<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
DIGITAL SOUND CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] 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:
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(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>
[LOGO OF DIGITAL SOUND CORPORATION]
February 24, 1998
To Our Shareholders:
You are cordially invited to attend the 1998 Annual Meeting of Shareholders of
Digital Sound Corporation to be held at the Company's offices at 6307
Carpinteria Avenue, Carpinteria, California 93013 on Friday, April 10, 1998 at
10:00 a.m.
The matters expected to be acted upon at the meeting are described in the
following Notice of Annual Meeting of Shareholders and Proxy Statement.
It is important that you use this opportunity to take part in the affairs of
your Company by voting on the business to come before this meeting. WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE PRIOR TO THE MEETING.
Returning the Proxy does NOT deprive you of your right to attend the meeting and
to vote your shares in person.
We look forward to seeing you at the meeting.
Sincerely,
/s/ Mark C. Ozur
Mark C. Ozur
President and Chief Executive Officer
<PAGE>
DIGITAL SOUND CORPORATION
6307 CARPINTERIA AVENUE
CARPINTERIA, CALIFORNIA 93013
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Digital
Sound Corporation (the "Company") will be held at the Company's offices located
at 6307 Carpinteria Avenue, Carpinteria, California 93013, on Friday, April 10,
1998 at 10:00 a.m. for the following purposes:
1. To elect directors of the Company to serve until the next Annual
Meeting of Shareholders and until their successors have been elected
and qualified. The Company's nominees for director are John D.
Beletic, Bandel L. Carano, J. David Hann, Scot B. Jarvis, Mark C.
Ozur and Frederick J. Warren.
2. To approve an amendment to the Company's 1983 Stock Option Plan to
increase the number of shares of the Company's Common Stock available
under the Plan from 6,500,000 to 9,500,000 shares.
3. To approve an amendment to the Company's Articles of Incorporation
effectuating a 1:4 reverse split of the Company's Common Stock.
4. To approve an amendment to the Company's Articles of Incorporation
increasing the number of shares of Common Stock authorized from
50,000,000 to 90,000,000.
5. To approve an amendment to the Company's Articles of Incorporation
changing the name of the Company to PulsePoint Communications
Corporation.
6. To ratify the appointment of Ernst & Young as independent public
accountants for the Company for the 1998 fiscal year.
7. To transact any other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on February 19, 1998 are
entitled to notice of and to vote at the meeting and any adjournment thereof.
By Order of the Board of Directors
B. Robert Suh
Corporate Secretary
Carpinteria, California
February 24, 1998
<PAGE>
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, YOU ARE URGED TO COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
DIGITAL SOUND CORPORATION
6307 CARPINTERIA AVENUE
CARPINTERIA, CALIFORNIA 93013
PROXY STATEMENT
FEBRUARY 24, 1998
The accompanying proxy is solicited on behalf of the Board of Directors of
Digital Sound Corporation, a California corporation (the "Company"), for use at
the Annual Meeting of Shareholders of the Company to be held at the Company's
principal executive offices located at 6307 Carpinteria Avenue, Carpinteria,
California 93013, on April 10, 1998 at 10:00 a.m. (the "Meeting"). Only holders
of record of the Company's Common Stock and the Series B Convertible Preferred
Stock at the close of business on February 19, 1998 will be entitled to vote at
the Meeting. At the close of business on that date, the Company expects to have
approximately 20,561,593 shares of Common Stock and 2,451,667 shares of Series B
Convertible Preferred Stock issued, outstanding and entitled to vote. A
majority of these shares will constitute the required quorum for the transaction
of business. This Proxy Statement and the accompanying form of proxy were first
mailed to shareholders on or about February 24, 1998. An annual report as
required by Rule 14a-3 of the rules of the Securities and Exchange Commission is
being mailed to each shareholder along with this Proxy Statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
The Series B Convertible Preferred Stock is entitled to a number of votes
equal to the number of shares of Common Stock into which such shares of Series B
Convertible Preferred Stock could be converted. As of the record date, each
share of Series B Convertible Preferred Stock is convertible into 10 shares of
Common Stock. Holders of Common Stock are entitled to one vote for each share
held as of the above record date. However, under the California Corporations
Code, if prior to the commencement of voting one or more shareholders has given
notice of his intention to cumulate his votes, then all shareholders will have
the right to elect directors by cumulative voting, with each share entitled to a
number of votes equal to the number of directors to be elected, which votes may
be cast for one candidate or distributed among two or more candidates. If no
such notice is given, there will be no cumulative voting, which means a simple
majority of the shares voting may elect all of the directors. In the event of
cumulative voting, the proxy solicited by the Board of Directors confers
discretionary authority on the proxies to cumulate votes so as to elect the
maximum number of nominees.
Under California law, shares represented by proxies that reflect abstentions
or "broker non-votes" (i.e., shares held by a broker or nominee which are
represented at the meeting, but with respect to which such broker or nominee is
not empowered to vote on a particular proposal or proposals) will be counted as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum. However, under California law, proxies that reflect
abstentions as to a particular proposal will be treated as voted for purposes of
determining the approval of that proposal and will have the same effect as a
vote against that proposal, while proxies that reflect broker non-votes will be
treated as unvoted for purposes of determining approval and will not be counted
as votes for or against that proposal.
1
<PAGE>
Any person signing a proxy in the form accompanying this Proxy Statement has
the power to revoke it prior to the Meeting or at the Meeting prior to the vote
pursuant to the proxy. A proxy may be revoked by a writing delivered to the
Company stating that the proxy is revoked, by a subsequent proxy that is signed
by the person who signed the earlier proxy and is presented at the Meeting or by
attendance at the Meeting and voting in person.
The expenses of soliciting proxies to be voted at the Meeting will be paid by
the Company. Following the initial mailing of the proxies and other soliciting
materials, the Company and/or its agents may also solicit proxies by mail,
telephone, facsimile or in person. The Company has retained a proxy
solicitation firm, MacKenzie Partners, Inc. to aid it in the solicitation
process and will pay this firm a fee not to exceed $10,000 plus expenses.
Following the initial mailing of the proxies and other soliciting materials, the
Company will request brokers, custodians, nominees and other record holders to
forward copies of the proxy and other soliciting materials to persons for whom
they hold shares of Common Stock and to request authority for the exercise of
proxies. In such cases, the Company, upon the request of the record holders,
will reimburse such holders for their reasonable expenses.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of January 22, 1998,
with respect to the beneficial ownership for each class of the Company's stock
by: (i) each shareholder known by the Company to be the beneficial owner of more
than five percent of the Company's stock, (ii) each director/nominee, (iii) each
of the named executive officers (Ozur, Beckwith, Eby, Milnes, Suh) and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(2)
------------------------- -----------------------------
NAME OF BENEFICIAL OWNER COMMON PREFERRED COMMON(2) PREFERRED
------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Oak Investment Partners III, A Limited
Partnership (3)............................ 1,937,857 8.61% *
Oak Investment Partners V, Limited
Partnership (3)............................ 186,400 652,000 * 26.59%
Oak V Affiliates Fund, Limited
Partnership (3)............................ 1,100 14,667 * *
Oak Investment Partners VII, Limited
Partnership (3)............................ 435,317 17.76%
Oak VII Affiliates Fund, Limited
Partnership (3)............................ 10,933 *
Bandel L. Carano (4)........................... 2,185,357 1,112,917 9.61% 45.39%
Frederick J. Warren (5)........................ 357,981 44,625 1.71% 1.82%
Mark C. Ozur (6)............................... 394,093 1.88%
J. David Hann (7).............................. 111,750 *
John D. Beletic (8)............................ 74,600 *
Scot B. Jarvis (9)............................. 4,463 *
James C. Eby (10).............................. 90,356 *
B. Robert Suh (11)............................. 82,902 *
Keith M. Beckwith (12)......................... 73,750 *
Stanford D. Milnes (13)........................ 25,000 *
Microsoft Corporation (14)..................... 446,250 18.20%
Citiventure 96 A.P. Partnership Fund, L.P. (15) 232,586 9.49%
Chancellor LGT Private Capital Offshore
Partners II, L.P. (15)..................... 103,441 4.22%
Chancellor LGT Private Capital Partners III,
Limited Partnership (15)................... 57,477 2.34%
Chancellor LGT Private Capital Offshore
Partners I, C.V. (15)...................... 8,121 *
Moore Global Investments, Ltd. (16)............ 164,667 6.72%
Remington Investment Strategies, L.P. (16)..... 36,146 1.47%
Strome Susskind Hedgecap Fund, L.P. (17)....... 75,863 3.09%
Strome Offshore, Limited (17).................. 49,087 2.00%
Strome Partners, L.P. (17)..................... 40,163 1.64%
Strome Hedgecap, Limited (17).................. 13,387 *
All executive officers and directors as a 3,395,789 1,608,255 14.17% 65.5%
group (14 persons including those named
above) (18)................................
</TABLE>
* Less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting power and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable.
3
<PAGE>
(2) For purposes of computing the percent, the number of shares of Common Stock
outstanding includes the shares subject to options held by the individuals
and the group, as set forth in the notes below.
(3) Oak Investment Partners V, Limited Partnership ("Oak V") owns 652,000
shares of Series B Convertible Preferred Stock, 161,950 shares of Common
Stock, an option in the name of Bandel L. Carano for the benefit of Oak V
dated May 6, 1996 to purchase 24,450 shares of Common, which is exercisable
on, or within 60 days after January 22, 1998, and an option in the name of
Bandel L. Carano for the benefit of Oak V dated May 24, 1996 to purchase
14,215 shares of Common, which is not exercisable on, or within 60 days
after, January 22, 1998. Oak V Affiliates Fund, Limited Partnership ("V
Affiliates") owns 14,667 shares of Series B Convertible Preferred Stock,
550 shares of Common Stock, an option in the name of Bandel L. Carano for
the benefit of V Affiliates dated May 6, 1996 to purchase 550 shares of
Common Stock, which is exercisable on, or within 60 days after, January 22,
1998 and an option in the name of Bandel L. Carano for the benefit of V
Affiliates to purchase 320 shares of Common Stock, which is not exercisable
on, or within 60 days after, January 22, 1998. Oak Investment Partners III,
A Limited Partnership ("Oak III") owns 1,912,857 shares of Common Stock, an
option in the name of Bandel L. Carano for the benefit of Oak III dated
January 27, 1993 to purchase 25,000 shares of Common Stock, which is
exercisable on, or within 60 days after, January 22, 1998, and an option in
the name of Bandel L. Carano for the benefit of Oak III dated May 24, 1996
to purchase 10,465 shares of Common Stock, which is not exercisable on, or
within 60 days after, January 22, 1998. Oak Investment Partners VII, A
Limited Partnership ("Oak VII") owns 435,317 shares of Series B Convertible
Preferred Stock. Oak VII Affiliates Fund, Limited Partnership ("VII
Affiliates") owns 10,933 shares of Series B Convertible Preferred Stock.
The address of Oak V Limited Partnership; Oak V Affiliates Fund, Limited
Partnership; Oak Investment Partners III, A Limited Partnership; Oak
Investment Partners VII, Limited Partnership; and Oak VII Affiliates Fund,
Limited Partnership is 525 University Avenue, Suite 1300, Palo Alto, CA
94301.
(4) Represents 60,000 shares held by Mr. Carano and the shares held by Mr.
Carano for the benefit of Oak Investment Partners III and the shares held
by Oak III, Oak V, V Affiliates, Oak VII, and VII Affiliates as to which
Mr. Carano has shared voting and investment power. Mr. Carano disclaims
beneficial ownership of any of the shares held by the Oak partnerships. Mr.
Carano's business address is 525 University Avenue, Suite 1300, Palo Alto,
CA 94301.
(5) Represents 307,981 shares held by Mr. Warren and 50,000 shares subject to
options exercisable on, or within 60 days after, January 22, 1998 held by
Mr. Warren and 44,625 shares of Series B Convertible Preferred Stock held
jointly by Mr. Warren and Robin Grace Warren. Mr. Warren's business address
is 11150 Santa Monica Boulevard, Suite 1200, Los Angeles, California 90025.
(6) Represents 19,093 shares held by Mr. Ozur and 375,000 shares subject to
options exercisable on, or within 60 days after, January 22, 1998. Mr.
Ozur's business address is 6307 Carpinteria Avenue, Carpinteria, CA 93103.
(7) Represents 73,000 shares held by Mr. Hann and 38,750 shares subject to an
option exercisable on, or within 60 days after, January 22, 1998. Mr.
Hann's address is 6115 N. Camelback Manor Drive, Scottsdale, AZ 85253.
(8) Represents 600 shares held by Mr. Beletic and 74,000 shares subject to
options exercisable on, or within 60 days after, January 22, 1998. Mr.
Beletic's business address is 3333 Lee Parkway, Suite 100, Dallas, TX
75219.
(9) Represents 4,463 shares of Series B Convertible Preferred Stock held by Mr.
Jarvis. Mr. Jarvis' business address is 4153 Issaquah Pine Lake Road, S.E.,
Issaquah, WA 98029.
(10) Represents 48,156 shares held by Mr. Eby and 42,200 shares subject to
options exercisable on, or within 60 days after, January 22, 1998. Mr.
Eby's business address is 6307 Carpinteria Avenue, Carpinteria, CA 93103.
(11) Represents 32,902 shares held by Mr. Suh and 50,000 shares subject to an
option exercisable on, or within 60 days after, January 22, 1998. Mr. Suh's
business address is 6307 Carpinteria Avenue, Carpinteria, CA 93103.
4
<PAGE>
(12) Represents 73,750 shares subject to an option held by Mr. Beckwith
exercisable on, or within 60 days after, January 22, 1998. Mr. Beckwith's
business address is 6307 Carpinteria Avenue, Carpinteria, CA 93103.
(13) Represents 25,000 shares subject to an option held by Mr. Milnes
exercisable on, or within 60 days after, January 22, 1998. Mr. Milnes'
business address is 6307 Carpinteria Avenue, Carpinteria, CA 93103.
(14) Microsoft Corporation owns 446,250 shares of Series B Convertible Preferred
Stock. The address of Microsoft Corporation is One Microsoft Way, Redmond,
WA 98052.
(15) Citiventure 96 A.P. Partnership Fund, L.P. ("Citiventure") owns 232,586
shares of Series B Convertible Preferred Stock. Chancellor LGT Private
Capital Offshore Partners I, C.V. ("Chancellor I") owns 8,121 shares of
Series B Convertible Preferred Stock. Chancellor LGT Private Capital
Offshore Partners II, L.P. ("Chancellor II") owns 103,441 shares of Series
B Convertible Preferred Stock. Chancellor LGT Private Capital Partners III,
L.P. ("Chancellor III") owns 57,477 shares of Series B Convertible
Preferred Stock. The Address of Citiventure, Chancellor I, Chancellor II,
and Chancellor III is 1166 Avenue of the Americas, New York, NY 10038.
(16) Moore Global Investments, Ltd. ("MGI") owns 164,667 shares of Series B
Convertible Preferred Stock. Remington Investment Strategies, L.P. ("RIS")
owns 36,146 shares of Series B Convertible Preferred Stock. Moore Capital
Management, Inc., a Connecticut corporation, is vested with investment
discretion with respect to portfolio assets held for the account of MGI.
Moore Capital Advisors, L.L.C., a New York limited liability company, is
the sole general partner of RIS. Mr. Louis M. Bacon is the majority
shareholder of Moore Capital Management, Inc. and is the majority equity
holder of Moore Capital Advisors, L.L.C. As a result, Mr. Bacon may be
deemed to be the indirect beneficial owner of the aggregate 200,813 shares
held by MGI and RIS. The address of MGI, RIS and Mr. Bacon is 1251 Avenue
of the Americas, 53rd Floor, New York, New York 10020.
(17) Strome Susskind Hedgecap Fund, L.P. ("Strome Susskind") owns 75,863 shares
of Series B Convertible Preferred Stock. Strome Hedgecap, Limited ("Strome
Hedgecap") owns 13,387 shares of Series B Convertible Preferred Stock.
Strome Offshore, Limited ("Strome Offshore") owns 49,087 shares of Series B
Convertible Preferred Stock. Strome Partners, L.P. ("Strome Partners") owns
40,163 shares of Series B Convertible Preferred Stock. The general partner
of Strome Susskind, Strome Hedgecap, Strome Offshore, and Strome Partners
is SSCO, Inc., a Delaware corporation. The address of Strome Susskind,
Strome Hedgecap, Strome Offshore, and Strome Partners is 100 Wilshire
Boulevard, 15/th/ Floor, Santa Monica, CA 90401.
(18) Includes 2,627,689 shares of Common Stock and 1,608,255 of Series B
Convertible Preferred Stock described in Notes 4 through 21 above. Also
includes 778,700 shares subject to options exercisable on, or within 60
days after, January 22, 1998.
5
<PAGE>
PROPOSAL NO. 1--ELECTION OF DIRECTORS
At the Meeting, shareholders will elect directors to hold office until the
next Annual Meeting of Shareholders and until their respective successors have
been elected and qualified. The Bylaws of the Company provide that the
Company's Board of Directors ("Board") shall comprise six members. Shares
represented by the accompanying proxy will be voted for the election of the six
nominees recommended by the Board unless the proxy is marked in such a manner as
to withhold authority to so vote. If any nominee for any reason is unable or
unwilling to serve, the proxies may be voted for such substitute nominee as the
proxy holders may determine. All of the nominees named below have consented to
being named herein and to serve if elected.
DIRECTORS/NOMINEES
The names of the nominees and certain information about them are set forth
below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- ------------------------------- ------- ----------------------------------------------------- ---------
<S> <C> <C> <C>
John D. Beletic 46 Chairman, President and Chief Executive Officer, 1991
PageMart Wireless Inc.
Bandel L. Carano (1) 36 Private Venture Capitalist 1988
J. David Hann (1)(2) 66 Business Consultant 1990
Scot B. Jarvis 37 Investor 1997
Mark C. Ozur 42 President, Chief Executive Officer 1994
of the Company
Frederick J. Warren (1)(2) 58 Private Venture Capitalist 1983
</TABLE>
(1) Member of the Compensation Committee of the Board in 1997. In March 1996,
Mr. Beletic was replaced by Mr. Hann as a member of the committee.
(2) Member of the Audit Committee of the Board in 1996.
Each of the directors listed above, except for Mr. Jarvis, were reelected at
the Company's Annual Meeting of Shareholders held on May 23, 1997. Mr. Jarvis
was appointed as director by the Board in January 1998. Each director will
serve until the next Annual Meeting of Shareholders and until his successor has
been elected and qualified.
Mr. Beletic is Chairman and Chief Executive Officer of PageMart Wireless, Inc.
Mr. Beletic joined PageMart in March 1992, after serving as a venture partner
with Morgan Stanley Venture Capital for one year. From 1986 to 1991, Mr.
Beletic served as President and CEO of Dallas-based Tigon Voice Messaging
Network, the country's largest voice mail service provider. Under his
leadership, Tigon grew from a start-up company to the industry leader within
five years. Mr. Beletic also serves on the Board of Directors of two other
corporations.
Mr. Carano has served as a director of the Company since August 1988. Since
July 1985, he has been a general partner of various venture capital funds
affiliated with Oak Investment Partners, a venture capital firm that is an
investor in the Company.
Mr. Hann has served as a director of the Company since July 1990. He served
as Chairman of the Board from September 1990 to December 1994 and from January
1996 to present. Since July 1995, Mr. Hann has served as an industry
consultant. From August 1994 to June 1995, Mr. Hann served as President and
Chief Executive Officer of Satloc, Inc., a provider of guidance systems
utilizing global positioning systems (GPS). Mr. Hann was a telecommunications
industry consultant from March 1990 to July 1994. From September 1987 to
February 1990 Mr. Hann was President and Chief Executive Officer of Citicorp's
Quotron Systems, Inc., a financial services company. From 1981 to March 1987 he
served as President of GTE Telenet and then as Executive Vice President of U.S.
Sprint.
Mr. Jarvis is co-founder of Cedar Grove Partners, LLC, a private investment
company. Mr. Jarvis also serves on the board of directors of Nextlink
Communications, Inc. From 1994 to 1996, Mr. Jarvis was Vice President-
6
<PAGE>
Operations of Eagle River Investments LLC, Eagle River, Inc. Preceding his
position at Eagle River Investments, Mr. Jarvis also was Vice President of McCaw
Development Corp. at McCaw Cellular Communications, Inc.; Vice President/General
Manager of the California Region for Cellular One; and Vice President of
Acquisitions and Development at McCaw Communications Companies, Inc.
Mr. Ozur has been President and Chief Executive Officer of the Company since
January 1995. Mr. Ozur served as Vice President and Chief Technical Officer of
the Company from April 1993 to December 1994. From 1990 to 1992 he was Vice
President of Precision Visuals, a software development company. From 1978 to
1982 and 1986 to 1990 he was at Digital Equipment Corporation, a computer
hardware and software company, developing software. During 1982 he founded
Omtool Corporation, a compiler and software publishing company.
Mr. Warren has served as a director of the Company since May 1983. He is a
founding general partner of Brentwood Associates, a venture capital and
leveraged buyout investment firm established in 1972. Mr. Warren also serves as
director of Cobblestone Holdings, Inc. and Cobblestone Golf Group, Inc., related
companies that own and operate golf course properties.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
NOMINATED DIRECTORS.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
The Board met four times during the fiscal year ended December 31, 1997. No
director attended fewer than 75% of the aggregate of the total number of
meetings of the Board and the total number of meetings held by all committees of
the Board on which he served. The Company pays each of its directors who is not
an employee of the Company a retainer of $1,000 per quarter and fees of $1,000
per board meeting attended.
Standing committees of the Board include an Audit Committee and a Compensation
Committee. The Board does not have a nominating committee or a committee
performing similar functions.
Messrs. Hann and Warren were the members of the Audit Committee during 1997.
The Audit Committee did not meet during 1997. The Audit Committee plans to hold
its 1997 meeting in April, 1998. The Audit Committee reviews the Company's
accounting practices and internal control systems and meetings with the
Company's outside auditors concerning the scope and terms of their engagement
and the results of their audits.
Messrs. Carano, Hann and Warren were members of the Company's Compensation
Committee during 1997. The Compensation Committee met three times during 1997.
The Compensation Committee determines the salaries of executive officers of the
Company, reviews and approves executive officer bonus plans and administers the
Company's employee stock option plan.
The Company has an Amended and Restated Stock Option Plan for Independent
Directors (the "Directors' Plan") which was first adopted by the Board and
approved by the Company's shareholders in January 1990 and was last amended by
the shareholders in May 1996. The Directors' Plan covers 500,000 shares of
Common Stock and provides for non-qualified stock options to assist the Company
in recruiting new directors and providing an incentive for existing directors.
The option exercise price is fair market value at the date of option grant and
options have a term of ten years. The Directors' Plan provides for an automatic
one-time grant of an option to purchase 25,000 shares at the time of a
director's first appointment or election to the Board of Directors, or re-
election at the 1996 Annual Meeting, if he was then a director, such option to
become exercisable on the fourth anniversary of the grant date, unless such
vesting is accelerated based on the fair market value of the shares of the
Company's Common Stock having achieved certain target prices. In addition,
whenever an independent director purchases shares of the Company's Common Stock
in the open market, such director is automatically granted an option to purchase
a like number of shares, such option to become exercisable in full six months
after the date of grant, provided that for each independent director the number
of shares covered by such options or options in the aggregate shall not exceed
25,000 shares.
7
<PAGE>
EXECUTIVE COMPENSATION
The following tables set forth information relating to the Chief Executive
Officer of the Company and the next four most highly compensated executive
officers for the fiscal year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- --------------------------- ----------------------
OTHER(B) RESTRICTED SECURITIES ALL OTHER
NAME AND SALARY BONUS ANNUAL STOCK UNDERLYING LTIP COMPENSATION
PRINCIPAL POSITION YEAR ($)(A) ($)(A) COMPENSATION AWARDS OPTIONS/SARS (#) PAYOUTS ($)(C)
- ---------------------------- ---- -------- ------ ------------- --------- ---------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark C. Ozur................ 1997 $259,947 $ 430 150,000 430
President and CEO 1996 230,748 60,000 15,370 77,000 370
1995 218,333 7,700 54,238 2,500 224
B. Robert Suh............... 1997 185,184 179 100,000 179
Vice President, Finance 1996 163,001 59,000 40,131 54,000 149
CFO 1995 18,598 25,000 15,241 100,000 25
Keith M. Beckwith........... 1997 174,261 255 75,000 255
Vice President, Sales 1996 152,726 51,000 210
1995 141,169 4,900 2,500 196
James C. Eby................ 1997 147,013 565 75,000 565
Vice President, Chief 1996 124,811 12,432 42,000 432
Quality and Operations 1995 118,816 4,165 12,240 2,500 240
Officer
Stanford D. Milnes 1997 169,117 30,000 348 175,000 348
Vice President
Asia/Pacific Rim Sales
Ruth R. Cox................. 1997 181,446 25,000 67,844 114
Vice President, Marketing 1996 128,519 15,000 35,328 154,000 192
</TABLE>
(A) Listed amounts include cash compensation earned and received by executive
officers as well as amounts earned and to be paid in subsequent periods.
(B) For 1996, Mr. Ozur received a car allowance of $15,000. For 1995, Mr. Ozur
received relocation assistance of $39,363 and a car allowance of $14,875.
For 1996, Mr. Suh received relocation assistance of $27,982 and a car
allowance of $12,000. For 1995, Mr. Suh received relocation assistance of
$13,847 and a car allowance of $1,369. For 1997, Ms. Cox received relocation
assistance of $67,730. For 1996, Ms. Cox received relocation assistance of
$25,674 and a car allowance of $9,462. For 1996, Mr. Eby received a car
allowance of $12,000. For 1995, Mr. Eby received a car allowance of $12,000.
In each year, while the other named executive officers received certain
perquisites, such perquisites and personal benefits were less than the
lesser of $50,000 or 10% of annual salary and bonus reported for each such
executive officer.
(C) Amounts listed represent the excess value of term life insurance.
8
<PAGE>
OPTION/SAR TABLE
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(C)
---------------------------------------- ---------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED(A) FISCAL YEAR PRICE(B) DATE 5%($) 10%($)
- -------------------------------- ------------ ------------ -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Ozur.................... 150,000 8.82% $1.53 9/25/02 $63,421 $140,135
Keith M. Beckwith............... 75,000 4.41% $1.53 9/25/02 $31,711 $ 70,067
James C. Eby.................... 75,000 4.41% $1.53 9/25/02 $31,711 $ 70,067
Stanford D. Milnes.............. 100,000 5.88% $1.56 2/3/02 $43,142 $ 95,326
75,000 4.41% $1.53 9/25/02 $31,711 $ 70,067
B. Robert Suh................... 100,000 5.88% $1.53 2/3/02 $42,281 $ 93,423
</TABLE>
(A) Mr. Ozur's, Mr. Eby's, Mr. Suh's, and Mr. Beckwith's options become
exercisable in full on the fourth anniversary date of the option grant,
subject to accelerated vesting in the event certain milestones are
achieved. Mr. Milnes' options become exercisable in annual installments of
25% commencing on the first anniversary of the grant dates of February 14,
1997 for 100,000 options and September 28, 1997 for 75,000 options. See
"Report of Compensation Committee - 1983 Stock Option Plan". Ruth R. Cox
received no option grants in 1997.
(B) The exercise price is the closing price of the Company's Common Stock on
the date of the option grant.
(C) The potential realizable value is calculated from the exercise price per
share, assuming the market price of the Company's Common Stock appreciates
in value at the stated percentage rate from the date of the option grant to
the expiration date. Actual realizable values, if any, are dependent on the
future market price of the Common Stock.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS AT FY-END OPTIONS/SARS
ON VALUE (#)(B) AT FY-END ($)(A)(B)
EXERCISE REALIZED ------------ -----------------------
NAME(C) # $(A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- -------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark C. Ozur..................... 0 0 375,000 279,500 $23,344 $45,017
Keith M. Beckwith................ 0 0 73,750 147,250 3,889 24,265
James C. Eby..................... 0 0 42,200 119,500 2,239 21,155
Stanford D. Milnes............... 0 0 0 175,000 0 18,702
B. Robert Suh.................... 0 0 50,000 204,000 1,550 29,194
</TABLE>
(A) Market price of underlying Common Stock on date of exercise or fiscal year-
end, minus the option exercise price. The market price per share at December
31, 1997 was $1.656.
(B) Number of shares includes all shares subject to option; option value
calculation includes only those options for which the exercise price per
share was below the market price per share at December 31, 1997.
(C) Ruth R. Cox exercised no options during the year and held no options at
12/31/97.
9
<PAGE>
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Committee") has
furnished the following report on executive compensation.
OVERALL POLICY
The Committee consists entirely of independent, outside directors and is
responsible for formulating and implementing corporate policy with respect to
executive compensation. Each year the Committee reassesses the Company's
executive compensation program. The Committee's annual review process involves
determining the base salaries of executive officers, reviewing and approving
executive officer performance bonus plans and bonus criteria, reviewing the
Company's stock option and stock purchase plans and administering the Company's
employee stock option plan.
In formulating a comprehensive executive compensation package for 1997, the
Committee's objectives were twofold. First, the Committee sought to attract and
retain talented and entrepreneurial management. To this end, the Committee set
executive officer base salaries at competitive levels. Second, the Committee
sought to motivate executive officers to perform to the full extent of their
abilities. Accordingly, the Committee created significant bonus compensation
opportunities intended to correlate executive compensation with the Company's
achievement of certain revenue goals. If the Company had achieved all revenue
goals set for 1997, approximately 17% of each executive officer's total cash
compensation would have consisted of bonus compensation.
The Company's 1997 executive compensation program comprised base salary,
bonuses and stock options. The policies underlying each component of the
compensation program are described more fully below. Although the components of
executive officer compensation are determined separately, the Committee
considers the entire compensation (earned or potentially earned) of each
executive officer in setting each component. Pursuant to Section 162(m) of the
Internal Revenue Code, in certain circumstances compensation paid to a named
executive officer in excess of $1 million may not be deducted as an expense by
the Company. Because the compensation of the Company's executive officers
historically has been well below this level, the Committee has not given
consideration to the potential application of Section 162(m) in setting
compensation policy.
BASE SALARY
The Committee compensation philosophy is to attract, retain and motivate
highly talented and entrepreneurial members of the management team. Candidates
are typically sought from a broad range of high tech industries including
software, computers and computer equipment, electronics, data and
telecommunications as well as the Company's own peer group in the voice
information processing industry. In keeping with this philosophy, executive
base salaries are set to be competitive with similarly sized companies in
comparable industries and facing comparable business challenges. The Company
participated in a survey in 1996 of executive compensation conducted by Radford
Associates, a leading provider of compensation and benefits surveys to the
technology industries. The survey included approximately 92 high technology
companies which have annual revenues ranging from $10 million up to $100
million. The Radford Associates executive compensation data provided a range of
executive officer base salaries and the midpoint salaries for various executive
officer positions. The Committee then set the range of the Company's 1997 base
salaries to reflect the level of competitiveness that the Company desired to
maintain in the marketplace at the executive officer level.
Once a range of base salaries has been established, the Committee determines
each executive's salary by examining such factors as individual and Company
performance, the Chief Executive Officer's recommendations and any new
responsibilities the executive may have assumed. In keeping with the Company's
commitment to incentive compensation, the Committee typically sets executive
officer base salaries slightly below the midpoint of the range of base salaries
paid by similarly sized companies to comparable officers. The 1997 base
salaries set for the Company's executives officers ranged from 87% to 105% of
the midpoint of the range of 1996 base salaries for comparable positions in the
Radford Survey for companies with sales between $40 million and $90 million.
10
<PAGE>
The Committee increased executive officer base salaries by an average of 6.0%
for 1997 to remain competitive with the market.
Mr. Ozur has an employment agreement with the Company that provides in the
event of a change in control of the Company which results in the termination of
his employment, or in the event of a loss of corporate officer status for
reasons other than cause, he will continue to receive his base salary and group
health benefits for a period of one year, provided he agrees not to join any of
a list of competitors provided by the Company.
BONUS PLAN
The executive officers, including the Chief Executive Officer, participated in
a Company bonus plan, the 1997 Executive Officer Bonus Plan (the "Plan"), which
provided for cash bonuses and option grants.
Cash Bonuses
The cash portion of the Plan provided for a cash bonus of 20% of base salary
at attainment of 100% of the Company's annual revenue target. The Plan
provided for a maximum annual cash bonus potential of 75% of base salary
contingent on exceeding the annual revenue target by 50%. If revenue exceeded
the annual revenue target, but was less than 150% of the annual revenue target,
the percentage payout would be linearly prorated. There was to be no cash bonus
if the annual revenue target was not met. Although the annual revenue target
was not met and no bonuses were paid to the executive officers pursuant to the
Plan, bonus payments which were guaranteed at the time of hire were paid to
three officers. Additionally, sign-on bonuses were paid to such officers.
Option Grants
The Company's 1983 Stock Option Plan (the "1983 Plan") was adopted by the
Board of Directors and the shareholders of the Company in October of that year
and has been amended from time to time since then. The objectives of the 1983
Plan are to provide executive officers and other key employees an opportunity to
acquire equity in the Company, to compensate them and to serve as a retention
and motivation vehicle. All options are granted at the current market price of
the underlying Common Stock. Because the value of an option bears a direct
relationship to the Company's stock price, it is an effective incentive for
executive officers to create value for shareholders. The Committee therefore
views stock options as an important component of its performance-based
compensation policy.
The Company's practice under the 1983 Plan has been to make an initial option
grant when an executive officer is hired with vesting at 25% per annum over a
period of four years and a five-year term. Upon completion of the second year
of employment, and annually thereafter, additional stock options may be granted
to the executive officer based upon individual and Company performance.
Additional options may be granted at the discretion of the Board of Directors.
COMPENSATION COMMITTEE
J. David Hann
Bandel L. Carano
Frederick J. Warren
11
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the Company's cumulative shareholder return on
its Common Stock (no dividends have been paid thereon) covering five the years
from December 31, 1992 to December 31, 1997 with the return on common stocks
included in the CRSP Index for the NASDAQ Stock Market (US Companies) and a Peer
Group of corporations selected by the Company (the "Peer Group").
COMPARISON OF CUMULATIVE TOTAL RETURNS
DECEMBER 31, 1992 TO DECEMBER 31, 1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHICS:
<TABLE>
<CAPTION>
DIGITAL
SOUND MARKET PEER
INDEX INDEX INDEX
------- ------ -----
<S> <C> <C> <C>
Dec 1992 100.0 100.0 100.0
Dec 1993 52.1 114.8 153.2
Dec 1994 86.9 112.2 158.2
Dec 1995 52.2 158.7 266.9
Dec 1996 60.9 195.2 238.9
Dec 1997 57.6 239.5 205.5
</TABLE>
12
<PAGE>
PROPOSAL NO. 2--AMENDMENT TO THE 1983 STOCK OPTION PLAN
PROPOSED AMENDMENT
At the Meeting shareholders will be asked to approve an amendment to the 1983
Stock Option Plan (the "1983 Plan") to increase the number of shares authorized
for issuance thereunder from 6,500,000 to 9,500,000 shares. The Board approved
this amendment on December 13, 1997.
The Board of Directors believes that the amendment is in the best interest of
the Company as the 1983 Plan plays an important role in the Company's efforts to
attract and retain employees.
The following is a summary of the principal provisions of the 1983 Plan and
the proposed amendment thereto. Tax information related to the 1983 Plan
follows this summary.
ADMINISTRATION
The 1983 Plan is currently administered by the Compensation Committee of the
Board of Directors of the Company (the "Committee"). The Committee is
authorized to determine the individuals to whom options should be granted, to
determine the number of shares to be subject to such options, to designate
whether an option should be an incentive stock option ("ISO") or a non-qualified
stock option ("NSO") and to establish the terms and conditions of such options
consistent with the 1983 Plan. The Committee is also authorized to adopt, amend
and rescind rules relating to the administration of the 1983 Plan and to
interpret the terms of options. The costs of administering the 1983 Plan are
paid by the Company.
ELIGIBILITY
The 1983 Plan provides that options may be granted to employees, including
officers and directors who are employees of the Company, as the Committee may
determine. Options may also be granted to others who serve as independent
contractors, consultants or advisors rendering services to the Company. An
optionee may hold more than one option, but only on the terms and subject to the
restrictions set forth in the 1983 Plan. As of January 22, 1998, approximately
141 people were eligible to receive options under the 1983 Plan.
The 1983 Plan does not provide for a maximum or minimum number of option
shares that could be granted to any one optionee, although for options granted
after December 31, 1986, there is a limit on the aggregate market value of
shares subject to options receiving incentive stock option treatment that are
exercisable for the first time in any one calendar year.
STOCK
The shares issuable upon exercise of the options are shares of the Company's
authorized but unissued Common Stock. The aggregate number of shares that may
be issued upon exercise of options granted or to be granted under the 1983 Plan,
after giving effect to the proposed amendment, is 9,500,000 shares of Common
Stock. As of January 22, 1998, options covering a total of 6,392,435 shares
have been issued under the 1983 Plan, and 2,738,075 shares have been issued upon
option exercises. Accordingly, the remaining number of shares that may be
issued under options to be granted under the 1983 Plan (assuming approval of the
amendment) is 107,565 shares of Common Stock. In the event that any outstanding
option under the 1983 Plan for any reason expires or becomes unexercisable in
whole or in part, the shares of Common Stock allocable to the unexercised
portion of such option may again be subject to an option under the 1983 Plan.
Upon approval of Proposal No. 3, a reverse stock split of the Common Stock, the
number of shares issuable under the 1983 Plan will be adjusted proportionately
to the reverse stock split ratio. See "Proposal No. 3 - Reverse Split of the
Common Stock".
13
<PAGE>
TERMS OF OPTIONS
The Committee determines for each option whether the option is to be an ISO or
a NSO. See "Federal Income Tax Consequences" below. Each option is evidenced
by a grant agreement in such form as the Committee approves and is generally
subject to the following terms and conditions:
. Number of Shares. Each option states the number of shares to which it
pertains.
. Option Price. Each option states the option price, which in the case of
ISO's may not be less than 100% of the fair market value of the shares of
Common Stock on the date of the grant. The Committee currently determines
such fair market value based upon the closing price of the Common Stock on
the date of the grant, as quoted on the NASDAQ National Market System. The
option price for NSOs may be less than 100% of the fair market value of the
Common Stock.
. Vesting. Options granted when an employee is hired generally vest and
become exercisable 25% after one year from the date of grant and thereafter
ratably over a four-year period from the date of grant and have a five-year
term. The Committee also grants options that vest after four years, but
which may vest earlier if specified performance criteria are met. The
Committee may grant options with other vesting schedules or terms in the
future.
. Exercise and Medium of Payment. An option is exercised by giving written
notice of exercise to the Company, specifying the number of shares of
Common Stock to be purchased and, except as noted below, tendering payment
to the Company of the purchase price. The option price is typically
payable by cash or by check, but the Committee may authorize the Company to
accept (i) the promissory note of the optionee; (ii) shares of fully paid
Common Stock (including shares issuable upon exercise of the option); or
(iii) such other consideration as determined by the Committee and as
permitted by law. The option price may not be paid in shares of the
Company's Common Stock, however, if the exercise date is during the period
(the "Blackout Period") beginning on and including the first calendar day
of the last month of any fiscal quarter of the Company and ending on and
including the second business day following the date of the release to the
public of the quarterly (or annual) summary statement of the sales and
earnings of the Company related to such fiscal quarter (or the year ending
with such fiscal quarter), unless expressly authorized by the Board.
. Termination of Employment. If an optionee ceases to be employed by the
Company for any reason other than death, options must be exercised not
later than three months after such termination and may be exercised only to
the extent the options were exercisable on the date of termination. A
longer exercise period and additional vesting may apply in the case of
death.
. Non-transferability of Option. An option generally may not be sold,
pledged, hypothecated, transferred, or disposed of in any manner other than
by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the optionee, only by the optionee.
. Adjustment Upon Changes in Capitalization. The number of shares subject to
any option, and the number of shares issuable under the 1983 Plan, are
subject to adjustment in the event of a recapitalization of the Company's
Common Stock. In the event of a dissolution or liquidation of the Company,
or in the event of a sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, the
options shall become immediately exercisable unless the options are assumed
by the successor company, including options that would not otherwise then
be exercisable. Where such options are assumed, unvested options will
become vested and exercisable in part in accordance with a formula and in
part ratably over an 18-month period or such shorter period as provided in
their original grant. Accelerated vesting does not occur in the event of a
merger with a wholly-owned subsidiary of the Company or a merger otherwise
not resulting in any substantial change in the Company's shareholders.
. Rights as Shareholder. An optionee has no rights as a shareholder with
respect to any shares covered by such option until the option has been
validly exercised.
14
<PAGE>
AMENDMENT OF THE 1983 PLAN
The Committee may amend or terminate the 1983 Plan from time to time without
approval of the shareholders, provided, however, that shareholder approval is
required for any amendment that increases the number of shares subject to the
1983 Plan (other than in connection with an adjustment upon a change in
capitalization) or makes any change in the designation of the class of persons
eligible to be granted options. However, no action by the Committee or
shareholders may affect any option previously granted under the 1983 Plan
without the written consent of the optionee.
FEDERAL INCOME TAX CONSEQUENCES
The Federal income tax discussion set forth below is intended for general
information only. State and local income tax consequences are not discussed,
and may vary from locality to locality.
Non-Qualified Stock Options. For Federal income tax purposes, the recipient
of NSOs granted under the 1983 Plan will not realize taxable income upon the
grant of the option, nor will the Company then be entitled to any deduction.
Generally, upon exercise of NSOs the optionee will realize ordinary income, and
the Company will be entitled to a deduction, in an amount equal to the
difference between the option exercise price and the fair market value of the
stock at the date of exercise. The Company will be required to withhold taxes
on the ordinary income realized by an optionee upon exercise of NSOs in order to
be entitled to the tax deduction. An optionee's basis for the stock for
purposes of determining his gain or loss on his subsequent disposition of the
shares generally will be the fair market value of the stock on the date of
exercise of the NSO.
Incentive Stock Options. There is no taxable income to an employee when an
ISO is granted to him or when that option is exercised; however, the amount by
which the fair market value of the shares at the time of exercise exceeds the
option price will be an "item of tax preference" for the optionee. Gain
realized by an optionee upon sale of stock issued on exercise of an ISO is
taxable as long-term capital gain, and no tax deduction is available to the
Company, unless the optionee disposes of the shares within two years after the
date of grant of the option or within one year of the date the shares were
transferred to the optionee. In such event the difference between the option
exercise price and the fair market value of the shares on the date of the
option's exercise will be taxed at ordinary income rates, and the Company will
be entitled to a deduction to the extent the employee must recognize ordinary
income.
Gain realized by an optionee upon sale of stock issued on exercise of an ISO
is taxable as long-term capital gain and no tax deduction is available to the
Company, unless the optionee disposes of the shares within two years after the
date of grant of the option or within one year of the date the shares were
transferred to the optionee. In such event the difference between the option
exercise price and the fair market value of the shares on the date of the
option's exercise will be taxed at ordinary income rates and, subject to the
limits of Section 162(m) of the Code, the Company will be entitled to a
deduction to the extent the employee must recognize ordinary income.
The tax consequences resulting from the exercise of an ISO through delivery of
already-owned shares of the Common Stock are not entirely certain. In published
rulings and proposed regulations, the Internal Revenue Service has taken the
position that generally the employee will recognize no income upon such stock-
for-stock exercise (subject to the discussion above), and that, to the extent an
equivalent number of shares of the Common Stock is acquired, the optionee's
basis in the shares of the Common Stock acquired upon such exercise is equal to
the optionee's basis in the surrendered shares increased by any compensation
income recognized by the optionee and that the optionee's basis in any
additional shares of the Common Stock acquired upon such exercise is zero.
ERISA INFORMATION
The Company believes that the 1983 Plan is not subject to any of the
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").
15
<PAGE>
RECOMMENDATION AND VOTE
The approval of the amendment to the 1983 Plan, which increases the authorized
shares thereunder from 6,500,000 to 9,500,000 requires the affirmative vote of a
majority of the shares present or represented and entitled to vote at the
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE AMENDMENT TO THE 1983
PLAN.
PROPOSAL NO. 3--REVERSE SPLIT OF COMMON STOCK
GENERAL
The Board of Directors has proposed to amend the Company's Ninth Amended and
Restated Articles of Incorporation to effect a one-for-four reverse stock split
(the "Reverse Split") of the issued and outstanding shares of the Company's
Common Stock. The complete text of the amendment to the Articles for the
Reverse Split (the "Reverse Split Amendment") is set forth below. Such text,
however, is subject to wording changes that may be required by the Secretary of
State of the State of California (the "California Secretary of State"). If the
Reverse Split is approved by the requisite vote of the Company's shareholders,
upon filing of the Reverse Split Amendment with the California Secretary of
State, each certificate representing shares of Common Stock outstanding
immediately prior to the Reverse Split (the "Old Shares") will be deemed
automatically without any action on the part of the shareholders to represent
one-fourth the number of shares of Common Stock after the Reverse Split (the
"New Shares"). No fractional New Shares will he issued as a result of the
Reverse Split. In lieu thereof, all fractional shares will be canceled and the
Company will pay the affected shareholder an amount of cash equal to the average
of the last sale price of the Old Shares, as reported on the NASDAQ National
Market for the ten trading days immediately preceding the effective date of the
Reverse Split Amendment. After the Reverse Split Amendment becomes effective,
shareholders will be asked to surrender certificates representing Old Shares in
accordance with the procedures set forth in a letter of transmittal to be sent
by the Company's Exchange Agent (the "Exchange Agent"). Upon such surrender, a
certificate representing the New Shares will be issued. However, each
certificate representing Old Shares will continue to be valid and represent New
Shares equal to one-fourth the number of Old Shares.
The number of shares of capital stock authorized by the Articles will not
change as a result of the proposed Reverse Split. The Common Stock issued
pursuant to the Reverse Split will be fully paid and nonassessable. The voting
and other rights of the Common Stock will not be altered by the Reverse Split.
PURPOSES OF THE PROPOSED REVERSE SPLIT
The Board of Directors believes the Reverse Split is desirable for several
reasons. The reduction in the number of issued and outstanding shares of Common
Stock caused by the Reverse Split is expected to increase the market price of
the Common Stock. The Board of Directors also believes that this may result in
a broader market for the Common Stock than that which currently exists, in part
because the Company's Common Stock may qualify for trading with additional
brokerage houses and institutional investors. The expected increased price
level may also encourage interest and trading in the Common Stock and possibly
promote greater liquidity for the Company's shareholders, although such
liquidity could be adversely affected by the reduced number of shares of Common
Stock outstanding after the Reverse Split.
There can be no assurance that any or all of these effects will occur.
Specifically, shareholders should not assume that the market price per New Share
of Common Stock after the Reverse Split will be four times the market price per
Old Share of Common Stock before the Reverse Split, or that such price will
either exceed or remain in excess of the current market price. Further, there
is no assurance that the market for the Common Stock will be improved.
Shareholders should note that the Board of Directors cannot predict what effect
the Reverse Split will have on the market price of the Common Stock.
16
<PAGE>
In addition, in connection with the private placement of the Company's Series
B Convertible Preferred Stock, the Reverse Split will provide a sufficient
number of shares of Common Stock available for issuance upon conversion of such
Series B Convertible Preferred Stock underlying certain Convertible Promissory
Notes (the "Notes"). See "Background and Recent Developments--Proposal No. 4."
CERTAIN EFFECTS OF THE REVERSE SPLIT
The authorized capital stock will not be changed by reason of the Reverse
Split. The principal effect of the Reverse Split will be to decrease the number
of outstanding Old Shares from 20,561,593, as of January 22, 1997, to
approximately 5,140,398 of New Shares. The Reverse Split will automatically
convert each outstanding share of Common Stock into one-fourth of a share of
Common Stock. The remaining three-fourths of each share of outstanding Common
Stock will automatically revert into authorized but unissued shares of Common
Stock, available for future issuance.
A further effect of the existence of unissued and unreserved Common Stock may
be to enable the Board of Directors to issue shares to persons friendly to
current management which could render more difficult or discourage an attempt to
obtain control of the Company by means of a merger, tender offer, proxy contest
or otherwise, and thereby protect the continuity of the Company's management.
See "Proposal No. 4 -- Increase in the Number of Authorized Shares From
50,000,000 to 90,000,000 -- Certain Effects of Authorized But Unissued Common
Stock, Including Anti-Takeover Implications."
Shareholders have no right under California law to dissent from the Reverse
Split of the Common Stock.
The outstanding shares of the Series B Convertible Preferred Stock will be
affected by a pro-rata reduction in the number of Common Stock into which such
Series B Convertible Preferred Stock is convertible and a pro-rata increase in
the conversion price.
The Common Stock is currently registered under Section 12(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and, as a result, the Company is
subject to the periodic reporting and other requirements of the Exchange Act.
The Reverse Split will not affect the registration of the Common Stock under the
Exchange Act.
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Reverse Split, the Company will send a letter
of transmittal to each holder of record of Old Shares of Common Stock
outstanding on the effective date of the Reverse Split. The letter of
transmittal will contain instructions for the surrender of certificate(s)
representing such Old Shares to the Company's Exchange Agent. Upon proper
completion and execution of the letter of transmittal and return thereof to the
Exchange Agent, together with the certificate(s) representing Old Shares, a
shareholder will be entitled to receive a certificate representing the number of
New Shares of Common Stock into which his Old Shares have been reclassified and
changed as a result of the Reverse Split.
Shareholders should not submit any certificates until requested to do so. No
------------------------------------------------------------------------
new certificate will be issued to a shareholder until he has surrendered his
outstanding certificate(s) together with the properly completed and executed
letter of transmittal to the Exchange Agent.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SPLIT
The Company does not expect any significant adverse federal income tax
consequences associated with the Reverse Split. The transaction should be
treated as a reorganization under Section 368(a)(1) of the Internal Revenue Code
of 1986, as amended, and the applicable Treasury Regulations, judicial authority
and current administrative rulings and practices in effect on the date of this
Proxy Statement. For example, a shareholder's basis in the shares
17
<PAGE>
will be the same (i.e., no gain or loss recognized) and the holding period will
continue. Where the Company purchases fractional or other shares of
shareholders, such transaction will have federal income tax consequences
associated with the purchase and sale of stock by an issuer.
PROPOSED AMENDMENT
The Reverse Split will be effected through an amendment to the Company's
Articles to add Paragraph 3 to Article III as follows:
3. REVERSE SPLIT
-------------
On the effective date of the filing of this Amendment to the Ninth
Amended and Restated Articles of Incorporation (the "Effective Date"),
the Common Stock of the Corporation will be reverse split on a one-
for-four basis so that each share of Common Stock issued and
outstanding immediately prior to the Effective Date shall
automatically be converted into and reclassified as one-fourth of a
share of Common Stock (the "Reverse Split"). No fractional shares will
be issued by the Corporation as a result of the Reverse Split. In lieu
thereof, each shareholder whose shares of Common Stock are not evenly
divisible by four will receive an amount of cash equal to the average
of the last sale price of the Old Shares, as reported on the NASDAQ
National Market for the ten trading days immediately preceding the
Effective Date.
RECOMMENDATION AND VOTE
Under the California Corporations Code, the affirmative vote of both (i) a
majority of the outstanding shares of the Common Stock and (ii) a majority of
all outstanding share of Common Stock and Series B Convertible Preferred Stock,
voting together as a single class, are required to approve the Reverse Split.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE IN FAVOR OF THE REVERSE
SPLIT OF COMMON STOCK.
BACKGROUND AND RECENT DEVELOPMENTS-- PROPOSAL NO. 4
GENERAL
For the past two and one-half years, the Company has been in a period of
intense investment. During this period, virtually all effort has been
concentrated on the development of the Company's next generation of products and
technologies and on the building of a marketing and sales capability to position
and deliver these products to the marketplace.
Throughout 1997, the Company's financial position steadily declined, including
the severe deterioration of its cash balances and it ultimately became apparent
that the Company would most likely exhaust its cash balances before it would be
able to recognize any returns from the internal investments that it had made
over the last two years on its next generation of products. In addition, the
Company also recognized that it needed to present adequate assurances to its
customers that it had the resources to remain viable. Because most of the
Company's products are purchased as a long-term investment by large
telecommunications network providers, the Company needed to be able to
demonstrate that it had a strong enough balance sheet and sufficient cash
reserves to win new business, or its financial deterioration would continue. As
a result, the Board of Directors began to investigate strategies available to
the Company to raise cash and strengthen its balance sheet. The Board of
Directors realized that, given the Company's precarious financial position, the
Company would not be able to obtain additional debt financing. Accordingly, the
Company contacted over forty potential investors, including financial
institutions and venture
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capitalists, seeking to raise between $15 - $20 million. Most of the potential
investors declined to pursue discussions with the Company, while others
indicated that any investment would have to be at a discount to the market price
of the Company's Common Stock and would also have to be senior to the Company's
Series A Convertible Preferred Stock, all of which was held by affiliates of Oak
Investment Partners ("Oak").
In addition to seeking a capital infusion, the Company was able to arrange a
short-term receivables-based credit facility (the "Credit Facility") with
Imperial Bank. As of November 21, 1997 the Company had access to $3.0 million
through this facility. Prior to establishing this Credit Facility on November
5, 1997, the Company's short-term cash assets totaled only $2.5 million. Had
this Credit Facility not been established, the Company would likely have been
unable to meet its future obligations including its payroll on November 20,
1997.
Discussions continued with various potential investors, and on December 19,
1997 (the "Closing Date"), the Company consummated a private placement of
convertible securities for an aggregate of approximately $20 million. Pursuant
to a Preferred Stock Purchase Agreement (the "Purchase Agreement"), the Company
(i) sold for cash (A) 1,785,000 shares of the Company's Series B Convertible
Preferred Stock and (B) $6,612,502.50 aggregate principal amount of the
Company's Notes and (ii) exchanged the 2,631,579 shares of Series A Convertible
Preferred Stock held by affiliates of Oak for 666,667 shares of the Series B
Convertible Preferred Stock (collectively, the "Transactions"). The Notes and
the Series B Convertible Preferred Stock are sometimes referred to herein as the
"Securities". Each share of Series B Convertible Preferred Stock is convertible
into 10 shares of Common Stock, subject to certain antidilution adjustments.
The Company sold the Securities at a price of $0.75 per share of Common Stock on
an as-converted basis. The Investors included: (i) Microsoft Corporation,
which purchased an aggregate of $5 million of the Securities, (ii) affiliates of
Oak and Bandel L. Carano, a director of the Company, which purchased an
aggregate of $5 million of the Securities, (iii) Frederick J. Warren, a director
of the Company, who purchased $500,000 of the Securities, and (iv) Scot B.
Jarvis who purchased $50,000 of the Securities. Subsequently, Mr. Jarvis became
a director of the Company. See "Security Ownership of Certain Beneficial Owners
and Management."
APPROVAL BY THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE
The terms of the Securities, the Purchase Agreement and the Transactions
contemplated thereby were approved by a Special Committee of the Board of
Directors consisting of Messrs. Hann and Beletic, who are not employees of the
Company and had no financial interest in the Transactions. The Transactions
were also approved by unanimous vote of the Board of Directors of the Company at
a meeting on December 12, 1997. In approving the Transactions, the Special
Committee and the Board of Directors considered (i) the Company's financial
position and its urgent need to raise cash, (ii) the fact that the Company had
pursued financing from over forty possible investors over a period of months and
that the Transactions were the only viable alternative, (iii) the fact that Oak
had indicated they would consummate the Transactions only if the Series A
Convertible Preferred Stock held by Oak was converted into Series B Convertible
Preferred Stock, (iv) the fact that Microsoft Corporation had indicated that
their investment would be contingent on a significant investment by one or more
of the affiliates of Oak who were already shareholders, and (v) the opinion of
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey") to the
effect that the Transactions are fair to the public shareholders of the
Company's Common Stock from a financial point of view.
FAIRNESS OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Pursuant to an engagement letter dated November 17, 1997 (the "Engagement
Letter"), the Company retained Houlihan Lokey to render to the Special
Committee and the Board of Directors an opinion as to the fairness to the public
shareholders of the Company, from a financial point of view, of the
Transactions. The Company did not provide Houlihan Lokey with any specific
instructions as to the investigations to be undertaken or procedures to be
followed by such firm in its review of the Transactions, nor did the Company
impose any limitations on the investigations or procedures that Houlihan Lokey
ultimately determined to follow. Houlihan Lokey was engaged only to render an
opinion on the Transactions and did not negotiate the terms of the Transactions
or advise the Board of Directors or the Special Committee of alternatives
thereto. A copy of the opinion of Houlihan Lokey dated
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December 5, 1997 to the Board of Directors to the effect that the Transactions
are fair to the public shareholders of the Company's Common Stock from a
financial point of view is attached to this Proxy Statement as ANNEX A and
incorporated herein by reference. Pursuant to the Engagement Letter, Houlihan
Lokey will receive a fee of between $60,000 to $75,000 in connection with the
issuance of the opinion to the Board of Directors. SHAREHOLDERS ARE URGED TO
READ THE OPINION IN ITS ENTIRETY FOR A DESCRIPTION OF THE FACTORS CONSIDERED AND
ASSUMPTIONS MADE BY HOULIHAN LOKEY IN RENDERING ITS OPINION.
THE TRANSACTIONS
The Company did not have an adequate number of shares of Common Stock
authorized to permit the conversion of the entire $20 million of Series B
Convertible Preferred Stock. As a result, the Company issued 2,451,667 shares
of Series B Convertible Preferred Stock (for which there is sufficient
authorized Common Stock available for issuance upon conversion) and
$6,612,502.50 aggregate principal amount of Notes. The Notes automatically
convert into the Series B Convertible Preferred Stock at a conversion price of
$7.50 per share (the "Note Conversion Price"), subject to customary antidilution
protection, if the Company's shareholders approve an amendment to the Articles
authorizing a sufficient number of shares of Common Stock to permit conversion
of all of the Series B Convertible Preferred Stock issuable upon conversion of
the Notes ("Shareholder Approval"). Pursuant to the Purchase Agreement, the
Company is required to hold the annual shareholders meeting as expeditiously as
reasonably practicable and in no event, subject to certain conditions, later
than April 15, 1998.
The Company was granted an exception by the National Association of Securities
Dealers, Inc. (the "NASD") to issue the Securities without prior shareholder
approval because the delay associated with seeking such shareholder approval
would have seriously jeopardized the Company's financial viability. Upon
consummation of the Transactions contemplated by the Purchase Agreement, the
Company had 58,198,262 shares of Common Stock outstanding or subject to issuance
upon exercise or conversion of outstanding options, warrants or convertible
securities including the Series B Convertible Preferred Stock and the Notes.
SERIES B CONVERTIBLE PREFERRED STOCK
The rights, preferences, privileges and restrictions of the Series B
Convertible Preferred Stock are set forth in the Certificate of Determination
(the "Series B Certificate") filed by the Company with the California Secretary
of State on December 16, 1997. The following descriptions of certain of the
rights, preferences, privileges and restrictions of the Series B Convertible
Preferred Stock are qualified in their entirety by reference to such Series B
Certificate.
Series. The Series B Certificate creates 3,373,334 shares of Series B
------
Convertible Preferred Stock.
Dividends. The holders of the Series B Convertible Preferred Stock are
---------
entitled to dividends at the applicable dividend rate for each share of the
underlying Common Stock into which the Series B Convertible Preferred Stock is
convertible. Dividends on the Series B Convertible Preferred Stock are not
mandatory or cumulative and no rights accrue to the holders of Series B
Convertible Preferred Stock if the company fails to declare dividends on the
Series B Convertible Preferred Stock.
Liquidation Preference. Upon liquidation, the holders of the Series B
----------------------
Convertible Preferred Stock are entitled to $7.50 per share plus all accrued and
unpaid dividends thereon to the extent funds are available therefor and subject
to all amounts payable in respect of any other shares of preferred stock of the
Company that rank pari passu with the Series B Convertible Preferred Stock.
Voting. Each share of Series B Convertible Preferred Stock is entitled to a
------
number of votes equal to the number of shares of Common Stock into which such
share of Series B Convertible Preferred Stock could be converted. Except as
otherwise required by law, the Series B Convertible Preferred Stock and the
Common Stock vote together and not as separate classes.
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Conversion. The Series B Convertible Preferred Stock is convertible at any
----------
time at the option of the holder into Common Stock, initially at a conversion
price (the "Series B Preferred Conversion Price") of $0.75 per share of Common
Stock. In addition to customary antidilution provisions, the Series B Preferred
Conversion Price is subject to adjustment for certain issuances of the Company's
Common Stock if the consideration per share of such issuance is less than the
Series B Preferred Conversion Price. Upon such an issuance, the Series B
Preferred Conversion Price would be reduced, subject to certain conditions, to
such lower consideration per share. The Series B Convertible Preferred Stock is
also subject to automatic conversion upon the earliest to occur of an event that
would cause the Series B Convertible Preferred Stock to be required to be
registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended, or upon the filing with the Secretary of the Company of the written
approval of the holders of more than 50% of the outstanding shares of the Series
B Convertible Preferred Stock.
CONVERTIBLE PROMISSORY NOTES
The Notes automatically convert into Series B Convertible Preferred Stock upon
Shareholder Approval providing for a sufficient number of shares of Common Stock
underlying such Series B Convertible Preferred Stock. A holder of a Note may
declare the principal and all accrued interest, at a rate of 7% per annum,
immediately due and payable upon certain events of default, including, without
limitation, (i) the Company's shareholders vote at a meeting at which a quorum
is present on a resolution that would constitute Shareholder Approval if
approved by such shareholders, and such resolution is not duly approved by such
shareholders at such meeting, (ii) the Company is in breach of any of the terms
and conditions of, or is in default under, the Purchase Agreement or (iii) the
annual shareholders meeting is not held within the time limitations in the
Purchase Agreement as set forth above. If at any time prior to Shareholder
Approval, the Company pays any dividend or distribution on the Series B
Convertible Preferred Stock, that dividend or distribution must also be paid or
made to the holders of the Notes as if the Notes had been converted into such
Series B Convertible Preferred Stock. No fractional shares of Series B
Convertible Preferred Stock will be issued.
REGISTRATION RIGHTS AGREEMENT
The Securities and the Common Stock issuable upon exercise of the Series B
Convertible Preferred Stock have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and are therefore subject to certain
restrictions on transfer. Concurrently with the execution of the Purchase
Agreement, the Company and the Investors entered into a Registration Rights
Agreement (the "Registration Rights Agreement") granting the Investors certain
registration rights with respect to the Common Stock issuable upon exercise of
the Series B Convertible Preferred Stock.
The Registration Rights Agreement provides registration rights with respect to
the Common Stock issued or issuable (i) upon conversion of the Series B
Convertible Preferred Stock or (ii) pursuant to a stock dividend, stock split or
other distribution with respect to such Common Stock ("Restricted Stock").
Prior to the seventh anniversary of the Closing Date, the holders of no fewer
than 35% of the shares of such Restricted Stock have the right to require the
Company on two occasions to register shares of Restricted Stock that are
otherwise not eligible for sale under Rule 144 of the Securities Act within a
three-month period and have an anticipated aggregate offering price of at least
$2.5 million. In addition, holders of Restricted Stock are granted the right to
participate in any other registration of Common Stock which the Company
undertakes (other than a registration of shares in connection with an employee
or similar benefit plan or a corporate reorganization on Forms S-4 or S-8), but
subject to certain underwriter cutbacks and hold-back agreements. All expenses
of registration (including one counsel for the registering holders), excluding
underwriters' and brokers' discounts and commissions, will be paid by the
Company. The Company and the holders of Restricted Stock are subject to
customary indemnification provisions.
AVAILABILITY OF THE DOCUMENTS
The Purchase Agreement, the Series B Certificate, the form of the Note and the
Registration Rights Agreement were filed with the Securities and Exchange
Commission on December 23, 1997, pursuant to a Current Report on Form 8-K.
Copies of these documents will be furnished to shareholders without charge upon
request to the Secretary of the Company.
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THE TRANSACTIONS-- REASONS FOR PROPOSAL NO. 3 AND PROPOSAL NO. 4
NEED FOR ADDITIONAL COMMON STOCK
The Company has authorized capital stock of 50,000,000 shares of Common Stock.
The Company does not presently have sufficient authorized but unissued Common
Stock available for issuance upon conversion of the Series B Convertible
Preferred Stock underlying the Notes. See "Background and Recent Developments--
Proposal No. 4."
The $6,612,502.50 aggregate principal amount of Notes outstanding convert at a
price of $7.50 per share into 881,667 shares of Series B Convertible Preferred
Stock. This would require 8,816,670 shares of Common Stock to be issued upon
conversion of the Series B Convertible Preferred Stock.
The additional authorized shares of Common Stock would also be available for
issuance at such times and for such proper corporate purposes as the Board of
Directors may approve. These additional shares may be utilized for a variety of
corporate purposes including future private or public offerings to raise
additional capital, to pay Company debts or to facilitate corporate
acquisitions, conversions of convertible securities, employee benefit plans,
stock splits, stock dividends, and other general corporate purposes. The
additional shares of Common Stock may also be utilized to enable the Board of
Directors to discourage attempts to obtain control of the Company. See
"Proposal No. 4 -- Increase in the Number of Authorized Shares From 50,000,000
to 90,000,000 -- Certain Effects of Authorized But Unissued Common Stock,
Including Anti-Takeover Implications." Increasing the authorized Common Stock
will give the Company greater flexibility and will allow the Company to issue
additional Common Stock for the purposes described above.
CONSEQUENCES IF SHAREHOLDER APPROVAL NOT OBTAINED
The Notes issued in connection with the Transactions automatically convert to
the Series B Convertible Preferred Stock upon Shareholder Approval. See
"Background and Recent Developments--Proposal No. 4." Without such Shareholder
Approval, each holder of a Note may declare the principal and all accrued
interest immediately due and payable. The Company would be obligated to repay
immediately $6,612,502.50 in aggregate principal amount of the Notes plus 7%
interest from the date of issue. THERE CAN BE NO ASSURANCE THAT THE COMPANY
WILL HAVE AVAILABLE CASH RESOURCES TO REPAY THE NOTES OR THAT IT WOULD BE ABLE
TO REPAY THE NOTES IN COMPLIANCE WITH APPLICABLE LAW. IN ADDITION, THE
COMPANY'S OBLIGATIONS TO REPAY THE NOTES WILL CREATE A DEFAULT UNDER CERTAIN OF
ITS OTHER AGREEMENTS. IN THE EVENT SHAREHOLDER APPROVAL IS NOT OBTAINED,
REPAYMENT OF THE NOTES WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
FINANCIAL CONDITION AND ABILITY TO IMPLEMENT ITS BUSINESS STRATEGY.
RELATIONSHIP BETWEEN PROPOSAL NO. 3 AND PROPOSAL NO. 4
Proposal No. 3 submits to shareholders an amendment to the Company's
Articles to effect the Reverse Split (as defined below) which would increase the
availability of the underlying Common Stock required to be issued upon
conversion of the Series B Convertible Preferred Stock issuable upon conversion
of the Notes. Proposal No. 4 submits to shareholders an amendment to the
Company's Articles to increase the number of authorized shares of Common Stock
from 50,000,000 to 90,000,000 which will similarly provide additional authorized
but unissued Common Stock. In order to prevent the material consequences that
could result if the availability of Common Stock is not increased, the Board of
Directors has determined to submit Proposal Nos. 3 and 4 to the shareholders.
See "-- Consequences if Shareholder Approval Not Obtained." If however both
proposals are approved, the Board of Directors intends to implement Proposal No.
3 and will not need to implement Proposal No. 4. See "Proposal No. 3 --
Reverse Split of Common Stock" and "Proposal No. 4 -- Increase in the Number of
Authorized Shares From 50,000,000 to 90,000,000."
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PROPOSAL NO. 4--INCREASE IN THE NUMBER OF AUTHORIZED SHARES
FROM 50,000,000 TO 90,000,000
The Board of Directors has proposed to amend Article III of the Articles to
increase the number of authorized shares of Common Stock from 50,000,000 to
90,000,000.
NEED TO INCREASE AUTHORIZED COMMON STOCK
The Company does not have enough authorized but unissued shares of Common
Stock available for issuance upon conversion of the Series B Convertible
Preferred Stock issuable upon conversion of the Notes. As of January 22, 1997,
the Company had a total of 20,561,593 shares of Common Stock outstanding. See
"The Transactions -- Reasons for Proposal No. 3 and Proposal No. 4."
The $6,612,502.50 aggregate principal amount of Notes outstanding convert at a
price of $7.50 per share into 881,667 shares of Series B Convertible Preferred
Stock. This would require 8,816,670 shares of Common Stock upon conversion of
such shares of Series B Convertible Preferred Stock. See "The Transactions --
Reasons for Proposal No. 3 and Proposal No. 4 -- Consequences if Shareholders
Approval Not Obtained."
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED COMMON STOCK, INCLUDING ANTI-
TAKEOVER IMPLICATIONS
Upon approval of Proposal No. 4, there will be approximately 31,801,738 shares
of Common Stock available for future issuance without further shareholder
approval after reserving 8,816,670 shares of Common Stock for conversion rights
under the Notes. See "The Transactions -- Reasons for Proposal No. 3 and
Proposal No. 4 -- Need For Additional Common Stock."
One of the effects of the existence of unissued and unreserved Common Stock
may be to enable the Board of Directors to issue shares to persons friendly to
current management which could render more difficult or discourage an attempt to
obtain control of the Company by means of a merger, tender offer, proxy contest
or otherwise, and thereby protect the continuity of the Company's management.
For example, the issuance of shares of Common Stock in a public or private sale,
merger, or similar transaction would increase the number of the Company's
outstanding shares, thereby diluting the interest of a party seeking to acquire
control of the Company.
The Company does not currently have any plans to issue additional shares of
Common Stock other than shares of Common Stock in conversion of options and of
the Series B Convertible Preferred Stock issuable upon conversion of the Notes.
PROPOSED AMENDMENT
The second sentence of paragraph 1 of Article III of the Company's Articles
would be amended to read in its entirety as follows:
"The number of shares of Common Stock authorized to be
issued is 90,000,000, and the number of shares of Preferred
Stock authorized to be issued is 15,000,000, 11,626,666 of
which are presently undesignated as to series and 3,373,334
of which are presently designated as 'Series B Convertible
Preferred Stock.'"
Such text, however, is subject to wording changes that may be required by the
California Secretary of State.
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<PAGE>
RECOMMENDATION AND VOTE
Under the California Corporations Code, the affirmative vote of both (i) a
majority of the outstanding shares of Common Stock and (ii) a majority of all
outstanding shares of Common Stock and Series B Convertible Preferred Stock,
voting together as a single class, are required for the approval of this
proposal.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE IN FAVOR OF THE INCREASE
IN THE NUMBER OF AUTHORIZED SHARES FROM 50,000,000 TO 90,000,000.
PROPOSAL NO. 5--NAME CHANGE OF THE CORPORATION FROM
DIGITAL SOUND CORPORATION TO PULSEPOINT COMMUNICATIONS CORPORATION
The Company has launched the enhanced application platform and communication
management applications called PulsePoint and has begun using the name
PulsePoint Communications in connection with its operations. In recognition of
the Company's new products and direction, the Company is proposing to change its
name to PulsePoint Communications Corporation. The Board of Directors has
unanimously adopted a resolution approving an amendment to the Articles to
change the name of the Company from Digital Sound Corporation to PulsePoint
Communications Corporation (the "Name Change Amendment").
The change of the Company's name will be effected through an amendment to
Article I of the Company's Articles. As amended, such Article I would read in
its entirety as follows:
"1. The name of the corporation is PulsePoint Communications
Corporation."
Under the California Corporations Code, the affirmative vote of a majority of
the outstanding shares of Common Stock and Series B Convertible Preferred Stock,
voting together as a single class, is required for the approval of this
proposal.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE IN FAVOR OF THE NAME
CHANGE AMENDMENT.
PROPOSAL NO. 6--RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
The Company has engaged Ernst & Young LLP as its independent accountants
performing the audit of the Company's financial statements for the 1998 fiscal
year, and the shareholders are asked to ratify such appointment. Ernst & Young
LLP (or its predecessor Arthur Young & Company) has audited the Company's
financial statements for the fiscal years 1986 through 1997. Representatives of
Ernst & Young LLP will be present at the Meeting, will be given an opportunity
to make a statement at the Meeting if they desire to do so and will be available
to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT
OF ERNST & YOUNG LLP.
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COMPLIANCE WITH SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the 1934 Act requires the Company's directors and executive
officers, and persons who own more than ten percent of a registered class of the
Company's equity securities ("Insiders"), to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock of the Company.
Insiders are required by SEC regulations to furnish the Company with copies of
all Section 16(a) reports they file.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, all such Section 16(a) filing requirements were complied
with during the fiscal year ended December 31, 1997.
SHAREHOLDER PROPOSALS
Shareholder proposals for inclusion in the Company's Proxy Statement and form
of proxy relating to the Company's 1999 Annual Meeting must be received by the
Company at its principal executive offices no later than December 17, 1998.
OTHER BUSINESS
The Board does not presently intend to bring any other business before the
Meeting and, so far as is known to the Board of Directors, no matters are to be
brought before the Meeting except as specified in the notice of the Meeting. As
to any business that may properly come before the Meeting, however, it is
intended that proxies, in the form enclosed, will be voted in the respect
thereof in accordance with the judgment of the persons voting such proxies.
By Order of the Board of Directors
B. Robert Suh
Corporate Secretary
ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
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ANNEX A
[Houlihan Lokey Howard & Zukin Financial Advisors, Inc. Letterhead]
December 5, 1997
To the Special Committee
of the Board of Directors
Digital Sound Corporation
Gentlemen:
We understand that Digital Sound Corporation ("Company" hereinafter) has entered
into agreements with various investors, and with Oak Investment Partners ("Oak"
hereinafter), whereby the new investors and Oak will collectively invest
$13,387,500 for 1,785,000 shares of Series B Convertible Preferred Stock of the
Company at a price of $7.50 per share, and will also collectively invest
$6,612,500 in a Convertible Promissory Note of the Company ("New Investment"
hereinafter). Concurrent with the New Investment, Oak will exchange its
currently outstanding 2,631,579 shares of Series A Convertible Preferred Stock
for 666,667 shares of Series B Convertible Stock ("Exchange" hereinafter). The
New Investment and the Exchange are referred to collectively as the
"Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders and on the Form 10-K
for the fiscal years ended 1996 and quarterly reports on Form 10-Q for the
two quarters ended June 30, 1997, which the Company's management has
identified as being the most current financial statements available;
2. reviewed draft copies of he following agreements dated November 20, 1997:
-- Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of Series B Convertible Preferred Stock of Digital Sound
Corporation;
-- Registration Rights Agreement;
-- Preferred Stock Purchase Agreement; and
-- Convertible Promissory Note
3. met with certain members of the senior management of the Company to discuss
the operations, financial condition, future prospects and projected
operations and performance of the Company;
4. reviewed forecasts and projections prepared by the Company's management with
respect to the Company for the years ended December 31, 1997 through 2001;
5. reviewed the historical market prices and trading volume for the Company's
publicly traded securities;
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6. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company, and publicly available
prices and premiums paid in other transactions that we considered similar to
the Transaction;
7. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Bases upon the foregoing, and in reliance thereon, it is our opinion that both
the New Investment and the Exchange are fair to the public stockholders of the
Company from a financial point of view.
Sincerely,
/s/ Houlihan Lokey Howard &
Zukin Financial Advisors, Inc.
__________________________________
HOULIHAN LOKEY HOWARD &
ZUKIN FINANCIAL ADVISORS, INC.
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DIGITAL SOUND CORPORATION
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 10, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned hereby appoints Mark C. Ozur and B. Robert Suh, or either of
them, each with power of substitution, to represent the undersigned at the
Annual Meeting of Shareholders of Digital Sound Corporation (the "Company") to
be held at the Company's principal executive offices located at
6307 Carpinteria Ave., Carpinteria, California 93013 on April 10, 1998, at
10:00 a.m., and any adjournment thereof, and to vote the number of shares the
undersigned would be entitled to vote if personally present at the meeting on
the following matters:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES FOR ELECTION AND
FOR PROPOSALS 2, 3, 4, 5, AND 6.
THIS PROXY WILL BE VOTED AS DIRECTED ON THE REVERSE SIDE. IN THE ABSENCE OF
DIRECTIONS, THIS PROXY WILL BE VOTED FOR THE COMPANY'S NOMINEES FOR ELECTION
AND FOR PROPOSALS 2, 3, 4, 5, AND 6. In their discretion, the proxies are
authorized to vote upon such other business as may properly come before the
meeting or any adjournment thereof to the extent authorized by Rule 14a-4(c)
promulgated by the Securities and Exchange Commission.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, YOU ARE URGED TO COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
1. ELECTION OF DIRECTORS. Nominees: John D. Beletic, Bandel L. Carano, J. David
Hann, Scott B. Jarvis, Mark C. Ozur and Frederick J. Warren.
[_] FOR[_] WITHHOLD AUTHORITY
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below:
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2. AMENDMENT TO THE 1983 STOCK OPTION PLAN [_] FOR[_] AGAINST[_] ABSTAIN
3. AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION EFFECTUATING A 1:4
REVERSE SPLIT OF COMMON STOCK.
[_] FOR[_] AGAINST[_] ABSTAIN
4. TO APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
INCREASING THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED.
[_] FOR[_] AGAINST[_] ABSTAIN
5. TO APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION CHANGING
THE NAME OF THE COMPANY.
[_] FOR[_] AGAINST[_] ABSTAIN
6. RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS
[_] FOR[_] AGAINST[_] ABSTAIN
Dated
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Signature(s)
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Please sign exactly as your name(s) appears
on your stock certificate. If shares of
stock are held of record in the names of two
or more persons or in the name of husband or
wife, whether as joint tenants or otherwise,
both or all of such persons should sign the
proxy. If shares of stock are held of record
by a corporation, the proxy should be
executed by the president or a vice
president and the secretary or assistant
secretary. Executors or administrators or
other fiduciaries who execute the above
proxy for a deceased shareholder should give
their full title. Please date the proxy.
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
