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Filed pursuant to
Rule 424(b)(3)
File No. 333-16053
300,000 SHARES
DIGITAL SYSTEMS INTERNATIONAL, INC.
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COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
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All of the up to 300,000 shares of Common Stock, par value $0.01 per share
(the "Common Stock"), offered hereby are being issued and sold by Digital
Systems International, Inc. ("Digital" or the "Company"). The Common Stock is
traded on the Nasdaq National Market under the symbol "DGTL." On November 29,
1996, the last reported sales price of the Common Stock on the Nasdaq National
Market was $15.375 per share. See "Price Range of Common Stock."
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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The shares of Common Stock offered by the Company may be sold from time to
time to purchasers directly in one or more transactions at a fixed price, which
may be changed, at varying prices determined at the time of sale or at
negotiated prices. Alternatively, the Company may from time to time sell the
Common Stock in transactions involving broker-dealers who may act as agents
and/or may acquire Common Stock from the Company as principals and who may
receive compensation from the Company and/or the purchasers of the shares.
Broker-dealers who acquire Common Stock as principals may thereafter resell such
Common Stock in transactions, including transactions of the nature described
above. Any broker-dealers who participate in a sale of shares of Common Stock
may be deemed to be "underwriters" as defined in the Securities Act of 1933, as
amended (the "Securities Act"). Any commissions paid or any discounts or
concessions allowed to any such broker-dealers, and, if any such broker-dealers
purchase shares of Common Stock as principals, any profits received on the
resale of such shares of Common Stock, may be deemed to be underwriting
discounts and commissions under the Securities Act.
Under an existing arrangement, a financial advisor to the Company may
receive a fee equal to the lesser of $0.40 per share or 3.0% of the sales price
of the Common Stock offered hereby to the extent it provides assistance with
respect to the sale of such stock. See "Plan of Distribution." The Company will
receive all of the proceeds from the sale of such stock, net of discounts,
commissions or fees, if any, and before deducting offering expenses, estimated
at approximately $42,120, payable by the Company.
The date of this Prospectus is December 2, 1996.
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AVAILABLE INFORMATION
Digital, a Washington corporation, is subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information may be
inspected at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain
regional offices of the Commission located at Citicorp Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a
web site (http://www.sec.gov) that contains certain reports, proxy statements
and other information regarding Digital. Material filed by Digital can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. The
Registration Statement and any amendments thereto, including exhibits filed as a
part thereof, also are available for inspection and copying as set forth above.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN EXHIBITS
TO SUCH DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE THEREIN,
ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO THE
SECRETARY, DIGITAL SYSTEMS INTERNATIONAL, INC., 6464 185TH AVENUE N.E., REDMOND,
WASHINGTON 98052-6736, TELEPHONE NUMBER (206) 881-7544.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-18511)
pursuant to the Exchange Act or the Securities Act are incorporated herein by
reference:
1. The Company's Current Report on Form 8-K, filed with the Commission
on October 18, 1996;
2. The Company's Registration Statement on Form S-4, including any
amendments thereto, filed with the Commission on October 25, 1996;
3. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995;
4. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, June 30 and September 30, 1996;
5. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A effective as of June 8, 1990, including
any amendment or report filed for the purpose of updating such description;
and
6. All other documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offering (as hereinafter
defined).
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Prospectus except as so modified, and any statement so
superseded shall not be deemed to constitute part of this Prospectus.
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THE COMPANY
Digital designs, develops, markets and supports call center systems and
application software designed to help organizations improve the productivity,
quality, effectiveness and profitability of their telephone communications with
customers. Digital also offers professional services designed to assist
organizations in integrating their telephone systems with computer and data
management systems. Digital's products are used in a variety of organizations,
including major financial institutions, utilities, telecommunications companies,
educational institutions, government centers and health care organizations. The
mailing address of Digital's principal executive offices is 6464 185th Avenue
N.E., Redmond, Washington 98052-6736, and its telephone number is (206)
881-7544.
THE OFFERING
Digital is offering the shares of Common Stock (the "Offering") in
connection with the Agreement and Plan of Merger, dated as of October 14, 1996
(the "Merger Agreement"), among Digital, ViewStar Corporation, a California
corporation ("ViewStar"), and Vision Merger Corporation, a Washington
corporation and wholly owned subsidiary of Digital ("Merger Sub"). Under the
Merger Agreement, Merger Sub will be merged with and into ViewStar (the
"Merger"), and ViewStar will become a wholly owned subsidiary of the Company. On
October 25, 1996, Digital filed a Registration Statement on Form S-4, File No.
333-14887 (the "Form S-4"), with the Commission registering up to 4,330,826
shares of Common Stock for issuance in connection with the Merger. On November
25, 1996, the Commission declared the Form S-4 effective. Digital and ViewStar
intend to consummate the Merger on or about December 31, 1996. At the effective
time of the Merger (the "Effective Time"), up to 4,330,826 shares of the Common
Stock registered under the Form S-4 will be exchanged for all of the outstanding
shares of ViewStar's common stock and preferred stock.
ViewStar provides client/server document workflow software that enables
customers to automate and improve document-intensive business processes across
the enterprise. The ViewStar Enterprise Document Workflow System is a family of
integrated software modules that together provide a complete framework for
designing, developing and deploying enterprise document workflow applications.
The ViewStar system allows customers to define and change work content, work
flows, business rules and user roles, facilitating the rapid design, development
and deployment of business process applications. ViewStar's products are used in
a wide variety of applications, including consumer and mortgage lending, claims
processing, underwriting, trust management, contract management, accounts
payable and customer service.
Digital is planning to sell up to 300,000 shares of Common Stock to ensure
that the Merger will be accounted for as a pooling-of-interests in accordance
with generally accepted accounting principles. The shares of Common Stock
offered hereby will be issued only if and to the extent the Company determines
that the issuance of such shares is necessary to ensure pooling-of-interests
accounting treatment. No shares will be issued if the Merger Agreement should be
terminated.
<TABLE>
<S> <C>
Common Stock offered..................... Up to 300,000 shares
Common Stock outstanding after the
Offering(1)(2)......................... Up to 9,741,805 shares
Common Stock outstanding after the
Offering and the Merger(2)(3).......... Up to 13,476,805 shares
Nasdaq National Market Symbol............ DGTL
</TABLE>
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(1) Without giving effect to the Merger.
(2) Based upon the number of shares outstanding on November 19, 1996. Does not
include up to 3,505,597 shares reserved for issuance, as of November 19,
1996, pursuant to Digital's employee stock option and purchase plans.
(3) Assumes the issuance of up to 3,735,000 shares of Common Stock in connection
with the Merger. These shares have been registered by the Company pursuant
to the Form S-4 effective November 25, 1996. Does not include up to 604,956
shares reserved for issuance upon exercise of ViewStar options and a warrant
being assumed in connection with the Merger.
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RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following in evaluating the Company, its
business and the Merger. This Prospectus contains forward-looking statements
that involve risks and uncertainties. Actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in this
section and elsewhere in this Prospectus.
Uncertainties Relating to Integration of Operations. The combination of
ViewStar and Digital will require the dedication of management resources, which
will temporarily distract attention from the day-to-day business of both
companies. The geographical separation of the companies' respective operations
may hinder efforts to integrate operations. There can be no assurance that the
combination will be completed without significant disruption of Digital's and
ViewStar's businesses. Should Digital and ViewStar not be able to combine their
businesses in a timely and coordinated fashion, there could be a material
adverse effect on operating results. In addition, anticipation of the
combination of the two companies could cause uncertainties, hesitation and
possible dissatisfaction among customers and potential customers of Digital and
of ViewStar, which could cause delays or cancellations of orders, resulting in a
decline in revenue. Long sales cycles for many of Digital's and ViewStar's
products could result in difficulty in finding replacement orders. Because many
of Digital's and ViewStar's costs are fixed in nature, reductions in revenue, if
any, could result in significant reductions in operating income.
Limited Operating Efficiencies as a Result of the Merger. Following the
Merger, Digital intends to operate ViewStar as a separate business unit.
Although some administrative and management functions of the two companies
eventually may be combined, potentially resulting in certain efficiencies and
reductions in overhead, additional operating efficiencies as a result of the
Merger may be limited in the near term or difficult to achieve. The geographical
separation of the companies' respective operations may further limit the
operating efficiencies. In addition, although the respective Boards of Directors
of Digital and of ViewStar expect that the companies' complementary
technologies, distribution channels and shared market vision may enhance the
sales performance of both businesses, there can be no assurance that any synergy
will be realized from the combination of Digital and ViewStar.
ViewStar History of Operating Losses; Accumulated Deficit. ViewStar
incurred net losses in each year through 1995, including net losses of $11.3
million in 1994 and $8.0 million in 1995. As of September 30, 1996, ViewStar had
an accumulated deficit of $31.5 million. Although ViewStar operated profitably
in the first nine months of 1996, there can be no assurance that ViewStar's
business will operate profitably in any quarter or on a sustained basis in the
future.
Uncertainty of Future Operating Results; Fluctuations in Operating Results;
Seasonality. Digital's product sales and ViewStar's license revenues are
difficult to forecast because their respective sales cycles are relatively long
and quarterly revenues depend on relatively few large contracts that are subject
to changes in customer budgets and general economic conditions. Because both
companies' operating expenses are based on anticipated revenue levels and a high
percentage of both companies' expenses are relatively fixed, the timing of
revenues from a single contract can cause significant fluctuations in operating
results from quarter to quarter and may adversely affect operating results. In
addition, both companies historically have operated with little backlog because
their products generally are shipped as orders are received. As a result,
revenues in any quarter are substantially dependent on orders booked and shipped
in that quarter. Further, certain contracts may constitute a significant portion
of the operating profits for the quarter in which they are signed. Digital's and
ViewStar's operating results have fluctuated in the past and are likely to do so
in the future, particularly on a quarterly basis. In addition, changes in levels
of ViewStar's consulting activity and seasonality in its training revenues have
resulted in variability of service revenue from quarter to quarter.
Historically, Digital and ViewStar often have recognized a substantial portion
of their revenues in the last month of the quarter, with these revenues
frequently concentrated in the last week of the quarter. In addition, Digital
and ViewStar generally have realized lower revenues from product sales and
license fees in the first quarter of the year than in the immediately preceding
quarter. Digital and ViewStar believe that this has been due primarily to the
structure of their sales commission programs and the concentration by some
customers of larger capital
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purchases in the fourth quarter of the calendar year to avoid end-of-year
budgetary limitations, followed by lower purchasing activity during the first
quarter of the next calendar year. Further, to the extent that international
operations in the future constitute a higher percentage of total revenues,
Digital and ViewStar anticipate that they ordinarily will experience relatively
weaker demand in the quarter ending September 30 due to reduced customer
activity in Europe during the summer months.
As a result of these and other factors, revenues for any quarter are
difficult to forecast and subject to significant variation. Moreover, results of
operations for any particular period are not necessarily indicative of future
performance. In particular, ViewStar does not believe that the revenue growth
rate it achieved in the first half of 1996 compared to the first half of 1995 is
sustainable. Due to all of the foregoing factors, it is likely that in some
future quarter the combined company's operating results will be below the
expectations of market analysts and investors.
Costs of Integration; Transaction Expenses. Digital and ViewStar estimate
they will incur direct transaction costs of approximately $2.5 million
associated with the Merger, which will be charged to operations upon
consummation of the Merger. The combined company expects to incur additional
charges to operations which are currently not reasonably estimable, to reflect
costs associated with integrating the two companies. There can be no assurance
that the combined company will not incur additional material charges in
subsequent quarters to reflect additional costs associated with the Merger.
Lengthy Sales and Implementation Cycle; Complex Service Requirements. The
purchase or license of Digital's products and the license of ViewStar's software
products is usually a significant decision by prospective customers requiring
each company to engage in a lengthy sales cycle, typically between six and
twelve months, without any assurance that new accounts will result. Moreover,
the cost to the customer of Digital's and ViewStar's products typically is only
a portion of the cost of implementing a large-scale call processing or document
workflow system. For these and other reasons, the sales cycle is subject to a
number of significant delays over which each company has little or no control.
Successful implementation of Digital's and ViewStar's products also often
requires lengthy and complex implementation and integration services, which
services may be provided by Digital or ViewStar or by third-party service
providers. The combined company's future operating results will depend upon its
ability to coordinate these complex service resources and ensure successful
implementation of its products, while limiting costs. The combined company may
have to devote significant additional resources to ensure successful
implementation and integration in certain key accounts that may be likely to
lead to additional business in a particular geographic area or industry. Failure
to achieve customer satisfaction despite such efforts could materially adversely
affect the combined company's future operating results.
Competition. The markets for Digital's and ViewStar's products are highly
competitive. Important competitive factors include price, performance, diversity
of product line, reliability, delivery capabilities, customer support and
service. Some competitors of Digital and ViewStar have significantly greater
financial, technical, manufacturing, marketing and other resources than Digital
and ViewStar. Competitors may develop products and technologies that are less
expensive or technologically superior to Digital's and ViewStar's products, and
there can be no assurance that competitors will not develop products that
incorporate capabilities or technologies that are superior to Digital's and
ViewStar's products. The markets for Digital's and ViewStar's products also are
characterized by significant price competition, and Digital and ViewStar expect
that their products will face increasing price pressure, which could result in
significant price erosion, with a material adverse effect upon results of
operations of the combined company.
ViewStar's competitors offer a variety of document workflow products and
services. ViewStar currently encounters direct competition from a number of
public and private companies or divisions thereof including FileNet Corporation,
International Business Machines Corporation ("IBM") and Wang Software. In
addition, ViewStar may face competition from new competitors including
client/server application vendors such as Oracle, PeopleSoft and SAP; document
management vendors such as Documentum and PC DOCS Group; and vendors of workflow
products such as Action Technologies and Staffware. Certain of these companies
have announced, and others may announce, document workflow capabilities for
their existing or future products. Many of these companies have longer operating
histories, significantly greater financial,
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marketing, service, support, technical and other resources and name recognition,
and a larger installed customer base than ViewStar. As a result, such
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than ViewStar. It is also
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share in ViewStar's industry. In addition,
ViewStar expects competition to increase as a result of software industry
consolidation, resulting in possible price reductions, reduced gross margins and
loss of market share. There can be no assurance that ViewStar will be able to
compete successfully against current and future competitors or that competitive
pressures faced by ViewStar will not materially and adversely affect the
business, results of operations and financial condition of the combined company.
ViewStar relies on a number of system integration firms for implementation
of its products, as well as recommendations of its products during the
evaluation stage of the purchasing process. Although ViewStar seeks to maintain
close relationships with these service providers, many of these third parties
have similar, and often more established, relationships with ViewStar's
principal competitors. If ViewStar is unable to develop and retain effective,
long-term relationships with these third parties, ViewStar's competitive
position would be materially adversely affected. Further, there can be no
assurance that these third parties, many of which have significantly greater
financial, marketing, service, support, technical and other resources than
ViewStar, will not market software products in competition with ViewStar's
products in the future.
Digital's principal competitors in the outbound call processing systems
market include Davox Corporation, EIS International, Inc. and Melita Electronic
Labs. The potential entry into the market of major telecommunications equipment
manufacturers also presents a strong competitive threat as these competitors may
elect to purchase Digital's competitors, thereby increasing their market
presence and distribution; resell principal competitors' products; or elect to
develop and market their own predictive dialing application software. In the
market for system integration services in call centers, Digital may compete with
software providers and system integrators such as Andersen Consulting, Genesys
Labs and Nabnasset Corporation. As Digital expands its offering of call center
applications, it also may encounter increased competition from call center
application providers such as Brock Control Systems, Information Management
Associates, Early Cloud (owned by IBM) and Versatility. As Digital expands into
the informal or casual call center market, it also will experience competition
from companies such as Active Voice Corporation, Applied Voice Technology, Inc.
and others which provide network-based applications that have a critical
computer telephony integration component. Many of Digital's current or potential
competitors have greater financial, technical and marketing resources than
Digital. To date, Digital has competed on the basis of the capabilities and the
price/performance of its systems, its applications expertise and the quality of
its customer support. As the call processing market matures and new and existing
companies compete for the same customers, price competition is likely to
intensify, which could adversely affect the operating results of the combined
company.
Dependence on Key Employees. The combined company's future success
depends, in large measure, on its ability to retain certain executives and other
key management, technical and marketing personnel. The loss of the services of
certain key employees could have an adverse effect on the combined company. From
time to time Digital and ViewStar also need to attract additional skilled
personnel in certain areas of their businesses. During 1995 and early 1996,
ViewStar experienced various changes in its senior management team and
engineering and sales personnel, requiring the replacement of some of its
executives and senior managers. There can be no assurance that, following the
Merger, the combined company will be able to retain key personnel or that it
will be able to attract sufficient qualified employees to support growth in its
business.
Technological Change and New Products. The document management and
workflow software market in which ViewStar participates and the call management
market in which Digital participates are characterized by rapid technological
change and frequent product introductions and improvements. Accordingly, the
success of both Digital and ViewStar will depend in part upon their ability to
develop product enhancements and new products that keep pace with continuing
changes in technology and customer preferences while remaining price
competitive. There can be no assurance that either company will be successful in
developing product enhancements or new products, that either will be able to
introduce such products or to adapt its products to
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technological change on a timely basis or that any such products or enhancements
will be successful in the marketplace.
ViewStar has incurred, and expects to continue to incur, substantial
expenses associated with the introduction and promotion of new products,
including its @Work family of products for the Internet and its ServiceReady
products for industry applications. There can be no assurance that the expenses
incurred will not exceed development budgets, that ViewStar will introduce
products in a timely fashion, if at all, or that such products will achieve
market acceptance and generate sales sufficient to offset development costs. In
addition, the success of ViewStar's @Work family of products for the Internet,
the first of which are scheduled to be released before the end of 1996, will
depend upon the acceptance of the Internet, intranets and World Wide Web
technologies. There can be no assurance that ViewStar's new products or
enhancements will meet customer requirements or be compatible with the emerging
standards of the Internet or World Wide Web, nor that the Internet and World
Wide Web will prove to be a viable network with the necessary speed, data
capability and security to support document workflow applications.
Limited Source of Supply. Digital purchases a principal telephone call
switching component for its MOSAIX line of products from a sole-source vendor.
If this component should become unavailable from such supplier, the
establishment of an alternate source could not be accomplished quickly and would
require investment of resources, which would delay Digital's manufacture of its
MOSAIX products. Any such delay could materially adversely affect the operating
results of the combined company.
Dependence on Windows NT and Other Core Microsoft Technologies. The
success of ViewStar's products and new products to be developed by the combined
company depends upon the continued acceptance and use in critical business
applications of Microsoft's Windows NT platform and other core Microsoft
technologies, such as the Windows NT Server, the Microsoft SQL Server database
and related Back Office software on which ViewStar's products are, and many of
the combined company's planned future products will be, based. During the first
nine months of 1996, approximately 80% of ViewStar's license revenues were
generated from Windows NT-based software. There can be no assurance that the
Windows NT platform will continue to achieve market acceptance. If the Windows
NT platform market fails to grow, grows more slowly than anticipated or becomes
obsolete, the business, results of operations and financial condition of the
combined company would be materially adversely affected.
Lack of Product Revenue Diversification. Digital derived over 90% of its
product revenues in the first six months of 1996 from the MOSAIX line of
products and associated applications. While Digital has developed new software
products and services and has established a new indirect channel of
distribution, it expects that the MOSAIX line of products will continue to
account for a significant amount of the combined company's sales in the future.
All of ViewStar's revenues are generated from sales or licenses of the ViewStar
System and related services and maintenance. A decline in demand for Digital's
or ViewStar's products as a result of competition, technological change or other
factors would have a material adverse effect on the combined company's results
of operations.
International Sales. Both Digital and ViewStar sell products to customers
in international markets and accordingly are subject to the normal risks of
international sales, such as currency fluctuations, longer payment cycles,
greater difficulties in accounts receivable collections and compliance with
export laws and a wide variety of foreign laws. Although neither company has
previously experienced significant difficulties under foreign law in exporting
its products to other countries, there can be no assurance that either company
will not experience such difficulties in the future. Any such difficulties would
have a material adverse effect on the combined company's international sales.
Because Digital and ViewStar invoice certain of their foreign sales in local
currency and do not hedge these transactions, fluctuations in exchange rates
could materially adversely affect the combined company's revenues and costs and
could create significant foreign currency losses.
Dependence on Proprietary Rights; Infringement Claims; Uncertainty of
Obtaining Licenses. The combined company's success depends in part upon
protecting its proprietary technology. Although both Digital and ViewStar seek
to protect their products, software, documentation and other written materials
under trade secret and copyright laws, these laws afford only limited
protection. Digital has few, and ViewStar has no, patents or patent applications
pending. Despite both companies' efforts to protect their proprietary
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rights, unauthorized parties may attempt to copy their products or to obtain and
use information that they regard as proprietary. Policing unauthorized use of
Digital's and ViewStar's products is difficult, and since both companies are
unable to determine the extent to which piracy of their software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect Digital's and ViewStar's
proprietary rights to as great an extent as the laws of the United States. There
can be no assurance that Digital's and ViewStar's means of protecting their
proprietary rights will be adequate or that their competitors will not
independently develop similar technology.
Both Digital and ViewStar have received communications asserting that their
products infringe the proprietary rights of third parties or seeking
indemnification against such infringement. Both Digital and ViewStar believe
that none of their respective products infringe the proprietary rights of third
parties. There can be no assurance, however, that third parties will not claim
infringement by Digital or ViewStar with respect to current or future products.
Digital and ViewStar expect that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the respective markets of the companies grow and the functionality of products
in different markets overlaps. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, adversely affect revenues, cause
product shipment delays or require the combined company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to Digital or ViewStar, if at all, which could
have a material adverse effect on the combined company's business, results of
operations and financial condition.
ViewStar and, to a lesser extent, Digital, also rely on certain software
that they license from third parties, including software that is integrated with
internally developed software and used in their products to perform key
functions. There can be no assurance that such firms will remain in business,
that they will continue to support their products or that their products will
otherwise continue to be available to the combined company on commercially
reasonable terms. The loss or inability to maintain any of these software
licenses could materially adversely affect the combined company's business.
Risk of Product Defects. Software and other products as internally complex
as those offered by Digital and ViewStar frequently contain errors or defects,
especially when first introduced or when new versions are released. Although
both companies conduct extensive product testing during product development,
both have experienced delays in the commercial release of products pending the
correction of software problems and, in some cases, have provided product
enhancements to correct errors or defects in released products. The combined
company could, in the future, lose revenues as a result of software errors or
other product defects. The combined company's products and future products are
intended for use in applications that are critical to a customer's business. As
a result, Digital and ViewStar expect that their customers and potential
customers have a greater sensitivity to product defects than the market for
software products generally. There can be no assurance that, despite testing by
Digital and ViewStar and by current and potential customers, errors or defects
will not be found in new products or releases after commencement of commercial
shipments, resulting in loss of revenues, delay in market acceptance, diversion
of development resources, damage to Digital's or ViewStar's reputation or
increased service and warranty costs, any of which could have a material adverse
effect on the combined company's business, results of operations and financial
condition.
Product Liability. Digital's and ViewStar's license agreements with their
customers typically contain provisions intended to limit their exposure to
potential product liability claims. However, it is possible that the limitation
of liability provisions contained in their license agreements may not be
effective. Although both companies carry product liability insurance coverage,
there can be no assurance that such insurance coverage will be sufficient in the
event of a successful product liability claim brought against either of them. A
successful product liability claim in excess of such insurance coverage could
have a material adverse effect on the combined company. In addition, there can
be no assurance that product liability coverage will continue to be available to
the combined company in sufficient amounts or at an acceptable cost.
Governmental Regulation. Digital's products are subject to and conform
with Federal Communications Commission regulations under the Communications Act
of 1934. Future products developed by Digital also may be required to comply
with certain registration and technical requirements before they can be sold in
the
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United States. As Digital expands its operations in other countries, its
products will become subject to regulation by foreign governments. Certain of
Digital's products are currently certified for use in the United Kingdom,
Canada, Australia, Japan and Hong Kong pursuant to applicable regulations.
While existing industry legislation does not directly regulate the
manufacture and sale of Digital's products, certain existing legislation may
affect the ability of Digital's customers to utilize some of its products in
certain ways. For example, Digital's MOSAIX systems may not be used for certain
prohibited debt collection and remote telephone solicitation practices, nor may
they be used under certain circumstances to leave or play artificial or
prerecorded messages. Other federal legislation that has been proposed from time
to time includes bills that would, if enacted, recognize certain privacy rights
of employees at the work site and regulate the ability of employers to monitor
job performance, including monitoring employees' telephone communications or
gathering information regarding such communications. It is possible that such
legislation, if enacted, might directly or indirectly affect how Digital's
systems, or some features thereof, can be used.
In addition, most states have enacted and/or proposed legislation limiting
certain telephone solicitation practices or restricting certain uses of
automatic dialing and announcement devices. If passed, such legislation may
directly or indirectly affect Digital's business. Digital is not presently aware
of any recently enacted state regulations or legislation materially affecting
use of Digital's products.
Deferred Tax Assets. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. ViewStar has provided a
full valuation allowance against its net deferred tax assets as it has
determined that it is more likely than not that the deferred tax assets will not
be realized. ViewStar's accounting for deferred taxes under Statement of
Financial Accounting Standards No. 109 involves the evaluation of a number of
factors concerning the realizability of ViewStar's deferred tax assets. To
support ViewStar's conclusion that a full valuation allowance was required,
management primarily considered such factors as ViewStar's history of operating
losses, the nature of ViewStar's deferred tax assets, and the lack of
significant firm sales backlog. Although management's operating plans assume
taxable and operating income in future periods, management's evaluation of all
the available evidence in assessing the realizability of the deferred tax assets
indicates that such plans were not considered sufficient to overcome the
available negative evidence.
Shares Subject to Future Sale. Digital will issue approximately 3,735,000
shares of Common Stock in the Merger, and up to approximately 600,000 shares of
Common Stock will be issuable upon the future exercise of the converted ViewStar
options. In general, the shares issued in the Merger, other than to affiliates
of ViewStar, will be freely tradable following the Merger. The shares issued
after the Effective Time upon the exercise of the converted ViewStar options
will be registered pursuant to a registration statement to be filed by Digital
under the Securities Act prior to the Effective Time. In addition, persons who
may be considered affiliates of Digital or ViewStar, respectively, have agreed
pursuant to a separate Shareholders Agreement that they will not transfer, sell,
exchange, pledge or otherwise dispose of any shares of Common Stock now held by
such holders or received by them in the Merger from 30 days prior to the
Effective Time until the date Digital shall have publicly released financial
results for a period that includes at least 30 days of combined operations of
Digital and ViewStar (the "Affiliates Expiration Date"). Immediately after the
Affiliates Expiration Date, these shares of Common Stock will be eligible for
sale in the public market, subject to compliance with Rules 144 and 145 under
the Securities Act. The sale of any of the foregoing shares of Common Stock may
cause substantial fluctuations in the price of the Common Stock.
Volatility of Stock Price. The market price of the Common Stock is highly
volatile. The market price of the Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the combined
company or its competitors, changes in prices of the combined company's or its
competitors' products and services, changes in product mix, and changes in
revenue and revenue growth rates for the combined company, as well as other
events or factors. Statements or changes in opinions, ratings or earnings
estimates made by brokerage firms or industry analysts relating to the market in
which the combined company does business have resulted, and could in the future
result, in an immediate and adverse effect on the market price of the Common
Stock.
9
<PAGE> 10
Statements by financial or industry analysts regarding the extent of the
dilution in Digital's net income per share resulting from the Merger and the
extent to which such analysts expect potential business synergies to offset such
dilution can be expected to contribute to volatility in the market price of the
Common Stock. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations that have particularly affected the market
price for the securities of many high-technology companies and often have been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
Antitakeover Effect of Certain Charter and Bylaw Provisions and Washington
Law. Certain provisions of Digital's Restated Articles of Incorporation and
Digital's Restated Bylaws may have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from attempting to
acquire, control of Digital. Certain of these provisions allow Digital to issue
preferred stock without any vote or further action by its shareholders,
eliminate cumulative voting, provide for a classified board of directors, limit
the rights of shareholders to call a special meeting and specify procedures for
director nominations by shareholders and submission of other proposals for
consideration at shareholder meetings. Digital is subject to the Washington
Antitakeover Act, which prohibits a "target corporation," with certain
exceptions, from engaging in certain "significant business transactions"
(including, among other things, mergers, consolidations or dispositions of
assets) with or to a person or group of persons that beneficially owns 10% or
more of the voting securities of the target corporation for a period of five
years after such acquisition, unless the transaction or acquisition of shares is
approved by a majority of the members of the target corporation's board of
directors prior to the time of acquisition. After the five-year period, a
"significant business transaction" may take place as long as it complies with
certain "fair price" provisions of the statute. These provisions could have the
effect of delaying, deferring or preventing a change in control of Digital,
including, without limitation, discouraging a proxy contest or making more
difficult the acquisition of a substantial block of the Company's Common Stock.
These provisions also could limit the price that investors might be willing to
pay in the future for the Company's Common Stock.
USE OF PROCEEDS
The net proceeds, not including any commissions paid or any discounts or
concessions that may be allowed to broker-dealers who may participate in the
Offering, to the Company from the sale of the Common Stock offered in the
Offering (if the Company sells the maximum of 300,000 shares offered hereby) at
an assumed public offering price of $14.75 per share are estimated to be
approximately $4.4 million. The Company anticipates that all of the net proceeds
of the Offering will be used for working capital and general corporate purposes.
PLAN OF DISTRIBUTION
The shares of Common Stock offered by the Company may be sold from time to
time to purchasers directly in one or more transactions at a fixed price, which
may be changed, at varying prices determined at the time of sale or at
negotiated prices. Alternatively, the Company may from time to time sell the
Common Stock in transactions involving broker-dealers who may act as agents
and/or may acquire Common Stock from the Company as principals and who may
receive compensation from the Company and/or the purchasers of the shares.
Broker-dealers who acquire Common Stock as principals may thereafter resell such
Common Stock in transactions, including transactions of the nature described
above. Broker-dealers may be entitled, under agreements that may be entered into
with the Company, to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act. Any broker-dealers who
participate in a sale of shares of Common Stock may be deemed to be
"underwriters" as defined in the Securities Act. Any commissions paid or any
discounts or concessions allowed to any such broker-dealers, and, if any such
broker-dealers purchase shares of Common Stock as principals, any profits
received on the resale of such shares of Common Stock, may be deemed to be
underwriting discounts and commissions under the Securities Act.
The rules of the Commission generally prohibit underwriters, brokers,
dealers and certain other persons engaged or participating in the distribution
of the Common Stock from making a market in such Common Stock during the
"cooling off" period preceding the commencement of such distribution.
10
<PAGE> 11
In order to comply with the securities laws of certain states, if
applicable, the Common Stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
On September 20, 1996, the Company engaged Dain Bosworth Incorporated
("Dain Bosworth") to act as its financial advisor in connection with the Merger
pursuant to the terms of an engagement letter (the "Engagement Letter"). Digital
also has negotiated the terms of a supplemental engagement letter (the
"Supplemental Letter") pursuant to which Dain Bosworth will use its best efforts
to sell the shares of Common Stock offered hereby in open market transactions at
prevailing market prices. Such assistance may consist of effecting sales of the
shares of Common Stock offered hereby through market making activities or in
block trades at its usual and customary commissions for such trades. Should Dain
Bosworth effect the sale of any of the shares of Common Stock offered hereby, it
will receive a fee equal to the lesser of $0.40 per share or 3.0% of the sales
price of the Common Stock sold. Dain Bosworth currently has no obligation to
take or pay for any shares of Common Stock offered hereby. The Supplemental
Letter contains other customary terms and conditions, including indemnification
provisions described in the next paragraph. If Dain Bosworth provides such
assistance, it may thereby be subject to restrictions on market making
activities during the "cooling off" period described above.
Pursuant to the Engagement Letter, the fees payable to Dain Bosworth in
connection with the Merger consist of a $25,000 engagement fee, a $125,000 fee
for rendering its fairness opinion to Digital's Board of Directors on October 9,
1996 in connection with the transaction contemplated by the Merger Agreement and
a $350,000 transaction fee payable upon consummation of the Merger. Digital also
has agreed pursuant to the Engagement Letter to reimburse Dain Bosworth for its
reasonable out-of-pocket expenses in connection with the Merger, which are not
expected to exceed $20,000. Under the Supplemental Letter Digital would be
required to reimburse Dain Bosworth for up to $10,000 of reasonable
out-of-pocket expenses in connection with the sale of the shares of Common Stock
offered hereby. In addition, Digital has agreed to indemnify Dain Bosworth
against certain expenses and liabilities arising in connection with its
engagement, including liabilities under the Securities Act and the Exchange Act
arising from any untrue statement or alleged untrue statement of a material fact
contained in any report, filing or other document used in connection with the
Merger or the Offering or any omission or alleged omission to state a material
fact necessary to make the statements therein not misleading. Dain Bosworth has
from time to time issued research reports and recommendations on the Common
Stock and, in the ordinary course of business, makes a market in the Common
Stock. In the course of its market making and other trading activities, Dain
Bosworth may from time to time have a long or short position in, and buy and
sell, securities of Digital.
There can be no assurance that the Company will sell any or all of the
shares of Common Stock offered hereby. It is anticipated that the Offering will
remain in effect until the shares of Common Stock offered hereby have been sold,
but in no event will any shares be sold in the Offering after the closing of the
Merger.
EXPERTS
The audited consolidated financial statements and consolidated financial
statement schedule of Digital Systems International, Inc. and its subsidiaries
as of December 31, 1994 and 1995 and for each of the years in the three-year
period ended December 31, 1995 and the consolidated financial statements and
consolidated financial statement schedule of ViewStar Corporation and its
subsidiaries as of December 31, 1994 and 1995 and for each of the years in the
three-year period ended December 31, 1995 have been incorporated herein by
reference in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated herein by reference, and upon the
authority of said firm as experts in accounting and auditing.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered in the Offering will be passed
upon for the Company by Perkins Coie, Seattle, Washington.
11
<PAGE> 12
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
The Offering.......................... 3
Risk Factors.......................... 4
Use of Proceeds....................... 10
Plan of Distribution.................. 10
Experts............................... 11
Validity of Common Stock.............. 11
</TABLE>
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300,000 SHARES
DIGITAL SYSTEMS
INTERNATIONAL, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
PROSPECTUS
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DECEMBER 2, 1996
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