownership of executive
officers on a comparative basis with companies in the same industry as well as
other companies in the same geographical area.
Base Salaries For Fiscal 1997
In establishing compensation guidelines with respect to base salary, AGI
utilized data from various surveys prepared by independent firms to assist it
in setting salary levels competitive with those of other similar industry
companies. While it is the Committee's intent to continue to review
periodically base salary information to monitor competitive ranges within the
applicable market, including consideration of AGI's geographic location and
individual job responsibilities, it is further the intent of the Committee to
maintain a close relationship between AGI's performance and the base salary
component of its executive officers' compensation.
77
<PAGE>
Stock Option Awards For Fiscal 1997
AGI's 1995 Stock Plan provides for the issuance of stock options to officers
and employees of AGI to purchase shares of AGI's Common Stock at an exercise
price equal to the fair market value of such stock on the date of grant. AGI's
stock options typically vest ratably over a period of four years. Stock
options are granted to AGI's executive officers and other employees both as a
reward for past individual and corporate performance and as an incentive for
future performance. The Committee believes that stock-based performance
compensation arrangements are essential in aligning the interests of
management and the stockholders in enhancing the value of AGI's equity.
Compensation of the Chief Executive Officer
The compensation for Jeffrey W. Dunn, AGI's Chairman, President and Chief
Executive Officer ("CEO"), is determined based on a number of factors,
including comparative salaries of CEO's of companies in AGI's peer group, the
CEO's individual performance and AGI's performance as measured against the
stated objectives. The CEO's total compensation package includes stock option
grants with the goal of motivating leadership for long-term AGI success and
providing significant reward upon achievement of AGI objectives and enhancing
stockholder value. As with other executives, size of option grants is also
based on a review of competitive survey data.
Deductibility Of Executive Compensation
The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code adopted under the Omnibus Budget Reconciliation Act of 1993,
which section disallows a deduction for any publicly held corporation for
individual compensation exceeding $1 million in any taxable year for the CEO
and four other most highly compensated executive officers, unless such
compensation meets the requirements for the "performance-based" exception to
the general rule. Since the cash compensation paid by AGI to each of its
executive officers is expected to be well below $1 million and AGI believes
that options granted under AGI's 1995 Stock Option Plan will meet the
requirements for qualifying as performance-based, the Committee believes that
this section will not affect the tax deductions available to AGI. It will be
the Committee's policy to qualify, to the extent reasonable, the executive
officers' compensation for deductibility under applicable tax law.
SUBMITTED BY THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Jos C. Henkens
David W. Pidwell
Peter L. Wolken
78
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return data,
assuming reinvestment of all dividends, for AGI's Common Stock at January 2,
1998 since April 10, 1997 (the date on which AGI's stock was first registered
under Section 12 of the Exchange Act to the cumulative return over such period
of (i) the U.S. Index for the Nasdaq National Market and (ii) the Computer
Manufacturer's Index for the Nasdaq National Market. The graph assumes that
$100 was invested on April 10, 1997 in AGI's Common Stock and each of the
comparative indices. The graph further assumes that such amount was initially
invested in AGI's Common Stock at a price per share of $9.00, the price at
which such stock was first offered to the public by AGI on that date. The
stock price performance on the following graph is not necessarily indicative
of future stock price performance.
[GRAPHICS APPEARS HERE]
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG ACCELGRAPHICS, INC.,
THE NASDAQ COMPUTER MANUFACTURER'S INDEX
AND THE NASDAQ STOCK MARKET INDEX
<TABLE>
<CAPTION>
4/11/97 6/30/97 9/30/97 12/31/97
------- ------- ------- --------
<S> <C> <C> <C> <C>
AccelGraphics.................................. $100 $ 46 $ 69 $ 52
NASDAQ......................................... $100 $120 $140 $132
Manufacturers.................................. $100 $125 $157 $140
</TABLE>
79
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of AGI's Common
Stock as of May 8, 1998 as to (i) each person who is known by AGI to
beneficially own more than five percent of AGI's Common Stock, (ii) each
director, (iii)) each of the Named Executives and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
--------------------
EXECUTIVE OFFICERS, DIRECTORS
AND 5% STOCKHOLDERS NUMBER PERCENT(2)
----------------------------- --------- ----------
<S> <C> <C>
Kubota Corporation........................................ 1,039,286 12.3%
2372-A Qume Drive
San Jose, CA 95131
Advanced Technology Ventures IV, L.P...................... 787,337 9.3
485 Ramona Street, Suite 200
Palo Alto, CA 94301
AVI Capital L.P. (and related entities)(3)................ 787,337 9.3
One First Street, Suite 12
Los Altos, CA 94022
STF II, L.P............................................... 628,772 7.4
c/o IndoSuez Ventures
2180 Sand Hill Road, Suite 450
Menlo Park, CA 94025
Woodside Fund III, L.P.................................... 432,652 5.1
850 Woodside Drive
Woodside, CA 94062
Jos C. Henkens(4)......................................... 792,337 9.4
c/o Advanced Technology Ventures
485 Ramona Street, Suite 200
Palo Alto, CA 94301
Peter L. Wolken(5)........................................ 792,337 9.4
c/o AVI Capital, L.P.
One First Street, Suite 12
Los Altos, CA 94022
David E. Gold(6).......................................... 633,772 7.5
c/o IndoSuez Ventures
2180 Sand Hill Road, Suite 450
Menlo Park, CA 94025
David W. Pidwell(7)....................................... 31,766 *
50628 Vickery Lane
Saratoga, CA 95070
Jeffrey W. Dunn(8)........................................ 482,333 5.7
Nancy E. Bush(9).......................................... 152,037 1.8
Lew S. Epstein(10)........................................ 75,352 *
Hiroki Kato(11)........................................... 18,437 *
Niraj Swarup(12).......................................... 37,416 *
Arthur C. Yan(13)......................................... 32,065 *
All executive officers and directors as a group (11 3,093,787 35.7%
persons)(14).............................................
</TABLE>
80
<PAGE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of shares,
the Common Stock options held by that person that are currently
exercisable, or become exercisable within 60 days following May 8, 1998,
are deemed outstanding. However, such shares are not deemed outstanding
for purposes of computing the percentage ownership of any other person.
Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock.
(2) Percentage of ownership is based on 8,473,232 shares of Common Stock
outstanding on May 8, 1998. The number of shares of Common Stock
beneficially owned includes the shares issuable pursuant to stock options
that are exercisable within 60 days of May 8, 1998. Shares issuable
pursuant to stock options are deemed outstanding for computing the
percentage of the person holding such options but are not outstanding for
computing the percentage of any other person.
(3) Includes 116,548 shares held by Associated Ventures Investors II, L.P.,
22,693 shares held by AVI Partners Growth Fund, L.P. and 8,313 shares
held by AVI Silicon Valley Partners, L.P.
(4) Includes 787,337 shares held by Advanced Technology Ventures IV, L.P.,
which Mr. Henkens may be deemed to beneficially own by virtue of his
status as a General Partner of Advanced Technology Ventures, a General
Partner of Advanced Technology Ventures IV, L.P. Mr. Henkens disclaims
beneficial ownership of the shares held by such entity except to the
extent of his proportionate partnership interest therein. Also includes
5,000 shares issuable upon exercise of options exercisable within 60 days
of May 8, 1998.
(5) Includes 639,783 shares held by AVI Capital, L.P., 116,548 shares held by
Associated Ventures Investors II, L.P., 22,698 shares held by AVI
Partners Growth Fund, L.P. and 8,313 shares held by AVI Silicon Valley
Partners, L.P., which Mr. Wolken may be deemed to beneficially own by
virtue of his status as General Partner of AVI Management Partners,
General Partner of each of the listed AVI funds. Mr. Wolken disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interests therein. Also includes
5,000 shares issuable upon exercise of options exercisable within 60 days
of May 8, 1998.
(6) Includes 628,772 shares held by STF II, L.P., which Mr. Gold may be
deemed to beneficially own by virtue of his status as a General Partner
of STF II, L.P. Mr. Gold disclaims beneficial ownership of the shares
held by such entity except to the extent of his proportionate partnership
interest therein. Also includes 5,000 shares issuable upon exercise of
options exercisable within 60 days of May 8, 1998.
(7) Includes 16,666 shares held by both the Pidwell Family Living Trust Dated
6/25/87 and 8,125 shares issuable upon exercise of options exercisable
within 60 days of May 8, 1998.
(8) Includes 398,661 shares held by both Jeffrey W. Dunn and Susan M. Dunn,
as trustees of the Jeffrey W. Dunn and Susan M. Dunn Trust Agreement
dated August 30, 1996. Also includes 11,250 shares held by Mr. Dunn's
minor children and 47,089 shares issuable upon exercise of options
exercisable within 60 days of May 8, 1998. Also includes 25,333 shares
held by the Leo Dunn--Family Share, John J. Yagjian et. al Trustees,
Agreement dated 3/28/91 (the "Trust") which Mr. Dunn may be deemed to
beneficially own by way of his interest in the Trust. Mr. Dunn disclaims
beneficial ownership of the shares held by such entity except to the
extent of his proportionate partnership interest therein.
(9) Includes 17,250 shares issuable upon exercise of options exercisable
within 60 days of May 8, 1998.
(10) Includes 67,019 shares issuable upon exercise of options exercisable
within 60 days of May 8, 1998.
(11) Represents 18,437 shares issuable upon exercise of options exercisable
within 60 days of May 8, 1998.
(12) Includes 20,965 shares issuable upon exercise of options exercisable
within 60 days of May 8, 1998.
(13) Includes 5,000 shares held by Mr. Yan's minor children and 5,760 shares
issuable upon exercise of options exercisable within 60 days of May 8,
1998.
(14) Includes 2,203,446 shares beneficially owned by entities affiliated with
Messrs. Gold, Henkens, Pidwell and Wolken for which they disclaim
beneficial ownership of the shares held by such entities except to the
extent of their respective proportionate partnership interests therein.
Also includes 205,811 shares issuable upon exercise of options
exercisable within 60 days of May 8, 1998.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1997 and April 1998, AGI entered into Key Employee Retention
Agreements with each of its executive officers. Pursuant to the terms of the
agreements, in the event of a change of control of AGI, the executive officers
are entitled to certain severance benefits, including acceleration of 50% of
their unvested stock and stock options and continuation of salary, bonus and
benefits for up to one year.
In November 1997, AGI entered into a Key Employee Retention Agreement with
its Chief Executive Officer. Pursuant to the terms of the agreement, in the
event of a change of control of AGI, the Chief Executive Officer is entitled
to certain severance benefits, including acceleration of 100% of his unvested
stock and stock options and continuation of salary, bonus and benefits for up
to 18 months. This agreement will be superseded by an employment agreement
which will become effective at the time of the Merger. See "DESCRIPTION OF
AGI--Interests of Certain Persons in the Merger."
AGI has entered into separate indemnification agreements with each of its
directors and officers that may require AGI among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
services as a director or officer and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
AGI believes that all of the transactions set forth above were made on terms
no less favorable to AGI than could have been obtained from unaffiliated third
parties.
LEGAL PROCEEDINGS
There are no material pending or threatened legal proceedings against AGI.
AGI from time to time is involved in routine legal matters incident to its
business.
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COMPARISON OF RIGHTS OF AGI STOCKHOLDERS AND E&S STOCKHOLDERS
Upon consummation of the Merger, stockholders of AGI may become stockholders
of E&S and the rights of all stockholders of E&S will be governed by
applicable laws of the State of Utah (rather than the Delaware General
Corporation Law "DGCL"), including the Utah Revised Business Corporation Act
("URBCA"), and by E&S's Articles of Incorporation, as amended (the "E&S
Charter"), and the E&S Bylaws rather than the AGI Certificate of
Incorporation, as amended (the "AGI Charter"), and the AGI Bylaws.
While there are substantial similarities between the URBCA and the DGCL as
well as between the charters and Bylaws of E&S and AGI, a number of
differences exist. The following is a summary of certain material differences
between the current rights of E&S stockholders and AGI stockholders under the
URBCA and the DGCL, respectively, and under the respective Charters and Bylaws
of E&S and AGI.
The following summary does not purport to be a complete description of the
rights of stockholders of E&S and AGI under, and is qualified in its entirety
by reference to, the DGCL, the URBCA, the E&S Charter, the E&S Bylaws, the AGI
Charter and the AGI Bylaws.
AUTHORIZED CAPITAL STOCK
The authorized capital stock of E&S currently consists of 40,000,000 shares
of capital stock, consisting of (i) 30,000,000 shares of E&S Common Stock, par
value $0.20 per share; (ii) 5,000,000 shares of Class A Preferred Stock,
without par value; and (iii) 5,000,000 shares of Class B Preferred Stock,
without par value.
The authorized capital stock of AGI currently consists of 52,000,000 shares
of capital stock, consisting of (i) 50,000,000 shares of AGI Common Stock, par
value $0.001 per share and (ii) 2,000,000 shares of AGI Preferred Stock, par
value $$0.001 per share.
STOCKHOLDER VOTING RIGHTS
Both AGI Common Stock and E&S Common Stock entitle holders thereof to one
vote for each share on each matter upon which stockholders have the right to
vote.
Under the DGCL, approval of mergers and consolidations and sales, leases or
exchanges of all, or substantially all of the property or assets of a
corporation, requires the affirmative vote or consent of the holders of a
majority of the outstanding shares entitled to vote, except that, unless
required by the certificate of incorporation, no vote of shareholders of the
corporation surviving a merger is necessary if: (i) the merger does not amend
the certificate of incorporation of the corporation; (ii) each outstanding
share immediately prior to the merger is to be an identical share after the
merger; and (iii) either no common stock of the corporation and no securities
or obligations convertible into common stock are to be issued in the merger,
or the common stock to be issued in the merger plus that initially issuable on
conversion of other securities issued in the merger does not exceed 20% of the
common stock of the corporation outstanding immediately before the merger.
Under the URBCA, merger, share exchange or sale of all or substantially all
of the assets of a corporation requires the approval of a majority (unless the
articles of incorporation, the bylaws or a resolution of the board of
directors requires a greater number) of the outstanding shares of the
corporation (voting in separate voting groups, if applicable). No vote of the
stockholders of the surviving corporation in a merger is required if: (i) the
articles of incorporation of the surviving corporation will not be changed;
(ii) each stockholder of the surviving corporation whose shares were
outstanding immediately before the effective date of the merger will hold the
same number of shares, with identical designations, preferences, limitation
and relative rights, immediately after the merger; (iii) the number of voting
shares outstanding immediately after the merger, plus the number of voting
shares issuable as a result of the merger (either by the conversion of
securities issued pursuant to the merger or the exercise of rights and
warrants issued pursuant to the merger), will not exceed by more than 20% the
total number of voting shares of the surviving corporation outstanding
immediately before the merger; and (iv) the
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number of participating shares (shares that entitle their holder to
participate without limitation in distributions) outstanding immediately after
the merger, plus the number of participating shares issuable as a result of
the merger (either by the conversion of securities issued pursuant to the
merger or the exercise of rights and warrants issued pursuant to the merger),
will not exceed more than 20% the total number of participating shares of the
surviving corporation outstanding immediately before the merger.
The E&S Charter may be amended by a majority vote of the E&S Board of
Directors and the affirmative vote of at least a majority of outstanding
shares of E&S Common Stock, except that the affirmative vote of not less than
eighty percent (80%) of the outstanding shares of E&S entitled to vote
generally in the election of directors shall be required to amend, alter,
change or repeal, or adopt any amendment(s) to the E&S Charter or Bylaws
inconsistent with E&S's Charter provisions concerning capitalization,
directors, business combinations with interested shareholders, or any
provisions of the E&S Charter or Bylaws that would change the quorum or notice
requirements for any meeting of the Board of Directors, the vote by which it
must act in connection with any matter, the manner of calling or conducting
meetings of Directors, or the place of such meetings. Provided however, that
such eighty percent (80%) vote shall not be required for any amendment,
alteration, change or repeal of such Charter or Bylaws, or adoption of any
inconsistent provision, which is recommended to stockholders by at least a
majority of the Continuing Directors, or in the case of amendment(s) to the
Bylaws adopted by the Board, which is approved by a majority of the continuing
Directors acting of their own volition.
The AGI Charter may be amended by a majority vote by the AGI Board and the
affirmative vote of at least a majority of the outstanding voting shares of
AGI Stock. The AGI Charter confers the power to amend the AGI Bylaws upon the
AGI Board. The AGI Board may alter, amend or repeal the AGI Bylaws or adopt
new bylaws. Bylaws adopted by the AGI Board may be amended or repealed by the
stockholders of AGI.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the DGCL, a special meeting of stockholders may be called by the Board
of Directors or by any person authorized to do so in the certificate of
incorporation or Bylaws. Under the URBCA, a special meeting of stockholders
may be called by (i) the Board of Directors or by any person authorized by the
Bylaws to call a special meeting or (ii) the holders of shares representing at
least ten percent (10%) of all votes entitled to be cast on any issue to be
considered at the special meeting.
The E&S Bylaws provide that special meetings of stockholders may be called
by the President, by any two (2) directors, by the Board of Directors, or by
the written request of stockholders holding 10% of the then issued stock of
E&S.
The AGI Bylaws provides that special meetings of the stockholders of AGI may
be called at any time by the AGI Board of Directors or the Chairman of the
Board, or by the written request of stockholders holding 10% of the then
issued stock of AGI.
BUSINESS COMBINATIONS
The DGCL states that a corporation shall not engage in any business
combination with any interested stockholder for a period of three years
following the date such stockholder became an interested stockholder. Under
the DGCL, an "interested stockholder" means any person who is the owner of 15%
or more of the outstanding voting stock of the corporation. Business
combinations are permitted within the three-year period if, prior to the date
such stockholder became an interested stockholder, the board of directors
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder. The DGCL also allows
business combinations if (i) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the outstanding voting stock of the
corporation at the time the transaction commenced (excluding shares owned by
directors, officers and employee stock plans) or (ii) on or subsequent to the
date on which such person became an interested stockholder, the business
combination is approved by the Board of Directors and authorized at a
stockholders' meeting by two-thirds of the disinterested stockholders.
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The Utah Control Shares Acquisitions Act provides that any person or entity
that acquires 20% or more of the outstanding voting shares of a publicly held
Utah corporation is denied voting rights with respect to the acquired shares
unless a majority of the disinterested stockholders of the corporation votes
to restore such voting rights. The Control Shares Acquisitions Act provides
that a person or entity acquires "control shares" whenever it acquires shares
that, but for the operation for the Control Shares Acquisitions Act, would
bring its voting power within any of the following three ranges: (i) 20 to
33%, (ii) 33 to 50%, and (iii) 50% or more. A "control share acquisition" is
generally defined as the direct or indirect acquisition of either ownership or
voting power associated with issued and outstanding control shares; however,
an acquisition pursuant to an agreement to which the corporation is a party
(which would require affirmative action on the part of the Board of Directors)
and which is conducted pursuant to the merger provisions of the URBCA, which
generally will require stockholder approval, is not considered a "control
share acquisition" and is therefore exempt from the provisions of the Control
Shares Acquisitions Act.
Under the Control Shares Acquisitions Act, a person or entity that acquires
control shares pursuant to a control share acquisition acquires voting rights
with respect to those shares only to the extent granted by a majority of
disinterested stockholders of each class of capital stock outstanding prior to
the acquisition. The stockholders of the corporations must consider the status
of those voting rights at the next annual or special meeting of stockholders.
The acquiror may accelerate the decision and require the corporation to hold
a special meeting of stockholders for the purpose of considering the status of
those rights if the acquiror (i) files an "acquiring person statement" with
the corporation and (ii) agrees to pay all expenses of the meeting. If the
stockholders do not vote to restore voting rights to the control shares, the
corporation may, if its Articles of Incorporation or bylaws so provide, redeem
the control shares from the acquiror at fair market value.
The E&S Charter provides that a Business Combination (as defined below)
shall require the affirmative vote of not less than eighty percent (80%) of
the votes entitled to be cast on any type of business combination by the
holders of all then outstanding shares of voting stock, voting together as a
single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required or that a lesser percentage or separate class
vote may be specified, by law or in any agreement with any national securities
exchange or otherwise, except as provided as below (where such business
combination shall require only the affirmative vote of the E&S stockholders):
1. The Business Combination shall have been approved by a majority of the
Board of Directors of E&S, who are not affiliates or associates or
representatives of any interested stockholder.
2. The aggregate amount of cash and the fair market value, as of the date
of the consummation of the Business Combination (as defined below), of
consideration other than cash to be received per share by holders of Common
Stock in such Business Combination, shall be at least equal to the highest
amount of the following:
(i) the highest per share price paid by or on behalf of the
Interested Stockholder (as defined below) for any share of common
stock;
(ii) the fair market value per share of Common Stock on the
announcement date or the date on which the Interested Stockholder
became an Interested Stockholder;
(iii) the price per share equal to the fair market value per share of
Common Stock determined pursuant to item 2(ii) above, multiplied by the
ratio of (x) the highest per share price paid by or on behalf of the
Interested Stockholder for any share of Common Stock in connection with
the acquisition within the two-year period immediately prior to the
announcement date, as adjusted, to (y) the fair market value per share
of Common Stock on the first day in such two-year period in which the
Interested Stockholder required beneficial ownership of any share of
Common Stock, as adjusted; and
(iv) E&S's net income per share of Common Stock for the four full
consecutive fiscal quarters immediately preceding the announcement
date, multiplied by the higher of the then price/earnings
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multiple of such Interested Stockholder or the highest price/earnings
multiple of E&S within the two-year period immediately preceding the
announcement date.
3. The term "Interested Stockholder" means any person who (a) is a
beneficial owner of voting stock representing ten percent (10%) or more of
the votes entitled to be cast with respect to the approval of any Business
Combination by the holders of all then outstanding shares of voting stock,
or (b) is an affiliate or associate of E&S and at any time within the two-
year period immediately prior to the date in question with the beneficial
owner of voting stock representing ten percent (10%) or more of the votes
entitled to be cast with respect to approval of any Business Combination by
the holders of all then outstanding shares of voting stock.
4. The term "Business Combination" means any merger or consolidation of
E&S or any subsidiary with (a) any Interested Stockholder or; (b) any other
corporation which is or after such merger or consolidation would be an
affiliate or associate of an Interested Stockholder; (c) any transaction
with an Interested Stockholder having an aggregate fair market value of
$10,000,000 dollars or more; (d) the adoption of any plan or proposal for
the liquidation or dissolution of E&S proposed by or on behalf of an
Interested Stockholder or any affiliate or associate of any Interested
Stockholder; (e) any reclassification of securities or recapitalization of
E&S; (f) any merger or consolidation of E&S with any of its subsidiaries or
any other transaction that has the effect, directly or indirectly, of
increasing the proportionate share of any class or series of capital stock;
or any securities convertible into capital stock or into equity securities
of any subsidiary, that is beneficially owned by the Interested Stockholder
or any affiliate or associate of any Interested Stockholder; or (g) any
agreement, contract or other arrangement providing for any one or more of
the actions specified in the foregoing clauses (a) to (f).
BUSINESS CONDUCTED AT STOCKHOLDERS' MEETINGS
Under both the URBCA and the DGCL, the business permitted to be conducted at
any special meeting of stockholders is limited to the matters stated in the
notice of meeting of stockholders.
SHAREHOLDERS CONSENT WITHOUT A MEETING
The E&S Charter provides that no action shall be taken by the stockholders
of E&S other than at an annual or special meeting of the stockholders, upon
due notice and in accordance with the provisions of E&S's Bylaws.
Under the URBCA, unless otherwise provided in the articles of incorporation,
action requiring the vote of stockholders may be taken without a meeting and
without prior notice by one or more written consents of the stockholders
having not less than the minimum number of votes that would be necessary to
take such action at a meeting at which all shares entitled to vote thereof
were present and voted (if stockholder action is by less than unanimous
written consent, notice shall be provided to the stockholders who did not
consent as least ten (10) days before the consummation of the transaction,
action or event authorized by the stockholders). However, any written consent
for the election of directors must be unanimous.
DISSENTERS' RIGHTS
Pursuant to the DGCL, stockholders are entitled to demand appraisal of their
shares in the case of mergers or consolidations, except where (i) they are
stockholders of the surviving corporation and the merger did not require their
approval under the DGCL; (ii) the corporation's shares are either listed on a
national securities
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exchange or designated as a national market system security on an interdealer
quotation system by the NASD; or (iii) the corporation's shares are held of
record by more than 2,000 stockholders. Appraisal rights are available in
either (i), (ii), or (iii) above, however, if the stockholders are required by
the terms of the merger or consolidation to accept any consideration other
than (a) stock of the corporation surviving or resulting from the merger or
consolidation, (b) shares of stock of another corporation which are either
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the NASD or held of
record by more than 2,000 stockholders, (c) cash in lieu of fractional shares,
or (d) any combination of the foregoing appraisal rights are not available in
the case of a sale, lease, exchange or other disposition by a corporation of
all or substantially all of its property and assets.
Under the URBCA, in connection with a merger, share exchange or sale, lease,
exchange or other disposition of all or substantially all of the assets of the
corporation (other than in the ordinary course of the corporation's business),
a dissenting stockholder, after complying with certain procedures, is entitled
to payment from the corporation of the fair value of the stockholder's shares.
The fair value is estimated by the corporation. However, if the stockholder is
unwilling to accept the corporation's estimate, the stockholder may provide
the corporation with an estimate of the fair value and demand payment of that
amount. If the corporation is unwilling to pay that amount, the corporation
shall apply for judicial determination of the fair value. Unless the articles
of incorporation, bylaws or a resolution of the Board of Directors provide
otherwise, stockholders are not entitled to dissenters' rights when the shares
are listed on a national securities exchange or the Nasdaq National Market, or
are held of record by more than 2,000 holders. However, this exception does
not apply if, pursuant to the corporate action, the stockholder will receive
anything except (i) shares of the surviving corporation, (ii) shares of a
corporation that is or will be listed on a national securities exchange, the
Nasdaq National Market, or held of record by more than 2,000 holders, (iii)
cash in lieu of fractional shares or (iv) any combination of the foregoing.
QUORUM OF DIRECTORS
Under the DGCL, unless a greater or lesser number is required for a quorum
by the certificate of incorporation or bylaws (but in no event less than one-
third of the votes of the entire board or committee), a majority of the
directors then in office shall constitute a quorum.
Under the URBCA, a quorum of the Board of Directors consists of a majority
of the fixed number of directors if the corporation has a fixed board size, or
if the corporation's Bylaws provide for a variable board size, a majority of
the number of directors prescribed, or if no number is prescribed, the number
in office. However, the articles of incorporation or the bylaws may establish
a higher or lower number of director to constitute a quorum, but in no event
may the number be less than one-third of the number of directors.
DERIVATIVE SUITS
Pursuant to the DGCL, the plaintiff must have been a shareholder of the
corporation at the time of the transaction of which he complains or his stock
thereafter must have devolved upon him by operation of law.
Under the URBCA, a person may not commence a derivative action unless the
person was a stockholder of the corporation at the time when the transactions
complained of occurred (unless the person became a shareholder through
transfer by operation of law from a person who was a shareholder at the time).
The complaint must be verified and allege with particularity (i) the demand
made on the board of directors and that either the demand was refused or
ignored by the board of directors, or (ii) if no demand was made on the board
of directors, why the person did not make the demand. If a court finds that
the proceeding was commenced without reasonable cause, the court may require
the plaintiff to pay the defendant's reasonable expenses, including counsel
fees.
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AMENDMENTS TO THE CHARTER
The DGCL provides that amendments to the certificate of incorporation
require the affirmative vote of the holders of a majority of the outstanding
shares entitled to vote thereon, except that if the certificate of
incorporation requires the vote of a greater number of proportion of the
directors or of the holders of any class of stock than is required by Delaware
Law with respect to any matter, the provision of the certificate of
incorporation may not be amended, altered or repealed except by such greater
vote.
The URBCA provides that the board of directors may propose amendments to the
articles of incorporation for submission to the stockholders. For an amendment
to be adopted, (i) the board of directors must recommend the amendment to the
stockholders (unless the board determines that because of a conflict of
interest or other special circumstances it should not make a recommendation
and communicates the basis for its determination to the stockholders), and
(ii) unless the articles of incorporation, the bylaws (if authorized by the
articles of incorporation) or a resolution of the board of directors require a
greater number, the amendment must be approved by (a) a majority of the votes
entitled to be cast on the amendment by any voting group as to which the
amendment would create dissenters' rights, (b) a majority of the votes
entitled to be cast on the amendment by any voting group as to which the
amendment would materially and adversely affect the voting group's rights in
shares (including preferential rights, rights in redemption, preemptive
rights, voting rights or rights in certain reverse splits), and (c) a majority
of the votes cast for all other voting groups (voting separately, as
applicable, with shares constituting a quorum present for each voting group).
NOTICE, ADJOURNMENT AND PLACE OF STOCKHOLDERS' MEETINGS
There is no specific statutory requirement under Delaware law with regard to
advance notice of director nominations and stockholder proposals. Absent a
Bylaw restriction, director nominations and stockholder proposals may be made
without advanced notice at the annual meeting. However, federal securities
laws generally provide that stockholder proposals that the proponent wished to
include in the Company's proxy materials must be received not less than 120
days in advance of the date stated in the proxy statement released in
connection with the previous year's annual meeting.
The AGI Bylaws provide that, in order for director nominations or
stockholder proposals to be properly brought before the annual meeting, the
stockholder must have delivered timely notice to the Secretary of the
Corporation. To be timely under the AGI Bylaws, notice must be received at the
principal executive offices of the Company not later than the following dates:
(i) with respect to a meeting of stockholders, 60 days in advance of such
meeting, but no more than 90 days in advance, if such meeting is to be held on
a day which is within 30 days preceding the anniversary of the previous year's
meeting; and (ii) with respect to any other meeting of stockholders or a
special meeting of stockholders, the close of business on the tenth day
following the date of public disclosure of the date of such meeting. These
notice requirements help ensure that stockholders are aware of all proposals
to be voted on at the annual meeting have the opportunity to consider each
proposal in advance of the annual meeting.
The E&S Bylaws require that notice of stockholders' meetings be given
between ten (10) and fifty (50) days before a meeting unless the stockholders
waive or reduce the notice waiting period by unanimous consent in writing.
Both the URBCA and the DGCL provide for adjournments of stockholders'
meetings. The URBCA requires notice of the adjournment if the adjournment is
for thirty (30) days or more. The DGCL and the AGI Bylaws require that if the
adjournment is for more than thirty (30) days or if a new record date is
fixed, notice must be given to the stockholders as for the original meeting.
Both the DGCL and URBCA permit meetings of stockholders to be held at such
place as is designated by or in the manner provided in the Bylaws. If not so
designated, DGCL requires that the meeting be held at the registered office of
the Delaware corporation, while the URBCA provides for the principal office of
the corporation.
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DIRECTORS
The AGI Bylaws provide that the number of members of the Board of Directors
shall consist of seven (7) persons. A majority of the number of directors then
in office constitutes a quorum for the transaction of business. The AGI
Charter provides that a vacancy in the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or other
cause may be filled only by a majority vote of the Directors then in office
even though less than a quorum, or by a sole remaining director.
The E&S Bylaws provide that the Board of Directors of the Company consists
of not less than three (3) and not more than seven (7) directors with actual
number being determined by resolutions adopted by the Board of Directors by
two-thirds vote and the Board from time to time. A majority of the number of
directors constitutes a quorum for the transactions of business. E&S's Charter
provides that a vacancy among the directors may be filled for the unexpired
term of the affirmative vote of a majority of the remaining directors in
office, though less than a quorum.
ELECTION AND REMOVAL OF DIRECTORS
The AGI Charter provides that the Board of Directors of AGI shall be divided
into three classes, as nearly equal in number as reasonably possible with a
term of office of the first class to expire at the 1998 annual meeting of
stockholder or any special meeting in lieu thereof, with the term of office of
the second class to expire at the 1999 annual meeting of stockholders or any
special meeting in lieu thereof, and the term of office of the third class to
expire at the 2000 annual meeting of stockholders or any special meeting in
lieu thereof. At each annual meeting of stockholders or special meeting in
lieu thereof following such initial classification, the directors elected to
succeed those directors whose terms expire, shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders or
special meeting in lieu thereof after their election until their successors
are duly elected and qualified. Any director, or the entire Board of
Directors, may be removed only for cause, and only the vote of a majority of
the voting power of the Company. Vacancies on the board may be filled by the
directors or the stockholders.
The E&S Charter provides that the directors shall be divided into three
classes. Each class consists of as nearly as possible one-third of the total
number of directors constituting the entire Board of Directors. Successors to
the class of directors whose term expires at an annual meeting are elected for
a three-year term expiring at the third annual meeting succeeding their
election. Under the URBCA, directors may be removed by a majority vote of
shareholders, with or without cause. Vacancies on the board may be filled by
the directors or the shareholders.
INSPECTION OF BOOKS AND RECORDS
Under the DGCL, any shareholder of record, upon written demand under oath
stating the purpose thereof, has the right during the usual hours for business
to inspect for any proper purpose, the corporation's stock ledger, a list of
its shareholders and its other books and records and to make copies or extract
therefrom.
Under the URBCA, upon providing the corporation with a written demand at
least five (5) business days before the date the stockholder wishes to make an
inspection, a stockholder and his agent and attorneys are entitled to inspect
and copy, during regular business hours: (i) the articles of incorporation,
bylaws, minutes of stockholders meetings for the previous three (3), written
communications to stockholders for the previous three (3) years, names and
business addresses of the officers and directors, the most recent annual
report delivered to the State of Utah, and financial statements for the
previous three (3) years and (ii) if the stockholder is acting in good faith
and for a proper purpose, excerpts from the records of the board of directors
and stockholders (including minutes of meetings, written consents and waivers
of notices), accounting records and stockholder lists.
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TRANSACTIONS WITH OFFICERS AND DIRECTORS
Under the DGCL, contracts or transactions in which a director or officer is
financially interested are not automatically void or voidable, if approved by
the stockholders or the directors. Approval by the stockholders requires only
a simple majority. Board approval must be by a majority of the disinterested
directors, but interested directors may be counted for purposes of
establishing a quorum.
The URBCA provides that every director who is in any way, directly or
indirectly, interested in a proposed contract or transaction with the Company
is liable to account to the Company for any profit made as a consequence of
the Company entering into such transaction unless such person: (a) disclosed
his or her interest at the meeting of directors where the proposed transaction
was first considered, and, after his or her disclosure, the transaction was
approved by the a majority of the disinterested directors; (b) disclosed his
or her interest prior to a meeting or written consent of stockholders and ,
after his or her disclosure, the transaction was approved by the a majority of
the disinterested shares; or (c) can show that the contract or transaction was
fair and reasonable to the Company.
LIMITATION ON LIABILITY OF DIRECTORS; INDEMNIFICATION OF OFFICERS AND
DIRECTORS
The DGCL permits a corporation to adopt provisions in its certificate of
incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, with the following exceptions: (a) a breach of
the director's duty of loyalty; (b) payment of an unlawful stock dividend or
making an unlawful stock repurchase or redemption; (c) acts or omissions not
in good faith or involving intentional misconduct or a knowing violation of
law; or (d) in any transaction in which the director derived an improper
personal benefit. The AGI Charter eliminates the liability of directors of the
corporation for monetary damages to the fullest extent permissible under DGCL.
The DGCL permits a corporation to indemnify its current and former
directors, officers, employees and other agents under circumstances similar to
those for which the E&S Charter Documents provide. The AGI Charter Documents
require AGI to indemnify all such persons whom it has the power to indemnify
to the fullest extent legally permissible by the DGCL. The AGI Bylaws permit
it to advance expenses to a director or officer, provided that the director or
officer undertakes to repay amounts advanced if it is ultimately determined
that such person is not entitled to indemnification, and subject to such other
conditions as the Board may impose.
Indemnification rights under the DGCL are not exclusive. Accordingly, AGI's
Bylaws specifically permit AGI to indemnify its directors, officers, employees
and other agents pursuant to an agreement, bylaw provision, shareholder vote
or vote of disinterested directors or otherwise, any or all of which may
provide indemnification rights broader than those currently available under
the Utah or Delaware indemnification statutes.
The URBCA permits a corporation, if so provided in its Articles of
Incorporation, its Bylaws or in a shareholder resolution, to eliminate or
limit the personal liability of a director to the corporation or its
stockholders for monetary damages due to any action taken or any failure to
take action as a director, except liability for: (a) improper financial
benefits received by a director; (b) intentional inflictions of harm on the
corporation or its shareholders; (c) payment of dividends to shareholders
making the corporation insolvent; and (d) intentional violations of criminal
law. The E&S Charter Documents eliminate the liability of directors of the
corporation for monetary damages to the fullest extent permissible under
URBCA.
Under the URBCA, a corporation may indemnify its current and former
directors, officers employees and other agents made party to any proceeding
because of their relationship to the corporation against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with such proceeding if that person acted in good faith and
reasonably believed his or her conduct to be in the corporation's best
interests, and, in the case of a criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful. The URBCA also permits a
corporation to indemnify its directors, officers, employees and other agents
in connection with the proceeding by or in the right of the corporation to
procure a judgment in its favor
90
<PAGE>
by reasons of the fact that the person is such an agent of the corporation,
against expenses actually and reasonably incurred by such persons in
connection with the proceeding. The URBCA prohibits the indemnification of an
agent in connection with the proceeding by or in the right of the corporation
in which the director, officer, employee or agent was adjudged liable to the
corporation, or in connection with any other proceeding in which the agent is
adjudged liable on the basis that the agent derived an improper personal
benefit. The E&S Charter Documents permit indemnification of all such persons
whom it has the power to indemnify to the fullest extent legally permissible
under the URBCA. The URBCA permits a corporation to advance expenses incurred
by a director, officer, employee or agent who is a party to a proceeding in
advance of final disposition of the proceeding if that persons provides (a) a
written affirmation of his good faith belief that he acted in good faith, in
the corporation's best interests and, in the case of a criminal proceeding,
had no reasonable cause to believe his conduct was unlawful; (b) a written
undertaking by or on behalf of that person to repay the advance if it is
ultimately determined that such person's conduct did not meet the statutory
standard required for indemnification; and (c) the corporation determines
under the facts then known that indemnification would not be precluded. The
E&S Charter Documents permit such advances.
Indemnification rights under URBCA are not exclusive. Accordingly, E&S's
Bylaws specifically permit E&S to indemnify its directors, officers, employees
and other agents pursuant to an agreement, bylaws provision, shareholder vote
or vote of disinterested directors or otherwise, any or all of which may
provide indemnification rights broader than those currently available under
the Utah or Delaware Indemnification statutes.
Both the AGI Charter Documents and E&S Charter Documents provide that AGI
and E&S, respectively, may purchase insurance on behalf of those persons
entitled to be indemnified.
91
<PAGE>
ELECTION OF CLASS I DIRECTORS
At the Annual Meeting, two directors of the AGI Board are to be elected,
each to hold office until the earlier of the expiration of their term or the
consummation of the Merger. The AGI Board of Directors, which is currently
comprised of six members, is divided into three classes. Each class of AGI
directors consists of two directors, and each class of directors serves for a
staggered three-year term and until a successor is elected and qualified.
All members of Class I are standing for reelection in 1998. The Board of
Directors has nominated the two current members of Class I to be re-elected
and to serve a three-year term expiring at the Annual Meeting of Stockholders
to be held in 2001. Each of the nominees named below is currently a director
of AGI and has consented to serve as a director:
<TABLE>
<CAPTION>
POSITION WITH AGI AND
NAME AGE PRESENT PRINCIPAL OCCUPATION
---- --- ----------------------------
<C> <C> <S>
David E. Gold 54 Mr. Gold has served as a director of AGI since June 1995.
Since February 1995, he has been a General Partner of Indo
Suez Ventures, a venture capital firm.
Peter L. Wolken 63 Mr. Wolken has served as a director of AGI since June
1995. Mr. Wolken is a general Partner of AVI Management
Partners and co-founded AVI in 1981. He serves as a
director of a number of private technology companies in
Silicon Valley and has served as a director of Qualix
Group, Inc. since 1990.
</TABLE>
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the Company's two nominees, David E. Gold and Peter L.
Wolken, regardless of whether any other names are placed in nomination by
anyone other than one of the proxy holders. In the event that any such nominee
is unable or declines to serve as a director at the time of the Annual
Meeting, the proxy holders will vote the proxies received by them in their
discretion for a substitute nominee. It is not expected that any nominee will
be unavailable. The term of office of each person elected as a director will
continue until the earlier of the expiration of his term or consummation of
the Merger.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEES LISTED ABOVE
92
<PAGE>
LEGAL MATTERS
The legality of the E&S Common Stock offered hereby will be passed upon for
E&S by Snell & Wilmer L.L.P., counsel to E&S. Snell & Wilmer L.L.P., counsel
to E&S and Venture Law Group, A Professional Corporation, counsel to AGI, will
deliver opinions concerning the federal income tax consequences of the Merger.
EXPERTS
The consolidated financial statements of AGI as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997
included in this Proxy Statement/Prospectus have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements and schedule of E&S as of December 31,
1997 and December 27, 1996, and for each of the years in the three-year period
ended December 31, 1997, have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
93
<PAGE>
ACCELGRAPHICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheet as of December 31, 1997 and 1996............... F-3
Consolidated Statement of Operations for the three years in the period
ended December 31, 1997.................................................. F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the three
years in the period ended December 31, 1997.............................. F-5
Consolidated Statements of Cash Flows for the three years in the period
ended December 31, 1997.................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of AccelGraphics, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of AccelGraphics, Inc. and its subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 26, 1998
F-2
<PAGE>
ACCELGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 2,979 $ 9,367 $10,732
Short-term investments......................... -- 6,526 6,729
Accounts receivable, net of allowances of $495,
$737 and $776................................. 4,392 6,545 5,776
Inventories.................................... 507 2,566 1,513
Other current assets........................... 49 434 309
------- ------- -------
Total current assets......................... 7,927 25,438 25,059
Property and equipment, net...................... 512 876 792
Long-term investments............................ -- 1,995 2,999
------- ------- -------
$ 8,439 $28,309 $28,850
======= ======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term obligations....... $ 16 $ 230 $ 332
Accounts payable............................... 1,466 2,066 2,316
Accrued liabilities............................ 1,415 1,266 1,228
------- ------- -------
Total current liabilities.................... 2,897 3,562 3,876
------- ------- -------
Capital lease obligation, net of current
portion......................................... 34 105 92
------- ------- -------
Long term debt, net of current portion........... -- 377 356
------- ------- -------
Subordinated convertible note payable to related
party........................................... 1,748 -- --
------- ------- -------
Mandatorily redeemable convertible preferred
stock........................................... 8,930 -- --
------- ------- -------
Commitments (Notes 4 and 8)
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 2,000 shares
authorized; none issued and outstanding....... -- -- --
Common Stock, $0.001 par value, 50,000 shares
authorized; 1,253, 8,378 and 8,451 shares
issued and outstanding........................ 1 8 8
Additional paid-in capital..................... 785 30,037 30,138
Notes receivable from stockholders............. (89) (49) (48)
Deferred stock compensation.................... (396) (160) (126)
Cumulative translation adjustment.............. (5) (9) (20)
Accumulated deficit............................ (5,466) (5,562) (5,426)
------- ------- -------
Total stockholders' equity (deficit)......... (5,170) 24,265 24,526
------- ------- -------
$ 8,439 $28,309 $28,850
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ACCELGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 3,911 $18,671 $33,509 $11,832 $10,479
Cost of revenues.................. 2,501 12,077 23,171 7,584 7,761
------- ------- ------- ------- -------
Gross profit.................... 1,410 6,594 10,338 4,248 2,718
------- ------- ------- ------- -------
Operating expenses:
Research and development........ 2,618 2,663 4,493 1,055 1,034
Sales and marketing............. 2,154 3,635 4,815 1,511 1,174
General and administrative...... 1,039 1,131 1,909 475 526
------- ------- ------- ------- -------
Total operating expenses...... 5,811 7,429 11,217 3,041 2,734
------- ------- ------- ------- -------
Income (loss) from operations..... (4,401) (835) (879) 1,207 (16)
Interest expense.................. (183) (145) (72) (40) (16)
Interest and other income, net.... 119 48 855 37 178
------- ------- ------- ------- -------
Income (loss) before income tax
provision ....................... (4,465) (932) (96) 1,204 146
Income tax provision............ -- -- -- 370 10
------- ------- ------- ------- -------
Net income (loss)................. $(4,465) $ (932) $ (96) $ 834 $ 136
======= ======= ======= ======= =======
Net income (loss) per share:
Basic........................... $ (9.15) $ (1.09) $ (0.02) $ 0.80 $ 0.02
======= ======= ======= ======= =======
Diluted......................... $ (9.15) $ (1.09) $ (0.02) $ 0.13 $ 0.02
======= ======= ======= ======= =======
Shares used in per share
calculations:
Basic........................... 488 854 6,103 1,039 8,415
======= ======= ======= ======= =======
Diluted......................... 488 854 6,103 6,648 8,973
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ACCELGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
NOTES STOCK-
ADDI- RECEIVABLE DEFERRED HOLDERS'
COMMON STOCK TIONAL FROM STOCK ACCUM- EQUITY
--------------- PAID-IN STOCK- COMPEN- CUMULATIVE ULATED TRANSLATION
SHARES AMOUNTS CAPITAL HOLDERS SATION ADJUSTMENT DEFICIT (DEFICIT)
------ ------- ------- ---------- -------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER
31,1994................ 910 $ 1 $ 60 $(55) $ -- $-- $ (69) $ (63)
Common Stock options
exercised.............. 202 -- 31 (20) -- -- -- 11
Repurchase of Common
Stock.................. (41) -- (11) -- -- -- -- (11)
Net loss................ -- -- -- -- -- -- (4,465) (4,465)
----- --- ------- ---- ----- ---- ------- -------
BALANCE AT DECEMBER 31,
1995................... 1,071 1 80 (75) -- -- (4,534) (4,528)
Common stock options
exercised.............. 129 -- 23 (13) -- -- -- 10
Repayment of notes
receivable from
stockholders........... -- -- -- 2 -- -- -- 2
Interest on notes
receivable............. -- -- -- (3) -- -- -- (3)
Deferred compensation
related to stock
options................ -- -- 608 -- (608) -- -- --
Stock issued in exchange
for services........... 53 -- 74 -- -- -- -- 74
Amortization of deferred
compensation........... -- -- -- -- 212 -- -- 212
Translation adjustment.. -- -- -- -- -- (5) -- (5)
Net loss................ -- -- -- -- -- -- (932) (932)
----- --- ------- ---- ----- ---- ------- -------
BALANCE AT DECEMBER 31,
1996................... 1,253 1 785 (89) (396) (5) (5,466) (5,170)
Stock issued in initial
public offering, net... 2,535 3 20,330 -- -- -- -- 20,333
Stock issued upon net
exercise of warrants... 22 -- -- -- -- -- -- --
Conversion of Preferred
Stock to Common Stock.. 4,509 4 8,926 -- -- -- -- 8,930
Common stock options
exercised.............. 59 -- 40 -- -- -- -- 40
Repayment of notes
receivable from
stockholder............ -- -- -- 40 -- -- -- 40
Amortization of deferred
compensation and other. -- -- (44) -- 236 -- -- 192
Translation adjustment.. -- -- -- -- -- (4) -- (4)
Net loss................ -- -- -- -- -- -- (96) (96)
----- --- ------- ---- ----- ---- ------- -------
BALANCE AT DECEMBER 31,
1997................... 8,378 8 30,037 (49) (160) (9) (5,562) 24,265
Stock issued upon net
exercise of warrants
(unaudited)............ 16 -- -- -- -- -- -- --
Common stock issued
(unaudited)............ 57 -- 101 -- -- -- -- 101
Repayment of notes
receivable from
stockholder
(unaudited)............ -- -- -- 1 -- -- -- 1
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- 34 -- -- 34
Translation adjustment
(unaudited)............ -- -- -- -- -- (11) -- (11)
Net income (unaudited).. -- -- -- -- -- -- 136 136
----- --- ------- ---- ----- ---- ------- -------
BALANCE AT MARCH 31,
1998 (UNAUDITED)....... 8,451 $ 8 $30,138 $(48) $(126) $(20) $(5,426) $24,526
===== === ======= ==== ===== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ACCELGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $(4,465) $ (932) $ (96) $ 834 $ 136
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and amortization. 158 228 423 78 122
Loss on disposal of property
and equipment................ -- -- 28 28 --
Stock compensation expense and
other........................ 98 283 192 61 34
Changes in assets and
liabilities:
Accounts receivable......... (1,084) (3,308) (2,153) (1,455) 769
Inventories................. (130) 504 (2,059) (433) 1,053
Other assets................ 20 (1) (385) 21 125
Accounts payable............ 340 964 600 1,928 250
Accrued liabilities......... 484 931 (149) 1,051 (38)
------- ------- ------- ------- -------
Net cash used in operating
activities............... (4,579) (1,331) (3,599) 2,113 2,451
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property and
equipment....................... (245) (251) (661) (69) (38)
Purchases of investments, net.... -- -- (8,521) -- (1,207)
------- ------- ------- ------- -------
Net cash used in investing
activities............... (245) (251) (9,182) (69) (1,245)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal repayment of note
payable/capital lease
obligation...................... (470) (4) (2,289) (2) (14)
Proceeds from issuance of notes
payable......................... 470 -- 1,049 -- 82
Proceeds from repayment of notes
receivable from stockholders.... -- 2 40 9 1
Net proceeds from issuance of
Common Stock.................... -- 10 20,373 9 101
Deferred financing costs......... -- -- -- (429) --
Proceeds from issuance of
Preferred Stock................. 4,095 3,185 -- -- --
------- ------- ------- ------- -------
Net cash provided by
financing activities..... 4,095 3,193 19,173 (413) 170
------- ------- ------- ------- -------
Effect of exchange rate changes on
cash............................. -- (5) (4) -- (11)
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents............. (729) 1,606 6,388 1,631 1,365
Cash and cash equivalents at
beginning of year................ 2,102 1,373 2,979 2,979 9,367
------- ------- ------- ------- -------
Cash and cash equivalents at end
of year.......................... $ 1,373 $ 2,979 $ 9,367 $ 4,610 $10,732
======= ======= ======= ======= =======
Supplemental cash flow
disclosures:
Interest paid.................... $ 47 $ 135 $ 202 $ 47 $ 33
======= ======= ======= ======= =======
Income taxes paid................ $ -- $ -- $ 181 $ 45 $ 4
======= ======= ======= ======= =======
Supplemental disclosure of noncash
investing and financing
activities:
Property and equipment acquired
under capital leases............ $ -- $ 54 $ 154 $ 80 $ --
======= ======= ======= ======= =======
Conversion of note payable to
Preferred Stock................. $ 1,650 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Conversion of Mandatorily
Redeemable Convertible Preferred
Stock into Common Stock......... $ -- $ -- $ 8,930 $ -- $ --
======= ======= ======= ======= =======
Issuance (cancellation) of
compensatory stock options...... $ -- $ 608 $ (44) $ -- $ --
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
AccelGraphics, Inc. (the "Company") designs, develops and markets 3-
dimensional ("3D") graphics subsystems, software accelerators and application
utility software products for the professional Windows NT and Windows 95
markets. The Company is incorporated in the State of Delaware and commenced
operations in late 1994.
The Company completed its initial public offering of Common Stock in April
1997. The offering consisted of 2,535,000 shares issued by the Company and
455,000 shares sold by existing stockholders and resulted in net proceeds to
the Company of approximately $20,300,000. In conjunction with the offering,
all shares of mandatorily redeemable convertible preferred stock were
automatically converted into 4,509,000 shares of Common Stock.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Fiscal year end
The Company operates under a 52-53 week fiscal year which ends on the Friday
closest to December 31. Fiscal 1997 was a 53 week year, while fiscal 1996 and
1995 were 52 week years. For convenience of presentation, the accompanying
consolidated financial statements have been shown as ending on December 31 of
each year.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Translation of foreign currencies
The functional currency of the Company's wholly owned subsidiaries is the
local currency. Accordingly, all assets and liabilities are translated into
United States dollars at current exchange rates as of the respective balance
sheet date. Revenue and expense items are translated using the average
exchange rates prevailing during the period. Gains and losses resulting from
translation are accumulated as a component of stockholders' equity. The
Company's sales are generally denominated in United States dollars. Net gains
and losses resulting from foreign exchange transactions were not significant
during the periods presented.
Revenue recognition
Revenues from product sales are generally recognized upon product shipment,
less an allowance for estimated future returns and exchanges. Provision for
the estimated costs of providing technical support services, and future
warranty obligations for the Company's products are recorded as a cost of
revenues upon recognition of related revenues. Revenues from license and
royalty agreements is recognized when the revenue is earned and collectibility
is assured.
F-7
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash, cash equivalents and investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1997 and 1996 approximately $9,331,000 and $2,408,000, respectively of
money market funds and commercial paper instruments, the fair value of which
approximate cost, are included in cash and cash equivalents.
Management determines the appropriate classification of its investments in
marketable debt securities at the time of purchase and re-evaluates such
designation as of each balance sheet date. The Company classifies all
securities as "available for sale" and carries them at fair value with any
unrealized gains or losses related to these securities reported as a separate
component of stockholders' equity.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market.
Research and development costs
Expenditures for research and development are charged to expense as
incurred. Software product development costs incurred from the time
technological feasibility has been reached until the product is generally
available to customers are capitalized and reported at the lower of cost or
net realizable value. To date, no significant amounts have been expended
subsequent to reaching technological feasibility. Non-recurring engineering
fees are reflected as a reduction of research and development expense in the
period earned. During 1996, the Company recognized $190,000 of such fees.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from two to five years. Capitalized lease assets and leasehold
improvements are amortized using the straight-line method over the shorter of
their estimated useful lives or the remaining lease term.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, investments and trade accounts
receivable. The Company places its cash and investments in money market
accounts, certificates of deposit, commercial paper and term notes. Cash and
investments are maintained with high quality institutions and their
composition and maturities are regularly monitored by management.
The Company's trade accounts receivable are derived from sales to original
equipment manufacturers, distributors and dealers located primarily in the
U.S. and Europe. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses based upon
the expected collectibility of all accounts receivable.
Revenues from Hewlett-Packard Company and Digital Equipment Corporation were
36.4% and 22.4%, respectively, of revenue in 1997. Revenues from Hewlett-
Packard Company and Digital Equipment Corporation were 22.8% and 27.9%,
respectively, of revenue in 1996. Revenues from the Company's former customer,
NeTpower, Inc., comprised 16.6% of revenues in 1995.
F-8
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenues from export sales, primarily Europe, were approximately
$15,360,000, $5,810,000 and $850,000 during 1997, 1996, and 1995,
respectively.
One customer and a sub-contract manufacturer for the Company accounted for
37.5% and 23.9%, respectively, of the accounts receivable balance at December
31, 1997.
Accounting for stock-based compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements
of Statement of Financial Accounting Standards No. 123 ("FAS 123"),
"Accounting for Stock-Based Compensation" (see Note 7).
Net loss per share
Effective December 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("FAS 128"), "Earnings per Share" and Staff
Accounting Bulletin No. 98; and consequently, all historical earnings per
share information has been restated.
Basic net loss per share is computed using the weighted-average number of
common shares outstanding during the periods. In accordance with the
requirements of FAS 128, the Company has excluded 131,000, 317,000 and 502,000
shares of common stock, which are subject to repurchase at December 31, 1997,
1996 and 1995, respectively, from basic shares outstanding. For the years
ended December 31, 1997, 1996 and 1995, there were no outstanding dilutive
common equivalent shares.
Basic and diluted EPS were calculated as follows during the three months
ended March 31, 1997 and 1998 (unaudited):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
1997 1998
------ ------
(IN
THOUSANDS,
EXCEPT PER
SHARE
AMOUNTS)
<S> <C> <C>
BASIC:
Weighted average common shares.............................. 1,240 8,415
Unvested portion of common shares subject to vesting........ (201) --
------ ------
Shares used in basic per share calculation.................. 1,039 8,415
====== ======
Net income.................................................. $ 834 $ 136
====== ======
Basic net income per share.................................. $ 0.80 $ 0.02
====== ======
DILUTED:
Weighted average common shares.............................. 1,240 8,415
Weighted average preferred shares, as if converted.......... 4,529 --
Common equivalent shares from stock options and warrants.... 879 558
------ ------
Shares used in diluted per share calculation................ 6,648 8,973
====== ======
Net income.................................................. $ 834 $ 136
====== ======
Diluted net income per share................................ $ 0.13 $ 0.02
====== ======
</TABLE>
F-9
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options to purchase 443,813 shares of common stock at a range of $5.25 to
$9.50 per share were outstanding during the first quarter of fiscal 1998 but
were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares
for the quarter. No options were excluded from the computation of diluted EPS
during the first quarter of fiscal 1997.
Recent pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company is required to adopt for its 1998
annual financial statements. This statement will require the Company to report
in the financial statements, in addition to net income, comprehensive income
and its components including foreign currency items and unrealized gains and
losses on certain investments in debt and equity securities. Upon adoption of
FAS 130, the Company is also required to reclassify financial statements for
earlier periods provided for comparative purposes.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company is required adopt for its 1998 annual
financial statements. This statement establishes standards for reporting
information about operating segments in annual financial statements and
requires selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Under FAS 131, operating segments are to be determined consistent with the way
that management organizes and evaluates financial information internally for
making operating decisions and assessing performance.
Unaudited Interim Financial Information
The unaudited interim financial information as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 has been prepared on the same basis
as the audited financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of this interim
information. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for any future
period.
NOTE 2--RELATED-PARTY TRANSACTIONS:
The Company had a subordinated convertible note payable to a related party
(see Note 5). The note was repaid in April 1997.
The Company has loans outstanding to certain employees totaling $49,000 at
December 31, 1997 for the purchase of Common Stock. These loans accrue
interest at a fixed rate of 7.32% per annum and are due on the earlier of
November 9, 1998 or termination of employment with the Company. Upon
termination of employment, the Company has the option to repurchase the
unvested shares by canceling the related portion of the loan.
At December 31, 1997, there were 51,000 shares of Common Stock which were
sold to certain employees and consultants as restricted stock for which
repurchase rights have not lapsed. These shares may be repurchased at the
Company's option if the employee or consultant terminates services prior to
vesting, generally over four years.
The Company purchased marketing services from a distributor which was also a
common stockholder until October 1997 for $12,000 and $108,000 in 1996 and
1995, respectively. No services were purchased in 1997. These amounts have
been recorded in the consolidated statement of operations as sales and
marketing expense. The Company recognized revenue from this distributor of
$990,000, $1,195,000 and $109,000 in 1997, 1996 and 1995, respectively.
F-10
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's outside legal counsel are also stockholders. The Company
incurred legal expenses to this stockholder of $430,000, $121,000 and $89,000
during 1997, 1996, and 1995, respectively.
NOTE 3--BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------- -----------
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents:
Cash....................................... $ 571 $ 36
Commercial paper........................... -- 6,461
Money market funds......................... 2,408 2,370
Other...................................... -- 500
------ ------
$2,979 $9,367
====== ======
Short-term investments:
Certificates of deposit.................... $ -- $2,998
Commercial paper........................... -- 2,118
Medium term notes.......................... -- 1,410
------ ------
$ -- $6,526
====== ======
Realized and unrealized gains or losses on
sales of available-for-sale securities were
immaterial for the years ended December 31,
1995, 1996 and 1997. Short- term
investments have maturities of less than
one year and long-term investments have
maturities of up to 2 years.
Inventories:
Raw materials.............................. $ 144 $1,297 $ 875
Work-in-process............................ 41 978 182
Finished goods............................. 322 291 456
------ ------ ------
$ 507 $2,566 $1,513
====== ====== ======
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Property and equipment:
Office furniture and equipment............. $ 871 $1,584
Leasehold improvements..................... 27 73
------ ------
898 1,657
Less: accumulated depreciation and
amortization.............................. (386) (781)
------ ------
$ 512 $ 876
====== ======
At December 31, 1996 and 1997, the Company
had $54,000 and $208,000, respectively, of
capitalized lease equipment and related
accumulated amortization of $5,000 and
$63,000, respectively.
Accrued liabilities:
Accrued employee compensation.............. $ 616 $ 410
Warranty and customer support.............. 325 633
Customer advances.......................... 292 --
Other accrued liabilities.................. 182 223
------ ------
$1,415 $1,266
====== ======
</TABLE>
F-11
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--BORROWINGS:
At December 31, 1997, the Company has borrowed $549,000 under a term loan
with a bank which provides for borrowings of up to $1,000,000 through May
1998. Outstanding borrowings bear interest at the bank's prime rate plus 0.5%
per annum (9.0% at December 31, 1997) through May 1998; thereafter, principal
and interest are due in 24 equal payments. The loan is secured by property and
equipment.
The Company also has a revolving line of credit agreement with the bank,
which, through December 1998, provides for maximum borrowings in an amount up
to the lower of 80% of eligible accounts receivable or $3,000,000. Borrowings
under the line are secured by all of the Company's assets and bear interest at
the bank's prime rate plus 0.25% per annum (8.75% at December 31, 1997). The
agreement requires that the Company maintain certain financial ratios and
levels of tangible net worth and profitability and also restricts the
Company's ability to pay cash dividends. All borrowings are cross-
collateralized. At December 31, 1997, there were no borrowings and $1,100,000
of standby letters of credit outstanding under the line of credit. As a result
of the loss incurred in September 1997, the Company was in violation of
certain debt covenants; however, the bank waived such covenants.
NOTE 5--SUBORDINATED CONVERTIBLE NOTE PAYABLE TO A RELATED PARTY:
In December 1994, the Company issued a subordinated convertible note payable
in the amount of $3,300,000 to Kubota Corporation ("Kubota"). In 1995, Kubota
converted $1,650,000 of the note into 990,000 shares of the Company's Series A
Preferred Stock. The outstanding balance of $1,650,000, together with accrued
interest of $98,000, was replaced with a new subordinated convertible note
payable of $1,748,000 which was repaid in April 1997. Interest expense under
the note payable was $45,000, $144,000 and $178,000 during the years ended
December 31, 1997, 1996 and 1995, respectively.
NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
A summary of Preferred Stock activity is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
SHARES AMOUNT
------ -------
<S> <C> <C>
Balance at December 31, 1994................................... -- $ --
Issuance of Series A Preferred Stock (June 1995) at $1.67 per
share for cash.............................................. 1,707 2,845
Issuance of Series A Preferred Stock (June 1995) at $1.67 per
share upon conversion of note with Kubota Corporation....... 990 1,650
Issuance of Series A Preferred Stock (July 1995) at $1.67 per
share for cash.............................................. 750 1,250
------ -------
Balance at December 31, 1995................................... 3,447 5,745
Issuance of Series B Preferred Stock (March 1996) at $3.00
per share for cash.......................................... 1,062 3,185
------ -------
Balance at December 31, 1996................................... 4,509 8,930
Conversion of Preferred Stock into Common Stock.............. (4,509) (8,930)
------ -------
-- $ --
====== =======
</TABLE>
NOTE 7--STOCK OPTION AND BENEFIT PLANS:
Stock Plan
The 1995 Stock Plan (the "Plan") authorizes the Board of Directors to grant
incentive stock options, nonstatutory stock options and stock purchase rights
to employees and consultants. Under the Plan, incentive stock options are
granted at a price not less than 100% of the fair market value of the
Company's Common Stock, as determined by the Company's Board of Directors, and
at a price not less than 110% of the fair market
F-12
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value for grants to employees who owned more than 10% of the voting power of
all classes of stock on the date of grant. Nonqualified stock options may be
granted at a price not less than 85% of the fair market value of the Common
Stock, as determined by the Board of Directors, and at a price not less than
110% of the fair market value for grants to a person who owned more than 10%
of voting power of all classes of stock on the date of grant. Stock purchase
rights may be granted at a price not less than 85% of the fair market value of
the Common Stock and at a price of 100% of the fair market value of the Common
Stock for grants to a stockholder owning 10% or more of the Company's
outstanding stock. Stock purchase rights expire 30 days after the date of
grant. Options generally become exercisable at a rate of not less than 25% per
year over a four year vesting period. At December 31, 1997, options authorized
under the Plan were 3,300,000 and options for approximately 1,810,000 shares
were available for future grant.
Directors' Stock Option Plan
The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors in January 1997. A total of 200,000 shares
of Common Stock has been reserved for issuance under the Directors' Plan.
During 1997, options to purchase 75,000 shares were granted under the
Directors' Plan.
A summary of activity under all the plans is as follows (in thousands except
per share amounts):
<TABLE>
<CAPTION>
WEIGHTED-
RANGE OF AVERAGE
OPTION PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
------ ----------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1994............. -- $ -- $ --
Granted.................................... 670 0.12-0.18 0.16
Exercised.................................. (202) 0.12-0.18 0.13
Canceled................................... (11) 0.12-0.18 0.15
-----
Outstanding at December 31,1995.............. 457 0.12-0.18 0.17
Granted.................................... 723 0.18-6.90 1.74
Exercised.................................. (129) 0.12-5.30 0.17
Canceled................................... (44) 0.12-0.18 0.15
-----
Outstanding at December 31,1996.............. 1,007 0.12-6.90 1.30
Granted.................................... 822 5.25-9.50 7.45
Exercised.................................. (158) 0.12-5.30 0.34
Canceled................................... (624) 0.12-9.50 6.25
-----
Outstanding at December 31,1997.............. 1,047 $0.12-$9.50 $3.32
=====
</TABLE>
Options to purchase 268,000, 155,000, and 120,000 shares were exercisable at
December 31, 1997, 1996 and 1995, respectively.
The weighted average fair value of options granted during 1997 and 1996 was
$3.18 and $2.20, respectively. During 1996, the weighted average fair value of
options granted at exercise prices below the fair value of the underlying
Common Stock was $1.53. All options granted during 1997 were granted at
exercise prices equal to the fair value of the underlying Common Stock.
During 1996, the Company granted options for the purchase of approximately
776,000 shares of Common Stock to employees at exercise prices ranging from
$0.30 to $6.90 per share. Based in part on an independent valuation of the
fair value of the Company's Common Stock, management calculated deferred
compensation of approximately $608,000 related to options granted during 1996.
Such deferred compensation is being amortized
F-13
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
over the vesting period relating to these options, of which $192,000 and
$212,000 has been recorded as expense in 1997 and 1996, respectively.
During 1996, the Company issued 53,000 shares to consultants for services
rendered. Such issuances were recorded at fair market value.
The following table summarizes information about employee stock options
outstanding at December 31, 1997 (in thousands, except per share and life
amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
AVERAGE WEIGHTED WEIGHTED
WEIGHTED REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.12--$0.70............. 591 8.10 $0.26 224 $0.24
$5.25--$6.00............. 247 9.66 5.56 33 5.64
$9.00--$9.50............. 209 9.27 9.31 11 9.50
----- ---
1,047 8.70 $3.32 268 $1.30
===== ===
</TABLE>
Fair Value Disclosures
Had compensation expense for options granted in 1997, 1996 and 1995 been
determined based on the fair value at the grant dates, as prescribed in FAS
123, the Company's net loss and basic and diluted pro forma net loss per share
would have been as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported................................. $ (96) $ (932) $ (4,465)
Pro forma................................... (580) (948) (4,468)
Basic and diluted net loss per share:
As reported................................. $ (0.02) $ (1.09) $ (9.15)
Pro forma................................... (0.09) (1.11) (9.16)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1997, 1996 and
1995, respectively: dividend yield of 0% for all three years, risk-free
interest rates of 6.2%, 6.5% and 6.4%, expected volatility of 70%, 0% and 0%,
and expected lives of 3.5 years for all years presented.
Warrants
In 1996, in connection with the negotiation of its line of credit facility,
the Company granted the bank warrants to purchase 30,000 shares of the
Company's Common Stock at an exercise price of $1.67 per share. The warrants
expire on October 10, 2000. The warrants had a nominal value at date of grant.
In December 1995, in connection with a development agreement with a
strategic partner, the Company granted the strategic partner warrants to
purchase 26,250 shares of the Company's Common Stock at $3.00 per share. The
warrants were automatically converted into 17,500 shares of Common Stock upon
the closing of the Company's initial public offering. The warrants had a
nominal value at date of grant.
F-14
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with a lease line of credit, in July 1996 the Company granted
the lessor warrants to purchase 7,000 shares of the Company's Series B
Preferred Stock at an exercise price of $3.00 per share. The warrants were
automatically converted into 4,667 shares of Common Stock upon the closing of
the Company's initial public offering. The warrants had a nominal value at
date of grant.
Employee Stock Purchase Plan
In January 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan (the "Purchase Plan") which provides for a total of 400,000
shares of Common Stock to be issued in a series of twelve month offering
periods, other than the first offering period, commencing on February 1, and
August 1, of each year. The first offering period commenced on April 16, 1997.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's compensation, at
a price equal to the lower of 85% of the fair market value of the Company's
Common Stock at the beginning or end of the offering period. No shares were
issued under the Purchase Plan during 1997.
NOTE 8--LEASES AND COMMITMENTS:
The Company is obligated under a non-cancelable operating lease for office
space and a non-cancelable capital lease for equipment. The leases expire at
various times through 2000. The office lease agreement provides for scheduled
rent increases. Rent expense is recognized ratably over the lease term. Rent
expense was $400,000, $156,000 and $129,000 for 1997, 1996 and 1995,
respectively.
Future minimum lease commitments under these leases at December 31, 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASE LEASE
--------- -------
<S> <C> <C>
Year ending December 31,
1998................................................... $394 $ 69
1999................................................... 131 69
2000................................................... -- 42
---- ----
Total................................................ $525 180
====
Less amount representing interest........................ (17)
----
Present value of capital lease obligation................ 163
Less current portion..................................... (58)
----
Long term capital lease obligation....................... $105
====
</TABLE>
NOTE 9--INCOME TAXES:
The provision for income taxes of $5,000 in 1997 is minimum state taxes and
is included in interest income and other, net. No provision for federal and
state income taxes was recorded in 1996 or 1995 as the Company incurred net
operating losses.
F-15
<PAGE>
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Net operating loss carryforwards......................... $ 790 $ 1,365
Tax credit carryforwards................................. 450 200
Nondeductible reserves and accruals...................... 944 630
------- -------
Total deferred tax assets................................ 2,184 2,195
Deferred tax asset valuation allowance................... (2,184) (2,195)
------- -------
$ -- $ --
======= =======
</TABLE>
The Company has incurred losses since its inception through December 31,
1997. Management believes that based on the currently available evidence,
including the Company's history of annual losses, the lack of carryback
capacity to realize deferred tax assets, the annual limitation on the
utilization of net operating loss carryforwards, the uncertainty of the
development of the market in which the Company competes and the fact that the
market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, it is more likely than not that
the Company will not generate sufficient taxable income to realize the
deferred tax asset. Accordingly, a full valuation allowance has been recorded.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $1,800,000 and $1,600,000, respectively,
available to offset future taxable income. Such carryforwards expire beginning
in 2010. At December 31, 1997, the Company also has $250,000 and $200,000 of
federal and state research and development credit carryforwards, respectively.
Utilization of approximately $1,500,000 of the Company's net operating loss
and research and development credit carryforwards is subject to an annual
limitation due to ownership change limitations prescribed by the Internal
Revenue Code of 1986 and similar state provisions and may be further limited
should another ownership change occur. The annual limitation may result in the
expiration of the net operating loss and credit carryforwards before their
utilization.
NOTE 10--BUSINESS SEGMENTS
The Company operates in a single industry segment encompassing the
development, marketing and support of graphic accelerator subsystems. The
Company markets its products to customers in the United States, Europe and
Asia-Pacific. The Company's customer base consists primarily of large OEMs and
distributors in United States, Europe and Asia.
Revenue information by geographic region is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
United States.................................... $ 18,149 $ 12,861 $ 3,061
Europe........................................... 8,820 4,810 600
Asia-Pacific..................................... 6,540 1,000 250
-------- -------- -------
$ 33,509 $ 18,671 $ 3,911
======== ======== =======
</TABLE>
F-16
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
AMONG
ACCELGRAPHICS, INC.,
E&S MERGER CORP.
AND
EVANS & SUTHERLAND COMPUTER CORPORATION
DATED APRIL 22, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I--THE MERGER..................................................... 1
1.01 The Merger....................................................... 1
1.02 Closing; Effective Time.......................................... 1
1.03 Effect of the Merger............................................. 2
1.04 Articles of Incorporation; Bylaws................................ 2
1.05 Directors and Officers........................................... 2
ARTICLE II--CONVERSION OF SECURITIES...................................... 2
2.01 Conversion or Cancellation of Shares............................. 2
2.02 Allocation of Merger Consideration; Election Procedures.......... 3
2.03 Transfers........................................................ 5
2.04 Dissenters' Rights............................................... 5
2.05 Termination of Exchange Fund..................................... 5
2.06 No Fractional Shares............................................. 6
2.07 AGI Options...................................................... 6
2.08 Further Assurances............................................... 6
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF AGI........................ 7
3.01 Organization and Qualification; Subsidiaries..................... 7
3.02 Certificate of Incorporation and Bylaws.......................... 7
3.03 Capitalization................................................... 7
3.04 Authority Relative to This Agreement............................. 8
3.05 No Conflict; Required Filings and Consents....................... 8
3.06 Compliance with Laws; Permits.................................... 9
3.07 SEC Filings; Financial Statements................................ 9
3.08 Absence of Certain Changes or Events............................. 10
3.09 Absence of Litigation............................................ 10
3.10 Employee Benefit; ERISA.......................................... 11
3.11 Labor Matters.................................................... 12
3.12 Title To and Sufficiency of Assets............................... 13
3.13 Intellectual Property............................................ 13
3.14 Tax Matters...................................................... 13
3.15 Environmental Matters............................................ 15
3.16 Material Contracts............................................... 16
3.17 Suppliers........................................................ 16
3.18 Tax Treatment.................................................... 16
3.19 Insurance........................................................ 16
3.20 Approval of AGI Board............................................ 16
3.21 Stockholder Vote Required........................................ 17
3.22 Accuracy of Information.......................................... 17
3.23 Transactions With Affiliates..................................... 17
3.24 Adequacy of Information Systems; No Adverse Warranties........... 17
3.25 Opinion of Financial Advisor..................................... 18
3.26 Brokers.......................................................... 18
3.27 Absence of Certain Business Practices............................ 18
ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF E&S AND MERGER SUB.......... 18
4.01 Organization and Qualification; Subsidiaries..................... 18
4.02 Articles of Incorporation and Bylaws............................. 18
4.03 E&S Common Stock To Be Issued in The Merger...................... 18
4.04 Authority Relative to This Agreement............................. 19
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
4.05 No Conflict; Required Filings and Consents....................... 19
4.06 SEC Filings; Financial Statements................................ 19
4.07 Absence of Litigation............................................ 20
4.08 Tax Treatment.................................................... 20
4.09 Absence of Certain Changes or Events............................. 20
4.10 Opinion of Financial Advisor..................................... 20
4.11 Brokers.......................................................... 20
ARTICLE V--CONDUCT OF BUSINESS PENDING THE MERGER......................... 20
5.01 Conduct of Business By AGI Pending The Merger.................... 20
5.02 Conduct of Business By E&S Pending The Merger.................... 22
ARTICLE VI--ADDITIONAL AGREEMENTS......................................... 22
6.01 Registration Statement; Proxy Statement.......................... 22
6.02 Stockholders' Meeting............................................ 23
6.03 Appropriate Action; Consents; Filings............................ 24
6.04 Access to Information; Confidentiality........................... 24
6.05 No Solicitation of Competing Transactions........................ 25
6.06 Indemnification and Insurance.................................... 26
6.07 Notification of Certain Matters.................................. 26
6.08 Stock Exchange Listing........................................... 27
6.09 Public Announcements............................................. 27
6.10 Plan of Reorganization........................................... 27
6.11 Affiliates....................................................... 27
6.12 AGI Employee Stock Purchase Plan................................. 27
6.13 Employment Agreements............................................ 27
6.14 Employees and Employee Benefits.................................. 27
ARTICLE VII--CONDITIONS TO THE MERGER..................................... 28
7.01 Conditions to the Obligations of Each Party...................... 28
7.02 Conditions to the Obligations of E&S and Merger Sub.............. 29
7.03 Conditions to the Obligations of AGI............................. 29
ARTICLE VIII--TERMINATION, AMENDMENT AND WAIVER........................... 30
8.01 Termination...................................................... 30
8.02 Effect of Termination............................................ 30
8.03 Fees and Expenses................................................ 30
8.04 Amendment........................................................ 31
8.05 Waiver........................................................... 31
ARTICLE IX--GENERAL PROVISIONS............................................ 31
9.01 Non-Survival of Representations, Warranties and Agreements....... 31
9.02 Notices.......................................................... 31
9.03 Certain Definitions.............................................. 32
9.04 Accounting Terms................................................. 33
9.05 Severability..................................................... 33
9.06 Entire Agreement; Assignment..................................... 33
9.07 Parties in Interest.............................................. 33
9.08 Specific Performance............................................. 33
9.09 Governing Law.................................................... 33
9.10 Headings......................................................... 33
9.11 Counterparts..................................................... 33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOCATION OF
DEFINED TERM DEFINED TERM
- ------------ ------------
<S> <C>
Affiliate............................................... Section 9.03(a)
Affiliated Person....................................... Section 3.23(a)
AGI Benefit Plans....................................... Section 3.10(a)
AGI Business............................................ Section 9.03(d)
AGI Common Stock........................................ Recitals
AGI Disclosure Schedule................................. Article III
AGI Financial Advisor................................... Section 3.25
AGI Fiscal Year 1997 Balance Sheet...................... Section 3.07(d)
AGI Group............................................... Section 9.03(e)
AGI Intellectual Property............................... Section 3.13
AGI Licenses............................................ Section 3.13
AGI Material Adverse Effect............................. Section 3.01
AGI Pension Plans....................................... Section 3.10(a)
AGI Permits............................................. Section 3.06(b)
AGI SEC Reports......................................... Section 3.07(a)
AGI Stock Option........................................ Section 2.07(a)
AGI Stock Option Plans.................................. Section 2.07(a)
Agreement............................................... Recitals
Beneficial Owner........................................ Section 9.03(b)
Blue Sky Laws........................................... Section 3.05(b)
Business Day............................................ Section 9.03(c)
Cash Consideration...................................... Section 2.01(a)
Cash Election........................................... Section 2.02(b)(ii)
Cash Election Shares.................................... Section 2.02(b)(viii)
Certificate of Merger................................... Section 1.02
Closing Agreement....................................... Section 3.14(a)(i)
Closing Date............................................ Section 1.02
Code.................................................... Recitals
Commonly Controlled Entity.............................. Section 3.10(a)
Competing Transaction................................... Section 6.05(a)
Confidentiality Agreement............................... Section 6.04(a)
Control................................................. Section 9.03(f)
Controlled By........................................... Section 9.03(f)
Current Offering........................................ Section 6.12
DGCL.................................................... Recitals
E&S Common Stock........................................ Recitals
E&S Financial Advisor................................... Section 4.10
E&S Material Adverse Effect............................. Section 4.01
E&S SEC Reports......................................... Section 4.06(a)
Effective Time.......................................... Section 1.02
Election Deadline....................................... Section 2.02(b)(iv)
Environmental Law....................................... Section 3.15(a)(ii)
Environmental Permit.................................... Section 3.15(a)(iii)
ERISA................................................... Section 3.10(a)
ESPP.................................................... Section 3.03
Exchange Act............................................ Section 3.05(b)
Exchange Agent.......................................... Section 2.02(b)(i)
Exchange Fund........................................... Section 2.02(b)(i)
Form of Election........................................ Section 2.02(b)(iii)
Governmental Authority.................................. Section 3.05(b)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOCATION OF
DEFINED TERM DEFINED TERM
- ------------ ------------
<S> <C>
Hazardous Substances...................................... Section 3.15(a)(i)
HSR Act................................................... Section 3.05(b)
Knowledge................................................. Section 9.03(h)
Laws...................................................... Section 3.05(a)
Liens..................................................... Section 3.12(a)
Material Contracts........................................ Section 3.16(a)
Merger.................................................... Recitals
Merger Consideration...................................... Section 2.01(a)
Merger Sub................................................ Recitals
NASD...................................................... Section 2.02(b)(iv)
NASDAQ/NMS................................................ Section 2.01(a)
Notice of Superior Proposal............................... Section 6.05(c)
PBGC...................................................... Section 3.10(g)
Person.................................................... Section 9.03(i)
Proxy Statement........................................... Section 2.02(b)(iii)
Real Estate............................................... Section 9.03(j)
Registration Statement.................................... Section 6.01(a)
Representatives........................................... Section 6.04(b)
SEC....................................................... Section 3.07(a)
Securities Act............................................ Section 2.03
Stock Consideration....................................... Section 2.01(a)
Stockholders' Meeting..................................... Section 6.02(a)
Subsidiaries.............................................. Section 9.03(k)
Subsidiary................................................ Section 3.01
Superior Proposal......................................... Section 6.05(c)
Surviving Corporation..................................... Section 1.01
Tax Return................................................ Section 3.14(a)(ii)
Tax Ruling................................................ Section 3.14(a)(iii)
Taxes..................................................... Section 3.14(a)(iv)
Terminating E&S Breach.................................... Section 8.01(d)
Terminating AGI Breach.................................... Section 8.01(e)
The Act................................................... Recitals
Under Common Control With................................. Section 9.03(f)
Voting Agreement.......................................... Recitals
Welfare Plans............................................. Section 3.10(a)
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated April 22, 1998 (this "Agreement") among
EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation ("E&S"), E&S
MERGER CORP., a Utah corporation and a wholly owned subsidiary of E&S ("Merger
Sub"), and ACCELGRAPHICS, INC., a Delaware corporation ("AGI").
WHEREAS, the parties hereto desire to cause AGI, upon the terms and subject
to the conditions of this Agreement and in accordance with the Utah Revised
Business Corporation Act (the "Act") and the Delaware General Corporation Law
("DGCL"), to merge with and into Merger Sub (the "Merger");
WHEREAS, in the Merger, each outstanding share of AGI common stock, par
value $.001 per share ("AGI Common Stock"), shall be converted into the right
to receive cash and or a fraction of a share of E&S common stock, par value
$.20 per share ("E&S Common Stock"), all on the terms set forth in this
Agreement;
WHEREAS, the Board of Directors of AGI has (i) determined that the Merger is
fair to the holders of shares of AGI Common stock, and is in the best
interests of such stockholders and (ii) approved this Agreement and the
transactions contemplated hereby and recommended unanimously that the holders
of shares of AGI Common Stock approve and adopt this Agreement;
WHEREAS, the Board of Directors of E&S has determined that the Merger is in
the best interests of E&S and its stockholders and, as sole stockholder of
Merger Sub, has approved and adopted this Agreement and the transactions
contemplated hereby;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of
the United States Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, as a condition and inducement to E&S and Merger Sub entering into
this Agreement and incurring the obligations set forth herein, concurrently
with the execution and delivery of this Agreement, E&S is entering into a
Voting Agreement and Irrevocable Proxy with certain stockholders of AGI, dated
the date hereof (the "Voting Agreement"), pursuant to which, among other
things, such stockholders have agreed, subject to the terms and conditions
contained therein, to vote all shares of AGI Common Stock then owned by such
stockholders to approve and adopt this Agreement, and have granted to E&S an
irrevocable proxy to so vote such shares upon the terms and subject to the
conditions set forth therein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained and intending to be legally bound hereby, E&S,
Merger Sub and AGI hereby agree as follows:
ARTICLE I
THE MERGER
1.01 THE MERGER. At the Effective Time (as defined in Section 1.02) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Act and the DGCL, AGI shall be merged with and
into Merger Sub, the separate corporate existence of AGI shall cease and
Merger Sub shall continue as the surviving corporation. Merger Sub as the
surviving corporation in the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
1.02 CLOSING; EFFECTIVE TIME. The closing of the transactions contemplated
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VII
hereof (but in any event within one business day thereof) or at such other
time as the parties hereto agree (the date on which the Closing shall occur,
the "Closing Date"). The Closing shall take place at the offices of Snell
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& Wilmer, L.L.P., 111 East Broadway, Suite 900, Salt Lake City, Utah 84111, or
at such other location as may be mutually agreed to by the parties. In
connection with the Closing, the parties hereto shall cause the Merger to be
consummated by filing of Articles of Merger (the "Articles of Merger") with
the Division of Corporations and Commercial Code of the State of Utah in
accordance with the provisions of the Act and by filing a certificate of
merger in form reasonably satisfactory to the parties hereto (the "Certificate
of Merger") with the Secretary of State of the State of Delaware in accordance
with the relevant provisions of the DGCL (the time of such filing, the
"Effective Time"). The date on which the Effective Time shall occur is
referred to herein as the "Effective Date."
1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of the
Act and the DGCL. Without limiting the generality of the foregoing and subject
thereto, at the Effective Time, all the property, rights, privileges, powers
and franchises of AGI and Merger Sub shall vest in the Surviving Corporation,
and all debts, liabilities and duties of AGI and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.04 ARTICLES OF INCORPORATION; BYLAWS.
(a) At the Effective Time, the Articles of Incorporation of Merger Sub, as
in effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended; provided,
however, that Article I of the Articles of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the corporation
is AccelGraphics, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.05 DIRECTORS AND OFFICERS. The directors of Merger Sub and the officers of
Merger Sub at the Effective Time shall, from and after the Effective Time, be
the directors and officers, respectively, of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Surviving
Corporation's Articles of Incorporation and Bylaws.
ARTICLE II
CONVERSION OF SECURITIES
2.01 CONVERSION OR CANCELLATION OF SHARES. By virtue of the Merger and
without any action on the part of E&S, Merger Sub or AGI or the holders of any
of the following securities, the manner of converting or canceling shares in
connection with the Merger shall be as follows:
(a) Conversion of Shares. Subject to the terms of Section 2.02, each
share of AGI Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of AGI Common Stock owned by E&S, Merger
Sub or any other direct or indirect subsidiary of E&S (collectively, the
"E&S Companies") or held in AGI's treasury or shares of AGI Common Stock
that are held by stockholders duly exercising appraisal rights pursuant to
Section 262 of the DGCL ("Dissenting Shares") to the extent such rights
shall be available in connection with the Merger), shall be converted into,
and become exchangeable for, at the election of the record holder thereof,
(i) $5.75 in cash (the "Cash Consideration") or (ii) that portion of a
share of E&S Common Stock, equal to a fraction, the numerator of which is
$5.75 and the denominator of which is the E&S Common Stock Price (the
"Stock Consideration," and, together with the Cash Consideration, the
"Merger Consideration"). For purposes of this Agreement, the term "E&S
Common Stock Price" shall mean an amount equal to the average closing sales
prices of E&S Common Stock on the National Association of Securities
Dealers, Inc. Automated Quotation/National Market System ("NASDAQ/NMS") on
each of the ten (10) consecutive trading days immediately preceding the
second trading day prior to the Effective Date, and the term "Stock
Exchange Ratio" shall mean a fraction the numerator of which is $5.75 and
the denominator of which is the E&S Common Stock Price. At the Effective
Time, all such shares of AGI Common Stock shall no longer be outstanding
and shall be canceled
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and retired and shall cease to exist, and each certificate (each a
"Certificate") representing any of such shares shall thereafter represent
only the right to receive the Merger Consideration (and the right, if any,
to receive cash in lieu of fractional shares) into which such shares have
been converted pursuant to this Article II, or the right, if any, to
receive payment from the Surviving Corporation of the "fair value" of such
shares as determined in accordance with Section 262 of the DGCL;
(b) Cancellation of Shares. Each share of AGI Common Stock issued and
outstanding immediately prior to the Effective Time and owned by any of the
E&S Companies, and each such share issued and held in AGI's treasury
immediately prior to the Effective Time, shall, at the Effective Time and
by virtue of the Merger, and without any action on the part of the holder
thereof, cease to be outstanding, shall be canceled and retired without
payment of any consideration therefor and shall cease to exist;
(c) Merger Sub Capital Stock. At the Effective Time, each share of common
stock, par value $.01 per share, of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall remain
outstanding and each certificate therefor shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
2.02 ALLOCATION OF MERGER CONSIDERATION; ELECTION PROCEDURES.
(a) Allocation. Notwithstanding anything in this Agreement to the contrary,
the maximum number of shares of AGI Common Stock to be converted into the
right to receive Cash Consideration in the Merger (the "Cash Election Maximum
Number") shall be, except as otherwise required under Section 2.02(b)(xi),
equal to the product of (w) 0.48 (as adjusted to reflect the amount, if any,
of cash payments made pursuant to Section 2.04 or Section 2.06) multiplied by
(x) the total number of shares of AGI Common Stock (other than the number of
shares of AGI Common Stock to be canceled in accordance with Section 2.01(b))
outstanding at the Effective Time. The maximum number of shares of AGI Common
Stock to be converted into the right to receive Stock Consideration in the
Merger (the "Stock Election Maximum Number") shall be equal to the product of
(y) 0.52 multiplied by (z) the total number of shares of AGI Common Stock
(other than the number of shares of AGI Common Stock to be cancelled in
accordance with Section 2.01(b)) outstanding at the Effective Time.
(b) Election Procedures.
(i) As soon as practicable following the Effective Time (but in any event
within two business days thereof), E&S shall deposit, or shall cause to be
deposited, with an exchange agent selected by E&S (the "Exchange Agent"),
with the reasonable concurrence of AGI, for the benefit of the holders of
shares of AGI Common Stock, for exchange in accordance with this Article
II, certificates representing shares of E&S Common Stock and any cash to be
paid upon due surrender of the Certificates pursuant to the provisions of
this Article II (such cash and certificates for shares of E&S Common Stock,
together with the amount of any dividends or distributions payable with
respect thereto, being hereinafter referred to as the "Exchange Fund").
(ii) Subject to allocation and proration in accordance with the
provisions of this Section 2.02, each record holder of shares of AGI Common
Stock (other than Dissenting Shares, if any, that are not to be treated as
Non-Election Shares pursuant to Section 2.04 and shares to be canceled in
accordance with Section 2.01(b)) issued and outstanding immediately prior
to the Election Deadline (as defined below) shall be entitled to elect to
receive in respect of each such share (i) the Cash Consideration (a "Cash
Election") or (ii) the Stock Consideration (a "Stock Election") or to
indicate that such record holder has no preference as to the receipt of
Cash Consideration or Stock Consideration for such shares (a "Non-
Election"). Holders of shares in respect of which a Non-Election is made
(including shares in respect of which such an election is deemed to have
been made pursuant to this Section 2.02 and Section 2.04 (collectively,
"Non-Election Shares")) shall receive 48% of the Merger Consideration in
cash and 52% of the Merger Consideration in E&S Common Stock, subject to
the allocation adjustment provisions set forth in Section 2.02(a).
(iii) Elections pursuant to Section 2.02(b)(ii) shall be made on a form
to be mutually agreed upon by AGI and E&S (a "Form of Election") and
provided by the Exchange Agent for that purpose to holders of
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record of shares of AGI Common Stock, together with appropriate transmittal
materials, at the time of mailing to holders of record of shares of AGI
Common Stock of the AGI's proxy statement with respect to its meeting of
stockholders (the "Proxy Statement") to approve the transactions
contemplated by this Agreement. Elections shall be made by mailing to the
Exchange Agent a duly completed Form of Election. The Form of Election
shall be explicit in permitting a holder of record of AGI Common Stock to
make a Cash Election with respect to a portion of the shares held by such
holder and make a Stock Election with respect to the remainder of the
shares held by such holder.
(iv) To be effective, a Form of Election must be (x) properly completed,
signed and submitted to the Exchange Agent at its designated office, by
5:00 p.m., Eastern Daylight Time on the business day that is two (2)
trading days prior to the Closing Date (which date shall be publicly
announced by E&S as soon as practicable but in no event less than five
trading days prior to Closing Date) (the "Election Deadline") and (y)
accompanied by the Certificates representing the shares of AGI Common Stock
as to which the election is being made (or by an appropriate guarantee of
delivery of such Certificates by a commercial bank or trust company in the
United States or a member of a registered national security exchange or of
the National Association of Securities Dealers, Inc. ("NASD"), provided
such Certificates are in fact delivered to the Exchange Agent within ten
(10) trading days after the date of execution of such guarantee of
delivery). Any holder of shares of AGI Common Stock that does not submit a
Form of Election to the Exchange Agent prior to the Election Deadline shall
be deemed to have made a Non-Election. E&S shall determine, in its sole and
absolute discretion, which authority it may delegate in whole or in part to
the Exchange Agent, whether Forms of Election have been properly completed,
signed, submitted or revoked and whether the Form of Election is otherwise
deemed effective pursuant to this Section 2.02(b)(iv). The decision of E&S
(or the Exchange Agent, as the case may be) in such matters shall be
conclusive and binding. To the extent practicable, E&S or the Exchange
Agent, as the case may be, shall attempt to notify any person who shall
submit a defective Form of Election of such defect prior to the Election
Deadline.
(v) AGI shall use reasonable commercial efforts to make a Form of
Election available to all persons who become holders of record of shares of
AGI Common Stock between the date of mailing of the Proxy Statement
described in Section 2.02(b)(iii) and the Election Deadline.
(vi) An election may be revoked, but only by written notice received by
the Exchange Agent prior to the Election Deadline. Any Certificate or
Certificates that have been submitted to the Exchange Agent in connection
with an election shall be returned without charge to the holder thereof in
the event such election is revoked as aforesaid and such holder requests in
writing the return of such Certificate or Certificates. Upon such
revocation, and unless an effective Form of Election is thereafter
submitted in accordance with this Section 2.02(b), any shares to which such
revocation applies shall be deemed Non-Election Shares. In the event that
this Agreement is terminated pursuant to the applicable provisions of this
Agreement, Certificates submitted prior to such time shall promptly be
returned without charge to the person submitting the same.
(vii) In the event that the aggregate number of shares in respect of
which Cash Elections have been made (collectively, the "Requested Cash
Election Shares") exceeds the Cash Election Maximum Number, all shares in
respect of which Stock Elections have been made (the "Stock Election
Shares") shall receive Stock Consideration, and all Requested Cash Election
Shares shall be converted into the right to receive Stock Consideration or
Cash Consideration such that each holder making a Cash Election shall
receive, for each share of AGI Common Stock for which a Cash Election has
been made, (x) cash in an amount equal to the product of (1) the Cash
Consideration multiplied by (2) a fraction, the numerator of which is the
Cash Election Maximum Number and the denominator of which is the number of
Requested Cash Election Shares (such product, the "Prorated Cash Amount"),
and (y) a portion of a share of E&S Common Stock equal to a fraction, the
numerator of which is equal to the Cash Consideration minus the Prorated
Cash Amount and the denominator of which is equal to the E&S Common Stock
Price.
(viii) In the event that the aggregate number of shares in respect of
which Stock Elections have been made (collectively, the "Requested Stock
Election Shares") exceeds the Stock Election Maximum Number,
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all shares in respect of which Cash Elections have been made (the "Cash
Election Shares") shall receive Cash Consideration, and all requested Stock
Election Shares shall be converted into the right to receive Stock
Consideration or Cash Consideration such that each holder making a Stock
Election shall receive, for each share of AGI Common Stock for which a
Stock Election has been made, (x) E&S Common Stock in an amount equal to
the product of (1) the Stock Consideration multiplied by (2) a fraction,
the numerator of which is the Stock Election Maximum Number and the
denominator of which is the number of Requested Stock Election Shares (such
product the "Prorated Stock Amount"), and (y) cash consideration equal to
the total Merger Consideration available for such holder, reduced by the
value of the Prorated Stock Amount.
(ix) In the event that paragraphs (vii) and (viii) of this Section
2.02(b) are not applicable, all Cash Election Shares and 48% of all Non-
Election Shares shall be converted into the right to receive the Cash
Consideration, and all Stock Election Shares and 52% of all Non-Election
Shares shall be converted into the right to receive the Stock Consideration
(and cash in lieu of fractional interests).
(x) The Exchange Agent, in consultation with E&S and AGI, shall make all
computations to give effect to this Section 2.02.
(xi) In the event either or both of the tax opinions of counsel referred
to in Section 7.01(f) cannot be rendered as a result of the Merger
potentially failing to satisfy continuity of interest requirements under
applicable federal income tax principles relating to reorganizations under
Section 368(a) of the Code, then the Cash Election Maximum Number shall be
reduced to the minimum extent necessary to enable the relevant tax opinion
or opinions, as the case may be, to be rendered.
2.03 TRANSFERS. After the Effective Time, there shall be no transfers on the
stock transfer books of AGI of the shares of AGI Common Stock that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged for shares of E&S Common Stock and/or any cash to be
paid upon the due surrender of and in respect of such Certificates pursuant to
this Agreement in accordance with the procedures set forth in this Article II.
Certificates surrendered for exchange by any person constituting an
"affiliate" of AGI for purposes of Rule 145(c) under the Securities Act of
1933, as amended (the "Securities Act"), shall not be exchanged until E&S
shall have received a written agreement from such person as provided in
Section 7.02(c).
2.04 DISSENTERS' RIGHTS. To the extent that appraisal rights shall be
determined to be applicable to the Merger, any stockholder of AGI who shall
have delivered a written demand for appraisal of such stockholder's shares of
AGI Common Stock, as provided in Section 262 of the DGCL (each a "Dissenting
Stockholder"), shall not be entitled to shares of E&S Common Stock or cash
pursuant to this Article II, unless and until the holder thereof shall have
failed to perfect or shall have effectively withdrawn or lost such holder's
right to dissent from the Merger under the DGCL, and shall be entitled to
receive only the payment provided by Section 262 of the DGCL with respect to
such shares. If any Dissenting Stockholder shall fail to perfect or shall have
effectively withdrawn or lost the right to dissent, the Dissenting Shares held
by such Dissenting Stockholder shall thereupon be treated as Non-Election
Shares. AGI shall give E&S (i) prompt notice of any written demands for
appraisal of any Dissenting Shares, attempted withdrawals of such demands, and
any other instruments served pursuant to applicable law received by AGI
relating to stockholders' rights of appraisal and (ii) the opportunity to
direct all negotiations and proceedings with respect to demand for appraisal
under the DGCL. AGI shall not, except with the prior written consent of E&S,
voluntarily make any payment with respect to any demands for appraisals of
Dissenting Shares, offer to settle or settle any such demands or approve any
withdrawal of any such demands.
2.05 TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any shares of E&S
Common Stock) that remains unclaimed by any portion or all of the stockholders
of AGI for one year after the Effective Time shall be paid to E&S. Any
stockholders of AGI who have not theretofore complied with this Article II
shall thereafter look only to E&S for any payment of shares of E&S Common
Stock and/or cash payable upon due surrender of their Certificates, and in
each case, without any interest thereon. Notwithstanding the foregoing, none
of E&S, the Surviving Corporation, the Exchange Agent
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or any other person shall be liable to any former holder of shares of AGI
Common Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
2.06 NO FRACTIONAL SHARES. No fraction of a share of E&S Common Stock will
be issued upon the surrender for exchange of Certificates pursuant to this
Article II. In lieu thereof, each holder of shares of AGI Common Stock who
would otherwise be entitled to a fraction of a share of E&S Common Stock
(after aggregating all fractional shares of E&S Common Stock to be received by
such holder) shall receive from E&S an amount of cash (rounded to the nearest
whole cent) equal to the product of (i) the fractional interest to which such
holder would otherwise be entitled, multiplied by (ii) the E&S Common Stock
Price.
2.07 AGI OPTIONS.
(a) Except as set forth below, each outstanding option (an "AGI Stock
Option"), whether or not exercisable and whether or not vested, at the
Effective Time under AGI 1995 Stock Plan, the AGI 1997 Director Option Plan,
or any other plans (the "AGI Stock Option Plans") shall be assumed by E&S and
deemed to constitute an option (an "E&S Option") to acquire, on the same terms
and conditions as were applicable under the E&S Option, the same number of
shares of E&S Common Stock as the holder of such E&S Option would have been
entitled to receive pursuant to the Merger had such holder exercised such
option in full immediately prior to the Effective Time (rounded down to the
nearest whole number), at a price per share (rounded up to the nearest whole
cent) equal to (i) the aggregate exercise price for the shares of E&S Common
Stock otherwise purchasable pursuant to such E&S Option divided by (ii) the
number of full shares of E&S Common Stock deemed purchasable pursuant to such
E&S Option in accordance with the foregoing; provided, however, that, in the
case of any E&S Option to which Section 422 of the Code applies ("incentive
stock options"), the option price, the number of shares purchasable pursuant
to such option and the terms and conditions of exercise of such option shall
be determined in order to comply with Section 424(a) of the Code.
Notwithstanding the above, any AGI Stock Option with an exercise price in
excess of $6.00 per share, shall not be assumed by E&S, but rather shall be
terminated and cancelled as of the Effective Date.
(b) As soon as practicable after the Effective Time, E&S shall deliver to
the participants in the E&S Option Plan appropriate notice setting forth such
participants' rights pursuant thereto and the grants pursuant to the E&S Stock
Option Plans shall continue in effect on the same terms and conditions
(subject to the adjustments required by this Section 6.5 after giving effect
to the Merger). E&S shall comply with the terms of the E&S Stock Option Plans
and use best efforts to ensure, to the extent required by, and subject to the
provisions of, such E&S Option Plan and Sections 422 and 424(a) of the Code,
that E&S Options which qualified as incentive stock options prior the
Effective Time continue to qualify as incentive stock options after the
Effective Time.
(c) E&S shall take all corporate action necessary to reserve for issuance a
sufficient number of shares of E&S Common Stock for delivery upon exercise of
E&S Options assumed in accordance with this Section 2.07. As soon as
practicable after the Effective Time and in any event no later than five
business days after the Closing Date, E&S shall file a registration statement
on Form S-8 (or any successor or other appropriate forms) under the Securities
Act or another appropriate form with respect to the shares of E&S Common Stock
subject to such options and shall use its best efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained
therein) for so long as such options remain outstanding.
2.08 FURTHER ASSURANCES. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Merger Sub or AGI acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with,
the Merger or otherwise to carry out this Agreement, the officers of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of each of the Merger Sub and AGI or otherwise, all such deeds,
bills of sale, assignments and assurances and to take and do, in such names
and on such behalves or otherwise, all such other
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actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out
the purposes of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF AGI
Except as disclosed in a separate disclosure schedule referring to the
Sections contained in this Agreement, which has been delivered by AGI to E&S
prior to the execution of this Agreement (the "AGI Disclosure Schedule"), AGI
hereby represents and warrants to E&S and Merger Sub that:
3.01 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of AGI and each
subsidiary of AGI (each, a "Subsidiary") is a corporation duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has the requisite corporate power and authority and all
necessary governmental approvals to own, lease and operate its properties and
to carry on its business as it is now being conducted, except where the lack
of such power, authority and approval would not, individually or in the
aggregate, have an AGI Material Adverse Effect (as defined below). Each of AGI
and each Subsidiary is duly qualified or licensed as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of the properties owned, leased or operated by it or the nature of its
business makes such qualification or licensing necessary, except for such
failures to be so qualified or licensed and in good standing that would not,
individually or in the aggregate, have an AGI Material Adverse Effect. The
term "AGI Material Adverse Effect" means any circumstances, change in, or
effect on, the AGI Group (as defined in Section 9.03), when taken as a
consolidated whole, or affecting the AGI Business (as defined in Section
9.03), which is, or could reasonably be expected in the future to be,
materially adverse to the AGI Group or the AGI Business; provided, however,
that any of such circumstances, changes in, or effects attributable to the
failure of E&S to make any deliveries of products to AGI following the date
hereof in accordance with the terms and specifications set forth in and
required by contractual arrangements between E&S and AGI shall not be taken
into account in determining whether there has been or would be a "AGI Material
Adverse Effect." A true and complete list of all the Subsidiaries, together
with the jurisdiction of incorporation of each Subsidiary and the percentage
of the outstanding capital stock of each Subsidiary owned by AGI and each
other Subsidiary, is set forth in Section 3.01 of AGI Disclosure Schedule.
Except as set forth in Section 3.01 of AGI Disclosure Schedule, AGI does not
directly or indirectly own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or similar
interest in, any corporation, partnership, limited liability company, joint
venture or other business association or entity.
3.02 CERTIFICATE OF INCORPORATION AND BYLAWS. AGI has heretofore furnished
to E&S complete and correct copies of the Certificate of Incorporation and the
Bylaws or equivalent organizational documents, each as amended to date, of AGI
and each Subsidiary. Such Certificate of Incorporation, Bylaws and equivalent
organizational documents are in full force and effect. Neither AGI nor any
Subsidiary is in violation of any provision of its Certificate of
Incorporation, Bylaws or equivalent organizational documents.
3.03 CAPITALIZATION. The authorized capital stock of AGI consists of (i)
50,000,000 shares of Common Stock, par value $.001 per share, and (ii)
2,000,000 shares of preferred stock, par value $.001 per share, issuable in
such series and with such rights and designations as the Board of Directors of
AGI may from time to time determine (the "AGI Preferred Stock"). As of March
31, 1998, (a) 8,451,088 shares of AGI Common Stock were issued and
outstanding, all of which were validly issued, fully paid and nonassessable,
(b) no shares of AGI Common Stock were held in the treasury of AGI or the
Subsidiaries, (c) 2,955,389 shares of AGI Common Stock were reserved for
future issuance pursuant to AGI Stock Option Plans, (d) 371,672 shares of AGI
Common Stock were reserved for future issuance pursuant to the AGI 1997
Employee Stock Purchase Plan ("ESPP"), and (e) no shares of AGI Preferred
Stock were issued and outstanding. All publicly traded shares of AGI Common
Stock have been approved for trading on the NASDAQ/NMS. Set forth in Section
3.03 of AGI
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Disclosure Schedule is a summary setting forth the number of outstanding AGI
Options, stock incentive rights or any other rights to acquire shares of AGI
Common Stock pursuant to AGI Stock Option Plans and the exercise price
therefor as of March 31, 1998. From January 2, 1998 through the date of this
Agreement, AGI has not issued, sold, pledged, disposed of, granted,
encumbered, or authorized the issuance, sale, pledge, disposition, grant or
encumbrance of any shares of capital stock of any class of AGI or any
Subsidiary or any rights to acquire such shares or other equity interests in
AGI or any Subsidiary, except pursuant to the exercise of AGI Options that
were outstanding as of January 2, 1998 and those additional AGI Options
granted since January 2, 1998 that are set forth in Section 3.03 of AGI
Disclosure Schedule. Except as set forth in this Section 3.03 or in Section
3.03 of AGI Disclosure Schedule, there are no options, warrants or other
rights, agreements, arrangements or commitments of any character relating to
the issued or unissued capital stock of AGI or any Subsidiary or obligating
the AGI or any Subsidiary to issue or sell any shares of capital stock of, or
other equity interests in, AGI or any Subsidiary. All shares of AGI Common
Stock subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and nonassessable. There
are no outstanding contractual obligations of AGI or any Subsidiary to
repurchase, redeem or otherwise acquire any shares of AGI Common Stock or any
capital stock of or any equity interests in any Subsidiary. Each outstanding
share of capital stock of each Subsidiary is duly authorized, validly issued,
fully paid and nonassessable and each such share owned by AGI or any
Subsidiary is free and clear of all security interests, liens, claims,
pledges, options, rights of first refusal, agreements, limitations on AGI's or
such other Subsidiary's voting rights, charges and other encumbrances of any
nature whatsoever.
3.04 AUTHORITY RELATIVE TO THIS AGREEMENT. AGI has all necessary corporate
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the Merger. The execution and delivery
of this Agreement by AGI and the consummation by AGI of the Merger have been
duly and validly authorized by all necessary corporate action and no other
corporate proceedings on the part of AGI are necessary to authorize this
Agreement or to consummate the Merger (other than, with respect to the Merger,
the adoption of this Agreement by the holders of a majority of the shares of
AGI Common Stock and the filing and recordation of appropriate merger
documents as required by the Act and the DGCL). This Agreement has been duly
and validly executed and delivered by AGI and, assuming the due authorization,
execution and delivery by E&S and Merger Sub, constitutes a legal, valid and
binding obligation of AGI, enforceable against AGI in accordance with its
terms.
3.05 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by AGI does not, and the
performance of this Agreement by AGI will not, (i) conflict with or violate
the Certificate of Incorporation or Bylaws or equivalent organizational
documents of AGI or any Subsidiary, as applicable, (ii) conflict with or
violate any domestic (federal, state or local) or foreign law, rule,
regulation, order, judgment or decree (collectively, "Laws") applicable to AGI
or any Subsidiary or by which any property or asset of AGI or any Subsidiary
is bound or affected, except for such conflicts or violations that,
individually or in the aggregate, are not reasonably likely to have an AGI
Material Adverse Effect, or (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of AGI or any Subsidiary pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which AGI or any Subsidiary is
a party or by which AGI or any Subsidiary or any property or asset of AGI or
any Subsidiary is bound or affected, except for any such breaches, defaults or
other occurrences that, individually or in the aggregate, would not have an
AGI Material Adverse Effect and will not prevent or materially delay the
consummation of the transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement by AGI does not, and the
performance of this Agreement by AGI will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, domestic, or foreign (a "Governmental
Authority"), except (i) for
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applicable requirements, if any, of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Securities Act of 1933, as amended (the
"Securities Act"), state securities or "blue sky" laws ("Blue Sky Laws"),
state takeover laws, the pre-merger notification requirements of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and
regulations thereunder (the "HSR Act"), and filing and recordation of
appropriate merger documents as required by the Act and the DGCL and the rules
of the National Association of Securities Dealers ("NASD") and (ii) where
failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, individually or in the aggregate, is not
reasonably likely to have an AGI Material Adverse Effect.
3.06 COMPLIANCE WITH LAWS; PERMITS.
(a) Neither AGI nor any Subsidiary is in conflict with, or in default or
violation of, (i) any Laws applicable to AGI or any Subsidiary or by which any
property or asset of AGI or any Subsidiary is bound or affected, or (ii) any
of AGI Permits (as defined below), except for any such conflicts, defaults or
violations that do not, individually or in the aggregate, have an AGI Material
Adverse Effect.
(b) Each of AGI and the Subsidiaries is in possession of all franchises,
grants, authorizations, licenses, permits, easements, variances, exceptions,
consents, certificates, approvals and orders from all federal, state, local
and foreign authorities and agencies, necessary for AGI or any of its
Subsidiaries, to own, lease and operate its properties or to carry on the AGI
Business (the "AGI Permits"), and no suspension or cancellation of any of AGI
Permits is pending or, to AGI's Knowledge, threatened, except where the
failure to have, or the suspension or cancellation of, any of AGI Permits,
individually or in the aggregate, would not have an AGI Material Adverse
Effect.
3.07 SEC FILINGS; FINANCIAL STATEMENTS.
(a) AGI has filed all forms, reports and documents required to be filed by
it with the Securities and Exchange Commission (the "SEC") since April 11,
1997 and has made available to E&S all registration statements filed by AGI
with the SEC, including all exhibits filed in connection therewith (on all
forms applicable to the registration of securities) since April 11, 1997 and
prior to the date of this Agreement (collectively, the "AGI SEC Reports"), and
has heretofore made available to E&S complete (i.e., unredacted) copies of
each exhibit (which is in effect as of the date hereof) to AGI SEC Reports
filed with the SEC. AGI SEC Reports (i) were prepared in all material respects
in accordance with the requirements of the Securities Act or the Exchange Act,
as the case may be, and the rules and regulations thereunder, and (ii) did not
at the time they were filed contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
(b) Except as disclosed in AGI SEC Reports, no Subsidiary is required to
file any form, report or other document with the SEC.
(c) Each of the consolidated financial statements (including, in each case,
any notes and schedules thereto) contained in AGI SEC Reports complied as to
form with the applicable accounting requirements and rules and regulations of
the SEC and was prepared in accordance with United States generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated (except as may be indicated in the notes thereto), and each fairly
presents the consolidated financial position, results of operations and cash
flows of AGI and the consolidated Subsidiaries as at the respective dates
thereof and for the respective periods indicated therein in accordance with
United States generally accepted accounting principles (subject, in the case
of unaudited statements, to normal and recurring year-end adjustments which
were not and are not expected, individually or in the aggregate, to have an
AGI Material Adverse Effect).
(d) Except as and to the extent set forth on the consolidated balance sheet
of AGI as of January 2, 1998, including the notes thereto (the "AGI Fiscal
Year 1997 Balance Sheet"), neither AGI nor any Subsidiary has any liability or
obligation of any nature (whether accrued, absolute, contingent or otherwise)
that would be
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required to be reflected on a balance sheet, or in the notes thereto, prepared
in accordance with United States generally accepted accounting principles,
except for liabilities and obligations (i) disclosed in any AGI SEC Report
filed since January 2, 1998 and prior to the date of this Agreement, (ii)
incurred since January 2, 1998 in the ordinary course of business which,
individually or in the aggregate, do not have an AGI Material Adverse Effect,
or (iii) incurred pursuant to this Agreement.
(e) All of the accounts receivable that are reflected on the AGI Fiscal Year
1997 Balance Sheet, and all accounts receivable which have arisen since the
AGI Fiscal Year 1997 Balance Sheet through the Effective Date, have arisen
from bona fide transactions in the ordinary course of business. AGI has no
knowledge of any facts or circumstances (other than general economic
conditions) that would result in any material increase in the uncollectability
of such accounts receivable.
(f) GI has heretofore furnished to E&S complete and correct copies of all
material amendments and modifications that have not been filed by AGI with the
SEC to all agreements, documents and other instruments that previously had
been filed by AGI with the SEC and are currently in effect.
3.08 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 2, 1998, except as
contemplated by this Agreement, disclosed in Section 3.08 of AGI Disclosure
Schedule, or disclosed in any AGI SEC Report filed since April 11, 1997,
AccelGraphics and the Subsidiaries have conducted their businesses only in the
ordinary course and in a manner consistent with past practice and, since
January 2, 1998, there has not been (a) any event or events having,
individually or in the aggregate, an AGI Material Adverse Effect, (b) any
change by AGI in its accounting methods, principles or practices, (c) any
revaluation by AGI of any material asset (including, without limitation, any
writing down or writing up of the value of inventory, writing off of notes or
accounts receivable or reversing of any accruals or reserves), other than in
the ordinary course of business consistent with past practice, (d) any entry
by AGI or any Subsidiary into any commitment or transaction material to AGI
and the Subsidiaries taken as a whole, except in the ordinary course of
business and consistent in all material respects with past practice, (e) any
declaration, setting aside or payment of any dividend or distribution in
respect of any capital stock of AGI or any redemption, purchase or other
acquisition of any of its securities, or (f) other than pursuant to the
contracts referred to in Section 3.10 or as expressly provided for in this
Agreement, any increase in or establishment of any bonus, insurance,
severance, deferred compensation, pension, retirement, profit sharing, stock
option (including, without limitation, the granting of stock options, stock
appreciation rights, performance awards, or restricted stock awards), stock
purchase or other employee benefit plan, or any other increase in the
compensation payable or to become payable to any officers or key employees of
AGI or any Subsidiary, except in the ordinary course of business consistent in
all material respects with past practice.
3.09 ABSENCE OF LITIGATION.
(a) Except as disclosed in AGI SEC Reports or in Section 3.09 of AGI
Disclosure Schedule, there is no claim, action, proceeding or investigation
pending or, to AGI's Knowledge, threatened against AGI or any Subsidiary, or
any property or asset of AGI or any Subsidiary, before any court, arbitrator
or Governmental Authority, which, individually or when aggregated with other
claims, actions, proceedings or investigations or product liability claims,
actions, proceedings or investigations which are reasonably likely to result
from facts and circumstances that have given rise to such a claim, action,
proceeding or investigation, would have an AGI Material Adverse Effect. As of
the date hereof, neither AGI nor any Subsidiary nor any property or asset of
AGI or any Subsidiary is subject to any order, writ, judgment, injunction,
decree, determination or award having, individually or in the aggregate, an
AGI Material Adverse Effect.
(b) Neither AGI nor any Subsidiary has received notice from any source that
a reasonable likelihood exists that AGI or any Subsidiary may be liable with
respect to product liability or worker's compensation claims, except for such
claims that, if determined adversely to AGI and the Subsidiaries, would not,
individually or in the aggregate, have an AGI Material Adverse Effect.
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3.10 EMPLOYEE BENEFIT; ERISA.
(a) Section 3.10(a) of AGI Disclosure Schedule contains a list of all
"employee pension benefit plans" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes
referred to herein as "AGI Pension Plans"), "employee welfare benefit plans"
(as defined in Section 3(1) of ERISA) (sometimes referred to herein as
"Welfare Plans"), and each other plan, arrangement or policy (written or oral)
relating to stock options, stock purchases, compensation, deferred
compensation, severance, fringe benefits or other employee benefits, in each
case maintained, or contributed to, by AGI or any of the Subsidiaries or any
other person or entity that, together with AGI is treated as a single employer
under Section 414(b), (c), (m) or (o) of the Code (each, together with AGI, a
"Commonly Controlled Entity"), for the benefit of any current or former
employees, officers, agents or directors of AGI or any of its subsidiaries
(all of the foregoing being herein called "AGI Benefit Plans"). AGI has made
available to E&S true and complete copies of (i) each AGI Benefit Plan (or, in
the case of any unwritten AGI Benefit Plans, descriptions thereof), (ii) the
most recent annual report on Form 5500 filed with the Internal Revenue Service
with respect to each AGI Benefit Plan (if any such report was required), (iii)
the most recent summary plan description (or similar document) for each AGI
Benefit Plan for which a summary plan description is required or was otherwise
provided to plan participants or beneficiaries and (iv) each trust agreement
and group annuity contract relating to any AGI Benefit Plan.
(b) Except where non-disclosure would not have an AGI Material Adverse
Effect, all AGI Pension Plans and related trusts that are intended to be tax-
qualified plans have been, since the effective date of the Tax Reform Act of
1986, the subject of determination letters from the Internal Revenue Service
to the effect that such AGI Pension Plans and related trusts are qualified and
exempt from federal income taxes under Sections 401(a) and 501(a),
respectively, of the Code, and no such determination letter has been revoked
nor, to the Knowledge of AGI, has revocation been threatened; no event has
occurred and no circumstances exist that would adversely affect the tax
qualification of such AGI Pension Plan nor has any such AGI Pension Plan been
amended since the date of its most recent determination letter or application
therefor in any respect that would adversely affect its qualification or
materially increase its costs or require security under Section 302 of ERISA.
(c) Except as would not, individually or in the aggregate, have an AGI
Material Adverse Effect: (i) each AGI Benefit Plan has been administered in
accordance with its terms; (ii) AGI Benefit Plans are, and have been
administered, in compliance with the applicable provisions of ERISA, the Code,
and all other applicable laws; (iii) there are no investigations by any
governmental agency, termination proceedings or other claims (except claims
for benefits payable in the normal operation of AGI Benefit Plans), suits or
proceedings against or involving any AGI Benefit Plan or asserting any rights
to or claims for benefits under any AGI Benefit Plan that could give rise to
any liability, and there are not any facts that would reasonably be expected
to give rise to any liability in the event of any such investigation, claim,
suit or proceeding.
(d) No Commonly Controlled Entity is required to contribute to any
"multiemployer plan" as defined in Section 4001(a)(3) of ERISA or, except as
set forth in Section 3.10(d) of AGI Disclosure Schedule, has withdrawn from
any such multiemployer plan where such withdrawal has resulted or would result
in any material "withdrawal liability" (within the meaning of Section 4201 of
ERISA) that has not been fully paid. Except as set forth in Section 3.10(d) of
AGI Disclosure Schedule, no Commonly Controlled Entity would incur any
material withdrawal liability if it were to withdraw from a multiemployer plan
with respect to which it currently has a contribution obligation. No Commonly
Controlled Entity, nor any officer of any Commonly Controlled Entity, nor any
of AGI Benefit Plans which are subject to ERISA, including AGI Pension Plans,
any trusts created thereunder or any trustee or administrator thereof, has
engaged in a "prohibited transaction" (as such term is defined in Section 406
of ERISA or Section 4975 of the Code) or any other breach of fiduciary
responsibility that could subject any Commonly Controlled Entity or any
officer of any Commonly Controlled Entity to any tax or penalty on prohibited
transactions imposed by such Section 4975 or to any material liability under
Section 502(i) or (l) of ERISA. Neither any of such AGI Benefit Plans nor any
of such trusts has been terminated, nor has there been any "reportable event"
(as that term is defined in Section 4043 of ERISA) with respect thereto,
during the last five years.
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(e) Except as set forth in Section 3.10(e) of AGI Disclosure Schedule,
neither AGI nor any of its Subsidiaries is a party to any agreement, contract
or arrangement that could result, separately or in the aggregate, in the
payment of any "excess parachute payments" within the meaning of Section 280G
of the Code.
(f) To the Knowledge of AGI, the disallowance of a deduction under Section
162(m) of the Code for employee remuneration will not apply to any amount paid
or payable by AGI or any Subsidiary.
(g) Except as would not have an AGI Material Adverse Effect, no liability
under Title IV of ERISA has been incurred by any Commonly Controlled Entity
that has not been satisfied in full, and no condition exists that presents a
material risk to any Commonly Controlled Entity of incurring a liability under
such Title, other than liability for premiums due the Pension Benefit Guaranty
Corporation ("PBGC") (which premiums have been paid when due). To the extent
this representation applies to sections 4064, 4069 or 4204 of Title IV of
ERISA, it is made not only with respect to each AGI Pension Plan but also with
respect to any employee benefit plan, program, agreement or arrangement
subject to Title IV of ERISA to which AGI or any Commonly Controlled Entity
made, or was required to make, contributions during the five (5) year period
ending on the Closing Date. Except as would not have an AGI Material Adverse
Effect, no AGI Pension Plan or any trust established thereunder has incurred
any "accumulated funding deficiency" (as defined in section 302 of ERISA and
section 412 of the Code), whether or not waived, as of the last day of the
most recent fiscal year of each AGI Pension Plan ended prior to the Closing
Date; and all contributions required to be made with respect thereto (whether
pursuant to the terms of any AGI Pension Plan or otherwise) on or prior to the
Closing Date have been timely made.
(h) AGI and each of its Subsidiaries have not incurred any liability under,
and have complied in all respects with, the Worker Adjustment and Retraining
Notification Act of 1988 and the regulations promulgated thereunder.
3.11 LABOR MATTERS.
(a) With respect to employees of AGI: (i) to the Knowledge of AGI, no senior
executive or key employee has any plans to terminate employment with AGI or
any of its Subsidiaries; (ii) there is no unfair labor practice charge or
complaint against AGI or any of its Subsidiaries pending or, to the Knowledge
of AGI, threatened before the National Labor Relations Board or any other
comparable authority; (iii) there is no demand for recognition made by any
labor organization or petition for election filed with the National Labor
Relations Board or any other comparable authority which, individually or in
the aggregate, would have an AGI Material Adverse Effect; (iv) no grievance or
any arbitration proceeding arising out of or under collective bargaining
agreements is pending and, to the Knowledge of AGI, no claims therefor have
been threatened other than grievances or arbitrations incurred in the ordinary
course of business which, individually or in the aggregate, would not have an
AGI Material Adverse Effect; (v) the consummation of the Merger and related
transactions contemplated by this Agreement will not give rise to termination
of any existing collective bargaining agreement or permit any labor
organization to reopen negotiations in respect of wages, hours or working
conditions under any such existing collective bargaining agreements; and (vi)
there is no litigation, arbitration proceeding, governmental investigation,
administrative charge, citation or action of any kind pending or, to the
Knowledge of AGI, proposed or threatened against AGI relating to employment,
employment practices, terms and conditions of employment or wages and hours
which, individually or in the aggregate, would have an AGI Material Adverse
Effect.
(b) None of AGI nor any of its Subsidiaries has any collective bargaining
relationship or duty to bargain with any Labor Organization (as such term is
defined in Section 2(5) of the National Labor Relations Act, as amended), and
none of AGI nor any of its Subsidiaries has recognized any labor organization
as the collective bargaining representative of any of its employees.
(c) AGI has complied in all material respects with all applicable employment
laws relating to equal employment, fair employment practices, immigration
compliance, prohibited discrimination or other similar employment practices or
acts.
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3.12 TITLE TO AND SUFFICIENCY OF ASSETS.
(a) As of the date hereof AGI and the Subsidiaries own, and as of the
Effective Time AGI and the Subsidiaries will own, good and marketable title to
all of their assets constituting personal property which is material to their
business (excluding, for purposes of this sentence, assets held under leases),
free and clear of any and all mortgages, liens, encumbrances, charges, claims,
restrictions, pledges, security interests or impositions (collectively,
"Liens") the existence of which would have an AGI Material Adverse Effect,
except as set forth in the AGI SEC Reports. Such assets, together with all
assets held by AGI and the Subsidiaries under leases, include all tangible and
intangible personal property, contracts and rights necessary or required for
the operation of the AGI Business.
(b) AGI owns no Real Estate. The leases to all Real Estate occupied by AGI
and the Subsidiaries which are material to the operation of AGI Businesses are
in full force and effect and no event has occurred which with the passage of
time, the giving of notice, or both, would constitute a default or event of
default by AGI or any Subsidiary or, to the Knowledge of AGI, any other person
who is a party signatory thereto, other than such defaults or events of
default which, individually or in the aggregate, would not have an AGI
Material Adverse Effect.
3.13 INTELLECTUAL PROPERTY. "AGI Intellectual Property" means all
trademarks, trademark registrations, trademark rights, trade names, trade name
rights, patents, patent rights, patent applications, industrial models,
inventions, invention disclosures, copyrights, copyright registrations,
servicemarks, servicemark registrations, servicemark rights, trade secrets,
applications for trademarks and for servicemarks, know-how and other
proprietary rights, data and information of any nature or form used or held
for use in connection with the businesses of AGI and the Subsidiaries as
currently conducted by AGI, together with all applications currently pending
for any of the foregoing. Except as disclosed in AGI SEC Reports, AGI and the
Subsidiaries own or possess adequate licenses or other valid rights to use all
of AGI Intellectual Property that is necessary or appropriate for the conduct
of AGI's or Subsidiaries' businesses. Section 3.13(a) of AGI Disclosure
Schedule lists each material license or other agreement pursuant to which AGI
has the right to use AGI Intellectual Property utilized in connection with any
product of AGI and the Subsidiaries, the cancellation or expiration of which
would have an AGI Material Adverse Effect (the "AGI Licenses"). There are no
pending, and between the date hereof and the Effective Time, there shall not
be any pending, or to AGI's Knowledge, threatened interferences, re-
examinations, oppositions or nullities involving any patents, patent rights or
applications therefor of AGI or any Subsidiary, except such as would not,
individually or in the aggregate, have an AGI Material Adverse Effect. There
is no material breach or violation by AGI under, and, to AGI's Knowledge,
there is no material breach by any other party to, any AGI License that is
reasonably likely to give rise to any termination or any loss of material
rights thereunder. AGI has put in place policies and procedures to maintain
the confidentiality of, and trade secret rights to, the processes and
formulas, research and development results and other know-how of AGI, the
value of which to AGI is dependent upon the maintenance of the confidentiality
thereof and, to the Knowledge of AGI, such policies and procedures have been
complied with. The conduct of the business of AGI and the Subsidiaries as
currently conducted does not and will not infringe upon or conflict with, in
any way, any license, trademark, trademark right, trade name, trade name
right, patent, patent right, industrial model, invention, service mark,
service right, copyright or any other intellectual property rights of any
third party that, individually or in the aggregate, would have an AGI Material
Adverse Effect. Except as disclosed in AGI SEC Reports, there are no
infringements of any AGI Intellectual Property which, individually or in the
aggregate, would have an AGI Material Adverse Affect. Neither AGI nor any
Subsidiary has licensed or, to the Knowledge of AGI, otherwise permitted the
use by any third party of any proprietary information or AGI Intellectual
Property on terms or in a manner which, individually or in the aggregate,
would have an AGI Material Adverse Effect.
3.14 TAX MATTERS.
(a) Definitions. As used in this Agreement:
(i) "Closing Agreement" means a written and legally binding agreement
with a taxing authority relating to Taxes.
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(ii) "Tax Return" means any report, return, information statement, payee
statement or other information required to be provided to any federal,
state, local or foreign Governmental Authority, or otherwise retained, with
respect to Taxes or AGI Benefit Plans.
(iii) "Tax Ruling" means a written ruling of a taxing authority relating
to Taxes.
(iv) "Taxes" means any and all taxes, levies, imposts, duties,
assessments, charges and withholdings imposed or required to be collected
by or paid over to any federal, state, local or foreign Governmental
Authority or any political subdivision thereof, including without
limitation income, gross receipts, ad valorem, value added, minimum tax,
franchise, sales, use, excise, license, real or personal property,
unemployment, disability, stock transfer, mortgage recording, estimated,
withholding or other tax, governmental fee or other like assessment or
charge of any kind whatsoever, and including any interest, penalties,
fines, assessments or additions to tax imposed in respect of the foregoing,
or in respect of any failure to comply with any requirement regarding Tax
Returns.
(b) Representations. Except as set forth in Section 3.14(b) of AGI
Disclosure Schedule or as would not, individually or in the aggregate, have an
AGI Material Adverse Effect:
(i) Filing of tax returns, payment of taxes. AGI has filed all Tax
Returns that AGI was required to file prior to the date hereof. All such
Tax Returns were correct and complete in all material respects and were
prepared and filed in accordance with applicable law. All Taxes owed by AGI
(whether or not shown on any Tax Return) with respect to Tax Returns the
due date of which preceded the date hereof have been paid or otherwise
contested in good faith. All other Taxes due and payable by AGI with
respect to periods ending on or before the date of the Closing or in
respect of transactions entered into or any state of facts existing on or
before the date of the Closing (whether or not a Tax Return is due on such
date) have been or will be paid on or before the date of the Closing or
have been or will be accrued on or before the date of the Closing. For
purposes of the preceding sentence, in determining the amount of Taxes due
and payable by AGI with respect to periods ending on or before the date of
the Closing or in respect of transactions entered into or any state of
facts existing on or before the date of the Closing, the date of the
Closing shall be deemed to be the last day of any applicable tax period.
All Tax Returns the due date of which (determined without extensions) is on
or after the date hereof but on or before the date of the Closing will be
correct and complete in all material respects and filed in accordance with
applicable law.
(ii) General Tax Matters. With respect to each taxable period for AGI
ending on or before the Closing Date (or as of such other date as set forth
below), (A) AGI will not be required (X) as a result of a change in method
of accounting for a taxable period ending on or prior to the Closing Date,
to include any adjustment under Section 481 of the Code (or any
corresponding provision of state, local, or foreign law) in taxable income
for any taxable period (or portion thereof) beginning after the Closing
Date or (Y) as a result of any "closing agreement," as described in Section
7121 of the Code (or any corresponding provision of state, local, or
foreign law) to include any item of income or exclude any item of deduction
from any taxable period (or portion thereof) beginning after the Closing
Date; (B) AGI is not a party to or bound by any tax allocation or tax
sharing agreement and has no current or potential obligation to indemnify
any other person with respect to any Tax or pay the Taxes of any other
person under Treasury Regulations Section 1.1502-6 (or any similar
provisions of state, local, or foreign law) as a transferee or successor,
by contract or otherwise; (C) AGI has not been a "U.S. real property
holding corporation" (within the meaning of Code Section 897(c)(2)) during
the applicable period specified in Code Section 897(c)(1)(A)(ii); (D) AGI
was not acquired in a qualified stock purchase under Code Section 338(d)(3)
and no elections under Code Section 338(g), protective carryover basis
elections, or offset prohibition elections are applicable to AGI; (E) AGI
has withheld and paid all Taxes required to have been withheld and paid in
connection with amounts paid or owing to an employee, independent
contractor, shareholder, or other third party; (F) no income under any
arrangement or understanding to which AGI is a party will be attributed to
AGI which is not represented by income to which AGI is legally entitled;
and (G) AGI owns no interest in any "controlled foreign corporation"
(within the meaning of Code Section 957), "passive foreign investment
company" (within the meaning of Code Section 1296) or other entity the
income of which is required to be included in the income of AGI whether or
not distributed
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(iii) Copies of Tax Returns. AGI has furnished or made available to E&S
copies of all income and sales Tax Returns filed by or with respect to AGI
relating to the period encompassing the three taxable years of AGI
preceding the date hereof. AGI shall provide E&S, prior to the filing
thereof, a copy of any income or sales Tax Returns which are filed prior to
the Effective Time.
(iv) Definition. Any reference to the term "AGI" in this Section 3.14
shall refer to AGI and any Subsidiary of AGI. Further, any reference to any
action of "AGI" in this Section 3.14 shall encompass any action or actions
taken by or at the direction of AGI whether or not such actions taken by or
at the direction of AGI were properly authorized.
3.15 ENVIRONMENTAL MATTERS.
(a) For purposes of this Agreement, the following terms shall have the
following meanings: (i) "Hazardous Substances" means (A) petroleum and
petroleum products, by-products or breakdown products, radioactive materials,
asbestos-containing materials and polychlorinated biphenyls, and (B) any other
chemicals, biological or radioactive materials or substances regulated as
toxic or hazardous or as a pollutant, contaminant or waste under any
applicable Environmental Law; (ii) "Environmental Law" means any law, past,
present or future and as amended, and any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent decree or judgment, or common law, relating to pollution or protection
of the environment, health or safety or natural resources, including, without
limitation, those relating to the use, handling, transportation, treatment,
storage, disposal, release or discharge of Hazardous Substances; and (iii)
"Environmental Permit" means any permit, approval, identification number,
license or other authorization required under any applicable Environmental
Law.
(b) AGI and the Subsidiaries are and have been in compliance with all
applicable Environmental Laws, have obtained all Environmental Permits and are
in compliance with their requirements, and have resolved all past non-
compliance with Environmental Laws and Environmental Permits without any
pending, ongoing or future obligation, cost or liability, except in each case
where such non-compliance would not, individually or in the aggregate, have an
AGI Material Adverse Effect.
(c) Neither AGI nor any of the Subsidiaries has (i) placed, held, located,
released, transported or disposed of any Hazardous Substances on, under, from
or at any of AGI's or any of the Subsidiaries' properties or any other
properties, other than in a manner that would not, in all such cases taken
individually or in the aggregate, result in an AGI Material Adverse Effect,
(ii) any Knowledge of the presence of any Hazardous Substances on, under,
emanating from, or at any of AGI's or any of the Subsidiaries' properties or
any other property but arising from AGI's or any of the Subsidiaries' current
or former properties or operations, other than in a manner that would not
result in an AGI Material Adverse Effect, or (iii) any Knowledge, nor has it
received any written notice (A) of any violation of or liability under any
Environmental Laws, (B) of the institution or pendency of any suit, action,
claim, proceeding or investigation by any Governmental Entity or any third
party in connection with any such violation or liability, (C) requiring the
response to or remediation of Hazardous Substances at or arising from any of
AGI's or any of the Subsidiaries' current or former properties or operations
or any other properties, (D) alleging noncompliance by AGI or any of the
Subsidiaries with the terms of any Environmental Permit in any manner
reasonably likely to require material expenditures or to result in material
liability or (E) demanding payment for response to or remediation of Hazardous
Substances at or arising from any of AGI's or any of the Subsidiaries' current
or former properties or operations or any other properties, except in each
case for the notices set forth in Section 3.15(c) of AGI Disclosure Schedule.
(d) No Environmental Law imposes any obligation upon AGI or any of the
Subsidiaries arising out of or as a condition to any transaction contemplated
by this Agreement, including any requirement to modify or to transfer any
permit or license, any requirement to file any notice or other submission with
any Governmental Authority, the placement of any notice, acknowledgment or
covenant in any land records, or the modification of or provision of notice
under any agreement, consent order or consent decree. No Lien has been placed
upon any of AGI's or the Subsidiaries' properties under any Environmental Law.
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(e) AGI and the Subsidiaries have made available to E&S copies of any
environmental assessment or audit report or other similar studies or analyses
currently in the possession of AGI or any of the Subsidiaries relating to any
real property currently or formerly owned, leased or occupied by AGI or any of
the Subsidiaries.
3.16 MATERIAL CONTRACTS.
(a) The contracts and agreements listed in Section 3.16(a) of the Disclosure
Schedule are contracts, agreements and arrangements that are material to AGI
and the Subsidiaries or, although not so material, are of unique value to AGI
and the Subsidiaries and are referred to herein collectively as the "Material
Contracts".
(b) Except as would not, individually or in the aggregate, have an AGI
Material Adverse Effect, each AGI License and each Material Contract is a
legal, valid and binding agreement, neither AGI nor any of the Subsidiaries
(or to the Knowledge of AGI, any other party thereto) is in default under any
AGI Licenses or Material Contracts, and none of the AGI Licenses or Material
Contracts has been canceled by the other party thereto; each Material Contract
and AGI License is in full force and effect and no event has occurred which,
with the passage of time or the giving of notice or both, would constitute a
default, event of default or other breach by AGI or applicable Subsidiary
party thereto which would entitle the other party to such Material Contract or
AGI License to terminate the same or declare a default or event of default
thereunder; AGI and the Subsidiaries are not in receipt of any claim of
default under any such agreement; AGI or the applicable Subsidiary party to
such Material Contract or AGI License maintains good business relationships
with the other party to such agreement. AGI has made available to E&S true and
complete copies of all AGI Licenses and all Material Contracts. AGI is not a
party to any contracts or agreements that limit the ability of AGI or any
Subsidiary or, after the Effective Time, E&S or any of its affiliates, to
compete in any line of business or with any person or in any geographic area
or during any period of time, or to solicit any customer or client.
(c) The Material Contracts are freely assignable to the Surviving
Corporation in connection with the Merger.
3.17 SUPPLIERS. Neither AGI nor any Subsidiary has received any notice that
any significant supplier will not sell raw materials, supplies, merchandise
and other goods to AGI or any Subsidiary at any time after the Effective Time
on terms and conditions substantially similar to those used in its current
sales to AGI and the Subsidiaries, subject only to general and customary price
increases, unless comparable raw materials, supplies, merchandise or other
goods are readily available from other sources on comparable terms and
conditions or unless such failure to sell would not have an AGI Material
Adverse Effect.
3.18 TAX TREATMENT. Neither AGI nor, to AGI's Knowledge, any of its
affiliates has taken, agreed to take, or will take any action that would
prevent the Merger from constituting a transaction qualifying under Section
368(a) of the Code. Neither AGI nor, to AGI's Knowledge, any of its affiliates
or agents is aware of any agreement, plan or other circumstance that would
prevent the Merger from qualifying under Section 368(a) of the Code, and, to
AGI's Knowledge, the Merger will so qualify.
3.19 INSURANCE. All fire and casualty, general liability, business
interruption, product liability, and sprinkler and water damage insurance
policies maintained by AGI or any of its Subsidiaries that are material to its
business are with reputable insurance carriers, provide full and adequate
coverage for all normal risks incident to the business of AGI and the
Subsidiaries and their respective properties and assets, and are in character
and amount at least equivalent to that carried by persons engaged in similar
businesses and subject to the same or similar perils or hazards, except for
any such failures to maintain insurance policies that, individually or in the
aggregate, would not have an AGI Material Adverse Effect. AGI and each
Subsidiary have made any and all payments required to maintain such policies
in full force and effect. Neither AGI nor any Subsidiary has received notice
of default under any such policy, and has not received written notice or, to
the Knowledge of AGI, oral notice of any pending or threatened termination or
cancellation, coverage limitation or reduction or material premium increase
with respect to such policy.
3.20 APPROVAL OF AGI BOARD. The Board of Directors of AGI has approved
unanimously the execution and delivery of this Agreement for purposes of
Section 203 of the DGCL.
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3.21 STOCKHOLDER VOTE REQUIRED. The affirmative vote of the holders of a
majority of the outstanding shares of AGI Common Stock is the only vote of the
holders of any class or series of capital stock of AGI necessary to approve
the Merger.
3.22 ACCURACY OF INFORMATION. Neither this Agreement (including the
schedules and exhibits hereto) nor any other document or certificates
delivered by AGI or the Subsidiaries pursuant to the terms of the Agreement
contains an untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained therein not misleading.
3.23 TRANSACTIONS WITH AFFILIATES.
(a) For purposes of this Section 3.23, the term "Affiliated Person" means
(i) any holder of 5% or more of the issued and outstanding AGI Common Stock,
(ii) any director, officer or senior executive of AGI or any Subsidiary, (iii)
any person, firm or corporation that directly or indirectly controls, is
controlled by, or is under common control with, any of AGI or any Subsidiary
or (iv) any member of the immediate family or any of such persons.
(b) Except as set forth in the AGI SEC Reports, to the Knowledge of AGI,
since April 11, 1997, AGI and the Subsidiaries have not, in the ordinary
course of business or otherwise, (i) purchased, leased or otherwise acquired
any material property or assets or obtained any material services from, (ii)
sold, leased or otherwise disposed of any material property or assets or
provided any material services to (except with respect to remuneration for
services rendered in the ordinary course of business as director, officer or
employee of AGI or any Subsidiary), (iii) entered into or modified in any
manner any contract with, or (iv) borrowed any money from, or made or forgiven
any loan or other advance (other than expenses or similar advances made in the
ordinary course of business) to, any Affiliated Person.
(c) Except as set forth in the AGI SEC Reports, to the Knowledge of AGI, (i)
the Material Contracts of AGI and the Subsidiaries do not include any material
obligation or commitment between AGI or any Subsidiary and any Affiliated
Person, (ii) the assets of AGI or any Subsidiary do not include any receivable
or other obligation or commitment from an Affiliated Person to AGI or any
Subsidiary and (iii) the liabilities of AGI and the Subsidiaries do not
include any payable or other obligation or commitment from AGI or any
Subsidiary to any Affiliated Person.
(d) To the Knowledge of AGI and except as set forth in the AGI SEC Reports,
no affiliated Person of any of AGI or any Subsidiary is a party to any
contract with any customer or supplier of AGI or any Subsidiary that affects
in any material manner the business, financial condition or results of
operations of AGI or any Subsidiary.
3.24 ADEQUACY OF INFORMATION SYSTEMS; NO ADVERSE WARRANTIES. Each component
of the management information and operating systems of AGI and the
Subsidiaries relating to or supportive of either companies' sales, accounting,
inventory, distribution, and other material systems and operations, including
all hardware and software relating thereto (collective "MIS Systems"), is
reasonably adequate to support the present and expected future business
operations for the next twelve months. Without limiting the generality of the
foregoing, the MIS Systems (i) include design, function, and performance
capabilities such that the MIS Systems will not abnormally end or have invalid
or incorrect results from and/or performance or functional degradation because
of the then-current date; (ii) the design and function of the MIS Systems
ensure year 2000 functionality and include, without limitation, date data
century recognition, calculations that accommodate same century and
multicentury formulas and date values, and date data interface values that
reflect the then current century; and (iii) are otherwise year 2000 date
compliant with present capability to implement year 2000 century date
conversion without material additional cost or devotion of management,
employees, or other resources, and will suffer no material adverse disruption
resulting from such date conversion. Neither AGI nor any Subsidiary has made
or provided warranties or guaranties, or other assurances expressed or
implied, to any other person that any products or services sold or provided by
either company are year 2000 date compliant in any respect or otherwise will
not or are not likely to experience year 2000 century recognition or
functionality difficulties.
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3.25 OPINION OF FINANCIAL ADVISOR. AGI has received the opinion of Cowen &
Company (the "AGI Financial Advisor"), to the effect that, as of the date
hereof, financial terms of the Merger are fair, from a financial point of
view, to the holders of AGI Common Stock.
3.26 BROKERS. Except for the AGI Financial Advisor, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of AGI. AGI has heretofore furnished to E&S a complete and correct copy
of all agreements between AGI and AGI Financial Advisor pursuant to which such
firm would be entitled to any payment relating to the Merger.
3.27 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither AGI nor any officer,
shareholder, employee, or agent of AGI, or any other person acting on its
behalf, has, directly or indirectly, within the past five years given or
agreed to give any gift, bribe, rebate, or kickback or otherwise provided any
similar benefit to any customer, supplier, governmental employee, or other
person who is or may be in a position to help or hinder AGI (or assist AGI in
connection with any actual or proposed transaction) (i) that subjected or
might have subjected AGI to any material damage or penalty in any civil,
criminal, or governmental litigation or proceeding, (ii) which if not given in
the past, or if not continued in the future, might have a AGI Material Adverse
Effect or subject AGI to suit or penalty in any private or governmental
litigation or proceeding, (iii) for any of the purposes described in Section
162(c) of the Code, or (iv) for the purpose of establishing or maintaining any
concealed fund or concealed bank account.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF E&S AND MERGER SUB
Except as specifically disclosed in E&S SEC Reports (as hereinafter defined)
filed subsequent to December 31, 1997 and prior to the date hereof, E&S and
Merger Sub hereby, jointly and severally, represent and warrant to AGI that:
4.01 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of E&S and Merger
Sub is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has the requisite
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as it is now being
conducted. Each of E&S and Merger Sub is duly qualified or licensed as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or operated
by it or the nature of its business makes such qualification or licensing
necessary, except for such failures to be so qualified or licensed and in good
standing that, individually or in the aggregate, would not have an E&S
Material Adverse Effect. The term "E&S Material Adverse Effect" means any
circumstances, change in, or effect on, E&S, when taken as a consolidated
whole, which is, or could reasonably be expected to in the future be,
materially adverse to business (financial or otherwise), of E&S taken as a
consolidated whole.
4.02 ARTICLES OF INCORPORATION AND BYLAWS. E&S has heretofore furnished to
AGI a complete and correct copy of the Articles of Incorporation and the
Bylaws, each as amended to date, of E&S and Merger Sub. Such Articles of
Incorporation and Bylaws are in full force and effect. Neither E&S nor Merger
Sub is in violation of any provision of its respective Articles of
Incorporation or Bylaws.
4.03 E&S COMMON STOCK TO BE ISSUED IN THE MERGER. The shares of E&S Common
Stock to be issued pursuant to the Merger will be duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, E&S's Articles of Incorporation or Bylaws or any agreement
to which E&S is a party or by which E&S is bound and will, when issued, be
registered under the Securities Act and the Exchange Act and registered or
exempt from registration under applicable Blue Sky Laws, and will not be
subject to restrictions on resale under the Securities Act, other than
restrictions imposed by Rule 145
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promulgated under the Securities Act and the restrictions imposed by the lock-
up agreements discussed in Section 7.02(d).
4.04 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of E&S and Merger Sub has
all necessary corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the Merger.
The execution and delivery of this Agreement by E&S and Merger Sub and the
consummation by E&S and Merger Sub of the Merger have been duly and validly
authorized by all necessary corporate action and no other corporate
proceedings on the part of E&S or Merger Sub are necessary to authorize this
Agreement or to consummate the Merger (other than, with respect to the Merger,
the filing and recordation of appropriate merger documents as required by the
Act). This Agreement has been duly and validly executed and delivered by E&S
and Merger Sub and, assuming the due authorization, execution and delivery by
AGI, constitutes a legal, valid and binding obligation of each of E&S and
Merger Sub enforceable against each of E&S and Merger Sub in accordance with
its terms. No vote of the stockholders of E&S is required for the approval of
this Agreement or the Merger under the Act or the Articles of Incorporation of
E&S.
4.05 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by E&S and Merger Sub do
not, and the performance of this Agreement by E&S and Merger Sub will not, (i)
conflict with or violate the Articles of Incorporation or Bylaws of E&S or
Merger Sub, (ii) conflict with or violate any Law applicable to E&S or Merger
Sub or by which any property or asset of E&S or Merger Sub is bound or
affected, except for such conflicts or violations which would not,
individually or in the aggregate, have an E&S Material Adverse Effect, (iii)
prevent or materially delay the consummation of the Merger or (iv) result in
any breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which E&S or Merger Sub is a party or by which E&S
or Merger Sub or any property or asset of either of them is bound or affected,
except for any such breaches or defaults which, individually or in the
aggregate, would not have an E&S Material Adverse Effect.
(b) The execution and delivery of this Agreement by E&S and Merger Sub do
not, and the performance of this Agreement by E&S and Merger Sub will not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic, foreign
or supranational, except (i) for applicable requirements, if any, of the
Exchange Act, the Securities Act, Blue Sky Laws, state takeover laws, the HSR
Act, and the filing and recordation of appropriate merger documents as
required by the Act and the DGCL and the rules of the NASDAQ/NMS, and (ii)
where failure to obtain such consents, approvals, authorizations or permits,
or to make such filings or notifications, is not reasonably likely to prevent
or materially delay consummation of the Merger, and would not, individually or
in the aggregate, have an E&S Material Adverse Effect.
4.06 SEC FILINGS; FINANCIAL STATEMENTS.
(a) E&S has filed all forms, reports and documents required to be filed by
it with the SEC since January 1, 1995 (collectively, the "E&S SEC Reports")
and has made available to AGI copies of all such documents (including all
exhibits filed in connection therewith). The E&S SEC Reports (i) were prepared
in accordance with the requirements of the Securities Act and the Exchange
Act, as the case may be, and the rules and regulations thereunder, (ii) did
not at the time they were filed contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading and (iii) did not at
the time they were filed omit any documents required to be filed as exhibits
thereto.
(b) Each of the consolidated financial statements (including, in each case,
any notes thereto) contained in the E&S SEC Reports complied as to form with
the applicable accounting requirements and rules and regulations of the SEC
and was prepared in accordance with United States generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated (except as may be indicated in the notes thereto) and each
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fairly presented the consolidated financial position, results of operations
and cash flows of E&S and its consolidated subsidiaries as at the respective
dates thereof and for the respective periods indicated therein in accordance
with United States generally accepted accounting principles (subject, in the
case of unaudited statements, to normal and recurring year-end adjustments
that were not and are not expected, individually or in the aggregate, to have
an E&S Material Adverse Effect).
(c) Except as and to the extent set forth on the consolidated balance sheet
of E&S as of December 31, 1997, including the notes thereto (the "E&S 1997
Balance Sheet"), neither E&S nor any of its consolidated subsidiaries has any
liability or obligation of any nature (whether accrued, absolute, contingent
or otherwise) that would be required to be reflected on a balance sheet, or in
the notes thereto, prepared in accordance with United States generally
accepted accounting principles, except for liabilities and obligations (i)
disclosed in any E&S SEC Report filed since December 31, 1997 and prior to the
date of this Agreement, (ii) incurred since December 31, 1997 in the ordinary
course of business which, individually or in the aggregate, do not have an E&S
Material Adverse Effect, or (iii) incurred pursuant to this Agreement.
(d) E&S has heretofore furnished to AGI complete and correct copies of all
material amendments and modifications that have not been filed by E&S with the
SEC to all agreements, documents and other instruments that previously had
been filed by E&S with the SEC and are currently in effect.
4.07 ABSENCE OF LITIGATION. There is no claim, action, proceeding or
investigation pending or, to E&S's Knowledge, threatened against E&S or any
Subsidiary, or any property or asset of E&S or any Subsidiary, before any
court, arbitrator or Governmental Authority, which, individually or when
aggregated with other claims, actions, proceedings or investigations or
product liability claims, actions, proceedings or investigations which are
reasonably likely to result from facts and circumstances that have given rise
to such a claim, action, proceeding or investigation, would have an E&S
Material Adverse Effect. As of the date hereof, neither E&S nor any Subsidiary
nor any property or asset of E&S or any Subsidiary is subject to any order,
writ, judgment, injunction, decree, determination or award having,
individually or in the aggregate, an E&S Material Adverse Effect.
4.08 TAX TREATMENT. Neither E&S nor, to E&S's Knowledge, any of its
affiliates has taken, agreed to take, or will take any action that would
prevent the Merger from constituting a transaction qualifying under Section
368(a) of the Code. Neither E&S nor, to E&S's Knowledge, any of its affiliates
or agents is aware of any agreement, plan or other circumstance that would
prevent the Merger from qualifying under Section 368(a) of the Code, and to
E&S's Knowledge, the Merger will so qualify.
4.09 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, except
as disclosed in any E&S SEC Report filed prior to the date hereof, there has
not been any event or events having, or reasonably likely to have,
individually or in the aggregate, an E&S Material Adverse Effect.
4.10 OPINION OF FINANCIAL ADVISOR. E&S has received the opinion of Hambrecht
& Quist LLC (the "E&S Financial Advisor"), to the effect that, as of the date
hereof, the Merger Consideration is fair to E&S from a financial point of
view.
4.11 BROKERS. Except for the E&S Financial Advisor, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of E&S or Merger Sub.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
5.01 CONDUCT OF BUSINESS BY AGI PENDING THE MERGER. AGI covenants and agrees
that, between the date of this Agreement and the Effective Time, except as set
forth in Section 5.01 of AGI Disclosure Schedule
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or as otherwise expressly provided for in this Agreement, unless E&S shall
otherwise agree (which agreement shall not be unreasonably withheld or
delayed) in writing, AGI Business shall be conducted only in, and AGI and the
Subsidiaries shall not take any action except in, the ordinary course of
business and in a manner consistent in all material respects with past
practice; and AGI shall use its best efforts to preserve intact its business
organization, to keep available the services of the current officers,
employees and consultants of AGI and the Subsidiaries and to preserve the
current relationships of AGI and the Subsidiaries with customers,
distributors, suppliers, licensors, licensees, contractors and other persons
with which AGI or any Subsidiary has significant business relations. By way of
amplification and not limitation, except as contemplated by this Agreement, or
as set forth in Section 5.01 of AGI Disclosure Schedule, neither AGI nor any
of the Subsidiaries shall, between the date of this Agreement and the
Effective Time, directly or indirectly do, any of the following without the
prior written consent of E&S, which consent shall not be unreasonably withheld
or delayed (prior consent shall be requested from John Lemley at E&S
([email protected]), with a copy to Mark McBride ([email protected])):
(a) amend or otherwise change its Certificate of Incorporation or Bylaws
or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant or encumber, or authorize the
issuance, sale, pledge, disposition, grant or encumbrance of, (i) any
shares of capital stock of any class of AGI or any Subsidiary, or any
options, warrants, convertible securities or other rights of any kind to
acquire any shares of such capital stock, or any other ownership interest
(including, without limitation, any phantom interest), of AGI or any
Subsidiary or (ii) any assets of AGI or any Subsidiary, except for sales in
the ordinary course of business and in a manner consistent in all material
respects with past practice and other asset sales for consideration or
having a fair market value aggregating not more than $100,000;
(c) other than regularly scheduled periodic cash dividends in amounts not
in excess of those previously declared, set aside, make or pay any dividend
or other distribution, payable in cash, stock, property or otherwise, with
respect to any of its capital stock, except that a Subsidiary may, after
consultation with E&S, declare and pay a dividend to AGI;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e) (i) acquire (including, without limitation, by merger, consolidation
or acquisition of stock or assets) any corporation, partnership, limited
liability company, other business organization or any division thereof, or
any material amount of assets; (ii) enter into any contract or agreement
that, if entered into prior to the date of this Agreement, would have been
required to be disclosed as a Material Contract, other than in the ordinary
course of business, consistent in all material respects with past practice;
or (iii) enter into or amend any Material Contract with respect to any
matter set forth in this subsection (e);
(f) (i) incur any additional indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any person, or
make any loans or advances, except in the ordinary course of business and
consistent in all material respects with past practice and in an amount not
in excess of $100,000; (ii) authorize capital expenditures which are, in
the aggregate, in excess of $300,000 for AGI and the Subsidiaries taken as
a whole; or (iii) enter into or amend any contract, agreement, commitment
or arrangement with respect to any matter set forth in this subsection (f);
(g) (except in the ordinary course of business and consistent in all
material respects with past practice) increase the compensation payable or
to become payable to its officers or employees generally or to any employee
with an annual base salary in excess of $125,000, or grant any bonus,
severance or termination pay in excess of $25,000 to, or enter into any
employment or severance agreement in excess of $25,000 with any director,
officer or other employee of AGI or any Subsidiary, or establish, adopt,
enter into or amend any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
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(h) acquire, sell, lease or dispose of any Real Estate or other material
assets, other than sales or leases of fixed assets (other than Real Estate)
or sales of inventory, in each case, in the ordinary course of business;
(i) accelerate the collection of accounts receivable, delay the payment
of accounts payable or take any action with respect to credit, collection
and fiscal policies and practices, other than in the ordinary course of
business and in a manner consistent with past practice with respect to
accounting policies or practices;
(j) make any material Tax election or settle or compromise any material
federal, state, local or foreign income Tax liability;
(k) take any action that would or is reasonably likely to result in any
of the covenants and agreements set forth in this Article V or in Article
VI or any of the conditions set forth in Article VII not being satisfied as
of the Closing Date;
(l) take any action, other than reasonable and usual actions in the
ordinary course of business and consistent in all material respects with
past practice, with respect to accounting policies or procedures
(including, without limitation, procedures with respect to the payment of
accounts payable and collection of accounts receivable);
(m) knowingly take any action that could reasonably be expected to
prevent the Merger from constituting a transaction qualifying under Section
368(a) of the Code; or
(n) except for the payment of reasonable professional fees relating to
the Merger, or otherwise and reasonable fees to financial advisors (which
financial advisory fees have heretofore been disclosed or are otherwise
acceptable, to E&S), pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise) in an amount in excess of $300,000 in the aggregate, other than
the payment, discharge or satisfaction, in the ordinary course of business
and consistent in all material respects with past practice, of liabilities
reflected or reserved against in AGI's 1997 Balance Sheet or subsequently
incurred in the ordinary course of business and consistent in all material
respects with past practice.
5.02 CONDUCT OF BUSINESS BY E&S PENDING THE MERGER. E&S covenants and agrees
that, between the date of this Agreement and the Effective Time, unless E&S
shall otherwise agree (which agreement shall not be unreasonably withheld or
delayed) in writing, E&S Business shall be conducted only in the ordinary
course, and E&S shall not (i) knowingly take any action that could reasonably
be expected to prevent the Merger from constituting a transaction qualifying
under Section 368(a) of the Code, or (ii) directly or indirectly take any
action or fail to take any action that is reasonably likely to result in a
material delay in the declaration of effectiveness of the Registration
Statement (as defined in Section 6.01 below) by the SEC.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01 REGISTRATION STATEMENT; PROXY STATEMENT.
(a) As promptly as practicable after the execution of this Agreement, AGI
and E&S shall prepare and file with the SEC preliminary proxy materials
relating to the meeting of the holders of shares of AGI Common Stock to be
held in connection with the Merger (together with any amendments thereof or
supplements thereto, the "Proxy Statement"). As promptly as practicable after
comments are received from the SEC on the preliminary proxy materials and
after the furnishing by AGI and E&S of all information required to be
contained therein, AGI and E&S shall prepare and file with the SEC a
registration statement on Form S-4 (together with all amendments thereto, the
"Registration Statement"), in which the Proxy Statement shall be included as a
prospectus in connection with the registration under the Securities Act of the
shares of E&S Common Stock to be issued to the holders of shares of AGI Common
Stock pursuant to the Merger. E&S shall use all reasonable efforts to cause
the Registration Statement to become effective as promptly as practicable, and
shall take all
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action required under any applicable federal or state securities laws in
connection with the issuance of shares of E&S Common Stock pursuant to the
Merger. AGI shall furnish all information concerning AGI as E&S may reasonably
request in connection with such actions and the preparation of the
Registration Statement. As promptly as practicable after the Registration
Statement shall have become effective, AGI shall mail the Proxy Statement to
its stockholders. The Proxy Statement shall include the unanimous
recommendation of the Board of Directors of AGI in favor of the Merger, unless
otherwise necessary due to the applicable fiduciary duties of the directors of
AGI, as determined by such directors in good faith after consultation with
independent legal counsel (who may be AGI's regularly engaged independent
legal counsel). No change in recommendation by the Board of Directors of AGI
shall in any way affect the obligations of the parties to the Voting
Agreements with respect to the voting of their shares of AGI Common Stock.
(b) The Registration Statement and the information supplied by E&S for
inclusion in the Proxy Statement shall not, at (i) the time the Registration
Statement is declared effective by the SEC; (ii) the time the Proxy Statement
(or any amendment thereof or supplement thereto) is first mailed to the
holders of shares of AGI Common Stock; (iii) the time of the Stockholders'
Meeting (as defined in Section 6.02); and (iv) the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. If at any time prior to the Effective Time any event
or circumstance relating to E&S or any of its subsidiaries, or their
respective officers or directors, is discovered by E&S which should be set
forth in an amendment or a supplement to the Registration Statement or Proxy
Statement, E&S shall promptly inform AGI, and AGI shall make appropriate
amendments or supplements to the Proxy Statement. The Proxy Statement shall
comply in all material respects as to form and substance with the requirements
of the Securities Act, the Exchange Act and the rules and regulations
thereunder. Notwithstanding the foregoing, AGI makes no representation or
warranty with respect to any information supplied by E&S or Merger Sub which
is contained in, or furnished in connection with the preparation of, any of
the foregoing documents.
(c) The Proxy Statement and the information supplied by AGI for inclusion in
the Registration Statement shall not, at (i) the time the Registration
Statement is declared effective by the SEC; (ii) the time the Proxy Statement
(or any amendment thereof or supplement thereto) is first mailed to the
holders of shares of AGI Common Stock; (iii) the time of the Stockholders'
Meeting; and (iv) the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. If at any
time prior to the Effective Time any event or circumstance relating to AGI or
any of the Subsidiaries, or their respective officers or directors, is
discovered by AGI which should be set forth in an amendment or a supplement to
the Registration Statement or Proxy Statement, AGI shall promptly inform E&S.
The Registration Statement and the Proxy Statement shall comply in all
material respects as to form and substance with the requirements of the
Securities Act, the Exchange Act and the rules and regulations thereunder.
Notwithstanding the foregoing, E&S and Merger Sub make no representations or
warranties with respect to any information supplied by AGI which is contained
in, or furnished in connection with the preparation of, any of the foregoing
documents.
6.02 STOCKHOLDERS' MEETING.
(a) Subject to the provisions of Section 6.05 and Section 8.01(f), AGI
shall, consistent with applicable law, call and hold a meeting of the holders
of shares of AGI Common Stock (the "Stockholders' Meeting") as promptly as
practicable for the purpose of voting upon the approval and adoption of this
Agreement and AGI shall use its reasonable best efforts to hold the
Stockholders' Meeting as soon as practicable after the date on which the
Registration Statement becomes effective. For so long as the Board of
Directors of AGI shall be recommending the Merger to the stockholders in
accordance with the last sentence of Section 6.01(a), AGI shall solicit from
the holders of shares of AGI Common Stock proxies in favor of the approval and
adoption of the Merger, and shall take all other action necessary or advisable
to secure the vote or consent of such holders required by the DGCL. Provided
that this Agreement shall not have been terminated in accordance with the
terms of Section 8.01(f), no change in or withdrawal of the recommendation of
the Board of Directors of AGI with
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respect to the Merger shall in any way affect the obligation of AGI to convene
the Stockholders' Meeting in accordance with this Section 6.02(a).
(b) E&S shall vote (or consent with respect to) any shares of AGI Common
Stock beneficially owned by it, or with respect to which it has the power (by
agreement, proxy or otherwise) or cause to be voted (or to provide a consent),
in favor of the approval and adoption of this Agreement at any meeting of the
stockholders of AGI at which this Agreement shall be submitted for approval
and adoption and at all adjournments or postponements thereof (or, if
applicable, by any action of the stockholders of AGI by consent in lieu of a
meeting).
6.03 APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) AGI and E&S shall use their reasonable efforts to (i) take, or cause to
be taken, all appropriate action and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the Merger as promptly as practicable, (ii) obtain
expeditiously from any Governmental Authorities any consents, licenses,
permits, waivers, approvals, authorizations or orders required to be obtained
or made by E&S or AGI or any of their Subsidiaries in connection with the
authorization, execution and delivery of this Agreement and the consummation
of the Merger, and (iii) as promptly as practicable, make all necessary
filings, and thereafter make any other required submissions, with respect to
this Agreement and the Merger required under (A) the Securities Act and the
Exchange Act, and any other applicable federal or state securities Laws, (B)
the HSR Act and any related governmental request thereunder and (C) any other
applicable Law; provided that E&S and AGI shall cooperate with each other in
connection with the making of all such filings, including providing copies of
all such documents to the non-filing party and its advisors prior to filing
and, if requested, accepting all reasonable additions, deletions or changes
suggested by the other party in connection therewith. From the date of this
Agreement until the Effective Time, each party shall promptly notify the other
party in writing of any pending or, to the knowledge of the first party,
threatened action, proceeding or investigation by any Governmental Authority
or any other person (i) challenging or seeking material damages in connection
with the Merger or the conversion of AGI Common into E&S Common Stock or cash
pursuant to the Merger or (ii) seeking to restrain or prohibit the
consummation of the Merger or otherwise limit the right of E&S or E&S's
subsidiaries to own or operate all or any portion of the businesses or assets
of AGI or its Subsidiaries, which in either case would have an AGI Material
Adverse Effect prior to or after the Effective Time, or an E&S Material
Adverse Effect after the Effective Time.
(b) AGI and E&S shall furnish to each other all information required for any
application or other filing to be made pursuant to the rules and regulations
of any applicable Law (including all information required to be included in
the Proxy Statement and the Registration Statement) in connection with the
transactions contemplated by this Agreement.
(c) (i) Each of E&S and AGI shall give (or shall cause its respective
subsidiaries to give) any notices to third parties and use, and cause its
respective subsidiaries to use, their reasonable efforts to obtain any third
party consents, (A) necessary, proper or advisable to consummate the
transactions contemplated in this Agreement, (B) disclosed or required to be
disclosed in AGI Disclosure Schedule or (C) required to prevent an AGI
Material Adverse Effect from occurring prior to or after the Effective Time or
an E&S Material Adverse Effect from occurring after the Effective Time.
6.04 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) The parties shall comply with, and shall cause their respective
Representatives (as defined below) to comply with, to the extent permitted by
applicable Law, all of their respective obligations under the Confidentiality
Agreement dated March 4, 1998 (the "Confidentiality Agreement") between AGI
and E&S.
(b) Subject to the Confidentiality Agreement, from the date hereof to the
Effective Time, AGI will provide to E&S (and its officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives, collectively, "Representatives") access to all information
and documents which E&S may reasonably request regarding the business, assets,
liabilities, employees and other aspects of AGI.
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(c) From the date hereof to the Effective Time, AGI shall: (i) provide to
E&S and its Representatives access at reasonable times upon prior notice to
the officers, employees, agents, properties, offices and other facilities of
AGI and its Subsidiaries and to the books and records thereof and (ii) furnish
promptly such information concerning the business, properties, contracts,
assets, liabilities, personnel and other aspects of AGI and its Subsidiaries
as E&S or its Representatives may reasonably request.
(d) From the date hereof to the Effective Time, E&S shall: (i) provide to
AGI and its Representatives access at reasonable times upon prior notice to
the officers, employees, agents, properties, offices and other facilities of
E&S and its Subsidiaries and to the books and records thereof and (ii) furnish
promptly such information concerning the business, properties, contracts,
assets, liabilities, personnel and other aspects of E&S and its Subsidiaries
as AGI or its Representatives may reasonably request.
(e) No investigation by AGI, E&S or Merger Sub, whether prior to the
execution of this Agreement or pursuant to this Section 6.04, shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto.
6.05 NO SOLICITATION OF COMPETING TRANSACTIONS.
(a) Neither AGI nor any Subsidiary shall, directly or indirectly, through
any officer, director, agent, investment banker, accountant, legal counsel,
financial advisor or otherwise, initiate, solicit or knowingly encourage
(including by way of furnishing non-public information or assistance), or take
any other action to facilitate knowingly, any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Competing Transaction (as defined below), or enter into or maintain or
continue discussions or negotiate with any person or entity in furtherance of
such inquiries or to obtain a Competing Transaction, or agree to or endorse
any Competing Transaction, or authorize or permit any of the officers,
directors or employees of AGI or any Subsidiary or any investment banker,
financial advisor, attorney, accountant or other agent or representative of
AGI or any Subsidiary to take any such action, and AGI shall notify E&S orally
(within one business day) and in writing (within 24 hours of oral
notification) of all of the relevant details relating to any inquiry or
proposal which AGI or any Subsidiary or any such officer, director, employee,
investment banker, financial advisor, attorney, accountant or other agent or
representative may receive relating to any of such matters and which AGI and
any of its officers or directors has knowledge of, and if such inquiry or
proposal is in writing, AGI shall deliver to E&S a copy of such inquiry or
proposal. AGI and its officers and directors will, and AGI will cause its
employees, agents, representatives (including, without limitation, any
investment banker, attorney or accountant retained by AGI) to, immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing. AGI will promptly request that each person to whom any confidential
documents or information concerning AGI was disclosed by AGI since December
31, 1997 for the purpose of discussing a possible change in control
transaction involving AGI (a "Potential Buyer"), either return all such
confidential documents and information, and all copies thereof, to AGI or
deliver a written certification of such destruction to AGI. AGI shall use all
reasonable efforts to cause each such Potential Buyer to comply with such
request. For purposes of this Agreement, "Competing Transaction" shall mean
any of the following involving AGI or any Subsidiary: (i) any merger,
consolidation, share exchange, recapitalization, business combination, or
other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 15% or more of the assets of AGI and the
Subsidiaries, taken as a whole, in a single transaction or series of related
transactions; (iii) any tender offer or exchange offer for 15% or more of the
shares of AGI Common Stock or the filing of a registration statement under the
Securities Act in connection therewith; (iv) any person having acquired
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder) having been formed which
beneficially owns or has the right to acquire beneficial ownership of, 15% or
more of the shares of AGI Common Stock; or (v) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
(b) Provided that there has been no breach of Section 6.05(a), if at any
time prior to the Effective Time, the Board of Directors of AGI is advised in
writing by AGI's legal counsel that it is necessary to do so in order to
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comply with its fiduciary duties to AGI's stockholders under applicable law,
AGI may, in response to an unsolicited inquiry, proposal or offer for a
Competing Transaction (so long as the Board of Directors of AGI in good faith
determines (in consultation with its financial advisor) the proposal or offer
represents a financially superior transaction for the stockholders of AGI as
compared to the Merger), (x) furnish only such information with respect to AGI
to any such person pursuant to a customary confidentiality agreement as was
delivered to E&S prior to the execution of this Agreement, and (y) participate
in the discussions and negotiations regarding such inquiry, proposal or offer.
Nothing contained in this Agreement shall prevent AGI or its Board of
Directors from complying with Rules 14d-9 and 14e-2 promulgated under the
Exchange Act with regard to any proposed Competing Transaction.
(c) Except as permitted by this Section 6.05(c), the Board of Directors of
AGI shall not enter into any agreement with respect to, any Competing
Transaction. Notwithstanding the preceding sentence, if the Board of Directors
of AGI determines in its good faith judgment, after consultation with outside
counsel, that it has received a Superior Proposal (as defined below), the
Board of Directors may terminate this Agreement pursuant to Section 8.01(f) by
providing written notice to E&S (a "Notice of Superior Proposal") advising E&S
that the Board of Directors has received a Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and providing notice
of termination of this Agreement. For purposes of this Agreement, a "Superior
Proposal" means any proposal made by a third party to acquire, directly or
indirectly, including pursuant to a merger, liquidation, dissolution or other
similar transaction, 100% of the aggregate voting power or capital stock of
AGI then outstanding or all or substantially all the assets of AGI for a price
per share in excess of $7.65, or, in the case of an asset sale, an aggregate
consideration (consisting of cash and/or securities) in excess of the product
of (i) the total issued and outstanding shares of AGI Common Stock on a fully
diluted basis, and (ii) $7.65.
6.06 INDEMNIFICATION AND INSURANCE.
(a) E&S and the Surviving Corporation agree that, except as may be limited
by applicable Laws, for six (6) years from and after the Effective Time, the
indemnification obligations set forth in AGI's Certificate of Incorporation
and AGI's Bylaws, in each case as of the date of this Agreement, shall survive
the Merger (and, prior to the Effective Time, E&S shall cause the Certificate
of Incorporation and Bylaws of Merger Sub to include such provisions) and
shall not be amended, repealed or otherwise modified after the Effective Time
in any manner that would adversely affect the rights thereunder of the
individuals who on or at any time prior to the Effective Time were entitled to
indemnification thereunder with respect to matters occurring prior to the
Effective Time. From and after the Effective Time, such obligations shall be
the joint and several obligations of the E&S and the Surviving Corporation.
(b) The Surviving Corporation shall maintain in effect, for three (3) years
from and after the Effective Time, directors' and officers' liability
insurance policies covering the persons who are currently covered in their
capacities as such directors and officers by AGI's current directors' and
officers' policies and on terms not materially less favorable than the
existing insurance coverage with respect to matters occurring prior to the
Effective Time.
(c) The Surviving Corporation and E&S shall honor and fulfill in all
respects the obligations of AGI pursuant to indemnification agreements with
AGI's directors and officers existing at or before the Effective Time.
6.07 NOTIFICATION OF CERTAIN MATTERS. From and after the date of this
Agreement until the Effective Time, each party hereto shall promptly notify
the other party hereto of (a) the occurrence, or non-occurrence, of any event
the occurrence or non-occurrence of which would be reasonably likely to cause
any condition to the obligations of any party to effect the Merger not to be
satisfied, or (b) the failure of AGI or E&S, as the case may be, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it pursuant to this Agreement which would be reasonably likely to
result in any condition to the obligations of any party to effect the Merger
not to be satisfied; provided, however, that the delivery of any notice
pursuant to this Section 6.07 shall not be deemed to be an amendment of this
Agreement or any Section in AGI Disclosure
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Schedule and shall not cure any breach of any representation or warranty
requiring disclosure of such matter prior to the date of this Agreement. No
delivery of any notice pursuant to this Section 6.07 shall limit or affect the
remedies available hereunder to the party receiving such notice, including the
rights of E&S under Section 7.02(a) and those of AGI under Section 7.03(a), in
the event that a representation or warranty made by AGI or E&S herein shall
not be true and correct (giving effect to any standards of materiality set
forth in such Sections) as of the date hereof or as of the date when made (if
a different date) and as of the Effective Time.
6.08 STOCK EXCHANGE LISTING. E&S shall as promptly as reasonably practicable
prepare and submit to Nasdaq a listing application covering the shares of E&S
Common Stock to be issued in the Merger and shall use its reasonable efforts
to cause such shares to be approved for listing on the NASDAQ/NMS prior to the
Effective Time. E&S shall also use its reasonable efforts to obtain all
necessary state securities law or "Blue Sky" qualifications, permits and
approvals required to carry out the transactions contemplated by this
Agreement, and AGI shall furnish all information concerning AGI and the
holders of AGI Stock as may be reasonably requested by E&S in connection with
such qualifications, permits and approvals.
6.09 PUBLIC ANNOUNCEMENTS. E&S and AGI shall consult with each other before
issuing any press release or otherwise making any public statements with
respect to this Agreement or any transaction contemplated hereby. E&S and AGI
shall not issue any such press release or make any such public statement
without the prior consent of the other (which consent shall not be
unreasonably withheld), except as may be required by Law or any listing
agreement with the NASD or any national securities exchange to which E&S or
AGI is a party. The parties have agreed on the text of a joint press release
by which E&S and AGI will announce the execution of this Agreement.
6.10 PLAN OF REORGANIZATION. This Agreement is intended to constitute a
"plan of reorganization" within the meaning of Section 1.368-2(g) of the
income tax regulations promulgated under the Code.
6.11 AFFILIATES. Within thirty (30) days from the date hereof, AGI shall
obtain from any person who may be deemed to be an affiliate, as of the date of
this Agreement, of AGI under Rule 145 of the Securities Act, a written
agreement substantially in the form attached hereto as Exhibit 6.11.
6.12 AGI EMPLOYEE STOCK PURCHASE PLAN. AGI shall take all actions necessary
pursuant to the terms of the ESPP in order to shorten the offering period
under such plan which includes the Effective Time (the "Current Offering")
such that a new purchase date shall occur prior to the Effective Time and
shares of AGI Common Stock shall be purchased by ESPP participants prior to
the Effective Time. The Current Offering shall expire immediately following
such new purchase date, and the ESPP shall terminate immediately prior to the
Effective Time. Subsequent to such new purchase date, AGI shall take no action
pursuant to the terms of the ESPP to commence any new offering period.
6.13 EMPLOYMENT AGREEMENTS. E&S shall have entered into Employment
Agreements with Jeff Dunn and Nancy Bush as of the Effective Date hereof in
the form of Exhibit 6.13 hereto, which agreements shall become effective as of
the Effective Time.
6.14 EMPLOYEES AND EMPLOYEE BENEFITS.
(a) From and after the Effective Time, employees of AGI shall be eligible to
participate in the E&S Pension Plan. For purposes of the E&S Pension Plan and
the other E&S employee benefit plans, E&S shall grant all employees of AGI
credit for all service (to the same extent as service with E&S or any
subsidiary of E&S is taken into account with respect to similarly situated
employees of E&S and the subsidiaries of E&S) with AGI and its predecessors
prior to the Effective Time for all purposes (other than vesting under the E&S
Pension Plan) as if such service with AGI was service with E&S or any
subsidiary of E&S; provided, however, that no such past service credit shall
be granted to the extent it would result in duplicative accrual of benefits
for the same period of service; and provided further that all AGI employees
participating in the E&S Pension Plan shall be subject to a vesting period of
5 years from the Effective Date. E&S shall provide or shall cause the
Surviving
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Corporation to provide benefits to any employee of AGI which are not less
favorable in the aggregate than the benefits provided to similarly situated
employees of the E&S and subsidiaries of E&S.
(b) The Surviving Corporation shall assume and continue all of medical and
dental plans of AGI through the end of fiscal year 1998. As of January 1,
1999, all employees of AGI shall be eligible to participate in the E&S medical
and dental plans and shall be subject to the normal policies and procedures of
such plans.
(c) E&S shall cause each participant in the AGI ESPP who becomes employed by
E&S or any of its subsidiaries to become eligible to participate in the E&S
ESPP, with such eligibility to participate as soon as practicable following
the Effective Time.
(d) Prior to the Effective Date, AGI shall adopt appropriate resolutions and
take any and all further actions necessary to terminate the 401(k) Plan
effective as of the date immediately preceding the Closing Date. In addition,
participants in the AGI 401(k) Plan shall make no further contributions to the
AGI 401(k) Plan, except for contributions necessary to fulfill obligations
incurred through the termination date of the AGI 401(k) Plan. E&S shall take
such action that will permit current participants in the AGI 401(k) Plan who
are employed by E&S to participate in the E&S 401(k) Plan as soon as
practicable after the Effective Date. The new participants in the E&S 401(k)
Plan shall be subject to a vesting period of 5 years for the E&S contributions
thereunder.
ARTICLE VII
CONDITIONS TO THE MERGER
7.01 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations of AGI,
E&S and Merger Sub to consummate the Merger are subject to the satisfaction
or, if permitted by applicable Law, waiver of the following conditions:
(a) this Agreement and the transactions contemplated hereby shall have
been approved and adopted by the affirmative vote of the holders of a
majority of the outstanding shares of AGI Common Stock in accordance with
the DGCL and AGI's Certificate of Incorporation;
(b) any applicable waiting period under the HSR Act relating to the
Merger shall have expired or been terminated;
(c) no order, statute, rule, regulation, executive order, stay, decree,
judgment or injunction shall have been enacted, entered, issued,
promulgated or enforced by any Governmental Authority or a court of
competent jurisdiction which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger;
(d) the Registration Statement shall have been declared effective, and no
stop order suspending the effectiveness of the Registration Statement shall
be in effect and no proceedings for such purpose shall be pending before or
threatened by the SEC;
(e) the shares of E&S Common Stock to be issued in the Merger shall have
been authorized for listing on Nasdaq National Market, subject to official
notice of issuance; and
(f) AGI shall have received the opinion of the Venture Law Group, A
Professional Corporation, counsel to AGI, and E&S and Merger Sub shall have
received the opinion of Snell & Wilmer, L.L.P., counsel to E&S and Merger
Sub, based upon representation letters and stockholder certificates in a
form acceptable to AGI's and E&S's legal counsel, to be provided at
Closing, and such other facts, representations and assumptions concerning,
among other things, the actions of the stockholders of AGI as counsel may
reasonably deem relevant, 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 E&S, Merger Sub
and AGI will be a party to the reorganization within the meaning of Section
368(b) of the Code, dated on the Closing Date.
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7.02 CONDITIONS TO THE OBLIGATIONS OF E&S AND MERGER SUB. The obligations of
E&S and Merger Sub to consummate the Merger are subject to the satisfaction
or, if permitted by applicable Law, waiver of the following further
conditions:
(a) (i) AGI 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) each of the representations and warranties of AGI
contained in this Agreement (disregarding for this purpose any
qualifications with respect to materiality or an AGI Material Adverse
Effect) shall be true and correct in all material respects, in each case as
of the date hereof and as of the Closing Date as if made at and as of such
time, it being understood and agreed by E&S and Merger Sub that this
Section 7.02(a) shall be deemed to have been satisfied unless any failure
of performance or failure to be so true and correct, individually or in the
aggregate, would have an AGI Material Adverse Effect; (iii) E&S shall have
received copies of all third party consents required to assign the Material
Contracts to the surviving corporation, except where the absence of which
would not have a AGI Material Adverse Effect; and (iv) E&S shall have
received a certificate signed by an executive officer of AGI to the
foregoing effect;
(b) E&S shall have received "cold comfort" letters of Price Waterhouse
and dated the date on which the Registration Statement shall become
effective and the Effective Time, respectively, and addressed to E&S, such
"cold comfort" letters being in such form and substance as is reasonably
customary for letters delivered by independent public accountants in
connection with registration statements similar to the Registration
Statement;
(c) E&S shall have received from any person who may be deemed to have
become an affiliate of AGI, as reasonably determined by AGI, pursuant to
Rule 145 under the Securities Act, after the date of this Agreement and on
or prior to the Effective Time, a signed agreement substantially in the
form of Exhibit 6.11 hereto;
(d) E&S shall have received from Jeff Dunn and Nancy Bush signed lock-up
agreements substantially in the form of Exhibit 7.02(d) hereto; and
(e) E&S shall have received from Jeff Dunn and Nancy Bush signed
Employment Agreements substantially in the form of Exhibit 6.13.
(f) E&S shall have received from Lew Epstein, Niraj Swarup, Stephen
Bartlett, Hiroki Kato, Arthur Yan, and Greg Milliken executed waivers,
waiving their rights under Section 2(b) of their respective Key Employee
Retention Agreements with AGI dated November 7, 1997 solely with respect to
any new options granted on April 22, 1998.
7.03 CONDITIONS TO THE OBLIGATIONS OF AGI. The obligations of AGI to
consummate the Merger are subject to the satisfaction or, if permitted by
applicable Law, waiver of the following further conditions:
(a) (i) E&S and Merger Sub shall have performed in all material respects
all of their respective obligations hereunder required to be performed by
them at or prior to the Effective Time; (ii) each of the representations
and warranties of E&S contained in this Agreement (disregarding for this
purpose any qualifications with respect to materiality or E&S Material
Adverse Effect) shall be true and correct in all material respects, in each
case as of the date hereof and as of the Closing Date as if made at and as
of such time; it being understood and agreed by AGI that this Section
7.03(a) shall be deemed to have been satisfied unless any failure of
performance or failure to be so true and correct, individually or in the
aggregate, would have a E&S Material Adverse Effect; and (iii) AGI shall
have received a certificate signed by an executive officer of E&S to the
foregoing effect.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.01 TERMINATION. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, notwithstanding any
requisite approval and adoption of this Agreement and the transactions
contemplated hereby by the stockholders of AGI:
(a) by written consent duly authorized by the Boards of Directors of each
of E&S and AGI;
(b) by either E&S or AGI if (i) the waiting period applicable to the
consummation of the Merger under the HSR Act shall not have expired or been
terminated prior to September 15, 1998, (ii) any court of competent
jurisdiction in the United States or other United States Governmental
Authority 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 (provided, however, that neither party
may terminate this Agreement pursuant to this Section 8.01(b)(ii) prior to
September 15, 1998 if the party subject to such order, decree or ruling is
using its reasonable best efforts to have such order, decree or ruling
removed, unless such order, decree or ruling shall have become final and
non-appealable), or (iii) the Effective Time shall not have occurred on or
before September 15, 1998; provided that in each case the right to
terminate this Agreement under this Section 8.01(b) shall not be available
to any party whose willful, deliberate or knowing failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date;
(c) by either E&S or AGI, if the Stockholders' Meeting shall have been
held and the holders of outstanding shares of AGI Common Stock shall have
failed to approve and adopt this Agreement at such meeting (including any
adjournment or postponement thereof);
(d) by AGI, upon a breach of any representation, warranty, or agreement
set forth in this Agreement such that the condition set forth in Section
7.03(a) would not be satisfied (a "Terminating E&S Breach"); provided,
however, that, if such Terminating E&S Breach is curable by E&S through the
exercise of its best efforts and E&S continues to exercise such best
efforts, AGI may not terminate this Agreement under this Section 8.01(d)
for a period of 30 days from the date on which AGI delivers to E&S written
notice setting forth in reasonable detail the circumstances giving rise to
such Terminating E&S Breach; or
(e) by E&S, upon a breach of any representation, warranty, or agreement
set forth in this Agreement such that the condition set forth in Section
7.02(a) would not be satisfied (a "Terminating AGI Breach"); provided,
however, that, if such Terminating AGI Breach is curable by AGI through the
exercise of its best efforts and AGI continues to exercise such best
efforts, E&S may not terminate this Agreement under this Section 8.01(e)
for a period of 30 days from the date on which E&S delivers to AGI written
notice setting forth in reasonable detail the circumstances giving rise to
such Terminating AGI Breach; or
(f) by AGI, if AGI shall have delivered to E&S a Notice of Superior
Proposal in accordance with Section 6.05(c).
8.02 EFFECT OF TERMINATION. Except as provided in Section 9.01, in the event
of the termination of this Agreement pursuant to Section 8.01, this Agreement
shall forthwith become void, there shall be no liability under this Agreement
on the part of E&S, Merger Sub or AGI or any of their respective officers or
directors and all rights and obligations of any party hereto shall cease;
provided, however, that nothing herein shall relieve any party from liability
for, or be deemed to waive any rights of specific performance of this
Agreement available to a party by reason of, any willful breach by the other
party or parties of its or their willful breach of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
8.03 FEES AND EXPENSES.
(a) In the event that this Agreement is terminated pursuant to Section
8.01(f) then, AGI shall reimburse E&S promptly for its documented out of
pocket expenses incurred in connection with the transactions
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contemplated by this Agreement (up to $100,000) and in addition, shall pay
to E&S a break up fee of $4,000,000, which amount shall be payable in
immediately available funds at the time of termination of this Agreement.
(b) Except as provided in Section 8.03(a) above, all expenses incurred by
the parties hereto shall be borne solely and entirely by the party which
has incurred the same; provided, however, that E&S and AGI shall bear
equally all expenses related to printing, filing and mailing the
Registration Statement and the Proxy Statement and all SEC and other
regulatory filing fees incurred in connection with the Registration
Statement and the Proxy Statement.
8.04 AMENDMENT. This Agreement may be amended by the parties hereto by
action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; provided that, after the approval and
adoption of this Agreement by the stockholders of AGI, no amendment may be
made which would reduce the amount or change the type of consideration to be
received by the stockholders of AGI pursuant to the Merger. This Agreement may
not be amended except by an instrument in writing signed by the parties
hereto.
8.05 WAIVER. At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any obligation or other act of any
other party hereto, (b) waive any inaccuracy in the representations and
warranties of the other party contained herein or in any document delivered by
the other party pursuant hereto and (c) waive compliance with any agreement or
condition contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party or parties to be bound
thereby.
ARTICLE IX
GENERAL PROVISIONS
9.01 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations, warranties and agreements in this Agreement and any
certificate delivered pursuant hereto by any person shall terminate at the
Effective Time or upon the termination of this Agreement pursuant to Section
8.01, as the case may be, except that the agreements set forth in Articles I
and II and Section 6.06 shall survive the Effective Time indefinitely, and
those set forth in Sections 6.09, 8.02, 8.03, 8.04, 8.05 and this Article IX
shall survive termination indefinitely.
9.02 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by
facsimile or by registered or certified mail (postage prepaid, return receipt
requested) or by a nationally recognized overnight courier service to the
respective parties at the following addresses (or at such other address for a
party as shall be specified in a notice given in accordance with this Section
9.02):
if to E&S or Merger Sub:
Evans & Sutherland Computer Corporation
600 Komas Drive
Salt Lake City, Utah 84108
Attn: John T. Lemley
with copies to:
Snell & Wilmer, L.L.P.
111 East Broadway, Suite 900
Salt Lake City, Utah 84111
Attn: David F. Evans, Esq.
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if to AGI:
AccelGraphics, Inc.
1873 Barber Lane
Milpitas, California 95035
Attn: Jeffrey Dunn
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, California 94025
Attn: Steven J. Tonsfeldt, Esq.
9.03 CERTAIN DEFINITIONS. For purposes of this Agreement, the term:
(a) "affiliate" of a specified person means a person who directly or
indirectly through one or more intermediaries controls, is controlled by,
or is under common control with, such specified person;
(b) "beneficial owner" with respect to any shares means a person who
shall be deemed to be the beneficial owner of such shares (i) which such
person or any of its affiliates or associates (as such term is defined in
Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly
or indirectly, (ii) which such person or any of its affiliates or
associates has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of
time), pursuant to any agreement, arrangement or understanding or upon the
exercise of consideration rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement
or understanding or (iii) which are beneficially owned, directly or
indirectly, by any other persons with whom such person or any of its
affiliates or associates or any person with whom such person or any of its
affiliates or associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any such
shares;
(c) "business day" means any day on which the principal offices of the
SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized to close in the City of New York, New York;
(d) "AGI Business" shall mean, as of the date specified, the collective
reference to AGI's 3-dimensional graphic business and any and all related
businesses, as presently conducted by the entities in the AGI Group and
their respective business operations;
(e) "AGI Group" shall mean AGI, the Subsidiaries and any partnerships in
which AGI or any Subsidiary has an interest, when taken as a whole;
(f) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of
voting securities, as trustee or executor, by contract or credit
arrangement or otherwise;
(g) "Governmental Authority" means any United States (federal, state or
local), foreign or supra-national Government, or governmental, regulatory
or administrative authority, agency or commission;
(h) "Knowledge," with respect to AGI, means the actual knowledge of Jeff
Dunn or Nancy Bush.
(i) "person" means an individual, corporation, limited liability company,
partnership, limited partnership, syndicate, person (including, without
limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act),
trust, association or entity or government, political subdivision, agency
or instrumentality of a government;
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(j) "Real Estate" means, with respect to AGI or any Subsidiary, as
applicable, all of the fee or leasehold ownership right, title and interest
of such person, in and to all real estate and improvements owned or leased
by any such person and which is used by any such person in connection with
the operation of its business; and
(k) "subsidiary" or "subsidiaries" of any person means any corporation,
partnership, joint venture or other legal entity of which such person
(either above or through or together with any other subsidiary), owns,
directly or indirectly, 50% or more of the stock or other equity interests,
the holders of which are generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other
legal entity.
9.04 ACCOUNTING TERMS. All accounting terms used herein which are not
expressly defined in this Agreement shall have the respective meanings given
to them in accordance with United States generally accepted accounting
principles.
9.05 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of Law, or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Merger is not affected in any manner materially adverse to
any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner
in order that the Merger be consummated as originally contemplated to the
fullest extent possible.
9.06 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the Exhibits
and AGI Disclosure Schedule, which are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein) and the
Confidentiality Agreement constitute the entire agreement among the parties
with respect to the subject matter hereof and supersede all prior agreements
and undertakings, both written and oral, among the parties, or any of them,
with respect to the subject matter hereof. This Agreement shall not be
assigned by operation of law or otherwise.
9.07 PARTIES IN INTEREST. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 6.06 (which is intended to be for the benefit of
the persons covered thereby and may be enforced by such persons).
9.08 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage
would occur in the event any provision of this Agreement was not performed in
accordance with the terms hereof and that the parties shall be entitled to
specific performance of the terms hereof, in addition to any other remedy at
law or in equity.
9.09 GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Utah applicable to contracts
executed in and to be performed in that state.
9.10 HEADINGS. The descriptive headings contained in this Agreement are
included for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.11 COUNTERPARTS. This Agreement may be executed and delivered (including
by facsimile transmission) in one or more counterparts, and by the different
parties hereto in separate counterparts, each of which when executed and
delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
[Signature Page Follows]
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IN WITNESS WHEREOF, E&S, Merger Sub and AGI have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER
CORPORATION
By: /s/ James R. Oyler
Its: President & C.E.O.
E&S MERGER CORP.
By: /s/ James R. Oyler
Its: President & C.E.O.
ACCELGRAPHICS, INC.
By: /s/ Jeffrey W. Dunn
Its: President/C.E.O.
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
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ANNEX II
April 22, 1998
Board of Directors
AccelGraphics, Inc.
1873 Barber Lane
Milpitas, CA 95035
Gentlemen:
You have requested our opinion as investment bankers as to the fairness, from
a financial point of view, to the holders of the outstanding shares of Common
Stock, par value $0.001 per share (the "Company Common Stock"), of
AccelGraphics, Inc. (the "Company"), of the financial terms of the Transaction
(as hereinafter defined). For the purposes of this opinion, the "Transaction"
means the transaction described below pursuant to that certain Agreement and
Plan of Merger among the Company, Evans & Sutherland Computer Corporation
("Evans & Sutherland") and a wholly-owned subsidiary of Evans & Sutherland
("Merger Sub"), to be dated April 22, 1998 (the "Agreement").
As more specifically set forth in the Agreement, and subject to certain terms
and conditions thereof, the Company has agreed to be acquired by Evans &
Sutherland through the merger of the Company with and into Merger Sub (the
"Merger" or "Transaction"). In the Merger, among other things, each then
outstanding share of Company Common Stock shall, by virtue of the Merger, be
converted into the right to receive, at the election of the record holder
thereof, (i) $5.75 in cash (the "Cash Consideration") or (ii) that portion of
a share of the Common Stock, par value $0.20 per share, of Evans & Sutherland
("Evans & Sutherland Common Stock"), determined by dividing $5.75 by the Evans
& Sutherland Common Stock Price (as defined below) (the "Stock Consideration,"
and, together with the Cash Consideration, the "Merger Consideration"). As
defined in the Agreement, the "Evans & Sutherland Common Stock Price" is equal
to the average closing sales price of Evans & Sutherland Common Stock on the
National Association of Securities Dealers, Inc. Automated Quotation/National
Market System ("Nasdaq/NMS") for the ten (10) consecutive trading days
immediately preceding the second trading day prior to the effective date of
the Merger. Notwithstanding the foregoing, the Cash Consideration and Stock
Consideration will be allocated so that the aggregate Merger Consideration
consists of 48% Cash Consideration and 52% Stock Consideration (adjusted to
reflect cash payments made with respect to fractional shares and dissenting
shares).
In the ordinary course of its services, Cowen & Company ("Cowen") is regularly
engaged in the valuation and pricing of businesses and their securities and in
advising corporate securities issuers on related matters.
In arriving at our opinion, Cowen has, among other things:
(1) reviewed the Company's audited financial statements for the fiscal
years ended December 31, 1995, 1996 and 1997 and unaudited financial
statements for the fiscal quarter ended March 31, 1998, certain publicly
available filings with the Securities and Exchange Commission and certain
other relevant financial and operating data for the Company furnished to
Cowen by management of the Company;
(2) reviewed Evans & Sutherland's audited financial statements for the
fiscal years ended December 31, 1995, 1996 and 1997 and unaudited financial
statements for the fiscal quarter ended March 31, 1998, certain publicly
available filings with the Securities and Exchange Commission and certain
other relevant financial and operating data of Evans & Sutherland furnished
to Cowen by management of Evans & Sutherland;
(3) reviewed the April 21, 1998 draft of the Agreement;
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(4) held meetings and discussions with management and senior personnel of
both the Company and Evans & Sutherland to discuss the business,
operations, historical financial results and future prospects of the
Company and Evans & Sutherland;
(5) reviewed, with management and senior personnel of both the Company
and Evans & Sutherland, First Call consensus earnings per share estimates
of financial institutions (the "First Call Estimates") for the Company and
Evans & Sutherland, respectively, and financial projections provided in
currently available Wall Street analyst reports (the "Analyst Projections")
for the Company and Evans & Sutherland, respectively, including, among
other things, the capital structure, sales, net income, cash flow, capital
requirements and other data of the Company and Evans & Sutherland we deemed
relevant;
(6) reviewed the operating results of the Company and the valuation of
the Company implied by the Transaction in comparison to other similar
publicly traded companies;
(7) reviewed the historical prices and trading activity of the Company
Common Stock from April 11, 1997 through April 21, 1998 and of the Evans &
Sutherland Common Stock for the periods April 21, 1995 to April 21, 1998
and April 21, 1997 to April 21, 1998;
(8) based on the Analyst Projections, analyzed the potential pro forma
financial effects of the Transaction;
(9) compared the financial terms of the Transaction with other similar
transactions in which control of an entity was acquired; and
(10) conducted such other studies, analysis, inquiries and investigations
as we deemed appropriate.
At the request of the Company, Cowen solicited third party indications of
interest in acquiring all or substantially all of the stock or assets of the
Company.
On April 21, 1998 the closing price of the Company Common Stock in the last
transaction reported by Nasdaq/NMS was $5.0625 per share.
In rendering our opinion, we relied upon the Company's management with respect
to the accuracy and completeness of financial and other information furnished
to us as described above. In addition, with respect to the First Call
Estimates and Analyst Projections, we assumed, based on discussions with
management of the Company and Evans & Sutherland, that such estimates and
projections provide a reasonable basis for our opinion and, with your consent,
we have relied upon such estimates and projections. We have not assumed any
responsibility for independent verification of such information, including
financial information, nor have we made an independent evaluation or appraisal
of any of the properties or assets of the Company or Evans & Sutherland. We
also have assumed, with your consent, that the Merger will qualify as a tax-
free transaction under the provisions of Section 368 of the Internal Revenue
Code of 1986. With respect to all legal matters relating to the Company, Evans
& Sutherland and the Merger, we have relied on the advice of legal counsel of
the Company. We render no opinion with respect to such legal matters.
Our opinion is necessarily based on general economic, market, financial and
other conditions as they exist on, and can be evaluated as of, the date
hereof, as well as the information currently available to us. It should be
understood that, although subsequent developments may affect our opinion, we
do not have any obligation to update, revise or reaffirm our opinion. Our
opinion does not constitute a recommendation to any holder of Company Common
Stock as to how such holder should vote on the proposed Transaction or as to
whether such holder should elect Cash Consideration or Stock Consideration.
Our opinion does not imply any conclusion as to the likely trading range for
the Evans & Sutherland Common Stock following consummation of the Merger,
which may vary depending on numerous factors that generally influence the
price of securities. Our opinion is limited to the fairness, from a financial
point of view, of the financial terms of the Transaction to holders of Company
Common Stock. We express no opinion with respect to any other reasons, legal,
business or otherwise, that may support the decision of the Company's Board of
Directors to approve, or the Company's decision to enter into, the Merger
Agreement.
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For purposes of rendering our opinion we have assumed, in all respects
material to our analysis, that the representations and warranties of each
party contained in the Agreement are true and correct, that each party will
perform all of the covenants and agreements required to be performed by it
under the Agreement and that all conditions to the consummation of the Merger
will be satisfied without waiver thereof. We have also assumed that all
governmental, regulatory or other consents and approvals contemplated by the
Agreement will be obtained and that in the course of obtaining any of those
consents no restrictions will be imposed or waivers made that would have an
adverse effect on the contemplated benefits of the Merger.
We have acted as financial advisor to the Board of Directors of the Company in
connection with the Merger and will receive a fee for our services, including
rendering this opinion, a significant portion of which is contingent upon the
consummation of the Merger. In the past, Cowen served as the lead manager for
the Company's April 1997 initial public offering and received customary fees
for the rendering of those services. In addition, in the ordinary course of
its business, Cowen trades the securities of the Company and Evans &
Sutherland for its own account and for the accounts of its customers, and,
accordingly, it may at any time hold a long or short position in such
securities. Moreover, as of April 22, 1998 Cowen and its affiliates had a
short position of 478 shares of the Company Common Stock.
On the basis of our review and analysis, as described above, and subject to
the limitations and assumptions set forth herein, it is our opinion as
investment bankers that, as of the date hereof, the financial terms of the
Transaction are fair, from a financial point of view, to the holders of the
Company Common Stock.
Very truly yours,
/s/ Cowen & Company
Cowen & Company
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ANNEX III
VOTING AGREEMENT AND IRREVOCABLE PROXY
VOTING AGREEMENT AND IRREVOCABLE PROXY dated April 22, 1998, among the
several stockholders of ACCELGRAPHICS, INC., a Delaware corporation (the
"Company"), that are parties hereto (each, a "Stockholder" and, collectively,
the "Stockholders"), and EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah
corporation ("E&S").
WHEREAS, E&S and E&S Merger Corp., a Utah corporation and a wholly owned
subsidiary of E&S ("Merger Sub"), propose to enter into an Agreement and Plan
of Merger dated the date hereof (as amended from time to time, the "Merger
Agreement;" capitalized terms being used herein as defined therein unless
otherwise defined herein), with the Company, which provides, among other
things, that the Company will merge with and into Merger Sub (the "Merger");
WHEREAS, as of the date hereof, each Stockholder is the record and
beneficial owner of the number of shares of Common Stock, par value $.001 per
share, of the Company (the "Common Stock"), set forth on Exhibit A attached
hereto (with respect to each Stockholder, such Stockholder's "Existing Shares"
and, together with any shares of Company Common Stock acquired after the date
hereof, whether upon the exercise of warrants, options, conversion of
convertible securities or otherwise, such Stockholder's "Shares"); and
WHEREAS, as a condition to the willingness of E&S to enter into the Merger
Agreement, E&S has requested that the Stockholders agree, and in order to
induce E&S to enter into the Merger Agreement, the Stockholders have agreed,
to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE I
VOTING AGREEMENT
1.01 VOTING AGREEMENT. Each Stockholder, severally and not jointly, hereby
agrees that, from and after the date hereof and until this Agreement shall
have been terminated in accordance with Article IV hereof, at any meeting of
the stockholders of the Company, however called, and in any action by consent
of the stockholders of the Company, such Stockholder will vote (or cause to be
voted) such Stockholder's Shares: (a) in favor of the approval and adoption of
the Merger Agreement, the Merger and all the transactions contemplated by the
Merger Agreement and this Agreement and otherwise in such manner as may be
necessary to consummate the Merger; (b) except as otherwise agreed to in
writing in advance by E&S or except in the case of a Superior Proposal as
defined in Section 6.05 of the Merger Agreement, against any action, proposal,
agreement or transaction that would result in a breach of any covenant,
obligation, agreement, representation or warranty of the Company contained in
the Merger Agreement or of the Stockholder contained in this Agreement; and
(c) against any action, proposal, agreement or transaction (other than the
Merger Agreement or the transactions contemplated thereby) that could result
in any of the conditions to the Company's obligations under the Merger
Agreement not being fulfilled or that is intended, or could reasonably be
expected, to impede, interfere or be inconsistent with, delay, postpone,
discourage or adversely affect the Merger Agreement, the Merger or this
Agreement. No Stockholder shall enter into any agreement or understanding with
any person or entity to vote such Stockholder's shares or give instructions in
any manner inconsistent with this Section 1.01. The Stockholder acknowledges
receipt and review of a copy of the Merger Agreement.
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<PAGE>
1.02 IRREVOCABLE PROXY. If, and only if, any Stockholder fails to comply
with the provisions of Section 1.01 (as determined by E&S in its sole
discretion), such Stockholder hereby agrees that such failure shall result,
without any further action by such Stockholder, in the irrevocable appointment
of E&S, and each of its officers, as such Stockholder's attorney-in-fact and
proxy pursuant to the provisions of Section 212(c) of the General Corporation
Law of the State of Delaware, with full power of substitution, to vote and
otherwise act (by written consent or otherwise) with respect to such
Stockholder's Shares at any meeting of stockholders of the Company (whether
annual or special and whether or not an adjourned or postponed meeting) or
consent in lieu of any such meeting or otherwise, on the matters and in the
manner specified in Section 1.01. THIS PROXY AND POWER OF ATTORNEY ARE
IRREVOCABLE AND COUPLED WITH AN INTEREST AND, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, SHALL BE VALID AND BINDING ON ANY PERSON TO WHOM A STOCKHOLDER
MAY TRANSFER ANY OF HIS SHARES IN BREACH OF THIS AGREEMENT. Each Stockholder
hereby revokes all other proxies and powers of attorney with respect to such
Stockholder's Shares with respect to the matters contemplated by Section 1.01
above that may have heretofore been appointed or granted, and no subsequent
proxy or power of attorney shall be given or written consent executed (and if
given or executed, shall not be effective) by any Stockholder with respect
thereto. All authority herein conferred or agreed to be conferred shall
survive the death or incapacity of any Stockholder and any obligation of the
Stockholder under this Agreement shall be binding upon the heirs, personal
representatives, successors and assigns of such Stockholder.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each Stockholder, severally and not jointly, hereby represents and warrants
to E&S in respect of such Stockholder as follows:
2.01 AUTHORITY RELATIVE TO THIS AGREEMENT. Such Stockholder has all
necessary power and authority to execute and deliver this Agreement, to
perform such Stockholders' obligations hereunder and to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by such Stockholder and constitutes a legal, valid and binding
obligation of such Stockholder, enforceable against such Stockholder in
accordance with its terms.
2.02 NO CONFLICT.
(a) The execution and delivery of this Agreement by such Stockholder does
not, and the performance of this Agreement by such Stockholder shall not,
(i) conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to such Stockholder or by which the Shares owned by such
Stockholder are bound or affected or (ii) result in any breach of, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a
lien or encumbrance on any of the Shares owned by such Stockholder pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which such
Stockholder is a party or by which such Stockholder or the Shares owned by
such Stockholder are bound or affected.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this Agreement by such Stockholder shall not,
require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental authority, domestic or foreign, except
for applicable requirements, if any, of the Securities Exchange Act of
1934, as amended, or the HSR Act.
2.03 TITLE TO THE SHARES. As of the date hereof, such Stockholder is the
record and beneficial owner of the number of shares of Common Stock set forth
on Exhibit A attached hereto opposite the name of such Stockholder. Such
Shares are all the securities of the Company owned, either of record or
beneficially, by such Stockholder. The Shares owned by such Stockholder are
owned free and clear of all security interests, liens, claims, pledges,
options, rights of first refusal, agreements, limitations on such
Stockholder's voting rights,
A-3-2
<PAGE>
charges and other encumbrances of any nature whatsoever. Except as provided in
this Agreement, such Stockholder has not appointed or granted any proxy, which
appointment or grant is still effective, with respect to the Shares owned by
such Stockholder.
ARTICLE III
COVENANTS OF THE STOCKHOLDERS
3.01 NO DISPOSITION OR ENCUMBRANCE OF SHARES. Each Stockholder, severally
and not jointly, hereby agrees that, except as contemplated by the Merger
Agreement, such Stockholder shall not (i) sell, transfer, tender, assign,
contribute to the capital of any entity, hypothecate, give or otherwise
dispose of, grant a proxy or power of attorney with respect to, deposit into
any voting trust, or create or permit to exist any security interest, lien,
claim, pledge, option, right of first refusal, agreement, limitation on such
Stockholder's voting rights, charge or other encumbrance of any nature
whatsoever with respect to, any of such Stockholder's Shares (or agree or
consent to, or offer to do, any of the foregoing), (ii) take any action that
would make any representation or warranty of such Stockholder herein untrue or
incorrect in any material respect or have the effect of preventing or
disabling such Stockholder from performing his or her obligations or, (iii)
directly or indirectly, initiate, solicit or encourage any person to take
actions that could reasonably be expected to lead to the occurrence of any of
the foregoing.
3.02 NO SOLICITATION OF TRANSACTIONS. Each Stockholder, severally and not
jointly, agrees that between the date of this Agreement and the date of
termination of the Merger Agreement, such Stockholder will not (a) solicit,
initiate, consider, encourage or accept any other proposals or offers from any
person relating to any Competing Transaction, or (b) participate in any
discussions, conversations, negotiations and other communications regarding,
or furnish to any other person any information with respect to, or otherwise
cooperate in any way, assist or participate in, facilitate or encourage any
effort or attempt by any other person to seek a Competing Transaction. Each
Stockholder immediately shall cease and cause to be terminated all existing
discussions, conversations, negotiations and other communications with any
persons conducted heretofore with respect to any of the foregoing. Each
Stockholder shall notify E&S promptly if any such proposal or offer, or any
inquiry or other contact with any person with respect thereto, is made and
shall, in any such notice to E&S, indicate in reasonable detail the identity
of the person making such proposal, offer, inquiry or contact and the terms
and conditions of such proposal, offer, inquiry or other contact.
Notwithstanding any term of this Article III, all actions that may be taken
following the date hereof by the Stockholder or any affiliate of the
Stockholder in their capacity as a member of the Board of Directors of the
Company shall be governed solely by the terms of the Merger Agreement and not
by the terms of this Agreement.
ARTICLE IV
TERMINATION
4.01 TERMINATION. This Agreement shall terminate, and no party shall have
any rights or obligations hereunder, and this Agreement shall become null and
void and have no further effect upon the earliest of (a) the Effective Time of
the Merger or (b) the termination of the Merger Agreement pursuant to Section
8.01. Nothing in this Section 4.01 shall relieve any party of liability for
any breach of this Agreement.
ARTICLE V
MISCELLANEOUS
5.01. SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of this Agreement is not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner
in order that the terms of this Agreement remain as originally contemplated to
the fullest extent possible.
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<PAGE>
5.02 FURTHER ASSURANCES. Each Stockholder and E&S will execute and deliver
all such further documents and instruments and take all such further action as
may be necessary in order to consummate the transactions contemplated hereby.
5.03 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage
would occur in the event any provision of this Agreement was not performed in
accordance with the terms hereof and that the parties shall be entitled to
specific performance of the terms hereof, in addition to any other remedy at
law or in equity.
5.04 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between E&S and the Stockholders with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between E&S and the Stockholders with respect to the subject matter hereof.
5.05 AMENDMENT; WAIVER. This Agreement may not be amended except by an
instrument in writing signed by all the parties hereto. Any party to this
Agreement may (a) extend the time for the performance of any of the
obligations or other acts of the other party, (b) waive any inaccuracies in
the representations and warranties of the other party contained herein or in
any document delivered by the other party pursuant hereto or (c) waive
compliance with any of the agreements or conditions of the other party
contained herein. Any such extension or waiver shall be valid only if set
forth in an instrument in writing signed by the party to be bound thereby. Any
waiver of any term or condition shall not be construed as a waiver of any
subsequent breach or a subsequent waiver of the same term or condition, or a
waiver of any other term or condition, of this Agreement. The failure of any
party to assert any of its rights hereunder shall not constitute a waiver of
any of such rights.
5.06 GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Utah applicable to contracts
executed in and to be performed in that State, without regard to the conflict
of law provisions thereof.
5.07 EXPENSES. Except as otherwise specified in this Agreement, all costs
and expenses, including, without limitation, fees and disbursements of
counsel, financial advisors and accountants, incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses, whether or not the Closing shall have
occurred.
5.08 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by telecopy or by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties at the
following addresses (or at such other address for a party as shall be
specified in a notice given in accordance with this Section 5.08):
(a) if to any Stockholder, addressed to such Stockholder:
AccelGraphics, Inc.
1873 Barber Lane
Milpitas, California 95035
Attn: Chief Executive Officer
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, California 94025
Attn: Steven J. Tonsfeldt, Esq.
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<PAGE>
(b) if to E&S:
Evans & Sutherland Computer Corporation
600 Komas Drive
Salt Lake City, Utah 84108
Attention: John T. Lemley
with copies to:
Snell & Wilmer, L.L.P.
111 East Broadway, Suite 900
Salt Lake City, Utah 84111
Attention: David F. Evans, Esq.
5.09 HEADINGS. The descriptive headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
5.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
EVANS AND SUTHERLAND COMPUTER CORPORATION
/s/ James R. Oyler
By: _________________________________
Name:James R. Oyler
Title:Chief Executive Officer
[VOTING AGREEMENT SIGNATURE PAGE]
A-3-5
<PAGE>
/s/ Stephen L. Bartlett
-------------------------------------
Stephen L. Bartlett
/s/ Nancy E. Bush
-------------------------------------
Nancy E. Bush
/s/ Jeffrey W. Dunn
-------------------------------------
Jeffrey W. Dunn
/s/ Lew S. Epstein
-------------------------------------
Lew S. Epstein
/s/ David W. Pidwell
-------------------------------------
David W. Pidwell
[VOTING AGREEMENT SIGNATURE PAGE]
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<PAGE>
/s/ Niraj Swarup
-------------------------------------
Niraj Swarup
/s/ Arthur Yan
-------------------------------------
Arthur Yan
ADVANCED TECHNOLOGY VENTURES IV,
L.P.
By: ATV Associates IV, L.P.
/s/ Jos C. Henkens
Name:
--------------------------------
(print)
General Partner
Title:
---------------------------------
STF II, L.P.
c/o IndoSuez Ventures
/s/ David E. Gold
By:
----------------------------------
David E. Gold
Name:
--------------------------------
(print)
General Partner
Title:
---------------------------------
ASSET MANAGEMENT ASSOCIATES 1996,
L.P.
By: AMC Partners 96, L.P.,
its General Partner
/s/ W. Ferrell Sanders
By:
----------------------------------
W. Ferrell Sanders
Name:
--------------------------------
(print)
General Partner
Title:
---------------------------------
[VOTING AGREEMENT SIGNATURE PAGE]
A-3-7
<PAGE>
AVI CAPITAL, L.P.
By: AVI Capital Management, L.P.,
its General Partner
/s/ Peter Wolken
Name:
--------------------------------
(print)
General Partner
Title:
---------------------------------
ASSOCIATED VENTURE INVESTORS II,
L.P.
By: AVI Management Partners III,
L.P.
/s/ Peter Wolken
Name:
--------------------------------
(print)
General Partner
Title:
---------------------------------
AVI PARTNERS GROWTH FUND II, L.P.
By: AVI Management Partners III,
L.P.
/s/ Peter Wolken
Name:
--------------------------------
(print)
General Partner
Title:
---------------------------------
AVI SILICON VALLEY PARTNERS, L.P.
By: AVI Management Partners III,
L.P.
/s/ Peter Wolken
Name:
--------------------------------
(print)
General Partner
Title:
---------------------------------
[VOTING AGREEMENT SIGNATURE PAGE]
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<PAGE>
FORM OF PROXY
ACCELGRAPHICS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR ANNUAL MEETING JUNE 26, 1998
The undersigned stockholder of AccelGraphics, Inc. (the "Company")
acknowledges receipt of the Notice of the Annual Meeting of Stockholders and
Proxy Statement/Prospectus, each dated May 15, 1998, and the undersigned revokes
all prior proxies and appoints Jeffrey W. Dunn and Nancy E. Bush, or either of
them, as proxies and attorneys-in-fact with full power to each of substitution,
on behalf of the undersigned, to represent the undersigned at the Annual Meeting
of stockholders of AccelGraphics, Inc., to be held on June 26, 1998, at 9:30
a.m. at the Sheraton San Jose, 1801 Barber Lane, Milpitas, California, 95035,
and to vote all shares of Common Stock that the undersigned would be entitled to
vote if then and there personally present, on the matters set forth on the
reverse side, and in their discretion upon such other matter or matters that may
properly come before the meeting and any postponements or adjournment(s)
thereof, and instructs said proxies to vote as follows:
<PAGE>
1. ELECTION OF CLASS I DIRECTORS OF THE COMPANY FOR A TERM EXPIRING AT THE
EARLIER OF CONSUMMATION OF THE MERGER (DEFINED BELOW) OR THE ANNUAL MEETING
OF COMPANY STOCKHOLDERS TO BE HELD IN 2001.
NOMINEES: DAVID E. GOLD; PETER L. WOLKEN
[_]FOR ALL [_]WITHHOLD ALL [_]FOR ALL(Except Nominee(s) written below)
--------------------------------
2. TO APPROVE AND ADOPT (A) THE AGREEMENT AND PLAN OF MERGER, DATED AS OF
APRIL 22, 1998 (THE "MERGER AGREEMENT") BETWEEN THE COMPANY AND EVANS &
SUTHERLAND COMPUTER CORPORATION, A UTAH CORPORATION ("E&S"), PURSUANT TO
WHICH THE COMPANY WILL MERGE (THE "MERGER") WITH AND INTO E&S MERGER CORP.,
A UTAH CORPORATION AND WHOLLY-OWNED SUBSIDIARY OF E&S, AND (B) THE MERGER:
[_]FOR [_]AGAINST [_]ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE.
IF NO SPECIFICATIONS ARE MADE, THIS PROXY WILL BE VOTED (1) FOR THE ELECTION OF
EACH OF THE CLASS I DIRECTORS, (2) FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER AND (3) AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
Dated this___day of________,1998
________________________________
Signature of Stockholder
________________________________
Signature of stockholder
Please sign exactly as your name or
names appear hereon. When signing as
attorney, executor, administrator,
trustee or guardian, please give
full title as such. If shares are
held jointly, each holder should
sign.
PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE.
