<PAGE> 1
LOGO
November 29, 1996
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
(the "Digital Special Meeting") of Digital Systems International, Inc.
("Digital"), which will be held on Friday, December 20, 1996, at 9:00 a.m.,
local time, at Digital's offices located at 6464 185th Avenue N.E., Redmond,
Washington.
At the Digital Special Meeting, you will be asked to consider and vote upon
a proposal to approve the issuance (the "Issuance") of shares of common stock of
Digital (the "Digital Common Shares") to the shareholders of ViewStar
Corporation ("ViewStar") in connection with an Agreement and Plan of Merger (the
"Merger Agreement") among ViewStar, Digital and Vision Merger Corporation, a
wholly owned subsidiary of Digital ("Merger Sub"), which provides for the merger
of Merger Sub into ViewStar (the "Merger"). In the Merger, (i) Digital will
issue approximately 3,735,000 Digital Common Shares in exchange for the
outstanding shares of common and preferred stock of ViewStar (the "ViewStar
Stock"), and (ii) Merger Sub will merge with and into ViewStar. Shareholders of
ViewStar will receive cash in lieu of any fractional Digital Common Shares. At
the Digital Special Meeting, you also will be asked to consider and vote upon
the adoption of the Digital Systems International, Inc. 1996 Stock Incentive
Compensation Plan (the "Digital Stock Incentive Plan"), which reserves 1,500,000
Digital Common Shares for issuance to directors, officers, employees and other
persons providing services to Digital for compensation and other general
corporate purposes and to enable the replacement of outstanding options to
purchase ViewStar Stock (the "ViewStar Options") with options to purchase
Digital Common Shares as contemplated by the Merger Agreement. In the event the
Digital Stock Incentive Plan is not approved, Digital will assume the ViewStar
Options and will treat all ViewStar Options as options to purchase Digital
Common Shares.
The affirmative vote of the holders representing a majority of the Digital
Common Shares present or represented by proxy at the Digital Special Meeting and
entitled to vote is necessary to approve the Issuance and the Digital Stock
Incentive Plan. Pursuant to a separate agreement, the directors and certain
executive officers of Digital, who hold in the aggregate approximately 1.7% of
the outstanding Digital Common Shares, have agreed to vote in favor of the
Issuance.
DIGITAL'S BOARD OF DIRECTORS BELIEVES THE ISSUANCE AND THE MERGER TO BE
FAIR TO AND IN THE BEST INTERESTS OF DIGITAL AND ITS SHAREHOLDERS, HAS APPROVED
THE ISSUANCE AND THE MERGER AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL OF THE
ISSUANCE. DIGITAL'S BOARD OF DIRECTORS ALSO RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE DIGITAL STOCK INCENTIVE PLAN.
You should read carefully the accompanying Notice of Special Meeting of
Shareholders and the Proxy Statement/Prospectus for details of the Merger, the
Digital Stock Incentive Plan and additional related information.
Whether or not you plan to attend the Digital Special Meeting, please
complete, sign and date the enclosed proxy card and return it promptly in the
enclosed postage-prepaid envelope. If you attend the Digital Special Meeting,
you may vote in person if you wish, even if you previously have returned your
proxy card. Your prompt response will be greatly appreciated.
Sincerely,
/s/ Patrick S. Howard
PATRICK S. HOWARD
President and Chief Executive Officer
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD.
<PAGE> 2
DIGITAL SYSTEMS
INTERNATIONAL, INC.
6464 185TH AVENUE N.E.
REDMOND, WASHINGTON 98052
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 20, 1996
TO THE SHAREHOLDERS OF DIGITAL SYSTEMS INTERNATIONAL, INC.:
The Special Meeting of Shareholders (the "Digital Special Meeting") of
Digital Systems International, Inc., a Washington corporation ("Digital"), will
be held on Friday, December 20, 1996, at 9:00 a.m., local time, at Digital's
offices located at 6464 185th Avenue N.E., Redmond, Washington, for the
following purposes:
1. To consider and vote upon a proposal to approve the issuance (the
"Issuance") of shares of common stock, par value $.01 per share, of Digital
(the "Digital Common Shares") to the shareholders of ViewStar Corporation,
a California corporation ("ViewStar"), in connection with an Agreement and
Plan of Merger, dated as of October 14, 1996 (the "Merger Agreement"),
among ViewStar, Digital and Vision Merger Corporation, a Washington
corporation and a wholly owned subsidiary of Digital ("Merger Sub"), which
provides for the merger of Merger Sub into ViewStar (the "Merger").
Pursuant to the Merger Agreement, Merger Sub will be merged with and into
ViewStar, and shares of common and preferred stock of ViewStar issued and
outstanding immediately prior to the Merger will be converted into
approximately 3,735,000 Digital Common Shares. THE MERGER IS MORE
COMPLETELY DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS, AND A
COPY OF THE MERGER AGREEMENT IS ATTACHED AS ANNEX I THERETO.
2. To consider and vote upon the adoption of the Digital Systems
International, Inc. 1996 Stock Incentive Compensation Plan (the "Digital
Stock Incentive Plan").
3. To transact such other business as properly may come before the
Digital Special Meeting or any adjournments or postponements thereof.
Only holders of record of Digital Common Shares at the close of business on
November 19, 1996, the record date for the Digital Special Meeting, are entitled
to notice of, and to vote at, the Digital Special Meeting and any adjournments
or postponements thereof.
The affirmative vote of the holders representing a majority of the Digital
Common Shares present or represented by proxy at the Digital Special Meeting and
entitled to vote is necessary to approve the Issuance. Pursuant to a separate
agreement, the directors and certain executive officers of Digital, who hold an
aggregate of approximately 1.7% of the voting power of the outstanding Digital
Common Shares, have agreed to vote in favor of the Issuance. Holders of Digital
Common Shares will not be entitled to dissenters' rights as a result of the
Merger because Digital is not a constituent corporation in the Merger.
The affirmative vote of the holders of shares representing a majority of
the Digital Common Shares present or represented by proxy at the Digital Special
Meeting is necessary to approve the adoption of the Digital Stock Incentive
Plan.
<PAGE> 3
WHETHER OR NOT YOU PLAN TO ATTEND THE DIGITAL SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE. YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE
IT IS VOTED BY SIGNING AND RETURNING A LATER-DATED PROXY WITH RESPECT TO THE
SAME SHARES, BY FILING WITH THE SECRETARY OF DIGITAL A WRITTEN REVOCATION
BEARING A LATER DATE OR BY ATTENDING AND VOTING IN PERSON AT THE DIGITAL SPECIAL
MEETING.
DIGITAL SYSTEMS INTERNATIONAL, INC.
/s/ John J. Flavio
JOHN J. FLAVIO
Secretary
Redmond, Washington
November 29, 1996
<PAGE> 4
LOGO
November 27, 1996
Dear Shareholder:
The Board of Directors of ViewStar Corporation ("ViewStar") has approved
the merger of ViewStar with a subsidiary of Digital Systems International, Inc.
("Digital"). As a result of the merger, ViewStar will become a wholly owned
subsidiary of Digital. The terms of the merger provide for each outstanding
share of the ViewStar Common Stock to be converted into .693 shares of Common
Stock of Digital ("Digital Common Shares"). The conversion ratio reflects a
recent 1-for-3.5 reverse split of the ViewStar Common Stock that occurred in
anticipation of a public offering. As a result of the ViewStar Common Stock
reverse split, each share of ViewStar Preferred Stock is convertible into 1/3.5
of a share of ViewStar Common Stock, so that every 3.5 shares of ViewStar
Preferred Stock will convert in the merger into .693 Digital Common Shares.
Digital Common Shares are traded on the Nasdaq National Market (symbol DGTL).
The closing price of a Digital Common Share on November 22, 1996 was $14.75.
Although ViewStar had planned an initial public offering of ViewStar Common
Stock and considered it an attractive opportunity for the ViewStar shareholders,
the ViewStar Board of Directors has concluded that the anticipated benefits of
the proposed merger with Digital provide a better opportunity for the
shareholders to realize the full value of their investment.
The consent of the holders of a majority of all outstanding shares of
ViewStar Common Stock and a majority of all outstanding shares of ViewStar
Preferred Stock is necessary to approve the Merger Agreement. Pursuant to a
separate agreement with Digital, certain ViewStar shareholders who hold
approximately 70.9% of the outstanding ViewStar Common Stock and approximately
94.9% of the outstanding ViewStar Preferred Stock have agreed to give their
written consent to the merger.
THE VIEWSTAR BOARD OF DIRECTORS BELIEVES THE MERGER TO BE FAIR TO AND IN
THE BEST INTERESTS OF VIEWSTAR AND ITS SHAREHOLDERS. ACCORDINGLY, THE VIEWSTAR
BOARD RECOMMENDS THAT THE VIEWSTAR SHAREHOLDERS APPROVE THE MERGER AGREEMENT.
You should read carefully the accompanying Proxy Statement/Prospectus for
details of the merger and additional related information.
Please complete, sign and date the enclosed form of consent and return it
promptly in the enclosed postage-prepaid envelope. Your prompt response will be
greatly appreciated.
Sincerely,
/s/ Kamran Kheirolomoom
--------------------------
KAMRAN KHEIROLOMOOM
President and Chief Executive Officer
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED FORM OF CONSENT.
<PAGE> 5
Filed pursuant to
Rule 424(b)(3)
File No. 333-14887
DIGITAL SYSTEMS INTERNATIONAL, INC.
PROXY STATEMENT
------------------------
VIEWSTAR CORPORATION
CONSENT SOLICITATION
------------------------
DIGITAL SYSTEMS INTERNATIONAL, INC.
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to holders of shares of
common stock, par value $.01 per share (the "Digital Common Shares"), of Digital
Systems International, Inc., a Washington corporation ("Digital"), in connection
with the solicitation of proxies by Digital's Board of Directors (the "Digital
Board") for use at the Special Meeting of Shareholders (the "Digital Special
Meeting") to be held on Friday, December 20, 1996, at Digital's offices located
at 6464 185th Avenue N.E., Redmond, Washington, at 9:00 a.m., local time, and at
any adjournments or postponements thereof.
This Proxy Statement/Prospectus also is being furnished to holders of
shares of common stock, par value $.001 per share (the "ViewStar Common Stock"),
and to holders of shares of preferred stock, par value $.001 per share (the
"ViewStar Preferred Stock" and, together with the ViewStar Common Stock, the
"ViewStar Stock"), of ViewStar Corporation, a California corporation
("ViewStar"), in connection with the solicitation of written consents (the
"ViewStar Consent Solicitation") of the shareholders of record of ViewStar (the
"ViewStar Shareholders") by ViewStar's Board of Directors (the "ViewStar Board")
with respect to the Merger (as hereinafter defined).
This Proxy Statement/Prospectus constitutes the Prospectus of Digital filed
as part of a Registration Statement on Form S-4 (together with any amendments or
supplements thereto, the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to up to 3,735,000 Digital Common
Shares issuable in connection with the Merger. All information concerning
Digital contained in this Proxy Statement/Prospectus has been furnished by
Digital, and all information concerning ViewStar contained in this Proxy
Statement/Prospectus has been furnished by ViewStar.
This Proxy Statement/Prospectus and the accompanying form of proxy or
consent, as applicable, are first being mailed to shareholders of Digital and of
ViewStar on or about November 27, 1996.
THE DIGITAL COMMON SHARES ISSUABLE IN THE MERGER HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
FOR A DESCRIPTION OF CERTAIN SIGNIFICANT CONSIDERATIONS IN CONNECTION WITH
THE MERGER AND THE RELATED TRANSACTIONS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS, SEE
"RISK FACTORS."
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER 27, 1996.
<PAGE> 6
DIGITAL SPECIAL MEETING
At the Digital Special Meeting, shareholders of record of Digital as of the
close of business on November 19, 1996 (the "Digital Shareholders") will
consider and vote upon (i) the issuance (the "Issuance") of Digital Common
Shares in exchange for shares of ViewStar Stock and upon the exercise of options
and a warrant to purchase shares of ViewStar Stock that will convert into
options and a warrant to purchase Digital Common Shares, in connection with the
Agreement and Plan of Merger, dated as of October 14, 1996 (the "Merger
Agreement"), among ViewStar, Digital and Vision Merger Corporation, a Washington
corporation and a wholly owned subsidiary of Digital ("Merger Sub"), pursuant to
which Merger Sub will be merged with and into ViewStar (the "Merger"), (ii) the
adoption of the Digital Systems International, Inc. 1996 Stock Incentive
Compensation Plan (the "Digital Stock Incentive Plan"), and (iii) such other
business as properly may come before the Digital Special Meeting.
VIEWSTAR CONSENT SOLICITATION
Written consents of ViewStar Shareholders as of the close of business on
November 25, 1996 (the "ViewStar Record Date") are being solicited to approve
the Merger Agreement.
CONSUMMATION OF THE MERGER
Upon consummation of the Merger, (i) each issued and outstanding share of
ViewStar Common Stock will be converted into the right to receive .693 Digital
Common Shares (the "Exchange Ratio"), (ii) each issued and outstanding share of
ViewStar Preferred Stock will convert into the right to receive a number of
Digital Common Shares equal to the product of the Exchange Ratio and the number
of shares of ViewStar Common Stock into which such share of ViewStar Preferred
Stock is convertible (based upon a conversion ratio of one share of ViewStar
Common Stock for every 3.5 shares of ViewStar Preferred Stock), (iii) each
outstanding option to purchase shares of ViewStar Stock (each, a "ViewStar
Option") will convert into an option to purchase that number of Digital Common
Shares which is equal to the product of the Exchange Ratio and the number of
shares of ViewStar Common Stock subject to such ViewStar Option; provided,
however, that in the event shareholder approval of the Digital Stock Incentive
Plan is not obtained, each outstanding option to purchase ViewStar Stock will be
assumed by Digital and will be deemed an option to purchase an equivalent number
of Digital Common Shares, (iv) each outstanding warrant to purchase shares of
ViewStar Stock (other than a warrant held by Comdisco, Inc. (the "Comdisco
Warrant"), which will convert into a warrant to purchase Digital Common Shares)
(each, a "ViewStar Warrant") will terminate in accordance with its terms unless
exercised prior to the Effective Time (as hereinafter defined), (v) all
outstanding shares of restricted stock owned by officers of ViewStar (the
"ViewStar Restricted Stock") outstanding at the Effective Time will convert into
.693 Digital Common Shares and will remain subject to the same terms and
conditions, including the schedule upon which rights to repurchase such shares
will lapse, as were applicable to the ViewStar Restricted Stock at the Effective
Time, and (vi) all shares of ViewStar Stock, except any Dissenting Shares (as
hereinafter defined), will no longer be outstanding and will automatically be
canceled, and each holder of a certificate representing shares of ViewStar Stock
will cease to have any rights as a ViewStar Shareholder with respect thereto,
except the right to receive the Digital Common Shares to be issued in
consideration therefor upon the surrender of such certificate, without interest.
Fractional Digital Common Shares will not be issued in connection with the
Merger. ViewStar Shareholders otherwise entitled to a fractional share will be
paid the value of such fraction in cash, determined as described under "THE
MERGER -- Terms of the Merger Agreement -- Fractional Shares."
ii
<PAGE> 7
AVAILABLE INFORMATION
Digital 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 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 Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such information 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, material filed by Digital can
be inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W. Washington, D.C. 20006. In addition,
the Commission maintains a Web site (http://www.sec.gov) that contains certain
reports, proxy statements and other information regarding Digital. This Proxy
Statement/Prospectus does not contain all 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 Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
ViewStar is not subject to the information and reporting requirements of
the Exchange Act.
THIS PROXY STATEMENT/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 PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON
WRITTEN OR ORAL REQUEST TO THE SECRETARY, DIGITAL SYSTEMS INTERNATIONAL, INC.,
6464 185th AVENUE N.E., REDMOND, WASHINGTON 98052, TELEPHONE NUMBER (206)
881-7544. TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
BEFORE DECEMBER 13, 1996.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by Digital pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Digital Special Meeting shall be deemed to be incorporated by reference
herein and to be a part hereof from the date any such document is filed. The
information relating to Digital contained in this Proxy Statement/Prospectus
does not purport to be comprehensive and should be read together with the
information in the documents incorporated by reference.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that also is incorporated by reference herein)
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed to constitute a part hereof except as so modified or
superseded. All information appearing in this Proxy Statement/Prospectus is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by reference,
except to the extent set forth in the immediately preceding statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY DIGITAL OR VIEWSTAR.
iii
<PAGE> 8
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF DIGITAL OR VIEWSTAR SINCE THE DATE HEREOF OR
THAT THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THEREOF.
TRADEMARKS
Campaign Director, MOSAIX, The Foresight Report and Intelligent Dialing are
registered trademarks of Digital. Analyst, InfoManager, Guide, Coach, Scout,
Predictive Blend and Realtime Monitor are trademarks of Digital. ViewStar,
Process Architect, Process@Work and InfoStore@Work are trademarks of ViewStar.
This Proxy Statement/Prospectus also contains trademarks of companies other than
Digital and ViewStar. The use of any such third-party trademark herein is an
editorial fashion only, and to the benefit of the owner thereof, with no
intention of commercial use or infringement of such trademark.
FORWARD-LOOKING INFORMATION
This Proxy Statement/Prospectus contains statements relating to future
results of Digital and ViewStar (including certain projections and business
trends) that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties, including,
but not limited to, changes in political and economic conditions; demand for and
market acceptance of new and existing products; successful development of
advanced technologies; and competitive product and pricing pressures, as well as
other risks and uncertainties, including, but not limited to, those set forth
under "RISK FACTORS" and detailed from time to time in the filings of Digital
with the Commission.
When used in this Proxy Statement/Prospectus with respect to Digital and
ViewStar, the words "estimate," "project," "intend" and "expect" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. Digital and ViewStar do not undertake
any obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
iv
<PAGE> 9
CONTENTS
<TABLE>
<S> <C>
Digital Special Meeting................ ii
ViewStar Consent Solicitation.......... ii
Consummation of the Merger............. ii
AVAILABLE INFORMATION.................. iii
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................ iii
TRADEMARKS............................. iv
FORWARD-LOOKING INFORMATION............ iv
SUMMARY................................ 1
The Companies........................ 1
Digital Special Meeting.............. 1
ViewStar Consent Solicitation........ 3
The Merger........................... 3
Summary Historical and Pro Forma
Condensed Combined Financial
Data.............................. 8
Comparative Per Share Data........... 10
RISK FACTORS........................... 11
STOCK PRICE INFORMATION................ 18
Digital.............................. 18
ViewStar............................. 18
PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS........................... 19
APPROVAL OF SHAREHOLDERS............... 24
General.............................. 24
Matters to Be Considered at the
Digital Special Meeting........... 24
ViewStar Consent Solicitation........ 24
Record Date; Shares Entitled to Vote;
Vote Required..................... 25
Proxies/Consents..................... 25
BACKGROUND OF AND REASONS FOR THE
MERGER............................... 27
Background........................... 27
Reasons for the Merger............... 29
Joint Reasons for the Merger...... 29
Digital's Reasons for the
Merger.......................... 30
ViewStar's Reasons for the
Merger.......................... 31
Opinion of Digital's Financial
Advisor........................... 32
THE MERGER............................. 37
Terms of the Merger Agreement........ 37
Effective Time of the Merger......... 38
Exchange of ViewStar Stock........... 38
Share Consideration Adjustment....... 38
Replacement of ViewStar Options;
Warrants.......................... 39
Quotation of the Digital Common
Shares on Nasdaq National
Market............................ 39
Representations and Warranties....... 39
Business of ViewStar Pending the
Merger............................ 40
Certain Covenants of Digital......... 41
No Solicitation...................... 42
Conditions; Waivers.................. 42
Amendment; Termination............... 43
Agreement of Digital Affiliates to
Vote in Favor of the Issuance..... 44
Certain Federal Income Tax
Consequences...................... 44
Resale of Digital Common Shares
Issued in the Merger;
Affiliates........................ 46
Accounting Treatment; Sale of
Shares............................ 47
Appointment of ViewStar
Representatives to the Digital
Board............................. 47
Management and Operations of ViewStar
After the Merger.................. 47
Expenses and Fees.................... 47
Rights of Dissenting ViewStar
Shareholders...................... 48
Interests of Certain Persons in the
Merger............................ 49
Shareholders Agreement............... 50
Registration Rights Agreement........ 51
DESCRIPTION OF DIGITAL CAPITAL STOCK... 52
COMPARATIVE RIGHTS OF VIEWSTAR
SHAREHOLDERS AND DIGITAL
SHAREHOLDERS......................... 52
Size and Classification of the Board
of Directors...................... 52
Cumulative Voting.................... 53
Removal of Directors................. 53
Special Meetings of Shareholders..... 53
Action Without Meeting............... 53
Amendments to Articles............... 53
Advance Notice Requirement for
Shareholder Proposals and
Nominations....................... 54
Inspection of Shareholder Lists...... 54
Dividends............................ 54
Amendment of Bylaws.................. 55
Transactions Involving Officers or
Directors......................... 55
Filling Vacancies on the Board of
Directors......................... 55
Limitation of Liability of Directors
and Indemnification............... 56
Provisions Affecting Acquisitions and
Business Combinations............. 57
Mergers, Acquisitions and Other
Transactions...................... 57
DIGITAL AND MERGER SUB................. 58
General.............................. 58
Industry Background.................. 58
Products and Services................ 59
</TABLE>
v
<PAGE> 10
<TABLE>
<S> <C>
MOSAIX Series Products............ 59
Application Software to Improve
Teleprofessional
Effectiveness................... 60
Client/Server Software for
Departmental Customer Contact
Centers......................... 60
Professional Services................ 61
Customer Support and Services........ 61
Product Development.................. 61
Manufacturing........................ 61
Sales and Marketing.................. 62
Competition.......................... 62
International Operations............. 63
Seasonality.......................... 63
Significant Customer................. 63
Regulatory Environment............... 63
Proprietary Rights................... 65
Employees............................ 65
Backlog.............................. 65
Facilities........................... 65
SELECTED DIGITAL FINANCIAL DATA........ 66
DIGITAL MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................ 67
Results of Operations................ 68
Liquidity and Capital Resources...... 70
New Accounting Standard.............. 71
BENEFICIAL OWNERSHIP OF DIGITAL COMMON
SHARES............................... 72
Compliance With Section 16(a) of the
Securities Exchange Act of 1934... 73
MANAGEMENT OF DIGITAL.................. 74
Executive Officers and Directors..... 74
DIGITAL EXECUTIVE COMPENSATION......... 77
Compensation Summary................. 77
Option Grants in 1995................ 78
Option Exercises in 1995 and Year-End
Value Table....................... 78
Compensation of the Digital Board.... 79
Employment Agreements, Termination of
Employment and Change of Control
Agreements........................ 79
Certain Transactions................. 79
VIEWSTAR............................... 80
General.............................. 80
Industry............................. 80
The ViewStar Solution................ 81
Products............................. 82
Professional Services and Support.... 83
Customers; Sales and Marketing....... 84
Research and Development............. 85
Employees............................ 85
Competition.......................... 85
Intellectual Property and Other
Proprietary Rights................ 86
Property and Facilities.............. 86
SELECTED VIEWSTAR FINANCIAL
DATA................................. 87
VIEWSTAR MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................ 88
Overview............................. 88
Results of Operations................ 89
Selected Quarterly Operating
Results........................... 92
Liquidity and Capital Resources...... 94
BENEFICIAL OWNERSHIP OF VIEWSTAR
STOCK................................ 95
MANAGEMENT OF VIEWSTAR................. 98
Executive Officers and Directors..... 98
VIEWSTAR EXECUTIVE COMPENSATION........ 99
Compensation Summary................. 99
Option Grants in Year Ended December
31, 1995.......................... 100
Aggregate Option Values at
December 31, 1995................. 101
CERTAIN TRANSACTIONS................... 102
DIGITAL SHAREHOLDER APPROVAL OF DIGITAL
STOCK INCENTIVE PLAN................. 104
Proposal to Adopt Digital Stock
Incentive Plan.................... 104
Summary of Digital Stock Incentive
Plan.............................. 104
General........................... 104
Awards............................ 105
Federal Income Tax Consequences of
Options Granted Under the Digital
Stock Incentive Plan.............. 107
New Plan Benefits.................... 108
LEGAL OPINION.......................... 109
TAX OPINION............................ 109
EXPERTS................................ 109
PROPOSALS BY DIGITAL SHAREHOLDERS...... 109
Annex I -- Agreement and Plan and Merger,
dated as of October 14, 1996,
among Digital, Merger Sub and
ViewStar
Annex II -- Shareholders Agreement, dated as
of October 14, 1996
Annex III -- Opinion of Dain Bosworth
Incorporated
Annex IV -- Chapter 13 of California
Corporations Code
Annex V -- Digital Systems International,
Inc. 1996 Stock Incentive
Compensation Plan
</TABLE>
vi
<PAGE> 11
SUMMARY
Certain significant matters discussed in this Proxy Statement/Prospectus
are summarized below. This summary is not intended to be complete and is
qualified in all respects by reference to the more detailed information
appearing or incorporated by reference in this Proxy Statement/Prospectus
(including the Annexes hereto). Shareholders are urged to read this Proxy
Statement/Prospectus and the accompanying Annexes in their entirety. See "RISK
FACTORS" for certain information that should be considered by the shareholders
of both Digital and ViewStar.
THE COMPANIES
DIGITAL SYSTEMS
INTERNATIONAL, INC......... 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, education, government
centers and healthcare 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. See "DIGITAL AND MERGER SUB."
VISION MERGER
CORPORATION................ Merger Sub, a wholly owned subsidiary of Digital,
was formed by Digital for the sole purpose of
effecting the Merger. The mailing address of Merger
Sub's principal executive offices is c/o Digital
Systems International, Inc., 6464 185th Avenue
N.E., Redmond, Washington 98052-6736, and its
telephone number is (206) 881-7544. See "DIGITAL
AND MERGER SUB."
VIEWSTAR CORPORATION....... 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 (the "ViewStar 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. The mailing address of
ViewStar's principal executive offices is 1101
Marina Village Parkway, Alameda, California 94501,
and its telephone number is (510) 337-2000. See
"VIEWSTAR."
DIGITAL SPECIAL MEETING
DATE, TIME AND PLACE OF THE
DIGITAL SPECIAL MEETING.... The Digital Special Meeting is to be held on
Friday, December 20, 1996, at 9:00 a.m., local
time, at Digital's offices located at 6464 185th
Avenue N.E., Redmond, Washington or at any
postponement or adjournment thereof.
1
<PAGE> 12
PURPOSES OF THE DIGITAL
SPECIAL MEETING............ At the Digital Special Meeting, Digital
Shareholders will consider and vote upon (i) the
issuance of Digital Common Shares in exchange for
shares of ViewStar Stock and upon the exercise of
currently outstanding options and a warrant to
purchase shares of ViewStar Stock that will convert
to options and a warrant to purchase Digital Common
Shares, in connection with the Merger Agreement,
(ii) the adoption of the Digital Stock Incentive
Plan, and (iii) such other business as properly may
come before the Digital Special Meeting.
On October 9, 1996, subject to Digital Shareholder
approval, the Digital Board adopted and approved
the Digital Stock Incentive Plan to provide for the
issuance of an aggregate maximum of 1,500,000
Digital Common Shares, which are intended to cover
(i) the issuance of up to 600,000 Digital Common
Shares upon exercise of replacement options to be
issued to ViewStar optionholders pursuant to the
Merger Agreement, (ii) the issuance of
approximately 300,000 Digital Common Shares upon
exercise of options to be granted to officers of
ViewStar, (iii) the issuance of approximately
300,000 Digital Common Shares to replace shares
that are reserved for issuance under Digital's
Restated 1987 Stock Option Plan (the "1987 Plan"),
which terminates in December 1996, and (iv)
additional Digital Common Shares to provide for
future grants. The Digital Board believes that the
adoption of the Digital Stock Incentive Plan will
further its objectives of forging a closer link
between the compensation of key employees,
consultants and directors and Digital's longer-term
financial performance and to better align the
interests of employees, nonemployee directors and
shareholders by making more Digital Common Shares
available for the grant of options and for sales to
employees under a stock purchase plan. In addition,
the terms of the Digital Stock Incentive Plan are
intended to conform to the exemption for
performance-based compensation under Section 162(m)
of the Internal Revenue Code of 1986, as amended
(the "Code"), which otherwise imposes a limit on
the deductibility for federal income tax purposes
of compensation paid to certain executive officers.
The Digital Board also believes that the
availability of an adequate number of shares for
issuance under the Digital Stock Incentive Plan is
necessary in order to carry out the plan's purpose
of attracting, retaining and motivating key
employees and directors essential to the success of
Digital.
RECORD DATE................ Only holders of record of Digital Common Shares at
the close of business on November 19, 1996 are
entitled to notice of and to vote at the Digital
Special Meeting (the "Digital Record Date"). On the
Digital Record Date, 9,441,805 Digital Common
Shares were outstanding and entitled to vote.
VOTE REQUIRED.............. The affirmative vote of holders representing a
majority of the Digital Common Shares, present in
person or represented by proxy at the Digital
Special Meeting, is required for approval of the
Issuance and for adoption of the Digital Stock
Incentive Plan. The directors and certain executive
officers of Digital, who are beneficial owners of
Digital Common Shares holding an aggregate of
approximately 1.7% of the outstanding Digital
Common Shares (the "Digital Affiliates"), have
agreed pursuant to a Shareholders Agreement to vote
in favor of the Issuance. See "APPROVAL OF
SHAREHOLDERS -- Record Date; Shares
2
<PAGE> 13
Entitled to Vote; Vote Required -- Digital," "THE
MERGER -- Agreement of Digital Affiliates to Vote
in Favor of the Issuance" and "-- Shareholders
Agreement" and "BENEFICIAL OWNERSHIP OF DIGITAL
COMMON SHARES."
VIEWSTAR CONSENT SOLICITATION
CONSENT SOLICITATION....... The consent of ViewStar Shareholders to approve the
Merger Agreement will be sought beginning on the
date of this Proxy Statement/Prospectus.
RECORD DATE................ The ViewStar Record Date is November 25, 1996. On
the ViewStar Record Date, 4,007,286 shares of
ViewStar Common Stock and 4,752,474 shares of
ViewStar Preferred Stock were outstanding.
CONSENTS REQUIRED.......... The consent of holders of a majority of all
outstanding shares of ViewStar Common Stock and the
consent of holders of a majority of all outstanding
shares of ViewStar Preferred Stock is required to
approve the Merger Agreement. Certain officers,
directors and principal shareholders of ViewStar
(the "ViewStar Affiliates"), who together
beneficially own shares of ViewStar Stock
representing approximately 70.9% of the voting
power of the ViewStar Common Stock and
approximately 94.9% of the voting power of the
ViewStar Preferred Stock, have agreed to give
written consents approving the Merger Agreement.
Accordingly, approval of the Merger Agreement by
the ViewStar Shareholders is assured. See "APPROVAL
OF SHAREHOLDERS -- Viewstar Consent Solicitation"
and " -- Record Date; Shares Entitled to Vote; Vote
Required -- ViewStar," "THE MERGER -- Agreement of
Digital Affiliates to Vote in Favor of the
Issuance" and "-- Shareholders Agreement" and
"BENEFICIAL OWNERSHIP OF VIEWSTAR STOCK."
THE MERGER
GENERAL.................... Upon consummation of the Merger, Merger Sub will
merge with and into ViewStar, which will become a
wholly owned subsidiary of Digital. Each share of
ViewStar Common Stock issued and outstanding
immediately prior to the Merger (except any
Dissenting Shares) will convert into the right to
receive .693 Digital Common Shares (the "Exchange
Ratio"), and each share of ViewStar Preferred Stock
issued and outstanding immediately prior to the
Merger will convert into the right to receive a
number of Digital Common Shares equal to the
product of the Exchange Ratio and the number of
shares of ViewStar Common Stock into which such
share of Viewstar Preferred Stock is convertible
(based on a conversion ratio of one share of
ViewStar Common Stock for every 3.5 shares of
ViewStar Preferred Stock). The Exchange Ratio
reflects a 1-for-3.5 reverse split of the ViewStar
Common Stock in August 1996. The Merger Agreement
does not contain any provisions for adjustment of
the Exchange Ratio based on fluctuation in the
price of Digital Common Shares. Subject to certain
limitations, the total number of Digital Common
Shares issuable in the Merger in exchange for
ViewStar Stock will be reduced in order to satisfy
certain claims of Digital or certain of its
affiliates or to reimburse certain administrative
costs and expenses. See "-- Share Consideration
Adjustment" and "THE MERGER -- Share Consideration
Adjustment." If the Digital Share-
3
<PAGE> 14
holders adopt the Digital Stock Incentive Plan,
each outstanding ViewStar Option will convert into
an option (a "Replacement Option") to purchase that
number of Digital Common Shares that is equal to
the product of the Exchange Ratio and the number of
shares subject to such ViewStar Option. If the
Digital Shareholders do not adopt the Digital Stock
Incentive Plan, each ViewStar Option will be
assumed by Digital and treated as an option to
purchase Digital Common Shares. Each outstanding
ViewStar Warrant (other than the Comdisco Warrant,
which will convert into a warrant to purchase
Digital Common Shares) will terminate in accordance
with its terms unless exercised prior to the
Effective Time. Based on the capitalization of
Digital and ViewStar as of November 22, 1996, and
the Exchange Ratio, the ViewStar Shareholders will
own as a result of the Merger approximately 28.3%
of the outstanding Digital Common Shares
immediately following consummation of the Merger
(excluding Digital Common Shares, if any, owned by
ViewStar Shareholders prior to the Merger, assuming
no Dissenting Shares and assuming no exercise of
outstanding warrants or options).
SHARE CONSIDERATION
ADJUSTMENT................. ViewStar has agreed that, subject to certain
limitations, the total number of Digital Common
Shares issuable in the Merger in exchange for
ViewStar Stock (the "Share Consideration") will be
reduced by a number of Digital Common Shares equal
in value to any losses in excess of $350,000 that
may be suffered by Digital, or certain of its
affiliates, due to (i) any inaccuracy in any
representation or warranty made by ViewStar or any
ViewStar Affiliate in the Merger Agreement, the
Shareholders Agreement (as defined below), any
document ancillary thereto or any certificate
delivered pursuant thereto, including, without
limitation, representations and warranties relating
to general corporate matters and to the conduct of
ViewStar's business or (ii) any failure by ViewStar
or any ViewStar Affiliate to perform or comply with
any covenant or agreement in the Merger Agreement,
the Shareholders Agreement or any document
ancillary thereto, including, without limitation,
covenants and agreements relating to the conduct of
ViewStar's business prior to the Effective Time.
With respect to each ViewStar Shareholder, 10% of
the Share Consideration (the "Holdback Shares")
will be held by Digital for potential transfer to
Digital to effect any reduction in the Share
Consideration in satisfaction of Digital claims or
for potential transfer to a representative of the
holders of the Holdback Shares to reimburse
administrative costs and expenses, including,
without limitation, costs incurred by such
representative in the settlement or defense of any
claims asserted against the Holdback Shares. Any
claims against the Holdback Shares must be asserted
by Digital not later than six months following the
Effective Time. See "THE MERGER -- Exchange of
ViewStar Stock" and "-- Share Consideration
Adjustment."
FRACTIONAL SHARES.......... No fractional Digital Common Shares will be issued
in the Merger. In lieu of any such fractional
shares, each holder of ViewStar Stock who otherwise
would be entitled to receive a fractional Digital
Common Share pursuant to the Merger will be paid an
amount in cash, without interest, determined as
described under "THE MERGER--Terms of the Merger
Agreement -- Fractional Shares."
4
<PAGE> 15
RECOMMENDATION OF THE
DIGITAL BOARD; FAIRNESS
OPINION.................... The Digital Board has determined the Issuance and
the Merger to be fair to and in the best interests
of Digital and the Digital Shareholders and has
approved the Issuance and the Merger Agreement. The
Digital Board recommends that Digital Shareholders
approve the Issuance. The Digital Board's
recommendation is based upon a number of factors
discussed in this Proxy Statement/Prospectus,
including, among other things, the written opinion
of Dain Bosworth, Inc. ("Dain Bosworth"), Digital's
financial advisor, to the effect that, based upon
and subject to the various considerations set forth
in such opinion, the Merger consideration is fair
to Digital from a financial point of view (the
"Dain Opinion"). The Digital Board also considered
various potential disadvantages to Digital and the
Digital Shareholders associated with the Merger,
which are discussed herein under "Background of and
Reasons for the Merger -- Reasons for the
Merger -- Digital's Reasons for the
Merger -- Disadvantages of the Merger to Digital."
A copy of the Dain Opinion, which sets forth the
assumptions made, procedures followed, matters
considered and scope of Dain Bosworth's review, is
attached to this Proxy Statement/Prospectus as
Annex III and should be read carefully in its
entirety. The Merger Agreement does not require
that the Dain Opinion be updated prior to the
Effective Time. See "BACKGROUND OF AND REASONS FOR
THE MERGER -- Opinion of Digital's Financial
Advisor," which also contains a discussion of the
fees to be paid to Dain Bosworth and the conditions
under which such fees are payable. A portion of the
fees to be paid to Dain Bosworth is contingent upon
consummation of the Merger. See "BACKGROUND OF AND
REASONS FOR THE MERGER -- Opinion of Digital's
Financial Advisor." The Digital Board further
recommends that Digital Shareholders vote to adopt
the Digital Stock Incentive Plan. Details regarding
the terms of the Digital Stock Incentive Plan are
discussed in this Proxy Statement/Prospectus. See
"DIGITAL SHAREHOLDER APPROVAL OF DIGITAL STOCK
INCENTIVE PLAN."
RECOMMENDATION OF THE
VIEWSTAR BOARD............. The ViewStar Board has determined the Merger to be
fair to and in the best interests of ViewStar and
its shareholders and has approved the Merger
Agreement. The ViewStar Board recommends that
ViewStar Shareholders approve the Merger Agreement.
The ViewStar Board's recommendation is based upon a
number of factors discussed in this Proxy
Statement/Prospectus. See "BACKGROUND OF AND
REASONS FOR THE MERGER." The ViewStar Board also
considered various potential disadvantages to
ViewStar and the ViewStar Shareholders associated
with the Merger, which are discussed herein under
"Background of and Reasons for the
Merger -- Reasons for the Merger -- ViewStar's
Reasons for the Merger -- Disadvantages of the
Merger to ViewStar."
CONDITIONS OF THE MERGER... Consummation of the Merger is subject to the
satisfaction of a number of conditions, including,
but not limited to: (i) the approval of the Merger
Agreement by the ViewStar Shareholders and the
approval of the Issuance by the Digital
Shareholders, (ii) the absence of any judgment,
writ, order or injunction of any court or
governmental body
5
<PAGE> 16
enjoining or otherwise preventing the consummation
of the Merger, and (iii) the receipt by Digital and
ViewStar of certain opinions regarding tax and
accounting matters. See "THE MERGER -- Conditions;
Waivers."
EFFECTIVE TIME OF THE
MERGER..................... Following receipt of all required approvals and
satisfaction or waiver (where permissible) of the
other conditions to the Merger, the Merger will be
consummated and become effective at the time (the
"Effective Time") at which all documents required
to be filed under the Washington Business
Corporation Act ("WBCA") and the California
Corporations Code ("CCC") to consummate the Merger
(the "Merger Documents") are accepted for filing by
the appropriate governmental authorities, or such
later date and time as may be specified in such
Merger Documents. See "THE MERGER -- Effective Time
of the Merger" and "-- Conditions; Waivers."
SURRENDER OF
CERTIFICATES............... If the Merger becomes effective, Digital will mail
a letter of transmittal with instructions to all
holders of record of ViewStar Stock as of the
Effective Time (except holders who have exercised
dissenters' rights) for use in surrendering their
stock certificates in exchange for certificates
representing Digital Common Shares and a cash
payment in lieu of fractional Digital Common
Shares. STOCK CERTIFICATES SHOULD NOT BE
SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS
RECEIVED.
TERMINATION................ The Merger Agreement may be terminated and the
Merger may be abandoned prior to the Effective
Time, notwithstanding approval by the shareholders
of Digital or ViewStar, or both (i) by mutual
consent of Digital and ViewStar, (ii) by either
Digital or ViewStar if the Merger has not been
consummated by February 15, 1997, and (iii) under
certain other circumstances specified in the Merger
Agreement. See "THE MERGER -- Amendment;
Termination." If the Merger Agreement is
terminated, either Digital or ViewStar may be
required to pay a termination fee of $4 million or
$6 million, depending on the circumstances, and to
reimburse the other party for its expenses. See
"THE MERGER -- Expenses and Fees."
SHAREHOLDERS AGREEMENT..... Concurrently with the execution of the Merger
Agreement, the Digital Affiliates and the ViewStar
Affiliates entered into an agreement with Digital
(the "Shareholders Agreement"). Pursuant to the
Shareholders Agreement, each of the Digital
Affiliates has agreed to vote all of his or her
Digital Common Shares for approval of the Issuance.
As of November 15, 1996, the Digital Affiliates had
the power to vote shares representing approximately
1.7% of the voting power of the Digital Common
Shares. Pursuant to the Shareholders Agreement,
each of the ViewStar Affiliates has agreed to give
his or her written consent with respect to all
shares of ViewStar Stock that such ViewStar
Affiliate has the right to vote to approve the
Merger Agreement. As of November 15, 1996, the
ViewStar Affiliates had the power to vote shares
representing approximately 70.9% of the voting
power of the ViewStar Common Stock and
approximately 94.9% of the voting power of the
ViewStar Preferred Stock. See "THE
MERGER -- Shareholders Agreement."
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES........... It is expected that the Merger will constitute a
reorganization for federal income tax purposes and,
accordingly, that no gain or loss will be
6
<PAGE> 17
recognized by the ViewStar Shareholders upon the
conversion of ViewStar Stock into Digital Common
Shares in the Merger (except with respect to any
cash received in lieu of a fractional Digital
Common Share). It is further expected that no gain
or loss will be recognized by ViewStar or Digital
as a result of the Merger. See "THE MERGER --
Certain Federal Income Tax Consequences." ViewStar
Shareholders and holders of ViewStar Options are
urged to consult their own tax advisors as to the
specific consequences to them of the Merger.
REGULATORY APPROVALS....... The parties to the Merger are not required to file
notifications under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and are not
aware of any other regulatory approvals required to
consummate the Merger.
ACCOUNTING TREATMENT;
SALE OF SHARES............. It is expected that the Merger will be accounted
for as a pooling-of-interests. It is a condition to
the obligation of Digital to consummate the Merger
that Digital receive the opinion of KPMG Peat
Marwick LLP that the Merger can be accounted for as
a pooling-of-interests. Pursuant to the Merger
Agreement, Digital has agreed that, if necessary to
ensure that the Merger will be accounted for as a
pooling-of-interests, it will sell up to 300,000
Digital Common Shares that were purchased by
Digital within the last two years.
APPOINTMENT OF VIEWSTAR
REPRESENTATIVES TO THE
DIGITAL
BOARD...................... Digital's Restated Bylaws authorize a range from
three to nine directors, and the number of
directors on the Digital Board currently is set at
seven. Digital has agreed to increase the size of
the Digital Board and appoint two representatives
of ViewStar to the Digital Board at the Effective
Time. Kamran Kheirolomoom, currently President and
Chief Executive Officer of ViewStar, and Umang
Gupta, a director of ViewStar, will be appointed to
the Digital Board.
INTERESTS OF CERTAIN
PERSONS
IN THE MERGER.............. Kamran Kheirolomoom, Robert I. Pender, Jr. and
Gayle A. Crowell, each an executive officer of
ViewStar, and another Vice President of ViewStar,
have entered into employment agreements with
Digital, to become effective at the Effective Time,
that provide for base salaries, annual bonuses,
grants of stock options and, with respect to Mr.
Pender, Ms. Crowell and the other Vice President of
ViewStar, certain retention incentives. The
employment agreements also provide for certain
benefits upon termination of employment by Digital.
Pursuant to the terms of Restricted Stock
Agreements between ViewStar and certain of its
officers, immediately upon the Effective Time,
one-half of all shares of ViewStar Restricted Stock
that remain unvested will become fully vested, and
ViewStar's right to repurchase such shares will
lapse. See "THE MERGER -- Terms of the Merger
Agreement" and "-- Interests of Certain Persons in
the Merger."
DISSENTERS' RIGHTS......... Holders of ViewStar Common Stock have the right to
dissent from the proposed Merger and receive, in
lieu of Digital Common Shares, cash equal to the
"fair market value" of their shares of ViewStar
Stock, subject to certain conditions, as provided
in the CCC. Holders of Digital Common Shares will
not be entitled to dissenters' rights as a result
of the Merger. See "THE MERGER -- Rights of
Dissenting ViewStar Shareholders."
7
<PAGE> 18
SUMMARY HISTORICAL AND PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The following summary historical financial data of Digital and ViewStar and
the summary pro forma combined financial data have been derived from the
historical consolidated financial statements of Digital and of ViewStar. The pro
forma combined financial data give effect to the Merger by combining the
financial statement data of Digital and of ViewStar for each of the years in the
three-year period ended December 31, 1995, and at and for the nine-month period
ended September 30, 1996, using the pooling-of-interests method of accounting.
The pro forma combined financial data have been presented for illustrative
purposes only and are not necessarily indicative of actual or future operating
results or the financial position that would have occurred or will occur upon
consummation of the Merger. The Digital historical financial data at and for
each of the years in the five-year period ended December 31, 1995 have been
extracted from the audited consolidated financial statements of Digital. The
Digital historical financial data at September 30, 1996 and for the nine-month
periods ended September 30, 1995 and 1996 have been extracted from unaudited
consolidated financial statements of Digital. The ViewStar historical financial
data at December 31, 1994 and 1995 and for each of the years in the three-year
period ended December 31, 1995 have been extracted from the audited consolidated
financial statements of ViewStar. The ViewStar historical financial data at
December 31, 1991, 1992 and 1993, for the years ended December 31, 1991 and
1992, at September 30, 1996 and for the nine-month periods ended September 30,
1995 and 1996 have been extracted from the unaudited consolidated financial
statements of ViewStar. In the opinion of each company's management, the
unaudited consolidated financial statements for its respective company includes
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation. The summary historical financial data presented below
should be read in conjunction with the consolidated financial statements and
notes thereto of both Digital and ViewStar contained herein. See the
Consolidated Financial Statements of Digital, the Consolidated Financial
Statements of ViewStar and "PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
DIGITAL HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT OR FOR
NINE-MONTH
PERIOD ENDED
AT OR FOR YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue......................... $51,761 $56,662 $41,141 $53,278 $68,010 $48,367 $62,501
Operating income (loss)......... 12,819 8,531 (5,473) 2,765 9,309 6,067 4,755
Net earnings (loss)(1).......... (1,190) 5,653 (6,766) 4,780 7,393 4,884 2,584
PER SHARE OPERATING DATA:
Net earnings (loss)(1).......... $ (0.13) $ 0.61 $ (0.72) $ 0.48 $ 0.75 $ 0.50 $ 0.26
Weighted average common and
common equivalent shares
outstanding................... 9,286 9,321 9,366 9,949 9,836 9,814 9,843
CONSOLIDATED BALANCE SHEET DATA:
Working capital................. $32,920 $37,556 $32,755 $42,251 $48,209 $47,088
Total assets.................... 62,516 72,657 67,575 77,940 81,191 76,700
Long-term obligations........... 3,351 7,219 1,067 168 91 30
Shareholders' equity............ 46,078 52,553 48,185 53,777 57,512 60,271
</TABLE>
- ---------------
(1) Net earnings (loss) includes a charge for purchase of in-process research
and development of $4,307,000 for the nine months ended September 30, 1996,
income related to litigation settlement of $3,248,000 for the year ended
December 31, 1994, a charge related to litigation settlement of $4,095,000
for the year ended December 31, 1993, and loss from discontinued operations
of $10,145,000 for the year ended December 31, 1991.
8
<PAGE> 19
VIEWSTAR HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT OR FOR
NINE MONTHS
ENDED
AT OR FOR YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue........................ $12,450 $23,131 $28,096 $22,812 $ 25,238 $17,155 $23,284
Operating income (loss)........ (893) (226) (1,876) (11,122) (7,451) (7,101) 1,068
Net income (loss).............. (841) (412) (2,315) (11,262) (7,956) (7,440) 938
Net income (loss) per share.... $ (2.22) $ (1.01) $ (5.09) $(21.21) $ (11.75) $(11.17) $ 0.18
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (deficit)...... $ 5,119 $ 4,666 $ 5,800 $(3,513) $(10,585) $(2,167)
Total assets................... 9,395 15,199 18,581 17,856 12,380 16,962
Long-term obligations.......... 304 626 857 955 994 4,715
Stockholders' equity
(deficit).................... 5,801 5,546 7,175 (978) (8,829) (4,436)
</TABLE>
DIGITAL AND VIEWSTAR PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT OR FOR
YEAR ENDED DECEMBER 31, NINE MONTHS
--------------------------- ENDED SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue................................... $69,237 $76,090 $93,248 $85,785
Operating income (loss)................... (7,349) (8,357) 1,858 5,823
Net earnings (loss)....................... (9,081) (6,482) (563) 3,522
PER SHARE OPERATING DATA:
Net earnings (loss)....................... $ (0.81) $ (0.55) $ (0.05) $ 0.26
Weighted average common and common
equivalent shares outstanding........... 11,250 11,739 11,693 13,392
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................... $42,421
Total assets.............................. 89,662
Long-term obligations..................... 745
Shareholders' equity...................... 53,335
</TABLE>
9
<PAGE> 20
COMPARATIVE PER SHARE DATA
The following table presents comparative per share data for Digital (on a
historical and pro forma basis) and for ViewStar (on a historical and equivalent
per share basis) based upon the historical financial statements of Digital and
of ViewStar. Neither company has paid any cash dividends. The pro forma combined
information has been presented for illustrative purposes only and is not
necessarily indicative of actual or future operating results or the financial
position that would have occurred or will occur upon consummation of the Merger.
The information presented below should be read in conjunction with the Pro Forma
Condensed Combined Financial Statements included elsewhere in this Proxy
Statement/Prospectus, the separate historical consolidated financial statements
and notes thereto of Digital and the separate historical consolidated financial
statements and notes thereto of ViewStar contained herein.
<TABLE>
<CAPTION>
AT OR FOR
YEAR ENDED DECEMBER 31, NINE MONTHS
------------------------------ ENDED SEPTEMBER 30,
1993 1994 1995 1996
------ ------- ------- -------------------
<S> <C> <C> <C> <C>
DIGITAL:
Historical:
Net earnings (loss) per share........... $(0.72) $ 0.48 $ 0.75 $ 0.26
Book value per share.................... 6.22 6.38
Pro Forma(1):
Net earnings (loss) per share........... (0.81) (0.55) (0.05) 0.26
Book value per share(2)................. 3.98 4.07
VIEWSTAR:
Historical:
Net income (loss) per share(3).......... $(5.09) $(21.21) $(11.75) $ 0.18
Book value per share.................... (2.59) (0.84)
Pro Forma Equivalent(4):
Net earnings (loss) per share........... (0.56) (0.38) (0.03) 0.18
Book value per share(2)................. 2.76 2.82
</TABLE>
- ---------------
(1) The pro forma combined financial data give effect to the Merger by combining
the financial statement data of Digital and of ViewStar for each year in the
three-year period ended December 31, 1995 and at and for the nine-month
period ended September 30, 1996 on the pooling-of-interests method of
accounting.
(2) The pro forma combined book value per share at December 31, 1995 and
September 30, 1996 gives effect to estimated direct transaction costs of
$2,500,000 as if such costs had been incurred as of such dates. The direct
transaction costs are not reflected in the pro forma combined net earnings
(loss) per share.
(3) Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding and dilutive common equivalent shares
from preferred stock outstanding, on an as-if-converted basis, and options
and warrants to purchase common stock using the treasury stock method.
(4) The pro forma equivalent information for ViewStar was calculated by
multiplying the combined entity pro forma combined per share amounts by the
Exchange Ratio of .693 Digital Common Shares applied to each share of
ViewStar Common Stock and each share of ViewStar Common Stock into which
shares of ViewStar Preferred Stock are convertible (based on a conversion
ratio of one share of ViewStar Common Stock for every 3.5 shares of ViewStar
Preferred Stock).
10
<PAGE> 21
RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus,
Digital Shareholders and ViewStar Shareholders should carefully consider the
following in evaluating the Issuance and the Merger. This Proxy
Statement/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 Proxy Statement/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. See "BACKGROUND
OF AND REASONS FOR THE MERGER."
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 revenues 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
11
<PAGE> 22
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 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. See "DIGITAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "VIEWSTAR MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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
12
<PAGE> 23
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, 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
13
<PAGE> 24
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 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. See
"VIEWSTAR -- Products" and "-- Research and Development."
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. See "VIEWSTAR -- Industry" and
"-- Products."
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
14
<PAGE> 25
affect the combined company's revenues and costs and could create significant
foreign currency losses. See "DIGITAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "VIEWSTAR MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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 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 grows 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
15
<PAGE> 26
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 (the "FCC") 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 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
Digital Common Shares in the Merger, and up to approximately 600,000 Digital
Common Shares will be issuable upon the future exercise of the converted
ViewStar Options. In general, the Digital Common Shares issued in the Merger,
other than to ViewStar Affiliates, will be freely tradable following the Merger.
The Digital Common 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 Digital Common Shares 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"). See "THE MERGER -- Shareholders Agreement."
Immediately after the Affiliates Expiration Date, these Digital Common Shares
will be eligible for sale in the public market, subject to compliance with Rules
144 and 145
16
<PAGE> 27
under the Securities Act. The sale of any of the foregoing Digital Common Shares
may cause substantial fluctuations in the price of Digital Common Shares.
Volatility of Stock Price. The market price of the Digital Common Shares is
highly volatile. The market price of the Digital Common Shares 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 Digital
Common Shares. 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 Digital Common Shares. 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
Digital Common Shares.
Antitakeover Effect of Certain Charter and Bylaw Provisions and Washington
Law. Certain provisions of Digital's Restated Articles of Incorporation (the
"Digital Articles of Incorporation") and Digital's Restated Bylaws (the "Digital
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. See
"COMPARATIVE RIGHTS OF VIEWSTAR SHAREHOLDERS AND DIGITAL SHAREHOLDERS." 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
Digital Common Shares. These provisions also could limit the price that
investors might be willing to pay in the future for Digital Common Shares. See
"DESCRIPTION OF DIGITAL CAPITAL STOCK."
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<PAGE> 28
STOCK PRICE INFORMATION
DIGITAL
The Digital Common Shares are quoted on the Nasdaq National Market. The
table below sets forth, for the periods indicated, the high and low sale prices
per Digital Common Share on the Nasdaq National Market as reported in published
financial sources. For current price information, Digital Shareholders and
ViewStar Shareholders are urged to consult publicly available sources.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
Fourth Quarter (through November 22, 1996)................... $22.625 $12.000
Third Quarter................................................ 18.000 12.875
Second Quarter............................................... 23.625 13.875
First Quarter................................................ 16.125 10.688
1995
Fourth Quarter............................................... 13.875 7.875
Third Quarter................................................ 11.750 8.375
Second Quarter............................................... 9.500 6.250
First Quarter................................................ 11.875 6.000
1994
Fourth Quarter............................................... 14.125 6.250
Third Quarter................................................ 7.750 3.500
Second Quarter............................................... 4.125 2.375
First Quarter................................................ 4.250 2.250
</TABLE>
On October 14, 1996, the last full trading day prior to announcement of the
execution of the Merger Agreement, the reported Nasdaq National Market closing
price per Digital Common Share was $22.625 ($15.68 per share of ViewStar Common
Stock based on the Exchange Ratio). On November 22, 1996, the most recent
available date prior to printing this Proxy Statement/Prospectus, the reported
Nasdaq National Market closing price per Digital Common Share was $14.75 ($10.22
per share of ViewStar Common Stock based on the Exchange Ratio). On that date,
there were 208 holders of record. Digital Shareholders and ViewStar Shareholders
are urged to obtain current market quotations for the Digital Common Shares.
No cash dividends were declared or paid by Digital during any of the
periods presented above. Digital presently does not intend to pay any cash
dividends in the foreseeable future, but to retain all earnings for use in its
business operations.
VIEWSTAR
There is no public market for shares of ViewStar Stock. There were 309
holders of record of ViewStar Stock as of November 15, 1996. ViewStar has not
paid its shareholders any cash dividends and does not anticipate paying any
dividends in the foreseeable future.
18
<PAGE> 29
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Pro Forma Condensed Combined Balance Sheet and Statements of
Operations give effect to the Merger on the pooling-of-interests method of
accounting. These Pro Forma Condensed Combined Financial Statements have been
prepared from the historical consolidated financial statements of Digital and of
ViewStar included elsewhere herein and should be read in conjunction therewith.
The pro forma condensed combined financial information is presented for
illustrative purposes only and is not necessarily indicative of operating
results or the financial position that would have actually been reported had the
Merger occurred at the beginning of the periods presented, nor is it necessarily
indicative of future operating results or financial position, and does not
incorporate any benefits from cost savings or synergies of operations of the
combined company.
The Pro Forma Condensed Combined Balance Sheet gives effect to the Merger
as if it had occurred on September 30, 1996, combining the balance sheets of
Digital and of ViewStar as of September 30, 1996. The Pro Forma Condensed
Combined Statements of Operations give effect to the Merger as if it had
occurred on December 31, 1992, combining the results of Digital and of ViewStar
for each of the years in the three-year period ended December 31, 1995 and for
the nine months ended September 30, 1996. There were no pro forma adjustments
required for the Pro Forma Condensed Combined Statements of Operations.
Digital and ViewStar estimate that they will incur direct transaction costs
of approximately $2,500,000 associated with the Merger, which will be charged to
operations upon consummation of the Merger. In addition, it is expected that
following the Merger, Digital will incur additional charges to operations to
reflect costs associated with integrating the two companies. However, these
integration costs are currently not reasonably estimable. There can be no
assurance that Digital will not incur additional charges to reflect costs
associated with the Merger or that management will be successful in its efforts
to integrate the operations of the two companies.
19
<PAGE> 30
PRO FORMA
CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- -------------------------
DIGITAL VIEWSTAR ADJUSTMENTS COMBINED
------- -------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents and short-term
investments................................ $30,043 $ 5,935 $35,978
Accounts receivable, net...................... 24,420 7,947 32,367
Current portion of contracts receivable....... 2,064 -- 2,064
Inventories................................... 2,175 -- 2,175
Prepaid expenses and other current assets..... 3,623 634 4,257
------- ------- -------
Total current assets.................. 62,325 14,516 76,841
Property and equipment, net..................... 6,019 1,991 8,010
Contracts receivable, net....................... 946 -- 946
Capitalized software costs, net................. 2,141 -- 2,141
Other assets, net............................... 5,269 455 $(4,000)(a) 1,724
------- ------- ------- -------
$76,700 $ 16,962 $(4,000) $89,662
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
obligations................................ $ 81 $ 907 $ 988
Accounts payable and accrued expenses......... 11,461 6,400 $ 2,500(c) 20,361
Customer deposits and unearned revenue........ 3,695 9,376 13,071
------- ------- ------- -------
Total current liabilities............. 15,237 16,683 2,500 34,420
Deferred income taxes........................... 739 -- 739
Long-term obligations and unearned revenue, less
current installments.......................... 453 4,715 (4,000)(a) 1,168
Shareholders' equity (deficit):
Preferred stock............................... -- 48 (48)(b) --
Common stock.................................. 94 39 (2)(b) 131
Additional paid-in capital.................... 32,859 27,399 (341)(b) 59,878
Deferred stock option compensation expense.... (8) -- (8 )
Cumulative translation adjustment............. (270) -- (270 )
Notes receivable from shareholders............ -- (391) 391(b) --
Retained earnings (accumulated deficit)....... 27,596 (31,531) (2,500)(c) (6,435 )
------- ------- ------- -------
Total shareholders' equity
(deficit)........................... 60,271 (4,436) (2,500) 53,335
------- ------- ------- -------
$76,700 $ 16,962 $(4,000) $89,662
======= ======= ======= =======
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
20
<PAGE> 31
PRO FORMA
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- ------- ------- -------------
<S> <C> <C> <C> <C>
Revenues....................................... $ 69,237 $76,090 $93,248 $85,785
Cost of revenues............................... 26,579 30,732 35,417 30,350
------- ------- ------- -------
Gross profit......................... 42,658 45,358 57,831 55,435
Operating expenses:
Selling, general and administrative.......... 38,706 41,478 41,179 33,210
Research and development..................... 11,301 12,159 13,054 11,390
Nonrecurring charges......................... -- 78 1,740 5,012
------- ------- ------- -------
Total operating expenses............. 50,007 53,715 55,973 49,612
------- ------- ------- -------
Income (loss) from operations........ (7,349) (8,357) 1,858 5,823
Other income (expense), net.................... (4,357) 4,447 1,730 1,190
------- ------- ------- -------
Income (loss) before income taxes.... (11,706) (3,910) 3,588 7,013
Income tax expense (benefit)................... (2,625) 2,572 4,151 3,491
------- ------- ------- -------
Net earnings (loss).................. $ (9,081) $(6,482) $ (563) $ 3,522
======= ======= ======= =======
Net earnings (loss) per share.................. $ (0.81) $ (0.55) $ (0.05) $ 0.26
======= ======= ======= =======
Shares used in per share calculations.......... 11,250 11,739 11,693 13,392
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
21
<PAGE> 32
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) As of September 30, 1996, Digital had a note receivable from ViewStar in the
amount of $4,000,000. The Pro Forma Condensed Combined Balance Sheet gives
effect to the elimination of this intercompany balance.
(b) Adjustments to record the Merger under pooling-of-interests accounting and
reflect Digital Common Shares to be issued in connection with the Merger.
(c) Total direct transaction costs to be incurred by Digital and ViewStar in
connection with the Merger are estimated to be approximately $2,500,000.
These costs relate primarily to legal, accounting, investment advisory and
printing services and will be charged to operations upon consummation of the
Merger. It is expected that, following the Merger, Digital will incur
additional charges to operations to reflect costs associated with
integrating the two companies. However, these integration costs are
currently not reasonably estimable. The Pro Forma Condensed Combined Balance
Sheet gives effect to the estimated direct transaction costs as if such
costs had been incurred as of September 30, 1996. The direct transaction
costs are not reflected in the Pro Forma Condensed Combined Statements of
Operations.
(d) The following is a summary of the historical results of operations of
Digital and ViewStar and their pro forma combined amounts to reflect the
Merger as if it were effected for all periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Digital............................. $41,141 $53,278 $68,010 $62,501
ViewStar............................ 28,096 22,812 25,238 23,284
------- ------- ------- -------
$69,237 $76,090 $93,248 $85,785
======= ======= ======= =======
Cost of revenues:
Digital............................. $17,930 $21,975 $26,922 $23,345
ViewStar............................ 8,649 8,757 8,495 7,005
------- ------- ------- -------
$26,579 $30,732 $35,417 $30,350
======= ======= ======= =======
Selling, general and administrative:
Digital............................. $23,197 $22,996 $24,297 $21,661
ViewStar............................ 15,509 18,482 16,882 11,549
------- ------- ------- -------
$38,706 $41,478 $41,179 $33,210
======= ======= ======= =======
Research and development:
Digital............................. $ 5,487 $ 5,542 $ 7,482 $ 7,728
ViewStar............................ 5,814 6,617 5,572 3,662
------- ------- ------- -------
$11,301 $12,159 $13,054 $11,390
======= ======= ======= =======
Nonrecurring charges:
Digital............................. $ -- $ -- $ -- $ 5,012
ViewStar............................ -- 78 1,740 --
------- ------- ------- -------
$ -- $ 78 $ 1,740 $ 5,012
======= ======= ======= =======
</TABLE>
22
<PAGE> 33
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Other income (expense), net:
Digital............................... $(4,037) $4,532 $2,186 $ 1,309
ViewStar.............................. (320) (85) (456) (119)
------- ------ ------ ------
$(4,357) $4,447 $1,730 $ 1,190
======= ====== ====== ======
Income tax expense (benefit):
Digital............................... $(2,744) $2,517 $4,102 $ 3,480
ViewStar.............................. 119 55 49 11
------- ------ ------ ------
$(2,625) $2,572 $4,151 $ 3,491
======= ====== ====== ======
</TABLE>
Nonrecurring charges include $1,740,000 of costs associated with reductions
in headcount and the termination of a proposed merger incurred in 1995 by
ViewStar, and the purchase of in-process research and development of $4,307,000
and the write-off of capitalized software costs of $705,000 incurred in 1996 by
Digital.
Other income (expense), net for Digital includes a charge related to
litigation settlement of $4,095,000 incurred in 1993 and income related to
litigation settlement of $3,248,000 recognized in 1994.
(e) The following table reconciles the numbers of shares used in the pro forma
per share calculations to the numbers set forth in Digital's historical
statements of operations:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Shares used in per share calculation
(in thousands, except Exchange Ratio):
Historical - Digital................................... 9,366 9,949 9,836 9,843
Options to purchase common stock (1)................... -- (319) (459) --
------- ------- ------- -------
9,366 9,630 9,377 9,843
------- ------- ------- -------
Historical -- ViewStar(2).............................. 2,718 3,043 3,342 5,121
Exchange Ratio......................................... 0.693 0.693 0.693 0.693
------- ------- ------- -------
1,884 2,109 2,316 3,549
------- ------- ------- -------
Pro forma combined..................................... 11,250 11,739 11,693 13,392
======= ======= ======= =======
</TABLE>
- ---------------
(1) Adjustment to exclude common stock equivalents arising from options to
purchase Digital Common Shares during periods when they would be
antidilutive on a pro forma combined basis.
(2) Includes the dilutive effect of preferred shares outstanding on an
as-if-converted basis and the 1-for-3.5 reverse split of the ViewStar Common
Stock in 1996.
23
<PAGE> 34
APPROVAL OF SHAREHOLDERS
GENERAL
This Proxy Statement/Prospectus is being furnished to Digital Shareholders
in connection with the solicitation of proxies by the Digital Board for use at
the Digital Special Meeting to be held on Friday, December 20, 1996, at
Digital's offices located at 6464 185th Avenue N.E., Redmond, Washington,
commencing at 9:00 a.m., local time, and at any adjournments or postponements
thereof.
This Proxy Statement/Prospectus also is being furnished to ViewStar
Shareholders in connection with the ViewStar Consent Solicitation.
This Proxy Statement/Prospectus and the accompanying form of proxy or
consent, as applicable, are first being mailed to shareholders of Digital and
ViewStar on or about November 27, 1996.
MATTERS TO BE CONSIDERED AT THE DIGITAL SPECIAL MEETING
At the Digital Special Meeting, Digital Shareholders of record as of the
close of business on November 19, 1996, will consider and vote upon (i) the
issuance of Digital Common Shares in exchange for shares of ViewStar Stock and
upon the exercise of currently outstanding options and a warrant to purchase
ViewStar Stock, which options and warrant are expected to be assumed or
converted into options and a warrant to purchase Digital Common Shares, in
connection with the Merger Agreement, (ii) the adoption of the Digital Stock
Incentive Plan, and (iii) such other business as properly may come before the
Digital Special Meeting.
On October 9, 1996, subject to Digital Shareholder approval, the Digital
Board adopted and approved the Digital Stock Incentive Plan to provide for
issuance of an aggregate maximum of 1,500,000 Digital Common Shares, which are
intended to cover (i) the issuance of up to 600,000 Digital Common Shares upon
exercise of Replacement Options, (ii) the issuance of approximately 300,000
Digital Common Shares upon exercise of options to be granted to officers of
ViewStar, (iii) the issuance of approximately 300,000 Digital Common Shares to
replace shares that are reserved for issuance under the 1987 Plan, which
terminates in December 1996, and (iv) additional Digital Common Shares to
provide for future grants of stock options and for issuance upon employee stock
purchases. The Digital Board believes that the adoption of the Digital Stock
Incentive Plan will further its objective of forging a closer link between the
compensation of key employees, consultants and directors and Digital's
longer-term financial performance and to better align the interests of
employees, nonemployee directors and shareholders by making more Digital Common
Shares available for the grant of options and for sales to employees under a
stock purchase plan. In addition, the terms of the Digital Stock Incentive Plan
are intended to conform to the exemption for performance-based compensation
under Section 162(m) of the Code, which otherwise imposes a limit on the
deductibility for federal income tax purposes of compensation paid to certain
executive officers. The Digital Board also believes that the availability of an
adequate number of shares for issuance under the Digital Stock Incentive Plan is
necessary in order to carry out the plan's purpose of attracting, retaining and
motivating key employees and directors essential to the success of Digital.
The Digital Board has approved the Merger Agreement and the Issuance and
recommends that Digital Shareholders vote "FOR" approval of the Issuance and
"FOR" adoption of the Digital Stock Incentive Plan. See "BACKGROUND OF AND
REASONS FOR THE MERGER" and "DIGITAL SHAREHOLDER APPROVAL OF DIGITAL STOCK
INCENTIVE PLAN."
VIEWSTAR CONSENT SOLICITATION
ViewStar Shareholders as of the close of business on November 25, 1996 are
asked to consider and grant written consent to the Merger Agreement. The Merger
Agreement provides that, upon the terms and subject to the conditions thereof,
(i) Merger Sub will merge into ViewStar, (ii) each share of ViewStar Common
Stock issued and outstanding immediately prior to the Merger (except any
Dissenting Shares) will be converted into the right to receive .693 Digital
Common Shares, (iii) each share of ViewStar Preferred Stock issued and
outstanding immediately prior to the Merger (except any Dissenting Shares) will
be converted into
24
<PAGE> 35
the right to receive .693 Digital Common Shares for each share of ViewStar
Common Stock into which such share of ViewStar Preferred Stock is convertible
(based on a conversion ratio of one share of ViewStar Common Stock for every 3.5
shares of ViewStar Preferred Stock), and (iv) each outstanding warrant to
purchase shares of ViewStar Stock (other than a warrant held by Comdisco, Inc.,
which will convert into a warrant to purchase Digital Common Shares) that is not
exercised prior to the Effective Time will terminate in accordance with its
terms. The Merger Agreement does not contain any provisions for adjustment of
the Exchange Ratio based on fluctuations in the price of Digital Common Shares.
If the Digital Shareholders adopt the Digital Stock Incentive Plan, each
outstanding ViewStar Option will convert into a Replacement Option to purchase
that number of Digital Common Shares that is equal to the product of the
Exchange Ratio and the number of shares of ViewStar Common Stock subject to such
ViewStar Option. If the Digital Shareholders do not adopt the Digital Stock
Incentive Plan, each ViewStar Option will be assumed by Digital and treated as
an option to purchase Digital Common Shares. See "THE MERGER -- Terms of the
Merger Agreement." No fractional Digital Common Shares will be issued in the
Merger. In lieu of any such fractional shares, each holder of ViewStar Stock who
otherwise would be entitled to receive a fractional Digital Common Share
pursuant to the Merger will be paid an amount in cash, without interest, equal
to the last reported sale price of one Digital Common Share as reported by the
Nasdaq National Market on the last business day prior to the Effective Time
multiplied by such fraction. See "THE MERGER -- Terms of the Merger
Agreement -- Fractional Shares."
Holders of ViewStar Common Stock will be entitled to dissenters' rights as
a result of the Merger. See "THE MERGER -- Rights of Dissenting ViewStar
Shareholders."
The ViewStar Board has approved the Merger Agreement and recommends that
ViewStar Shareholders approve the Merger Agreement. See "BACKGROUND OF AND
REASONS FOR THE MERGER."
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
Digital. The close of business on November 19, 1996 has been fixed as the
Digital Record Date. As of the Digital Record Date, there were 9,441,805 Digital
Common Shares outstanding and entitled to vote. The holders of record on the
Digital Record Date of Digital Common Shares are entitled to one vote per
Digital Common Share. The presence in person or by proxy of the holders of
shares representing a majority of the voting power of the Digital Common Shares
entitled to vote is necessary to constitute a quorum for the transaction of
business at the Digital Special Meeting. Under Rule 4460(i) of the National
Association of Securities Dealers, Inc. and the Digital Articles of
Incorporation and the Digital Bylaws, the affirmative vote of holders of shares
representing a majority of the outstanding voting power of the Digital Common
Shares present in person or represented by proxy at the Digital Special Meeting
is required for approval of the Issuance and for adoption of the Digital Stock
Incentive Plan.
Abstentions from voting and broker nonvotes are not considered present at
the Digital Special Meeting and consequently will have no effect on the approval
of the Issuance or adoption of the Digital Stock Incentive Plan.
ViewStar. The close of business on November 25, 1996 has been fixed as the
ViewStar Record Date. As of the ViewStar Record Date, there were 4,007,286
shares of ViewStar Common Stock outstanding and entitled to vote and 4,752,474
shares of ViewStar Preferred Stock outstanding and entitled to vote. The holders
of record on the ViewStar Record Date of shares of ViewStar Stock are entitled
to one vote per share of ViewStar Stock. The consent of holders of shares
representing a majority of the outstanding voting power of each class of
ViewStar Stock is required for approval of the Merger Agreement.
PROXIES/CONSENTS
Digital. Digital Common Shares represented by properly executed proxies
received at or prior to the Digital Special Meeting that have not been revoked
will be voted at the Digital Special Meeting in accordance with the instructions
contained therein. Digital Common Shares represented by properly executed
proxies for which no instruction is given will be voted "FOR" approval of the
Issuance and "FOR" adoption of the Digital Stock Incentive Plan. Digital
Shareholders are requested to complete, sign, date and return promptly the
25
<PAGE> 36
enclosed proxy card in the postage-prepaid envelope provided for this purpose to
ensure that their Digital Common Shares are voted. A Digital Shareholder may
revoke a proxy by submitting at any time prior to the vote on the Issuance or
the Digital Stock Incentive Plan a later-dated proxy with respect to the same
shares, by delivering written notice of revocation to the Secretary of Digital
at any time prior to such vote or by attending the Digital Special Meeting and
voting in person. Mere attendance at the Digital Special Meeting will not in and
of itself revoke a proxy.
If the Digital Special Meeting is postponed or adjourned for any reason, at
any subsequent reconvening of the Digital Special Meeting all proxies (except
for any proxies that have theretofore effectively been revoked or withdrawn)
will be voted in the same manner as such proxies would have been voted at the
original convening of the Digital Special Meeting, notwithstanding that such
proxies may have been effectively voted on the same or any other matter at a
previous meeting.
ViewStar. ViewStar Shareholders are requested to complete, sign, date and
return promptly the enclosed form of written consent in the postage-prepaid
envelope provided for this purpose to ensure that their shares of ViewStar Stock
are voted. A ViewStar Shareholder may revoke a consent by notice given to the
Secretary of ViewStar prior to such time as consents sufficient to approve the
Merger Agreement have been received.
Proxy/Consent Solicitation. Each of Digital and ViewStar will bear the cost
of soliciting proxies or consents, as applicable, from its respective
shareholders. In addition to solicitation by mail, directors, officers and
employees of Digital or ViewStar may solicit proxies/consents by telephone,
telegram or otherwise. Such directors, officers and employees of Digital or
ViewStar will not receive additional compensation for such solicitation but may
be reimbursed for out-of-pocket expenses incurred in connection therewith.
Brokerage firms, fiduciaries and other custodians who forward soliciting
material to the beneficial owners of Digital Common Shares held of record by
them will be reimbursed for their reasonable expenses incurred in forwarding
such material.
26
<PAGE> 37
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND
Digital's core business has historically focused on products and services
for call management systems which integrate computers, telephony and other
computer-based communications. Increasingly, however, its customers have sought
to combine Digital's advanced telephony and call management technologies with
enterprise data management and business process applications to address their
overall "customer management" needs. Digital has responded to this trend by
partnering with its customers to produce applications that integrate call flow
into the organization's broader workflow management processes. It has also
sought to partner with other companies to develop and market additional products
and applications that would address the broad enterprise customer management
market.
In early 1995, Digital became aware of ViewStar's enterprise workflow and
business process automation software and concluded that, in light of their
complementary products, ViewStar could be a good candidate for a co-marketing or
value-added reseller relationship.
In early August 1995, an executive of Digital contacted an executive of
ViewStar to determine ViewStar's interest in a co-marketing relationship. On
August 9, the President and Chief Executive Officer of Digital met with
ViewStar's President and Chief Executive Officer to discuss various forms of
strategic alliance, focusing on joint marketing efforts but ranging, in very
general terms, to the possibility of a merger with Digital. In August, however,
the ViewStar Board decided to enter into merger negotiations with Caere
Corporation ("Caere"). Discussions between ViewStar and Digital terminated in
mid-September.
In October 1995, ViewStar entered into a merger agreement with Caere, which
agreement was terminated in late January 1996. Upon learning of the termination
of the Caere merger in February 1996, Digital's Chief Financial Officer John J.
Flavio initiated discussions with Kamran Kheirolomoom, the President and Chief
Executive Officer of ViewStar, regarding a possible marketing alliance with
Digital. On April 26, 1996, Mr. Kheirolomoom and Steve Russell, the Vice
President of Product Planning of ViewStar, met with Patrick Howard, Digital's
President and Chief Executive Officer, Mr. Flavio, Thomas R. Clark, Executive
Vice President, and Tom Edwards, Vice President, of Digital, to discuss the two
companies' products and capabilities and the mutual benefits of a marketing
alliance and joint product development.
In late May 1996, ViewStar began discussions with investment banking firms
regarding a possible initial public offering (an "IPO") of ViewStar Common
Stock. ViewStar and Digital met periodically during May and July to discuss a
possible marketing alliance and joint product development.
On July 15, 1996, Mr. Howard met with Mr. Kheirolomoom and discussed in
general terms the possibilities for some form of marketing alliance and joint
product development that included the possibility of an investment in ViewStar
by Digital. ViewStar continued with its IPO plans and, accordingly, filed a
registration statement with the Commission on August 5, 1996.
During August 1996, representatives of Digital and of ViewStar held several
other meetings at which ViewStar's products were presented and the parties
continued to discuss both an alliance and an investment by Digital. On August 9,
1996, ViewStar provided Digital with a nonbinding term sheet proposing an equity
investment by Digital in ViewStar of $3 million to $5 million at a per share
price related to the estimated IPO price. Mr. Flavio then requested that Dain
Bosworth assist Digital in evaluating the potential investment in, and valuation
of, ViewStar and subsequently discussed the possible combination of Digital and
ViewStar with Harvey N. Gillis, the chair of Digital's Audit Committee.
On August 22, 1996, Mr. Howard sent Mr. Kheirolomoom a nonbinding letter
outlining the terms of a possible merger in which ViewStar shareholders would
receive consideration valued at approximately $55 million consisting of cash and
Digital Common Shares, and offering to provide $4 million of interim financing
to ViewStar, all subject to a due diligence investigation.
On August 23, 1996, the ViewStar Board met and concluded that ViewStar
should not proceed with merger negotiations because the proposed total
consideration offered to ViewStar Shareholders was not comparable to that which
could be realized through the IPO.
27
<PAGE> 38
On August 30, after the exchange of additional Digital and ViewStar
financial information, Messrs. Howard and Flavio and Steve L. Adams, the Senior
Vice President, Marketing and Business Development of Digital, met with Mr.
Kheirolomoom and Robert I. Pender, Jr., Chief Financial Officer of ViewStar, to
consider revising Digital's proposal, and to discuss related interim financing
arrangements and the desire of both parties to proceed with joint marketing and
product development efforts. They also discussed the conditions under which
ViewStar would proceed with negotiations for a merger.
On September 1, 1996, Mr. Howard sent a memorandum to the Digital Board
outlining Digital's and ViewStar's shared vision of the market opportunities for
customer management software applications.
On September 4, 1996, Messrs. Kheirolomoom and Pender gave a presentation
to Messrs. Flavio and Adams and other Digital representatives describing
ViewStar's perspective of the customer management market. Mr. Howard then sent a
memorandum to the Digital Board outlining a proposal for a possible merger with
ViewStar. During the week that followed, Messrs. Flavio and Howard individually
provided status reports on the discussions with ViewStar to members of the
Digital Board.
On September 15, 1996, Messrs. Howard, Flavio, Adams, Kheirolomoom and
Pender held further discussions regarding ViewStar's business and prospects,
Digital's merger proposal and a proposed timetable for negotiation of a merger.
The parties also negotiated the final terms of an agreement providing for a loan
by Digital to ViewStar of $4,000,000 (the "Loan Agreement") and a Joint
Marketing and Product Development Agreement (the "Joint Marketing Agreement")
under which the parties would begin to implement a product development and joint
marketing strategy.
As a result of these ongoing discussions, Digital modified its proposal in
a letter dated September 19, 1996 to Mr. Kheirolomoom to reflect a merger in
which ViewStar Shareholders would receive Digital Common Shares with an
approximate total value of $70 million. The revised proposal contemplated the
setting of a fixed exchange ratio.
At a meeting on September 19, 1996, Mr. Howard made a presentation to the
ViewStar Board on Digital's business and potential synergies between the
companies' products. The ViewStar Board then discussed and approved the Loan
Agreement and the Joint Marketing Agreement and authorized ViewStar management
to initiate a due diligence investigation and enter into negotiations with
Digital on the terms generally outlined in Digital's proposal. Digital and
ViewStar then executed the Loan Agreement and a confidentiality agreement
pursuant to which the parties agreed not to publicly disclose any information
regarding the negotiation of the proposed merger.
Immediately thereafter, executives of Digital and ViewStar and their
counsel proceeded to prepare and negotiate the terms of definitive agreements in
accordance with the preliminary understandings between the parties. Digital
formally engaged Dain Bosworth to act as its financial advisor in connection
with the Merger. Between September 20 and October 14, 1996, both parties
conducted legal and financial due diligence investigations of each other's
businesses and continued their negotiations of the merger terms.
On October 2, 1996, the Digital Board met with management and its legal and
financial advisors to consider the merger proposal. At the October 2 meeting,
representatives of Dain Bosworth reviewed preliminary financial information
regarding Digital, ViewStar and the proposed transaction. The Digital Board
discussed the background of the negotiations with ViewStar, the nature of
ViewStar's products, ViewStar's financial results, ViewStar's desire to limit
the circumstances under which a merger agreement could be terminated, Digital's
financial results, the proposed structure of the transaction, the fact that it
was intended to qualify for pooling-of-interests accounting treatment and to
constitute a tax-free reorganization under the Code, a preliminary timetable for
the transaction and the desire of both parties to complete the transaction as
promptly as possible.
On October 8, the ViewStar Board held a meeting at which the terms of the
proposed Merger Agreement were discussed with management, ViewStar's legal
advisors and representatives of the investment banking firms of Hambrecht &
Quist LLC and Cowen & Company, ViewStar's financial advisors. The financial
advisors discussed various aspects of the Merger and provided certain
statistical compilations. The financial advisors were not retained to render
opinions concerning the fairness of the terms of the Merger, nor did they
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<PAGE> 39
participate in the negotiation of such terms. The ViewStar Board discussed the
financial terms of the Merger, the potential benefits to ViewStar and the
ViewStar Shareholders from the Merger, the nature of Digital's products,
ViewStar's financial results, the proposed structure of the transaction, the
fact that it was intended to qualify for pooling-of-interests accounting
treatment and to constitute a tax-free reorganization under the Code and a
preliminary timetable for the transaction. Following these discussions, the
ViewStar Board approved the Merger Agreement and the ancillary agreements.
On October 9, the Digital Board met telephonically with Digital's
management and financial and legal advisors, reviewed the intervening
negotiations and the terms of the draft Merger Agreement and received in oral
form the Dain Opinion described under "BACKGROUND OF AND REASONS FOR THE
MERGER -- Opinion of Digital's Financial Advisor." Following such discussion,
the Digital Board unanimously approved the Merger, subject to further
negotiation of the final terms of the proposed Merger Agreement and ancillary
agreements in accordance with guidance given by the Digital Board. Management of
Digital resolved the remaining open terms in accordance with such guidance
between October 9 and October 14, 1996.
THE MERGER AGREEMENT WAS EXECUTED ON OCTOBER 14, 1996. A COPY OF THE MERGER
AGREEMENT IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX I.
REASONS FOR THE MERGER
Joint Reasons for the Merger
The Digital Board and the ViewStar Board each considered that the combined
company would have the potential for competitive advantage and improved
financial performance. The Digital Board and the ViewStar Board also considered
several significant changes in the information technology industry. These
changes include (i) the evolution of the traditional call center into a full
function customer service center providing an integrated point for customer
interaction and service; (ii) the focus on improved customer service as the
driving factor in enterprise business process automation decisions; (iii) the
growth of Microsoft Windows NT client-server technology; and (iv) the increasing
sensitivity of corporate customers to the size and financial strength of vendors
of mission-critical applications.
Digital and ViewStar have identified a number of potential mutual benefits
of the Merger that they believe will contribute to the success of the combined
company. These potential benefits include:
- TECHNICAL EXPERTISE IN BOTH THE CALL CENTER AND DOCUMENT WORKFLOW
ENVIRONMENTS. The Boards of Directors of Digital and ViewStar believe
that Digital's call center expertise, combined with the document workflow
technology of ViewStar, will enable the combined company to provide the
integrated "customer management" solutions demanded by corporate
customers. These solutions will also position the combined company to
provide software applications that will enhance the increased growth of
the Windows NT platform.
- IMPROVED COMPETITIVE POSITION. The Boards of Directors of Digital and
ViewStar believe that increased revenues and resources will allow the
combined company to meet increasing competitive challenges from larger
companies, accelerate technological innovation and promote greater
customer and market awareness.
- LEVERAGING THE COMBINED CUSTOMER BASE. The Boards of Directors of Digital
and ViewStar believe that the combined customer base will afford the
combined company new opportunities to sell one another's products and
allow broader access to the growing market for enterprise customer
management solutions.
- EMPLOYEE RECRUITMENT AND RETENTION. The Boards of Directors of Digital
and ViewStar believe that higher visibility, increased financial strength
and greater career opportunities will allow the combined company to
attract and retain a larger pool of appropriately skilled and trained
employees.
- GREATER ECONOMIES OF SCALE IN INTERNATIONAL MARKETS. The Boards of
Directors of Digital and ViewStar believe that the greater international
sales volume of the combined company will allow the
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<PAGE> 40
considerable start-up and support costs involved in entering new foreign
markets, which will be shared across a broader product range.
- COMPLEMENTARY SALES CHANNEL STRENGTHS. The Boards of Directors of Digital
and ViewStar believe that Digital's historical distribution through
direct and value-added reseller channels, combined with ViewStar's
distributors, system integrators and direct sales channels, will provide
the combined company comprehensive distribution for increased market
coverage.
In addition to the joint reasons discussed above, the Board of Directors of
each company also considered separate reasons for approving the Issuance and the
Merger, which are summarized below.
Digital's Reasons for the Merger
The Digital Board believes that the following are additional reasons for
the Digital Shareholders to vote in favor of the Issuance:
- SOFTWARE APPLICATIONS TRANSITION. The Digital Board believes that
ViewStar products and technology will allow Digital to accelerate the
move from a computer telephony integration ("CTI")-based systems company
to a software applications company focused on customer management. The
Digital Board further believes that the combined company will be in a
position to offer NT-based products and benefit from the anticipated
adoption of Microsoft Windows NT as the standard platform for enterprise
applications.
- DIVERSIFICATION OF PRODUCTS. The Digital Board believes that ViewStar's
complementary products and technology will enable Digital to expand and
diversify its product offerings, thereby creating a more comprehensive
and complete software applications solution for its existing customer
base.
- EXPANSION OF DIGITAL'S MARKET. The Digital Board believes that ViewStar
products will enable Digital to establish a significant presence in the
customer management market by combining an integrated point of contact
for customer interaction with products that combine the telephony
(callflow) functionality Digital provides with the data management and
business process applications (workflow) capability that ViewStar
provides.
In the course of its deliberations, the Digital Board reviewed with
Digital's management a number of other factors relevant to the Merger. In
particular, the Digital Board considered, among other things: (i) information
concerning Digital's and ViewStar's respective businesses, prospects, financial
performances, financial conditions, operations and product development
schedules; (ii) the market price of the Digital Common Shares in the recent
past; (iii) multiples paid in other selected software merger and acquisition
transactions; (iv) an analysis of the respective contributions to revenues,
operating profits and net profits of the two companies; (v) the compatibility of
the managements of Digital and ViewStar; (vi) Digital's strategic objectives for
participating in the enterprise client-server software market; (vii) a financial
presentation by Dain Bosworth, including the Dain Opinion described under
"BACKGROUND OF AND REASONS FOR THE MERGER -- Opinion of Digital's Financial
Advisor"; (viii) reports from management and legal advisors on the results of
Digital's due diligence investigation of ViewStar; (ix) the terms of the Merger
Agreement, including the termination fees payable to Digital under certain
circumstances, ViewStar's agreement not to solicit other acquisition
transactions and the provision for an adjustment in the Share Consideration to
compensate for certain breaches of the Merger Agreement; and (x) the execution
of employment agreements with certain key employees to be effective upon the
Effective Time.
DISADVANTAGES OF THE MERGER TO DIGITAL. The Digital Board also considered
a variety of potentially negative factors in its deliberations concerning the
Merger. The following, in the Digital Board's view, were the actual or potential
material disadvantages of the Merger to Digital and the Digital Shareholders:
(i) the significant losses incurred by ViewStar as recently as the first half of
1995; (ii) the adverse revenue trend experienced by ViewStar during 1994 through
the first quarter of 1995; (iii) the possible dilutive effect of the issuance of
Digital Common Shares in the Merger (see "BACKGROUND OF AND REASONS FOR THE
MERGER -- Opinion of Digital's Financial Advisor -- Pro Forma Merger Analysis");
(iv) the risk that the public market price of the Digital Common Shares might be
adversely affected by announcement
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<PAGE> 41
of the Merger; (v) the charges expected to be incurred in connection with the
Merger, primarily in the quarter in which the Merger is completed, including the
direct transaction costs to be reflected in a charge estimated to be
approximately $2.5 million and additional changes to operations which are not
currently reasonably estimable (see "PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS"); (vi) the risk that the combined company's ability to increase or
maintain revenues might be diminished by intensified competition among suppliers
of similar or related products; (vii) the risk that, despite the efforts of the
combined company, the services of key persons might not be retained; (viii) the
risk that other benefits sought to be obtained by the Merger might not be
obtained; and (ix) other risks described under "RISK FACTORS."
In view of the wide variety of factors, both positive and negative, that it
considered, the Digital Board did not find it practical to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered. After taking into consideration all of the factors set forth above,
the Digital Board determined that the Merger was in the best interests of
Digital and the Digital Shareholders. ACCORDINGLY, THE DIGITAL BOARD HAS
APPROVED THE MERGER AGREEMENT AND THE ISSUANCE AND RECOMMENDS THAT THE DIGITAL
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE ISSUANCE.
ViewStar's Reasons for the Merger
The ViewStar Board believes that the proposed Merger would afford ViewStar
the following additional advantages and a greater opportunity to accomplish its
strategic objectives:
- CAPITALIZE ON ENTERPRISE CUSTOMER MANAGEMENT SOLUTIONS. The ViewStar
Board believes that the combination will allow ViewStar to capitalize on
the growth in the customer interaction and customer service interaction
process automation markets.
- COMPLEMENTARY CAPABILITIES. The ViewStar Board believes that Digital's
complementary capabilities and advanced telephony technology will
complement ViewStar's current enterprise applications software and
improve its ability to provide a comprehensive customer management
solution to its customers.
- IMPROVED MARKET VISIBILITY. As a result of the financial strength and
stability of the combined company, the ViewStar Board believes that
ViewStar will be more visible in the marketplace and more likely to be
viewed as having the size and financial strength required to be an
enterprise-wide provider of mission-critical application solutions to
corporate customers.
- EMPLOYEE RECRUITMENT AND RETENTION. The ViewStar Board believes that, in
addition to greater stability, a publicly traded company has greater
ability to provide financial incentives in order to recruit and retain
employees.
- SHAREHOLDER LIQUIDITY. The ViewStar Board believes that the Merger will
provide ViewStar Shareholders with the ability to convert a currently
illiquid investment into a liquid one with the opportunity to realize a
future return based on the potential appreciation of the Digital Common
Shares after the Merger.
The ViewStar Board believes that it is in the best interests of the
ViewStar Shareholders to obtain marketable securities that may be either held or
sold as determined by each individual shareholder. In this regard, the ViewStar
Board considered alternative means to provide liquidity for ViewStar
Shareholders, including proceeding with the IPO of ViewStar Common Stock. The
ViewStar Board concluded that the benefits of the Merger provide ViewStar
Shareholders with a better opportunity to realize the full value of their
investment.
In evaluating the proposed Merger, the ViewStar Board considered and
discussed a wide variety of factors, including the terms of the Merger
Agreement, Digital's business and the potential synergies with ViewStar's
business, the recent price range of the Digital Common Shares, the management of
the combined company and the requirement of a tax-free transaction. The ViewStar
Board also discussed the Merger Agreement in light of its fairness to ViewStar's
shareholders, including the limited circumstances under which the Merger
Agreement could be terminated and the termination fee payable to ViewStar or by
ViewStar under certain circumstances. As part of the evaluation process, the
ViewStar Board reviewed information about the business, operations and prospects
of both ViewStar and Digital, as well as the combined company.
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<PAGE> 42
DISADVANTAGES OF THE MERGER TO VIEWSTAR. The ViewStar Board also
considered a variety of potentially negative factors in its deliberations
concerning the Merger. The following, in the ViewStar Board's view, were the
actual or potential material disadvantages of the Merger to ViewStar and the
ViewStar Shareholders: (i) the potential disruption of ViewStar's business that
might result following the announcement of the Merger and during the combination
of operations of the two companies; (ii) the effects of the public announcement
of the Merger on ViewStar's ability to attract and retain key management,
marketing and technical personnel; (iii) the risk that benefits sought to be
obtained by the Merger might not be obtained; (iv) the possibility that the
Merger might not be consummated and the difficulties in proceeding with an IPO
in such event; and (v) other risks described under "RISK FACTORS."
In view of the wide variety of factors, both positive and negative, that it
considered, the ViewStar Board did not find it practical to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered. After taking into consideration all of the factors set forth above,
the ViewStar Board determined that the Merger was in the best interests of
ViewStar and its shareholders. ACCORDINGLY, THE VIEWSTAR BOARD HAS APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT THE VIEWSTAR SHAREHOLDERS GIVE THEIR
CONSENTS TO APPROVE THE MERGER AGREEMENT.
OPINION OF DIGITAL'S FINANCIAL ADVISOR
Digital retained Dain Bosworth on September 20, 1996 to act as Digital's
financial advisor in connection with the Merger, including rendering its opinion
to the Digital Board as to the fairness, from a financial point of view, to the
Digital Shareholders of the consideration to be paid by Digital in connection
with the Merger. The amount of the Share Consideration was determined pursuant
to negotiations between Digital and ViewStar and not pursuant to any
recommendations of Dain Bosworth.
At the October 9, 1996 special meeting of the Digital Board, Dain Bosworth
delivered an oral opinion, which was subsequently confirmed in writing, that,
subject to the assumptions set forth below, as of such date and based on the
matters described therein, the consideration to be paid by Digital in connection
with the Merger was fair to the Digital Shareholders from a financial point of
view. Dain Bosworth has consented to the use of its name and to the inclusion of
the Dain Opinion in this Proxy Statement/Prospectus. No limitations were imposed
by the Digital Board upon Dain Bosworth with respect to the investigations made
or procedures followed by it in rendering the Dain Opinion.
THE FULL TEXT OF THE WRITTEN DAIN OPINION DATED OCTOBER 9, 1996, WHICH SETS
FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF
THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX III AND IS INCORPORATED
HEREIN BY REFERENCE. DIGITAL SHAREHOLDERS ARE URGED TO READ THE DAIN OPINION IN
ITS ENTIRETY. THE SUMMARY OF THE DAIN OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS SETS FORTH THE MATERIAL ANALYSES AND MATTERS PRESENTED BY
DAIN BOSWORTH TO THE DIGITAL BOARD AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF SUCH OPINION. THOUGH DAIN BOSWORTH HAS CONSENTED TO THE
INCLUSION OF THE DAIN OPINION IN THIS PROXY STATEMENT/PROSPECTUS, THE DAIN
OPINION IS DIRECTED TO THE DIGITAL BOARD, ADDRESSES ONLY THE FAIRNESS OF THE
CONSIDERATION TO BE PAID BY DIGITAL IN CONNECTION WITH THE MERGER TO DIGITAL
SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY DIGITAL SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE
AT THE DIGITAL SPECIAL MEETING. THE DAIN OPINION WAS RENDERED TO THE DIGITAL
BOARD FOR ITS CONSIDERATION IN DETERMINING WHETHER TO APPROVE THE MERGER
AGREEMENT. THE DIGITAL BOARD HAS NOT REQUESTED THAT DAIN BOSWORTH UPDATE ITS
OPINION FROM OCTOBER 9, 1996, AND, ACCORDINGLY, THE DISCUSSION OF THE DAIN
OPINION SET FORTH BELOW IS BASED ON THE TRADING PRICE OF DIGITAL COMMON SHARES,
GENERAL MARKET, ECONOMIC, FINANCIAL, MONETARY AND OTHER CONDITIONS AS THEY
EXISTED AND ON INFORMATION AVAILABLE TO DAIN BOSWORTH AS OF THE DATE OF THE DAIN
OPINION. IT IS UNDERSTOOD THAT, ALTHOUGH SUBSEQUENT DEVELOPMENTS OR EVENTS MAY
HAVE AFFECTED ITS OPINION, DAIN BOSWORTH HAS NOT UPDATED, REVIEWED OR REAFFIRMED
THE DAIN OPINION.
In arriving at the Dain Opinion, Dain Bosworth reviewed the financial terms
and conditions of the Merger Agreement and the Merger, including, but not
limited to, the number and fair market value of the Digital Common Shares to be
issued in connection with the Merger. Dain Bosworth, among other things, (i)
reviewed the Merger Agreement, (ii) held discussions with senior members of the
management of Digital and of ViewStar concerning the business, operations and
prospects of each company and the reasons for the
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<PAGE> 43
Merger, (iii) reviewed certain business and financial information concerning
Digital and ViewStar, including certain publicly available documents filed by
Digital and by ViewStar with the Commission, (iv) compared certain financial
statistics of Digital and ViewStar with statistics of publicly traded companies
deemed comparable, (v) reviewed price and trading data of the Digital Common
Shares, and (vi) to the extent publicly available, compared the financial terms
of the Merger with those of other transactions deemed comparable.
In conducting its review and arriving at its opinion that the consideration
to be paid by Digital in connection with the Merger was fair, Dain Bosworth
assumed and relied upon, without independent verification, the accuracy,
completeness and fairness of the information furnished to or otherwise reviewed
by or discussed with it for purposes of rendering the Dain Opinion. With respect
to financial projections of ViewStar and other information relating to the
prospects of ViewStar provided to Dain Bosworth by ViewStar, Dain Bosworth
assumed that such projections and other information were reasonably prepared and
reflected the best currently available judgments and estimates of the management
of ViewStar as to the likely future financial performances of ViewStar and of
the combined company. In addition, Dain Bosworth relied upon estimates and
judgments of members of Digital's and ViewStar's managements as to the potential
revenue synergies and cost savings that could result from the Merger, and
assumed that there had been no material changes to either Digital or ViewStar
since the respective dates of their latest financial statements made available
to Dain Bosworth and that no material adverse change will subsequently occur to
Digital or ViewStar. In addition, Dain Bosworth also assumed that the Merger
would be consummated in accordance with the terms set forth in the Merger
Agreement, and, with the consent of Digital and ViewStar, that the Merger will
qualify for pooling-of-interests accounting treatment and as a tax-free
reorganization under the Code for Digital. Dain Bosworth did not make, and it
was not provided with, an independent evaluation or appraisal of the assets of
ViewStar. The Dain Opinion is based on market, economic and other conditions as
they existed and could be evaluated as of the date of the Dain Opinion.
The following paragraphs summarize the most significant quantitative and
qualitative analyses performed by Dain Bosworth in arriving at the Dain Opinion
and reviewed with the Digital Board and do not purport to be a complete
description of the analyses performed by Dain Bosworth. The information
presented below is based on the financial condition of Digital and ViewStar as
of a date or dates shortly before the Dain Opinion was rendered on October 9,
1996 and stock price information through the close of the market on October 7,
1996.
Analysis of Certain Other Publicly Traded Companies. This analysis examines
a company's valuation in the public market compared to the valuation in the
public market of other selected publicly traded companies. Dain Bosworth
analyzed the relative performance and outlook for Digital and ViewStar by
comparing certain financial and stock information for Digital and financial
information for ViewStar with the corresponding publicly available data and
information from comparable publicly traded companies. The valuation analysis
was based on several variables, including revenue, operating income, net income
for the last twelve months and projected net income for 1997. The earnings
estimates used in this analysis for Digital in 1997 were as reported by First
Call Corporation, a data service that monitors and compiles selected research
analysts' most current earnings estimates on companies of interest to investors.
In order to better evaluate the Digital Common Shares, Dain Bosworth
compared certain financial and stock market information for Digital with
corresponding information from a group of ten comparable, publicly traded
companies consisting of Active Voice Corporation, Applied Voice Technology,
Inc., Aspect Telecommunications Corporation, Boston Technology, Inc., Brite
Voice Systems, Inc., Davox Corporation, Dialogic Corporation, EIS International,
Inc., InterVoice, Inc., and Periphonics Corporation (the "Selected Digital
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Comparables"). Dain Bosworth noted from this analysis that the multiples for
Digital were generally within the range of multiples for the Selected Digital
Comparables.
<TABLE>
<CAPTION>
ENTERPRISE VALUE MARKET VALUE
---------------------------- -----------------------------
LTM LTM LTM PROJECTED CY97
REVENUE OPERATING INCOME NET INCOME NET INCOME
------- ---------------- ---------- --------------
<S> <C> <C> <C> <C>
Digital Systems International,
Inc............................ 2.2x 13.8x 22.5x 17.0x
Selected Digital Comparables:
High........................... 5.9x 117.6x 128.7x 31.3x
Low............................ 0.6x 3.7x 6.6x 5.0x
</TABLE>
- ---------------
NOTES:
Based on the closing trade price of the Digital Common Shares on October 7,
1996, which was $21.375.
Enterprise Value = Market Value + Total Debt + Preferred Stock - Cash
LTM = last twelve months
Dain Bosworth compared certain financial information for ViewStar with
corresponding information from a group of seven comparable, publicly traded
companies consisting of Documentum, Inc., FileNet Corporation, Imnet Systems,
Inc., Oracle Corporation, PC Docs Group International, Inc., PeopleSoft, Inc.
and Wang Laboratories, Inc. (the "Selected ViewStar Comparables"). Dain Bosworth
noted from this analysis that the multiples for ViewStar were generally within
the range of multiples for the Selected ViewStar Comparables.
<TABLE>
<CAPTION>
ENTERPRISE VALUE MARKET VALUE
---------------------------- -----------------------------
LTM LTM LTM PROJECTED CY97
REVENUE OPERATING INCOME NET INCOME NET INCOME
------- ---------------- ---------- --------------
<S> <C> <C> <C> <C>
ViewStar Corporation............. 2.7x 64.4x 93.4x 20.9x
Selected ViewStar Comparables:
High........................... 13.4x 159.1x 185.3x 110.0x
Low............................ 0.7x 9.4x 27.4x 12.9x
</TABLE>
- ---------------
NOTES:
Enterprise Value = Market Value + Total Debt + Preferred Stock - Cash
Implied Enterprise Value for ViewStar based on $83.8 million market value (based
on ViewStar's ownership of 3.9 million Digital Common Shares, assuming the
exercise of all vested ViewStar Options and excluding the unvested ViewStar
Restricted Stock, at $21.375, the closing price on October 7, 1996) and net cash
of $600,000
LTM = last twelve months
It is also noted that, in making these comparisons with the comparable
group of publicly traded companies, no premium for control was applied to the
prevailing market values of comparable companies. Application of such a control
premium to the market values of the comparable companies would cause a more
favorable comparison, from Digital's perspective, with the multiples for
ViewStar implied by the Merger.
Analysis of Selected Merger and Acquisition Transactions. Dain Bosworth
reviewed and summarized the financial terms, to the extent publicly available,
of eight recent merger transactions involving computer software and integration
companies, which were deemed relevant and comparable to the business of ViewStar
(the "Comparable Transactions"). The Comparable Transactions consisted of
Cambridge Technology Partners, Inc.'s acquisition of Systems Consulting Group,
Inc.; Computer Sciences Corporation's acquisition of The Continuum Company,
Inc.; First Data Corporation's acquisition of First Financial Management
Corporation; HBO & Company's acquisition of CliniCom, Inc.; IBM's acquisition of
Tivoli Systems Inc.; MCI Communications Corporation's acquisition of SHL
Systemhouse, Inc.; PLATINUM technologies, Inc.'s acquisition of Protosoft, Inc.;
and Sybase, Inc.'s acquisition of Powersoft Corporation. In this analysis, Dain
Bosworth calculated the ratio of the implied enterprise value (defined as the
price paid to the equity holders of the target company, plus the debt and
preferred stock assumed by the other party to the transaction,
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<PAGE> 45
less the cash of the target company) to the last twelve months' revenue and
operating income prior to the announcement of the transaction. Also, Dain
Bosworth calculated the ratio of the price paid for the stock to the last twelve
months' net income. All multiples for the Comparable Transactions were based on
public information available at the time of announcement of such transaction,
without taking into account differing market and other conditions present at the
time of the Comparable Transactions. The following table summarizes the results
of Dain Bosworth's analysis comparing the range of Comparable Transaction
multiples to the multiples implied by the Merger.
<TABLE>
<CAPTION>
ENTERPRISE VALUE MARKET VALUE
---------------------------- ------------
LTM LTM LTM NET
REVENUE OPERATING INCOME INCOME
------- ---------------- ------------
<S> <C> <C> <C>
ViewStar Corporation.......................... 2.7x 64.4x 93.4x
Comparable Transactions:
High........................................ 16.0x 203.4x 192.3x
Low......................................... 1.3x 7.4x 7.9x
</TABLE>
- ---------------
NOTES:
Enterprise Value = Market Value + Total Debt + Preferred Stock - Cash
Implied Enterprise Value for ViewStar based on $83.8 million equity value (based
on ViewStar's ownership of 3.9 million Digital Common Shares, assuming the
exercise of all vested ViewStar Options and excluding the unvested ViewStar
Restricted Stock at $21.375, the closing price on October 7, 1996) and net cash
of $600,000
LTM = last twelve months
No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisitions summarized
above is identical to Digital, ViewStar or the Merger. Accordingly, such
analyses must take into account differences in the financial and operating
characteristics of the Selected Digital Comparables and the Selected ViewStar
Comparables and the companies in the Comparable Transactions and other factors
that would affect the public trading value and acquisition value of the Selected
Digital Comparables and the Selected ViewStar Comparables, and the Comparable
Transactions, respectively.
Contribution Analysis. Dain Bosworth analyzed the relative contributions of
Digital and ViewStar to the pro forma income statement of the combined company
and compared such contributions to the pro forma ownership of Digital by the
ViewStar Shareholders. The analysis was performed based on the projected
financial results for the twelve months ending December 31, 1996 for Digital and
ViewStar, the projected twelve months ending December 31, 1997, and the
projected twelve months ending December 31, 1998, as provided by the management
of Digital and of ViewStar. This analysis showed that ViewStar would contribute
27.3%, 28.3% and 31.4% of net revenue, 29.4%, 31.3% and 34.9% of gross income,
10.4%, 18.0% and 30.3% of operating income and 8.1%, 16.4% and 28.7% of income
before taxes of the combined company for fiscal years 1996, 1997 and 1998,
respectively. These ranges do not give effect to potential cost savings and
synergies that could be achieved in the Merger. Based on Digital's fifteen-day
moving average closing price of $17.86 on October 6, 1996, ViewStar shareholders
would own approximately 28.0% of the combined company.
Pro Forma Merger Analysis. Dain Bosworth analyzed certain pro forma effects
on the combined company resulting from the Merger. Dain Bosworth computed the
resulting dilution/accretion to the combined company's earnings per share
estimate for the fiscal years ending December 31, 1996, 1997, and 1998 pursuant
to the Merger before and after taking into account any potential cost savings,
revenue loss, and other synergies that Digital and ViewStar could achieve if the
Merger were consummated and before nonrecurring costs relating to the Merger.
Dain Bosworth noted that before taking into account any potential cost savings,
revenue loss, and other synergies and before certain nonrecurring costs relating
to the Merger, the Merger would be approximately 21.6% dilutive to the combined
company's earnings per share for fiscal year 1996. Dain Bosworth also noted that
assuming (i) the issuance of 3,918,824 Digital Common Shares to ViewStar, (ii)
potential operating synergies ranging from zero to $4.50 million for fiscal year
1997 that Digital and ViewStar could achieve if the Merger were consummated, and
(iii) no impact from nonrecurring costs
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<PAGE> 46
relating to the Merger, the Merger would have a dilutive/accretive impact on the
combined company's earnings per share ranging from approximately 2.0% dilutive
(assuming no operating synergies and no loss of revenue resulting from the
Merger) to 14.1% accretive (assuming operating synergies totaling $4.5 million
and no loss of revenue resulting from the Merger). Applying these same
assumptions to the fiscal year ending December 31, 1998, the Merger would have
an accretive impact on the combined company's earnings, ranging from
approximately 11.6% accretive (assuming no operating synergies and no loss of
revenue resulting from the Merger) to 23.9% accretive (assuming operating
synergies totaling $4.5 million and no loss of revenue resulting from the
Merger). There can be no assurance that the combined company will be able to
minimize the potential revenue loss or realize any potential operating synergies
in the amounts estimated, or at all, following the Merger.
Discounted Cash Flow Analysis. Dain Bosworth did not perform a discounted
cash flow analysis on ViewStar since there were no long-term (five-year)
projections of cash flow available for ViewStar and the terminal value was
deemed to be difficult to ascertain. Dain Bosworth determined that its analyses
described above were sufficient to arrive at the Dain Opinion.
While the foregoing summary describes all analyses and factors that Dain
Bosworth deemed material in its presentation to the Digital Board, it is not a
comprehensive description of all analyses and factors considered by Dain
Bosworth. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the applications of these methods to the particular
circumstances, and, therefore, such an opinion is not readily susceptible to
summary description. Dain Bosworth believes that its analyses must be considered
as a whole and that selecting portions of its analyses and other factors
considered by it, without considering all analyses and factors, would create an
incomplete view of the evaluation process underlying the Dain Opinion. In
performing its analyses, Dain Bosworth considered general economic, market and
financial conditions and other matters, many of which are beyond the control of
Digital and ViewStar. The analyses performed by Dain Bosworth are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. Additionally, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business actually
may be sold. Furthermore, no opinion is being expressed as to the prices at
which Digital Common Shares may trade at any future time.
Pursuant to an agreement dated September 20, 1996 between Digital and Dain
Bosworth, the fees payable to Dain Bosworth consist of a $25,000 engagement fee,
a $125,000 fee for rendering the Dain Opinion to the Digital Board on October 9,
1996 in connection with the Merger and a $350,000 transaction fee payable upon
consummation of the Merger. In addition, Digital has agreed to reimburse Dain
Bosworth for its reasonable out-of-pocket expenses, which are not expected to
exceed $20,000, and 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 any omission or alleged
omission to state a material fact necessary to make the statements therein not
misleading.
Dain Bosworth was selected by Digital on the basis of its experience in
valuing securities in connection with mergers and acquisitions, knowledge of
Digital and telecommunications equipment manufacturers and expertise in
transactions involving computer software companies. Dain Bosworth is a
nationally recognized investment banking firm and is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. Dain Bosworth has from time to time issued research reports and
recommendations on Digital Common Shares and, in the ordinary course of
business, makes a market in Digital Common Shares. 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.
These activities may have created a potential conflict of interest for Dain
Bosworth when it rendered the Dain Opinion.
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THE MERGER
THE DESCRIPTION OF THE MERGER AGREEMENT, THE SHAREHOLDERS AGREEMENT AND THE
REGISTRATION RIGHTS AGREEMENT SET FORTH BELOW DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, THE
SHAREHOLDERS AGREEMENT AND THE REGISTRATION RIGHTS AGREEMENT, COPIES OF WHICH
ARE ATTACHED AS ANNEXES I AND II, RESPECTIVELY, TO THIS PROXY
STATEMENT/PROSPECTUS AND/OR INCORPORATED BY REFERENCE HEREIN.
TERMS OF THE MERGER AGREEMENT
The Merger. Subject to the terms and conditions of the Merger Agreement,
Merger Sub will merge into ViewStar at the Effective Time and the separate
corporate existence of Merger Sub will then cease. ViewStar (the "Surviving
Corporation") will become a wholly owned subsidiary of Digital.
Conversion of ViewStar Stock in the Merger. Upon consummation of the
Merger, each issued and outstanding share of ViewStar Common Stock (other than
Dissenting Shares) will convert into the right to receive .693 Digital Common
Shares, and each issued and outstanding share of ViewStar Preferred Stock (other
than Dissenting Shares) will convert into the right to receive a number of
Digital Common Shares equal to the product of the Exchange Ratio and the number
of shares of ViewStar Common Stock into which such share of ViewStar Preferred
Stock is convertible (based upon a conversion ratio of one share of ViewStar
Common Stock for every 3.5 shares of ViewStar Preferred Stock). The Exchange
Ratio reflects a 1-for-3.5 reverse split of the ViewStar Common Stock in August
1996. Each share of ViewStar Restricted Stock outstanding at the Effective Time
will convert into .693 Digital Common Shares and will remain subject to the same
terms and conditions, including the schedule pursuant to which rights of
repurchase will lapse, as were applicable to such ViewStar Restricted Stock at
the Effective Time. In addition, at the Effective Time (a) each ViewStar Option
will convert into an option to purchase a number of Digital Common Shares which
is equal to the product of the Exchange Ratio and the number of shares of
ViewStar Common Stock subject to such ViewStar Option and (b) each ViewStar
Warrant, other than the Comdisco Warrant, that is not exercised prior to the
Effective Time will terminate in accordance with its terms. See "THE MERGER --
Replacement of ViewStar Options; Warrants." If, prior to the Effective Time,
Digital should split or combine the Digital Common Shares, or pay a stock
dividend or other stock distribution in Digital Common Shares, or otherwise
change the Digital Common Shares into any other securities, or make any other
dividend on or distribution of the Digital Common Shares, the Exchange Ratio
will be appropriately adjusted to reflect such split, combination, dividend or
other distribution or change.
Subject to certain limitations, the total number of Digital Common Shares
issuable in the Merger in exchange for ViewStar Stock will be reduced in order
to satisfy certain claims of Digital or certain of its affiliates or to
reimburse certain administrative costs and expenses. See "-- Share Consideration
Adjustment."
Based on the number of shares of ViewStar Stock outstanding on the ViewStar
Record Date, assuming the exercise of all outstanding ViewStar Options and
ViewStar Warrants (whether or not currently exercisable), and based on the
Exchange Ratio established in the Merger Agreement, a maximum of approximately
4.3 million Digital Common Shares may be issued in connection with the Merger.
Fractional Shares. No fractional Digital Common Shares will be issued in
the Merger. In lieu of any such fractional shares, each holder of ViewStar Stock
who otherwise would be entitled to receive a fractional Digital Common Share
pursuant to the Merger Agreement will be paid an amount in cash, without
interest, equal to the last reported sale price of one Digital Common Share as
reported by the Nasdaq National Market on the last business day prior to the
closing of the Merger (the "Closing Date"), multiplied by such fraction.
Articles of Incorporation and Bylaws. The Merger Agreement provides that
the Articles of Incorporation of ViewStar as in effect immediately prior to the
Effective Time will become the articles of incorporation of the Surviving
Corporation. The Bylaws of ViewStar as in effect immediately prior to the
Effective Time will become the bylaws of the Surviving Corporation.
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Directors and Officers. The directors and officers of Merger Sub at the
Effective Time will become the directors and officers, respectively, of the
Surviving Corporation until their successors have been duly elected or appointed
and qualified or until their earlier death, resignation or removal.
EFFECTIVE TIME OF THE MERGER
As soon as practicable following satisfaction or waiver (where permissible)
of the conditions to the Merger, the Merger will be consummated and become
effective at the time at which all Merger Documents are accepted for filing by
the appropriate governmental agency or such later date and time as may be
specified in the Merger Documents. See "THE MERGER -- Conditions; Waivers."
EXCHANGE OF VIEWSTAR STOCK
The Merger Agreement provides that the exchange of shares of ViewStar Stock
in the Merger will be effected as follows:
(i) prior to the Closing, Digital will supply to a bank or trust
company designated by Digital (the "Exchange Agent") certificates
evidencing the Share Consideration;
(ii) prior to the Closing, Digital will instruct, and will use
reasonable efforts to cause, the Exchange Agent to deliver, within three
business days of the Closing Date, to each holder of record of a
certificate or certificates that immediately prior to the Effective Time
represented outstanding shares of ViewStar Stock (the "Certificates") a
form of letter of transmittal and instructions for use in effecting the
surrender of the Certificates;
(iii) at or following the Closing, upon surrender of the Certificates
for cancellation to the Exchange Agent, together with letters of
transmittal duly executed and any other required documents, holders of such
Certificates will receive in exchange therefor certificates representing a
number (rounded down to the nearest whole number) of Digital Common Shares
equal to 90% of the Share Consideration to which the ViewStar Shareholder
surrendering the Certificate is entitled and cash in lieu of fractional
Digital Common Shares, and the surrendered Certificates will be canceled;
(iv) the remaining 10% of the Share Consideration, representing the
Holdback Shares, will be held by Digital in order to effect any reduction
in the Share Consideration as described below; and
(v) after the Effective Time, each outstanding, unsurrendered
Certificate will be deemed to evidence ownership of the number of Digital
Common Shares into which such shares of ViewStar Stock will have been
converted; however, the holders of outstanding, unsurrendered Certificates
after the Effective Time will not be entitled to receive any dividends or
distributions of any kind payable to the holders of record of Digital
Common Shares until such Certificates are surrendered, although any such
dividends or distributions will accrue and be payable to the holders upon
surrender of the Certificates. No interest will accrue or be payable on
such dividends or distributions until surrender of such Certificates.
SHARE CONSIDERATION ADJUSTMENT
Pursuant to the Merger Agreement, ViewStar has agreed that, subject to
certain limitations discussed below, the Share Consideration will be reduced by
a number of Digital Common Shares equal in value (as of the Closing Date) to any
losses in excess of $350,000 that may be suffered by Digital, or any of its
officers, directors or affiliates, due to: (i) any inaccuracy in any
representation or warranty made by ViewStar or any ViewStar Affiliate in the
Merger Agreement, the Shareholders Agreement, any document ancillary thereto or
any certificate delivered pursuant thereto, including, without limitation,
representations and warranties relating to general corporate matters and to the
conduct of ViewStar's business or (ii) any failure by ViewStar or any ViewStar
Affiliate to perform or comply, in whole or in part, with any covenant or
agreement in the Merger Agreement, the Shareholders Agreement or any document
ancillary thereto, including, without limitation, covenants and agreements
relating to the conduct of ViewStar's business prior to the Effective Time. The
Share Consideration adjustment is limited to 10% of the Share Consideration. The
Holdback Shares will be held by Digital for potential transfer to it to effect
any reduction in the Share Consideration in satisfaction of
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Digital claims. The Merger Agreement provides for selection of a Shareholder
Representative by the holders of the Holdback Shares having full authority to
settle or defend all claims by Digital against the Holdback Shares. In addition,
the Shareholder Representative may be reimbursed for certain costs and expenses
through the transfer of Holdback Shares remaining after satisfaction of such
Digital claims. The Shareholder Representative is exonerated from any liability
for actions taken, or omissions to act, in good faith. Any Holdback Shares
transferred to Digital will be accounted for as a reduction of the Share
Consideration and will be allocated among the holders of the Holdback Shares on
a pro rata basis. Any claims against the Holdback Shares must be asserted by
Digital not later than six months following the Effective Time. The Holdback
Shares will be held of record by the ViewStar Shareholders, who will have the
full right to vote such shares in matters coming before the Digital
Shareholders. Stock certificates representing any Holdback Shares not
transferred either to Digital or the Shareholder Representative will be
distributed to the holders on the later of (i) the end of the claims period and
(ii) the final resolution of any pending claims.
REPLACEMENT OF VIEWSTAR OPTIONS; WARRANTS
At the Effective Time, each holder of an outstanding ViewStar Option will
receive, in exchange for each ViewStar Option held by such holder, whether or
not vested or exercisable, a Replacement Option to acquire, on the same terms
and conditions as were applicable under such ViewStar Option, that number of
Digital Common Shares equal to the product of the Exchange Ratio and the number
of shares of ViewStar Common Stock subject to such ViewStar Option, at a price
per share equal to the aggregate exercise price for the shares of ViewStar
Common Stock subject to such ViewStar Option divided by the number of whole
Digital Common Shares purchasable pursuant to such Replacement Option. In the
Merger Agreement, Digital has undertaken to use reasonable efforts to register
under the Securities Act the Digital Common Shares that are to be issued upon
exercise of Replacement Options.
ViewStar Warrants that have not been exercised as of the Effective Time
will terminate in accordance with their respective terms; provided, however,
that if, prior to the Closing Date, Comdisco, Inc. does not exercise the
Comdisco Warrant, dated May 31, 1996, to purchase 42,857 shares of ViewStar
Preferred Stock at a per share price of $0.70, then the Comdisco Warrant will
convert into a warrant to acquire, on the same terms and conditions as were
applicable under the Comdisco Warrant, 8,486 Digital Common Shares at a per
share price of $3.53.
QUOTATION OF THE DIGITAL COMMON SHARES ON NASDAQ NATIONAL MARKET
In the Merger Agreement, Digital has agreed to use all reasonable efforts
to cause Digital Common Shares issued in connection with the Merger to be quoted
on the Nasdaq National Market.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto. The Merger Agreement includes representations and warranties by
ViewStar as to (i) the corporate organization, good standing and power of
ViewStar and its subsidiaries, (ii) approvals by the ViewStar Board and
authorization of the Merger Agreement, (iii) ViewStar's capitalization, (iv)
pending or threatened litigation, (v) ViewStar's noncontravention of any
agreement, law or charter or bylaw provision, (vi) the Merger Agreement's
noncontravention of any agreement, law or charter or bylaw provision and the
absence of the need (except as specified) for governmental or third-party
consents to the Merger, (vii) the terms, existence, operations, liabilities and
compliance with applicable laws of ViewStar employee plans, and certain other
matters relating to the Employee Retirement Income Security Act of 1974, as
amended, (viii) payment of taxes, (ix) ownership of and rights to use certain
intellectual property, (x) the accuracy of ViewStar's financial statements, (xi)
the conduct of ViewStar's business in the ordinary and usual course and the
absence of any material adverse change in the business, properties, operations,
condition (financial or other), assets, liabilities or, to ViewStar's knowledge,
the prospects of ViewStar, (xii) certain contracts and leases of ViewStar and
its subsidiaries, (xiii) certain transactions with affiliates, (xiv) brokers and
finders employed by ViewStar, (xv) the accuracy of information to be supplied by
ViewStar for inclusion in this Proxy Statement/Prospectus and in the
Registration Statement, (xvi) certain tax matters, (xvii) property owned or
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leased by ViewStar, (xviii) the accuracy of customer and supplier lists provided
by ViewStar, (xix) the accuracy of information provided by ViewStar regarding
backlog orders, (xx) certain labor and employment matters, (xxi) the accuracy of
information provided by ViewStar regarding accounts receivable, (xxii)
ViewStar's corporate books and records, (xxiii) ViewStar's licenses, permits and
other authorizations, (xxiv) ViewStar's insurance coverage, (xxv) the absence of
questionable payments by ViewStar, (xxvi) the accuracy of information provided
by ViewStar regarding its bank accounts, (xxvii) adherence by ViewStar to the
requirements for accounting treatment of the Merger as a pooling-of-interests,
and (xxviii) the accuracy and completeness of disclosure made by representatives
of ViewStar and its subsidiaries in connection with the Merger Agreement.
The Merger Agreement also includes representations and warranties by
Digital and Merger Sub as to (i) the corporate organization, good standing and
power of Digital and its subsidiaries, (ii) approvals by the Digital Board and
authorization of the Merger Agreement, (iii) Digital's capitalization, (iv) the
authorization of the Digital Common Shares to be issued in the Merger, (v)
pending or threatened litigation, (vi) Digital's noncontravention of any
agreement, law or charter or bylaw provision, (vii) the Merger Agreement's
noncontravention of any agreement, law or charter or bylaw provision and the
absence of the need (except as specified) for governmental or third-party
consents to the Merger, (viii) payment of taxes, (ix) ownership of and rights to
use certain intellectual property, (x) the accuracy of Digital's financial
statements and filings with the Commission, (xi) the absence of any material
adverse change in the business, properties, operations, condition (financial or
other), assets, liabilities or, to Digital's knowledge, the prospects of
Digital, (xii) certain contracts and leases of Digital and its subsidiaries,
(xiii) the ownership, activities and assets of Merger Sub, (xiv) brokers and
finders employed by Digital, (xv) the accuracy of information to be supplied by
Digital for inclusion in this Proxy Statement/Prospectus and in the Registration
Statement, (xvi) certain tax matters, (xvii) the accuracy of customer and
supplier lists provided by Digital, (xviii) the accuracy of information provided
by Digital regarding backlog orders, (xix) adherence by Digital to the
requirements for accounting treatment of the Merger as a pooling-of-interests,
and (xx) the accuracy and completeness of disclosure made by representatives of
Digital in connection with the Merger Agreement.
BUSINESS OF VIEWSTAR PENDING THE MERGER
ViewStar has agreed that, prior to the Effective Time or earlier
termination of the Merger Agreement, except as contemplated by the Merger
Agreement, it will conduct its operations according to its ordinary course of
business consistent with past practice, seek to preserve intact its current
business organizations, keep available the service of its current officers and
employees and preserve its relationships with customers, suppliers and others.
ViewStar has also agreed that, prior to the Effective Time, unless Digital
agrees in writing or as otherwise permitted by the Merger Agreement, it will
not:
(i) except for shares of ViewStar Stock issued upon exercise of
ViewStar Options or ViewStar Warrants outstanding as of October 14, 1996,
issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, sale, disposition, pledge or other
encumbrance of, any additional shares of its capital stock or any
securities or rights convertible into, exchangeable for or evidencing the
right to subscribe for any shares of its capital stock, or any other
securities in respect of, in lieu of, or in substitution for, ViewStar
Stock outstanding as of October 14, 1996;
(ii) except for shares of ViewStar Restricted Stock that ViewStar is
required to repurchase in accordance with the terms of the applicable
Restricted Stock Agreements, redeem, purchase or otherwise acquire, or
propose to redeem, purchase or otherwise acquire, any of its outstanding
securities;
(iii) split, combine, subdivide or reclassify any shares of its
capital stock or declare, set aside for payment or pay any dividend, or
otherwise make any payments to ViewStar Shareholders in their capacity as
such;
(iv) (a) grant any material increases in the compensation of any of
its directors, officers or key employees, except in the ordinary course of
business and consistent with past practice, (b) pay or agree to pay any
pension, retirement allowance or other material employee benefit not
required or contemplated by any of the existing benefit, severance, pension
or employment plans, agreements or arrangements as in
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effect on October 14, 1996 to any such director, officer or key employee,
whether past or present, (c) enter into any new, or materially amend any
existing, employment agreement with any such director, officer or key
employee, (d) enter into any new, or materially amend any existing,
severance agreement with any such director, officer or key employee, or (e)
except as may be required to comply with applicable law, amend any
existing, or become obligated under any new, employee plan or benefit
arrangement;
(v) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of ViewStar;
(vi) make any other acquisition, by means of merger, consolidation or
otherwise, (a) of any direct or indirect ownership interest in or assets
comprising any business enterprise or operation or (b) except in the
ordinary course of business and consistent with past practice, of any other
assets in excess of $50,000;
(vii) adopt any amendments to the Restated Articles of Incorporation
of ViewStar (the "ViewStar Articles of Incorporation") or the Restated and
Amended Bylaws of ViewStar (the "ViewStar Bylaws");
(viii) incur any indebtedness for borrowed money or guaranty any such
indebtedness or, except in the ordinary course of business and consistent
with past practice, make any loans, advances or capital contributions to,
or investments in, any other person or entity;
(ix) engage in the conduct of any business the nature of which is
materially different from the business ViewStar is currently engaged in;
(x) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of
ViewStar;
(xi) enter into any contract, arrangement or understanding requiring
the purchase of equipment, materials, supplies or services over a period
greater than twelve months and for the expenditure of greater than $75,000
per year which is not cancelable without penalty on 30 days' or less
notice, except in the ordinary course of business for the distribution of
products or the production of inventory; or
(xii) authorize or announce an intention, or enter into any contract,
agreement, commitment or arrangement, to do any of the foregoing.
CERTAIN COVENANTS OF DIGITAL
Digital has agreed that, prior to the Effective Time or earlier termination
of the Merger Agreement, except as otherwise permitted in the Merger Agreement
or with ViewStar's prior written consent, it will not:
(i) adopt any amendments to the Digital Articles of Incorporation or
take any other action requiring a vote of the holders of Digital Common
Shares, which action would adversely affect the terms and provisions of the
Digital Common Shares or the rights of the holders thereof, including,
without limitation, the authorization or issuance of any shares of capital
stock with rights superior to the Digital Common Shares;
(ii) except for Digital Common Shares issued under Digital's Employee
Stock Purchase Plan or upon exercise of options granted under Digital's
stock option plans, and except for option grants under such plans, issue,
deliver, sell, dispose of, pledge or otherwise encumber, or authorize or
propose the issuance, delivery, sale, disposition, pledge or other
encumbrance of, any additional shares of its capital stock, or any
securities or rights convertible into, exchangeable for or evidencing the
right to subscribe for any shares of its capital stock, or any securities
in respect of, in lieu of or in substitution for Digital Common Shares
outstanding as of October 14, 1996;
(iii) redeem, purchase or otherwise acquire, or propose to redeem,
purchase or otherwise acquire, any of its outstanding securities;
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(iv) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or otherwise
make any payments to Digital Shareholders in their capacity as such;
(v) make any other acquisition, by means of merger, consolidation or
otherwise, (a) of any direct or indirect ownership interest in or assets
comprising any business enterprise or operation or (b) except in the
ordinary course of business and consistent with past practice, of any other
assets; provided, however, that Digital may acquire assets the value of
which is less than 10% of Digital's total assets;
(vi) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of Digital; or
(vii) authorize or announce an intention, or enter into any contract,
agreement, commitment or arrangement, to do any of the foregoing.
NO SOLICITATION
Under the Merger Agreement, ViewStar has agreed that neither it nor any of
its subsidiaries or any of their respective officers, directors, employees,
representatives or agents will, directly or indirectly, solicit or encourage the
initiation of any inquiries or proposals concerning any merger, sale of
substantial assets, sale of shares of capital stock (including, without
limitation, by way of a tender offer) or similar transactions involving ViewStar
or any of its subsidiaries (each, an "Alternative Proposal"). ViewStar has
agreed to notify Digital immediately of any inquiries or proposals with respect
to any such Alternative Proposal that are received by, or any such negotiations
or discussions that are sought to be initiated with, ViewStar. The ViewStar
Board is not prevented, however, from considering, negotiating, approving and
recommending an unsolicited Alternative Proposal deemed by the ViewStar Board to
be more favorable than the Merger to the ViewStar Shareholders (a "Superior
Proposal") if, after consultation with advisors and counsel, the ViewStar Board
determines that it must do so in order to discharge its fiduciary duties.
CONDITIONS; WAIVERS
Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of ViewStar, Digital and Merger Sub to effect the Merger
are subject to the satisfaction or waiver of the following conditions: (i) the
Merger Agreement shall have been approved by the holders of shares representing
a majority of all outstanding shares of ViewStar Common Stock and by the holders
of shares representing a majority of all outstanding shares of ViewStar
Preferred Stock, (ii) the Issuance shall have been approved by the holders of
shares representing a majority of the Digital Common Shares present in person or
represented by proxy at the Digital Special Meeting, (iii) all required
authorizations in connection with the execution and delivery of the Merger
Agreement and the performance of the obligations thereunder shall have been
obtained, (iv) there shall not be in effect any judgment, writ, order or
injunction of any court or governmental body enjoining or otherwise preventing
consummation of the transactions contemplated by the Merger Agreement, or
permitting consummation only subject to conditions or restrictions unacceptable
to either Digital or ViewStar, each in its reasonable judgment, (v) the
Registration Statement shall have been declared effective and there shall be no
stop order suspending the effectiveness thereof, or any action, suit, proceeding
or investigation by the Commission to suspend the effectiveness thereof, and all
necessary approvals under state securities laws or the Securities Act or the
Exchange Act relating to the issuance or trading of the Digital Common Shares
shall have been received, and (vi) Digital and ViewStar shall have received a
tax opinion of Perkins Coie, including an opinion that the Merger will
constitute a "tax-free" reorganization under Section 368(a) of the Code.
Conditions to the Obligations of Digital and Merger Sub. The respective
obligations of Digital and Merger Sub to effect the Merger are subject to the
satisfaction or waiver of the following additional conditions: (i) each of the
representations and warranties of ViewStar contained in the Merger Agreement
that is (a) qualified as to materiality shall be true and correct and (b) not so
qualified shall be true in all material respects, in each case on and as of the
date made, and ViewStar shall have delivered a revised ViewStar Disclosure
Statement reflecting any changes occurring between October 14, 1996 and the
Closing Date that
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would be required in order to make ViewStar's representations and warranties
true and correct as of the Effective Time, (ii) at or prior to the Closing,
ViewStar shall have performed or complied in all material respects with all
agreements and conditions required of it, (iii) all material consents, waivers,
approvals, authorizations or orders required to be obtained, and all filings
required to be made, by ViewStar for the authorization, execution and delivery
of the Merger Agreement and the consummation by it of the transactions
contemplated thereby shall have been obtained and made by ViewStar, (iv)
ViewStar shall have delivered to Digital a certificate, dated the Closing Date
and signed by the President or any Vice President of ViewStar, certifying as to
the fulfillment of the conditions specified in clauses (i) through (iii) of this
sentence, (v) Digital shall have received a legal opinion from Wilson, Sonsini,
Goodrich & Rosati, P.C. in form and substance reasonably satisfactory to
Digital, (vi) Digital shall have received an opinion from KPMG Peat Marwick LLP
that the Merger will qualify for pooling-of-interests accounting treatment,
(vii) Digital shall have received a certificate from ViewStar pursuant to
Section 1455 of the Code (and a certificate or certificates under any analogous
provisions of state or local law) to the effect that an interest in ViewStar is
not a "United States real property interest" within the meaning of Section 897
of the Code (and any analogous provisions of state or local law), and (viii) all
outstanding employment agreements with certain specified ViewStar executive
officers will be in effect at the Effective Time of the Merger.
Conditions to the Obligations of ViewStar. The obligations of ViewStar to
effect the Merger are subject to the satisfaction or waiver of the following
additional conditions: (i) each of the representations and warranties of Digital
and Merger Sub contained in the Merger Agreement that is (a) qualified as to
materiality shall be true and correct and (b) not so qualified shall be true in
all material respects, in each case on and as of the date made, and Digital
shall have delivered a revised Digital Disclosure Statement reflecting any
changes occurring between October 14, 1996 and the Closing Date that would be
required in order to make its representations and warranties true and correct as
of the Effective Time, (ii) at or prior to the Closing, Digital shall have
performed or complied in all material respects with all agreements and
conditions required of it, (iii) all material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required to be
made, by Digital or Merger Sub for the authorization, execution and delivery of
the Merger Agreement and the consummation by it of the transactions contemplated
thereby shall have been obtained and made by Digital and Merger Sub, (iv)
Digital shall have delivered to ViewStar a certificate, dated the Closing Date
and signed by the President or any Vice President of Digital, certifying as to
the fulfillment of the conditions specified in clauses (i) through (iii) of this
sentence, (v) ViewStar shall have received a legal opinion from Perkins Coie in
form and substance reasonably satisfactory to ViewStar, and (vi) ViewStar shall
have received a copy of the opinion from KPMG Peat Marwick LLP regarding
pooling-of-interests accounting treatment referred to above.
AMENDMENT; TERMINATION
The parties to the Merger Agreement may not amend, change, supplement,
waive or otherwise modify the Merger Agreement, except by an instrument in
writing signed by the party against whom enforcement is sought.
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, before or after approval by ViewStar, the Digital
Shareholders or the ViewStar Shareholders, by the mutual written consent of
Digital and ViewStar duly authorized by the Digital Board and the ViewStar
Board, respectively. The Merger Agreement also may be terminated by action of
either the Digital Board or the ViewStar Board (i) if the Merger has not been
consummated by February 15, 1997 (provided that such right to terminate will not
be available to any party whose breach of any representation, warranty, covenant
or agreement set forth in the Merger Agreement has been the cause of or resulted
in the failure of the Merger to occur on or before such date), (ii) if any court
or governmental body has issued a final and nonappealable order, decree or
ruling or taken any other action having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, (iii) if the requisite vote of
the Digital Shareholders or the ViewStar Shareholders shall not be obtained,
(iv) upon a breach of any representation, warranty, covenant or agreement on the
part of ViewStar or Digital, respectively, set forth in the Merger Agreement
such that the conditions to
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consummation of the Merger would not be satisfied, or (v) if the ViewStar Board
shall have resolved to accept a Superior Proposal.
In addition, Digital may terminate the Merger Agreement if (i) the ViewStar
Board withdraws or modifies its recommendation of the Merger in a manner adverse
to Digital, (ii) the ViewStar Board recommends an Alternative Proposal to the
ViewStar Shareholders, (iii) the ViewStar Board recommends that the ViewStar
Shareholders tender their shares pursuant to any tender offer or exchange offer
for 25% or more of the outstanding ViewStar Stock, or (iv) any condition of the
Merger to be fulfilled by ViewStar cannot reasonably be expected to be satisfied
by February 15, 1997. ViewStar may terminate the Merger Agreement if (a) the
Digital Board withdraws or modifies its recommendation of the Issuance in a
manner adverse to ViewStar or (b) any condition of the Merger to be fulfilled by
Digital cannot reasonably be expected to be fulfilled by February 15, 1997.
AGREEMENT OF DIGITAL AFFILIATES TO VOTE IN FAVOR OF THE ISSUANCE
Concurrently with the execution of the Merger Agreement, Digital, the
Digital Affiliates and the ViewStar Affiliates entered into the Shareholders
Agreement pursuant to which each Digital Affiliate has agreed to attend the
Digital Special Meeting in person or by proxy and to vote all Digital Common
Shares that such shareholder has the right to vote in favor of the Issuance. See
"THE MERGER -- Shareholders Agreement."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code. It is a condition to the obligation of Digital and ViewStar to
consummate the Merger that Digital and ViewStar shall have received an opinion
from Perkins Coie, tax counsel to Digital ("Tax Counsel") to the effect that (i)
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, (ii) each of Digital, Merger
Sub and ViewStar will be a party to the reorganization within the meaning of
Section 368(b) of the Code, (iii) no gain or loss will be recognized by Digital,
Merger Sub or ViewStar as a result of the Merger, (iv) no gain or loss will be
recognized by a ViewStar Shareholder as a result of the Merger with respect to
shares of ViewStar Stock converted solely into Digital Common Shares (except
with respect to cash received by such shareholders in lieu of fractional
shares), and (v) no gain or loss will be recognized by Digital or holders of
ViewStar Options that qualify as incentive stock options upon the exchange of
such options for Replacement Options. The effects of any cash received in lieu
of fractional share interests are discussed below.
Based upon the advice of Tax Counsel, Digital and ViewStar expect that the
Merger will qualify as a reorganization under the Code with the consequences set
forth above. Assuming that the Merger so qualifies, the tax basis of the Digital
Common Shares (including the Holdback Shares) received by ViewStar Shareholders
in the Merger will be the same, in each instance, as the tax basis of the
ViewStar Stock surrendered in exchange therefor, excluding any basis allocable
to fractional share interests in Digital Common Shares for which cash is
received. In addition, the holding period of the Digital Common Shares
(including the Holdback Shares) received in the Merger by ViewStar Shareholders
will include the period during which the shares of ViewStar Stock surrendered in
exchange therefor were held, provided that such shares of ViewStar Stock were
held as capital assets at the Effective Time.
ViewStar Shareholders who receive cash in the Merger as a result of the
rounding off of fractional share interests in Digital Common Shares will be
treated, in each instance, as having received the fractional share interests and
then as having sold such interests for the cash received. This sale will result
in the recognition of gain or loss for federal income tax purposes, measured by
the difference between the amount of cash received and the portion of the basis
of the share of ViewStar Stock allocable to such fractional share interests.
Such gain or loss will be capital gain or loss, if such share of ViewStar Stock
was held as a capital asset at the Effective Time, and will be long-term capital
gain or loss if such share of ViewStar Stock has been held for more than one
year and the receipt of such cash is not essentially equivalent to a dividend.
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A ViewStar Shareholder who receives cash in the Merger as a result of the
exercise of dissenters' rights will, if the shares of ViewStar Stock were held
as a capital asset at the Effective Time, recognize capital gain or loss
measured by the difference between the amount of cash received by such ViewStar
Shareholder and such shareholder's basis for such shares of ViewStar Stock,
assuming that the receipt of cash is not essentially equivalent to a dividend.
Such capital gain or loss will be long-term capital gain or loss if the shares
of ViewStar Stock were held for more than one year at the Effective Time;
otherwise, it will be treated as short-term capital gain or loss.
Continuity of Interest Requirement. To qualify as a reorganization, the
Merger must satisfy certain requirements for tax-free reorganizations, including
the "continuity of interest" requirement. To satisfy the "continuity of
interest" requirement, ViewStar Shareholders must not, pursuant to a plan or
intent existing at or prior to the Merger, dispose of or transfer so much of
either (i) their ViewStar Common Stock in anticipation of the Merger or (ii) the
Digital Common Shares to be received in the Merger, including dispositions
through the receipt of cash in lieu of fractional shares or the exercise of
dissenters' rights (collectively, "Planned Dispositions"), that the holders of
ViewStar Stock, as a group, would no longer have a significant equity interest
in the ViewStar business conducted by Digital after the Merger.
ViewStar has represented that there is no plan or intention on the part of
ViewStar Shareholders owning 5% or more of the ViewStar Stock, and that ViewStar
knows of no plan or intention on the part of the remaining ViewStar
Shareholders, to engage in Planned Dispositions that would reduce the holdings
of Digital Common Shares by all ViewStar Shareholders to less than 50% of the
total value of the ViewStar Stock as of the Closing Date. Furthermore, certain
significant ViewStar Shareholders have represented that they have no current
plan or intention to sell more than 25% of the Digital Common Shares they will
receive in the Merger, taking into account Planned Dispositions (with the
exception, in the case of such shareholders that are partnerships, of certain
transfers to partners of such shareholders that do not constitute a Planned
Disposition). See "THE MERGER -- Shareholders Agreement."
Assuming the accuracy of these representations as of the Effective Time and
that the ViewStar Shareholders holding less than 5% of the ViewStar Stock will
not engage in Planned Dispositions that would reduce the holding of Digital
Common Shares by all ViewStar Shareholders (taking into account Planned
Dispositions) to less than 50% of the total value, as of the Effective Time, of
all the formerly outstanding ViewStar Stock at such time, the "continuity of
interest" requirement will be met. If the representations or assumptions above
prove to be inaccurate, it is possible that the "continuity of interest"
requirement will not be satisfied, and if such requirement is not satisfied, the
Merger would not be treated as a reorganization. See "-- Assumptions Made by Tax
Counsel; Failure of the Merger to Qualify as a Tax-Free Reorganization" below.
"Substantially All" Requirement. In the case of reorganizations that are
subsidiary mergers, such as the Merger, the surviving corporation must acquire
"substantially all" the assets of the acquired corporation. For advance letter
ruling purposes the Internal Revenue Service (the "IRS") will rule that the
"substantially all" requirement will be met if, at the time of the merger, the
surviving corporation holds at least 90% of the fair market value of the net
assets and 70% of the fair market value of the gross assets of the acquired
corporation (taking into account certain premerger redemptions and distributions
and amounts used by the acquired corporation to pay reorganization expenses and
dissenting shareholders). Each of Digital and ViewStar has represented that the
IRS ruling standard set forth above will be met. Accordingly, assuming the
accuracy of these representations, the "substantially all" requirement will be
met. If the representations or this assumption proves to be inaccurate because,
for example, ViewStar's payments to dissenters constitute more than 10% of the
fair market value of the net assets of ViewStar, it is possible that the
"substantially all" requirement will not be satisfied, and if such requirement
is not satisfied, the Merger would not be treated as a reorganization. See
"--Assumptions Made by Tax Counsel; Failure of the Merger to Qualify as a
Tax-Free Reorganization" below.
Assumptions Made by Tax Counsel; Failure of the Merger to Qualify as a
Tax-Free Reorganization. Tax Counsel's opinion will be based on the assumptions
set forth above and upon the following assumptions: (i) the Merger will be
consummated in accordance with the Merger Agreement, (ii) the representations
given
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by Digital in that certain Digital Tax Certificate attached as Exhibit 6.16 to
the Merger Agreement by ViewStar in that certain ViewStar Tax Certificate
attached as Exhibit 5.16 to the Merger Agreement (including the representations
by ViewStar and Digital that any intercompany indebtedness between the companies
was negotiated at arm's length and is commercially reasonable and the
representation by Digital that it has no plan or intention, as of the Effective
Time, to liquidate ViewStar and that it will not liquidate ViewStar within two
years of the Effective Time) and by certain significant ViewStar Shareholders
are accurate, and (iii) after the Effective Time the parties intend ViewStar to
continue its business as a wholly owned subsidiary of Digital. Should any of
these assumptions or representations upon which the tax opinion regarding the
Merger is based prove inaccurate, the Merger may not qualify as a tax-free
reorganization under Section 368(a) of the Code. Furthermore, the tax opinion is
not binding upon the IRS, which may challenge the qualification of the Merger as
a reorganization under Section 368(a) of the Code.
If the Merger does not so qualify, the ViewStar Shareholders will recognize
gain or loss upon the Merger in an amount equal to the difference between the
fair market value at the Effective Time of the Digital Common Shares received,
including Holdback Shares, and the adjusted tax basis of the ViewStar
Shareholders in the shares of ViewStar Stock exchanged therefor. In such event,
a former ViewStar Shareholder's aggregate basis in the Digital Common Shares so
received would equal its fair market value, and the ViewStar Shareholder's
holding period for such Digital Common Shares would begin the day after the
Effective Time.
Qualification of Incentive Stock Options. The opinion of Tax Counsel with
respect to incentive stock options set forth above is limited to the exchange of
ViewStar Options that qualify as incentive stock options for Replacement
Options. No opinion is expressed as to whether particular ViewStar Options meet
the requirements for incentive stock options set forth in the Code. Furthermore,
no opinion is expressed as to the tax consequences of the exchange of ViewStar
Options that do not qualify as incentive stock options for Replacement Options
or, alternatively, the assumption of such nonqualifying ViewStar Options by
Digital. Replacement Options received in exchange for ViewStar Options that do
not qualify as incentive stock options will not qualify as incentive stock
options.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION
WHETHER TO VOTE IN FAVOR OF APPROVAL OF THE MERGER AGREEMENT OR IN FAVOR OF
APPROVAL OF THE ISSUANCE. THE DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES
THAT MAY BE RELEVANT TO A PARTICULAR VIEWSTAR SHAREHOLDER SUBJECT TO SPECIAL
TREATMENT UNDER CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS DEALERS IN SECURITIES,
BANKS, INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS, NON-UNITED STATES PERSONS
AND SHAREHOLDERS WHICH ACQUIRED THEIR SHARES OF VIEWSTAR STOCK PURSUANT TO THE
EXERCISE OF VIEWSTAR OPTIONS OR OTHERWISE AS COMPENSATION, NOR DOES IT ADDRESS
ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCALITY OR FOREIGN
JURISDICTION. MOREOVER, THE TAX CONSEQUENCES TO HOLDERS OF VIEWSTAR OPTIONS THAT
ARE NOT INCENTIVE STOCK OPTIONS OR TO PERSONS HOLDING SHARES OF VIEWSTAR COMMON
STOCK THAT ARE SUBJECT TO RESTRICTION ARE NOT DISCUSSED. THE DISCUSSION IS BASED
ON THE CODE, TREASURY REGULATIONS THEREUNDER AND ADMINISTRATIVE RULINGS AND
COURT DECISIONS AS OF THE DATE HEREOF. ALL OF THE FOREGOING ARE SUBJECT TO
CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THE
DISCUSSION. VIEWSTAR SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER
TO THEM.
RESALE OF DIGITAL COMMON SHARES ISSUED IN THE MERGER; AFFILIATES
The Digital Common Shares to be issued to ViewStar Shareholders in
connection with the Merger will be freely transferable under the Securities Act,
except for Digital Common Shares issued to the ViewStar
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Affiliates, who may not sell their Digital Common Shares acquired in connection
with the Merger except pursuant to an effective registration statement under the
Securities Act covering such shares, or in compliance with Rule 145 promulgated
under the Securities Act or another applicable exemption from the registration
requirements of the Securities Act. Each ViewStar Affiliate has agreed not to
sell, transfer or otherwise dispose of any Digital Common Shares received in the
Merger in violation of the Securities Act, and that such ViewStar Affiliate will
not, after the 30th day prior to the Effective Time, sell any Digital Common
Shares or any ViewStar securities until after such time as consolidated
financial statements which reflect at least 30 days of post-Merger operations
have been published by Digital, except for (a) certain distributions to partners
by ViewStar Shareholders which are general or limited partnerships or (b) other
transfers or dispositions that, taking into account the actions of other
affiliates, will not prevent Digital from accounting for the Merger as a
pooling-of-interests. See "THE MERGER -- Accounting Treatment; Sale of Shares."
ACCOUNTING TREATMENT; SALE OF SHARES
It is expected that the Merger will be accounted for as a
pooling-of-interests for accounting and financial reporting purposes. It is a
condition to the obligation of Digital to consummate the Merger that Digital
receive the opinion of KPMG Peat Marwick LLP that the Merger can be accounted
for as a pooling-of-interests. Pursuant to the Merger Agreement, Digital has
agreed that, if necessary to ensure that the Merger will be accounted for as a
pooling-of-interests, it will sell up to 300,000 Digital Common Shares that were
purchased by Digital within the last two years. See "THE MERGER -- Conditions;
Waivers."
APPOINTMENT OF VIEWSTAR REPRESENTATIVES TO THE DIGITAL BOARD
Currently Digital has seven directors. The Digital Bylaws authorize a range
of from three to nine directors, and the number of directors on the Digital
Board is currently set at seven. Digital has agreed to increase the size of the
Digital Board and to appoint two representatives of ViewStar to the Digital
Board at the Effective Time. Kamran Kheirolomoom, currently President and Chief
Executive Officer of ViewStar, and Umang Gupta, a director of ViewStar, will be
appointed to the Digital Board for terms that will expire at the next annual
meeting of Digital shareholders.
MANAGEMENT AND OPERATIONS OF VIEWSTAR AFTER THE MERGER
After the Merger, ViewStar will be a wholly owned subsidiary of Digital.
ViewStar will operate as one of Digital's business units, and Digital currently
intends to maintain ViewStar's corporate headquarters in Alameda, California.
After the Merger, ViewStar will have access to resources generally available to
Digital's other business units, will participate in appropriate activities with
other Digital business units and will operate under the direction and guidance
of Digital's senior management and the Digital Board.
In addition, pursuant to employment agreements with Digital that will
become effective at the Effective Time, Kamran Kheirolomoom, Gayle Crowell,
Robert Pender, Jr. and Steve Russell will become President; Senior Vice
President, Enterprise Applicants Group; Vice President, Finance; and Vice
President, Product Development, respectively, of the Surviving Corporation after
the Merger. See "THE MERGER -- Interests of Certain Persons in the Merger."
EXPENSES AND FEES
All fees and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby will be paid by the party incurring such
expenses, whether or not the Merger is consummated, except that Digital and
ViewStar have agreed that Digital will pay 70% and ViewStar will pay 30% of all
fees and expenses (other than attorneys' fees) incurred to print and file this
Proxy Statement/Prospectus and the Registration Statement (including financial
statements and exhibits) and any amendments or supplements thereto.
In addition, ViewStar has agreed to pay Digital a fee of $4,000,000, plus
actual, documented and reasonable out-of-pocket expenses of Digital relating to
the transactions contemplated by the Merger Agreement (including, but not
limited to, fees and expenses of Digital's counsel, accountants and financial
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advisors, but excluding any discretionary fees paid to such financial advisors),
upon the first to occur of the following events:
(i) the termination of the Merger Agreement by Digital if the ViewStar
Board withdraws or modifies its recommendation of the Merger Agreement in a
manner adverse to Digital, recommends an Alternative Transaction (as
hereinafter defined) or recommends a tender or exchange offer for 25% or
more of the outstanding ViewStar Stock;
(ii) the termination of the Merger Agreement by Digital after a breach
by ViewStar of certain provisions of the Merger Agreement;
(iii) the termination of the Merger Agreement by Digital or ViewStar
as a result of the failure to receive the requisite consents in favor of
approval of the Merger Agreement by the ViewStar Shareholders; or
(iv) the termination of the Merger Agreement by ViewStar or Digital
upon ViewStar's resolution to accept a Superior Proposal.
Digital similarly has agreed to pay ViewStar a fee of $4,000,000, plus
actual, documented and reasonable out-of-pocket expenses of ViewStar relating to
the transactions contemplated by the Merger Agreement (including, but not
limited to, fees and expenses of ViewStar's counsel, accountants and financial
advisors, but excluding any discretionary fees paid to such financial advisors),
upon the first to occur of the following events:
(i) the termination of the Merger Agreement by ViewStar after a breach
by Digital of certain provisions of the Merger Agreement;
(ii) the termination of the Merger Agreement by Digital or ViewStar as
a result of the failure to receive the requisite vote for approval of the
Issuance by the Digital Shareholders at the Digital Special Meeting; or
(iii) the termination of the Merger Agreement by ViewStar if the
Digital Board withdraws or modifies its recommendation of the Issuance in a
manner adverse to ViewStar.
In the event either party terminates the Merger Agreement under
circumstances requiring payment of a fee as described above, the paying party
shall be required to pay an additional fee of $2,000,000 (plus actual,
documented and reasonable out-of-pocket expenses incurred in the collection of
such fee) if the paying party consummates an Alternative Transaction within six
months of the termination of the Merger Agreement. An "Alternative Transaction"
means any transaction in which another person acquires more than 25% of the
outstanding shares or assets of either company, whether by purchase, merger or
otherwise.
RIGHTS OF DISSENTING VIEWSTAR SHAREHOLDERS
If the Merger Agreement is approved by the required vote of ViewStar
Shareholders and is not abandoned or terminated, holders of ViewStar Common
Stock who did not consent to the Merger may, by complying with Sections 1300
through 1312 of the CCC, be entitled to dissenters' rights as described therein.
Holders of ViewStar Preferred Stock are not entitled to dissenters' rights or to
request cash for shares. The record holders of the shares of ViewStar Common
Stock that are eligible to, and do, exercise dissenters' rights with respect to
the Merger are referred to herein as "Dissenting Shareholders," and the shares
of ViewStar Common Stock with respect to which they exercise dissenters' rights
are referred to herein as "Dissenting Shares." If a ViewStar Shareholder has a
beneficial interest in shares of ViewStar Common Stock that are held of record
in the name of another person, such as a broker or nominee, and such ViewStar
Shareholder desires to perfect whatever dissenters' rights such beneficial
ViewStar Shareholder may have, such beneficial ViewStar Shareholder must act
promptly to cause the holder of record timely and properly to follow the steps
summarized below.
The following discussion is not a complete statement of California law
relating to dissenters' rights and is qualified in its entirety by reference to
Sections 1300 through 1312 of the CCC attached to this Proxy
Statement/Prospectus as Annex IV and incorporated herein by reference. This
discussion and Sections 1300
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through 1312 of the CCC should be reviewed carefully by any holder who wishes to
exercise statutory dissenters' rights or preserve the right to do so, since
failure to comply with the required procedures will result in the loss of such
rights.
Shares of ViewStar Common Stock must satisfy each of the following
requirements to qualify as Dissenting Shares: (i) the shares of ViewStar Common
Stock must have been outstanding on the ViewStar Record Date, (ii) the
Dissenting Shareholder must not have consented to the Merger Agreement, (iii)
the Dissenting Shareholder must make a written demand that ViewStar repurchase
shares of ViewStar Common Stock at fair market value (as defined below), and
(iv) the Dissenting Shareholder must submit Certificates for endorsement.
Pursuant to Sections 1300 through 1312 of the CCC, Dissenting Shareholders
may require ViewStar to repurchase their Dissenting Shares at a price equal to
the fair market value of such shares determined as of the day before the
announcement of the terms of the Merger, excluding any appreciation or
depreciation as a consequence of the proposed Merger, but adjusted for any stock
split, reverse stock split or stock dividend that becomes effective thereafter.
Within ten days following approval of the Merger by ViewStar Shareholders,
ViewStar is required to mail to each holder of shares of ViewStar Common Stock
who did not consent to the Merger Agreement a notice of the approval of the
Merger Agreement, a statement of the price determined by ViewStar to represent
the fair market value of Dissenting Shares (which shall constitute an offer by
ViewStar to purchase such Dissenting Shares at such stated price), and a
description of the procedures for such holders to exercise their rights as
Dissenting Shareholders.
Within 30 days after the date on which the notice of the approval of the
Merger Agreement by the outstanding shares of ViewStar Stock is mailed to
Dissenting Shareholders, a Dissenting Shareholder must demand that ViewStar
repurchase such Dissenting Shareholder's Dissenting Shares in a statement,
setting forth the number and class of Dissenting Shares held of record by such
Dissenting Shareholder, that the Dissenting Shareholder demands that ViewStar
purchase the Dissenting Shares, and a statement of what the Dissenting
Shareholder claims to be the fair market value of the Dissenting Shares as of
the day before the announcement of the proposed Merger. The statement of fair
market value in such demand by the Dissenting Shareholder constitutes an offer
by the Dissenting Shareholder to sell the Dissenting Shares at such price within
such 30-day period. Such holder must also submit to ViewStar or its transfer
agent Certificates representing any Dissenting Shares that the Dissenting
Shareholder demands ViewStar purchase, so that such Dissenting Shares may either
be stamped or endorsed with the statement that the shares are Dissenting Shares
or exchanged for Certificates of appropriate denomination so stamped or
endorsed.
If, upon the Dissenting Shareholder's surrender of the Certificate
representing the Dissenting Shares, ViewStar and a Dissenting Shareholder agree
upon the price to be paid for the Dissenting Shares and agree that such shares
are Dissenting Shares, then the agreed price is required by law to be paid to
the Dissenting Shareholder within the later of 30 days after the date of such
agreement and 30 days after any statutory or contractual conditions to the
consummation of the Merger are satisfied or waived.
If ViewStar and a Dissenting Shareholder disagree as to the price for such
Dissenting Shares or disagree as to whether such shares are entitled to be
classified as Dissenting Shares, such holder has the right to bring an action in
California Superior Court, within six months after the date on which the notice
of approval of the Merger Agreement by ViewStar Shareholders is mailed, to
resolve such dispute. In such action, the court will determine whether the
shares of ViewStar Common Stock held by such Dissenting Shareholder are
Dissenting Shares, the fair market value of such shares of ViewStar Common
Stock, or both. The CCC provides, among other things, that a Dissenting
Shareholder may not withdraw the demand for payment of the fair market value of
Dissenting Shares unless ViewStar consents to such request for withdrawal.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Employment Agreements. Kamran Kheirolomoom, Robert I. Pender, Jr. and
Gayle A. Crowell, each an executive officer of ViewStar, as well as another Vice
President of ViewStar, have entered into employment
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agreements with Digital that provide for the 1997 base salaries to be paid to
such individuals, their eligibility for performance-based bonus payments and
individual grants of stock options which begin vesting in 1998. In addition,
with respect to Mr. Pender, Ms. Crowell and the other Vice President of
ViewStar, Digital has agreed to pay an additional one-time bonus that must be
repaid should the employee terminate his or her employment prior to December 31,
1997.
If either Mr. Kheirolomoom or Mr. Pender terminates his employment for
"good reason," or if Digital terminates employment without "cause" (as such
terms are defined in the employment agreements), Digital is required to pay to
Mr. Kheirolomoom or Mr. Pender, as the case may be, his base salary, bonus and
stock option vesting through the end of 1997 or, if greater, six months' base
salary, bonus and stock option vesting as of the date of termination. In
addition, if prior to December 31, 1997, Mr. Kheirolomoom's employment is
terminated by Digital for any reason (or if he terminates employment for good
reason), Digital will continue to provide certain benefits to which Mr.
Kheirolomoom is entitled under his current employment agreement with ViewStar.
If Ms. Crowell terminates her employment for good reason, or if Digital
terminates such employment without cause, Ms. Crowell will receive twelve
months' compensation and benefits. If, prior to December 31, 1997, her
employment is terminated by Digital for any reason (or if she terminates
employment for good reason), any stock options held by Ms. Crowell will continue
to vest through December 31, 1997.
Vesting of ViewStar Restricted Stock. Pursuant to the terms of certain
Restricted Stock Agreements entered into in March 1996, certain officers and key
employees have purchased shares of ViewStar Common Stock which are subject to
ViewStar's right of repurchase should the employment of such officers or key
employees be terminated. Each month, such restrictions lapse with respect to 2%
of the shares purchased under the Restricted Stock Agreements. In addition,
immediately prior to the Effective Time, in accordance with their terms,
one-half of all the unvested shares of ViewStar Restricted Stock outstanding
will automatically become fully vested, and ViewStar's right to repurchase such
shares of ViewStar Restricted Stock will lapse with respect to such shares. As
of October 14, 1996, 441,427 shares of ViewStar Restricted Stock were issued and
outstanding. At the Effective Time, approximately 305,909 Digital Common Shares
will be issued pursuant to the Merger for such shares of ViewStar Restricted
Stock, of which 119,542 shares will be subject to the right of repurchase.
Indemnification of Directors and Officers Pursuant to the Merger
Agreement. From and after the Effective Time, Digital will, and will cause the
Surviving Corporation to, indemnify, defend and hold harmless the present and
former officers, directors and employees of ViewStar against all losses,
expenses, claims, damages or liabilities arising out of actions or omissions
occurring prior to the Effective Time (including, without limitation, the
transactions contemplated by this Proxy Statement/Prospectus) to the fullest
extent permitted or required under applicable law (and will also advance
expenses as incurred to the fullest extent permitted under applicable law,
provided that the person to whom expenses are advanced provides an undertaking
to repay such advances if it is ultimately determined that such person is not
entitled to indemnification). Digital and Merger Sub have agreed that all such
rights to indemnification will, with respect to matters occurring through the
Effective Time, survive the Merger and will continue in full force and effect
for a period of not less than six years from the Effective Time.
SHAREHOLDERS AGREEMENT
Concurrently with the execution of the Merger Agreement, Digital, the
Digital Affiliates and the ViewStar Affiliates entered into the Shareholders
Agreement, pursuant to which (i) each ViewStar Affiliate has agreed to give
written consent with respect to all shares of ViewStar Stock that such ViewStar
Affiliate has the right to vote to approve the Merger Agreement, and (ii) each
Digital Affiliate has agreed to attend the Digital Special Meeting, in person or
by proxy, and to vote all Digital Common Shares that such Digital Affiliate has
the right to vote for approval of the Issuance.
The Shareholders Agreement also contains certain provisions relating to the
treatment of the Merger as a pooling-of-interests for accounting purposes.
Specifically, each ViewStar Affiliate and Digital Affiliate has agreed that (i)
until 30 days prior to the Effective Time, without the consent of Digital (which
shall not be unreasonably withheld), such ViewStar Affiliate or Digital
Affiliate will not transfer or otherwise dispose of
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any ViewStar Stock or any Digital capital stock, except for certain limited
transfers and other dispositions specified in the Shareholders Agreement, and
(ii) from and after 30 days prior to the Effective Time, such ViewStar Affiliate
or Digital Affiliate will not sell or transfer any ViewStar Stock or any Digital
capital stock (except for sales or transfers that will not prevent Digital from
accounting for the Merger as a pooling-of-interests) until the Affiliates
Expiration Date.
Pursuant to the Shareholders Agreement, the ViewStar Affiliates have also
acknowledged the resale restrictions imposed by Rule 145 promulgated under the
Securities Act on the Digital Common Shares to be received by them in the
Merger. In addition, the ViewStar Affiliates have made certain representations
pertaining to the "continuity of interests" requirements for a tax-free
reorganization. See "THE MERGER -- Certain Federal Income Tax Consequences."
REGISTRATION RIGHTS AGREEMENT
To induce certain of the ViewStar Affiliates which are venture capital
funds to sign the Shareholders Agreement, Digital has agreed to enter into a
registration rights agreement (the "Registration Rights Agreement") with such
ViewStar Affiliates prior to the Closing Date. The Registration Rights Agreement
will (i) provide for one shelf registration on a Form S-3 registration statement
of the Digital Common Shares to be issued to each such ViewStar Affiliate
pursuant to the Merger Agreement, (ii) cover nonunderwritten sales by such
ViewStar Affiliate (or its distributee partners) of such Digital Common Shares
during any three-month period during 1997 when such ViewStar Affiliate would be
unable to sell all of its Digital Common Shares pursuant to Rule 145(d)
promulgated under the Securities Act, and (iii) contain other terms that are
usual and customary for such agreements.
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DESCRIPTION OF DIGITAL CAPITAL STOCK
The following descriptions are summarized from the provisions of the
Digital Articles of Incorporation.
Digital's authorized capital includes 25,000,000 Digital Common Shares. All
Digital Common Shares are entitled to participate equally in dividends. Each
Digital Shareholder has one vote for each share registered in such shareholder's
name as of the applicable record date for any matter presented to Digital
Shareholders. All Digital Common Shares rank equally on liquidation. All
outstanding Digital Common Shares, and all Digital Common Shares to be issued
pursuant to the Merger, are or will be fully paid and nonassessable by Digital.
Holders of Digital Common Shares have no preemptive rights and are not entitled
to cumulate their votes in the election of directors.
Digital's authorized capital also includes a class of 5,000,000 shares of
Preferred Stock. No shares of Preferred Stock are issued or outstanding. The
Digital Board is authorized to establish the number of shares, designations,
relative rights, preferences and limitations, including voting and conversion
rights, of any future series of Preferred Stock.
COMPARATIVE RIGHTS OF VIEWSTAR
SHAREHOLDERS AND DIGITAL SHAREHOLDERS
Digital was incorporated in Washington in 1984. ViewStar was incorporated
in California in 1986. If the Merger is consummated, holders of ViewStar Stock
will become holders of Digital Common Shares, and the rights of the former
ViewStar Shareholders will be governed by the laws of Washington, the WBCA, the
Digital Articles of Incorporation and the Digital Bylaws. The rights of ViewStar
Shareholders currently are governed by the laws of California, the CCC, the
ViewStar Articles of Incorporation and the ViewStar Bylaws. The following is a
summary of certain material differences between the rights of the Digital
Shareholders and the ViewStar Shareholders and does not purport to be a complete
statement of the rights of such shareholders under the above-mentioned
provisions. This summary is qualified in its entirety by reference to the full
text of such documents. For information as to how such documents may be
obtained, see "AVAILABLE INFORMATION."
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Digital. The WBCA provides that the board of directors of a Washington
corporation shall consist of one or more directors as fixed by its articles of
incorporation or bylaws. The Digital Bylaws provide that the Digital Board shall
be comprised of not fewer than three nor more than nine members, which number
may be increased or decreased within such range by the Digital Board or the
Digital Shareholders. The number of Digital directors currently is set at seven
and will be increased to nine as of the Effective Time. As permitted by the
WBCA, the Digital Board is classified into three classes which are approximately
equal in number. Directors of each class serve for a term of three years, and
elections are staggered such that approximately one-third of the Digital Board
is elected each year.
ViewStar. Under the CCC, although changes in the number of directors must
in general be approved by the shareholders, the board of directors of a
California corporation may fix the exact number of directors within a stated
range set forth in the corporation's articles of incorporation or bylaws, if the
stated range has been approved by the shareholders. The ViewStar Bylaws provide
that the ViewStar Board shall be comprised of not less than four nor more than
seven members, which number may be increased or decreased within such range by
the vote of a majority of the shares outstanding and entitled to vote; provided,
however, that the number of directors may not be reduced to a number less than
five if 16 2/3% of the shares outstanding and entitled to vote on the matter
cast votes against such proposal. The number of ViewStar directors currently is
set at six. The ViewStar Board is not classified. Directors serve for a term of
one year, and all directors are elected at the same meeting.
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CUMULATIVE VOTING
Digital. As is permitted by the WBCA, the Digital Articles of
Incorporation expressly deny Digital Shareholders the right to cumulate their
votes in the election of directors.
ViewStar. Under the CCC, cumulative voting in the election of directors is
a right available to all shareholders of California corporations unless a
corporation is "listed" for trading and that corporation's articles of
incorporation specifically eliminate cumulative voting. The ViewStar Articles of
Incorporation do not (and may not) eliminate cumulative voting.
REMOVAL OF DIRECTORS
Digital. The Digital Bylaws provide that the Digital Shareholders may
remove one or more of Digital's directors, with or without cause, at a special
meeting called for such purpose, by the affirmative vote of shares representing
a majority of the votes cast in person or by proxy at the special meeting.
ViewStar. The CCC provides that no director may be removed (unless all
directors are removed) if the votes cast against removal, or not consenting to
removal, would be sufficient to elect the director if voted cumulatively at an
election at which the same total number of votes were cast and the entire number
of directors authorized at the time of the director's most recent election were
then being elected.
SPECIAL MEETINGS OF SHAREHOLDERS
Digital. Under the Digital Bylaws, a special meeting of Digital
Shareholders may be called only by Digital's President, the Chairman of the
Board or the Digital Board, or by the holders of 10% of the voting shares
entitled to vote at such special meeting. Business to be transacted at a special
meeting is limited to the purposes stated in the notice of the special meeting
given to Digital Shareholders. Notice of a special meeting ordinarily must be
given to shareholders at least 10 and no more than 60 days prior to the special
meeting, but must be given at least 20 days and no more than 60 days prior to
the date of a special meeting called for the consideration of certain
extraordinary matters.
ViewStar. Under the CCC, a special meeting of shareholders may be called
only by the corporation's board of directors, president, chairman of the board,
or the holders of at least 10% of the voting shares entitled to vote at such
special meeting. The ViewStar Bylaws do not authorize any additional methods of
calling a special meeting. If called by the ViewStar Shareholders, the ViewStar
Bylaws provide that the ViewStar Shareholders demanding the meeting must give a
written notice of the meeting to the Chairman, President, Vice President or
Secretary of ViewStar. Such notice must state the time of, and the matters to be
considered at, the special meeting. ViewStar's officers must give timely notice
of the special meeting to the ViewStar Shareholders at least 35 but no more than
60 days prior to the special meeting. In the event notice of a special meeting
is not given within 20 days of a ViewStar Shareholder demand, however, the
demanding shareholder(s) may provide such notice to the other ViewStar
Shareholders.
ACTION WITHOUT MEETING
Digital. The Digital Bylaws provide that any action that may be taken at a
meeting of Digital Shareholders may be taken by written consent setting forth
the actions taken and signed by all Digital Shareholders entitled to vote with
respect to such action.
ViewStar. The ViewStar Bylaws provide that any action that may be taken at
a meeting of ViewStar Shareholders may be taken by written consent setting forth
the actions taken and signed by the holders of shares representing a majority of
the voting power of the class of stock voting thereon.
AMENDMENTS TO ARTICLES
Digital. The WBCA authorizes a corporation's board of directors to make
various changes of an administrative nature to the corporation's articles of
incorporation, including changes of corporate name, changes to the number of
outstanding shares in order to effectuate a stock split or stock dividend in the
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corporation's own shares, and changes to or elimination of provisions with
respect to the par value of the corporation's stock. Other amendments to a
corporation's articles of incorporation must be recommended to the shareholders
by the board of directors, unless the board determines that, because of a
conflict of interest or other special circumstances, it should make no
recommendation, and must be approved by a majority (if the corporation is a
public company) of all votes entitled to be cast by each voting group that has a
right to vote on the amendment. The articles of incorporation of a corporation
may provide for a higher percentage of shareholder approval, but the Digital
Articles of Incorporation do not so provide.
ViewStar. Sections 902 and 903 of the CCC provide that any action to amend
a corporation's articles of incorporation must be approved by a majority of the
outstanding voting shares of each class of shares entitled to vote thereon.
ADVANCE NOTICE REQUIREMENT FOR SHAREHOLDER PROPOSALS AND NOMINATIONS
Digital's Bylaws require reasonable advance notice by a Digital
Shareholder, delivered to Digital's Secretary between 60 and 90 days prior to
the date of the annual meeting (or, if Digital provides less than 60 days'
notice of its annual meeting, not more than 10 days following the mailing of
such notice), of a proposal or director nomination that such shareholder desires
to present at the annual shareholders meeting. ViewStar's Bylaws do not require
advance notice of proposals or director nominations intended to be presented by
a ViewStar Shareholder at an annual shareholders meeting.
INSPECTION OF SHAREHOLDER LISTS
Digital. Under the WBCA, a shareholder may inspect a corporation's
shareholder list in connection with a shareholders meeting. Shareholders may
inspect the voting shareholder list, which must be kept at the corporation's
principal offices or at a place identified in the meeting notice in the city in
which the meeting is to be held, beginning 10 days prior to the meeting and
continuing through the meeting. Any demand to copy such records must be made
with five days' advance notice to the corporation. A shareholder also may
inspect the corporation's shareholder list by exercising his or her right under
the WBCA to inspect the corporation's records for any proper purpose, provided
the shareholder's demand is made in good faith and with five days' advance
notice.
ViewStar. The CCC allows any shareholder to inspect the shareholder list
for a purpose reasonably related to such person's interest as a shareholder.
Additionally, the CCC provides for an absolute right to inspect and copy the
corporation's shareholder list by a person or persons holding at least 5% in the
aggregate of the corporation's outstanding voting shares, or any shareholder or
shareholders holding 1% or more of such shares who have filed a Schedule 14B
with the Commission relating to the election of directors (such schedule was
repealed by the Commission in 1992).
DIVIDENDS
Digital. Under the WBCA, a corporation may declare and pay dividends
unless (i) the corporation would, as a result, become unable to pay its debts as
they become due in the usual course of business or (ii) the corporation's total
assets would be less than the sum of its total liabilities plus any preferential
rights of shares senior to those receiving distributions. Under the Digital
Articles of Incorporation, the rights of holders of Digital Common Shares to
receive dividends are subject to the preferential rights of holders of any
outstanding shares of Digital Preferred Stock. The Digital Articles of
Incorporation and Digital Bylaws do not contain any provisions further
restricting the declaration or payment of dividends.
ViewStar. The CCC provides that a corporation may make a distribution to
its shareholders if (i) the retained earnings of the corporation immediately
prior to the distribution equal or exceed the amount of the proposed
distribution or (ii) immediately after giving effect to the distribution, (a)
the sum of the assets of the corporation (exclusive of goodwill, capitalized
research and development expenses and deferred charges) would be at least equal
to 1 1/4 times its liabilities (not including deferred taxes, deferred income
and other deferred credits) and (b) the current assets of the corporation would
be at least equal to its current liabilities or, if the average of the earnings
of the corporation before taxes on income and before interest expense for the
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two preceding years was less than the average of the interest expense of the
corporation for such years, at least equal to 1 1/4 times its current
liabilities. In addition, the corporation making the distribution must not be,
and must not as a result of the distribution become, likely to be unable to meet
its liabilities (except those whose payment is otherwise adequately provided
for) as they mature. Neither the ViewStar Articles of Incorporation nor the
ViewStar Bylaws contain any presently applicable restrictions on the declaration
or payment of dividends.
AMENDMENT OF BYLAWS
Digital. Under the WBCA, the bylaws of a corporation may be amended either
by the corporation's board of directors or by its shareholders. The Digital
Bylaws may be amended or repealed by the Digital Board or by the Digital
Shareholders, except that the Digital Board may not amend any bylaw that the
Digital Shareholders have, in amending or repealing such bylaw, provided may not
be amended or repealed by the Digital Board.
ViewStar. Under the CCC, a corporation's bylaws may be adopted, amended or
repealed either by the board of directors or the shareholders of the
corporation. The ViewStar Bylaws provide that they may be changed either by vote
of the holders of a majority of the outstanding shares entitled to vote or by
the ViewStar Board (subject to the ViewStar Shareholders' ability to adopt a
bylaw provision restricting or eliminating the power of the ViewStar Board to
adopt, amend or repeal the ViewStar Bylaws); provided, however, that the
ViewStar Board may not amend the ViewStar Bylaws in order to change a fixed
number of directors (except to alter the authorized number of directors within
the existing range of a minimum of four and a maximum of seven directors) or to
change from a fixed to a variable board or vice versa. A bylaw adopted by the
ViewStar Shareholders may restrict or eliminate the power of the ViewStar Board
to adopt, amend or repeal the bylaws.
TRANSACTIONS INVOLVING OFFICERS OR DIRECTORS
Digital. The WBCA sets forth a safe harbor for transactions between a
corporation and one or more of its directors. A conflicting interest transaction
may not be enjoined, set aside or give rise to damages if (i) it is approved by
a majority of qualified directors; (ii) it is approved by the affirmative vote
of a majority of all qualified shares; or (iii) at the time of commitment, the
transaction was fair to the corporation. For purposes of this provision, a
"qualified director" is one who does not have (a) a conflicting interest
respecting the transaction or (b) a familial, financial, professional or
employment relationship with a second director, which relationship would
reasonably be expected to exert an influence on the first director's judgment
when voting on the transaction. "Qualified shares" are defined generally as
shares other than those beneficially owned, or the voting of which is
controlled, by a director who has a conflicting interest respecting the
transaction.
ViewStar. Under the CCC, any loan or guarantee to or for the benefit of a
director or officer of the corporation or its subsidiaries requires approval of
the shareholders unless such loan or guarantee is provided for under a plan
approved by shareholders owning a majority of the outstanding shares of the
corporation. In addition, the CCC permits shareholders to approve a bylaw
authorizing the board of directors alone to approve a loan or guarantee to or on
behalf of an officer (whether or not a director) if the board of directors
determines that such a loan or guarantee may reasonably be expected to benefit
the corporation, which bylaw may be utilized to authorize officer loans and
guarantees if the corporation has 100 or more shareholders of record. The
ViewStar Shareholders have approved such a bylaw provision.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Digital. Unless the articles of incorporation of the corporation state
otherwise, the WBCA permits any vacant seat on the board of directors, whether
caused by a director's resignation, removal or other departure, to be filled by
either the corporation's board of directors or by its shareholders. The WBCA
permits the board to fill a vacancy even if the directors in office constitute
less than a quorum. The Digital Articles of Incorporation do not further
restrict the Digital Board's right to fill any vacancies that may exist on the
Digital Board.
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ViewStar. Under the CCC, any vacancy on the board of directors, other than
one created by removal of a director, may be filled by the board of directors.
If the number of directors is less than a quorum, a vacancy may be filled by the
unanimous written consent of the directors then in office, by the affirmative
vote of a majority of the directors at a meeting held pursuant to notice or
waivers of notice or by a sole remaining director. A vacancy created by removal
of a director may be filled by the board of directors only if so authorized by a
corporation's articles of incorporation or by a bylaw approved by the
corporation's shareholders. The ViewStar Articles of Incorporation and ViewStar
Bylaws do not authorize the ViewStar Board to fill such a vacancy.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION
Digital. The WBCA permits a corporation to provide in its articles of
incorporation for the elimination or limitation of liability of directors to the
corporation or its shareholders for monetary damages for their conduct as
directors, except that a corporation may not limit a director's liability for
acts or omissions involving intentional misconduct or knowing violation of law,
for unlawful distributions, or for any transaction in which the director derived
an improper personal financial benefit. The Digital Articles of Incorporation
limit directors' liability to the fullest extent permitted by the WBCA.
Under the WBCA, if authorized by the articles of incorporation, a bylaw
adopted or ratified by shareholders or a resolution adopted or ratified, before
or after the event, by the shareholders, a corporation has the power to
indemnify a director or officer made a party to a proceeding, or advance or
reimburse expenses incurred in a proceeding, under any circumstances, except
that no such indemnification shall be allowed on account of (i) acts or
omissions of a director or officer finally adjudged to be intentional misconduct
or a knowing violation of law, (ii) conduct of a director or officer finally
adjudged to be an unlawful distribution, or (iii) any transaction with respect
to which it was finally adjudged that such director or officer personally
received a benefit in money, property or services to which the director or
officer was not legally entitled. Unless limited by the corporation's articles
of incorporation, the WBCA requires indemnification if the director or officer
was wholly successful on the merits of the action or otherwise. Any
indemnification of a director in a derivative action must be reported to the
shareholders in writing. Written commentary by the drafters of the WBCA, which
has the status of legislative history, specifically indicates that a corporation
may indemnify its directors and officers for amounts paid in settlement of
derivative actions, provided that the director's or officer's conduct does not
fall within one of the categories set forth above. The Digital Bylaws provide
for indemnification of directors and officers of Digital to the fullest extent
permitted by Washington law.
ViewStar. Under the CCC, a corporation is permitted to adopt a provision
in its articles of incorporation eliminating the liability of a director to the
corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty of care, provided such liability does not arise from
certain proscribed conduct, including intentional misconduct and transactions
pursuant to which the director received an improper personal benefit. In
addition, under the CCC, (i) a corporation has the power to indemnify a director
against expenses, judgments, fines and settlements if that person acts in good
faith and in a manner the person reasonably believed to be in the best interests
of the corporation and if, in the case of a criminal proceeding, the corporation
had no reasonable cause to believe the conduct of the person was unlawful, and
(ii) a corporation has the power to indemnify, with certain exceptions, any
person who is a party to any action by or in the right of the corporation
against expenses actually and reasonably incurred by that person in connection
with the defense or settlement of the action if the person acted in good faith
and in a manner the person believed to be in the best interests of the
corporation and its shareholders.
The indemnification authorized by the CCC is not exclusive, and a
corporation may grant its directors, officers, employees or other agents certain
additional rights to indemnification. The ViewStar Articles of Incorporation and
the ViewStar Bylaws provide for indemnification of its agents (as defined under
the CCC) to the fullest extent permissible under the CCC, which may be in excess
of the indemnification expressly permitted by Section 317 of the CCC.
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PROVISIONS AFFECTING ACQUISITIONS AND BUSINESS COMBINATIONS
Digital. Chapter 23B.19 of the WBCA, which applies to Washington
corporations that have a class of voting stock registered under the Exchange
Act, prohibits a "target corporation," with certain exceptions, from engaging in
certain "significant business transactions" with a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation (an "Acquiring Person") 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. Such prohibited transactions include, among other
things, a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person, termination of 5% or more
of the employees of the target corporation as a result of the Acquiring Person's
acquisition of 10% or more of the shares or allowing the Acquiring Person to
receive any disproportionate benefit as a shareholder. 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. A corporation may
not opt out of this statute. This provision may have the effect of delaying,
deferring or preventing a change of control of Digital.
ViewStar. California has no statute comparable to Chapter 23B.19 of the
WBCA. However, the CCC does provide that, except where the fairness of the terms
and conditions of the transaction has been approved by the California
Commissioner of Corporations and except in a "short-form" merger, if the
surviving corporation or its parent corporation owns, directly or indirectly,
shares of the target corporation representing more than 50% of the voting power
of the target corporation prior to the merger, the nonredeemable common stock of
a target corporation may be converted only into nonredeemable common stock of
the surviving corporation or its parent corporation, unless all of the
shareholders of the class consent. The effect of this provision is to prohibit a
cash-out merger of minority shareholders, except where the majority shareholder
already owns 90% or more of the voting power of the target corporation and
could, therefore, effect a short-form merger to accomplish such a cash-out of
minority shareholders.
MERGERS, ACQUISITIONS AND OTHER TRANSACTIONS
Digital. Under the WBCA, a merger, consolidation, sale of substantially
all of a corporation's assets other than in the regular course of business, or
dissolution of a public corporation must be approved by the affirmative vote of
a majority of directors when a quorum is present, and by two-thirds of all votes
entitled to be cast by each voting group entitled to vote as a separate group,
unless another proportion (but not less than a majority of all votes entitled to
be cast) is specified in the articles of incorporation. The Digital Articles of
Incorporation do not provide for a different proportion.
ViewStar. Under the CCC, a merger, consolidation or sale of substantially
all of a corporation's assets must be approved by the board of directors and the
holders of a majority of the outstanding shares of each class of stock.
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DIGITAL AND MERGER SUB
GENERAL
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. Under the brand name MOSAIX, Digital offers a suite of
sophisticated systems for processing and managing outbound and blended
inbound/outbound telephone traffic. Digital's products and services are used in
a broad range of industries, including financial services and credit card and
consumer collections, telecommunications and utilities, retail, cable
television, healthcare, fundraising, education and telemarketing.
Digital's strategy is to assist organizations to profitably and effectively
manage the "electronic space" between them and their customers by integrating
advanced telephony and call management technologies with data management and
business process applications. Using its sophisticated call processing and
management technology as a core, Digital believes that organizations will be
able to expand the functions and capabilities of their call centers, with an
emphasis on software-only products, to integrate their call flow, customer
information and workflow. This strategy is based upon improving the
effectiveness of each electronic contact with a customer to solve problems,
increase customer satisfaction and further enhance the customer relationship.
Headquartered in Redmond, Washington, Digital has sales offices in
Wilmington, Delaware; Atlanta, Georgia; Chicago, Illinois; and London, England
and has established value-added reseller relationships in North America, Asia,
Australia, South America, Africa and Europe. To date, Digital has an installed
base of over 1,000 systems worldwide.
Digital, a Washington corporation, was incorporated in 1984. Merger Sub, a
Washington corporation, was formed by Digital in 1996 for the sole purpose of
effecting the Merger.
INDUSTRY BACKGROUND
Over the past ten years, businesses and other organizations have
increasingly used dedicated centers for processing and managing high volumes of
incoming and outgoing telephone traffic. Such call centers have been used
extensively in such fields as credit card and consumer collections, catalog
sales, telemarketing and customer service. In these call centers, activities
such as placing and receiving telephone calls are linked to the computer
functions of database management to capture, store and report on relevant
customer information. As the importance of the call center has increased and as
more functions and capabilities have been combined, a parallel industry also has
emerged to create and support the systems, software and services that are
designed to make these call centers efficient, effective and well matched to the
broader corporate mission of the enterprise.
Typically, the call center is the primary "hub" within an organization for
placing or receiving a large volume of customer calls. Customer service
representatives, often referred to as "agents," are the call center's workforce
responsible for talking with customers about subjects including reservations,
product information, account information, resolving financial matters and more.
The communication objectives are as varied as the businesses that employ call
centers as part of their marketing and/or services strategy. Digital believes
that the call center has become a strategic business asset as well as the
greatest point of integration for customer communications in many enterprises.
The result is a shift away from a call center-only mission to a higher value
customer-care mission.
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Call centers can range in size from less than five agents in one location
to thousands of agents in multiple locations, networked together via computer
and telecommunications systems. With the significant variability of call center
sizes and call handling objectives, the industry relies on a variety of
suppliers to provide product and service solutions to address their business and
communication needs. Today these product and service solutions include:
- Customer premise telephone call routing and switching systems (ACDs and
PBXs)
- Computer telephony integration (CTI) software (software to integrate
computers and telecommunications equipment)
- Application software to enhance and facilitate inbound and outbound
customer communications
- Agent coaching and counseling software tools
- Reporting tools to measure and report on agent effectiveness
- Peripheral products (headsets, speakers, video displays)
- Voice mail and interactive voice response ("IVR") systems, which enable
callers to access information in an organization's computer database via
touch-tone dialing
- Computer networking and communications systems, including e-mail and
Internet access systems
PRODUCTS AND SERVICES
MOSAIX Series Products
The MOSAIX product line is Digital's UNIX-based suite of products for the
processing and management of outbound and inbound call center activity.
Integrating directly with an organization's existing telecommunications system
and customer database, the core function of the MOSAIX systems is to process and
manage outbound and blended outbound/inbound customer contact activity within
call centers. In managing outbound calling, the MOSAIX systems acquire, review
and organize customer data; automatically dial phone numbers quickly; monitor,
interpret and act upon each telephone call's progress; program redials at the
appropriate time and rate; route live voice responses immediately to an
operator; and post and report record updates. The MOSIAX Series 5300 product, in
addition to performing its normal outbound call management functions, assists in
managing inbound calls by monitoring and predicting the volume of inbound calls
and shifting agents to and from outbound call duties as inbound volumes change
according to preestablished customer service levels.
The MOSAIX Series 5000 product line was launched in the summer of 1995 and
includes Campaign Director, a graphical interface for the supervisor that
provides real-time control over call center operations. This real-time control
allows a supervisor to carefully monitor call center progress toward given goals
and to manage call center resources efficiently. Digital's Predictive Blend
technology, available with the MOSAIX Series 5300 product, allows inbound call
centers the ability to maximize agent productivity. Predictive Blend predicts
the personnel requirements necessary to handle incoming telephone calls and
seamlessly transfers agents back and forth between incoming and outgoing call
functions as call volumes change.
In January 1996, Digital introduced the MOSAIX Series 3000 and 4000
products, which are smaller-scale systems designed to assist smaller call
centers and organizations in processing and managing their outbound call
requirements. Series 4000 is marketed through Digital's direct sales force and
targets the midrange financial services and telemarketing customer. Series 3000
is sold by Digital's newly developed network of value-added resellers, who are
expected to focus on small and medium-sized telemarketing service bureaus and
internal telemarketing, telesales and teleservicing departments.
Digital launched its first Internet-based product, Campaign Surfer, in
October 1996. This product enables users of popular Web browsers to view
information about MOSAIX calling campaigns and agent performance. In addition,
Digital opened up the MOSAIX product line to third-party application developers
by
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releasing the Agent API developer's kit, which helps customers integrate data
from their host and MOSAIX systems by building customized agent applications.
Digital's MOSAIX products are used in a broad range of industries,
including financial services and credit card and consumer collections,
telecommunications and utilities, retail, cable television, healthcare,
fundraising, educational and telemarketing. Historically, the highest sales have
been to the financial services and credit industries, with emphasis on
collection activity, the telecommunications and utilities industries and major
retail businesses.
Application Software to Improve Teleprofessional Effectiveness
Digital provides stand-alone software products that can reside in both
host-based and client/server environments as well as integrate with computer
telephony systems.
Guide. Guide is designed to improve the quality of customer interaction by
providing managers and supervisors control over the content and pace of each
customer contact. Call guides (or scripts) for call center employees
historically have been programmed by the vendor or by application specialists,
with any changes requiring shut down and reprogramming. By contrast, Guide is
designed so that call center supervisors without programming skills can design
and maintain scripts without relying on the vendor or third-party application
specialists. Supervisors can change the scripts as necessary, even mid-campaign,
providing increased flexibility and enabling the organization to tailor scripts
based on agent skill levels and campaign objectives.
Analyst. Analyst software produces detailed and flexible reports,
integrating statistics from various vendors products, including the ACD/PBX
(telephone switch), the IVR system, host computer, dialer and other
applications. It can also feed other software programs, such as payroll or
executive reporting systems. This product is designed to assist call center
managers to review the performance of multiple call center systems by
integrating and normalizing raw data and generating key statistics. Analyst
features also include goal setting for agents and data extracts of the
statistics to be placed into other software programs (e.g., an extract of all
agent hours from the payroll department or system performance information to be
placed into an executive presentation document).
Coach. Coach is a software product under development that is designed to
assist organizations with monitoring, evaluating, coaching and training their
teleprofessionals by displaying for supervisors on their terminals a duplicate
of the display on an agent's terminal, while monitoring the agent's call and
allowing the supervisor to suggest ways to improve performance. Digital believes
that the product will enable customer contact centers to improve the quality of
customer contact, establish consistent evaluation criteria for employees,
provide consistent, meaningful and timely feedback, and reduce overall training
costs and employee turnover.
Client/Server Software for Departmental Customer Contact Centers
Introduced in August 1996, Scout is a desktop application that uses a
Windows NT-based telephony server to manage incoming telephone calls. Digital is
marketing Scout through its network of value-added resellers to organizations
with smaller call centers and to larger organizations with departments with
informal call center needs.
Scout is designed to enable agents, managers and supervisors to obtain
immediate visual representations of queuing and other information about incoming
calls and, on the basis of such information, to handle or distribute such calls
appropriately (including taking calls out of order, routing callers directly to
agents with proper skill sets to handle their requests or problems or directing
less important calls to voicemail). Using Scout's integrated IVR functions, call
center personnel can review relevant information about the caller or the reason
for the call without changing the caller's position in the queue. Customer
information and attributes arrive at the agent's desktop terminal at the same
time as the call.
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PROFESSIONAL SERVICES
Digital's Professional Services Group provides fee-based business process
consulting and systems integration services. This group helps clients plan,
budget, design and implement new business processes and technologies that
improve customer management and call center workflow, with a critical focus on
how voice and transaction data are handled and moved around within the call
centers. Projects often will involve the implementation of one or more Digital
products, as well as the development of custom applications to meet unique user
requirements. The Professional Services Group provides such services as business
process re-engineering, call center re-engineering, call center implementation,
application development and systems integration, as well as technology
transfers, revenue improvement services and performance services (including
services to governmental agencies to enhance tax revenue collection).
CUSTOMER SUPPORT AND SERVICES
Digital believes that customer service and support are an integral part of
its strategy. Service capability, availability and responsiveness play an
important role in marketing and selling its systems, particularly as the
technological complexity of the products increases.
Digital earns system support fees by providing ongoing support for all of
its products. It provides training both at its facilities before shipment and at
the customer's site after shipment. Digital offers a full range of product
support options, including telephone support from "normal business hours" to "24
hours a day" and on-site response from the "next-half-day" to "immediate service
(four hours or less)." Customer support representatives are able to service
customer systems on a remote basis from the customer support center in Redmond,
Washington. If needed, customer support representatives will dispatch on-site
support, which is provided by IBM in North America and the United Kingdom.
Digital earns other fees by providing certain special services, such as system
relocation and additional training, upon customer request. In addition to the
customer support and training facilities located in its Redmond, Washington
headquarters, the Company operates a customer support and sales center at its
subsidiary office in the United Kingdom.
PRODUCT DEVELOPMENT
Digital's engineers continue to develop new products and new applications
for existing products that will improve MOSAIX and other system performance and
help tailor systems to the evolving and unique customer management missions of
Digital's customers. In recent years, Digital increasingly has focused its
development efforts on client/server, Windows NT-based and Internet-enabled
software solutions to the issues and challenges facing call centers and on the
integration of data and computer systems with telephony systems. Digital
releases new features and enhancements to existing products, new products and
new services on an ongoing basis.
In 1993, 1994 and 1995, Digital recorded research and development expenses
of $5.5 million, $5.5 million and $7.5 million, respectively, net of capitalized
software development costs. During the same periods, Digital capitalized $1.5
million, $1.6 million and $1.6 million, respectively, of software development
costs. Digital intends to continue making substantial investments in research
and development to maintain its competitive position.
MANUFACTURING
Digital's manufacturing operations consist of procurement, assembly,
testing and quality control of all parts, components, subassemblies and final
assemblies of its products. Components and subassemblies for Digital's products
are manufactured by third-party vendors to Digital's specifications from
materials provided by Digital. Digital's suppliers maintain quality control by
subjecting components and subassemblies to rigorous testing, including
in-circuit automated testing. Digital does its own testing of systems and
subassemblies using automated test equipment and manual tests. Beginning in
mid-1996, certain of Digital's products were manufactured on a turn-key basis by
an independent third-party vendor.
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SALES AND MARKETING
Digital markets its products and services in the United States and Canada
through a direct sales force operating from Digital's headquarters in Redmond,
Washington and offices in Wilmington, Delaware; Atlanta, Georgia; and Chicago,
Illinois. A direct sales staff and support organization is located at Digital's
subsidiary offices in the United Kingdom through a wholly owned subsidiary.
Digital also has established distributor relationships in Australia, Africa,
South America and Asia. MOSAIX and Guide have been localized for sale into the
Japanese market.
In the third quarter of 1995, Digital launched a new North American
value-added reseller program. This program has 30 trained value-added resellers
for the MOSAIX, Scout and software products and plans to continue to recruit
additional value-added resellers on an ongoing basis. Additional relationships
are being developed in Europe, South America, Asia and Australia.
COMPETITION
The market for Digital's products and services is highly competitive.
Important competitive factors include, price, performance, diversity of product
line, reliability, delivery capabilities, customer support and service.
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 ACD and PBX suppliers
(suppliers of customer-premised call routing and switching systems) also
presents a strong competitive threat, as these competitors may elect to purchase
Digital's competitors, 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.
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<PAGE> 73
INTERNATIONAL OPERATIONS
Digital's product sales to customers in international markets outside North
America comprised approximately 10.4%, 13.0% and 16.6% of total product sales in
1993, 1994 and 1995, respectively. In most cases, Digital markets its products
and services internationally through distributors.
The following table sets forth certain information relating to Digital's
foreign and domestic operations for the years ended December 31, 1993, 1994 and
1995.
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenue -- U.S. operations
United States....................................... $36,869 $46,379 $56,755
U.S. export......................................... 2,584 3,911 7,715
Revenue -- international operations foreign
subsidiary.......................................... 1,688 2,988 3,540
------- ------- -------
$41,141 $53,278 $68,010
======= ======= =======
Income (loss) from operations
U.S. operations..................................... $(4,675) $ 1,955 $ 8,539
Foreign subsidiary.................................. (513) 529 777
Elimination......................................... (285) 281 (7)
------- ------- -------
$(5,473) $ 2,765 $ 9,309
======= ======= =======
Assets
U.S. operations..................................... $65,545 $75,120 $79,514
Foreign subsidiary.................................. 2,030 2,820 1,677
------- ------- -------
$67,575 $77,940 $81,191
======= ======= =======
</TABLE>
SEASONALITY
Digital's quarterly operating results may be subject to seasonal
influences. Seasonal fluctuations may be attributable in part to the general
unavailability during the summer months of customers' employees who are
authorized to make capital expenditures. Certain customers may accelerate their
purchases of systems to avoid end-of-year budgetary limitations. Therefore, the
fourth quarter typically reflects higher levels of revenues. Digital does not
attempt to modify or adjust operating expenses during the fourth quarter in
anticipation of these factors. These seasonal fluctuations may continue in the
future.
SIGNIFICANT CUSTOMER
No customer accounted for more than 10% of Digital's revenues in 1993 or
1995. During 1994, Digital recorded sales to a single customer, NYNEX, which
accounted for 10% of Digital's revenues.
REGULATORY ENVIRONMENT
Domestic and Foreign Product Registration Requirements. Digital's products
are subject to and conform with FCC 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
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.
Legislative Overview. 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. as described below, 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.
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<PAGE> 74
Federal Legislation. In December 1991, Congress enacted and the President
signed into law the Telephone Consumer Protection Act of 1991 ("TCPA"), which
specifically regulates the telemarketing industry and the use of automatic
dialers. The TCPA prohibits or otherwise regulates the making of certain types
of telephone calls using automatic telephone dialing systems or initiated by an
artificial or prerecorded voice to deliver messages. Telephone calls made using
an auto dialer, and initiated by an artificial or prerecorded voice to deliver a
message are further subject to requirements that the caller identify itself in
the message, and disconnect the line within five seconds of receiving
notification that the called party has hung up.
In 1992 the FCC promulgated regulations implementing the TCPA, establishing
rules requiring that telemarketers maintain a "do-not-call list" of persons who
indicate they do not want to receive solicitation telephone calls (regardless of
how such calls are placed or initiated), but also specifically exempting from
the prohibition the use of auto dialers (to make telephone calls to residential
subscribers), calls that are not made for a commercial purpose or, if for a
commercial purpose, that are made to persons with whom the caller has an
established business relationship or that do not include the transmission of any
unsolicited advertisement (such as debt collection calls). Since its enactment,
significant portions of the TCPA have been challenged as unconstitutional. As a
result, some provisions of the TCPA may be declared unenforceable. Digital has
concluded that under the definition of what constitutes an auto dialer under the
rules and regulations issued by the FCC, use of Digital's MOSAIX systems and
related products has not been materially affected. It is always possible,
however, that the TCPA, or the regulations issued thereunder, might be amended
in the future, or that other new laws might be enacted, so as to affect use of
Digital's products.
The Fair Debt Practices Act prohibits certain telephone debt collection
practices, including the repeated or continuous ringing of a telephone or
engagement of any person in telephone conversation with the intent to annoy,
abuse or harass such person, and communication by a debt collector with a
consumer at any unusual or inconvenient place or time. The practice of call
abandonment or placing calls in long holding queues could be considered
harassment as defined under the Fair Debt Practices Act. Digital's Intelligent
Dialing software places calls with the intention of having an operator available
or, at the customer's choice, with minimal holding queue to minimize the
call-abandonment and long holding queue problems. In addition, Digital's
Intelligent Dialing software can be programmed to conform to the Fair Debt
Practices Act's restrictions concerning the time of day when calls may be
placed.
In August 1994, Congress enacted, and the President signed into law, the
Telemarketing and Consumer Fraud and Abuse Prevention Act (the "Telemarketing
Act"), which authorizes the Federal Trade Commission (the "FTC") to prescribe
regulations prohibiting deceptive telemarketing acts or practices. In August
1995, the FTC issued its Final Rule pursuant to the Telemarketing Act. Digital
supports reasonable legislative efforts to reduce consumer fraud, but which do
not unreasonably restrict the responsible uses of Digital's products.
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 employee 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.
State Legislation. Most states have enacted legislation limiting certain
telephone solicitation practices or restricting certain uses of automatic
dialing and announcement devices. Several of these laws prohibit telephone
solicitors from contacting customers who have indicated a desire not to receive
telephone solicitations. Many of these states have passed legislation that
specifically regulates certain uses of Automatic Dialers and Recorded Message
Playback devices ("ADRMPs"). In general, these state statutes (i) restrict the
hours during which ADRMPs may place calls, (ii) require that ADRMPs be used in
conjunction with an operator, (iii) require that ADRMPs or operators using
ADRMPs obtain permits for their use, (iv) require that ADRMPs automatically
disconnect when the receiving party terminates an ADRMP-placed call, (v) require
that prior to delivery of an ADRMP's prerecorded message the recipient of the
call consent to hear such message or that the user of the ADRMP identify itself
to the called party in such message, or (vi) prohibit the use of ADRMPs to
solicit the purchase of goods or services. While a MOSAIX system can be
configured at a customer's request to function as an ADRMP, such systems are
designed and, Digital believes, generally used by its customers to effect
person-to-person contacts rather than deliver prerecorded
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messages. Statutes aimed at regulating the telemarketing industry are regularly
proposed and are pending in many states. If passed, such legislation may
directly or indirectly affect Digital. Digital is not presently aware of any
recently enacted state regulations or legislation materially affecting use of
its products.
Digital Systems Regulatory Strategy. Digital fully supports legislation
designed to promote the responsible use of auto dialing equipment. Digital
endeavors to design its MOSAIX systems to enable its customers to comply with
the requirements of current and anticipated regulations.
PROPRIETARY RIGHTS
As new products are identified and created, Digital has sought, and will
continue to seek, patent protection, where appropriate, for inventions arising
out of its development efforts. Thus Digital sought and obtained, on March 30,
1992, a U.S. Patent (No. 5,101,425) on its Realtime Monitor, a device enabling
real time monitoring of predictive dialing systems. On November 14, 1995,
Digital obtained a U.S. Patent (No. 5,467,391) on its Integrated Intelligent
Call Blending technology, which describes a system and method for sharing a pool
of agents in a telephone call servicing operation so that agents are utilized
effectively. Digital also intends to pursue, where applicable, patent protection
for these inventions in the international markets where they are offered.
Although Digital has not registered its copyrighted software, such software
is protected by copyright and trade secret laws. In addition, Digital enters
into confidentiality agreements with certain of its employees, consultants,
distributors, value-added resellers and customers; limits access to and
distribution of its software, documentation and other proprietary information;
and enters into noncompete agreements with certain of its employees. There can
be no assurance that the steps taken by Digital to protect its proprietary
rights will be adequate to deter misappropriation or independent third-party
development of its technology.
EMPLOYEES
As of October 18, 1996, Digital employed approximately 427 persons (not
including independent contractors and temporary employees) on a full-time basis.
None of Digital's employees are covered by collective bargaining agreements, nor
has it ever experienced a work stoppage. Digital considers its employee
relations to be good.
BACKLOG
Digital's backlog at December 31, 1994 was $20.6 million, compared with
$6.5 million at December 31, 1995. A substantial part of the backlog at December
31, 1994 was related to the newly developed products in the MOSAIX product line
which were installed and accepted throughout 1995. In addition to installed but
unaccepted orders, Digital's backlog includes firm orders for products that are
to be delivered generally within 120 days of receipt of order. During 1995,
Digital improved internal processes to decrease the amount of time between a
customer's decision to purchase a system and the implementation of that system,
thus contributing in part to decline in backlog. Digital's backlog at September
30, 1996 was $5.2 million. Currently, backlog is not large in relation to
Digital's sales and may not be indicative of future performance.
FACILITIES
Digital's corporate offices are in the Seattle, Washington area in an
84,000 square-foot office facility leased by Digital at 6464 185th Avenue N.E.,
Redmond, Washington 98052. The corporate offices include sales and marketing,
service, engineering, finance, administrative, manufacturing and international
functions. The lease expires March 31, 1999, with an option to extend.
Digital leases an 11,000-square-foot sales facility in Wilmington, Delaware
under a lease expiring May 31, 1997. Digital currently subleases a portion of
the space. Digital also leases sales offices in Atlanta, Georgia and Chicago,
Illinois under leases that expire on March 31, 1996 and August 1, 1997,
respectively. Digital's United Kingdom subsidiary occupies approximately 3,000
square feet of space near London under a long-term lease.
Digital believes that its facilities are suitable and adequate for its
current needs.
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SELECTED DIGITAL FINANCIAL DATA
The following selected historical financial data of Digital have been
derived from Digital's historical consolidated financial statements. The
selected financial data presented below should be read in conjunction with
Digital's consolidated financial statements and the notes thereto contained
herein.
<TABLE>
<CAPTION>
AT OR FOR
NINE MONTHS ENDED
AT OR FOR YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1991 1992 1993 1994 1995 1995 1996
-------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue..................... $ 51,761 $56,662 $41,141 $53,278 $68,010 $48,367 $62,501
Cost of revenue............. 16,236 18,966 17,930 21,975 26,922 19,211 23,345
-------- ------- ------- ------- ------- ------- -------
Gross profit............. 35,525 37,696 23,211 31,303 41,088 29,156 39,156
Operating expenses:
Selling, general and 17,497 23,320 23,197 22,996 24,297 18,055 21,661
administrative.........
Research and 5,209 5,845 5,487 5,542 7,482 5,034 7,728
development............
Write-off of capitalized -- -- -- -- -- -- 705
software...............
Purchase of in-process -- -- -- -- -- -- 4,307
research and
development............
-------- ------- ------- ------- ------- ------- -------
Total operating 22,706 29,165 28,684 28,538 31,779 23,089 34,401
expenses..........
-------- ------- ------- ------- ------- ------- -------
Operating income 12,819 8,531 (5,473) 2,765 9,309 6,067 4,755
(loss)............
Other income (expense), 984 (61) (4,037) 4,532 2,186 1,624 1,309
net(1)...................
-------- ------- ------- ------- ------- ------- -------
Earnings (loss) 13,803 8,470 (9,510) 7,297 11,495 7,691 6,064
before income
taxes.............
Income tax expense 4,848 2,817 (2,744) 2,517 4,102 2,807 3,480
(benefit)................
-------- ------- ------- ------- ------- ------- -------
Earnings (loss) from 8,955 5,653 (6,766) 4,780 7,393 4,884 2,584
continuing
operations........
Loss from discontinued (10,145) -- -- -- -- -- --
operations...............
-------- ------- ------- ------- ------- ------- -------
Net earnings $ (1,190) $ 5,653 $(6,766) $ 4,780 $ 7,393 $ 4,884 $ 2,584
(loss)............
======== ======= ======= ======= ======= ======= =======
Net earnings (loss) per $ (0.13) $ 0.61 $ (0.72) $ 0.48 $ 0.75 $ 0.50 $ 0.26
share....................
======== ======= ======= ======= ======= ======= =======
Weighted average common 9,286 9,321 9,366 9,949 9,836 9,814 9,843
shares and common
equivalent shares
outstanding..............
CONSOLIDATED BALANCE SHEET
DATA:
Working capital............. $ 32,920 $37,556 $32,755 $42,251 $48,209 $47,088
Total assets................ 62,516 72,657 67,575 77,940 81,191 76,700
Long-term obligations....... 3,351 7,219 1,067 168 91 30
Shareholders' equity........ 46,078 52,553 48,185 53,777 57,512 60,271
</TABLE>
- ---------------
(1) Includes income related to litigation settlement of $3,248,000 for the year
ended December 31, 1994 and a charge related to litigation settlement of
$4,095,000 for the year ended December 31, 1993.
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DIGITAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth for the years ended December 31, 1993, 1994
and 1995 and for the nine months ended September 30, 1995 and 1996 certain
operating data expressed as a percentage of revenues.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales........................... 68.5% 68.9% 66.2% 66.4% 68.3%
Service and miscellaneous............... 31.5 31.1 33.8 33.6 31.7
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Cost of product sales and services:
Product sales........................... 46.2 38.3 39.3 40.0 32.9
Service and miscellaneous............... 38.0 47.7 40.1 39.2 47.0
----- ----- ----- ----- -----
43.6 41.2 39.6 39.7 37.4
Gross profit:
Product sales........................... 53.8 61.7 60.7 60.0 67.1
Service and miscellaneous............... 62.0 52.3 59.9 60.8 53.0
----- ----- ----- ----- -----
56.4 58.8 60.4 60.3 62.6
Operating expenses:
Selling, general and administrative..... 56.4 43.2 35.7 37.3 34.7
Research and development................ 13.3 10.4 11.0 10.4 12.4
Write-off of capitalized software
costs................................. -- -- -- -- 1.1
Purchase of in-process research and
development........................... -- -- -- -- 6.9
----- ----- ----- ----- -----
Total operating expenses........... 69.7 53.6 46.7 47.7 55.0
----- ----- ----- ----- -----
Operating income (loss)............ (13.3) 5.2 13.7 12.5 7.6
Other income (expense), net................ (9.8) 8.5 3.2 3.4 2.1
----- ----- ----- ----- -----
Earnings (loss) before income
taxes............................ (23.1) 13.7 16.9 15.9 9.7
Income tax expense (benefit)............... (6.7) 4.7 6.0 5.8 5.6
----- ----- ----- ----- -----
Net earnings (loss)................ (16.4)% 9.0% 10.9% 10.1% 4.1%
===== ===== ===== ===== =====
</TABLE>
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
For the nine months ended September 30, 1996, Digital reported net earnings
of $2.6 million, or $.26 per share. In February 1996, Digital acquired Caleo
Software, Inc. ("Caleo") and wrote off $4.3 million of in-process research and
development costs associated with the acquisition. In addition, Digital wrote
off $0.7 million of previously capitalized software costs. Excluding these
charges, net earnings for the first nine months of 1996 would have been $7.3
million, or $.75 per share, compared to $4.9 million, or $.50 per share, for
1995.
Revenue. Revenue of $62.5 million for the nine months ended September 30,
1996 represented a 29.2% increase over revenue of $48.4 million reported in the
comparable period of the prior year. Product sales increased $10.6 million to
$42.7 million in 1996 versus $32.1 million in 1995. Service and miscellaneous
revenue increased by $3.5 million to $19.8 million from $16.3 million as a
result of increased professional service and customer support revenue.
International revenue increased to $9.9 million in 1996 from $8.6 million in
1995, due to increased product sales in Europe, Africa and Asia. The overall
revenue increase was influenced by continuing acceptance of the MOSAIX Series
5300 products to customers in the telecommunications, financial services, and
retailing industries.
For the first nine months of 1996, the sale of MOSAIX systems to three
customers accounted for 21.5% of that period's total product revenue, while
three customers accounted for 30.6% for the first nine months of 1995.
Gross Margin. Gross margin improved to 62.6% for the first nine months of
1996 from 60.3% for the first nine months of 1995. Product gross margin was
67.1% for the first nine months of 1996 compared to 60.0% in the comparable
period of the prior year. Product gross margins are influenced in part by the
increase in sales volume as well as product mix, overhead coverage, and software
amortization expense. Gross margin in 1995 included accelerated software
amortization expense resulting from the replacement of earlier versions of
MOSAIX software with the MOSAIX Series 5000 products. For the first nine months
of 1996, Digital expensed $1.9 million related to software amortization,
compared to $2.4 million in the comparable period of the prior year. During the
first nine months of 1996, Digital sold a greater proportion of large scale,
complex telemarketing and financial services application products in the MOSAIX
Series 5300, which contributed to the increase in gross margins. Gross margin on
service and miscellaneous revenue for the first nine months of 1996 was 53.0%
compared to 60.8% in the comparable period of the prior year, due to a higher
mix of lower-margin professional service revenues and lower customer support
margins.
Selling, General and Administrative. For the first nine months of 1996,
selling, general and administrative expenses were $21.7 million, or 34.7% of
revenue, compared to $18.1 million, or 37.3% of revenue in the comparable period
of the prior year. While selling, general and administrative expenses decreased
as a percentage of revenue, the increase in spending was due to increased travel
expenses, expansion of marketing activities, advertising and personnel costs.
Research and Development. For the first nine months of 1996, research and
development expenses, net of amounts capitalized, were $7.7 million, or 12.4% of
revenue, compared to $5.0 million, or 10.4% of revenue, in the comparable period
of the prior year. Gross research and development spending increased from $6.5
million to $8.8 million due primarily to increases in engineering staff and
outside contractors. Software costs capitalized as a percentage of research and
development spending were 10.7% ($0.9 million) in the first nine months of 1996
and 22.2% ($1.4 million) in the first nine months of 1995. Capitalized software,
net continues to decrease, and as of September 30, 1996, has been reduced to
$2.1 million versus $2.9 million as of December 31, 1995.
Digital remains committed to the ongoing development or acquisition of new
products and improvements to existing products as a key source of future
revenue. Digital expects to invest approximately 10%-12% of revenue in new
product development. However, from time to time Digital may exceed the current
level of investment in product development.
Other Income (Expense), Net. Other income (expense), net is comprised
primarily of interest income and totaled $1.3 million in the first nine months
of 1996 compared to $1.6 million in the comparable period of
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<PAGE> 79
the prior year. Interest income was slightly lower in 1996 compared to the prior
year due to a decrease in cash and short-term investments.
Income Taxes. Digital's effective tax rate, including the effect of the
in-process research and development write off related to the Caleo acquisition
in the first quarter of 1996, was 57.4% in the first nine months of 1996
compared to 36.5% in the comparable 1995 period. The in-process research and
development write-off is not deductible for tax purposes. Excluding the $4.3
million charge, Digital's nine-month 1996 effective tax rate would have been
36.6% compared to 36.5% in the comparable period of the prior year.
1995 COMPARED WITH 1994
Revenue. Revenue for the year ended December 31, 1995 was $68.0 million
and represents an increase of 27.7% over revenue of $53.3 million in 1994.
Product sales increased by $8.3 million (or 22.7%) to $45.0 million in 1995 from
$36.7 million in 1994. The improvement in product sales was due to increased
acceptance and sales of the MOSAIX series of products. International product
sales increased by $2.9 million (or 58.8%) compared to 1994, due primarily to
increased sales in Asia and Canada. Service and miscellaneous revenue increased
$6.4 million (or 38.6%) to $23.0 million in 1995 from $16.6 million in 1994.
This increase was due to an increase in professional services revenue for both
systems integration and facilities management projects, as well as a higher
volume of systems support and "right to use" fees.
Digital's backlog at December 31, 1995 was $6.5 million compared to $20.6
million at December 31, 1994. Digital's backlog includes only firm orders for
products that are to be delivered generally within 120 days of receipt of order.
A substantial part of backlog at December 31, 1994 was related to the enhanced
newly developed products in the MOSAIX family which were installed and accepted
throughout 1995. During 1995, Digital improved internal processes to decrease
the time between a customer's decision to purchase a system and the
implementation of that system. Because of the possibility of customer changes in
delivery schedules or cancellation of orders, Digital's backlog as of any
particular date may not be indicative of actual sales for any future period.
Gross Margin. Gross margin improved to 60.4% in 1995 from 58.8% in 1994.
Product gross margin declined slightly to 60.7% in 1995 from 61.7% in 1994 due
to the lower volume of upgrades and increased software amortization. Product
gross margins are influenced by a variety of factors, including product volume
and mix, overhead coverage, and software amortization expense. During 1995,
software amortization expense totaled $2.8 million, an increase of $0.8 million
over 1994. Service and miscellaneous gross margin improved to 59.9% in 1995
compared to 52.3% in 1994. Lower 1994 service gross margin was due to start-up
costs of the Professional Services Group and higher fixed costs of providing
customer service and support.
Selling, General and Administrative. Digital's selling, general and
administrative expenses increased $1.3 million (or 5.7% of revenue) to $24.3
million in 1995 from $23.0 million in 1994. However, as a percentage of revenue,
selling, general and administrative expenses decreased to 35.7% in 1995 from
43.2% in 1994, due to higher revenues. The increased spending was related to
higher compensation expenses (due to increased employment) and facilities
expenses, partially offset by lower bad debt and outside service expenses.
Research and Development. Research and development expenses, net of
software capitalization, were $7.5 million (or 11% of revenue) in 1995 compared
to $5.5 million (or 10.4% of revenue) in 1994. Gross research and development
spending increased by $2.0 million to $9.1 million in 1995 from $7.1 million in
1994. Digital capitalized 17.4% of gross research and development spending (or
$1.6 million) compared to 22.6% (or $1.6 million) in 1994. The spending increase
was due to an expansion in Digital's applications software development efforts.
Digital remains committed to the ongoing development or acquisition of new
products and improvements to existing products as a key source of future
revenue.
Other Income (Expense), Net. Other income (expense), net was $2.2 million
in 1995 compared to $4.5 million in 1994. Other income (expense), net for 1994
includes pretax nonoperating income of $3.3 million, net of legal expenses ($2.1
million after-tax), associated with the settlement of a lawsuit. Interest
income, net increased 81.1% to $2.0 million in 1995 from $1.1 million in 1994
due to higher invested cash balances and an improved rate of return.
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<PAGE> 80
Income Taxes. Digital's effective tax rate was 35.7% in 1995 compared to
34.5% in 1994. The 1994 tax rate benefited from the utilization of Digital's
foreign subsidiary's net operating loss carryforward offsetting the subsidiary's
1994 taxable earnings.
1994 COMPARED WITH 1993
Revenue. Digital's revenue increased by $12.1 million (or 29.5%) to $53.3
million in 1994 from $41.1 million in 1993. Product sales increased by $8.5
million (or 30.2%) to $36.7 million in 1994 from $28.2 million in 1993 due to
increased sales of the MOSAIX series of products. International product sales
increased by $1.6 million (or 66.0%) when comparing 1994 with the prior year,
due primarily to increased sales in Europe. Service and miscellaneous revenue
increased by $3.6 million (or 27.9%) to $16.6 million from $13.0 million, due
primarily to growth in Digital's installed base as well as consulting revenues
from a system integration project. Digital's backlog at December 31, 1994 was
$20.6 million compared to $3.6 million at December 31, 1993. A substantial part
of this backlog was related to the enhanced newly developed products in the
MOSAIX line, which were installed and accepted throughout 1995.
Gross Margin. Gross margin improved to 58.8% in 1994 from 56.4% in 1993.
Product gross margin increased to 61.7% in 1994 from 53.8% in 1993, due
primarily to the impact of higher product sales on fixed manufacturing costs as
well as higher margins on installation revenue and the MOSAIX product line,
partially offset by increased software amortization expense. Service and
miscellaneous gross margin declined to 52.3% in 1994 from 62.0% in 1993 due to
higher system support costs and the impact of higher-than-planned costs
associated with the system integration project discussed above.
Selling, General and Administrative. Digital's selling, general and
administrative expenses were $23.0 million (or 43.2% of revenue) in 1994
compared to $23.2 million (or 56.4% of revenue) in 1993. As a percentage of net
sales, selling, general and administrative expenses decreased in 1994 when
compared to 1993, due primarily to the increase in revenue. Higher compensation
expense (related in part to increased revenues) and marketing expenses were
offset by lower bad debt and outside services expenses. Included in the 1994
expenses was a $400,000 restructuring charge associated with the consolidation
of customer support activities.
Research and Development. Research and development expenses were $5.5
million (or 10.4% of revenue) in 1994 compared to $5.5 million (or 13.3% of
revenue) in 1993. Although research and development expenses remained flat in
dollars, such expenses declined as a percentage of revenue due to the increase
in revenue. In 1994, Digital capitalized 22.6% of gross research and development
costs (or $1.6 million) compared to 21.5% (or $1.5 million) in 1993. Software
amortization expense was $2.0 million for 1994 compared to $1.2 million for
1993.
Other Income (Expense), Net. Other income (expense), net for 1994 includes
pretax nonoperating income of $3.3 million, net of legal expenses ($2.1 million
after-tax), associated with the settlement of a lawsuit. Interest income, net
increased to $1.1 million in 1994 from $.1 million in 1993, due primarily to
higher cash balances throughout the year. Other income (expense), net for 1993
includes a $4.1 million pretax charge to earnings ($2.7 million or $0.29 per
share after-tax) related to the settlement of a class action lawsuit.
Income Taxes. Digital's effective tax rate was 34.5% in 1994 compared to a
28.9% tax benefit in 1993 resulting from the 1993 pretax loss of $9.5 million.
The 1994 tax rate benefited from the utilization of Digital's foreign
subsidiary's net operating loss carryforward offsetting the subsidiary's 1994
taxable earnings. The 1993 income tax benefit was reduced by a foreign
subsidiary generating no tax benefit for that year.
LIQUIDITY AND CAPITAL RESOURCES
Digital's combined cash and cash equivalents and short-term investments
were $30.0 million at September 30, 1996 compared to $39.8 million at December
31, 1995 and $41.0 million at December 31, 1994. The short-term investment
portfolio is invested in municipal securities, corporate notes and bonds, and
commercial paper, and is diversified among security types and issuers. It does
not include any derivative products. At September 30, 1996, Digital's working
capital was $47.1 million compared to $48.2 million at
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<PAGE> 81
December 31, 1995. During the first nine months of 1996, Digital used $1.8
million in cash from operations compared to $8.3 million generated in the
comparable 1995 period. The use of cash from operating activities in the nine
months ended September 30, 1996 was due primarily to the purchase of Caleo for
$4.8 million in cash during February 1996, as well as a decrease in customer
deposits and an increase in accounts receivable. Of the $4.8 million Caleo
purchase price, $4.3 million was charged to operations as in-process research
and development costs.
During 1995, Digital generated $7.5 million in cash from operations
compared to $24.4 million in 1994 and $14.5 million in 1993. The decrease in
cash flow from operations from 1994 to 1995 was primarily related to a
substantial increase in receivables, due in part to annual service billings at
year-end, as well as a reduction in customer deposits. The reduced amount of
customer deposits was due to process improvements no longer requiring customer
deposits before orders are processed. The increase in cash flow from operations
from 1993 to 1994 was primarily a result of the net loss in 1993 compared to net
earnings in 1994.
During the first nine months of 1996, Digital invested $2.7 million to
purchase furniture, equipment and leasehold improvements compared to $1.6
million for the first nine months of the prior year. The increase is primarily
due to the investment in internal customer management hardware and software
systems. Digital invested $2.4 million in additions to furniture, equipment and
leasehold improvements during 1995, compared to $1.6 million in both 1994 and
1993. Digital made repayments on long-term obligations of $0.1 million in the
first nine months of 1996 compared to $0.9 million in the first nine months of
1995. Digital's cash position was reduced in September 1996 by a $4.0 million
loan to ViewStar concurrent with the execution of the Joint Marketing Agreement.
Repayment of long-term obligations used $0.9 million in 1995, $3.1 million in
1994 and $3.3 million in 1993.
In 1995, the Digital Board authorized Digital to repurchase up to 1,600,000
Digital Common Shares. As of September 30, 1996, a total of 691,000 shares had
been repurchased at a cost of approximately $5.5 million. These shares will be
used to service Digital's employee stock option and stock purchase plans. The
repurchase plan was suspended on October 2, 1996.
In addition to its cash and short-term investment balances, Digital has
available a $10 million domestic line of credit to meet cash flow needs. Digital
has elected not to renew a second $10 million line of credit at this time.
Management believes that existing cash and short-term investments and cash flow
from operations, together with its available credit line, will continue to be
sufficient to meet ongoing operating requirements as well as Digital's
investment in capital assets additions and research and development activities.
In connection with research and development and market expansion, cash may be
used to acquire technology or to fund strategic ventures.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation." This pronouncement
establishes accounting and reporting standards for stock-based employee
compensation plans, including stock purchase plans, stock options and stock
appreciation rights. This standard defines a fair value-based method of
accounting for these equity instruments. This method measures compensation cost
based on the value of the award and recognizes that cost over the service
period. Companies may elect to adopt this standard or to continue accounting for
these types of equity instruments under current guidance, APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Companies which elect to continue
using the rules of APB Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if this new statement had been applied. This
new standard is required for fiscal years beginning after December 15, 1995.
Digital has elected to continue using the rules of APB Opinion No. 25 and
will make the required pro forma disclosures in its December 31, 1996 audited
consolidated financial statements.
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<PAGE> 82
BENEFICIAL OWNERSHIP OF DIGITAL COMMON SHARES
The following table sets forth certain information regarding the beneficial
ownership of Digital Common Shares as of November 15, 1996, of (i) each person
known by Digital to own beneficially 5% or more of the Digital Common Shares,
(ii) each Digital director, (iii) each executive officer of Digital for whom
information is given in the Summary Compensation Table in this Proxy
Statement/Prospectus, and (iv) all directors and executive officers as a group.
Each of the named persons has sole voting and investment power with respect to
the shares listed, except as stated below.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------------------------------------------------- -------------------- ----------------
<S> <C> <C>
Donald L. and Lucy A. Stoner(1)............................ 515,000 5.5%
6014 E. Mercer Way
Mercer Island, WA 98040
Dimensional Fund Advisors Inc.(2).......................... 498,100 5.3%
1299 Ocean Avenue
Santa Monica, CA 90401
Tom A. Alberg(3)........................................... 20,100 **
H. Robert Gill............................................. 0 **
Harvey N. Gillis(4)........................................ 39,000 **
David J. Ladd(5)........................................... 5,000 **
Robert S. Leventhal(6)..................................... 3,750 **
Cynthia Stroum(7).......................................... 106,774 1.1%
Patrick S. Howard(8)....................................... 93,500 1.0%
John J. Flavio(9).......................................... 56,868 **
Edmund D. Wilsbach(10)..................................... 38,100 **
Thomas R. Clark(11)........................................ 54,093 **
Richard L. Anderson(12).................................... 28,213 **
All directors and executive officers
as a group (17 persons)(13).............................. 499,855 5.3%
</TABLE>
- ---------------
** Less than 1% of the outstanding Digital Common Shares.
(1) Based on information reported by Mrs. Stoner on October 17, 1996; Mr. and
Mrs. Stoner's shares are held in joint tenancy with right of survivorship.
Includes 3,271 shares held by the Stoner Foundation, of which Mrs. Stoner
is the sole trustee.
(2) Based on publicly available information reported to Digital as of February
9, 1996. Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 498,100
Digital Common Shares as of December 31, 1995, all of which shares are held
in portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, for all of which Dimensional serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
(3) Includes options exercisable within 60 days for the purchase of 9,000
shares. Also includes 100 shares held by Mr. Alberg's spouse.
(4) Includes options exercisable within 60 days for the purchase of 9,000
shares.
(5) Represents options exercisable within 60 days for the purchase of 3,000
shares.
(6) Includes option exercisable within 60 days for the purchase of 3,000
shares.
(7) Includes 5,903 shares held by Ms. Stroum as custodian for her children
under the Washington Uniform Transfers to Minors Act. Also includes options
exercisable within 60 days for the purchase of 9,000 shares.
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<PAGE> 83
(8) Includes options exercisable within 60 days for the purchase of 87,500
shares.
(9) Includes options exercisable within 60 days for the purchase of 53,000
shares. Also includes 150 shares held by the Flavio Family Trust, of which
Mr. Flavio's spouse is trustee.
(10) Represents options exercisable within 60 days for the purchase of 38,100
shares.
(11) Includes options exercisable within 60 days for the purchase of 50,000
shares.
(12) Includes options exercisable within 60 days for the purchase of 21,547
shares.
(13) Includes options exercisable within 60 days for the purchase of 320,009
shares.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires Digital's directors and
executive officers, and persons who own more than 10% of a registered class of
securities, to file with the Commission initial reports of ownership of common
stock and other equity securities of Digital. Officers, directors and
greater-than-10% shareholders are required by Commission regulations to furnish
Digital with copies of all Section 16(a) forms they file.
To Digital's knowledge, based solely on a review of the copies of such
reports furnished to Digital and written representations that no other reports
were required, during the year ended December 31, 1995, all Section 16(a) filing
requirements applicable to its officers, directors and greater-than-10%
shareholders were satisfied, except for (i) an untimely Form 4 filing by Joseph
White with regard to the sale of Digital Common Shares held by an investment
club of which Mr. White was a member and (ii) the inadvertent omission from Mr.
Alberg's Form 3 of 100 Digital Common Shares held in his wife's individual
retirement account, which have subsequently been reported.
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<PAGE> 84
MANAGEMENT OF DIGITAL
EXECUTIVE OFFICERS AND DIRECTORS
The following individuals are the current executive officers of Digital who
will serve in the capacities noted until their successors are appointed.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES WITH DIGITAL
- --------------------------------------------- --- --------------------------------------------
<S> <C> <C>
Patrick S. Howard............................ 54 Chairman of the Board of Directors,
President and Chief Executive Officer
Thomas R. Clark.............................. 45 Executive Vice President and President, DSI
Professional Services
Steve L. Adams............................... 41 Senior Vice President, Marketing and
Business Development
John J. Flavio............................... 49 Senior Vice President, Finance and
Administration, Chief Financial Officer,
Secretary and Treasurer
Edmund D. Wilsbach........................... 54 Senior Vice President, Sales
Richard L. Anderson.......................... 57 Vice President and Controller
Charles A. Little............................ 48 Vice President, Call Center Products
Jack P. Praino............................... 36 Vice President, North American Distribution
Nicholas A. Tiliacos......................... 42 Vice President, International Business
Operations
Joseph P. White.............................. 36 Vice President, DSI Direct
William Bradford Weller...................... 38 Assistant Secretary and General Counsel
Tom A. Alberg................................ 56 Director
H. Robert Gill............................... 60 Director
Harvey N. Gillis............................. 50 Director
David J. Ladd................................ 50 Director
Robert S. Leventhal.......................... 69 Director
Cynthia Stroum............................... 46 Director
</TABLE>
Patrick S. Howard has served as Digital's President and Chief Executive
Officer since November 1994. From July 1994 to November 1994, Mr. Howard served
as a consultant and acting Chief Executive Officer for the PC Products Division
of Octel Communications Corporation, a voice message manufacturer ("Octel").
From March 1994 to June 1994, Mr. Howard served as Vice President of Octel. Mr.
Howard served as President and Chief Executive Officer, and as a director, of
VMX, Inc., a call processing and unified messaging company ("VMX"), from June
1984 until the merger of VMX with Octel in March 1994.
Thomas R. Clark has served as Digital's Executive Vice President and as
President, DSI Professional Services, a division of Digital, since February
1996. He was Digital's Senior Vice President, Products and Operations from
September 1994 to February 1996. From April 1991 to October 1993, he was
President and Chief Executive Officer of Data I/O Corp., which produces
engineering software and manufacturing systems to work with semiconductors. From
October 1985 to April 1991, he served in various capacities for Data I/O Corp.,
including Senior Vice President and General Manager, Product Operations. He
holds a B.S. in Electronic Engineering from Ohio State University.
Steve L. Adams has served as Digital's Senior Vice President, Marketing and
Business Development since February 1996. From 1994 to January 1996, he served
as Vice President of Marketing of Novell, Inc.'s GroupWare Division. From 1993
to 1994, Mr. Adams was Vice President of Product Operations of Big Sky
Technologies, a leading supplier of software products. From 1988 to 1993, Mr.
Adams served in various capacities at Simpact Associates, Inc., a provider of
voice and data communications, including Vice President of Corporate Marketing
and Planning and Manager of Marketing Communications. Mr. Adams holds a Ph.D.
and an M.A. in English from the Florida State University.
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<PAGE> 85
John J. Flavio has served as Digital's Senior Vice President, Finance and
Administration, Chief Financial Officer, Secretary and Treasurer since July
1993. From October 1992 to June 1993, he was Vice President, Finance and Chief
Financial Officer of MiniStor Peripherals Corporation, a manufacturer of
subminiature disk drives for portable computers. From 1985 to 1992, Mr. Flavio
was Executive Vice President, Finance and Chief Financial Officer of Tenera,
L.P., a provider of professional services and software to the public utilities
industry. He holds a B.S. in Finance from the University of Santa Clara and is a
certified public accountant.
Edmund D. Wilsbach has served as Digital's Senior Vice President, Sales
since February 1996. He served as Digital's Senior Vice President, Sales and
Professional Services from June 1995 to February 1996, as its Senior Vice
President, Professional Services from February 1995 to June 1995, and as its
Vice President, New Business Development from November 1993 to February 1995.
From January 1992 to November 1993, he was Director of Digital's Revenue
Management Services Group, a business unit created to provide sales and services
to state and local governments. From 1988 to July 1992, he was an independent
consultant.
Richard L. Anderson has served as Digital's Vice President and Controller
since November 1994. From September 1993 to November 1994, he was Vice
President, Finance, Chief Financial Officer and Secretary of Merix Corporation,
a manufacturer of printed circuit boards. From April 1982 to September 1993, he
served in various capacities, including Director, Corporate Development and
Group Controller, of Tektronix Corporation, a manufacturer of test and
measurement instruments. He holds a B.S. in Physics from Bucknell University, an
M.S. in Physics from the University of Maryland, and an M.S. in Management from
Johns Hopkins University. Mr. Anderson is a certified public accountant.
Charles A. Little has served as Digital's Vice President, Call Center
Products since June 1995. From June 1994 to June 1995, he was Digital's
Director, and later Executive Director, of Engineering. From February 1990 to
March 1994, Mr. Little served in various capacities including Director of
Engineering, Director of Marketing and Product Line Director for the Eldec
Corporation, a designer and manufacturer of aerospace and defense control and
monitoring products. He holds a B.S. in Aeronautical and Astronautical
Engineering and an M.S. in Applied Mathematics and Bioengineering from the
University of Washington.
Jack P. Praino has served as Digital's Vice President, North American
Distribution since June 1995. He served as Digital's Executive Director,
Marketing from February 1994 to June 1995, and as its Voicelink Business Unit
Manager from March 1991 to October 1992. From October 1992 to February 1994, he
was Digital's Director of Market Development, and from September 1990 to March
1991, he was Group Leader Market Manager. He served as Market Manager for
Digital from March 1990 to September 1990. He holds a B.A. in Operations
Management from Eastern Washington University and an M.B.A. from City
University.
Nicholas A. Tiliacos has served as Digital's Vice President, International
Business Operations since February 1996. From 1988 to 1996, he was the Founding
Partner and Managing Director of Ventech International, an international
consulting and business development company. Mr. Tiliacos holds a B.S. in
Business Administration from Florida State University and an M.S. in
International Management from the American Graduate School of International
Management.
Joseph P. White has served as Digital's Vice President, DSI Direct since
February 1996 and as its Vice President, Product Development from June 1995 to
February 1996. From January 1995 to May 1995, he was Digital's Executive
Director of Sales and Business Operations and from November 1993 to December
1994, he was Director of Sales Operations. From March 1991 to November 1993, he
served in Digital's Sales Department as Senior Account Executive. From September
1988 to January 1991, he was a senior consultant for Deloitte & Touche. Mr.
White holds a B.S. in Communications Management from the University of Portland
and an M.B.A. in Marketing from the Harvard Business School.
William Bradford Weller has served as Digital's Assistant Secretary since
February 1994 and as its General Counsel since January 1992. From 1983 to
December 1991, he was an Associate at Lane Powell Spears Lubersky, a law firm.
He holds a B.A. in Economics from Stanford University and a J.D. from Hastings
College of Law.
Tom A. Alberg has been a director of Digital since April 1992 and a member
of the Digital Board's Audit Committee since October 1992. Mr. Alberg has been a
principal in Madrona Investment Group, L.L.C., a
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<PAGE> 86
merchant banking firm, since January 1996. From April 1991 to October 1995, he
was the President and a director of LIN Broadcasting Corporation, and from July
1990 to October 1995, he was Executive Vice President of McCaw Cellular
Communications, Inc.; both companies were providers of cellular telephone
services and are now part of AT&T Corp. Prior to 1990, Mr. Alberg was a partner
of the law firm Perkins Coie, where he also served as Chairman of the firm's
Executive Committee. Mr. Alberg is also a director of Active Voice Corporation,
a manufacturer of voice message systems, Visio Corporation, a software firm,
Teledesic Corporation, a satellite telecommunications services provider, and
Emeritus Corp., a developer of assisted-living facilities.
H. Robert Gill has been a director of Digital since July 1996 and currently
serves as Chairman of the Digital Board's Compensation Committee. Mr. Gill has
served as President of The Topaz Group, a provider of board consulting services,
since April 1996. Before joining The Topaz Group, Mr. Gill served as Senior Vice
President and President, Enhanced Products Group for Frontier Corporation
following its merger with ALC Communications Corporation ("ALC") in December
1995. From January 1989 until the time of such merger, Mr. Gill served as
President and Chief Executive Officer of ConferTech International, a subsidiary
of ALC. Mr. Gill is also a director of Topro, Inc., a provider of systems
integration services for manufacturing industries, and Online System Services,
Inc., a provider of services and consulting relating to Internet Web site
content and commerce, and Chairman of the Board of Directors of Qualmark, a
provider of equipment and systems for environmental testing.
Harvey N. Gillis has been a director of Digital since March 1987 and is
currently Chairman of the Audit Committee. Since September 1992, Mr. Gillis has
been Senior Vice President, Finance and Administration and Chief Financial
Officer of Advanced Technology Laboratories, Inc., a manufacturer of medical
diagnostic equipment. From December 1991 to September 1992, Mr. Gillis was
Senior Vice President, Finance and Administration of NeoPath, Inc., a biomedical
equipment manufacturer of image diagnostic analysis systems. From December 1985
to December 1991, Mr. Gillis was Chief Operating Manager of Samuel Stroum
Enterprises, an investment company. Mr. Gillis is also a director of Edmark
Corporation.
David J. Ladd was appointed a director of Digital in February 1995 for an
initial term expiring on the date of the 1996 Annual Meeting of Shareholders and
has been a member of the Compensation Committee since December 1995. Since March
1994, Mr. Ladd has been the Executive Vice President and Chief Technology
Officer of Octel. Mr. Ladd was Executive Vice President, Chief Technology
Officer and a director of VMX from June 1986 to March 1994, when VMX merged with
Octel.
Robert S. Leventhal was appointed a director of Digital in October 1995 for
an initial term expiring on the date of the 1996 Annual Meeting of Shareholders
and has been a member of the Compensation Committee since December 1995. From
September 1989 to June 1994, Mr. Leventhal was Dean of the University of
Washington's School of Business Administration. From 1980 to 1988, he served
first as a director and then as Chairman of the Board, Chief Executive Officer
and Chief Operating Officer of Western Union Corporation, a provider of money
transfer and transaction-processing services. Mr. Leventhal is a Trustee of the
Seattle Repertory Theatre and Chairman of the Board of C3 Wireless
Communications Corporation and Global Datacom Inc.
Cynthia Stroum has been a director of Digital since November 1984 and is
currently a member of the Digital Board's Compensation Committee. Ms. Stroum has
been active in venture capital investments since 1983. Ms. Stroum serves on the
Board of Trustees of the Pacific Northwest Ballet and is a director of the
Northwest School for Hearing-Impaired Children.
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<PAGE> 87
DIGITAL EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information concerning the annual
and long-term compensation for services in all capacities to Digital for the
years ended December 31, 1995, 1994 and 1993 received by Digital's Chief
Executive Officer and the four other most highly compensated executive officers
of Digital during the last completed year (the "Digital Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- ----------------------------------------- ----- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Patrick S. Howard........................ 1995 251,573 100,000 -0- 4,148
President and Chief Executive
Officer(2) 1994 37,296 15,000 175,000 -0-
Thomas R. Clark.......................... 1995 176,680 60,375 -0- 1,758
Executive Vice President and 1994 58,427 12,259 100,000 775
President, DSI Professional Services(3)
John J. Flavio........................... 1995 146,500 43,355 15,000 3,307
Senior Vice President, 1994 146,730 30,595 -0- 1,258
Finance and Administration, 1993 88,691 -0- 75,000 250
Chief Financial Officer, Secretary and
Treasurer(4)
Edmund D. Wilsbach....................... 1995 131,541 40,365 10,000 2,247
Senior Vice President, Sales 1994 125,653 27,430 30,000 -0-
1993 95,545 -0- 40,000 -0-
Richard L. Anderson...................... 1995 121,500 26,082 6,190 2,435
Vice President and Controller(5) 1994 13,987 2,700 40,000 -0-
</TABLE>
- ---------------
(1) Consists of matching contributions awarded pursuant to the Digital Systems
International, Inc. Profit Sharing and Salary Deferral Plan and Trust.
(2) Mr. Howard's employment with Digital commenced November 8, 1994.
(3) Mr. Clark's employment with Digital commenced September 2, 1994.
(4) Mr. Flavio's employment with Digital commenced July 28, 1993.
(5) Mr. Anderson's employment with Digital commenced November 7, 1994.
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OPTION GRANTS IN 1995
The following table provides information on grants of stock options in 1995
to the Digital Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL
---------------------- REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS EXERCISE STOCK
UNDERLYING GRANTED TO PRICE PRICE APPRECIATION
OPTIONS EMPLOYEES PER FOR OPTION TERM(3)
GRANTED IN FISCAL SHARE EXPIRATION -------------------
NAME (#) YEAR(2) ($/SH) DATE 5% 10%
- ---------------------------------- --------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Patrick S. Howard................. -0- -- -- -- -- --
Thomas R. Clark................... -0- -- -- -- -- --
John J. Flavio.................... 15,000 5.37% $ 8.375 10/18/05 $79,005 $200,214
Edmund D. Wilsbach................ 10,000 3.58% $ 12.875 12/13/05 $80,970 $205,194
Richard L. Anderson............... 6,190 2.22% $ 9.000 7/19/05 $35,036 $88,787
</TABLE>
- ---------------
(1) The options have terms of 10 years from the date of grant and become
exercisable in equal annual installments over a period of four years,
commencing one year after the date of grant. Upon the occurrence of certain
business combination transactions, the exercisability of the options is
accelerated. All options were granted with an exercise price equal to the
fair market value on the date of grant based on the closing price of the
Digital Common Shares as quoted on the Nasdaq National Market.
(2) Digital granted 279,382 stock options to employees in 1995.
(3) Assumes all options are exercised at the end of their respective 10-year
terms. The dollar amounts under these columns are the result of calculations
at the 5% and 10% rates required by applicable regulations of the Commission
and, therefore, are not intended to forecast possible future appreciation,
if any, of the Digital Common Share price. Actual gains, if any, on stock
option exercises depend on the future performance of the Digital Common
Shares and overall stock market conditions, as well as the optionholders'
continued employment through the vesting period. The amount reflected in
this table may not necessarily be achieved.
OPTION EXERCISES IN 1995 AND YEAR-END VALUE TABLE
The following table provides information on options outstanding at December
31, 1995 for each of the Digital Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 1995
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT IN-THE-MONEY
ON VALUE FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
EXERCISE REALIZED -------------------------- ---------------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE(2)
- --------------------------------- -------- -------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Patrick S. Howard................ -0- -0- 43,750 131,250 $ 87,500 $262,500
Thomas R. Clark.................. -0- -0- 25,000 75,000 $171,750 $515,250
John J. Flavio................... -0- -0- 37,500 52,500 $328,125 $397,500
Edmund D. Wilsbach............... -0- -0- 27,950 52,650 $242,750 $381,700
Richard L. Anderson.............. -0- -0- 10,000 36,190 $ 17,500 $ 77,260
</TABLE>
- ---------------
(1) These amounts represent the aggregate number of options exercised multiplied
by the market price of a Digital Common Share at the time of exercise minus
the exercise price for each option.
(2) These amounts represent the aggregate number of in-the-money options,
multiplied by the difference between the $13.00 closing price of a Digital
Common Share on the Nasdaq National Market on December 29, 1995 minus the
exercise price for each option.
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COMPENSATION OF THE DIGITAL BOARD
Digital's directors currently receive $1,000 in cash compensation for
attending Digital Board meetings, and are reimbursed for their expenses. In
addition, nonemployee directors may from time to time be asked to provide
consulting services to Digital at a compensation rate of $1,000 per day (or $125
per hour for partial days). It is intended by Digital that cash compensation for
nonemployee directors shall not be less than $7,000 per year as combined
compensation for Digital Board meeting attendance and consulting services
rendered.
Nonemployee directors also receive stock option grants to purchase Digital
Common Shares under Digital's Restated 1992 Stock Option Plan for Non-Employee
Directors upon their initial appointment or election as directors and annually
thereafter.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF
CONTROL AGREEMENTS
As of November 8, 1994, Digital entered into an employment agreement with
Patrick S. Howard stating the terms and conditions of his employment by Digital
as Chief Executive Officer and President, including appointment of Mr. Howard as
a director, an agreement to nominate Mr. Howard for election as a director at
Digital's 1995 Annual Meeting of Shareholders, and an agreement to permit Mr.
Howard to nominate an additional director to serve on the Digital Board. The
agreement establishes Mr. Howard's minimum annual base salary at $250,000 and
provides for the continuation of base salary for one year in the event of
termination of employment for any reason other than cause or in the event of a
change of control of Digital.
As of March 1, 1995, Digital entered into an agreement with John J. Flavio,
Digital's Senior Vice President, Finance and Administration, Chief Financial
Officer, Secretary and Treasurer, providing for employment at a minimum annual
base salary of $145,000 through November 8, 1996 and, after such date, for
continuation of such salary for a period of six months in the event of
termination of employment for any reason other than cause or in the event of a
change of control of Digital.
As of March 1, 1995, Digital entered into an agreement with Edmund D.
Wilsbach, then Digital's Senior Vice President, Sales and Professional Services
(now Senior Vice President, Sales), providing for employment at a minimum annual
base salary of $130,000 through December 15, 1996 and, after such date, for
continuation of base salary for a period of six months in the event of
termination of employment for any reason other than cause or in the event of a
change of control of Digital.
As of March 1, 1995, Digital entered into an agreement with Thomas R.
Clark, then Digital's Senior Vice President, Products and Operations (now
Executive Vice President and President, DSI Professional Services), providing
for employment at a minimum annual base salary of $175,000 and for continuation
of base salary for a period of six months in the event of termination of
employment for any reason other than cause or in the event of a change of
control of Digital.
As of March 1, 1995, Digital entered into an agreement with Richard L.
Anderson, Digital's Vice President and Controller, providing for employment at a
minimum annual base salary of $120,000, and for continuation of base salary for
a period of six months in the event of termination of employment for any reason
other than cause or in the event of a change of control of Digital.
Pursuant to the 1987 Plan and the employment agreements described above,
all outstanding options become vested and exercisable should certain events
occur, including certain mergers and business combinations, that result in a
change of control of Digital. In the alternative, unless the plan administrator
determines otherwise, such optionees may elect to receive a cash amount equal to
the difference between the option exercise price and the fair market value of
the stock on the date of the election.
CERTAIN TRANSACTIONS
On December 13, 1994, Digital guaranteed certain obligations of Edmund D.
Wilsbach in favor of Seattle-First National Bank, up to the amount of $100,000,
in connection with the purchase of a residence in the state of Washington by Mr.
Wilsbach.
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VIEWSTAR
GENERAL
ViewStar provides client/server document workflow software that enables
customers to automate and improve document-intensive business processes across
the enterprise. The ViewStar System is a client/server application framework
software built around Windows NT utilizing Microsoft's enterprise computing
architecture. Customers can use ViewStar's application framework to rapidly
develop and deploy business-critical, process-intensive applications that
integrate structured and unstructured information. 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.
INDUSTRY
In today's highly competitive marketplace, companies must continuously
improve their core business processes and operations, many of which involve
managing and processing vast amounts of information. The increasing volume,
variety and complexity of this information poses a significant challenge to
organizations for which the efficient and timely processing of information is
critical. As a result, companies seek to implement business process automation
solutions to shorten document-intensive processing cycles, increase
productivity, deliver superior customer service and gain competitive advantage.
The rapid adoption of Windows NT and other enabling technologies is providing
these companies with the infrastructure to implement enterprise-wide software
solutions more rapidly and effectively to address these needs.
Business Process Reengineering. In the early 1990s, in an effort to
improve their overall competitiveness, many companies initiated business process
reengineering ("BPR") efforts to reinvent their corporate strategies. However,
because the successful implementation of these new high-level strategies often
required the redesign of business-critical operational processes, companies
broadened their BPR focus to include process automation. Examples of such
business-critical processes include claims processing and underwriting
operations in the insurance industry and consumer and mortgage loan processing
in the financial services industry. As these BPR efforts gain momentum,
companies worldwide increasingly seek innovative software solutions to automate
and improve these reengineered business-critical processes.
Need to Integrate and Manage Structured and Unstructured Data. The
proliferation of relational database management systems and the growth of
client/server computing has fueled deployment of applications that process and
manage structured data. Structured data, such as financial or inventory data,
are typically stored in the rows and columns of databases. However, these
applications and their underlying technologies are not designed to manage the
increasing complexity and variety of the information content and transaction
requirements inherent in most business processes. According to some industry
reports, up to 80% of corporate data is unstructured data, consisting of imaged
documents, faxes, electronic documents, forms, mainframe-generated reports,
digitized voice messages, electronic data interchange ("EDI") records and Web
documents. For example, loan officers processing loan applications need access
to a variety of structured data such as customer and product information and
unstructured data, including images of applications, credit reports, credit
analysis spreadsheets and other documents. As such, the ability to access,
manage and process all relevant information content, including the seamless
integration of structured and unstructured data, has emerged as a key
requirement for business process automation solutions.
Evolution of Workflow and Document Management Software. Initial efforts to
automate document-intensive processes began with electronic imaging technologies
in the late 1980s. These early image-processing products provided on-line
equivalents to paper-based storage and management of business information. These
systems focused primarily on storage and retrieval applications and were
generally only available on dedicated, expensive and proprietary platforms.
Workflow technology emerged first with the development of rigid and highly
customized workflow software that addressed transaction-based applications
focused on automated routing of document images and related information.
Although this software generated significant benefits both in improved
operations efficiency and cost reductions, implementations were costly, limited
in scope and difficult to change. At the
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same time, document management emerged as a means for managing electronic
documents and certain other types of unstructured business information. While
these solutions provide significant benefits by allowing enterprise access to
documents, document management systems do not generally address the fundamental
need to automate and improve business processes. These limitations have resulted
in growing market demand for solutions that combine sophisticated workflow
functionality with the ability to seamlessly manage both structured business
information, such as financial inventory data, and unstructured business
information, such as imaged documents, faxes, electronic documents, forms,
digitized voice messages and Web documents, to deliver an integrated application
framework that automates and improves document-intensive business processes
throughout the enterprise.
Market Requirements for Rapid Delivery of Enterprise
Applications. Business process automation software must address a number of
critical requirements to successfully automate business processes in today's
computing environments. In contrast to many enterprise applications that entail
lengthy and costly deployment cycles, successful new enterprise applications
must incorporate technologies that facilitate rapid development and deployment.
Furthermore, once an application is implemented, companies must be able to
quickly and easily alter the application to keep pace with changing business
requirements. Companies seek to implement business process automation solutions
that can extend the value of their current applications and be cost-effectively
deployed across the entire enterprise. Microsoft's enterprise computing
architecture, specifically Windows NT as the preferred application server
platform and OLE for application integration and delivery, provides an
integrated framework to leverage the existing corporate infrastructure and
deliver a new class of business process automation software solutions.
New Opportunities Created by the Internet and World Wide Web
Technologies. With the adoption of the Internet and intranets, companies have
recognized the opportunity to provide their employees, business partners and
customers with access to business information. By combining workflow and
document management with Internet and intranet technologies, companies will be
able to significantly broaden access to automated business processes within
their enterprises. In addition, companies will be able to extend the reach and
value of business process automation to include document-based business
transactions with their partners and customers beyond the enterprises. As a
result, businesses seek next-generation business process automation solutions
that include Internet and intranet capabilities.
THE VIEWSTAR SOLUTION
ViewStar provides client/server document workflow software that enables
customers to automate and improve document-intensive business processes across
the enterprise. The ViewStar System is a client/server application software
built around Windows NT utilizing Microsoft's enterprise-computing architecture.
Customers can use ViewStar's object-oriented application framework to rapidly
develop and deploy business-critical, process-intensive applications that
integrate structured and unstructured information.
ViewStar's products deliver the following benefits to its customers:
Increased Productivity. The ViewStar System allows customers to automate
document-intensive business processes to achieve shortened cycle times,
increased productivity, improved customer service and enhanced adaptability to
business change. The ViewStar System automates the delivery and flow of work-
related information, thereby reducing the time spent by users to locate, access,
gather and share information needed to complete their work. ViewStar's software
reduces or eliminates bottlenecks and identifies areas for improvement by
monitoring, tracking and reporting on the flow of work. By capturing the
information, business rules and workflow logic, the ViewStar System enables
companies to establish a "process memory" and facilitates continuous
modifications and improvements. ViewStar's software permits coordination of and
reliable access to relevant enterprise-wide information, thereby ensuring the
completeness and integrity of data used by individuals, teams and geographically
distributed organizations in the performance of their work.
Rapid Application Development and Deployment. The ViewStar System
facilitates rapid development of customized business process automation
solutions. Utilizing Process Architect, ViewStar's visual business process
modeler, customers can interactively define the work content, workflow tasks and
processes, business rules, user roles and job functions. The product includes an
extensive library of usable tasks that can easily be
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configured and included in the workflow process. Using Process Architect,
customers can also interactively monitor the process and adapt to changing
business needs. To further reduce implementation cycles, ViewStar intends to
offer, before the end of 1996, pre-built application templates incorporating
application-specific process models, information and business rules for certain
targeted industries.
Focus on Windows NT and Other Microsoft Technologies. The ViewStar System
extensively leverages Microsoft's enterprise computing architecture, including
the Windows NT platform, the Windows NT Server, the Microsoft SQL Server
database and related Back Office software. The ViewStar System supports Oracle
and Sybase databases on both the Windows NT Server and on the leading UNIX
platforms. ViewStar believes that this approach allows organizations to fully
utilize their existing client/server infrastructure, thereby enabling customers
to cost-effectively acquire and implement the ViewStar System while preserving
their investments in their existing computing resources, expertise and trained
personnel.
Enterprise-Wide Scalability. The ViewStar System is designed for
enterprise-wide scalability, thereby allowing organizations to deploy
applications ranging from small departmental applications to large complex
systems distributed over multiple locations. ViewStar's products are designed to
scale to the entire enterprise with the ability to support multiple clusters and
thousands of users worldwide.
Internet Leverage. The first of ViewStar's @Work family of Internet
products is expected to be available before the end of 1996. These products are
expected to include features that enable distributed organizations and remote
users such as vendors, customers, agents and partners to originate work and
track work-in-progress using Web browsers. In addition, the ViewStar System
enables users to utilize the Internet to move work between ViewStar Systems
either across departments via an intranet or between enterprises via the
Internet. Together, these products enable broad, secure user-participation in
automated business processes and facilitate document-based business transactions
within and between enterprises.
PRODUCTS
The ViewStar System is an enterprise-class, client-server application
framework that is built around Windows NT and utilizes Microsoft's
enterprise-computing architecture. The ViewStar System is designed to automate
and improve document-intensive business processes that require integration of
structured and unstructured data, including imaged documents, faxes, electronic
documents, forms, mainframe-generated reports, digitized voice messages, EDI
records and Web documents. ViewStar's @Work product extensions for the Internet
and its ServiceReady preconfigured application templates, the first of which is
expected to be generally available before the end of 1996, are add-on software
products that complement and extend the ViewStar family of products.
Process Architect is ViewStar's visual workflow and process modeling
application framework that enables interactive definition, configuration and
deployment of complex workflow processes. Using Process Architect, business
analysts and application designers can define the work content, business rules,
workflow maps and user roles and activities. Process Architect provides a
library of predefined business functions and reusable tasks that can be easily
configured to create a workflow map representing the business process. Through
Process Architect's animated simulation feature, "what if" analyses of the
throughput can be undertaken and bottlenecks predicted. Process Architect can
also be used to dynamically change the business process and automatically
rebuild the workflow application.
Application Designer facilitates rapid application delivery by providing
predefined application frameworks that can be "snapped together" to meet
specific user, application and job function requirements. Components such as
workflow tasks, user activities and document operations are stored in object
libraries and made available for selection and reuse through a standard
Windows-based graphical interface. In addition, Application Designer provides
preconfigured application templates for the most-requested users roles and job
functions, such as document access and display, workpacket creation and
indexing, document workflow processing, exception case handling and legacy
system integration.
Business Process Interface ("BPI") is a set of OLE automation interfaces
that enables the creation of workflow tasks and user applications using any OLE
2.0-compliance visual programming environment. BPI
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consists of high-level automation objects and a set of OLE customer controls.
Any third-party development tool that supports OLE 2.0, such as Visual Basic,
Visual C++, Delphi and PowerBuilder, can be used with BPI. In addition, the
system's OLE-based component architecture enables easy integration with
third-party components, including document and data capture subsystems, 3270
emulation packages for accessing mainframe data and productivity applications
such as Microsoft Word or Excel.
Application Services deliver core ViewStar System functionality for
workflow transaction processing, integrated document and information management,
and enterprise information exchange across the enterprise. ViewStar Application
Services can be consolidated on a single server or distributed across multiple
servers to deliver unmatched scalability in performance, throughput and storage
capacity.
Workflow Services execute workflow transactions, procedures and tasks,
including those actively generated in a workflow and those scheduled to run
periodically at predetermined times or at specific events. These services
also handle custom task processing, work tracking and monitoring, scheduled
tasks and document and data import and export.
Document Services provide systemwide access to ViewStar's document
workflow information repository that manages the structured data and
documents associated with ViewStar work objects, including document
references and attributes, work-in-progress and historical tracking
information, location and status of all workpackets in the system. All
objects and unstructured data associated with documents, folders and
workpackets, including images, electronic documents and voice objects, are
referenced and stored in standard network file servers. In addition,
ViewStar's Storage Services provide access to high-capacity devices such as
optical disk and juke box libraries.
Enterprise Information Exchange Services enable wide-area, multisite
workflow processing and distribution utilizing either Microsoft's MAPI
messaging and replication services or the Internet. The ViewStar Enterprise
Services utilize relational database engines for centralized resource
management and allow companies to distribute work geographically for local
processing, without sacrificing the tracking, monitoring and coordination
provided by the workflow management application.
Future Products. ViewStar intends to make a number of new products
generally available before the end of 1996. The new products will include the
first of the @Work product extensions for the Internet and the first of the
ServiceReady family, a series of preconfigured application templates for
targeted industries.
The initial @Work product offerings include Process@Work and
InfoStore@Work. Process@Work leverages the Internet and intranet infrastructure
to allow workflow initiation and status tracking from a Web browser. Utilizing
the Process Architect and the Process@Work server, workflow import and tracking
functions can be added to a workflow map. Once configured, Process Architect
automatically generates the Web page that allows users to initiate workflows,
submit work and information and track the status of their work in progress.
ViewStar's InfoStore@Work enables integrated access to the information stored in
ViewStar System repositories beyond the enterprise.
ViewStar intends to deliver the first of its ServiceReady family of
products for use in retirement and payables servicing before the end of 1996.
ViewStar's retirement servicing product is a preconfigured application based on
ViewStar's document workflow software designed to meet the needs of the market
for retirement benefits processing. This product handles documents that relate
to retirement servicing, including beneficiary, allocation and address changes.
The payables servicing product includes a set of processes common to accounts
payable applications and allows customization of these processes to the
customer's policies and requirements, leveraging ViewStar's experience in
implementing accounts payable systems. Built-in functionality of document
capture, vendor setup, host integration, indexing, processing, auditing,
customer service and archival storage is provided with the product.
PROFESSIONAL SERVICES AND SUPPORT
ViewStar's professional services and support organizations work in close
cooperation with service partners and independent, authorized affiliate
consultants to provide a wide range of consulting, educational and ongoing
support services to ViewStar customers, enabling rapid and successful delivery
of ViewStar document
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workflow applications. ViewStar's consulting group offers a core set of services
and packaged offerings designed to accelerate the development and deployment of
ViewStar document workflow applications across the enterprise. This group also
utilizes its network of service providers and system integration partners to
provide its customers with a broad range of application development, systems
planning and configuration and system integration services.
The ViewStar support organization offers a broad range of services and
programs, including hotline technical support, remote dial-in services,
Web-accessible knowledge base and customer on-site assistance to support
ViewStar's installed customer base and ensure timely resolution of customer- and
partner-reported problems. ViewStar currently has support centers in its
headquarters in Alameda, California and in the United Kingdom. ViewStar
Education Services offers a core curriculum of classroom and on-site training
courses focused on development and delivery of ViewStar's document workflow
system for end-users, developers and system administrators. Training courses are
available at ViewStar's training centers in Alameda and at its international
support center in the United Kingdom.
CUSTOMERS; SALES AND MARKETING
ViewStar has directly or indirectly licensed its products to more than 300
end-user customer sites worldwide in a broad range of industries, including
banking, insurance, financial services, energy, telecommunications,
manufacturing and healthcare, as well as governmental agencies.
ViewStar sells directly through its field sales force and indirectly
through system integrators and distributors to medium and large-size
organizations worldwide. Currently, ViewStar markets and sells its document
workflow software and solutions through its direct channel and an indirect
channel primarily consisting of system integrators and distributors. ViewStar
has ten sales offices in the United States and two in Europe, and is a party to
twenty distribution and system integration agreements in the United States,
Europe and Asia/Pacific, as well as having relationships with several other
system integrators and service providers. ViewStar's sales and marketing
organization consisted of 47 employees as of September 30, 1996. The sales cycle
for ViewStar's products varies depending on the application, deployment
requirements and the customer, but typically ranges from six to twelve months.
ViewStar's worldwide network of integrators and distributors sells,
customizes, deploys and supports its products and solutions across a wide range
of industries. For significant sales in targeted industries, ViewStar
supplements the efforts of its integrators with a team-based approach that
includes ViewStar's sales and technical personnel. A portion of ViewStar's
direct sales force is responsible for local partner support, joint sales
efforts, management and development of new regional and global integrators and
distributors. ViewStar intends to further expand its indirect channel by
recruiting industry and application-specific solution partners and value-added
application developers. In this effort, ViewStar will market and sell its
ServiceReady family of industry-specific products, two of which are expected to
be available before the end of 1996.
ViewStar targets large, global customers in key vertical markets. A
significant portion of ViewStar's direct sales force is focused primarily on
identifying and generating business through such customers. In these efforts,
the direct sales force frequently utilizes the resources of ViewStar's system
integrators, as well as a network of third-party application developers, to
develop and deploy ViewStar System solutions. ViewStar also undertakes joint
marketing efforts for the ViewStar System with industry leaders such as Compaq,
Microsoft, Oracle and Sybase to stimulate and educate the market, as well as to
identify and generate customer leads in target markets. In addition, ViewStar
has entered into and is expanding corporate and marketing relationships with
other technology partners whose products and component technologies leverage or
integrate with the ViewStar System to offer comprehensive document workflow
solutions. These partners include Cornerstone Imaging, Fujitsu, Kofax Image
Products and Symantec corporation's Delrina Group, among others.
ViewStar has committed and continues to commit significant time and
financial resources to expanding international sales and support channels and
marketing efforts. International license fee revenue accounted for 8%, 25% and
17% of ViewStar's license fee revenue in 1994 and 1995 and for the nine months
ended September 30, 1996, respectively. ViewStar believes that in order to
increase sales opportunities and profitability, it will be required to expand
its international operations. There can be no assurance, however, that
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ViewStar will be able to maintain or increase international market demand for
its products. See "RISK FACTORS -- International Sales" and "VIEWSTAR
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
RESEARCH AND DEVELOPMENT
ViewStar conducts its research and development activities at its facilities
in Alameda, California. As of September 30, 1996, ViewStar had 41 employees
engaged in research and development. ViewStar's total research and development
spending was approximately $5.6 million in 1995 and $3.7 million in the nine
months ended September 30, 1996.
ViewStar has committed and expects to continue to commit substantial
resources to research and development. ViewStar supplements its product
development efforts by reviewing customer feedback on existing products and
working with customers and potential customers to anticipate future
functionality requirements. Product development efforts are directed at
increasing product functionality, improving product performance, expanding
product capabilities to shorten the application development and deployment cycle
and further leverage the Microsoft Windows NT platform. ViewStar continues to
identify and prioritize various technologies for potential future product
offerings.
EMPLOYEES
As of September 30, 1996, ViewStar had 144 full-time employees, including
47 in sales and marketing, 40 in consulting and customer support, 41 in research
and development and 16 in finance and administration. No employees are covered
by collective bargaining agreements, and ViewStar believes that it maintains
good relations with its employees. Competition for qualified personnel in the
industry in which ViewStar competes is intense. ViewStar believes that its
future success will depend in part upon its continued ability to attract, hire
and retain qualified personnel.
COMPETITION
The market for ViewStar's products is intensely competitive and subject to
rapid change caused by new product introductions and other market activities of
industry participants. ViewStar's products are targeted for document workflow
software solutions, and ViewStar's competitors offer a variety of products and
services to address this market. ViewStar currently encounters direct
competition from a number of public and private companies or divisions thereof,
including FileNet, 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, 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.
ViewStar also faces indirect competition from system integrators. ViewStar
relies on a number of system integration firms for implementation and other
services, 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 in the future or otherwise reduce
or discontinue their relationship with or support of ViewStar and its products.
See "RISK FACTORS -- Competition."
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It is also possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. In addition, ViewStar
expects competition to increase as a result of software industry consolidation.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could materially adversely affect ViewStar's
business, results of operations and financial condition. 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 its business, results of operations and
financial condition.
ViewStar believes that the principal competitive factors affecting its
market include product features such as adaptability, scalability, ability to
integrate with third party products, functionality, ease of use, product
reputation, quality, performance, price, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although
ViewStar believes that it currently competes favorably with respect to such
factors, there can be no assurance that ViewStar can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical and other resources
than ViewStar.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
ViewStar's success depends in part upon protecting its proprietary
technology. ViewStar seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. ViewStar presently has no patents or patent applications
pending. Despite ViewStar's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of ViewStar's products or to
obtain and use information that ViewStar regards as proprietary. Policing
unauthorized use of ViewStar's products is difficult, and since ViewStar is
unable to determine the extent to which piracy of its software products exists,
software piracy can be expected to be a persistent problem. In addition, the
laws of some foreign countries do not protect ViewStar's proprietary rights to
as great an extent as do the laws of the United States. There can be no
assurance that ViewStar's means of protecting its proprietary rights will be
adequate or that ViewStar's competitors will not independently develop similar
technology. Although ViewStar has received communications asserting that its
products infringe the proprietary rights of third parties or seeking
indemnification against such infringement, ViewStar is not aware that any of its
products infringe the proprietary rights of third parties. There can be no
assurance, however, that other third parties will not claim infringement by
ViewStar with respect to current or future products. ViewStar expects that
software product developers will be increasingly subject to infringement claims
as the number of products and competitors in ViewStar's industry segment grows
and functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, resulting in costly
litigation, cause product shipment delays or require ViewStar to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to ViewStar, if at all, which
could have a material adverse effect on ViewStar's business, results of
operations and financial condition. In addition, ViewStar relies on certain
software that it licenses from third parties, including software that is
integrated with internally developed software and used in ViewStar's 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 ViewStar on commercially
reasonable terms. The loss or inability to maintain any of these software
licenses could result in delays or reductions in product shipments until
equivalent software can be developed, identified, licensed and integrated, which
would materially adversely affect ViewStar's business, results of operations and
financial condition. See "RISK FACTORS -- Dependence on Proprietary Rights;
Infringement Claims; Uncertainty of Obtaining Licenses."
PROPERTY AND FACILITIES
ViewStar's administrative offices and manufacturing and warehousing
facilities occupy approximately 55,000 square feet in Alameda, California,
pursuant to a lease that expires in May 1999. ViewStar also leases office space
in Boston, Charlotte, Chicago, Cleveland, Costa Mesa, Dallas, Houston, New York
and Vienna, Virginia and in Bracknell, United Kingdom and Paris, France.
Management believes that its current facilities will be adequate to meet its
needs through at least the next twelve months.
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SELECTED VIEWSTAR FINANCIAL DATA
The following selected historical financial data of ViewStar have been
derived from ViewStar's historical consolidated financial statements. The
selected financial data presented below should be read in conjunction with
Viewstar's consolidated financial statements and the notes thereto contained
herein.
<TABLE>
<CAPTION>
AT OR FOR
NINE MONTHS ENDED
AT OR FOR YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues.................... $12,450 $23,131 $28,096 $ 22,812 $ 25,238 $17,155 $23,284
Cost of revenues............ 3,793 9,113 8,649 8,757 8,495 6,277 7,005
------- ------- ------- -------- ------- ------- -------
Gross profit................ 8,657 14,018 19,447 14,055 16,743 10,878 16,279
------- ------- ------- -------- ------- ------- -------
Operating expenses:
Sales and marketing...... 5,188 8,627 12,894 15,568 14,912 11,131 9,982
Research and
development............ 2,997 3,559 5,814 6,617 5,572 4,305 3,662
General and
administrative......... 1,365 2,058 2,615 2,914 1,970 1,574 1,567
Nonrecurring charges..... -- -- -- 78 1,740 969 --
------- ------- ------- -------- ------- ------- -------
Total operating
expenses.......... 9,550 14,244 21,323 25,177 24,194 17,979 15,211
------- ------- ------- -------- ------- ------- -------
Operating income (loss)..... (893) (226) (1,876) (11,122) (7,451) (7,101) 1,068
Other income (expense)...... 52 (109) (320) (85) (456) (307) (119)
------- ------- ------- -------- ------- ------- -------
Income (loss) before
income taxes...... (841) (335) (2,196) (11,207) (7,907) (7,408) 949
Income taxes................ -- 77 119 55 49 32 11
------- ------- ------- -------- ------- ------- -------
Net income (loss)... $ (841) $ (412) $(2,315) $(11,262) $ (7,956) $(7,440) $ 938
======= ======= ======= ======== ======= ======= =======
Net income (loss) per
share.................... $ (2.22) $ (1.01) $ (5.09) $ (21.21) $ (11.75) $(11.17) $ 0.18
======= ======= ======= ======== ======= ======= =======
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (deficit)... $ 5,119 $ 4,666 $ 5,800 $ (3,513) $(10,585) $(2,167)
Deferred revenue............ 579 1,760 6,121 9,767 10,625 9,376
Total assets................ 9,395 15,199 18,581 17,856 12,380 16,962
Short-term debt............. 864 3,262 701 2,446 3,055 907
Long-term obligations....... 304 626 857 955 994 4,715
Stockholders' equity
(deficit)................ 5,801 5,546 7,175 (978) (8,829) (4,436)
</TABLE>
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<PAGE> 98
VIEWSTAR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Proxy Statement/Prospectus includes forward-looking statements that
involve risks and uncertainties. ViewStar's 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
"RISK FACTORS."
OVERVIEW
ViewStar was incorporated in California in 1986 and shipped its first
product in 1988. ViewStar provides client/server document workflow software that
enables customers to automate and improve document-intensive business processes.
ViewStar's license fee revenue rose consistently from 1989 through 1993. License
fee revenue decreased in 1994 compared to 1993 primarily as a result of customer
dissatisfaction with ViewStar's inability to fulfill customer service and
support demands that particularly arose from several large orders received in
the second half of 1993. Such customer dissatisfaction and the resulting lost
revenue opportunities also contributed to a significant number of resignations
in ViewStar's direct sales force, which had further adverse effects on license
fee revenue through the first half of 1995. ViewStar addressed these problems by
(i) expanding its use of system integrators and distributors to market
ViewStar's products and service its customer base, (ii) strengthening its senior
management team, (iii) restructuring its sales and distribution organization,
(iv) adding employees to meet service and support requirements, and (v) adding
employees to redevelop ViewStar's core technology focusing on Windows NT. Costs
associated with certain of these actions, combined with reduced revenues,
resulted in net losses in 1994 and 1995 of $11.3 million and $8.0 million,
respectively. Favorable market acceptance of Versions 4.0 and 4.1, which focused
on Windows NT, in the third and fourth quarters of 1995, combined with decreases
in operating expenses, provided ViewStar with renewed revenue growth and
improved operating results. ViewStar operated profitably for the first three
quarters of 1996 and was also profitable in the third and fourth quarters of
1995, before nonrecurring charges. Although ViewStar has recently experienced
revenue growth, such growth should not be considered indicative of future
revenue growth, if any, or of future operating results. There can be no
assurance that ViewStar's business can operate profitably on a sustained basis
in the future.
Prior to 1994, a portion of ViewStar's revenues consisted of sales of
hardware, including optical storage devices, scanners and high-speed printers,
as part of its document workflow systems. Since 1994, ViewStar has not sold
hardware directly to customers, but has relied on outside hardware distributors
to make direct hardware sales to ViewStar's customers.
ViewStar's international sales for the years ended December 31, 1994 and
1995 and the nine months ended September 30, 1996 represented approximately 8%,
25% and 17% of ViewStar's total revenues, respectively. ViewStar intends to
allocate additional resources to increase international sales as a percentage of
total revenues in the future. There can be no assurance that ViewStar will
achieve additional revenues from international sales. If ViewStar fails to
increase international sales, ViewStar's business would be materially adversely
affected. See "RISK FACTORS -- International Sales."
Substantially all of ViewStar's revenues are derived from licenses of the
ViewStar System and related consulting and maintenance services. Software
license fee revenue is recognized when (i) a signed contract exists, (ii)
delivery has occurred, (iii) the fee is fixed and collectibility is probable,
and (iv) remaining vendor obligations are insignificant. Generally, revenue from
the sale of software licenses through distributors is recognized after contract
signing and shipment and upon the earlier of sale to an end-user or receipt of
nonrefundable cash payments from the distributors. Revenue from software
installation and consulting contracts is recognized as services are performed.
Revenue from software maintenance agreements is recognized ratably over the
service period. ViewStar has not capitalized any software development costs to
date.
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<PAGE> 99
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Revenues
Total Revenues. Total revenues increased 35.7% to $23.3 million for the
nine months ended September 30, 1996 from $17.2 million for the comparable
period in 1995. The increase was due to increased license fee revenue due to the
increased market acceptance of ViewStar's products.
License Fees. License fee revenue increased 42.3% to $12.1 million for the
nine months ended September 30, 1996 from $8.5 million for the comparable period
in 1995. The increase was due to increased market acceptance of ViewStar's
products, especially Versions 4.0 and later, which were first introduced in the
second half of 1995 and are focused on Windows NT, and to the increased
referenceability of ViewStar's installed customer base. ViewStar does not
believe that this rate of license fee revenue growth is sustainable into the
future, and year-to-year comparisons should not be relied upon as indicative of
future results.
Services. Service revenue, which includes revenue for both consulting
services and maintenance fees, increased 30.4% for the nine months ended
September 30, 1996 to $11.2 million from $8.6 million for the comparable period
in 1995. Increased license fee revenue in the second half of 1995 resulted in
the increase in both maintenance fees and the demand for ViewStar's consulting
services. The increase in consulting services was also attributable to the
addition of several new service providers, thereby enabling ViewStar to meet the
demand for installation, upgrade and other consulting services. Consulting
service revenue increased 41.5% to $5.5 million for the nine months ended
September 30, 1996 from $3.9 million for the comparable period in 1995.
Maintenance fees increased 21.2% to $5.7 million for the nine months ended
September 30, 1996 from $4.7 million for the comparable period in 1995.
Cost of Revenue
License Fees. Cost of license fee revenue consists of commissions paid to
partners for their participation in certain license transactions, royalty
payments to third party software vendors and costs of product media, duplication
and packaging. Cost of license fee revenue increased to $870,000, or 7.2% of
license fee revenue, for the nine months ended September 30, 1996, compared to
$386,000, or 4.5% of license fee revenue, for the comparable period in 1995.
This increase as a percentage of license fee revenue was primarily due to a
relatively large commission paid to a partner on a license transaction which was
partially offset by a percentage decrease in royalty payments to third-party
software vendors.
Services. Cost of service revenue consists primarily of the cost of
providing implementation, consulting, maintenance and training services. Cost of
service revenue includes both direct costs and the cost of third-party
consulting providers. Cost of service revenue was $6.1 million, or 54.8% of
service revenue, for the nine-month period ended September 30, 1996, compared to
$5.9 million, or 68.5% of service revenue, for the comparable period in 1995.
This decrease in cost of service revenue as a percentage of service revenue was
due to a reduction in consulting and customer support from early 1995 levels,
reflecting ViewStar's increased use of third party service providers. ViewStar's
experience has been that consulting fees paid to third-party service providers
are lower than the compensation, training and other costs associated with
employees who provide such services. ViewStar expects cost of service revenue as
a percentage of service revenue to fluctuate and does not expect cost of service
revenue to continue to decrease in absolute dollars or as a percentage of
service revenue.
Operating Expenses
Sales and Marketing. Sales and marketing expense consists primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expense, and travel, entertainment and promotional expense. Sales and
marketing expense decreased to $10.0 million, or 42.9% of total revenues, for
the nine-month period ended September 30, 1996, from $11.1 million, or 64.9% of
total revenues, for the comparable period in 1995. The decrease in sales and
marketing expense in absolute dollars and as a percentage of total revenues was
due to a reduction in the number of sales employees during 1995 and the
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<PAGE> 100
increased reliance on system integrators and distributors. ViewStar expects
sales and marketing expense to increase in absolute dollars, but not necessarily
as a percentage of total revenues.
Research and Development. Research and development expense consists
primarily of costs of personnel and equipment needed to conduct product
development efforts. Research and development expense decreased to $3.7 million,
or 15.7% of total revenues, for the nine months ended September 30, 1996, from
$4.3 million, or 25.1% of total revenues, for the comparable period in 1995, due
to a reduction in headcount during the latter half of 1995 and decreased
utilization of third-party consultants for product testing. The reduction in
headcount reflected the completion of the intensive efforts in 1995 to redevelop
ViewStar's core technology focusing on Windows NT. ViewStar is committed to
providing continuing enhancements to current products as well as to developing
new technologies for the future. ViewStar expects research and development
expense to increase in absolute dollars and to fluctuate as a percentage of
total revenues in the future.
General and Administrative. General and administrative expense consists
primarily of the salaries of the Company's executive, administrative and
financial personnel and outside legal, audit and associated administration
expenses. General and administrative expense was $1.6 million, or 6.7% of total
revenues, for the nine months ended September 30, 1996, compared to $1.6
million, or 9.2% of total revenues, for the comparable period in 1995. ViewStar
expects general and administrative expense to increase in absolute dollars and
to fluctuate as a percentage of total revenues in the future
Nonrecurring Charges. ViewStar incurred nonrecurring charges of $969,000
for the first nine months of 1995, which included such items as severance pay,
education programs and job search fees in connection with a reduction in
headcount. There was no such similar expense incurred during the nine months
ended September 30, 1996.
Other Income (Expense)
Other income (expense) consists of interest income earned on short-term
investments and interest expense on lines of credit, bank loans and capital
leases. Other expense decreased to $119,000 for the nine months ended September
30, 1996 from $307,000 for the comparable period in 1995 due to decreased
interest expense from reduced borrowings during 1996. See "VIEWSTAR MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
Income Taxes
Income tax expense decreased to $11,000 for the nine months ended September
30, 1996 from $32,000 for the comparable period in 1995. These expenses reflect
foreign taxes incurred on certain foreign license fee revenue. ViewStar incurred
a net loss in the 1995 period and no provision for tax was required. As of
December 31, 1995, ViewStar had net operating loss carryforwards in the amount
of $22.7 million for federal income tax purposes, expiring from 2003 through
2010, and $9.2 million for state franchise tax purposes expiring from 1996
through 2000. In addition, as of December 31, 1995, ViewStar had federal and
state research and development credit carryforwards of $920,000 and $605,000
respectively, expiring from 2001 through 2010. Due to the change of ownership
provisions of the Tax Reform Act of 1986, the availability of ViewStar's net
operating loss and credit carryforwards will be subject to an annual limitation
against taxable income in future periods if a change of ownership for income tax
purposes should occur over a three-year period, which could substantially limit
the eventual tax utilization of these carryfowards.
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
difference 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 the Company's history of operating losses, the nature
of ViewStar's deferred tax
90
<PAGE> 101
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.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Revenues
Total Revenues. Total revenues increased 10.6% to $25.2 million for 1995
from $22.8 million for 1994 due to increased license fee revenue. Total revenues
decreased 18.8% to $22.8 million for 1994 from $28.1 million for 1993 because of
weakened demand for ViewStar's products and the factors described in "VIEWSTAR
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Overview."
License Fees. License fee revenue increased 24.9% to $13.0 million for
1995 compared to $10.4 million for 1994 due to stronger demand for ViewStar's
4.0 and 4.1 product versions released in 1995. License fee revenue decreased
34.1% to $10.4 million for 1994 from $15.8 million for 1993, due in part to
customer dissatisfaction with ViewStar's inability to fulfill customer service
and support demands that particularly arose from several large orders received
in the second half of 1993. Such customer dissatisfaction and resulting lost
revenue opportunities also contributed to a significant number of resignations
in ViewStar's direct sales force, which had further adverse effects on license
fee revenue.
Services. Service revenue increased 2.4% to $12.1 million for 1995 from
$11.9 million for 1994, due to an increase in maintenance fees, offset by a
reduction in consulting service revenue. Service revenue increased 16.2% to
$11.9 million in 1994 from $10.2 million for 1993, primarily because of
increases in maintenance and training fees due to the expansion of ViewStar's
installed base. Consulting service revenue decreased 16.1% to $5.7 million for
1995 from $6.8 million for 1994. This decrease reflected a reduction in services
personnel and increased reliance on third-party consulting providers to provide
consulting services, as described above. Consulting service revenue decreased
4.8% to $6.8 million for 1994 from $7.2 million for 1993 due to decreased demand
resulting from lower license fee revenue. Maintenance fees for 1995 increased
27.4% to $6.4 million from $5.0 million for 1994, due to the expansion of
ViewStar's installed base. Maintenance fees increased 65.4% to $5.0 million for
1994 from $3.0 million for 1993, due to the increase in 1993 license fee
revenue.
Hardware. Hardware revenue declined to $70,000 in 1995 from $519,000 and
$2.0 million in 1994 and 1993, respectively, due to ViewStar's decision to rely
on third parties to sell hardware to its customers. ViewStar does not expect to
generate hardware revenue in the future.
Cost of Revenue
License Fees. Cost of license fee revenue was $536,000, or 4.1% of license
fee revenue, for 1995, compared to $720,000, or 6.9% of license fee revenue, for
1994, due to reductions in third-party royalties on the new version of
ViewStar's products. Cost of license fee revenue was $720,000 for 1994, compared
to $606,000, or 3.8% of license fee revenue, for 1993, due to higher production
costs and royalties paid to third parties.
Services. Cost of service revenue was $8.0 million, or 65.6% of service
revenue, for 1995 compared to $8.0 million, or 67.4% of service revenue, for
1994, reflecting an increased use of third-party consulting providers, offset by
a decrease in consulting headcount. Cost of service revenue was $8.0 million for
1994 compared to $6.7 million, or 65.6% of service revenue, for 1993, due to the
increase in headcount in the latter part of 1994 and an increase in the cost of
third-party service providers.
Hardware. Since 1994, ViewStar has not sold hardware directly to
customers, but instead has relied on outside hardware distributors to make
direct hardware sales to ViewStar's customers. As a result, the cost of hardware
for 1995 was zero compared to $42,000, or 8.1% of hardware revenue, for 1994.
The cost of hardware
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for 1994 was $42,000 compared to $1.3 million, or 65.9% of hardware revenue, for
1993. ViewStar does not anticipate having any costs associated with the sale of
hardware in the future.
Operating Expenses
Sales and Marketing. Sales and marketing expense decreased to $14.9
million, or 59.1% of total revenues, for 1995 from $15.6 million, or 68.2% of
total revenues, for 1994, resulting from expense reductions due to decreased
headcount in both departments, partially offset by increases in costs and
commissions associated with higher revenues. Sales and marketing expense
increased to $15.6 million for 1994 from $12.9 million, or 45.9% of total
revenues, for 1993 primarily due to personnel increases intended to provide
sales support for anticipated 1994 revenue growth, together with an additional
$1.0 million in expenses relating to the formation and operation of the United
Kingdom subsidiary.
Research and Development. Research and development expense decreased to
$5.6 million, or 22.1% of total revenues, for 1995 from $6.6 million, or 29.0%
of total revenues, for 1994 due to a modest reduction in personnel and
cost-containment measures. Research and development expense increased to $6.6
million for 1994 from $5.8 million, or 20.7% of total revenues, for 1993 due to
increased staffing of software engineers required to enhance ViewStar's product
line. ViewStar is committed to providing continuing enhancements to current
products as well as to developing new technologies for the future. ViewStar
expects to continue to invest heavily in research and development in future
periods.
General and Administrative. General and administrative expense decreased
to $2.0 million, or 7.8% of total revenues, for 1995 from $2.9 million, or 12.8%
of total revenues, for 1994 primarily due to reductions in head count. General
and administrative expenses increased to $2.9 million for 1994 from $2.6
million, or 9.3% of total revenues, for 1993 due to increases in staffing in
1993 and 1994.
Nonrecurring Charges. During 1995, ViewStar incurred approximately $1.7
million of nonrecurring charges consisting of $500,000 of costs, principally
legal fees, associated with the termination of the proposed merger with Caere
and $1.2 million of expenses for severance pay, educational programs and job
search fees resulting from a reduction in headcount. ViewStar incurred $78,000
in severance-related expense in 1994 and incurred no such similar expense in
1993.
Other Income (Expense)
Other expense increased to $456,000 for 1995 from $85,000 for 1994 due to
increased interest expense incurred in 1995 related to ViewStar's line of
credit, bridge loan and additional financing of capital equipment. Other expense
decreased to $85,000 in 1994 from $320,000 for 1993, due to decreased interest
expense from reduced borrowings in 1994 compared to 1993. See "-- Liquidity and
Capital Resources."
Income Taxes
Income tax expense decreased to $49,000 for 1995 from $55,000 for 1994,
primarily due to a slight decrease in state and foreign tax obligations. Income
tax expense decreased to $55,000 for 1994 from $119,000 for 1993, due to the
increased losses in 1994.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited consolidated financial
information for each of the seven quarters ended September 30, 1996, as well as
such data expressed as a percentage of ViewStar's total revenues for the period
indicated. The data have been derived from unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. Such statements of operations data should be
read in conjunction with ViewStar's audited consolidated financial statements
and notes thereto. ViewStar believes that quarter-to-quarter comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
-------- -------- --------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
License fees.................. $ 1,086 $ 2,976 $ 4,428 $4,541 $3,457 $4,000 $ 4,622
Services...................... 2,723 2,787 3,085 3,542 3,483 3,801 3,921
Hardware...................... 27 45 (2) -- -- -- --
------- ------- ------ ------ ------ ------ -------
Total revenues................ 3,836 5,808 7,511 8,083 6,940 7,801 8,543
Total cost of revenues........ 2,268 2,084 1,925 2,218 2,198 2,388 2,419
------- ------- ------ ------ ------ ------ -------
Gross profit.................. 1,568 3,724 5,586 5,865 4,742 5,413 6,124
------- ------- ------ ------ ------ ------ -------
OPERATING EXPENSES:
Sales and marketing.............. 3,483 4,152 3,496 3,781 2,980 3,304 3,698
Research and development......... 1,528 1,487 1,290 1,267 1,193 1,243 1,226
General and administrative....... 562 591 421 396 433 511 623
Nonrecurring charges............. 320 47 602 771 -- -- --
------- ------- ------ ------ ------ ------ -------
Total operating expenses...... 5,893 6,277 5,809 6,215 4,606 5,058 5,547
------- ------- ------ ------ ------ ------ -------
Operating income (loss).......... (4,325) (2,553) (223) (350) 136 355 577
Other expense.................... (47) (114) (146) (149) (22) (55) (42)
------- ------- ------ ------ ------ ------ -------
Income (loss) before taxes.... (4,372) (2,667) (369) (499) 114 300 535
Income taxes..................... -- 32 -- 17 11 -- --
------- ------- ------ ------ ------ ------ -------
Net income (loss)............. $ (4,372) $ (2,699) $ (369) $ (516) $ 103 $ 300 $ 535
------- ------- ------ ------ ------ ------ -------
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
License fees.................. 28.3% 51.2% 58.9% 56.2% 49.8% 51.3% 54.1%
Services...................... 71.0 48.0 41.1 43.8 50.2 48.7 45.9
Hardware...................... 0.7 0.8 -- -- -- -- --
------- ------- ------ ------ ------ ------ -------
Total revenues................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Total cost of revenues........ 59.1 35.9 25.6 27.5 31.7 30.6 28.3
------- ------- ------ ------ ------ ------ -------
Gross profit.................. 40.9 64.1 74.4 72.5 68.3 69.4 71.7
------- ------- ------ ------ ------ ------ -------
OPERATING EXPENSES:
Sales and marketing.............. 90.8 71.5 46.6 46.8 43.0 42.3 43.3
Research and development......... 39.9 25.6 17.2 15.7 17.2 15.9 14.4
General and administrative....... 14.7 10.2 5.6 4.9 6.2 6.6 7.3
Nonrecurring charges............. 8.3 0.8 8.0 9.5 -- -- --
------- ------- ------ ------ ------ ------ -------
Total operating expenses...... 153.7 108.1 77.4 76.9 66.4 64.8 65.0
------- ------- ------ ------ ------ ------ -------
Operating income (loss).......... (112.8) (44.0) (3.0) (4.4) 1.9 4.6 6.7
Other expense.................... (1.2) (2.0) (1.9) (1.8) (0.3) (0.7) (0.5)
------- ------- ------ ------ ------ ------ -------
Income (loss) before taxes.... (114.0) (46.0) (4.9) (6.2) 1.6 3.9 6.2
Income taxes..................... -- 0.5 -- 0.2 0.2 -- --
------- ------- ------ ------ ------ ------ -------
Net income (loss)............. (114.0)% (46.5)% (4.9)% (6.4)% 1.4% 3.9% 6.2%
======= ======= ====== ====== ====== ====== =======
</TABLE>
ViewStar's license fee revenue is difficult to forecast because ViewStar's
sales cycle is relatively long and quarterly revenues depend on a relatively few
large contracts that are subject to changes in customer budgets and general
economic conditions. Because ViewStar's operating expenses are based on
anticipated revenue levels and a high percentage of ViewStar's 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
materially adversely affect operating results. ViewStar historically has
operated with little backlog because its software products are generally shipped
as orders are received. As a result, license fee revenue in any quarter depends
substantially on orders booked and shipped in that quarter. Further, a
relatively few contracts may constitute a significant portion of the operating
profits in any quarter. Historically, ViewStar has often recognized a
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substantial portion of its revenues in the last month of the quarter, with these
revenues frequently concentrated in the last week of the quarter. In addition,
changes in levels of consulting activity and seasonality in training revenues,
which tend to lag license fee revenue by approximately one quarter, have
resulted in variability of services revenues from quarter to quarter.
ViewStar has generally realized lower license fee revenue in the first
quarter of the year than in the immediately preceding quarter. ViewStar believes
that this has been primarily due to the structure of ViewStar's sales commission
program and the concentration by some customers of larger capital purchases in
the fourth quarter of the calendar year, followed by lower purchasing activity
during the first quarter of the next calendar year. To the extent that
international operations in the future constitute a higher percentage of total
revenues, ViewStar anticipates that it may also experience relatively weaker
demand in the quarter ending September 30 as a result of reduced customer
activity in Europe during the summer months. As a result of these factors,
revenues for any quarter are subject to significant variation, and ViewStar
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. See "RISK FACTORS -- Uncertainty of Future Operating Results;
Fluctuations in Operating Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, ViewStar has financed its operations through the private
sale of equity securities totaling $27.0 million, borrowings from its principal
shareholders (and in 1996 from Digital) and bank indebtedness. ViewStar's cash
balance as of September 30, 1996 was $5.9 million. Net cash provided by (used
in) operating activities was $27,000, ($1.8) million and ($4.3) million for the
first nine months of 1996, and for the years ended December 31, 1995 and 1994,
respectively. Under ViewStar's secured bank line of credit, as of September 30,
1996 up to $4.0 million was available for working capital advances, based upon
the level of eligible accounts receivable. ViewStar has not needed to borrow
against this facility during the nine months ended September 30, 1996. ViewStar
intends to finance its operations with its available cash and borrowings on its
bank line of credit, if needed. In September 1996, ViewStar borrowed $4.0
million from Digital pursuant to a promissory note with a 48-month term, bearing
interest at 0.50% above the prime rate, with monthly payments of interest only
due until the end of the 48-month term. The loan is subordinated to ViewStar's
bank line of credit. In June 1995, ViewStar borrowed $2.0 million from certain
of its existing ViewStar Preferred Stock investors. These borrowings were
subordinated to its bank line of credit. This loan was converted to equity in
March 1996. Management of ViewStar believes that existing cash and short-term
investments and cash flow from operations, together with available credit lines,
will continue to be sufficient to meet ongoing operating requirements as well as
ViewStar's investment in capital additions and research and development
activities through 1997. See Notes 4 and 7 of ViewStar Notes to Consolidated
Financial Statements.
ViewStar's cash used for investing activities has consisted primarily of
capital equipment purchases. ViewStar's total capital expenditures, including
those under capital leases, totaled $606,000 for the first nine months of 1996.
ViewStar forecasts additional capital expenditures of approximately $325,000
during the remainder of 1996. ViewStar currently has an active lease line, which
expires on December 31, 1996, to provide an additional $425,000 of lease
capacity at 8% interest and payable over 36 months.
ViewStar had a working capital deficit of $2.2 million at September 30,
1996 and $10.6 million at December 31, 1995. Excluding deferred revenues of $9.4
million at September 30, 1996 and $10.6 million at December 31, 1995, ViewStar
had positive working capital of $7.2 million at September 30, 1996 and $40,000
at December 31, 1995.
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<PAGE> 105
BENEFICIAL OWNERSHIP OF VIEWSTAR STOCK
The following table sets forth, as of November 15, 1996, certain
information with respect to the beneficial ownership of shares of both classes
of ViewStar Stock by (i) each person (or group of affiliated persons) known to
ViewStar to be the beneficial owner of 5% or more of ViewStar's outstanding
shares of both classes of ViewStar Stock, (ii) each ViewStar director, (iii)
each executive officer of ViewStar, and (iv) all directors and executive
officers of ViewStar as a group. Except as otherwise noted, ViewStar believes
that the beneficial owners of the shares of ViewStar Stock listed below, based
on information furnished by such owners, have sole voting and investment power
with respect to such shares.
<TABLE>
<CAPTION>
SHARES OF VIEWSTAR SHARES OF VIEWSTAR DIGITAL COMMON
COMMON STOCK PREFERRED STOCK SHARES BENEFICIALLY
BENEFICIALLY OWNED BENEFICIALLY OWNED OWNED AFTER
PRIOR TO MERGER(1) PRIOR TO MERGER(1) MERGER(2)
--------------------- --------------------- ---------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
- ------------------------------ ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Entities associated with The
Mayfield Fund(3).............. 733,112 18.2% 1,429,377 30.1% 791,063 5.9%
2800 Sand Hill Road, Suite
250
Menlo Park, CA 94025
Entities associated with Inman
& Bowman(4)................... 452,672 11.3% 882,410 18.6% 488,419 3.6%
4 Orinda Way
Building D, Suite 150
Orinda, CA 94563
Entitles associated with
J.P. Morgan Investment
Corporation(5).............. 438,215 10.9% 757,911 15.9% 453,749 3.4%
Wall Street
New York, NY 10260-0060
Entities associated with
Institutional Venture
Partners(6)................... 355,098 8.8% 692,002 14.6% 383,099 2.8%
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Entities Associated with
Technology Partners(7)........ 287,158 7.2% 319,783 6.7% 262,317 1.9%
1550 Tiburon Blvd. Suite A
Belvedere, CA 94920
Wongfratris Company(8)........ 239,968 6.0% 414,949 8.7% 248,458 1.8%
51 Jordan Place
Palo Alto, CA 94501
Kamran Kheirolomoom(9)........ 323,713 8.0% -- -- 224,333 1.7%
ViewStar Corporation
1101 Marina Village Parkway
Alameda, CA 94501
Gayle A. Crowell(10).......... 113,498 2.8% -- -- 78,654 **
Shirish S. Hardikar(11)....... 66,713 1.7% -- -- 46,232 **
Robert I. Pender, Jr.(12)..... 61,384 1.5% -- -- 42,539 **
J.E. Ardell, III(15).......... 149,100 3.6% 170,020 3.7% 272,350 2.0%
Umang Gupta(13)............... 9,286 ** -- -- 6,435 **
Grant Inman(4)................ 452,672 11.3% 882,410 18.6% 488,419 3.6%
F. Gibson Myers, Jr.(3)....... 733,112 18.2% 1,429,377 30.1% 791,063 5.9%
Hon Wong(8)................... 239,968 6.0% 414,949 8.7% 248,458 1.8%
Mark W. Perry(14)............. 100,285 2.5% -- -- 69,498 **
All current directors and
executive officers as a
group (9 persons)(16)....... 2,149,446 53.3% 2,896,756 61.0% 2,196,762 16.6%
</TABLE>
- ---------------
** Less than 1%.
95
<PAGE> 106
(1) Percentage ownership calculations are based on 4,007,286 shares of ViewStar
Common Stock and 4,752,474 shares of ViewStar Preferred Stock outstanding
as of November 15, 1996. Beneficial ownership is determined in accordance
with the rules of the Commission and includes voting and investment power
with respect to shares. Shares of ViewStar Stock subject to options or
warrants currently exercisable or exercisable within 60 days of November
15, 1996 are deemed outstanding for computing the percentage ownership of
the person holding such options or warrants, but are not deemed outstanding
for computing the percentage of any other person.
(2) Percentage ownership calculations are based on 9,441,730 Digital Common
Shares outstanding as of November 15, 1996 and assume that an aggregate of
4,046,954 Digital Common Shares will be issued in the Merger or upon the
exercise of options or warrants exercisable within 60 days of November 15,
1996. Beneficial ownership after the Merger for each of the listed ViewStar
Shareholders is calculated by multiplying the Exchange Ratio by the number
of shares of ViewStar Common Stock beneficially owned by such ViewStar
Shareholder and, with respect to ViewStar Preferred Stock, by multiplying
the Exchange Ratio by the number of shares of ViewStar Common Stock
issuable upon conversion of all of such shareholder's ViewStar Preferred
Stock.
(3) Consists of (a) 21,687 shares of ViewStar Common Stock held by Mayfield
Associates, 7,531 shares of ViewStar Common Stock held by Mayfield
Associates Fund II, 520,477 shares of ViewStar Common Stock held by
Mayfield VI and 159,830 shares of ViewStar Common Stock held by Mayfield
VII; (b) 39,267 shares of ViewStar Preferred Stock held by Mayfield
Associates, 20,122 shares of ViewStar Preferred Stock held by Mayfield
Associates Fund II, 942,402 shares of ViewStar Preferred Stock held by
Mayfield VI, and 427,586 shares of ViewStar Preferred Stock held by
Mayfield VII; and (c) 618 shares of ViewStar Common Stock issuable pursuant
to stock purchase warrants held by Mayfield Associates, 366 shares of
ViewStar Common Stock issuable pursuant to stock purchase warrants held by
Mayfield Associates Fund II, 14,832 shares of ViewStar Common Stock
issuable pursuant to stock purchase warrants held by Mayfield VI and 7,772
shares of ViewStar Common Stock issuable pursuant to stock purchase
warrants held by Mayfield VII. F. Gibson Myers, Jr., a director of
ViewStar, is a general partner of Mayfield Associates, Mayfield Associates
Fund II, Mayfield VI and Mayfield VII and has voting and investment power
with respect to such shares. Mr. Myers disclaims beneficial ownership of
such shares except to the extent of his proportionate partnership interest
therein.
(4) Consists of (a) 430,163 shares of ViewStar Common Stock held by Inman &
Bowman and 7,950 shares of ViewStar Common Stock held by Inman & Bowman
Entrepreneurs; (b) 871,493 shares of ViewStar Preferred Stock held by Inman
& Bowman and 10,917 shares of ViewStar Preferred Stock held by Inman &
Bowman Entrepreneurs; and (c) 14,414 shares of ViewStar Common Stock
issuable pursuant to stock purchase warrants held by Inman & Bowman and 146
shares of ViewStar Common Stock issuable pursuant to stock purchase
warrants held by Inman & Bowman Entrepreneurs. Grant Inman, a director of
ViewStar, is a general partner of Inman & Bowman and Inman & Bowman
Entrepreneurs and has voting and investment power with respect to such
shares. Mr. Inman disclaims beneficial ownership of such shares except to
the extent of his proportionate partnership interest therein.
(5) Consists of (a) 426,393 shares of ViewStar Common Stock held by J.P. Morgan
Investment Corporation; (b) 718,708 shares of ViewStar Preferred Stock held
by J.P. Morgan Investment Corporation and 39,204 shares of ViewStar
Preferred Stock held by Sixty Wall Street SBIC Fund; and (c) 11,821 shares
of ViewStar Common Stock issuable pursuant to stock purchase warrants held
by J.P. Morgan Investment Corporation.
(6) Consists of (a) 338,525 shares of ViewStar Common Stock held by
Institutional Venture Partners IV and 5,156 shares of ViewStar Common Stock
held by Institutional Venture Management IV; (b) 681,622 shares of ViewStar
Preferred Stock held by Institutional Venture Partners IV and 10,381 shares
of ViewStar Preferred Stock held by Institutional Venture Management IV;
and (c) 11,246 shares of ViewStar Common Stock issuable pursuant to stock
purchase warrants held by Institutional Venture Partners IV and 171 shares
of ViewStar Common Stock issuable pursuant to stock purchase warrants held
by Institutional Venture Management IV.
96
<PAGE> 107
(7) Consists of (a) 69,165 shares of ViewStar Common Stock held by Technology
Partners West Fund II, 69,164 shares of ViewStar Common Stock held by
Technology Partners West Fund III, 136,600 shares of ViewStar Common Stock
held by Technology Partners West Fund IV and 8,657 shares of ViewStar
Common Stock held by TPW Venture Partners IX; (b) 78,929 shares of ViewStar
Preferred Stock held by Technology Partners West Fund II, 78,929 shares of
ViewStar Preferred Stock held by Technology Partners West Fund III, 156,846
shares of ViewStar Preferred Stock held by Technology Partners West Fund IV
and 5,079 shares of ViewStar Preferred Stock held by TPW Venture Partners
IX; and (c) 893 shares of ViewStar Common Stock issuable pursuant to stock
purchase warrants held by Technology Partners West Fund II, 893 shares of
ViewStar Common Stock issuable pursuant to stock purchase warrants held by
Technology Partners West Fund III and 1,786 shares of ViewStar Common Stock
issuable pursuant to stock purchase warrants held by Technology Partners
West Fund IV.
(8) Consists of 233,497 shares of ViewStar Common Stock, 414,949 shares of
ViewStar Preferred Stock and 6,471 shares of ViewStar Common Stock issuable
pursuant to stock purchase warrants held by Wongfratris Company. Hon Wong,
a director of ViewStar, is a general partner of Wongfratris Company and has
voting and investment power with respect to such shares. Mr. Wong disclaims
beneficial ownership of such shares, except to the extent of his
proportionate partnership interest therein.
(9) Includes 60,285 shares of ViewStar Common Stock issuable pursuant to stock
options exercisable within 60 days.
(10) Includes 27,784 shares of ViewStar Common Stock issuable pursuant to stock
options exercisable within 60 days.
(11) Includes 23,856 shares of ViewStar Common Stock issuable pursuant to stock
options exercisable within 60 days.
(12) Includes 15,670 shares of ViewStar Common Stock issuable pursuant to stock
options exercisable within 60 days.
(13) Includes 9,285 shares of ViewStar Common Stock issuable pursuant to stock
options exercisable upon consummation of the Merger.
(14) Mr. Perry is no longer a director or executive officer of ViewStar.
(15) J.E. Ardell, III, a director of ViewStar, is a general partner of
Technology Partners West Fund IV and has voting and investment power with
respect to such shares. Mr. Ardell disclaims beneficial ownership of such
shares except to the extent of his proportionate partnership interest
therein. Mr. Ardell is also the beneficial owner of 10,718 shares of
ViewStar Common Stock and 13,174 shares of ViewStar Preferred Stock.
(16) See footnotes (3), (4), (7) through (13) and (15).
97
<PAGE> 108
MANAGEMENT OF VIEWSTAR
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the ViewStar
Record Date with respect to each executive officer and director of ViewStar.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH VIEWSTAR
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Kamran Kheirolomoom(1)........... 41 President, Chief Executive Officer and Chairman of
the Board
Gayle A. Crowell................. 46 Senior Vice President and General Manager, Worldwide
Operations
Shirish S. Hardikar.............. 41 Vice President, Marketing
Robert I. Pender, Jr............. 39 Vice President of Finance and Chief Financial
Officer
J.E. Ardell, III(1)(2)........... 56 Director
Umang Gupta...................... 47 Director
Grant Inman(2)................... 54 Director
F. Gibson Myers, Jr.(1).......... 54 Director
Hon Wong......................... 39 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Kamran Kheirolomoom joined ViewStar as President and Chief Executive
Officer in February 1986, serving until January 1992. He served as Chief
Executive Officer from January 1992 to July 1993 and as President and Chief
Executive Officer from July 1993 to May 1994. He served as Chairman of the Board
from May 1994 to July 1995, and as President and Chief Executive Officer since
July 1995. He has served as a director of ViewStar since February 1986.
Gayle A. Crowell joined ViewStar as Senior Vice President and General
Manager, Worldwide Operations in July 1994. Prior to joining ViewStar, she was
Vice President of Worldwide Sales of Recognition International, a document
management company, from November 1991 to June 1994. From May 1989 to November
1991, she was Group Director of Channels of Oracle Corporation, a database and
applications software company ("Oracle").
Shirish S. Hardikar joined ViewStar as Vice President, Marketing in March
1995. Prior to joining ViewStar, he was a Vice President of Action Technologies,
Inc., a workflow automation company, from September 1993 to March 1995. From
January 1992 to September 1993, he was a Vice President and director and the
Secretary of Renaissance Software, Inc., an object-oriented UNIX software
development company. He was a founder of Vistron Inc., a network printing and
imaging systems manufacturer, where he served as a Vice President from January
1990 to December 1991.
Robert I. Pender, Jr. joined ViewStar as Controller in April 1993. In
August 1995, he became Vice President of Finance and Chief Financial Officer.
From January 1992 to April 1993, he served as Controller of Versant Object
Technology Corporation, an object-oriented database software development
company. From October 1989 to January 1992, he was International Finance Manager
of Silvar-Lisco Corporation (renamed Silicon Valley Research, Inc.), an
engineering software development company. Prior to that, Mr. Pender held various
positions at Arthur Andersen & Co., most recently as tax manager.
J.E. Ardell, III joined ViewStar as a director in February 1996. Since
January 1994, he has been a general partner of Technology Partners, a venture
capital firm. From January 1990 to January 1994, he was a special limited
partner of Technology Partners. Mr. Ardell is also a director of Vectra
Technologies, Inc., a nuclear engineering company.
Umang Gupta is the founder of Gupta Corporation, a publicly held
client/server software company that is now known as Centura Software
Corporation. He served as its Chairman, President and Chief Executive
98
<PAGE> 109
Officer from 1984 to 1995. Mr. Gupta also is a director of Centura Software
Corporation and Webflow Corporation, a privately held Internet software company.
Prior to founding Gupta Corporation, he served in various sales, marketing and
management positions at Oracle and IBM.
Grant Inman joined ViewStar as a director in March 1996. He has been a
general partner of Inman & Bowman, a venture capital firm, since June 1985. He
is also a director of InSite Vision, Inc., Lam Research Corporation and Paychex,
Inc.
F. Gibson Myers, Jr. has served as a director of ViewStar since May 1988.
Mr. Myers joined Mayfield Fund, a venture capital firm, in 1970 and has been a
general partner of several venture capital funds associated with Mayfield Fund
since that time. He is also a director of Spectralink Corporation, a
manufacturer of wireless telephone systems.
Hon Wong has served as a director of ViewStar since October 1986. Mr. Wong
has been a partner of Wongfratis Co., a venture capital firm, since January
1990.
VIEWSTAR EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information regarding compensation
paid by ViewStar for services rendered to ViewStar during the year ended
December 31, 1995 by (i) Kamran Kheirolomoom, ViewStar's President and Chief
Executive Officer, who will continue to serve as President of Digital after the
Merger, (ii) the Company's three other executive officers whose salary plus
bonus exceeded $100,000, and (iii) an executive officer whose employment
terminated during the year (collectively, the "ViewStar Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND ------------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($)(1) BONUS($) OPTIONS(#) COMPENSATION ($)
- --------------------------------------- ------------ -------- ------------ ----------------
<S> <C> <C> <C> <C>
Kamran Kheirolomoom.................... 171,000 37,022 -- 51,000(1)
President and Chief Executive Officer
Gayle A. Crowell....................... 170,000 147,525 7,143 --
Senior Vice President and General
Manager, Worldwide Operations
Shirish S. Hardikar.................... 130,625 74,750 42,857 --
Vice President, Marketing
Robert I. Pender, Jr................... 113,333 28,708 14,286
Vice President, Finance and Chief
Financial Officer
Mark W. Perry (2)...................... 200,000 31,700 -- --
</TABLE>
- ---------------
(1) Consists of a payment pursuant to an employment agreement dated July 26,
1995 and amended on July 2, 1996.
(2) Mr. Perry served as President and Chief Executive Officer from May 1994
through July 1995 and was Chairman of the Board from August 1995 until May
1996.
99
<PAGE> 110
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995
The following table sets forth each grant of stock options made during the
year ended December 31, 1995 to each of the ViewStar Named Executive Officers
identified in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------- ANNUAL RATES OF STOCK
NUMBER OF PRICE
SECURITIES PERCENT OF PRICER APPRECIATION FOR
UNDERLYING TOTAL OPTIONS EXERCISE OPTION TERM($)(3)
OPTIONS GRANTED IN PRICE PER EXPIRATION -------------------------
NAME GRANTED(#) FISCAL 1995(1) SHARES($)(2) DATE 5% 10%
- ----------------------- ---------- -------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kamran Kheirolomoom.... -- -- -- -- -- --
Gayle A. Crowell....... 7,143(4) 2.0% 0.35 5/31/05 1,572 3,984
Shirish S. Hardikar.... 28,571(5) 8.2 0.35 3/31/05 6,289 15,937
14,286(4) 4.1 0.35 5/31/05 3,145 7,969
Robert I. Pender, Jr... 7,143(4) 2.0 0.35 5/31/05 1,572 3,984
7,143(6) 2.0 0.35 7/26/05 1,572 3,984
Mark W. Perry.......... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Based on an aggregate of 348,907 options granted by ViewStar in the year
ended December 31, 1995 to employees of and consultants to ViewStar,
including the ViewStar Named Executive Officers, under ViewStar's incentive
stock plans.
(2) The exercise price per share of each option was equal to the fair market
value of the ViewStar Common Stock on the date of grant as determined by the
ViewStar Board. All the options have an exercise price of $0.35 per share.
(3) The potential realizable value is calculated based on the term of the option
on the date of grant (ten years), assuming that the fair market value of the
ViewStar Common Stock on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option and that
the option is exercised and sold on the last day of its term for the
appreciated stock price.
(4) The options became exercisable as to 25% of the shares on September 30,
1995, and vest as to an additional 25% every six months thereafter, based
upon such person's continued employment.
(5) The option became exercisable as to 12% of the shares on September 1, 1995,
and vests as to an additional 2% each month thereafter, based upon Mr.
Hardikar's continued employment.
(6) The option became exercisable as to 2% of the shares on July 1, 1995, and
vests as to an additional 2% each month thereafter, based upon Mr. Pender's
continued employment.
100
<PAGE> 111
AGGREGATE OPTION VALUES AT DECEMBER 31, 1995
The following table sets forth information with respect to the number and
value of securities underlying unexercised options held by the ViewStar Named
Executive Officers at December 31, 1995. No options were exercised by the
ViewStar Named Executive Officers in 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF VIEWSTAR
COMMON STOCK SUBJECT TO VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kamran Kheirolomoom...................... 62,286 23,429 505,762 190,243
Gayle A. Crowell......................... 14,929 27,929 121,223 226,783
Shirish S. Hardikar...................... 9,285 26,428 75,394 214,595
Robert I. Pender, Jr..................... 7,643 16,643 62,061 135,141
Mark W. Perry............................ 60,000 111,429 487,200 904,803
</TABLE>
- ---------------
(1) The per share value of the ViewStar Common Stock at December 31, 1995 cannot
be readily ascertained. Accordingly, the value of unexercised in-the-money
options on that date is based on a value of $10.22 per share, the product of
the Exchange Ratio and the reported Nasdaq National Market closing price per
Digital Common Share on November 22, 1996, the most recent available date
prior to the printing of this Proxy Statement/Prospectus, minus the per
share exercise price, multiplied by the number of shares underlying the
option.
101
<PAGE> 112
CERTAIN TRANSACTIONS
In August 1993 and September 1994, ViewStar sold shares of Series E
Preferred Stock convertible into ViewStar Common Stock at a price of $13.65 per
share to a group of investors, including the following entities affiliated with
directors and entities known to ViewStar to beneficially own 5% or more of the
outstanding ViewStar Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
The Inman & Bowman entities (Grant Inman)(1)......................... 62,916
The Institutional Venture Partners entities(2)....................... 55,796
The J.P. Morgan Investment Corporation entities(3)................... 69,251
The Mayfield Fund entities (F. Gibson Myers, Jr.)(4)................. 206,916
The Technology Partners entities (J.E. Ardell, III)(5)............... 42,446
The Wongfratris Company (Hon Wong)................................... 44,249
</TABLE>
- ---------------
(1) The Inman & Bowman entities are Inman & Bowman and Inman & Bowman
Entrepreneurs.
(2) The Institutional Venture Partners entities are Institutional Venture
Management IV and Institutional Venture Partners IV.
(3) The J.P. Morgan Investment Corporation entities are J.P. Morgan Investment
Corporation and Sixty Wall Street SBIC Fund.
(4) The Mayfield Fund entities are Mayfield Associates, Mayfield Associates Fund
II, Mayfield VI and Mayfield VII.
(5) The Technology Partners entities are Technology Partners West Fund II,
Technology Partners West Fund III, Technology Partners West Fund IV, L.P.
and TPW Venture Partners IX.
In May 1995, ViewStar issued notes and warrants to a group of investors,
including the following entities affiliated with directors and entities known to
ViewStar to beneficially own 5% or more of the outstanding ViewStar Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NOTE AMOUNT(1) UNDERLYING WARRANTS(2)
-------------- ----------------------
<S> <C> <C>
The Inman & Bowman entities
(Grant Inman)(3)............................. $407,683 14,560
The Institutional Venture Partners
entities(4).................................. $319,671 11,417
The J.P. Morgan Investment Corporation
entities..................................... $331,000 11,821
The Mayfield Fund entities (F. Gibson Myers,
Jr.)(5)...................................... $660,446 23,588
The Technology Partners entities
(J.E. Ardell, III)(6)........................ $100,000 3,572
The Wongfratris Company (Hon Wong)............. $181,200 6,471
</TABLE>
- ---------------
(1) Each of the notes was subordinated to senior indebtedness and secured by
ViewStar's property pursuant to the terms of a security agreement between
each noteholder and ViewStar. The notes bore interest at the rate of 9% and
were due in May 1996. In March 1996, all principal and accrued interest on
the notes was converted into Series F Preferred Stock at the rate of $2.45
per share.
(2) Each warrant has an exercise price of $2.10 per share and a net exercise
feature. Each warrant expires on the earlier of the closing of an initial
public offering of ViewStar Common Stock and June 1, 2000.
(3) The Inman & Bowman entities are Inman & Bowman and Inman & Bowman
Entrepreneurs.
(4) The Institutional Venture Partners entities are Institutional Venture
Management IV and Institutional Venture Partners IV.
(5) The Mayfield Fund entities are Mayfield Associates, Mayfield Associates Fund
II, Mayfield VI and Mayfield VII.
(6) The Technology Partners entities are Technology Partners West Fund II,
Technology Partners West Fund III and Technology Partners West Fund IV.
102
<PAGE> 113
In October 1995, ViewStar entered into an agreement with Stephen E. Recht,
its former Chief Financial Officer, pursuant to which ViewStar will pay Mr.
Recht $25,000 subject to and upon the completion of the Merger. Also in October
1995, Mr. Recht exercised an option to purchase 21,143 shares of ViewStar Common
Stock at an exercise price of $2.10 per share. The option exercise price was
paid by Mr. Recht's full-recourse promissory note in the principal amount of
$44,000 due the earlier of 18 months after the Closing Date or 30 days after the
sale of the shares.
In October 1995, ViewStar entered into an agreement with Caere pursuant to
which ViewStar would merge with Caere and the shareholders and optionees of
ViewStar would receive shares of common stock and options to purchase common
stock of Caere (the "Caere Agreement"). Pending completion of the merger, the
Caere Agreement precluded ViewStar from raising equity funds to strengthen its
working capital, which had decreased to $2.8 million at December 31, 1995. In
January 1996, the Caere Agreement was terminated. Following termination of the
Caere Agreement, ViewStar needed to retain its key employees and raise equity
funds to strengthen its balance sheet and pay the notes issued in May 1995. In
February 1996, ViewStar repriced all options outstanding under its stock option
plans from $2.10 to $0.35. In February 1996, the ViewStar Board also approved
the sale of 448,571 shares of ViewStar Restricted Stock at a purchase price of
$0.35 per share, including an aggregate of 324,285 shares sold to ViewStar's
executive officers. ViewStar has an option to repurchase these shares at the
original purchase price in the event of the termination of employment of a
particular executive officer. The repurchase option lapses over a period of 50
months, subject to accelerated vesting as to a portion of these shares upon the
completion of the Merger. Finally, in March and June 1996, ViewStar sold
4,752,474 shares of Series F Preferred Stock for approximately $1.2 million in
cash and approximately $2.1 million in conversion of the notes issued by
ViewStar in May 1995.
The shares of Series F Preferred Stock, convertible into ViewStar Common
Stock at a price of $2.45 per share, were sold to a group of investors,
including the following entities affiliated with directors and entities know to
ViewStar to beneficially own 5% or more of the outstanding ViewStar Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
The Inman & Bowman entities (Grant Inman)(1)......................... 252,117
The Institutional Venture Partners entities(2)....................... 197,715
The J.P. Morgan Investment Corporation entities(3)................... 216,546
The Mayfield Fund entities(4)........................................ 408,393
The Technology Partners entities (J.E. Ardell, III)(5)............... 91,336
The Wongfratris Company (Hon Wong)................................... 118,557
</TABLE>
- ---------------
(1) The Inman & Bowman entities are Inman & Bowman and Inman & Bowman
Entrepreneurs.
(2) The Institutional Venture Partners entities are Institutional Venture
Management IV and Institutional Venture Partners IV.
(3) The J.P. Morgan Investment Corporation entities are J.P. Morgan Investment
Corporation and Sixty Wall Street SBIC Fund.
(4) The Mayfield Fund entities are Mayfield Associates, Mayfield Associates Fund
II, Mayfield VI and Mayfield VII.
(5) The Technology Partners entities are Technology Partners West Fund II,
Technology Partners West Fund III, Technology Partners West Fund IV and TPW
Venture Partners IX.
103
<PAGE> 114
DIGITAL SHAREHOLDER APPROVAL OF
DIGITAL STOCK INCENTIVE PLAN
PROPOSAL TO ADOPT DIGITAL STOCK INCENTIVE PLAN
On October 9, 1996, the Digital Board adopted and approved the Digital
Stock Incentive Plan, which, subject to Digital Shareholder approval, reserves
1,500,000 Digital Common Shares for issuance thereunder. The Digital Stock
Incentive Plan is the successor to Digital's existing 1987 Plan, which is
scheduled to expire on December 2, 1996.
The purpose of the Digital Stock Incentive Plan is to enhance the long-term
shareholder value of Digital by offering opportunities to Digital's directors,
officers, key employees, consultants, agents, advisors and independent
contractors providing services to Digital to participate in Digital's growth and
success, and to encourage them to remain in the service of Digital and its
subsidiaries and to acquire and maintain stock ownership in Digital. In
addition, pursuant to the Merger Agreement, Digital has agreed to grant
Replacement Options to each holder of outstanding ViewStar Options. The Digital
Stock Incentive Plan provides for the issuance of an aggregate maximum of
1,500,000 Digital Common Shares, which are intended to cover (i) the issuance of
up to 600,000 Digital Common Shares upon exercise of Replacement Options, (ii)
the issuance of approximately 300,000 Digital Common Shares upon exercise of
options to be granted to officers of ViewStar, (iii) the issuance of
approximately 300,000 Digital Common Shares to replace shares that are reserved
for issuance under the 1987 Plan, and (iv) additional Digital Common Shares to
provide for future grants. The following description of the Digital Stock
Incentive Plan does not purport to be complete and is qualified in its entirety
by reference to the Digital Stock Incentive Plan, a copy of which is attached as
Annex V to this Proxy Statement/Prospectus.
The Digital Board recommends a vote FOR adoption of the Digital Stock
Incentive Plan.
SUMMARY OF DIGITAL STOCK INCENTIVE PLAN
General
The Digital Stock Incentive Plan generally includes provisions for the same
kinds of awards that could have been made under the 1987 Plan but gives Digital
greater flexibility in certain respects. The following are certain of the most
significant differences between the Digital Stock Incentive Plan and the 1987
Plan:
(a) The Digital Stock Incentive Plan provides for grants to advisors,
as well as Digital's officers, directors, key employees, consultants,
agents, and independent contractors.
(b) In addition to stock options, as authorized under the 1987 Plan,
the Digital Stock Incentive Plan provides for stock awards (including
restricted stock).
(c) Unless otherwise provided in the award, the Digital Stock
Incentive Plan requires mandatory acceleration of vesting in the event of
certain mergers, consolidations, sales of substantially all the assets of
Digital, a liquidation of Digital or the acquisition by any person of a
majority of Digital's outstanding voting securities, except where such
awards are assumed or replaced in the transaction with a comparable award
or a cash incentive program or where Digital's accountants deliver an
opinion that such acceleration could prevent the parties to the transaction
from accounting for the transaction as a pooling-of-interests. If an
optionholder's employment is terminated without cause or for good reason
within two years of a merger or other significant corporate transaction,
any options which were assumed or replaced will immediately accelerate.
(d) The Digital Stock Incentive Plan requires that the exercise price
per share of all option grants, whether the option is an incentive stock
option, as defined in Section 422 of the Code ("ISO"), or a nonqualified
stock option ("NSO"), shall be no less than the fair market value of a
Digital Common Share on the date of grant.
(e) The Digital Stock Incentive Plan limits grants to individuals to
100,000 Digital Common Shares per year (except that Digital may make
additional one-time grants of up to 300,000 shares to a
104
<PAGE> 115
newly hired individual), as compared to 250,000 shares per year under the
1987 Plan. In addition, no more than 300,000 Digital Common Shares are
available for issuance pursuant to stock awards.
(f) An employee may exercise an option granted under the Digital Stock
Incentive Plan for up to one year following termination of employment
resulting from the employee's retirement.
Awards
Option or stock awards made under the Digital Stock Incentive Plan may be
made singly or in combination. Awards also may be made in replacement of, or as
alternatives to, grants or rights under any other employee or compensation plan
or in substitution for, or by the assumption of, awards issued under plans of an
acquired entity.
Stock Subject to the Digital Stock Incentive Plan. Subject to adjustment
from time to time as provided in the Digital Stock Incentive Plan, a maximum of
1,500,000 Digital Common Shares will be available for issuance under the Digital
Stock Incentive Plan. The total of all Digital Common Shares subject to
outstanding options under the 1987 Plan, as of November 15, 1996, and the
1,500,000 shares that would be available under the Digital Stock Incentive Plan
is approximately 23.0% of the sum of the number of Digital Common Shares
outstanding as of November 15, 1996 and the number of Digital Common Shares to
be issued in the Merger in exchange for outstanding ViewStar Stock. No more than
300,000 shares may be issued as stock awards (including restricted stock) under
the Digital Stock Incentive Plan. Shares issued pursuant to the Digital Stock
Incentive Plan will be drawn from authorized but unissued shares.
Subject to adjustment from time to time as provided in the Digital Stock
Incentive Plan, no more than 100,000 Digital Common Shares may be subject to
aggregate awards under the Digital Stock Incentive Plan to any participant in
any one year, except that Digital may make additional one-time grants of up to
300,000 Digital Common Shares to any newly hired individual, such limitation to
be applied consistently with the requirements of, and only to the extent
required for compliance with, certain provisions of Section 162(m) of the Code,
which precludes Digital from taking a tax deduction for compensation payments to
executives in excess of $1 million, unless such payments qualify for the
"performance-based" exemption from the $1 million limitation.
Any Digital Common Shares that cease to be subject to an award (other than
by reason of exercise or payment of the award to the extent it is exercised for
or settled in shares), including, without limitation, in connection with the
cancellation of an award and the grant of a replacement award, will be available
for issuance in connection with future grants of awards under the Digital Stock
Incentive Plan.
Eligibility to Receive Awards. Awards may be granted under the Digital
Stock Incentive Plan to those officers, directors and key employees of Digital
and its subsidiaries as the plan administrator from time to time selects. Awards
may also be made to consultants, agents, advisors and independent contractors
who provide services to Digital and its subsidiaries.
Terms and Conditions of Stock Option Grants. Options granted under the
Digital Stock Incentive Plan may be ISOs or NSOs. The per share option price for
each option granted under the Digital Stock Incentive Plan will be determined by
the plan administrator, but will be not less than 100% of a Digital Common
Share's fair market value on the date of grant. For purposes of the Digital
Stock Incentive Plan, "fair market value" means the closing price for a Digital
Common Share as reported by the Nasdaq National Market for a single trading day.
The exercise price for shares purchased under options may be paid in cash
or by check or, unless the plan administrator at any time determines otherwise,
a combination of cash, check, Digital Common Shares which have been held for at
least six months, a promissory note, delivery of a properly executed exercise
notice, together with irrevocable instructions to a broker, or such other
consideration as the plan administrator may permit. Digital may require the
optionee to pay to Digital any applicable withholding taxes that Digital is
required to withhold with respect to the grant or exercise of any award. The
withholding tax may be paid in cash or, subject to applicable law, the plan
administrator may permit the optionee to satisfy such obligations by the
withholding or delivery of Digital Common Shares. Digital may withhold from any
award or any Digital
105
<PAGE> 116
Common Shares issuable pursuant to an award or from any cash amounts otherwise
due from Digital an amount equal to such withholding taxes. Digital may also
deduct from any award any other amounts due from the recipient of the award to
Digital or any of its subsidiaries.
The option term will be fixed by the plan administrator, and each option
will be exercisable pursuant to a vesting schedule determined by the plan
administrator. If the vesting schedule is not set forth in the instrument
evidencing the option, the option will become exercisable in four equal annual
installments beginning one year after the date of grant. The plan administrator
will also determine the circumstances under which an option will be exercisable
in the event the optionee ceases to provide services to Digital or one of its
subsidiaries. If not so established, options generally will be exercisable for
one year after termination of services as a result of retirement, early
retirement at Digital's request, disability or death and for three months after
all other terminations. An option will automatically terminate if the optionee's
services are terminated for cause, as defined in the Digital Stock Incentive
Plan.
Stock Awards. The plan administrator is authorized to make awards of
Digital Common Shares to participants on such terms and conditions and subject
to such restrictions, if any (whether based on performance standards, periods of
service or otherwise), as the plan administrator may determine. Restrictions may
include repurchase or forfeiture rights in favor of Digital.
Loans, Loan Guarantees and Installment Payments. To assist a holder
(including a holder who is an officer or director of Digital) in acquiring
Digital Common Shares pursuant to an award granted under the Digital Stock
Incentive Plan, the plan administrator may authorize (a) the extension of a loan
to the holder by Digital, (b) the payment by the holder of the purchase price,
if any, of the Digital Common Shares in installments, or (c) the guarantee by
Digital of a loan obtained by the grantee from a third party. The terms of any
loans, installment payments or guarantees, including the interest rate and terms
of repayment, will be subject to the plan administrator's discretion, and may be
granted with or without security.
Transferability. No option will be assignable or otherwise transferable by
the holder other than by will or the laws of descent and distribution and,
during the holder's lifetime, may be exercised only by the holder, except, in
the plan administrator's sole discretion, to the extent permitted by Section 422
of the Code.
Adjustment of Shares. In the event of any changes in the outstanding stock
of Digital by reason of stock dividends, stock splits, spin-offs, combinations
or exchanges of shares, recapitalizations, mergers, consolidations,
distributions to shareholders other than a normal cash dividend, or other
changes in Digital's corporate or capital structure, the plan administrator
shall make proportional adjustments in (a) the maximum number of and class of
securities subject to the Digital Stock Incentive Plan, (b) the maximum number
and class of securities that may be made subject to awards to any participant,
and (c) the number and class of securities that are subject to any outstanding
award and the per share price of such securities, without any change in the
aggregate price to be paid therefor.
Corporate Transaction. In the event of certain mergers, consolidations,
sales of substantially all the assets of Digital, a liquidation of Digital or
the acquisition by any person of a majority of Digital's outstanding voting
securities, each option or stock award that is at the time outstanding will
automatically accelerate so that each such award becomes, immediately prior to
such corporate transaction, 100% vested, unless, in the opinion of Digital's
accountants, such acceleration would render unavailable pooling-of-interests
accounting for the corporate transaction, and except that such award will not so
accelerate if and to the extent (a) such award is, in connection with the
corporate transaction, either to be assumed by the successor corporation or
parent thereof or to be replaced with a comparable award for the purchase of
shares of the capital stock of the successor corporation or its parent
corporation or (b) such award is to be replaced with a cash incentive program of
the successor corporation that preserves the spread existing at the time of the
corporate transaction and provides for subsequent payout in accordance with the
same vesting schedule applicable to such award. Any such awards that are assumed
or replaced in the corporate transaction and do not otherwise accelerate at that
time shall be accelerated in the event the holder's employment or services
should subsequently terminate within two years following such corporate
transaction, unless such employment or services are terminated by Digital for
cause or by the holder voluntarily without good reason.
106
<PAGE> 117
Further Adjustment of Awards. The plan administrator shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of Digital, as defined by the
plan administrator, to take such further action as it determines to be necessary
or advisable, and fair and equitable to holders, with respect to awards. Such
authorized action may include (but is not limited to) establishing, amending or
waiving the type, terms, conditions or duration of, or restrictions on, awards
so as to provide for earlier, later, extended or additional time for exercise,
payment or settlement or lifting restrictions, differing methods for calculating
payments or settlements, alternate forms and amounts of payments and settlements
and other modifications, and the plan administrator may take such actions with
respect to all holders, to certain categories of holders or only to individual
holders. The plan administrator may take such actions before or after granting
awards to which the action relates and before or after any public announcement
with respect to such sale, merger, consolidation, reorganization, liquidation or
change in control that is the reason for such action.
Administration. The Digital Stock Incentive Plan will be administered by a
committee or committees appointed by, and consisting of one or more members of,
the Digital Board. The Digital Board may delegate the responsibility for
administering the Digital Stock Incentive Plan with respect to designated
classes of eligible participants to different committees, subject to such
limitations as the Digital Board deems appropriate. Committee members will serve
for such terms as the Digital Board may determine, subject to removal by the
Digital Board at any time. The composition of any committee responsible for
administering the Digital Stock Incentive Plan with respect to officers and
directors of Digital who are subject to Section 16 of the Exchange Act with
respect to securities of Digital will comply with the requirements of Rule 16b-3
promulgated under Section 16(b) of the Exchange Act, or any successor provision.
Amendment and Termination. The Digital Stock Incentive Plan may be
suspended or terminated by the Digital Board or by the shareholders of Digital
at any time. The Digital Board may amend the Digital Stock Incentive Plan, as it
deems advisable, subject to shareholder approval in certain instances, as set
forth in the Digital Stock Incentive Plan. No ISOs may be granted under the
Digital Stock Incentive Plan more than ten years after the date the Digital
Stock Incentive Plan is adopted by the Digital Board.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE DIGITAL STOCK
INCENTIVE PLAN
The federal income tax consequences to Digital and to any person granted an
option under the Digital Stock Incentive Plan under the existing applicable
provisions of the Code and the regulations thereunder are substantially as
follows.
Under present law and regulations, no income will be recognized by a
participant upon the grant of stock options.
On the exercise of an NSO, the optionee will recognize taxable ordinary
income in an amount equal to the excess of the fair market value of the shares
acquired over the option price. Upon a later sale of those shares, the optionee
will have short-term or long-term capital gain or loss, as the case may be, in
an amount equal to the difference between the amount realized on such sale and
the tax basis of the shares sold. If payment of the option price is made
entirely in cash, the tax basis of the shares will be equal to their fair market
value on the exercise date (but not less than the option price), and the shares'
holding period will begin on the day after the exercise date.
If the optionee uses already-owned shares to exercise an option in whole or
in part, the transaction will not be considered to be a taxable disposition of
the already-owned shares. The optionee's tax basis and holding period of the
already-owned shares will be carried over to the equivalent number of shares
received upon exercise. The tax basis of the additional shares received upon
exercise will be the fair market value of the shares on the exercise date (but
not less than the amount of cash, if any, used in payment), and the holding
period for such additional shares will begin on the day after the exercise date.
The same NSO tax consequences described above also apply to an ISO that is
exercised more than three months after the optionee's termination of employment
(or more than twelve months thereafter in the case of permanent and total
disability, as defined in the Code).
107
<PAGE> 118
Upon the exercise of an ISO during employment or within three months after
the optionee's termination of employment (twelve months in the case of permanent
and total disability, as defined in the Code), for regular tax purposes the
optionee will recognize no income at the time of exercise (although the optionee
will have income for alternative minimum income tax purposes at that time as if
the option were an NSO) and no deduction will be allowed to Digital for federal
income tax purposes in connection with the grant or exercise of the option. If
the acquired shares are sold or exchanged after the later of (a) one year from
the date of exercise of the option and (b) two years from the date of grant of
the option, the difference between the amount realized by the optionee on that
sale or exchange and the option price will be taxed to the optionee as a long-
term capital gain or loss. If the shares are disposed of before such holding
period requirements are satisfied, then the optionee will recognize taxable
ordinary income in the year of disposition in an amount equal to the excess, on
the date of exercise of the option, of the fair market value of the shares
received over the option price paid for such shares (or generally, if less, the
excess of the amount realized on the sale of the shares over the option price.
The optionee will also have capital gain or loss, long-term or short-term, as
the case may be, in an amount equal to the difference between (i) the amount
realized by the optionee upon that disposition of the shares and (ii) the option
price paid by the optionee increased by the amount of ordinary income, if any,
so recognized by the optionee.
Upon payment to a participant in settlement of a stock option, the
participant will recognize taxable ordinary income in an amount equal to the
cash and the fair market value of the Digital Common Shares received.
Special rules apply to a director or officer subject to liability under
Section 16(b) of the Exchange Act.
In all the foregoing cases Digital will be entitled to a deduction at the
same time and in the same amount as the participant recognizes ordinary income,
subject to all the following limitations. Under Section 162(m) of the Code,
certain compensation payments in excess of $1 million are subject to a
limitation on deductibility for Digital. The limitation on deductibility applies
with respect to that portion of a compensation payment for a taxable year in
excess of $1 million to either Digital's Chief Executive Officer or any one of
the other four most highly compensated executive officers. Certain
performance-based compensation is not subject to the limitation on
deductibility. Options can qualify for this performance-based exception, but
only if they are granted at fair market value, the total number of shares that
can be granted to an executive for any period is stated, and shareholder and
Board approval is obtained. The option portions of the Digital Stock Incentive
Plan have been drafted to allow compliance with those performance-based
criteria.
NEW PLAN BENEFITS
Since awards under the Digital Stock Incentive Plan will be discretionary,
awards thereunder for the current year are not presently determinable. For
purposes of comparison, the following table contains information about awards
made and benefits received during 1996 through November 22, 1996 under the 1987
Plan to the Digital Named Executive Officers and the groups indicated. No stock
options granted in 1996 have vested. Approximately 64 persons have received
awards in 1996 under the 1987 Plan; it is not anticipated that the total number
of persons receiving awards in 1996 under the 1987 Plan and the Digital Stock
Incentive Plan would be substantially greater. On November 15, 1996, the closing
price of the Digital Common Shares as reported by the Nasdaq National Market was
$15.00 per share.
BENEFITS UNDER 1987 PLAN IN 1996
<TABLE>
<CAPTION>
NUMBER OF SHARES OF AVERAGE WEIGHTED
COMMON STOCK EXERCISE PRICE OF
NAME UNDERLYING OPTIONS OPTIONS GRANTED($)
------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Patrick S. Howard................................ -- --
Thomas R. Clark.................................. 15,000 12.625
John J. Flavio................................... -- --
Edmund D. Wilsbach............................... -- --
Richard L. Anderson.............................. -- --
All executive officers as a group................ 165,000 13.34
All other employees (including all officers who
are not executive officers) as a group......... 243,875 16.59
</TABLE>
108
<PAGE> 119
LEGAL OPINION
The legality of the Digital Common Shares to be issued in connection with
the Merger is being passed upon for Digital by Perkins Coie.
TAX OPINION
Certain of the tax consequences of the Merger to ViewStar Shareholders will
be passed upon at the Effective Time, as a condition to the Merger, by Perkins
Coie. See "THE MERGER -- Certain Federal Income Tax Consequences."
EXPERTS
The consolidated financial statements and consolidated financial statement
schedule of Digital Systems International, Inc. and 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 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 included herein in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
PROPOSALS BY DIGITAL SHAREHOLDERS
Shareholder proposals intended to be presented at Digital's 1997 Annual
Meeting of Shareholders must be received by Digital not later than November 27,
1997 for inclusion in the proxy materials for such meeting.
109
<PAGE> 120
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DIGITAL SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.......................................................... F-2
Consolidated balance sheets as of December 31, 1994 and 1995 and September 30, 1996
(unaudited)......................................................................... F-3
Consolidated statements of operations for the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1995 and 1996 (unaudited).......... F-4
Consolidated statements of shareholders' equity for the years ended December 31, 1993,
1994 and 1995 and for the nine months ended September 30, 1996 (unaudited).......... F-5
Consolidated statements of cash flows for the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1995 and 1996 (unaudited).......... F-6
Notes to consolidated financial statements............................................ F-8
VIEWSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.......................................................... F-19
Consolidated balance sheets as of December 31, 1994 and 1995 and September 30, 1996
(unaudited)......................................................................... F-20
Consolidated statements of operations for the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1995 and 1996 (unaudited).......... F-21
Consolidated statements of stockholders' equity (deficit) for the years ended December
31, 1993, 1994 and 1995 and for the nine months ended September 30, 1996
(unaudited)......................................................................... F-22
Consolidated statements of cash flows for the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1995 and 1996 (unaudited).......... F-23
Notes to consolidated financial statements............................................ F-24
</TABLE>
F-1
<PAGE> 121
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Digital Systems International, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
Systems International, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Digital
Systems International, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
February 2, 1996
F-2
<PAGE> 122
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
------------------- 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $40,971 $ 5,914 $ 2,508
Short-term investments.................................... -- 33,848 27,535
Trade accounts receivable, less allowance for doubtful
accounts of $482 in 1994, $362 in 1995 and $806 in
1996................................................... 11,912 22,206 24,420
Inventories............................................... 4,291 2,958 2,175
Current installments of contracts receivable.............. 3,846 2,797 2,064
Prepaid expenses and other current assets................. 478 702 1,513
Deferred federal income taxes............................. 2,072 1,526 2,110
------- ------- -------
Total current assets.............................. 63,570 69,951 62,325
Furniture, equipment and leasehold improvements, net........ 5,589 5,508 6,019
Contracts receivable, less allowance for doubtful contracts
of $567 in 1994, $857 in 1995 and $219 in 1996, less
current installments...................................... 3,894 1,793 946
Capitalized software costs, net of accumulated amortization
of $4,811 in 1994, $4,894 in 1995 and $3,267 in 1996...... 4,041 2,870 2,141
Other assets, net........................................... 846 1,069 5,269
------- ------- -------
$77,940 $81,191 $76,700
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current installments of long-term obligations............. $ 941 $ 77 $ 81
Accounts payable.......................................... 2,319 4,270 3,412
Accrued compensation...................................... 2,475 2,082 3,289
Other accrued expenses.................................... 3,728 5,583 4,760
Customer deposits and unearned revenue.................... 11,856 9,730 3,695
------- ------- -------
Total current liabilities......................... 21,319 21,742 15,237
------- ------- -------
Long-term obligations, excluding current installments....... 168 91 30
Deferred federal income taxes............................... 1,885 1,199 739
Unearned revenue............................................ 791 647 423
Commitments, contingencies and subsequent event
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 5,000 shares;
no shares issued or outstanding........................ -- -- --
Common stock, $.01 par value. Authorized 25,000 shares;
issued and outstanding 9,755 shares in 1994, 9,252
shares in 1995 and 9,440 shares in 1996................ 98 93 94
Additional paid-in capital................................ 36,484 32,772 32,859
Deferred stock option compensation expense................ (85) (31) (8)
Cumulative translation adjustment......................... (339) (334) (270)
Retained earnings......................................... 17,619 25,012 27,596
------- ------- -------
Total shareholders' equity........................ 53,777 57,512 60,271
------- ------- -------
$77,940 $81,191 $76,700
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 123
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales.......................... $28,177 $36,694 $45,017 $32,093 $42,694
Service and miscellaneous.............. 12,964 16,584 22,993 16,274 19,807
------- ------- ------- ------- -------
41,141 53,278 68,010 48,367 62,501
------- ------- ------- ------- -------
Cost of product sales and services:
Product sales.......................... 13,006 14,068 17,703 12,824 14,044
Service and miscellaneous.............. 4,924 7,907 9,219 6,387 9,301
------- ------- ------- ------- -------
17,930 21,975 26,922 19,211 23,345
------- ------- ------- ------- -------
Gross profit................... 23,211 31,303 41,088 29,156 39,156
------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative.... 23,197 22,996 24,297 18,055 21,661
Research and development............... 5,487 5,542 7,482 5,034 7,728
Write-off of capitalized software
costs............................... -- -- -- -- 705
Purchase of in-process research and
development......................... -- -- -- -- 4,307
------- ------- ------- ------- -------
Total operating expenses....... 28,684 28,538 31,779 23,089 34,401
------- ------- ------- ------- -------
Operating income (loss)........ (5,473) 2,765 9,309 6,067 4,755
------- ------- ------- ------- -------
Other income (expense), net:
Interest income, net................... 88 1,089 1,972 1,433 1,334
Litigation settlement.................. (4,095) 3,248 -- -- --
Other, net............................. (30) 195 214 191 (25)
------- ------- ------- ------- -------
Other income (expense), net.... (4,037) 4,532 2,186 1,624 1,309
------- ------- ------- ------- -------
Earnings (loss) before income
taxes........................ (9,510) 7,297 11,495 7,691 6,064
Income tax expense (benefit)............. (2,744) 2,517 4,102 2,807 3,480
------- ------- ------- ------- -------
Net earnings (loss)............ $(6,766) $ 4,780 $ 7,393 $ 4,884 $ 2,584
======= ======= ======= ======= =======
Net earnings (loss) per share............ $ (0.72) $ 0.48 $ 0.75 $ 0.50 $ 0.26
======= ======= ======= ======= =======
Weighted average common shares and common
share equivalents outstanding.......... 9,366 9,949 9,836 9,814 9,843
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 124
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995, AND NINE MONTHS ENDED SEPTEMBER
30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED
STOCK
COMMON STOCK ADDITIONAL OPTION CUMULATIVE TOTAL
--------------- PAID-IN COMPENSATION TRANSLATION RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EXPENSE ADJUSTMENT EARNINGS EQUITY
------ ------ ---------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992.............. 9,107 $ 91 $ 33,955 $ (757) $(341) $19,605 $52,553
Exercise of stock options.................. 19 -- 27 -- -- -- 27
Common stock issued in settlement of
lawsuit.................................. 445 5 1,995 -- -- -- 2,000
Amortization of deferred compensation
expense.................................. -- -- -- 213 -- -- 213
Tax benefit realized upon exercise of stock
options.................................. -- -- 23 -- -- -- 23
Forfeiture of compensatory stock options... -- -- (227) 227 -- -- --
Common stock sold pursuant to employee
stock purchase plan...................... 34 -- 113 -- -- -- 113
Translation adjustment..................... -- -- -- -- 22 -- 22
Net loss for the year ended December 31,
1993..................................... -- -- -- -- -- (6,766 ) (6,766)
----- --- ------ ---- ---- ------ ------
BALANCES AT DECEMBER 31, 1993.............. 9,605 96 35,886 (317) (319) 12,839 48,185
Exercise of stock options.................. 112 2 373 -- -- -- 375
Amortization of deferred compensation
expense.................................. -- -- -- 120 -- -- 120
Tax benefit realized upon exercise of stock
options.................................. -- -- 218 -- -- -- 218
Forfeiture of compensatory stock options... -- -- (112) 112 -- -- --
Common stock sold pursuant to employee
stock purchase plan...................... 38 -- 119 -- -- -- 119
Translation adjustment..................... -- -- -- -- (20) -- (20)
Net earnings for the year ended December
31, 1994................................. -- -- -- -- -- 4,780 4,780
----- --- ------ ---- ---- ------ ------
BALANCES AT DECEMBER 31, 1994.............. 9,755 98 36,484 (85) (339) 17,619 53,777
Exercise of stock options.................. 76 -- 253 -- -- -- 253
Amortization of deferred compensation
expense.................................. -- -- -- 54 -- -- 54
Tax benefit realized upon exercise of stock
options.................................. -- -- 103 -- -- -- 103
Common stock sold pursuant to employee
stock purchase plan...................... 29 -- 226 -- -- -- 226
Translation adjustment..................... -- -- -- -- 5 -- 5
Net earnings for the year ended December
31, 1995................................. -- -- -- -- -- 7,393 7,393
Repurchase of common stock................. (608 ) (5) (4,294) -- -- -- (4,299)
----- --- ------ ---- ---- ------ ------
BALANCES AT DECEMBER 31, 1995.............. 9,252 93 32,772 (31) (334) 25,012 57,512
Exercise of stock options (unaudited)...... 254 2 1,125 -- -- -- 1,127
Amortization of deferred compensation
expense (unaudited)...................... -- -- -- 23 -- -- 23
Common stock sold pursuant to employee
stock purchase plan (unaudited).......... 17 -- 187 -- -- -- 187
Translation adjustment (unaudited)......... -- -- -- -- 64 -- 64
Net earnings for the nine months ended
September 30, 1996 (unaudited)........... -- -- -- -- -- 2,584 2,584
Repurchase of common stock (unaudited)..... (83 ) (1) (1,225) -- -- -- (1,226)
----- --- ------ ---- ---- ------ ------
BALANCES AT SEPTEMBER 30, 1996
(UNAUDITED).............................. 9,440 $ 94 $ 32,859 $ (8) $(270) $27,596 $60,271
===== === ====== ==== ==== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 125
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................. $ (6,766) $ 4,780 $ 7,393 $ 4,884 $ 2,584
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 3,840 4,944 5,622 4,628 4,094
Issuance of common stock for litigation
settlement..................................... 2,000 -- -- -- --
Provision for doubtful accounts.................. 2,166 846 469 470 100
Deferred income tax benefit...................... (1,375) (1,818) (140) (208) (549)
Other............................................ 864 534 156 86 (237)
Change in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable.................................. 11,042 (1,609) (10,764) (1,871) (2,314)
Decrease (increase) in inventories............. (908) 1,684 1,095 1,044 494
Decrease in contracts receivable............... 1,960 3,876 3,150 1,403 1,580
Decrease (increase) in refundable income
taxes....................................... (2,193) 2,193 -- -- --
Decrease (increase) in prepaid expenses and
other current assets........................ 937 106 (224) (118) (811)
Increase in other assets....................... -- -- (505) -- --
Increase (decrease) in accounts payable........ (125) 375 1,952 861 (858)
Increase (decrease) in accrued compensation.... (380) 1,677 (393) (829) 1,207
Increase (decrease) in other accrued
expenses.................................... 966 687 1,855 2,272 (823)
Increase (decrease) in customer deposits and
unearned revenue............................ 2,496 6,138 (2,128) (4,279) (6,259)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................. 14,524 24,413 7,538 8,343 (1,792)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of short-term investments.................. -- -- (50,433) (35,282) (32,373)
Proceeds from maturities of short-term
investments...................................... -- -- 16,585 -- 38,686
Purchase of furniture, equipment and leasehold
improvements..................................... (1,648) (1,612) (2,449) (1,622) (2,696)
Increase in capitalized software costs.............. (1,508) (1,619) (1,652) (1,444) (902)
Decrease (increase) in other assets, net............ (204) 313 -- 414 (4,000)
Other............................................... -- -- -- -- (443)
-------- -------- -------- -------- --------
Net cash used in investing activities............ (3,360) (2,918) (37,949) (37,934) (1,728)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash............... (25) (31) 12 50 82
-------- -------- -------- -------- --------
Cash flows from financing activities:
Repayment of long-term obligations.................. (3,324) (3,059) (941) (922) (56)
Repurchase of common shares......................... -- -- (4,299) (4,048) (1,226)
Net proceeds from sale of common stock.............. 140 494 582 289 1,314
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities..................................... (3,184) (2,565) (4,658) (4,681) 32
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 7,955 18,899 (35,057) (34,222) (3,406)
</TABLE>
F-6
<PAGE> 126
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents at beginning of period...... 14,117 22,072 40,971 40,971 5,914
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period............ $ 22,072 $ 40,971 $ 5,914 $ 6,749 $ 2,508
======== ======== ======== ======== ========
Supplemental disclosures of cash flow
information -- cash paid during the period for:
Income taxes........................................ $ 181 $ 3,922 $ 3,245 $ 1,044 $ 3,704
-------- -------- -------- -------- --------
Interest............................................ 448 193 77 72 9
-------- -------- -------- -------- --------
Supplemental schedule of noncash transactions:
Equipment transferred from inventory................ 165 252 238 -- 289
-------- -------- -------- -------- --------
Tax benefit realized upon exercise of stock options
and warrants..................................... 23 218 103 -- --
-------- -------- -------- -------- --------
Other long-term liabilities...................... (117) (134) -- -- --
-------- -------- -------- -------- --------
Net book value of rental systems returned to
inventory........................................ -- 21 -- -- --
-------- -------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 127
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business.
Digital Systems International, Inc. and subsidiaries (Company) designs,
manufactures, markets and supports Customer Management systems, software and
services which are sold both domestically and internationally to companies that
rely heavily on the telephone to communicate with customers and potential
customers. Credit is extended to such customers in the Company's normal course
of business. Voicelink Systems Limited, a wholly owned subsidiary, is
incorporated in the United Kingdom and has various business activities which are
similar in nature to those of the Company.
b. Basis of Presentation.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
c. Cash Equivalents and Short-Term Investments.
All short-term investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents.
The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The Company's investment securities are classified as
held-to-maturity and, as such, are carried at amortized cost.
d. Inventories.
Inventories are stated at the lower of cost (first-in, first-out) or market
(replacement cost for raw materials and net realizable value for finished goods,
work-in-process and spare parts).
e. Furniture, Equipment and Leasehold Improvements.
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation and amortization of furniture, equipment (including rental systems)
and leasehold improvements are provided on the straight-line method over the
three- to five-year estimated useful lives of the assets or the lease term,
whichever is shorter. Maintenance and repairs are expensed as incurred. When
properties are retired or otherwise disposed of, gains and losses are reflected
in the consolidated statement of operations.
f. Capitalized Software Costs.
Software development costs incurred in conjunction with product development
are charged to research and development expense until technological feasibility
has been established. Thereafter, software development costs for qualified
projects are capitalized and reported at the lower of unamortized cost or net
realizable value.
Amortization of capitalized software costs begins when the related product
is available for general release to customers and is computed for each product
based on the greater of (a) the ratio of current gross revenue for a product to
the total of current and anticipated future gross revenue for the product or (b)
on a straight line basis over the estimated life of the product. Amortization
expense related to capitalized software costs
F-8
<PAGE> 128
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
amounted to $1,205, $2,021 and $2,823 for 1993, 1994 and 1995, respectively.
These amounts are included in cost of product sales.
g. Revenue Recognition.
Revenue on system sales is generally recognized when the units are shipped
and the Company has no significant obligations yet to be satisfied. For system
sales requiring significant customization or for new products, revenue is
recognized upon customer acceptance. Installation fees relating to system sales
are recognized when the related system is installed. Revenue from system support
service is recognized using the straight-line method over the term of the
contract.
Customer payment terms vary. Amounts billed in advance of satisfying
revenue recognition criteria are classified in "customer deposits and unearned
revenue." Costs incurred prior to satisfying revenue recognition criteria are
deferred and are classified as a component of inventories.
The Company also licenses and sells its systems pursuant to lease
agreements, which are generally for three to five-year terms. The Company's
accounting policy is consistent with the statement of position on software
revenue recognition issued by the American Institute of Certified Public
Accountants.
- Due to the lack of a reasonable basis for estimating the collectibility
of lease payments, revenue from rental of products with an initial
contract term of less than three years is recognized on the installment
method over the contract term.
- Revenue from contracts with an initial term of three years or more is
recognized when the units are shipped, at the present value of the
minimum payments at the beginning of the contract discounted at the
Company's incremental borrowing rate. Because these leases qualify as
sales type leases, the revenue for the hardware is recognized upon
shipment. At the time of shipment there are generally no significant
vendor obligations remaining and collectibility is considered probable;
therefore, software revenue is also recognized.
h. Research and Development Costs.
Research and development costs are charged to expense as incurred, except
as described in f.
i. Income Taxes.
The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets and liabilities are measured using
currently enacted tax rates that are expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
j. Product Warranties.
The Company generally provides a 90-day warranty period for all products
sold. A charge to the statement of operations is made at the time of sale for
estimated costs of repair or replacement of the products.
F-9
<PAGE> 129
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
k. Net Earnings (Loss) Per Share.
Net earnings (loss) per share is computed using the weighted average number
of common shares plus dilutive common share equivalents outstanding during the
period. Common share equivalents are calculated under the treasury stock method
and consist of unexercised employee stock options. Fully diluted earnings per
share for all periods presented were not materially different from primary
earnings per share.
l. Foreign Currency Translation.
Assets and liabilities of foreign operations are translated into U.S.
dollars using rates of exchange in effect at the end of the year. Income and
expense accounts are translated into U.S. dollars using annual average rates of
exchange. The net gain or loss resulting from translation is shown as a
cumulative translation adjustment in shareholders' equity. Gains and losses from
foreign currency transactions are included in other income (expense), net.
m. Financial Instruments and Concentrations of Credit Risk.
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts and contracts receivable, accounts
payable, and long-term obligations. The Company's cash and cash equivalents and
short-term investments are diversified among security types and issuers, and
approximate fair value. Concentrations of credit risk with respect to
receivables are limited due to the diversity in geographic location of customers
as well as diversity in industries. In addition, the Company performs initial
and ongoing evaluations of its customers' financial position, and generally
extends credit on open account without requiring collateral. However, the
Company generally receives a significant down payment prior to shipment of the
system. The fair value of the financial instruments approximates their recorded
value. The Company does not have financial instruments with off-balance sheet
risk.
n. Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
o. Interim Financial Information.
The accompanying interim financial statements as of September 30, 1996 and
for the nine months ended September 30, 1995 and 1996, in the opinion of
management, include all adjustments necessary for a fair presentation of the
information therein.
p. Reclassifications.
Certain reclassifications have been made to the prior period financial
statements to conform with the current year presentation.
F-10
<PAGE> 130
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company's cash and cash equivalents and short-term investments as of
December 31 consist of the following:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Cash and cash equivalents:
Cash........................................................... $ 1,025 $ 1,073
Commercial paper............................................... -- 2,957
Money market................................................... 39,946 1,884
------- -------
Cash and cash equivalents.............................. 40,971 5,914
------- -------
Short-term investments:
Municipal securities........................................... -- 19,595
Corporate notes and bonds...................................... -- 9,859
Commercial paper............................................... -- 4,394
------- -------
Short-term investments................................. -- 33,848
------- -------
Cash and cash equivalents and short-term investments... $40,971 $39,762
======= =======
</TABLE>
The short-term investments are classified as held to maturity. Due to the
short-term nature of these investments, changes in market interest rates would
not have a significant impact on the fair value of these securities. These
securities are carried at amortized cost which approximates fair value.
Contractual maturities of investment securities at December 31, 1995 will
occur during 1996. Actual maturities may differ from contractual maturities due
to borrowers' rights to call or prepay obligations with or without penalties.
3. INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Raw materials........................................ $ 865 $ 838 $ 898
Work-in-process...................................... 1,393 1,269 491
Finished goods....................................... 198 26 245
Installations in progress............................ 1,304 610 212
Spare parts.......................................... 531 215 329
------ ------ -------
$4,291 $2,958 $ 2,175
====== ====== =======
</TABLE>
F-11
<PAGE> 131
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. CONTRACTS RECEIVABLE
The present value of the future minimum payments to be received on
contracts receivable as of December 31, 1995 is as follows:
<TABLE>
<S> <C>
1996........................................................................ $3,180
1997........................................................................ 1,576
1998........................................................................ 843
1999........................................................................ 398
2000........................................................................ 138
------
6,135
Less amounts representing interest at rates ranging from 6.23% to 10%....... 688
------
Present value of contracts receivable....................................... 5,447
Less:
Current installments...................................................... 2,797
Allowance for doubtful contracts.......................................... 857
------
Contracts receivable, net................................................. $1,793
======
</TABLE>
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements as of December 31 consist
of the following:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Furniture and fixtures........................................... $ 2,102 $ 2,118
Computer equipment............................................... 9,056 11,112
Computer software................................................ 1,470 1,519
Office equipment................................................. 789 928
Leasehold improvements........................................... 932 1,045
------- -------
14,349 16,722
Less accumulated depreciation and amortization................... 8,760 11,214
------- -------
$ 5,589 $ 5,508
======= =======
</TABLE>
6. BANK LINE OF CREDIT
At December 31, 1995, the Company had available $20,000 of unsecured
domestic lines of credit. Restrictive terms of these lines of credit require,
among other things, that the Company maintain minimum net worth and working
capital. There were no borrowings outstanding under these lines at December 31,
1995.
F-12
<PAGE> 132
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. LONG-TERM OBLIGATIONS
A summary of long-term obligations at December 31 follows:
<TABLE>
<CAPTION>
1994 1995
------ ----
<S> <C> <C>
Various obligations, final payment due 1998......................... $ 272 $168
Unsecured notes payable to bank, payable in monthly installments of
approximately $150 including interest at an average rate of
7.0%.............................................................. 837 --
------ ----
Total long-term obligations......................................... 1,109 168
Less current installments........................................... 941 77
------ ----
Long-term obligations, excluding current installments............. $ 168 $ 91
====== ====
</TABLE>
Principal maturities of long-term obligations at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996.......................................................................... $ 77
1997.......................................................................... 81
1998.......................................................................... 10
----
$168
====
</TABLE>
8. SHAREHOLDERS' EQUITY
a. Stock Option Plan.
The Company's Restated 1987 Stock Option Plan (Plan) allows for the
reservation of 2,800 shares of common stock for grants. Options granted under
the Plan may be designated as qualified or nonqualified at the discretion of the
Board of Directors.
Generally, the options vest over either a four-year period in cumulative
increments of 25% beginning one year from the date of grant or over a five-year
period in cumulative increments of 20% each year beginning either one year from
the date of grant or, in certain instances, one year from the individual's
employment date. All options expire ten years from the date of grant, and are
currently granted at prices not less than fair market value.
In December 1993, the Board of Directors voted to allow certain employees,
excluding officers, to exchange their unexercised options for incentive stock
options. The incentive stock options vest over a new four-year period and were
granted with an exercise price of the greater of $4 per share or the fair market
value on the date of exchange.
F-13
<PAGE> 133
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A summary of stock options follows:
<TABLE>
<CAPTION>
SHARES NUMBER OF
AVAILABLE OPTIONS
FOR GRANT OUTSTANDING PRICE PER SHARE
---------- ----------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1992........................... 656 833 $ 0.80 - 18.81
Granted................................................ (785) 785 3.50 - 9.50
Exercised.............................................. -- (19) 0.80 - 2.40
Canceled............................................... 276 (276) 4.00 -15.73
---- ----- -------------
Balance at December 31, 1993........................... 147 1,323 0.80 - 18.81
Plan amendment......................................... 400 -- --
Granted................................................ (973) 973 2.63 - 12.13
Exercised.............................................. -- (112) 0.80 - 9.50
Canceled............................................... 596 (596) 0.80 - 18.81
---- ----- -------------
Balance at December 31, 1994........................... 170 1,588 0.80 - 12.13
Plan amendment......................................... 400 -- --
Granted................................................ (279) 279 6.63 - 12.88
Exercised.............................................. -- (76) 0.80 - 8.88
Canceled............................................... 385 (385) 2.75 - 11.81
---- ----- -------------
Balance at December 31, 1995........................... 676 1,406 $ 0.80 - 12.88
==== ===== =============
</TABLE>
At December 31, 1995, options to purchase a total of 466 shares were
exercisable at a weighted average exercise price of $5.05 per share.
b. Stock Option Plan for Non-Employee Directors.
Under the Company's 1992 Stock Option Plan for Non-Employee Directors (1992
Plan), 125 shares of the Company's common stock are reserved for issuance to
non-employee directors of the Company.
An initial grant of five shares is automatically made to each non-employee
director upon appointment as a director of the Company. Initial grants vest over
a five-year period in cumulative increments of 20% each year beginning from the
date of the first subsequent annual meeting of shareholders following grant. An
additional one share is granted following each annual shareholders meeting. Each
additional grant is immediately vested and exercisable.
All options expire ten years from the date of grant or, if earlier, five
years after termination as a director of the Company. Options are exercisable at
the fair market value of the stock at the date of grant. At December 31, 1995,
48 shares were outstanding under the 1992 Plan at a weighted average exercise
price of $8.11 per share and 30 shares were exercisable at a weighted average
price of $7.75 per share.
c. Employee Stock Purchase Plan.
The Company's 1991 Employee Stock Purchase Plan provides for 200 shares of
the Company's common stock to be reserved for issuance upon exercise of purchase
rights granted to participating employees of the Company. The purchase rights
are exercisable semiannually on June 30 and December 31 of each year at a
F-14
<PAGE> 134
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
price equal to the lesser of 85% of the fair market value of the Company's stock
at the beginning or end of the respective semiannual periods.
d. Stock Repurchase Plan
In 1995, the Company's Board of Directors authorized a plan to repurchase
up to 1,600 shares of the Company's common stock, subject to certain limitations
and conditions. As of December 31, 1995, the Company had purchased 608 shares at
a total cost of $4,299. The shares are used primarily to service the Company's
employee benefit plans.
9. SIGNIFICANT CUSTOMER
No customer accounted for more than 10% of total revenue in 1993 or 1995.
One customer accounted for approximately 10% of total revenue in 1994.
10. INCOME TAXES
The components of earnings (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------ -------
<S> <C> <C> <C>
U.S. operations........................................ $(8,860) $6,857 $10,789
Foreign................................................ (650) 440 706
------- ------ -------
$(9,510) $7,297 $11,495
======= ====== =======
</TABLE>
Components of income tax expense (benefit) are summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- ------
<S> <C> <C> <C>
Current:
Federal.............................................. $(2,101) $ 3,845 $3,493
State................................................ 57 209 490
Foreign.............................................. 354 240 259
------- ------- ------
Total current.......................................... (1,690) 4,294 4,242
Deferred -- federal.................................. (1,054) (1,777) (140)
------- ------- ------
$(2,744) $ 2,517 $4,102
======= ======= ======
</TABLE>
F-15
<PAGE> 135
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income tax expense (benefit) on earnings (loss) before income taxes differs
from "expected" income tax expense (benefit) (computed by applying the U.S.
federal income tax rate of 34%) as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............... $(3,233) $2,481 $3,908
Research and experimentation tax credits and foreign tax
credits............................................... (193) (306) (100)
State income taxes, net of federal benefit.............. 38 138 323
Foreign subsidiary's losses providing no current
benefit............................................... 221 -- --
Utilization of foreign subsidiary's losses.............. -- (150) (185)
Tax-exempt interest income.............................. -- -- (234)
Foreign taxes withheld.................................. 354 240 209
Other................................................... 69 114 181
------- ------ ------
$(2,744) $2,517 $4,102
======= ====== ======
</TABLE>
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Depreciation..................................................... $ 241 $ 80
Capitalized software development costs, net of amortization...... 1,252 976
Contract revenue................................................. 1,076 855
Other............................................................ 87 197
------- -------
Gross deferred federal tax liabilities................. 2,656 2,108
------- -------
Provision for doubtful receivables............................... (626) (409)
Provision for inventory obsolescence............................. (269) (300)
Provision for warranties and returns............................. (86) (230)
Unearned revenue................................................. (641) (339)
Provision for vacation expense................................... (128) (175)
Provision for self insurance..................................... (103) (191)
Taxable subsidiary earnings...................................... -- (154)
Foreign loss carryforward........................................ (199) --
Capitalized technical publication expense, net of amortization... (86) (75)
Other............................................................ (904) (562)
------- -------
Gross deferred federal tax assets...................... (3,042) (2,435)
Deferred tax valuation allowance................................. 199 --
------- -------
Net deferred tax assets........................................ (2,843) (2,435)
------- -------
Net deferred income taxes...................................... $ (187) $ (327)
======= =======
</TABLE>
The net changes in the valuation allowance for deferred tax assets were an
increase of $116 in 1993, a decrease of $103 in 1994 and a decrease of $199 in
1995. These changes primarily relate to the net operating loss carryforward
generated by foreign operations.
F-16
<PAGE> 136
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES
a. Profit Sharing and Deferred Compensation Plan.
The Company has a Profit Sharing and Deferred Compensation Plan (Profit
Sharing Plan) under Section 401(k) of the Internal Revenue Code of 1986, as
amended. Substantially all full-time employees are eligible to participate. The
Company, at its discretion, may contribute a portion of its profits to the
Profit Sharing Plan. Participants will receive their share of those profits upon
retirement or termination, subject to a vesting schedule. The Company's
contributions to the Profit Sharing Plan were $94, $160 and $409 for 1993, 1994
and 1995, respectively.
b. Lease Commitments.
The Company leases its office and warehouse space under terms of
noncancelable operating leases expiring at various dates through 1999.
Future minimum lease payments under noncancelable operating leases at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................................ $1,385
1997........................................................................ 1,250
1998........................................................................ 1,132
1999........................................................................ 185
------
$3,952
======
</TABLE>
Rent expense under noncancelable operating leases amounted to $1,485,
$1,618 and $1,364 for 1993, 1994 and 1995, respectively.
c. Litigation.
In 1994, the Company settled a lawsuit it had filed, resulting in an
increase to nonoperating income of approximately $3.3 million, net of legal
costs.
In 1993, the Company settled a lawsuit that had been filed against it,
resulting in a charge to non-operating expense of approximately $4.1 million.
12. NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. This pronouncement establishes
accounting and reporting standards for stock-based employee compensation plans,
including: stock purchase plans, stock options and stock appreciation rights.
This standard defines a fair-value-based method of accounting for these equity
instruments. This method measures compensation cost based on the value of the
award and recognizes that cost over the service period. Companies may elect to
adopt this standard or to continue accounting for these types of equity
instruments under current guidance, APB Opinion No. 25, Accounting for Stock
Issued to Employees. Companies which elect to continue using the rules of
Opinion No. 25 must make pro forma disclosures of net income and earnings per
share as if this new statement had been applied. This new standard is required
for fiscal years beginning after December 15, 1995. The Company is in the
process of evaluating this statement and its impact on the Company's financial
condition and results of operations.
F-17
<PAGE> 137
DIGITAL SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. GEOGRAPHIC SEGMENT INFORMATION
The Company's operations consist primarily of call management solutions
within the telecommunications industry. The Company's products are marketed
internationally through its subsidiary in the United Kingdom, the U.S. parent
and independent distributors.
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenue-U.S. operations:
United States....................................... $36,869 $46,379 $56,755
United States export................................ 2,584 3,911 7,715
Revenue-International operations:
Foreign subsidiary.................................. 1,688 2,988 3,540
------- ------- -------
41,141 53,278 68,010
------- ------- -------
Income (loss) from operations:
U.S. operations..................................... (4,675) 1,955 8,539
Foreign subsidiary.................................. (513) 529 777
Eliminations........................................ (285) 281 (7)
------- ------- -------
(5,473) 2,765 9,309
------- ------- -------
Assets:
U.S. operations..................................... 65,545 75,120 79,514
Foreign subsidiary.................................. 2,030 2,820 1,677
------- ------- -------
$67,575 $77,940 $81,191
======= ======= =======
</TABLE>
14. SUBSEQUENT EVENT
In February 1996, the Company purchased Caleo Software, Inc., an
Atlanta-based software company for $4,750 in cash. The acquisition was accounted
for using the purchase method, and $4,307 was charged to operations in the first
quarter of 1996 as in-process research and development costs.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited statements of operations for
each quarter of 1995 and 1994:
<TABLE>
<CAPTION>
QUARTERS FIRST SECOND THIRD FOURTH TOTAL
- ----------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1995:
Revenue.................................. $15,085 $16,637 $16,644 $19,644 $68,010
Operating income......................... 870 2,476 2,720 3,243 9,309
Net earnings............................. 929 1,904 2,051 2,509 7,393
Net earnings per share................... $ 0.09 $ 0.19 $ 0.21 $ 0.25 $ 0.75
======= ======= ======= ======= =======
1994:
Revenue.................................. $ 9,775 $11,979 $14,919 $16,605 $53,278
Operating income (loss).................. (1,546) 526 1,836 1,949 2,765
Net earnings (loss)...................... (781) 2,551 1,349 1,661 4,780
Net earnings (loss) per share............ $ (0.08) $ 0.26 $ 0.14 $ 0.16 $ 0.48
======= ======= ======= ======= =======
</TABLE>
In the second quarter of 1994, the Company reported a $2,100 after-tax
increase to net earnings (or $0.21 per share), net of legal costs, due to final
settlement of a lawsuit.
F-18
<PAGE> 138
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ViewStar Corporation:
We have audited the accompanying consolidated balance sheets of ViewStar
Corporation and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ViewStar
Corporation and subsidiaries as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Jose, California
July 3, 1996, except for Note 7,
which is as of August 15, 1996
F-19
<PAGE> 139
VIEWSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 4,094 $ 1,832 $ 5,935
Accounts receivable, net of allowances of $532, $644
and $744 in 1994, 1995 and 1996 respectively........ 9,787 7,211 7,947
Prepaid expenses and other current assets.............. 485 587 634
-------- -------- --------
Total current assets................................ 14,366 9,630 14,516
Property and equipment, net.............................. 3,135 2,493 1,991
Other assets............................................. 355 257 455
-------- -------- --------
$ 17,856 $ 12,380 $ 16,962
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................. $ 5,666 $ 6,535 $ 6,400
Borrowings under bank line of credit................... 1,500 -- --
Subordinated notes payable to stockholders............. -- 2,000 --
Deferred revenue....................................... 9,767 10,625 9,376
Current portion of capital lease obligations and
notes payable....................................... 946 1,055 907
-------- -------- --------
Total current liabilities........................... 17,879 20,215 16,683
Noncurrent portion of capital lease obligations and
notes payable.......................................... 955 994 4,715
Commitments
Stockholders' deficit:
Preferred stock, $.01 par value; 9,395,146, 9,395,146
and 5,950,000 shares authorized in 1994, 1995 and
1996, respectively; 2,665,853, 2,665,853 and
4,752,478 shares issued and outstanding in 1994,
1995, and 1996, respectively (aggregate liquidation
preference of $4,990 in 1996)....................... 27 27 48
Common stock, $.01 par value; 15,000,000, 20,000,000,
and 40,000,000 shares authorized in 1994, 1995, and
1996, respectively; 585,091, 744,923 and 3,925,361
shares issued and outstanding in 1994, 1995, and
1996, respectively.................................. 6 7 39
Additional paid-in capital............................. 23,621 23,905 27,399
Notes receivable from stockholders..................... (119) (299) (391)
Accumulated deficit.................................... (24,513) (32,469) (31,531)
-------- -------- --------
Total stockholders' deficit.................... (978) (8,829) (4,436)
-------- -------- --------
$ 17,856 $ 12,380 $ 16,962
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 140
VIEWSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees.................................. $15,847 $ 10,436 $13,031 $ 8,490 $12,079
Services...................................... 10,205 11,857 12,137 8,595 11,205
Hardware...................................... 2,044 519 70 70 --
------- -------- ------- ------- -------
Total revenues........................ 28,096 22,812 25,238 17,155 23,284
------- -------- ------- ------- -------
Cost of revenues:
License fees.................................. 606 720 536 386 870
Services...................................... 6,695 7,995 7,959 5,891 6,135
Hardware...................................... 1,348 42 -- -- --
------- -------- ------- ------- -------
Total cost of revenues................ 8,649 8,757 8,495 6,277 7,005
------- -------- ------- ------- -------
Gross profit.......................... 19,447 14,055 16,743 10,878 16,279
------- -------- ------- ------- -------
Operating expenses:
Sales and marketing........................... 12,894 15,568 14,912 11,131 9,982
Research and development...................... 5,814 6,617 5,572 4,305 3,662
General and administrative.................... 2,615 2,914 1,970 1,574 1,567
Nonrecurring charges.......................... -- 78 1,740 969 --
------- -------- ------- ------- -------
Total operating expenses.............. 21,323 25,177 24,194 17,979 15,211
------- -------- ------- ------- -------
Operating income (loss)......................... (1,876) (11,122) (7,451) (7,101) 1,068
Interest expense................................ (378) (284) (579) (411) (279)
Other income.................................... 58 199 123 104 160
------- -------- ------- ------- -------
Income (loss) before income taxes..... (2,196) (11,207) (7,907) (7,408) 949
Income taxes.................................... 119 55 49 32 11
------- -------- ------- ------- -------
Net income (loss)..................... $(2,315) $(11,262) $(7,956) $(7,440) $ 938
======= ======== ======= ======= =======
Net income (loss) per share..................... $ (5.09) $ (21.21) $(11.75) $(11.17) $ 0.18
======= ======== ======= ======= =======
Shares used in per share computation............ 455 531 677 666 5,121
======= ======== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 141
VIEWSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
--------------- --------------- PAID-IN FROM ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT (DEFICIT)
------ ------ ------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AS OF DECEMBER
31, 1992............... 2,160 $ 22 442 $ 4 $ 16,456 $ -- $ (10,936) $ 5,546
Issuance of common
stock.................. -- -- 55 1 105 (59) -- 47
Issuance of Series E
preferred stock........ 286 3 -- -- 3,894 -- -- 3,897
Net loss................. -- -- -- -- -- -- (2,315) (2,315)
------ ---- ----- --- ------- ---- -------- --------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AS OF DECEMBER
31, 1993............... 2,446 25 497 5 20,455 (59) (13,251) 7,175
Issuance of common
stock.................. -- -- 88 1 217 (60) -- 158
Issuance of Series E
preferred stock........ 220 2 -- -- 2,949 -- -- 2,951
Net loss................. -- -- -- -- -- -- (11,262) (11,262)
------ ---- ----- --- ------- ---- -------- --------
BALANCES AS OF DECEMBER
31, 1994............... 2,666 27 585 6 23,621 (119) (24,513) (978)
Issuance of common
stock.................. -- -- 160 1 284 (180) -- 105
Net loss................. -- -- -- -- -- -- (7,956) (7,956)
------ ---- ----- --- ------- ---- -------- --------
BALANCES AS OF DECEMBER
31, 1995............... 2,666 27 745 7 23,905 (299) (32,469) (8,829)
Conversion of preferred
stock to common stock
(unaudited)............ (2,666) (27) 2,666 27 -- -- -- --
Issuance of Series F
preferred stock
(unaudited)............ 4,752 48 -- -- 3,279 -- -- 3,327
Issuance of common stock
(unaudited)............ -- -- 514 5 215 (92) -- 128
Net income (unaudited)... -- -- -- -- -- -- 938 938
------ ---- ----- --- ------- ---- -------- --------
BALANCES AS OF SEPTEMBER
30, 1996 (UNAUDITED)... 4,752 $ 48 3,925 $ 39 $ 27,399 $ (391) $ (31,531) $ (4,436)
====== ==== ===== === ======= ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 142
VIEWSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------
1993 1994 1995 1995 1996
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $(2,315) $(11,262) $(7,956) $(7,440) $ 938
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 1,030 1,239 1,644 1,226 1,108
Issuance of promissory note to customer.................. -- -- 300 -- --
Changes in operating assets and liabilities:
Accounts receivable, net............................... (979) 311 2,576 3,137 (736)
Prepaid expenses and other current assets.............. 207 (148) (102) (54) (47)
Accounts payable and accrued expenses.................. (278) 1,939 869 (105) 13
Deferred revenue....................................... 4,361 3,646 858 229 (1,249)
------- -------- ------- ------- -------
Net cash provided by (used in) operating activities...... 2,026 (4,275) (1,811) (3,007) 27
------- -------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment......................... (439) (1,230) (332) (317) (171)
Proceeds from sale of property and equipment............... -- -- 388 353 --
Other assets............................................... (116) (19) 98 (33) (198)
------- -------- ------- ------- -------
Net cash provided by (used in) investing activities...... (555) (1,249) 154 3 (369)
------- -------- ------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings under bank line of credit......... 4,350 2,900 -- -- --
Payments of borrowings under bank line of credit........... (7,100) (1,400) (1,500) (1,500) --
Proceeds from subordinated notes issued to stockholders.... -- -- 2,000 2,000 --
Proceeds from promissory note issued to alliance partner... -- -- -- -- 4,000
Principal payments on capital lease obligations............ (781) (905) (1,180) (902) (817)
Payments on promissory note to customer.................... -- -- (30) -- (45)
Proceeds from issuance of preferred stock.................. 3,897 2,951 -- -- 1,179
Proceeds from issuance of common stock..................... 47 158 105 68 128
------- -------- ------- ------- -------
Net cash provided by (used in) financing activities...... 413 3,704 (605) (334) 4,445
------- -------- ------- ------- -------
Change in cash and cash equivalents...................... 1,884 (1,820) (2,262) (3,338) 4,103
Cash and cash equivalents, beginning of period............... 4,030 5,914 4,094 4,094 1,832
------- -------- ------- ------- -------
Cash and cash equivalents, end of period..................... $ 5,914 $ 4,094 $ 1,832 $ 756 $ 5,935
======= ======== ======= ======= =======
Cash paid:
Interest................................................... $ 377 $ 299 $ 491 $ 369 $ 189
======= ======== ======= ======= =======
Income taxes............................................... $ 57 $ 30 $ 10 $ -- $ --
======= ======== ======= ======= =======
Noncash financing and investing activities:
Capital lease obligations incurred......................... $ 1,199 $ 1,248 $ 1,058 $ 945 $ 435
======= ======== ======= ======= =======
Issuance of common stock in exchange for note receivable... $ 59 $ 60 $ 180 $ 145 $ 92
======= ======== ======= ======= =======
Issuance of preferred stock in exchange for subordinated
notes payable and related accrued interest............... $ -- $ -- $ -- $ -- $ 2,147
======= ======== ======= ======= =======
Conversion of preferred stock to common stock.............. $ -- $ -- $ -- $ -- $ 94
======= ======== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 143
VIEWSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ViewStar Corporation (the Company) provides client/server document workflow
software that enables customers to automate and improve document-intensive
business processes across the enterprise.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenues
Revenues from the sale of software licenses and hardware are recognized
when (i) a signed contract exists, (ii) delivery has occurred, (iii) the fee is
fixed and collectibility is probable, and (iv) remaining vendor obligations are
insignificant. Generally, revenues from the sale of software licenses through
distributors are recognized after contract signing and shipment and upon the
earlier of sale to the end user or upon receipt of nonrefundable cash payments
from the distributors. Revenues from third-party hardware referral fees are
recognized after contract signing and shipment from the hardware distributor to
the customer. Revenues from software installation and consulting contracts are
recognized as the services are performed. Revenues from software maintenance
agreements are recognized ratably over the service period.
The Company licenses its products to customers in a variety of industries
throughout North America, Europe, Japan, and Australia. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses.
Revenues related to customers outside the United States were $3,091,000,
$1,844,000, and $6,405,000 during the years ended December 31, 1993, 1994, and
1995, respectively. Revenues related to customers outside the United States
during the year ended December 31, 1995 related principally to customers located
in the United Kingdom.
Income Taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax basis 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. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Cash, Cash Equivalents and Financial Instruments
Cash equivalents, consisting of liquid investments with original maturities
of three months or less, are stated at cost, which approximates fair value.
Unrealized gains and losses as of December 31, 1994 and 1995, and realized gains
and losses for the periods then ended were not material. Cash equivalents are
composed of
F-24
<PAGE> 144
VIEWSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
certificates of deposit with major banks, government securities, and money
market securities of companies from a variety of industries. The Company
classified all of its debt securities as "held-to-maturity" as of December 31,
1994 and 1995.
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximate fair values due to the
short maturity of those instruments.
Property and Equipment
Property and equipment are recorded at cost and depreciated on a
straight-line basis over the three- to five-year estimated useful lives of the
assets. Leasehold improvements and assets recorded under capital leases are
amortized over the shorter of the estimated useful lives or the related lease
terms.
Computer Software Development Costs
Costs to develop computer software products are expensed as incurred until
technological feasibility is achieved. Once technological feasibility of a
software product to be marketed has been established, development and
enhancement costs are capitalized. Generally, the establishment of technological
feasibility of the Company's products and general release coincide. As a result,
the Company has not capitalized any software development costs to date.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of shares of common stock outstanding and dilutive common equivalent shares from
preferred stock outstanding, on an as-if-converted basis, and options and
warrants to purchase common stock using the treasury stock method.
Interim Financial Information
The accompanying consolidated balance sheet as of September 30, 1996, the
consolidated statements of operations and cash flows for the nine months ended
September 30, 1995 and 1996, and the consolidated statement of stockholders'
equity (deficit) for the nine months ended September 30, 1996 are unaudited but,
in the opinion of management, include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the periods
presented. The consolidated results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results for any future
period.
Reclassifications
Certain amounts in the accompanying 1993 and 1994 consolidated financial
statements were reclassified in order to conform to the 1995 consolidated
financial statement presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Furniture and equipment............................................ $2,161 $2,151
Leasehold improvements............................................. 530 518
Equipment recorded under capital lease............................. 4,966 5,990
------ ------
7,657 8,659
</TABLE>
F-25
<PAGE> 145
VIEWSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------ ------
<S> <C> <C>
Less accumulated depreciation and amortization, including $3,242
and $4,415 applicable to equipment recorded under capital leases
in 1994 and 1995, respectively................................... 4,522 6,166
------ ------
$3,135 $2,493
====== ======
</TABLE>
(3) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Accrued commissions................................................ $1,495 $1,654
Other.............................................................. 4,171 4,881
------ ------
$5,666 $6,535
====== ======
</TABLE>
(4) BANK LINE OF CREDIT, SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS AND NOTES
PAYABLE
The Company has a financing agreement with a bank providing for borrowings
of up to $4 million under a line of credit bearing interest at the bank's prime
rate plus 2.75%. The agreement limits borrowings to 80% of eligible accounts
receivable, as defined. In April 1996, the Company extended the line of credit
through December 31, 1996. The borrowings are secured by substantially all of
the Company's assets. The agreement does not include any financial covenants.
Also in May 1995, the Company obtained $2 million in cash from certain of
its existing stockholders in exchange for subordinated notes. The notes bore
interest at 9% per annum. The principal amount of the notes and accrued interest
was due upon demand at any time after April 15, 1996. The notes were
subordinated to the Company's line of credit with the bank and were secured by
all of the Company's assets. In March 1996, the subordinated notes were
exchanged for shares of preferred stock (see Note 7).
Included in capital lease obligations and notes payable in the accompanying
consolidated balance sheet as of December 31, 1995 is $270,000 related to a
non-interest-bearing note payable to a customer. The note is unsecured and
$90,000 is payable in each of the years 1996, 1997, and 1998.
In September 1996, the Company borrowed $4 million from Digital Systems
International, Inc. (Digital) pursuant to a promissory note with a 48-month
term, bearing interest at 0.50% above the prime rate, with monthly payments of
interest only due until the end of the 48-month term. In October 1996, the
Company entered into an agreement with Digital under which all of the Company's
common and preferred stock will be exchanged for shares of common stock of
Digital, and all of the Company's outstanding options to purchase common stock
will be converted into options to purchase Digital common stock, at the rate of
.693 shares of Digital common stock for each equivalent share of the Company's
common stock.
F-26
<PAGE> 146
VIEWSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
(5) LEASE OBLIGATIONS
The Company leases certain computers and other equipment under capital
leases. In addition, the Company leases its facilities and certain equipment
under operating leases. Future minimum lease payments are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996............................................................. $ 1,109 $ 1,205
1997............................................................. 659 1,146
1998............................................................. 179 1,213
1999............................................................. 21 513
2000............................................................. -- 126
------ ------
1,968 $ 4,203
======
Less amounts representing interest............................... 189
------
Present value of minimum lease payments.......................... 1,779
Less current portion............................................. 965
------
Noncurrent portion of capital lease obligations.................. $ 814
======
</TABLE>
Rent expense was $1,108,000, $1,246,000, and $1,422,000 for the years ended
December 31, 1993, 1994, and 1995, respectively.
(6) INCOME TAXES
The components of the provision for income taxes consisted of the following
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal...................................................... $ 14 $-- $--
State........................................................ 55 20 32
Foreign...................................................... 50 35 17
---- --- ---
$119 $55 $49
==== === ===
</TABLE>
F-27
<PAGE> 147
VIEWSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses.............................................. $ 305 $ 339
Allowances.................................................... 230 279
Accrued compensation.......................................... 373 262
Net operating losses.......................................... 6,413 8,573
Research and development credits.............................. 1,186 1,524
Deferred revenue.............................................. -- 1,147
Other......................................................... 624 186
------- --------
Total deferred tax assets............................. 9,131 12,310
Valuation allowance............................................. (9,131) (12,310)
------- --------
Net deferred tax assets............................... $ -- $ --
======= ========
</TABLE>
Income taxes differed from the amount computed by applying the statutory
federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
----- ------- -------
<S> <C> <C> <C>
Income taxes computed using statutory federal income
tax rate.............................................. $(747) $(3,810) $(2,688)
State taxes, net of federal benefit..................... 55 20 32
Net operating losses not utilized....................... 747 3,810 2,688
Foreign taxes........................................... 50 35 17
Other................................................... 14 -- --
----- ------- -------
$ 119 $ 55 $ 49
===== ======= =======
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $22,697,000, expiring in the
years 2003 through 2010, and net operating loss carryforwards for state income
tax purposes of approximately $9,200,000 expiring in the years 1996 through
2000. The Company also had federal and state research and development credit
carryforwards of approximately $920,000 and $605,000, respectively, which expire
in the years 2001 through 2010.
Due to change of ownership provisions of the Tax Reform Act of 1986,
utilization of the Company's net operating loss carryforwards and research and
development credit carryforwards may be subject to limitation if it should be
determined that a greater than 50% ownership change were to occur in the future.
(7) STOCKHOLDERS' EQUITY (DEFICIT)
Reverse Stock Split
In August 1996, a 1-for-3.5 reverse stock split of the Company's common
stock was effected. All share data in the accompanying consolidated financial
statements and notes have been retroactively restated to give effect to the
reverse stock split.
F-28
<PAGE> 148
VIEWSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
Preferred Stock
Preferred stock as of December 31, 1995, consisted of the following series:
<TABLE>
<CAPTION>
NONCUMULATIVE
LIQUIDATION DIVIDEND PER
SERIES AUTHORIZED OUTSTANDING PREFERENCE SHARE
- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
A-1 316,667 90,476 $ 992,751 $0.53
A-2 210,000 60,000 655,200 0.53
B 415,142 118,612 1,376,818 0.60
C 2,660,081 754,308 9,328,726 0.67
D-1 1,795,974 513,097 7,542,536 0.84
D-2 2,197,282 623,886 7,808,554 0.84
E-1 1,000,000 285,714 4,992,000 1.37
E-2 800,000 219,760 3,449,660 1.37
-----------
$36,146,245
===========
</TABLE>
Each share of Series A, B, C, D, and E preferred stock is convertible into
one share of common stock. The shares could have been converted at any time, at
the option of the stockholder, except that conversion was to automatically occur
upon a public offering of the Company's common stock under certain conditions.
The preferred stock has noncumulative dividend and voting rights equal to the
number of shares of common stock into which it is convertible.
In March and June 1996, the Company completed the Series F preferred stock
financing transaction, in which a total of 4,752,478 shares were issued at $0.70
per share. The Company issued 3,067,855 shares in repayment of the $2,000,000
subordinated notes outstanding plus the related accrued interest of $147,000 and
1,684,623 shares for $1,179,000 in cash. The Series F preferred stock has a
liquidation preference of $1.05 per share, a noncumulative dividend of $0.07 per
share, is convertible into common stock at any time at the rate of 3.5 shares of
Series F preferred stock for one share of common stock and has other privileges
as the other series of preferred stock. Subsequent to December 31, 1995, the
Company issued warrants to purchase 65,324 shares of Series F preferred stock to
a leasing company at exercise prices ranging from $0.70 to $3.90 per share.
In June 1996, by consent of the holders of a majority of the outstanding
shares of such series, all shares of Series A, B, and C preferred stock
automatically converted to common stock. Additionally, by consent of the holders
of 75% of the outstanding shares of Series D and E preferred stock, all such
shares also converted to common stock. As a result, 2,665,853 shares of common
stock were issued in exchange for all shares of Series A, B, C, D, and E
preferred stock.
Due to the conversion of preferred stock to common stock noted above, there
were no shares of Series A, B, C, D, or E preferred stock outstanding as of June
1996. The Company, therefore, amended its Articles of Incorporation such that
each outstanding share of Series F preferred stock was reclassified as a share
of Series A preferred stock.
Amended 1986 Incentive Stock Plan
The Company has an Amended 1986 Incentive Stock Plan (the 1986 Plan)
allowing the Board of Directors to grant nonstatutory stock options, incentive
stock options, and stock purchase rights to officers and employees at amounts
not less than 85%, 100%, and 85% (110% for key stockholders), respectively, of
the fair market value of common stock, as determined by the Company's Board of
Directors, based on factors described in the 1986 Plan. The term of options and
rights may not exceed 10 years. No nonstatutory stock options were outstanding
as of December 31, 1995.
F-29
<PAGE> 149
VIEWSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
Activity under the 1986 Plan is summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS OUTSTANDING
AVAILABLE ------------------------
FOR NUMBER OF EXERCISE
GRANT SHARES PRICE
-------- --------- ------------
<S> <C> <C> <C>
Outstanding as of December 31, 1993.......................... 395,301 499,611 $2.10 - 5.25
Granted.................................................... (220,381) 220,381 2.10 - 7.00
Exercised.................................................. -- (61,847) 2.10 - 5.25
Canceled................................................... 85,079 (85,079) 2.10 - 5.25
-------- --------
Outstanding as of December 31, 1994.......................... 259,999 573,066 2.10 - 7.00
Granted.................................................... (339,786) 339,786 2.10 - 5.25
Exercised.................................................. -- (156,831) 2.10 - 5.25
Canceled................................................... 172,007 (172,007) 2.10 - 5.25
-------- --------
Outstanding as of December 31, 1995.......................... 92,220 584,014 2.10 - 7.00
Reserved (unaudited)....................................... 181,571 --
Granted (unaudited)........................................ (157,143) 157,143 0.35
Exercised (unaudited)...................................... -- (59,785) 0.35 - 2.10
Canceled (unaudited)....................................... 52,093 (52,093) 0.35 - 2.10
-------- --------
Outstanding as of September 30, 1996 (unaudited)............. 168,741 629,279 $ 0.35
========
--------
Exercisable as of December 31, 1995.......................... 259,415 $ 0.35
========
</TABLE>
In 1994, the Company's Board of Directors amended all outstanding stock
options to purchase common stock with exercise prices in excess of $2.10 per
share to reduce their exercise price to $2.10 per share. In February 1996, the
Company amended all outstanding options to purchase common stock of the Company
such that all options with exercise prices in excess of $0.35 per share were
reduced to $0.35 per share.
1994 Stock Plan
In January 1994, the Company adopted the 1994 Stock Plan (the 1994 Plan)
under which incentive and nonstatutory options to purchase shares of common
stock may be granted to certain employees and consultants of the Company. A
total of 227,143 shares of common stock have been reserved for issuance under
the 1994 Plan and, as of December 31, 1995, options to purchase 195,714 shares
at $2.10 per share are outstanding, 14,286 of which are nonstatutory stock
options. Options to purchase 28,571 shares at $2.10 per share were exercised
during 1994, and options to purchase 143 shares at $2.10 per share were
exercised during 1995. The exercise price of each incentive and nonqualified
stock option may not be less than 100% and 85%, respectively, of the fair market
value of the stock on the date of grant (110% of the fair market value for key
stockholders). Options vest based upon criteria determined by the Board of
Directors, generally ratably over a 50-month period. Options expire after 10
years from the date of grant. As of December 31, 1995, options to purchase
48,114 shares were exercisable and 2,714 shares remained available for grant. In
February 1996, the Board increased the number of shares of common stock reserved
for issuance under the 1994 Plan by 121,429 shares and amended all outstanding
options to lower their exercise price to $0.35 per share. In July 1996, the
Board increased the number of shares of common stock reserved for issuance under
the 1994 Plan by 751,429 shares. During the nine months ended September 30,
1996, options to purchase 153,286 shares at exercise prices ranging from $0.35
to $2.63 per share were granted, options to purchase 6,229 shares at $0.35 per
share were exercised and options to purchase 121,000 shares of common stock at
$0.35 per share were canceled.
F-30
<PAGE> 150
VIEWSTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
Restricted Stock
In February 1996, the Company approved the issuance of up to an aggregate
maximum 471,429 shares of common stock under restricted stock purchase
agreements. The agreements specify a purchase price of $0.35 per share to be
paid in the form of full-recourse promissory notes. A total of 448,571 shares
were issued. Under the terms of the agreements, the foregoing shares will be
subject to the right of repurchase by the Company upon the purchaser's
termination of employment with or services to the Company. The shares are
released from the right of repurchase at the rate of 2% of the total number of
shares per month. However, upon the closing of an initial public offering or a
merger, 50% of any unreleased shares shall be released.
Common Stock Warrants
In connection with the sale of subordinated notes described in Note 4, the
Company also issued warrants expiring in June 2000 to purchase 71,429 shares of
common stock at $2.10 per share.
As of December 31, 1995, warrants to purchase approximately 14,652 shares
of common stock had been issued in connection with the line of credit agreement
with the bank. These warrants expire in March 1997, September 1999, and May
2000, or, under certain conditions, at various dates upon the closing of a
public offering or merger. The exercise price of the warrants range from $6.48
to $13.65 per share.
In connection with the signing of a distributor agreement, the Company
issued a warrant to purchase 7,143 shares of common stock at an exercise price
per share of $14.00.
(8) NONRECURRING CHARGES
During the fiscal year ended December 31, 1995, the Company incurred
approximately $1,740,000 of nonrecurring charges consisting of $500,000 of
costs, principally legal fees, associated with the termination of a proposed
merger with Caere Corporation and $1,240,000 of expenses for severance pay,
educational programs and job search fees resulting from a reduction in
headcount.
F-31
<PAGE> 151
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 152
ANNEX I
AGREEMENT AND PLAN OF MERGER
AMONG
DIGITAL SYSTEMS INTERNATIONAL, INC.,
VISION MERGER CORPORATION
AND
VIEWSTAR CORPORATION
AS OF
OCTOBER 14, 1996
<PAGE> 153
CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS.................................................................. 1
ARTICLE II THE MERGER; EFFECTIVE TIME; CLOSING......................................... 5
2.1 The Merger....................................................................... 5
2.2 Effective Time................................................................... 5
2.3 Closing.......................................................................... 5
ARTICLE III TERMS OF MERGER............................................................ 5
3.1 Articles of Incorporation........................................................ 5
3.2 Bylaws........................................................................... 5
3.3 Directors........................................................................ 5
3.4 Officers......................................................................... 6
ARTICLE IV MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER.... 6
4.1 Share Consideration; Conversion or Cancellation of Shares in the Merger.......... 6
4.2 Closing Consideration; Holdback.................................................. 7
4.2.1 Purchase Price Reduction.................................................... 7
4.2.2 Certificates................................................................ 8
4.2.3 Release of Holdback Shares.................................................. 8
4.2.4 Shareholder Representative.................................................. 9
4.2.5 Digital Claims Procedure.................................................... 9
4.2.6 Third Party Claims.......................................................... 10
4.2.7 Shareholder Representative's Expenses....................................... 11
4.2.8 Voting; Disposition......................................................... 11
4.2.9 Merger or Recapitalization.................................................. 11
4.2.10 Taxation of Dividends....................................................... 11
4.3 Surrender of Certificates........................................................ 11
4.4 Fractional Shares................................................................ 12
4.5 Transfer of Shares After the Effective Time...................................... 12
4.6 Arbitration...................................................................... 12
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................ 12
5.1 Organization, Etc. of the Company................................................ 12
5.2 Subsidiaries..................................................................... 13
5.3 Agreement........................................................................ 13
5.4 Capital Stock.................................................................... 13
5.5 Litigation....................................................................... 14
5.6 Compliance With Other Instruments, Etc........................................... 14
5.7 Employee Benefit Plans........................................................... 15
5.8 Taxes............................................................................ 16
5.9 Intellectual Property............................................................ 17
5.10 Financial Statements............................................................. 18
5.11 Absence of Certain Changes or Events............................................. 19
5.12 Contracts and Leases............................................................. 21
5.13 Insider Interests................................................................ 21
5.14 Brokers and Finders.............................................................. 22
5.15 S-4 Registration Statement and Proxy Statement/Prospectus........................ 22
5.16 Tax Matters...................................................................... 22
</TABLE>
<PAGE> 154
<TABLE>
<S> <C>
5.17 Property......................................................................... 22
5.18 Customers and Suppliers.......................................................... 24
5.19 Orders, Commitments and Returns.................................................. 24
5.20 Labor and Employment Matters..................................................... 24
5.21 Accounts Receivable.............................................................. 25
5.22 Corporate Books and Records...................................................... 25
5.23 Licenses, Permits, Authorizations, Etc........................................... 25
5.24 Insurance........................................................................ 25
5.25 Absence of Questionable Payments................................................. 25
5.26 Bank Accounts.................................................................... 26
5.27 Pooling Matters.................................................................. 26
5.28 Full Disclosure.................................................................. 26
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF DIGITAL AND MERGER SUB.................... 26
6.1 Organization, Etc. of Digital.................................................... 26
6.2 Operations of Subsidiaries....................................................... 27
6.3 Agreement........................................................................ 27
6.4 Capital Stock.................................................................... 27
6.5 Authorization for Digital Common Shares.......................................... 28
6.6 Litigation....................................................................... 28
6.7 Compliance With Other Instruments, Etc........................................... 28
6.8 Taxes............................................................................ 29
6.9 Intellectual Property............................................................ 29
6.10 Reports and Financial Statements................................................. 29
6.11 Absence of Certain Changes or Events............................................. 29
6.12 Contracts and Leases............................................................. 30
6.13 Ownership of Merger Sub; No Prior Activities; Assets of Merger Sub............... 30
6.14 Brokers and Finders.............................................................. 30
6.15 S-4 Registration Statement and Proxy Statement/Prospectus........................ 30
6.16 Tax Matters...................................................................... 31
6.17 Customers and Suppliers.......................................................... 31
6.18 Orders, Commitments and Returns.................................................. 31
6.19 Pooling Matters.................................................................. 31
6.20 Full Disclosure.................................................................. 32
ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS........................................ 32
7.1 Conduct of Business of the Company............................................... 32
7.2 No Solicitations................................................................. 33
7.3 Consent Solicitation and Meeting of Shareholders................................. 34
7.4 Registration Statement/Proxy Materials........................................... 34
7.5 S-3 Registration Statement....................................................... 35
7.6 Reasonable Efforts............................................................... 35
7.7 Access to Information............................................................ 36
7.8 Indemnification of Directors and Officers........................................ 36
7.9 Quotation of Digital Common Shares............................................... 36
7.10 Affiliates of Digital and the Company............................................ 37
7.11 Certain Covenants of Digital..................................................... 37
7.12 Tax Matters...................................................................... 38
7.13 S-1 Registration Statement....................................................... 38
</TABLE>
<PAGE> 155
<TABLE>
<S> <C>
7.14 Warrants......................................................................... 38
7.15 Termination of Agreements........................................................ 38
7.16 Board Representation............................................................. 38
7.17 Notice to Company Shareholders................................................... 38
7.18 Digital Notice of Certain Events................................................. 38
ARTICLE VIII CONDITIONS................................................................ 39
8.1 Conditions to Each Party's Obligations........................................... 39
8.2 Conditions to Obligations of Digital and Merger Sub.............................. 40
8.3 Conditions to Obligations of the Company......................................... 41
ARTICLE IX TERMINATION................................................................. 42
9.1 Termination...................................................................... 42
9.2 Effect of Termination............................................................ 43
ARTICLE X SURVIVAL AND REMEDIES........................................................ 43
10.1 Survival........................................................................ 43
10.2 Exclusive Remedy................................................................ 43
ARTICLE XI MISCELLANEOUS AND GENERAL.................................................... 43
11.1 Fees and Expenses............................................................... 43
11.2 Disclosure Statements........................................................... 45
11.3 Notices, Etc.................................................................... 45
11.4 Amendments, Waivers, Etc........................................................ 45
11.5 No Assignment................................................................... 45
11.6 Entire Agreement................................................................ 46
11.7 Specific Performance............................................................ 46
11.8 Remedies Cumulative............................................................. 46
11.9 No Waiver....................................................................... 46
11.10 No Third Party Beneficiaries.................................................... 46
11.11 Jurisdiction.................................................................... 46
11.12 Public Announcements............................................................ 47
11.13 Governing Law................................................................... 47
11.14 Name, Captions, Etc............................................................. 47
11.15 Counterparts.................................................................... 47
</TABLE>
<PAGE> 156
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit 1 Form of Restricted Stock Purchase Agreement
Exhibit 5.16 Company Tax Matters Certificate
Exhibit 6.16 Digital Tax Matters Certificate
Exhibit 7.3 Shareholders Agreement
Exhibit 8.2(e) Form of Opinion of Counsel for the Company
Exhibit 8.2(h) List of Company Officers Executing Employment Agreements
Exhibit 8.3(e) Form of Opinion of Counsel for Digital
</TABLE>
<PAGE> 157
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of October 14,
1996, among Digital Systems International, Inc., a Washington corporation
("Digital"), Vision Merger Corporation, a Washington corporation and a direct
wholly owned subsidiary of Digital ("Merger Sub"), and ViewStar Corporation, a
California corporation (the "Company").
RECITALS
WHEREAS, the Boards of Directors of Digital, Merger Sub and the Company
each have determined that it is in the best interests of their respective
shareholders for Merger Sub to merge with the Company upon the terms and subject
to the conditions of this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Code (as defined below);
WHEREAS, it is intended that the Merger shall be recorded for accounting
purposes as a pooling of interests; and
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements set forth herein, Digital, the Company and Merger Sub
hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"AAA Rules": As defined in Section 4.6.
"Acquisition Proposal": As defined in Section 7.2(a).
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
"Alternative Transaction": As defined in Section 11.1(c).
"Authorization": Any consent, approval or authorization of, expiration or
termination of any waiting period requirement (including pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) by, or filing,
registration, qualification, declaration or designation with, any Governmental
Body.
"CCC": The California Corporations Code.
"Certificates": As defined in Section 4.3.
"Closing": The closing of the Merger.
"Closing Consideration": As defined in Section 4.2.
"Closing Date": The date on which the Closing occurs.
"Code": The Internal Revenue Code of 1986, as amended, and all regulations
promulgated thereunder, as in effect from time to time.
"Comdisco" and the "Comdisco Warrant": As defined in Section 4.1(e).
"Company": ViewStar Corporation, a California corporation.
"Company Affiliates": As defined in Section 7.10.
"Company Claim": As defined in Section 7.8(a).
"Company Common Stock": Common stock, par value $.001 per share, of the
Company.
"Company Consent Solicitation": As defined in Section 7.3(a).
<PAGE> 158
"Company Disclosure Statement": The disclosure statement dated the date of
this Agreement delivered by the Company to Digital.
"Company Financial Statements": As defined in Section 5.10.
"Company Indemnitees": As defined in Section 7.8(a).
"Company Option Plans": As defined in Section 4.1(d).
"Company Preferred Stock": Series A Preferred Stock, par value $.01 per
share, of the Company.
"Company Tax Matters Certificate": As defined in Section 5.16.
"Confidentiality Agreement": The letter agreement between the Company and
Digital dated September 19, 1996.
"Designee": As defined in Section 7.16.
"Digital": Digital Systems International, Inc., a Washington corporation.
"Digital Acquisition Proposal": As defined in Section 7.18.
"Digital Claim Reserve Amount": As defined in Section 4.2.5(c).
"Digital Claims": As defined in Section 4.2.1(c).
"Digital Common Shares": Shares of common stock, par value $.01 per share,
of Digital.
"Digital Disclosure Statement": The disclosure statement dated the date of
this Agreement delivered by Digital to the Company.
"Digital Employee Stock Purchase Plan": As defined in Section 6.4.
"Digital Financial Statements": The financial statements included in the
Digital SEC Reports.
"Digital Losses": As defined in Section 4.2.1(a).
"Digital Option Plans": The stock option plans for employees, officers and
directors of Digital identified in the Digital SEC Reports, together with the
Digital Stock Incentive Plan.
"Digital SEC Reports": As defined in Section 6.10.
"Digital Shareholders Meeting": As defined in Section 7.3(b).
"Digital Stock Incentive Plan": As defined in Section 4.1(d).
"Digital Tax Matters Certificate": As defined in Section 6.16.
"DOL": The United States Department of Labor.
"Effective Time": As defined in Section 2.2.
"Employee Benefit Plan": As defined in Section 5.7(a).
"ERISA": The Employee Retirement Income Security Act of 1974, as amended,
and all regulations promulgated thereunder, as in effect from time to time.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"Exchange Agent": As defined in Section 4.3.
"Exchange Ratio": As defined in Section 4.1(a).
"Fees": As defined in Section 11.1(e).
"Governmental Body": Any federal, state, municipal, political subdivision
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.
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"Holdback Shares": As defined in Section 4.2.
"Holdback Termination Date": The date six months following the Closing Date
or such shorter period as may be required to ensure that the Merger may be
accounted for as a "pooling of interests."
"Intellectual Property": All intellectual property rights, including, but
not limited to, patents, patent applications, trademarks, trademark applications
and registrations, service marks, service mark applications and registrations,
copyrights, licenses and customer lists, proprietary processes, formulae,
inventions, trade secrets, know-how, development tools and other proprietary
rights used by the Company and its Subsidiaries or Digital and its Subsidiaries,
as the case may be, pertaining to any product, software or service manufactured,
marketed, licensed or sold by the Company and its Subsidiaries or Digital and
its Subsidiaries, as the case may be, in the conduct of their business or used,
employed or exploited in the development, license, sale, marketing, distribution
or maintenance thereof, and all documentation and media constituting, describing
or relating to the above, including, but not limited to, manuals, memoranda,
know-how, notebooks, software, records and disclosures.
"Intellectual Property Licenses": All license agreements or other
agreements which in any way affect the rights of the Company or of Digital to
any of their respective Intellectual Property.
"IRS": The U.S. Internal Revenue Service.
"Issuance": As defined in Section 7.3(b).
"knowledge" (and any derivatives thereof): The actual knowledge of a Person
(or, in the case of a corporation, partnership or other entity, the actual
knowledge of its executive officers) after inquiry of the appropriate employee
charged with principal responsibility for the subject matter thereof, and any
further investigation that may be appropriate where the circumstances would
indicate the need for further investigation, but no information known by any
other employee, or any attorney, accountant or other representative, of such
party shall be imputed to such party unless such information would have been
disclosed by such an investigation.
"Merger": The merger of Merger Sub with and into the Company as
contemplated by Section 2.1.
"Merger Documents": As defined in Section 2.2.
"Merger Sub": Vision Merger Corporation, a Washington corporation and a
direct wholly owned Subsidiary of Digital.
"Nasdaq/NM": The Nasdaq National Market.
"Open Digital Claim": As defined in Section 4.2.5(c).
"Operative Documents": This Agreement (including all Exhibits hereto, the
Company Disclosure Statement and the Digital Disclosure Statement), the
Shareholders Agreement and any other documents the execution of which is
necessary in order to consummate the Merger.
"Option": As defined in Section 4.1(d).
"Person": Any individual or corporation, company, partnership, trust,
incorporated or unincorporated association, joint venture or other entity of any
kind.
"Personal Property": As defined in Section 5.17(b).
"Proxy Statement/Prospectus": As defined in Section 7.4.
"RCW": The Revised Code of Washington.
"Real Property": As defined in Section 5.17(a).
"Replacement Option": As defined in Section 4.1(d).
"Representative Reimbursement": As defined in Section 4.2.7.
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"Respective Representatives": As defined in Section 7.7.
"Response Period": As defined in Section 4.2.5(b).
"Restricted Stock": Shares of Company Common Stock issued as restricted
stock pursuant to the form of Restricted Stock Purchase Agreement attached
hereto as Exhibit 1.
"S-1 Registration Statement": The registration statement on Form S-1,
Registration Number 333-09573, as amended, filed by the Company with the SEC
under the Securities Act to effect an initial public offering of the Company
Common Stock.
"S-3 Registration Statement": As defined in Section 7.5.
"S-4 Registration Statement": As defined in Section 7.4.
"SEC": The Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended.
"Share Consideration": As defined in Section 4.1(b).
"Shareholder Representative": As defined in Section 4.2.4(a).
"Shareholders": The shareholders of the Company immediately prior to the
Effective Time.
"Shareholders Agreement": As defined in Section 7.3(a).
"Shares": Collectively, the shares of Company Common Stock and Company
Preferred Stock.
"Software Products": As defined in Section 5.9(b).
"Subsidiary": As to any Person, any other Person of which at least 50% of
the equity or voting interests are owned, directly or indirectly, by such first
Person.
"Superior Proposal": As defined in Section 7.2(a).
"Surviving Corporation": The surviving corporation in the Merger.
"Tax Returns": All tax returns, information returns and reports for Taxes
required to be filed with any Governmental Body.
"Taxes": All taxes, charges, fees, levies or other assessments, including,
but not limited to, income, excise, gross receipts, property, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, severance, stamp, occupation, windfall profits, social security and
unemployment or other taxes imposed by the United States or any agency or
instrumentality thereof, any state, county, local or foreign government, or any
agency or instrumentality thereof, and any interest or fines, and any and all
penalties or additions relating to such taxes, charges, fees, levies or other
assessments.
"Third Party": As defined in Section 11.1(c).
"Threshold": As defined in Section 4.2.1(b).
"Warrant": As defined in Section 4.1(e).
"WBCA": The Washington Business Corporation Act.
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ARTICLE II
THE MERGER; EFFECTIVE TIME; CLOSING
2.1 THE MERGER
Upon the terms and subject to the conditions of this Agreement, at the
Effective Time, Merger Sub shall be merged with and into the Company in
accordance with the provisions of the WBCA and the CCC and with the effects
provided in RCW 23B.11.060 and CCC Section 1107. The separate corporate
existence of Merger Sub shall thereupon cease, and the Company shall be the
Surviving Corporation and shall be governed by the laws of the state of
California. Notwithstanding the foregoing, at any time prior to the Closing
Date, Digital may elect to have Merger Sub be the Surviving Corporation so long
as such action does not result in the inability to satisfy any of the conditions
set forth in Article VIII.
2.2 EFFECTIVE TIME
As soon as practicable following satisfaction or waiver of the conditions
set forth in Article VIII, the parties shall file with the appropriate
Governmental Bodies all documents (executed in accordance with the relevant
provisions of the WBCA and the CCC) required to be filed under the WBCA and the
CCC to consummate the Merger (the "Merger Documents"). The Merger shall become
effective on the date and at the time (the "Effective Time") that the Merger
Documents have been accepted for filing by the appropriate Governmental Bodies
(or such later date and time as may be specified in the Merger Documents), which
shall be the Closing Date or as soon as practicable thereafter.
2.3 CLOSING
Subject to the fulfillment or waiver of the conditions set forth in Article
VIII, the Closing shall take place (a) at the offices of Perkins Coie, 1201
Third Avenue, Seattle, Washington, at 10 a.m. within one business day of the
date of receipt of the last of the approvals required by Sections 8.1(a) and (b)
or (b) at such other place and/or time and/or on such other date as Digital and
the Company may agree or as may be necessary to permit the fulfillment or waiver
of the conditions set forth in Article VIII.
ARTICLE III
TERMS OF MERGER
3.1 ARTICLES OF INCORPORATION
The Articles of Incorporation of the Company in effect immediately prior to
the Effective Time shall be the Articles of Incorporation of the Surviving
Corporation, until duly amended in accordance with the terms thereof and of the
CCC.
3.2 BYLAWS
The Bylaws of the Company in effect at the Effective Time shall be the
Bylaws of the Surviving Corporation, until duly amended in accordance with the
terms thereof, of the Articles of Incorporation of the Surviving Corporation and
of the CCC.
3.3 DIRECTORS
The directors of Merger Sub at the Effective Time shall, from and after the
Effective Time, be the directors of the Surviving Corporation until their
respective successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Surviving
Corporation's Articles of Incorporation and Bylaws.
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3.4 OFFICERS
The officers of Merger Sub at the Effective Time shall, from and after the
Effective Time, be the officers of the Surviving Corporation until their
respective successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Surviving
Corporation's Articles of Incorporation and Bylaws.
ARTICLE IV
MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SHARES IN THE MERGER
4.1 SHARE CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER
Subject to the provisions of this Article IV, at the Effective Time, by
virtue of the Merger and without any action by holders thereof, the shares of
the capital stock of the constituent corporations shall be converted as follows:
(a) Other than Shares as to which dissenters' rights of appraisal have
been exercised, each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into 0.693
Digital Common Shares (the "Exchange Ratio") and each share of Company
Preferred Stock issued and outstanding immediately prior to the Effective
Time shall be converted into a number of Digital Common Shares equal to the
product of the Exchange Ratio times the number of shares of Company Common
Stock into which such Company Preferred Stock is convertible immediately
prior to the Effective Time. If, prior to the Effective Time, Digital
should split or combine the Digital Common Shares, or pay a stock dividend
or other stock distribution in Digital Common Shares, or otherwise change
the Digital Common Shares into any other securities, or make any other
dividend or distribution on the Digital Common Shares, then the Exchange
Ratio will be appropriately adjusted to reflect such split, combination,
dividend or other distribution or change.
(b) All Shares converted into Digital Common Shares pursuant to this
Section 4.1 shall cease to be outstanding, shall be canceled and retired
and shall cease to exist, and each holder of a certificate representing any
such Shares shall thereafter cease to have any rights as Company
Shareholders with respect to such Shares, except the right to receive for
each of the Shares, upon the surrender of such certificate in accordance
with Section 4.3, and subject to Section 4.2, the amount of Digital Common
Shares specified above (the "Share Consideration") and cash in lieu of
fractional Digital Common Shares as contemplated by Section 4.4.
(c) Each share of common stock, par value $0.01 per share, of Merger
Sub issued and outstanding immediately prior to the Effective Time shall
evidence the same number of shares of common stock of the Surviving
Corporation.
(d) At the Effective Time, each outstanding option to purchase Shares
(each, an "Option") issued pursuant to any of the Company's stock option
plans (the "Company Option Plans"), whether vested or unvested, shall
convert into an option (a "Replacement Option") to acquire, on the same
terms and conditions, including the vesting schedule, as were applicable
under such replaced Option prior to the Effective Time, the number of
Digital Common Shares (rounded down to the nearest whole number) equal to
the product of the Exchange Ratio and the number of Shares subject to such
Option, at a price per share equal to the aggregate exercise price for the
Shares subject to such Option divided by the number of full Digital Common
Shares deemed to be purchasable pursuant to such Replacement Option;
provided, however, that in no event shall the terms of any Replacement
Option give the employee additional benefits that he or she did not have
under an original Option that is described in Section 421(a) of the Code.
Following the Effective Time, upon surrender of the outstanding Options,
Digital shall deliver to holders of Options appropriate option agreements
representing the Replacement Options.
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Digital shall submit to its shareholders at the Digital Shareholders
Meeting a proposal to adopt a new stock option plan (the "Digital Stock
Incentive Plan") with a sufficient number of Shares reserved thereunder to
permit the issuance of the Replacement Options. Digital shall use all
reasonable efforts to file on or prior to the Closing Date, and maintain
the effectiveness of, a registration statement or registration statements
on Form S-8 with respect to Digital Common Shares subject to such
Replacement Options (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such Replacement Options
remain outstanding. In the event approval of the Digital Stock Incentive
Plan is not obtained at the Digital Shareholders Meeting, each Option shall
be assumed by Digital and deemed to constitute a Replacement Option.
(e) On or before the Closing Date, each holder, other than Comdisco,
Inc. ("Comdisco") of an outstanding warrant to purchase Shares (each, a
"Warrant") shall have exercised such Warrant for Shares in accordance with
its terms. Warrants that have not been exercised as of the Effective Time
shall terminate in accordance with their respective terms; provided,
however, that if, prior to the Closing Date, Comdisco shall not have
exercised its Warrant dated May 31, 1996, to purchase 42,857 shares of
Company Preferred Stock at a per share price of $0.70 (the "Comdisco
Warrant"), then Comdisco and Digital shall enter into a written agreement
providing that the Comdisco Warrant shall be replaced by a warrant to
acquire, on the same terms and conditions as were applicable under the
Comdisco Warrant, 8,486 Digital Common Shares at a per share price of
$3.53.
(f) Each share of Restricted Stock outstanding at the Effective Time
shall convert into 0.693 Digital Common Shares in accordance with Section
4.1(a) and shall remain subject to the same terms and conditions, including
the vesting schedule, as were applicable to such Restricted Stock prior to
the Effective Time.
4.2 CLOSING CONSIDERATION; HOLDBACK
Each Shareholder (other than Shareholders exercising dissenters' rights)
will receive, upon surrender of such Shareholder's Certificates in accordance
with Section 4.3, a number (rounded down to the nearest whole number) of Digital
Common Shares equal to 90% of the Share Consideration to which such Shareholder
shall be entitled (the "Closing Consideration"). The remaining 10% of the Share
Consideration (together with any dividends or distributions accrued or made
thereon after the Effective Time and any other securities or property which may
be issued after the Effective Time in exchange for such shares in any merger or
recapitalization or similar transaction involving Digital, the "Holdback
Shares") will be held by Digital in order to effect any reduction in the Share
Consideration pursuant to the provisions of this Section 4.2. On the Holdback
Termination Date, except as otherwise specified in this Section 4.2, Digital
will issue certificates to each Shareholder for such Shareholder's Holdback
Shares that have not been retransferred to Digital in accordance with the
provisions of this Section 4.2.
4.2.1 PURCHASE PRICE REDUCTION
(a) From and after the Effective Time, and subject to the provisions of
this Section 4.2, the Share Consideration shall be reduced by a number of
Digital Common Shares equal in value to the amount of any and all losses,
damages, debts, liabilities, obligations, judgments, orders, awards, writs,
injunctions, decrees, fines, penalties, taxes, costs or expenses (including but
not limited to any legal or accounting fees or expenses, other than those
incurred by Digital in connection with asserting a Digital Claim under this
Section 4.2) incurred by Digital or any of its officers, directors or Affiliates
("Digital Losses") arising out of or in connection with:
(i) any inaccuracy in any representation or warranty made by the
Company or a Company Affiliate in this Agreement or in any other Operative
Document or in any certificate delivered pursuant hereto or thereto, or
(ii) any failure by the Company or a Company Affiliate to perform or
comply, in whole or in part, with any covenant or agreement in this
Agreement or in any other Operative Document.
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(b) Notwithstanding the foregoing, the Share Consideration shall not be
reduced until the aggregate Digital Losses exceed $350,000 (the "Threshold");
provided, however, that once the aggregate Digital Losses exceed the Threshold,
the Share Consideration shall be reduced only by a number of Digital Common
Shares equal in value to the amount by which all Digital Losses exceed the
Threshold.
(c) Prior to submitting any claim that the Share Consideration should be
reduced (a "Digital Claim"), Digital shall use reasonable efforts to determine
the amount, if any, by which the Digital Losses would be offset by Digital's
recovery of insurance proceeds and reduction of tax liabilities and to provide
the Shareholders notice of and a description of such determination. Any
adjustment to the Share Consideration under this Article IV shall be reduced to
the extent any Digital Losses specified in a Digital Claim are reduced by such a
recovery or reduction.
(d) The Share Consideration shall not be reduced with respect to any
Digital Claims which are first asserted by Digital after the Holdback
Termination Date.
4.2.2 CERTIFICATES
Certificates representing the Holdback Shares shall be held by Digital,
subject to Digital's rights of retransfer under this Section 4.2, and will bear
a legend to that effect. The record or beneficial owners of Holdback Shares
shall execute and deliver such instruments as Digital may from time to time
reasonably request for the purpose of retransferring any Holdback Shares to
Digital or the Shareholder Representative.
4.2.3 RELEASE OF HOLDBACK SHARES
Digital shall hold the Holdback Shares in accordance with this Agreement
and shall transfer the Holdback Shares only as follows:
(a) Holdback Shares shall be (i) retransferred to Digital, when and to
the extent authorized under this Section 4.2, to effect any reduction in
the Share Consideration resulting from Digital Claims under this Section
4.2, and (ii) transferred to the Shareholder Representative in connection
with Representative Reimbursements in accordance with Section 4.2.7. Any
Holdback Shares to be retransferred to Digital or transferred to the
Shareholder Representative pursuant to this Section 4.2 shall be rounded to
the nearest whole share and shall be valued on the basis of the last
reported sale price of Digital Common Shares on the Nasdaq/NM (i) in the
case of transfers to Digital, on the Closing Date and (ii) in the case of a
transfer to the Shareholder Representative in accordance with Section
4.2.7, on the last business day preceding such transfer.
(b) On the Holdback Termination Date, the Holdback Shares (excluding
Holdback Shares retransferred to Digital or transferred to the Shareholder
Representative in accordance with paragraph (a) of this Section 4.2.3 or
held in reserve pending resolution of an Open Digital Claim) shall be
released to the Shareholders pro rata in accordance with their percentage
ownership of the Company immediately prior to the Effective Time; provided,
however, that no Holdback Shares shall be released to any Shareholder who
has not previously surrendered all of such Shareholder's Certificates in
accordance with Section 4.3.
(c) After the Holdback Termination Date, when a final determination is
made with respect to any Open Digital Claim, (i) the number of Holdback
Shares transferable to Digital as a result of such final determination
shall be transferred to Digital from the Digital Claim Reserve Amount for
such Open Digital Claim, (ii) Holdback Shares shall be transferred to the
Shareholder Representative in accordance with Section 4.2.7 for additional
Representative Reimbursements not in excess of the Holdback Shares
remaining in the Digital Claim Reserve Amount, and (iii) the Holdback
Shares included in such Digital Claim Reserve Amount remaining after the
transfers in (i) and (ii) above shall be released to the Shareholders pro
rata in accordance with their percentage ownership of the Company
immediately prior to the Effective Time.
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4.2.4 SHAREHOLDER REPRESENTATIVE
(a) In order to facilitate the administration of the Digital Claims
procedure set forth in Sections 4.2.5 and 4.2.6, promptly after the Closing
Date, the holders of a majority in interest of the Holdback Shares shall select
a Person (the "Shareholder Representative") to act for and on behalf of all
holders of the Holdback Shares with respect to all matters arising in connection
with this Section 4.2 including, without limitation, the power and authority, in
his or her sole discretion, to:
(i) take any action contemplated to be taken by the Shareholder
Representative under this Section 4.2;
(ii) negotiate, determine, defend and settle any dispute which may
arise under this Section 4.2; and
(iii) make, execute, acknowledge and deliver any releases, assurances,
receipts, requests, instructions, notices, agreements, certificates and any
other instruments, and to generally do any and all things and to take any
and all actions which may be requisite, proper or advisable in connection
with this Section 4.2.
(b) The holders of a majority in interest of the Holdback Shares may
replace the Shareholder Representative at any time with a substitute Shareholder
Representative who shall have all the powers and responsibilities of the
Shareholder Representative set forth in this Section 4.2.
(c) Neither the Shareholder Representative, nor any substitute Shareholder
Representative, shall be liable to any Person for any action taken or any
omission to act, in good faith, in connection with the Shareholder
Representative's responsibilities as Shareholder Representative.
(d) Promptly following his or her selection, the Shareholder
Representative, or any substitute Shareholder Representative, shall provide
Digital with a written certification of his or her selection and of the address
for notices to such Shareholder Representative. Digital may thereafter deal
exclusively with the Shareholder Representative in connection with the Digital
Claims procedure in reliance on such certification. Whenever in connection with
the provisions of this Section 4.2 Digital shall receive any certificate or
other written correspondence from the Shareholder Representative, such
certificate or other written correspondence shall be full authorization to
Digital for any action taken or suffered in good faith by it under the
provisions of this Section 4.2 in reliance thereon.
4.2.5 DIGITAL CLAIMS PROCEDURE
The procedure for the retransfer to Digital of Holdback Shares to reduce
the Share Consideration under this Section 4.2 shall be as follows:
(a) Subject to the limitation that written notice of any Digital Claim
must be given to the holders of the Holdback Shares not later than the
Holdback Termination Date, from time to time as Digital determines that the
Share Consideration must be reduced in accordance with Section 4.2.3,
Digital may give written notice of the Digital Claim to the Shareholder
Representative describing in such notice the nature of the Digital Claim,
the amount thereof if then ascertainable and, if not then ascertainable,
the estimated maximum amount thereof, and the provisions in this Agreement
on which the Digital Claim is based.
(b) If Digital has not received written objection to a Digital Claim
from the Shareholder Representative within 30 days after notice of such
Digital Claim is delivered (the "Response Period"), the Digital Claim
stated in such notice shall be conclusively deemed to be approved by the
holders of the Holdback Shares, and Digital will be entitled to receive,
and may take all actions necessary to effect the retransfer to Digital of,
a number of Holdback Shares equal in value to the amount of such Digital
Claim.
(c) If within the Response Period Digital shall have received from the
Shareholder Representative a written objection to the Digital Claim
specifying the nature of and grounds for such objection, then such Digital
Claim shall be deemed to be an "Open Digital Claim," and Digital shall
reserve a number of
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Holdback Shares equal in value to the amount of such Open Digital Claim
(the "Digital Claim Reserve Amount").
(d) The Holdback Shares reserved for any Open Digital Claim shall be
retransferred to Digital only in accordance with either (i) a mutual
agreement among Digital and the Shareholder Representative, which shall be
memorialized in writing, or (ii) a final and binding arbitration decision
or court order pertaining to the Open Digital Claim.
4.2.6 THIRD PARTY CLAIMS
(a) Digital shall notify the Shareholder Representative in writing
reasonably promptly after the assertion against Digital or any of its officers,
directors or Affiliates of any claim by a third party (a "Third Party Claim") in
respect of which Digital intends to base a Digital Claim. The failure or delay
so to notify the Shareholder Representative shall not be deemed to preclude the
Digital Claim except to the extent that the Shareholder Representative
demonstrates that his or her ability to defend or resolve such Third Party Claim
is adversely affected thereby.
(b) (i) Subject to the rights of or duties to any insurer or other third
party having potential liability therefor, the Shareholder Representative shall
have the right, upon written notice given to Digital within 30 days after
receipt of the notice from Digital of any Third Party Claim, to assume the
defense or handling of such Third Party Claim, at the sole expense of the
Shareholder Representative (which expense shall be eligible for a Representative
Reimbursement), in which case the provisions of paragraph (b)(ii) of this
Section 4.2.6 shall govern.
(ii) The Shareholder Representative shall select counsel reasonably
acceptable to Digital in connection with conducting the defense or handling of
such Third Party Claim, and the Shareholder Representative shall defend or
handle the same in consultation with Digital and shall keep Digital timely
apprised of the status of such Third Party Claim. The Shareholder Representative
shall not, without the prior written consent of Digital, agree to a settlement
of any Third Party Claim, unless (A) the settlement provides an unconditional
release and discharge of Digital (or its officers, directors or Affiliates, as
the case may be), and Digital (or its officers, directors or Affiliates, as the
case may be) is reasonably satisfied with such discharge and release and
(B) Digital shall not have reasonably objected to any such settlement on the
ground that the circumstances surrounding the settlement would, or would be
reasonably expected (so far as can be foreseen at the time) to, result in an
adverse impact on the business, properties, operations, condition (financial or
other) or prospects of Digital or the business conducted by the Surviving
Corporation. Digital shall cooperate with the Shareholder Representative, and
shall be entitled to participate in the defense or handling of such Third Party
Claim with its own counsel and at its own expense.
(c) (i) If the Shareholder Representative does not give written notice to
Digital within 30 days after receipt of the notice from Digital of any Third
Party Claim of the election by the Shareholder Representative to assume the
defense or handling of such Third Party Claim, the provisions of paragraph
(c)(ii) of this Section 4.2.6 shall govern.
(ii) Digital may select counsel in connection with conducting the defense
or handling of such Third Party Claim and defend or handle such Third Party
Claim in such manner as it may deem appropriate; provided, however, that Digital
shall keep the Shareholder Representative timely apprised of the status of such
Third Party Claim and shall not settle such Third Party Claim without the prior
written consent of the Shareholder Representative, which consent shall not be
unreasonably withheld. If Digital defends or handles such Third Party Claim, the
Shareholder Representative shall cooperate with Digital and shall be entitled to
participate in the defense or handling of such Third Party Claim with its own
counsel and at its own expense.
(d) Digital may notify the Shareholder Representative of a Digital Claim
even though the amount thereof plus the amount of other Digital Claims
previously notified by Digital aggregate less than the Threshold.
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4.2.7 SHAREHOLDER REPRESENTATIVE'S EXPENSES
The Shareholder Representative shall be entitled to submit to Digital an
affidavit certifying in reasonable detail as to costs or expenses, including
attorneys' fees, incurred by the Shareholder Representative in the satisfaction
of his or her responsibilities as Shareholder Representative. Digital shall
reimburse the Shareholder Representative for such costs and expenses, but only
to the extent of the value of the Holdback Shares (as established in accordance
with this Section 4.2), excluding Holdback Shares retransferred to Digital in
accordance with Section 4.2.3(a) or held in reserve pending resolution of any
Open Digital Claim (any such reimbursement, a "Representative Reimbursement"),
by transferring to the Shareholder Representative a number of Holdback Shares
with a value equal to the amount of such Representative Reimbursement.
4.2.8 VOTING; DISPOSITION
The Holdback Shares shall be held of record by the holders thereof, who
shall have the full right to vote the Holdback Shares on all matters coming
before the shareholders of Digital. The holders of the Holdback Shares shall not
sell or transfer to any third party any interest in the Holdback Shares prior to
any distribution of the Holdback Shares to such holders pursuant to Section
4.2.3(b) or (c).
4.2.9 MERGER OR RECAPITALIZATION
In the event of any merger, recapitalization or similar transaction
involving Digital prior to the time when all Holdback Shares have been
transferred or released in accordance with the terms of this Section 4.2, such
Holdback Shares shall be converted or exchanged in accordance with such
transaction in the same manner as other Digital Common Shares, and any
securities or property issued in conversion or exchange thereof shall then be
included within the definition of Holdback Shares and shall otherwise become
subject to this Agreement in lieu of such Digital Common Shares. If as a result
of any such transaction the shareholders of Digital immediately before the
transaction will not own in excess of 50% of the voting capital stock of Digital
immediately after the transaction, the Holdback Termination Date shall be deemed
to be the closing date of such transaction and the Holdback Shares shall be
retransferred to Digital or released to the holders of the Holdback Shares, as
the case may be, as provided herein.
4.2.10 TAXATION OF DIVIDENDS
For federal and state income tax purposes, any dividends or other
distributions with respect to the Holdback Shares shall be income of the holders
thereof.
4.3 SURRENDER OF CERTIFICATES
Digital shall supply, or shall cause to be supplied, to or for the account
of a bank or trust company designated by Digital (the "Exchange Agent"), in
trust for the benefit of the holders of Shares (other than Shares for which
dissenters' rights have been exercised), for exchange in accordance with this
Section 4.3, through the Exchange Agent, certificates evidencing the Digital
Common Shares issuable pursuant to Section 4.1 in exchange for outstanding
Shares. Prior to the Closing, Digital shall instruct, and shall use reasonable
efforts to cause, the Exchange Agent to deliver, within three business days of
the Closing Date, to each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented outstanding Shares
(the "Certificates") (a) a form of letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange Agent)
and (b) instructions for use in effecting the surrender of the Certificates. At
or following the Closing, upon surrender of Certificates for cancellation to the
Exchange Agent, together with such letter of transmittal duly executed and any
other required documents, the holder of such Certificates shall receive for each
of the Shares represented by such Certificates the Closing Consideration and
cash in lieu of fractional Digital Common Shares as contemplated by Section 4.4,
and the Certificates so surrendered shall forthwith be canceled. Until
surrendered, each outstanding Certificate shall, upon and after the Effective
Time, be deemed for all purposes (other than to the extent provided in the
following sentence) to evidence only the right to receive, upon surrender of the
Certificate, a certificate or certificates representing the Closing
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Consideration and cash in lieu of fractional Digital Common Shares. Unless and
until such outstanding Certificates are so surrendered, the holders thereof
shall not be entitled to receive any dividends or distributions of any kind
payable to the holders of record of Digital Common Shares. Upon the surrender of
any such Certificate, however, there shall be paid to the record holder of the
certificate issued in exchange therefor the aggregate amount of dividends and
distributions, if any, which theretofore became payable in respect of the
Closing Consideration, and such surrendered Certificate shall be duly canceled.
No interest shall be payable on or in respect of such deferred dividends or
distributions until surrender of such outstanding Certificates.
4.4 FRACTIONAL SHARES
No fractional Digital Common Shares shall be issued in the Merger. In lieu
of any such fractional securities, each holder of Shares who would otherwise
have been entitled to a fraction of a Digital Common Share upon surrender of
Certificates for exchange pursuant to this Article IV will be paid an amount in
cash (without interest) equal to the last reported sale price of one Digital
Common Share on the Nasdaq/NM on the last business day prior to the Closing
Date, multiplied by such fraction.
4.5 TRANSFER OF SHARES AFTER THE EFFECTIVE TIME
No transfers of Shares shall be made on the stock transfer books of the
Company after the close of business on the day prior to the date of the
Effective Time.
4.6 ARBITRATION
Any controversies or claims arising out of or relating to this Agreement
shall be fully and finally settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (the "AAA
Rules"), conducted by one arbitrator either (a) mutually agreed upon by Digital
and the Company if prior to the Effective Time or Digital and the Shareholder
Representative if after the Effective Time or (b) chosen in accordance with the
AAA Rules, except that the parties thereto shall have any right to discovery as
would be permitted by the Federal Rules of Civil Procedure for a period of 90
days following the commencement of such arbitration, and the arbitrator thereof
shall resolve any dispute which arises in connection with such discovery. The
prevailing party shall be entitled to costs, expenses and reasonable attorneys'
fees, and judgment upon the award rendered by the arbitrator may be entered in
any court of competent jurisdiction identified in Section 11.11. Arbitration
proceedings shall be conducted in either Seattle, Washington or San Francisco,
California.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company (which term for purposes of the provisions in this Article V
other than Sections 5.1, 5.2, 5.3 and 5.4 shall include all of the Company's
Subsidiaries) hereby represents and warrants to Digital and Merger Sub that,
except as set forth in the Company Disclosure Statement:
5.1 ORGANIZATION, ETC. OF THE COMPANY
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the state of California and has all requisite
corporate power and authority to own and operate its properties, to carry on its
business as now conducted, to enter into this Agreement and to carry out the
provisions of this Agreement and consummate the transactions contemplated
hereby. The Company is duly qualified and in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary and where the
failure to be so qualified has, or would be reasonably expected (so far as can
be foreseen at the time) to have, a material adverse effect on the business,
properties, operations, condition (financial or other) or, to the Company's
knowledge, the prospects of the Company. The Company has obtained from the
appropriate Governmental Bodies all approvals and
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licenses necessary for the conduct of its business and operations as currently
conducted, which approvals and licenses are valid and remain in full force and
effect, except where the failure to have obtained such licenses or approvals or
the failure of such licenses and approvals to be valid and in full force and
effect does not have, and would not be reasonably expected (so far as can be
foreseen at the time) to have, a material adverse effect on the business,
properties, operations, condition (financial or other) or, to the Company's
knowledge, the prospects of the Company.
5.2 SUBSIDIARIES
(a) The name, jurisdiction of incorporation and jurisdictions of foreign
qualification of each of the Company's Subsidiaries are as set forth in the
Company Disclosure Statement. Except as set forth in the Company Disclosure
Statement, the Company does not own, directly or indirectly, any ownership,
equity, profits or voting interest in, or otherwise control, any corporation,
partnership, joint venture or other entity, and has no agreement or commitment
to purchase any such interest. The Company owns 100% of the issued and
outstanding shares of capital stock, or other ownership interests, of each of
the Company's Subsidiaries, free and clear of any lien, encumbrance, preemptive
right, right of first offer or refusal, or other prior claim, and all the issued
and outstanding shares of capital stock, or other ownership interests, of the
Company's Subsidiaries are duly authorized and validly issued, fully paid and
nonassessable, and were issued and acquired in compliance with all applicable
federal, state and foreign securities and other laws.
(b) Each Subsidiary of the Company (i) is a corporation or other legal
entity duly organized, validly existing and (if applicable) in good standing
under the laws of the jurisdiction of its organization and has the full power
and authority to own its properties and conduct its business and operations as
currently conducted, except where the failure to be duly organized, validly
existing and in good standing does not have, and would not be reasonably
expected (so far as can be foreseen at the time) to have, a material adverse
effect on the business, properties, operations, condition (financial or other)
or, to the Company's knowledge, the prospects of the Company and its
Subsidiaries taken as a whole, (ii) is duly qualified and in good standing in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified does not have, and would not be
reasonably expected (so far as can be foreseen at the time) to have, a material
adverse effect on the business, properties, operations, condition (financial or
other) or, to the Company's knowledge, the prospects of the Company and its
Subsidiaries taken as a whole, and (iii) has obtained from the appropriate
Governmental Bodies all approvals and licenses necessary for the conduct of its
business and operations as currently conducted, which approvals and licenses are
valid and remain in full force and effect, except where the failure to have
obtained such approvals and licenses or the failure of such approvals and
licenses to be valid and in full force and effect does not have, and would not
be reasonably expected (so far as can be foreseen at the time) to have, a
material adverse effect on the business, properties, operations, condition
(financial or other) or, to the Company's knowledge, the prospects of the
Company and its Subsidiaries taken as a whole.
5.3 AGREEMENT
This Agreement and the consummation of the transactions contemplated hereby
have been approved by the Company's Board of Directors and have been duly
authorized by all other necessary corporate action on the part of the Company
(except for the approval of the Company's shareholders as contemplated by
Section 7.3(a)). This Agreement has been duly executed and delivered by a duly
authorized officer of the Company and constitutes a valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws of general application that may affect the
enforcement of creditors' rights generally and by general equitable principles.
The Company has delivered to Digital true and correct copies of resolutions
adopted by the Company's Board of Directors approving this Agreement.
5.4 CAPITAL STOCK
(a) The authorized capital stock of the Company consists of 40,000,000
shares of Company Common Stock, of which 3,925,361 shares are outstanding as of
the date hereof, and 5,950,000 shares of Company
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Preferred Stock, of which 4,752,474 shares are outstanding as of the date
hereof. The outstanding Shares are held of record and beneficially by the
Shareholders as set forth in the Company Disclosure Statement; such Shareholder
list specifically identifies all Company Affiliates. All outstanding Shares are
duly authorized, validly issued, fully paid and nonassessable, and issued in
compliance with all federal, state and foreign securities laws, and no class of
capital stock of the Company is entitled to preemptive rights.
(b) There are outstanding on the date hereof no options, warrants or other
rights to acquire capital stock from the Company, except (i) Company Preferred
Stock convertible into 1,357,851 shares of Company Common Stock, (ii) Options
representing in the aggregate the right to purchase up to 860,708 shares of
Company Common Stock, and (iii) Warrants representing in the aggregate the right
to purchase up to 105,468 shares of Company Common Stock (assuming conversion of
any shares of Company Preferred Stock for which such Warrant is exercisable).
Set forth in the Company Disclosure Statement is a spreadsheet accurately
reflecting the number of Options, Warrants and shares of Restricted Stock
outstanding, the grant dates, vesting schedules and exercise prices thereof (in
each case, as applicable), and the identities of the holders thereof and an
indication of their relationships to the Company.
(c) Except as set forth in the Company Disclosure Statement, the Company is
not a party or subject to any agreement or understanding, and, to the Company's
knowledge, there is no agreement or understanding between any Persons, that
affects or relates to the voting or giving of written consents with respect to
any securities of the Company or the voting by any director of the Company.
Except as set forth in the Company Disclosure Statement, no Shareholder or any
Affiliate thereof is indebted to the Company, the Company is not indebted to any
of its Shareholders or any Affiliate thereof, and the Company is not under any
contractual or other obligation to register any of its presently outstanding
securities or any of its securities which may hereafter be issued.
5.5 LITIGATION
Except as disclosed in the Company Disclosure Statement, there are no
actions, suits, investigations or proceedings (adjudicatory, rulemaking or
otherwise) pending or, to the Company's knowledge, threatened against the
Company (or any Employee Benefit Plan), or any property of the Company
(including the Company's Intellectual Property), in any court or before any
arbitrator of any kind or before or by any Governmental Body, except actions,
suits, investigations or proceedings that, in the aggregate, do not have, and
would not be reasonably expected (so far as can be foreseen at the time) to
have, a material adverse effect on (a) the business, properties, operations,
condition (financial or other) or, to the Company's knowledge, the prospects of
the Company or (b) the ability of the Company to perform its obligations under
this Agreement.
5.6 COMPLIANCE WITH OTHER INSTRUMENTS, ETC.
(a) The Company is not in violation of any term of (i) its charter, Bylaws
or other organizational documents, (ii) any agreement or instrument relating to
indebtedness for borrowed money or any other agreement to which it is a party or
by which it is bound, (iii) any applicable law, ordinance, rule or regulation of
any Governmental Body, or (iv) any applicable order, judgment or decree of any
court, arbitrator or Governmental Body, the consequence of which violation,
whether individually or in the aggregate, would have, or would be reasonably
expected (so far as can be foreseen at the time) to have, a material adverse
effect on the (A) business, properties, operations, condition (financial or
other) or, to the Company's knowledge, the prospects of the Company or (B)
ability of the Company to perform its obligations under this Agreement.
(b) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will not
(i) constitute a violation (with or without the giving of notice or lapse of
time, or both) of any provision of law or any judgment, decree, order,
regulation or rule of any court or Governmental Body applicable to the Company,
(ii) require any Authorization or any consent or approval of any nongovernmental
Person, except compliance with applicable securities laws, the approval of the
shareholders of each of the Company and Digital and the filing of all documents
necessary to consummate the Merger with the Washington Secretary of State and
the California Secretary of State, (iii) result in a default (with or without
the giving of notice or lapse of time, or both) under, acceleration or
termination of, or the
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creation in any party of the right to accelerate, terminate, modify or cancel,
any agreement, lease, note or other restriction, encumbrance, obligation or
liability to which the Company is a party or by which it is bound or to which
any assets of the Company are subject, (iv) result in the creation of any lien
or encumbrance upon the assets of the Company or upon any outstanding Shares or
other securities of the Company, (v) conflict with any provision of the
Company's charter or Bylaws, or (vi) invalidate or adversely affect any permit,
license, authorization or status used in the conduct of the Company's business
(provided that, in making the representations in (ii), (iii) and (vi) of this
paragraph (b), the Company may assume that it will be the Surviving Corporation
following the Merger).
5.7 EMPLOYEE BENEFIT PLANS
(a) The Company Disclosure Statement sets forth an accurate and complete
list and description of, and the annual amount expected to be paid for the
Company's current fiscal year pursuant to, each employee benefit plan, policy,
program, contract or arrangement covering or benefiting any officer, employee,
former employee, director or former director of the Company or any dependents or
beneficiaries of any such person, or with respect to which the Company has (or
could have) any material obligation or liability, including, but not limited to,
each "employee benefit plan," within the meaning of Section 3(3) of ERISA, and
each retirement, pension, deferred compensation, profit-sharing, stock bonus,
stock purchase, stock option, savings, bonus, severance, cafeteria, medical,
dental, life insurance, disability, medical expense reimbursement, dependent
care expense reimbursement or tuition reimbursement plan, policy or program
(such items are hereinafter referred to collectively as "Employee Benefit Plans"
and each individually as an "Employee Benefit Plan"). The Company has no
agreement, arrangement, commitment or obligation to create any employee benefit
plan, policy, program, contract or arrangement not identified in the Company
Disclosure Statement or to modify or amend any existing Employee Benefit Plan.
(b) The Company has delivered to Digital true, correct and complete copies
of all Employee Benefit Plans (including all amendments thereto), together with,
to the extent applicable to a particular Employee Benefit Plan, the following:
(i) copies of the annual reports (Form 5500 series) filed with respect to the
Employee Benefit Plan for the last three years; (ii) copies of the summary plan
descriptions, summary annual reports, summaries of material modifications and
all material employee manuals or communications filed or distributed with
respect to the Employee Benefit Plan during the last three years; (iii) copies
of any insurance contracts or trust agreements through which the Employee
Benefit Plan is funded; (iv) copies of all contracts relating to the Employee
Benefit Plan; and (v) a copy of the most recent Internal Revenue Service
determination letter issued with respect to the Employee Benefit Plan.
(c) With respect to each Employee Benefit Plan: (i) the Company is, and at
all times has been, in compliance with, and such Employee Benefit Plan is, and
at all times has been, maintained, administered and operated in compliance with,
the terms of such Employee Benefit Plan and all applicable laws, rules and
regulations, including, but not limited to, ERISA and the Code and which is not
otherwise exempt from the prohibited transactions provisions of ERISA or the
Code; (ii) all Tax Returns and other information relating to such Employee
Benefit Plan required to be filed with any Governmental Body have been
accurately, timely and properly filed; (iii) all notices, statements, reports
and other disclosure required to be given or made to participants in such
Employee Benefit Plan or their beneficiaries have been accurately, timely and
properly disclosed or provided; (iv) neither the Company nor any other fiduciary
of such Employee Benefit Plan has engaged in any transaction or acted or failed
to act in a manner that violates the fiduciary requirements of Section 404 of
ERISA with respect to such Employee Benefit Plan; and (v) no event has occurred
or is threatened or about to occur that would constitute a prohibited
transaction under Section 406 or 407 of ERISA or under Section 4975 of the Code
and which is not otherwise exempt from the prohibited transaction provisions of
ERISA or the Code. Each Employee Benefit Plan that is intended to be qualified
under Section 401(a) of the Code, is and at all times since inception has been,
so qualified, and its related trust is, and at all times since inception has
been, exempt from taxation under Section 501(a) of the Code. Each Employee
Benefit Plan that constitutes a "group health plan" within the meaning of
Section 4980B(g)(2) of the Code or Section 607(1) of ERISA has been administered
and operated at all times in compliance with the requirements of Section
4980B(f) of the Code and Title I, Subtitle B, Part 6 of ERISA.
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(d) All contributions and other payments required to have been made by the
Company (including any pretax or post-tax contributions or payments by employees
or their dependents) to any Employee Benefit Plan (or to any Person pursuant to
the terms thereof) have been so made, and the amount of any such payment or
contribution obligation that has accrued, but is not yet due, as of the date
hereof, has been properly reflected in the Company Financial Statements.
(e) There are no actions, suits or claims (other than routine claims for
benefits) pending, and to the Company's knowledge there are no actions, suits or
claims threatened, with respect to any Employee Benefit Plan or against the
assets of any Employee Benefit Plan, nor, to the Company's knowledge, is there a
reasonable basis for any such action, suit or claim. None of the Employee
Benefit Plans is currently under investigation, audit or review, directly or
indirectly, by the IRS, the DOL or any other Governmental Body, and, to the
Company's knowledge, no such action is contemplated or under consideration by
the IRS, DOL or any other Governmental Body.
(f) The Company does not maintain or contribute to, and has never
maintained or contributed to (or been obligated to contribute to), any
multi-employer plan within the meaning of Section 3(37) or Section 4001(a)(3) of
ERISA, or any plan that is subject to Section 302 or Title IV of ERISA or
Section 412 of the Code.
(g) The Company is not, and has never been, a member of (i) a controlled
group of corporations, within the meaning of Section 414(b) of the Code, (ii) a
group of trades or businesses under common control, within the meaning of
Section 414(c) of the Code, (iii) an affiliated service group, within the
meaning of Section 414(m) of the Code, or (iv) any other group of persons,
organizations and/or entities that is treated as a single employer under Section
414(o) of the Code.
(h) No Employee Benefit Plan that is an "employee welfare benefit plan"
within the meaning of Section 3(l) of ERISA provides, or has any obligation to
provide, benefits with respect to current or former employees of the Company or
any other entity beyond their retirement or other termination of service,
including, without limitation, post-retirement (or post-termination) medical,
dental, life insurance, severance or any other similar benefit, whether provided
on an insured or self-insured basis, other than continuation coverage required
to be provided under Section 4980B of the Code or Title I, Subtitle B, Part 6 of
ERISA.
(i) The consummation of any transaction contemplated hereby will not result
in any (i) payment (whether of severance pay or otherwise) becoming due from the
Company to any officer, employee, former employee or director thereof or to the
trustee under any "rabbi trust" or similar arrangement or (ii) benefit under any
Employee Benefit Plan being established or becoming accelerated, vested or
payable.
5.8 TAXES
The Company has (a) duly and timely filed, including valid extensions, with
the appropriate Governmental Bodies all Tax Returns required to be filed by it,
all of which Tax Returns are true, correct and complete, and (b) paid in full or
provided for all Taxes that are due or claimed to be due by any Governmental
Body. Except as described in the Company Disclosure Statement, (i) the reserves
and provisions for Taxes reflected in the Company Financial Statements are
adequate for the payment of current Taxes not yet due and payable; (ii) no
unresolved claim for assessment or collection of Taxes has been asserted or
threatened against the Company, and no audit or investigation by any
Governmental Body is under way with respect to Taxes, interest or other charges;
(iii) to its knowledge, no circumstances exist or have existed which would
constitute grounds for assessment against the Company of any Tax liability with
respect to any period for which Tax Returns have been filed; (iv) the Company
has not filed or entered into any election, consent or extension agreement or
any waiver that extends any applicable statute of limitations; (v) any Taxes
incurred by the Company or accrued by it since September 30, 1996 have arisen in
the ordinary course of business; and (vi) the Company has not filed any consent
to the application of Section 341(f)(2) of the Code to any assets held, acquired
or to be acquired by it. The Company has furnished Digital with complete and
correct copies of all Tax Returns filed by the Company. There are no Tax liens
on any property or assets of the Company other than liens for Taxes not yet due
and payable. No claim has been made by an authority in any jurisdiction where
the Company does not file Tax Returns that the Company is or may be subject to
taxation by that
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jurisdiction. The Company (1) has not made any payments, is not obligated to
make any payments, and is not a party to any agreement (including this
Agreement) that could obligate it to make any payments that will not be
deductible under Section 280G of the Code; (2) has not been a U.S. real property
holding corporation within the meaning of Section 897(c)(2) of the Code during
the applicable period specified in Section 897(c)(1)(A)(2)(i) of the Code; (3)
is not a party to any Tax allocation or sharing agreement; (4) has not been a
member of an affiliated group filing a consolidated income Tax Return; and (5)
does not have any liability for Taxes of any Person under Treasury Regulations
Section 1.1502-6 (or any similar provision of state, local or foreign law) as a
transferor or successor by contract or otherwise.
5.9 INTELLECTUAL PROPERTY
Set forth in the Company Disclosure Statement is a true and complete list
of all of the Company's Intellectual Property and Intellectual Property
Licenses. Such list indicates the specific Intellectual Property affected by
each Intellectual Property License. To the Company's knowledge, neither the
Company's operations nor any of its Intellectual Property or Intellectual
Property Licenses infringe or provide any basis to believe that its operations
or any of its Intellectual Property or Intellectual Property Licenses would
infringe upon any validly issued or pending trademark, trade name, service mark,
copyright or, to the knowledge of the Company, any validly issued or pending
patent or other right of any other Person, nor, to the knowledge of the Company,
is there any infringement by any other Person of any of the Company's
Intellectual Property or of any other intellectual property to which the
Company's Intellectual Property Licenses relate. The consummation of the
transactions contemplated hereby will not alter or impair the Company's rights
to any of its Intellectual Property or under any of its Intellectual Property
Licenses. The manner in which the Company has manufactured, packaged, shipped,
advertised, labeled and sold its products complies with all applicable laws and
regulations pertaining thereto.
Except as set forth in the Company Disclosure Statement, the Company is not
aware of any adverse claim to its sole and exclusive ownership of or licensee
rights to:
(a) its Intellectual Property, its Intellectual Property Licenses and
the technology, know-how and processes now used by it, or used in
connection with any product now being manufactured and sold by it, in the
manner that such product is now being manufactured and sold, and
(b) all right, title and interest of whatever kind or nature
throughout the world in and to the fully or partially developed computer
software products listed in the Company Disclosure Statement, with all
modifications, enhancements and additions thereto, including, without
limitation, all rights in and to all versions thereof and all source code,
object code, manuals and other documentation and related materials thereof
(collectively, the "Software Products"). Without limiting the generality of
the above, the Software Products shall also include all of the Company's
related programs, trade secrets, algorithms and processes relating to the
Software Products or such programs, the Company's copyright in and to each
of the Software Products and all works derivative therefrom, all current,
previous, enhanced and developmental versions of the source and object code
and any variations thereof, all user and programmer documentation, all
design specifications, all maintenance and installation job control
language, all systems documentation (including all flow charts, systems
procedures and program component descriptions), all procedures for
modification and preparation for the release of enhanced versions and all
test data available (excluding all proprietary information of third
parties) with respect to the Software Products.
Each of the Company's Intellectual Property Licenses is valid, binding and
enforceable in accordance with its terms against the parties thereto, the
Company has performed all obligations imposed upon it thereunder, and neither
the Company nor, to the Company's knowledge, any other party thereto is in
default thereunder, nor is there any event which with notice or lapse of time,
or both, would constitute a default by the Company or, to the Company's
knowledge, any other party thereunder. The Company has not received notice that
any party to any of the Company's Intellectual Property Licenses intends to
cancel, terminate or refuse to renew the same or to exercise or decline to
exercise any option or other right thereunder. No licenses, sublicenses,
covenants or agreements have been granted or entered into by the Company in
respect of any of
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the Company's Intellectual Property except the Intellectual Property Licenses
listed in the Company Disclosure Statement and except for licenses, sublicenses,
covenants or agreements involving obligations (contingent or otherwise) not in
excess of $250,000 during the fiscal year ending December 31, 1996, or, to the
Company's knowledge, in any future year. No director, officer, shareholder or
employee of the Company owns, directly or indirectly, in whole or in part, any
of the Company's Intellectual Property. To the Company's knowledge, none of the
Company's officers, directors, employees, consultants, distributors, agents,
representatives or advisors has entered into any agreement regarding know-how,
trade secrets, assignment of rights in inventions, or prohibition or restriction
of competition or solicitation of customers, or any other similar restrictive
agreement or covenant, whether written or oral, with any Person other than the
Company, that would be reasonably expected to have (as far as can be foreseen at
the time), a material adverse effect on the business, properties, operations,
condition (financial or other) assets, liabilities or, to the Company's
knowledge, prospects of the Company.
No Person has asserted any claim of infringement or other interference with
third-party rights with respect to the Company's Intellectual Property. Except
as set forth in the Company Disclosure Statement, (i) the Company has not
disclosed any source code regarding the Software Products to any Person other
than an employee of the Company or to Digital or Merger Sub, except for any
disclosure that would not be reasonably expected (as far as can be foreseen at
the time) to have a material adverse effect on the business, properties,
operations, condition (financial or other) or, to the Company's knowledge,
prospects of the Company; (ii) the Company has at all times maintained
reasonable procedures to protect, and has enforced, all of its trade secrets;
(iii) neither the Company nor any escrow agent is under any contractual or other
obligation to disclose the source code or any other proprietary information
included in or relating to the Company's Software Products (nor, to the
knowledge of the Company, is any other party to the Company's Intellectual
Property Licenses under any obligation to disclose any source code or other
proprietary information included in or relating to such Software Products) to
any Person, and no event has occurred, including the execution of this Agreement
or any related change in the Company's business activities, which would give
rise to such obligation; and (iv) the Company has not deposited any source code
regarding the Software Products into any source code escrows or similar
arrangements. If, as disclosed in the Company Disclosure Statement, the Company
has deposited any source code to its Software Products into source code escrows
or similar arrangements, no event has occurred that has or could reasonably form
the basis for a release of such source code from such escrows or arrangements.
The Software Products are free from known significant defects and
substantially conform to the specifications, documentation and sample
demonstration furnished to the Company's current or prospective customers or to
Digital.
5.10 FINANCIAL STATEMENTS
The Company has provided to Digital true and correct copies of its (a)
audited consolidated balance sheets as of December 31, 1993, 1994 and 1995, and
related audited statements of operations and cash flows for the fiscal years
then ended, and (b) unaudited consolidated balance sheets as of March 31, 1996
and June 30, 1996, and related unaudited statements of operations and cash flows
for the quarters then ended (collectively, the "Company Financial Statements").
Each of such balance sheets (including the related notes) presents fairly, in
all material respects, the consolidated financial position of the Company and
its Subsidiaries as of the respective dates thereof, and the other related
statements (including the related notes) included therein present fairly, in all
material respects, the results of operations and cash flows of the Company for
the respective periods or as of the respective dates set forth therein, all in
conformity with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise noted therein and subject, in
the case of the unaudited interim financial statements, to normal year-end
adjustments (other than reclassifications having no effect on profit or loss)
which will not have a net negative effect on profit or loss of $150,000 or more
in the aggregate and any other adjustments described therein and except that
such interim financial statements do not contain the notes required by generally
accepted accounting principles. The Company has no liabilities or financial
obligations (absolute, contingent or otherwise) required to be disclosed in
financial statements or notes thereto, in accordance with generally
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accepted accounting principles, which are not fully reflected or reserved
against in the June 30, 1996 balance sheet, except such liabilities or
obligations that (i) were incurred since the date of the balance sheet in the
ordinary course of business and consistent with past practice or (ii) are not in
excess of $25,000 in the aggregate or $5,000 individually. The Company maintains
standard systems of accounting which are adequate for its business. The
Company's practices with respect to capitalizing software development costs, as
reflected in the Company Financial Statements, are reasonable, in accordance
with industry standards, and in conformity with generally accepted accounting
principles, consistently applied during the periods involved.
5.11 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as specifically set forth in the Company Disclosure Statement and
except for transactions specifically contemplated in this Agreement, since June
30, 1996, neither the Company nor any of its officers or directors in their
representative capacities on behalf of the Company has:
(a) taken any action or entered into or agreed to enter into any
transaction, agreement or commitment other than in the ordinary course of
business or involving an insignificant obligation or expenditure;
(b) forgiven or canceled any indebtedness or waived any claims or
rights of material value (including, without limitation, any indebtedness
owing by any shareholder, officer, director, employee or Affiliate of the
Company);
(c) granted, other than in the ordinary course of business and
consistent with past practice, any increase in the compensation of
directors, officers, employees or consultants (including any such increase
pursuant to any employment agreement or bonus, pension, profit-sharing,
lease payment or other plan or commitment);
(d) suffered any material adverse change in its business, properties,
operations, condition (financial or other), assets, liabilities or, to the
Company's knowledge, its reasonably foreseeable prospects (other than as a
result of economic or political developments of general applicability);
(e) borrowed or agreed to borrow any funds, incurred or become subject
to, whether directly or by way of assumption or guarantee or otherwise, any
obligations or liabilities (absolute, accrued, contingent or otherwise),
except liabilities and obligations that (i) were incurred in the ordinary
course of business and consistent with past practice or (ii) are not in
excess of $25,000 in the aggregate or $5,000 individually, or increased, or
experienced any change in any assumptions underlying, or methods of
calculating, any bad debt, contingency or other reserves;
(f) paid, discharged or satisfied any claims, liabilities or
obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice, or not in excess of $25,000 in the aggregate
or $5,000 individually, of claims, liabilities and obligations reflected or
reserved against in the June 30, 1996 balance sheet or incurred in the
ordinary course of business and consistent with past practice since June
30, 1996, or prepaid any obligation having a fixed maturity of more than 90
days from the date such obligation was issued or incurred;
(g) permitted or allowed any of its property or assets (real, personal
or mixed, tangible or intangible) to be subjected to any mortgage, pledge,
lien, security interest, encumbrance, restriction or charge, except (i)
assessments for current Taxes not yet due and payable, (ii) landlord's
liens for rental payments not yet due and payable, and (iii) mechanics',
materialmen's, carriers' and other similar statutory liens securing
indebtedness that was incurred in the ordinary course of business and is
not yet due and payable;
(h) written down the value of any inventory (including write-downs by
reason of shrinkage, markdown or obsolescence) or written off as
uncollectible any notes or accounts receivable, except in the ordinary
course of business and consistent with past practice;
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(i) sold, transferred or otherwise disposed of any of its properties
or assets (real, personal or mixed, tangible or intangible), except the
sale of inventory in the ordinary course of business and consistent with
past practice;
(j) disposed of or permitted to lapse any rights to the use of any
trademark, trade name, patent or copyright, or disposed of or disclosed to
any Person without obtaining an appropriate confidentiality agreement from
any such Person any trade secret, formula, process or know-how not
theretofore a matter of public knowledge;
(k) made any single capital expenditure or commitment in excess of
$150,000 for additions to property, plant, equipment or intangible capital
assets or made aggregate capital expenditures in excess of $750,000 for
additions to property, plant, equipment or intangible capital assets;
(l) made any change in any method of accounting or accounting practice
or internal control procedure;
(m) issued any capital stock or other securities (other than grants of
options under the Company Option Plans or the issuance of Company Common
Stock upon the exercise of options granted under the Company Option Plans),
or declared, paid or set aside for payment any dividend or other
distribution in respect of its capital stock, or redeemed, purchased or
otherwise acquired, directly or indirectly, any shares of capital stock or
other securities of the Company, or otherwise permitted the withdrawal by
any of the holders of capital stock of the Company of any cash or other
assets (real, personal or mixed, tangible or intangible), in compensation,
indebtedness or otherwise, other than payments of compensation in the
ordinary course of business and consistent with past practice;
(n) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets (real, personal or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of
the Company's shareholders, officers, directors or employees or any
Affiliate thereof, except for (i) compensation paid to officers and
employees at rates not exceeding the rates of compensation paid during the
fiscal year last ended, (ii) compensation increased in the ordinary course
of business and consistent with past practice, (iii) funds advanced to the
Company's employees for travel expenses in the ordinary course of business
and consistent with past practice, and (iv) draws on commissions in the
ordinary course of business and consistent with past practice of up to
$20,000 per individual employee;
(o) entered into or agreed to enter into, or otherwise suffered to be
outstanding, any power of attorney of the Company or any obligations or
liabilities (absolute, accrued, contingent or otherwise) of the Company, as
guarantor, surety, cosigner, endorser, comaker, indemnitor or otherwise in
respect of the obligation of any other Person;
(p) received notice of, or otherwise obtained knowledge of (i) any
action, suit, arbitration, proceeding or investigation involving, pending
against or threatened against the Company or any employee of the Company in
any court or before any arbitrator of any kind or before or by any
Governmental Body; (ii) any valid basis for any action, suit, arbitration,
proceeding, investigation or the application of any fine or penalty adverse
to the Company or any employee of the Company; or (iii) any outstanding or
unsatisfied judgments, orders, decrees or stipulations to which the Company
or any employee of the Company is a party and where such items in clause
(i), (ii) or (iii) above relate directly to the transactions contemplated
herein or which would be reasonably expected (so far as can be foreseen at
the time) to have a material adverse effect on the business, properties,
operations, condition (financial or other) or, to the Company's knowledge,
the prospects of the Company;
(q) entered into or agreed to any sale, assignment, transfer or
license of any patents, trademarks, copyrights, trade secrets or other
intangible assets of the Company or any amendment or change to any existing
license or other agreement relating to intellectual property, other than in
the ordinary course of business;
(r) received notice that there has been a loss of, or contract
cancellation by, any material current or prospective customer, licensor or
distributor of the Company; or
(s) agreed, whether in writing or otherwise, to take any action
described in this Section 5.11.
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5.12 CONTRACTS AND LEASES
The Company Disclosure Statement contains an accurate and complete listing
of all material contracts, leases, agreements or understandings, whether written
or oral, of the Company. For purposes of this representation, a contract, lease,
agreement or understanding is "material" if it involves (a) obligations
(contingent or otherwise) of, or payments to the Company in excess of, $250,000
during the fiscal year ending December 31, 1996, or to the Company's knowledge,
in any future year, or (b) the license of any patent, copyright, trade secret or
other proprietary right (i) to the Company which is necessary for the Company to
carry on its business or (ii) from the Company which materially limits the
ability of the Company to carry on its business. Each of such contracts, leases,
agreements and understandings is in full force and effect and is valid, binding
and enforceable in accordance with its terms against each party thereto, and (A)
none of the Company or, to the Company's knowledge, any other party thereto has
breached any of the above or is in default thereunder, (B) no event has occurred
which, with notice or lapse of time, or both, would constitute such a breach or
default, (C) no claim of material default thereunder has, to the Company's
knowledge, been asserted or threatened, and (D) none of the Company or, to the
Company's knowledge, any other party thereto is seeking the termination or
renegotiation thereof or substitute performance thereunder, except where such
breach or default, or attempted termination, renegotiation or substitute
performance, individually or in the aggregate, does not have, and would not be
reasonably expected (so far as can be foreseen at the time) to have, a material
adverse effect on the business, properties, operations, condition (financial or
other) or, to the Company's knowledge, the prospects of the Company. True and
complete copies of each such written contract (or written summaries of the terms
of any such oral contract) have been heretofore delivered to Digital. Except as
specifically set forth in the Company Disclosure Statement, the Company has no:
(a) outstanding sales or service contracts, bids, commitments or
proposals priced significantly lower than the Company's customary list
price for such products or services such that the contract, bid, commitment
or proposal might be expected by the Company to result in any loss upon
completion or performance thereof;
(b) contracts with its agents, consultants, advisors, distributors or
dealers that are not, except as provided by law to the contrary without
regard to the express terms of such contract, cancelable by the Company
within 30 days' notice without liability, penalty or premium exceeding
$5,000;
(c) agreement or arrangement providing for the payment of any bonus or
commission based on sales or earnings, or any compensation agreement or
arrangement affecting or relating to former employees of the Company;
(d) employment agreement, whether express or implied, or any other
agreement for services that contains any severance or termination pay
liabilities or obligations;
(e) noncompetition agreement or other restriction from carrying on its
business anywhere in the world;
(f) liability or obligation with respect to the return of inventory or
merchandise other than on account of a defective condition, incorrect
quantities or missed delivery dates; or
(g) disagreement with any of its suppliers, customers, distributors,
OEM resellers, licensors or licensees, except where such disagreement does
not have and would not be reasonably expected (so far as can be foreseen at
the time) to have a material adverse effect on the business, properties,
operating condition (financial or other) or, to the Company's knowledge,
the prospects of the Company.
5.13 INSIDER INTERESTS
Except as set forth in the Company Disclosure Statement, no officer,
director, Affiliate or other representative of the Company has any interest
(other than as a shareholder of the Company) (a) in any of the Company's Real
Property or Personal Property or (b) to the Company's knowledge, in any
agreement, contract, arrangement or obligation relating to the Company, its
present or prospective business or its operations. The Company and, to the
Company's knowledge, its officers and directors have no interest, either
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directly or indirectly, in any Person that presently (i) provides any services,
produces and/or sells any products or product lines, or engages in any activity
which is competitive with the business in which the Company is now engaged or
proposes to engage (other than as a beneficial owner of shares in a publicly
held company aggregating less than 5% of the total outstanding equity interest
in such company, held for investment only); (ii) is a supplier, customer or
creditor, or has an existing contractual relationship with any of the Company's
employees (or Persons performing similar functions); or (iii) has any direct or
indirect interest in any asset or property, real or personal, tangible or
intangible, of the Company or any property, real or personal, tangible or
intangible, that is necessary or desirable for the present or anticipated future
conduct of the Company's business.
5.14 BROKERS AND FINDERS
Except for the fees and expenses payable to Hambrecht & Quist LLC and Cowen
and Company, the Company has not employed any investment banker, broker, finder,
consultant or intermediary, in connection with the transactions contemplated by
this Agreement, which would be entitled to any investment banking, brokerage,
finder's or similar fee or commission in connection with this Agreement or the
transactions contemplated hereby.
5.15 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS
None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Proxy Statement/Prospectus will (a) in the case of the S-4 Registration
Statement, at the time it becomes effective, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or (b) in the case of
the Proxy Statement/Prospectus, at the time of mailing the Proxy
Statement/Prospectus, at the time of the Digital Shareholders Meeting and at the
time consents of the Company's shareholders are obtained, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If at any time
prior to the Effective Time any event with respect to the Company or its
officers and directors shall occur that is required to be described in the Proxy
Statement/Prospectus or the S-4 Registration Statement, the Company shall notify
Digital thereof by reference to this Section 5.15 and cooperate with Digital in
preparing and filing with the SEC and, as required by law, disseminating to the
shareholders of the Digital and Company an amendment or supplement which
accurately describes such event or events in compliance with all provisions of
applicable law.
5.16 TAX MATTERS
The representations set forth in the numbered paragraphs of the form of Tax
Matters Certificate of the Company attached hereto as Exhibit 5.16 (the "Company
Tax Matters Certificate") are true and correct in all respects, and such
representations are hereby incorporated herein by reference with the same effect
as if set forth herein in their entirety.
5.17 PROPERTY
(a) The Company owns no real property other than the leasehold interests
described in the Company Disclosure Statement, which contains a complete and
accurate list of all real property of the Company which is leased, rented or
used by the Company (the "Real Property").
(b) The Company has separately delivered to Digital a complete and accurate
report for the period beginning January 1, 1995 of the Company's fixed asset and
roll-forward schedule, which lists all leaseholds, improvements, leased
equipment and other furniture, equipment and personal property (the "Personal
Property"), showing aggregate additions, deletions and changes through September
30, 1996. The Real Property and the Personal Property include all properties and
assets (whether real, personal or mixed, tangible or intangible) (other than, in
the case of the Personal Property, property rights with an individual value of
less
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than $5,000) reflected in the June 30, 1996 balance sheet and all the properties
and assets purchased by the Company since June 30, 1996 (except for such
properties or assets sold since such date in the ordinary course of business and
consistent with past practice). The Real Property and the Personal Property
include all material property used in the business of the Company.
(c) The Company's leasehold interest in each parcel of the Real Property is
free and clear of all liens, mortgages, pledges, deeds of trust, security
interests, charges, encumbrances and other adverse claims or interests of any
kind. Each lease of any portion of the Real Property is valid, binding and
enforceable in accordance with its terms against the parties thereto and any
other Person with an interest in such Real Property, the Company has performed
in all material respects all obligations imposed upon it thereunder, and neither
the Company nor any other party thereto is in default thereunder nor is there
any event which with notice or lapse of time, or both, would constitute a
default thereunder. Except as set forth in the Company Disclosure Statement, no
consent is required from any Person under any lease or other agreement or
instrument relating to the Real Property in connection with the consummation of
the transactions contemplated by this Agreement, and the Company has not
received notice that any party to any such lease or other agreement or
instrument intends to cancel, terminate or refuse to renew the same or to
exercise or decline to exercise any option or other right thereunder. The
Company has not granted any lease, sublease, tenancy or license of, or entered
into any rental agreement or contract of sale with respect to, any portion of
the Real Property.
(d) The Company's offices, warehouse and other structures and its Personal
Property are of a quality consistent with industry standards, are in good
operating condition and repair, normal wear and tear excepted, are adequate for
the uses to which they are being put, and, to the Company's knowledge, comply in
all material respects with applicable safety and other laws and regulations. To
the Company's knowledge, the Company is not in violation of, and has not
violated, in connection with the ownership, use, maintenance or operation of the
Real Property or the Personal Property or the conduct of its business, any
applicable federal, state, county or local statutes, laws, regulations,
guidances, rules, ordinances, codes, licenses, permits, judgments, writs,
decrees, injunctions or orders of any Governmental Body relating to
environmental (air, water, groundwater, soil, noise and odor) matters, including
without limitation, the Clean Air Act, the Federal Water Pollution Control Act,
the Resource Conservation and Recovery Act and the regulations issued
thereunder, the Comprehensive Environmental Response, Compensation, and
Liability Act, the Clean Water Act, the Hazardous Materials Transportation Act,
the Toxic Substances Control Act, the Hazardous Waste Control Act, comparable
California laws, and the regulations issued thereunder, and all other applicable
federal, state, county, local and foreign environmental requirements where such
violation would be reasonably expected (so far as can be foreseen at the time)
to have, a material adverse effect on the Company's business, properties,
operations, condition (financial or other) or, to the Company's knowledge,
prospects.
(e) Except as set forth in the Company Disclosure Statement, and except for
(i) assessments for current Taxes not yet due and payable, (ii) landlord's liens
for rental payments in respect of the Real Property incurred in the ordinary
course of business and not yet due and payable, and (iii) mechanics',
materialmen's, carriers' and other similar statutory liens securing indebtedness
that was incurred in the ordinary course of business and is not yet due and
payable, the Personal Property is free and clear of all liens, and, other than
leased Personal Property which is so noted on the list supplied pursuant to
clause (b) of this Section 5.17, the Company owns such Personal Property.
(f) Each lease, license, rental agreement, contract of sale or other
agreement to which the Personal Property is subject is valid, binding and
enforceable in accordance with its terms against the parties thereto, the
Company has performed in all material respects all obligations imposed on it
thereunder, and neither the Company nor, to the Company's knowledge, any other
party thereto is in default thereunder, nor is there any event which with notice
or lapse of time, or both, would constitute a default by the Company or, to the
Company's knowledge, any other party thereunder. Except as set forth in the
Company Disclosure Statement, no consent is required from any Person under any
lease or other agreement or instrument relating to the Personal Property in
connection with the consummation of the transactions contemplated by this
Agreement, and the Company has not received notice that any party to any such
lease or other agreement or instrument intends to cancel, terminate or refuse to
renew the same or to exercise or decline to exercise any option or
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other right thereunder. The Company has not granted any lease, sublease, tenancy
or license of any portion of the Personal Property.
(g) Neither the whole nor any portion of the leaseholds or any other assets
or property of the Company is subject to any currently outstanding governmental
decree or order to be sold or is being condemned, expropriated or otherwise
taken by any public authority with or without payment of compensation therefor,
nor has any such condemnation, expropriation or taking been proposed.
5.18 CUSTOMERS AND SUPPLIERS
The Company Disclosure Statement sets forth (a) a complete and accurate
list of the customers of the Company accounting for 5% or more of the Company's
sales during the fiscal year last ended, showing the approximate total sales by
the Company to each such customer during the fiscal year last ended and the
nine-month period ended September 30, 1996, and (b) a complete and accurate list
of the suppliers of the Company from whom the Company has purchased 5% or more
of the goods or services purchased by the Company in the fiscal year last ended.
The Company has no reasonable basis to expect any material modification to its
relationship with any customer or supplier named in the Company Disclosure
Statement.
5.19 ORDERS, COMMITMENTS AND RETURNS
The Company Disclosure Statement contains an accurate summary of the
Company's total backlog of orders (including all accepted and unfulfilled sales
orders) and the aggregate of all outstanding purchase orders issued by the
Company (which include all contracts or commitments for the purchase by the
Company of materials or other supplies). All such sale and purchase commitments
were made in the ordinary course of business. Except as set forth in the Company
Disclosure Statement, there are no outstanding claims in excess of $100,000 in
the aggregate or $25,000 individually against the Company to return products by
reason of alleged failure to conform to customer expectations, defective
products, missed delivery dates or otherwise, or of products in the possession
of customers under an understanding that such products would be returnable.
5.20 LABOR AND EMPLOYMENT MATTERS
There are no material labor disputes, employee grievances or disciplinary
actions pending or, to the Company's knowledge, threatened against or involving
the Company or any of its present or former employees, and the Company has not
experienced any work stoppage or other labor difficulty since its incorporation.
The Company has complied with all provisions of law relating to employment and
employment practices, terms and conditions of employment, wages and hours, the
failure to comply with which would be reasonably expected (so far as can be
foreseen at the time) to have a material adverse effect upon the business
properties, operations, condition (financial or other) or, to the Company's
knowledge, the prospects of the Company. The Company is not engaged in any
unfair labor practice and has no liability for any arrears of wages or Taxes or
penalties for failure to comply with any such provisions of law. No collective
bargaining agreement is binding on the Company, and the Company has no knowledge
of any organizational efforts presently being made or threatened by or on behalf
of any labor union or other employee organization with respect to employees of
the Company. Each employee, officer and consultant of the Company has executed a
nondisclosure agreement in the form provided to Digital. To the Company's
knowledge, no employee (or Person performing similar functions) of the Company
is in violation of any such agreement or any employment agreement,
noncompetition agreement, patent disclosure agreement, invention assignment
agreement, proprietary information agreement or other contract or agreement
relating to the relationship of such employee with the Company or any other
party, and the Company will use its best efforts to prevent any such violation.
The Company Disclosure Statement sets forth a true and complete list of (a) the
names and current compensation amounts of all directors and officers of the
Company; (b) the wage rates for nonsalaried and nonofficer salaried employees of
the Company by classification, and all labor union contracts (if any); (c) all
group insurance programs in effect for employees of the Company; and (d) the
names and current compensation packages of all independent contractors and
consultants of the Company. The Company is not in default with respect to any of
its obligations referred to above and has no obligation or liability for
severance or back pay owed
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through or by virtue of the Closing. Except as disclosed in the Company
Disclosure Statement, all employees of the Company are employed on an "at will"
basis.
5.21 ACCOUNTS RECEIVABLE
All accounts receivable of the Company reflected in the June 30, 1996
balance sheet, or existing at the Effective Time, represent sales actually made
in the ordinary course of business and were recorded in the Company's books
consistently with generally accepted principles governing revenue recognition,
consistently applied during the periods involved. The bad debt reserves and
sales return allowances reflected in the June 30, 1996 balance sheet are in
conformity with generally accepted accounting principles consistently applied
during the periods involved. Set forth in the Company Disclosure Statement is a
full and complete list and aging study of all consolidated accounts receivable
of the Company existing as of June 30, 1996.
5.22 CORPORATE BOOKS AND RECORDS
The Company has furnished to Digital or its representatives for their
examination true and complete copies of (a) the charter and Bylaws of the
Company as currently in effect, including all amendments thereto, (b) the minute
books of the Company, and (c) the stock transfer books of the Company. Such
minutes reflect all meetings of the Company's shareholders, Board of Directors
and any committees thereof since the Company's inception, and accurately reflect
in all material respects the events of and actions taken at such meetings. Such
stock transfer books accurately reflect all issuances and transfers of shares of
capital stock of the Company since its inception.
5.23 LICENSES, PERMITS, AUTHORIZATIONS, ETC.
Except as identified in the Company Disclosure Statement, the Company has
received all currently required Authorizations, licenses, orders, registrations
and permits of all Governmental Bodies, the failure to obtain which would be
reasonably expected (so far as can be foreseen at the time) to have a material
adverse effect on its business properties, operations, condition (financial or
other) or, to the Company's knowledge, prospects. The Company has not received
any notifications of any asserted present failure by it to have obtained any
such Authorization, license, order, registration or permit, or past and
unremedied failure to obtain such items.
5.24 INSURANCE
The Company maintains (a) insurance on all of its property (including
leased premises) that insures against loss or damage by fire or other casualty
(including extended coverage) and (b) insurance against liabilities, claims and
risks of a nature and in such amounts as are normal and customary in the
Company's industry for companies of similar size and financial condition. All
insurance policies of the Company are in full force and effect, all premiums
with respect thereto covering all periods up to and including the date this
representation is made have been paid, and no notice of cancellation or
termination has been received with respect to any such policy. Such policies are
sufficient for compliance with all requirements of law currently applicable to
the Company and of all agreements to which the Company is a party, will remain
in full force and effect through the respective expiration dates of such
policies without the payment of additional premiums, and will not in any way be
affected by, or terminate or lapse by reason of, the transactions contemplated
by this Agreement. The Company has not been refused any insurance with respect
to its assets or operations, nor has its coverage been limited, by any insurance
carrier to which it has applied for any such insurance or with which it has
carried insurance.
5.25 ABSENCE OF QUESTIONABLE PAYMENTS
Neither the Company nor any director, officer, agent, employee or other
Person acting on behalf of the Company has used any Company funds for improper
or unlawful contributions, payments, gifts or entertainment, or made any
improper or unlawful expenditures relating to political activity to domestic or
foreign governmental officials or others. The Company has adequate financial
controls to prevent such improper or
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unlawful contributions, payments, gifts, entertainment or expenditures. Neither
the Company nor any current director, officer, agent, employee or other Person
acting on behalf of the Company has accepted or received any improper or
unlawful contributions, payments, gifts or expenditures. The Company has at all
times complied, and is in compliance, in all respects with the Foreign Corrupt
Practices Act and all foreign laws and regulations relating to prevention of
corrupt practices and similar matters.
5.26 BANK ACCOUNTS
The Company Disclosure Statement sets forth the names and locations of all
banks, trust companies, savings and loan associations and other financial
institutions at which the Company maintains safe deposit boxes or accounts of
any nature and the names of all Persons authorized to draw thereon, make
withdrawals therefrom or have access thereto.
5.27 POOLING MATTERS
The Company has not taken any action, or become aware of any action taken
by any shareholder of the Company, involving any recapitalization or repurchase
or redemption of any securities of the Company, or any grant or acceleration of
any options to acquire securities of the Company, or any purchase or sale of
securities of Digital, and to the Company's knowledge there have occurred no
other events with respect to or involving the Company or its shareholders that,
taken individually or together, would, to the Company's knowledge, affect the
ability of Digital to account for the transactions contemplated by this
Agreement as a "pooling of interests" transaction in accordance with generally
accepted accounting principles, and the Company is not aware of any facts,
excluding actions by Digital, that otherwise could prevent such accounting
treatment.
5.28 FULL DISCLOSURE
The Company Financial Statements, the S-1 Registration Statement and all
information in the Company Disclosure Statement and the Exhibits hereto do not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements so made or information so delivered
not misleading and, to the Company's knowledge, no other information furnished
by the Company to Digital or its representatives in connection with this
Agreement contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements so made or information
so delivered not misleading.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF DIGITAL
AND MERGER SUB
Each of Digital and Merger Sub hereby represents and warrants to the
Company that, except as set forth in the Digital Disclosure Statement:
6.1 ORGANIZATION, ETC. OF DIGITAL
Digital is a corporation duly organized, validly existing and in good
standing under the laws of the state of Washington and has all requisite
corporate power and authority to own and operate its properties, to carry on its
business as now conducted, to enter into this Agreement and to carry out the
provisions of this Agreement and consummate the transactions contemplated
hereby. Digital is duly qualified and in good standing in each jurisdiction in
which the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary and where the failure to be
so qualified has, or would be reasonably expected (so far as can be foreseen at
the time) to have, a material adverse effect on the business, properties,
operations, condition (financial or other) or, to Digital's knowledge, the
prospects of Digital and its Subsidiaries taken as a whole. Digital has obtained
from the appropriate Governmental Bodies all approvals and licenses necessary
for the conduct of its business and operations as currently conducted, which
approvals and licenses are valid and remain in full force and effect, except
where the failure to have obtained such
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approvals or licenses or the failure of such approvals and licenses to be valid
and in full force and effect does not have, and would not be reasonably expected
(so far as can be foreseen at the time) to have, a material adverse effect on
the business, properties, operations, condition (financial or other) or, to
Digital's knowledge, the prospects of Digital and its Subsidiaries taken as a
whole.
6.2 OPERATIONS OF SUBSIDIARIES
Each Subsidiary of Digital (a) is a corporation or other legal entity duly
organized, validly existing and (if applicable) in good standing under the laws
of the jurisdiction of its organization and has the full power and authority to
own its properties and conduct its business and operations as currently
conducted, except where the failure to be duly organized, validly existing and
in good standing does not have, and would not be reasonably expected (so far as
can be foreseen at the time) to have, a material adverse effect on the business,
properties, operations, condition (financial or other) or, to Digital's
knowledge, the prospects of Digital and its Subsidiaries taken as a whole, (b)
is duly qualified and in good standing in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification necessary, except where the failure to be so
qualified does not have, and would not be reasonably expected (so far as can be
foreseen at the time) to have, a material adverse effect on the business,
properties, operations, condition (financial or other) or, to Digital's
knowledge, the prospects of Digital and its Subsidiaries taken as a whole, and
(c) has obtained from the appropriate Governmental Bodies all approvals and
licenses necessary for the conduct of its business and operations as currently
conducted, which approvals and licenses are valid and remain in full force and
effect, except where the failure to have obtained such approvals and licenses or
the failure of such approvals and licenses to be valid and in full force and
effect does not have, and would not be reasonably expected (so far as can be
foreseen at the time) to have, a material adverse effect on the business,
properties, operations, condition (financial or other) or, to Digital's
knowledge, the prospects of Digital and its Subsidiaries taken as a whole.
6.3 AGREEMENT
This Agreement and the consummation of the transactions contemplated hereby
have been approved by the respective Boards of Directors of Digital and Merger
Sub and by Digital as the sole shareholder of Merger Sub, and have been duly
authorized by all other necessary corporate action on the part of each of them
(except for the approval of Digital's shareholders contemplated by Section
7.3(b)). This Agreement has been duly executed and delivered by a duly
authorized officer of each of Digital and Merger Sub and constitutes a valid and
binding agreement of Digital and Merger Sub, enforceable against Digital and
Merger Sub in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general application that may affect the enforcement of creditors' rights
generally and by general equitable principles. Digital has delivered to the
Company true and correct copies of resolutions adopted by the Board of Directors
of each of Digital and Merger Sub approving this Agreement.
6.4 CAPITAL STOCK
The authorized capital stock of Digital consists of (a) 25,000,000 Digital
Common Shares and (b) 5,000,000 shares of preferred stock, $.01 par value per
share. All the outstanding Digital Common Shares are duly authorized, validly
issued, fully paid and nonassessable, and no class of capital stock of Digital
is entitled to preemptive or cumulative voting rights. As of the close of
business on September 30, 1996, 9,522,688 Digital Common Shares and no shares of
preferred stock were issued and outstanding, and since that date there have been
no further issuances of Digital Common Shares, except in connection with the
exercise of options issued pursuant to the Digital Option Plans, and except for
issuances of Digital Common Shares pursuant to Digital's Employee Stock Purchase
Plan (the "Digital Employee Stock Purchase Plan"). Except as disclosed in the
Digital SEC Reports, all outstanding shares of capital stock of the Subsidiaries
of Digital are owned by Digital or a direct or indirect wholly owned Subsidiary
of Digital, free and clear of all liens, charges, encumbrances, claims and
options of any nature. There are outstanding on the date hereof no options,
warrants or other rights to acquire capital stock from Digital or any of its
Subsidiaries, nor are there any securities outstanding which are directly or
indirectly convertible into or exchangeable for shares of capital
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stock of Digital or any of its Subsidiaries, except options to purchase Digital
Common Shares granted pursuant to the Digital Option Plans and rights existing
under the Digital Employee Stock Purchase Plan. As of the close of business on
September 30, 1996, there were 2,925,000 Digital Common Shares reserved for
issuance upon the exercise of stock options, of which 970,298 Digital Common
Shares had been issued and 1,445,799 Digital Common Shares were subject to
outstanding options as of such date, and there were 52,942 Digital Common Shares
reserved for issuance under the Digital Employee Stock Purchase Plan. Digital
has not declared, and no Person has any accrued right to receive, any
distribution with respect to shares of capital stock of Digital.
6.5 AUTHORIZATION FOR DIGITAL COMMON SHARES
Prior to the Effective Time, Digital will have taken all necessary action
to permit it to issue the number of Digital Common Shares required to be issued
pursuant to Article IV. The Digital Common Shares issued pursuant to Article IV
will, when issued, be duly authorized, validly issued, fully paid and
nonassessable, and no shareholder of Digital will have any preemptive right of
subscription or purchase in respect thereof. The Digital Common Shares will,
when issued, be registered under the Securities Act and the Exchange Act and
registered or exempt from registration under any applicable state securities
laws.
6.6 LITIGATION
Except as disclosed in the Digital SEC Reports filed prior to the date
hereof or the Digital Disclosure Statement, there are no actions, suits,
investigations or proceedings (adjudicatory, rulemaking or otherwise) pending
or, to the knowledge of Digital, threatened against Digital or any of its
Subsidiaries, or any property of Digital or any such Subsidiary (including any
Intellectual Property), in any court or before any arbitrator of any kind or
before or by any Governmental Body, except actions, suits, investigations or
proceedings that, in the aggregate, do not have, and would not be reasonably
expected (so far as can be foreseen at the time) to have, a material adverse
effect on the (a) business, properties, operations, condition (financial or
other) or, to Digital's knowledge, the prospects of Digital and its Subsidiaries
taken as a whole or (b) ability of Digital to perform its obligations under this
Agreement.
6.7 COMPLIANCE WITH OTHER INSTRUMENTS, ETC.
(a) Neither Digital nor any Subsidiary of Digital is in violation of any
term of (i) its charter, Bylaws or other organizational documents, (ii) any
agreement or instrument relate to indebtedness for borrowed money or any other
agreement to which it is a party or by which it is bound, (iii) any applicable
law, ordinance, rule or regulation of any Governmental Body, or (iv) any
applicable order, judgment or decree of any court, arbitrator or Governmental
Body, the consequences of which violation, whether individually or in the
aggregate, would have, or would be reasonably expected (so far as can be
foreseen at the time) to have, a material adverse effect on the (A) business,
properties, operations, condition (financial or other) or, to Digital's
knowledge, the prospects of Digital and its Subsidiaries taken as a whole or (B)
ability of Digital to perform its obligations under this Agreement.
(b) The execution, delivery and performance of this Agreement by Digital
and Merger Sub and the consummation of the transactions contemplated hereby will
not (i) constitute a violation (with or without the giving of notice or lapse of
time, or both) of any provision of law or any judgment, decree, order,
regulation or rule of any court or Governmental Body applicable to Digital or
Merger Sub, (ii) require any Authorization or any consent or approval of any
nongovernmental Person, except compliance with applicable securities laws, the
approval of the shareholders of each of the Company and Digital and the filing
of all documents necessary to consummate the Merger with the Washington
Secretary of State and the California Secretary of State (all such
Authorizations and other consents or approvals to be duly obtained at or prior
to the Closing), (iii) result in a default (with or without the giving of notice
or lapse of time, or both) under, acceleration or termination of, or the
creation in any party of the right to accelerate, terminate, modify or cancel,
any agreement, lease, note or other restriction, encumbrance, obligation or
liability to which Digital or Merger Sub is a party or by which it is bound or
to which any assets of the Company are subject, (iv) result in the creation of
any lien or encumbrance upon the assets of Digital or Merger Sub or upon any
outstanding securities of Digital or Merger
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Sub, (v) conflict with any provision of the charter or Bylaws of Digital or
Merger Sub, or (vi) invalidate or adversely affect any permit, license,
authorization or status used in the conduct of Digital's business.
6.8 TAXES
Digital and its Subsidiaries have filed all Tax Returns required to be
filed by them, and have paid all Taxes shown to be due thereon, other than Taxes
appropriate reserves for which have been made in the Digital Financial
Statements (and, to the extent material, such reserves have been accurately
described to the Company). There are no assessments or adjustments for Taxes
that have been asserted in writing against Digital or its Subsidiaries for any
period for which Digital has not made appropriate reserves in the Digital
Financial Statements.
6.9 INTELLECTUAL PROPERTY
Digital and its Subsidiaries own, or have the defensible right to use, all
Intellectual Property used in Digital's business, except where the failure to
own or have the right to use such Intellectual Property, in the aggregate, would
not be reasonably expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations, condition
(financial or other) or, to Digital's knowledge, the prospects of Digital and
its Subsidiaries taken as a whole. To Digital's knowledge, neither Digital's
operations nor any of its Intellectual Property or Intellectual Property
Licenses infringe or provide any basis to believe that its operations or any of
its Intellectual Property or Intellectual Property Licenses would infringe upon
any validly issued or pending trademark, trade name, service mark, copyright or,
to Digital's knowledge, any validly issued or pending patent or other right of
any other Person, nor, to Digital's knowledge, is there any infringement by any
other Person of any of Digital's Intellectual Property or of any other
intellectual property to which Digital's Intellectual Property Licenses relate.
6.10 REPORTS AND FINANCIAL STATEMENTS
Digital has timely filed all reports (including, without limitation, proxy
statements) required to be filed with the SEC since January 1, 1993
(collectively, the "Digital SEC Reports"), and has previously furnished or made
available to the Company true and complete copies of all Digital SEC Reports.
None of the Digital SEC Reports, as of their respective dates (as amended
through the date hereof), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Each of the balance sheets (including the related notes)
included in the Digital SEC Reports presents fairly, in all material respects,
the consolidated financial position of Digital and its Subsidiaries as of the
respective date thereof, and the other related financial statements (including
the related notes) included therein present fairly, in all material respects,
the results of operations and the cash flows of Digital and its Subsidiaries for
the respective periods or as of the respective dates set forth therein, all in
conformity with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise noted therein and subject, in
the case of the unaudited interim financial statements, to normal year-end
adjustments and any other adjustments described therein. Digital has no
liabilities or financial obligations (absolute, contingent or otherwise)
required to be disclosed in its financial statements or the notes thereto in
accordance with generally accepted accounting principles which are not fully
reflected or reserved against in the unaudited balance sheet contained in its
report on Form 10-Q for the quarter ended June 30, 1996, except such liabilities
or obligations that would not be reasonably expected (so far as can be foreseen
at the time) to have a material adverse effect on the business, properties,
operations, condition (financial or other) or, to Digital's knowledge, the
prospects of Digital and its Subsidiaries taken as a whole. All of the Digital
SEC Reports, as of their respective dates (as amended through the date hereof),
complied in all material respects with the requirements of the Exchange Act and
the applicable rules and regulations thereunder.
6.11 ABSENCE OF CERTAIN CHANGES OR EVENTS
During the period since December 31,1995, and except as disclosed in the
Digital SEC Reports, (a) the business of Digital has been conducted only in the
ordinary course, consistent with past practice, (b) Digital
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has not entered into any material transaction other than in the ordinary course
of business and consistent with past practice, and (c) there has not been any
material adverse change in the business, properties, operations, condition
(financial or other), assets, liabilities or, to Digital's knowledge, the
reasonably foreseeable prospects of Digital and its Subsidiaries taken as a
whole (other than as a result of economic or political developments of general
applicability).
6.12 CONTRACTS AND LEASES
The Digital SEC Reports contain an accurate and complete list of all
material contracts, leases, agreements or understandings, whether written or
oral, required to be described therein or filed as exhibits thereto pursuant to
the Exchange Act and the applicable rules and regulations thereunder. Each of
such contracts, leases, agreements and understandings is in full force and
effect and is valid, binding and enforceable in accordance with its terms
against each party thereto, and (a) none of Digital or its Subsidiaries or, to
Digital's knowledge, any other party thereto has breached any of the above or is
in default thereunder, (b) no event has occurred which, with notice or lapse of
time, or both, would constitute such a breach or default, (c) no claim of
material default thereunder has, to Digital's knowledge, been asserted or
threatened, and (d) none of Digital or its Subsidiaries or, to Digital's
knowledge, any other party thereto is seeking the termination or renegotiation
thereof or substitute performance thereunder, except where such breach or
default, or attempted termination, renegotiation or substitute performance,
individually or in the aggregate, would not be reasonably expected (so far as
can be foreseen at the time) to have a material adverse effect on the business,
properties, operations, condition (financial or other) or, to Digital's
knowledge, the prospects of Digital and its Subsidiaries taken as a whole.
6.13 OWNERSHIP OF MERGER SUB; NO PRIOR ACTIVITIES; ASSETS OF MERGER SUB
(a) Merger Sub was formed by Digital solely for the purpose of engaging in
the transactions contemplated hereby.
(b) As of the date hereof and at the Effective Time, the capital stock of
Merger Sub is and will be owned 100% by Digital directly. There are not as of
the date hereof and there will not be at the Effective Time any outstanding or
authorized options, warrants, calls, rights, commitments or any other agreements
of any character which Merger Sub is a party to, or may be bound by, requiring
it to issue, transfer, sell, purchase, redeem or acquire any shares of capital
stock or any securities or rights convertible into, exchangeable for, or
evidencing the right to subscribe for or acquire, any shares of capital stock of
Merger Sub.
(c) As of the date hereof and at the Effective Time, except for obligations
or liabilities incurred in connection with its incorporation or organization and
the transactions contemplated thereby and hereby, Merger Sub has not and will
not have incurred, directly or indirectly through any Subsidiary or Affiliate,
any obligations or liabilities or engaged in any business or activities of any
type or kind whatsoever or entered into any agreements or arrangements with any
Person.
(d) Digital will take all action necessary to ensure that Merger Sub at no
time prior to the Effective Time owns any asset other than an amount of cash
necessary to incorporate Merger Sub and to pay the expenses of the Merger
attributable to Merger Sub if the Merger is consummated.
6.14 BROKERS AND FINDERS
Except for the fees and expenses payable to Dain Bosworth, Inc., Digital
has not employed any investment banker, broker, finder, consultant or
intermediary in connection with the transactions contemplated by this Agreement
which would be entitled to any investment banking, brokerage, finder's or
similar fee or commission in connection with this Agreement or the transactions
contemplated hereby.
6.15 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS
None of the information supplied or to be supplied by Digital or Merger Sub
for inclusion or incorporation by reference in the S-4 Registration Statement or
the Proxy Statement/Prospectus will (a) in
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the case of the S-4 Registration Statement, at the time it becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading or (b) in the case of the Proxy Statement/Prospectus, at the time of
mailing the Proxy Statement/Prospectus, at the time of the Digital Shareholders
Meeting and at the time consents of the Company's shareholders are obtained,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time any event with respect to
Digital, its officers and directors or any of its Subsidiaries shall occur that
is required to be described in an amendment of, or a supplement to, the Proxy
Statement/Prospectus or the S-4 Registration Statement, Digital shall notify the
Company thereof by reference to this Section 6.15 and, in the case of the Proxy
Statement/Prospectus or the S-4 Registration Statement, such event shall be so
described, and an amendment or supplement shall be promptly filed with the SEC
and, as required by law, disseminated to the shareholders of Digital and the
Company, and such amendment or supplement shall comply with all provisions of
applicable law. The S-4 Registration Statement will comply (with respect to
Digital and Merger Sub) as to form in all material respects with the provisions
of the Securities Act. The Proxy Statement/Prospectus will comply (with respect
to Digital and Merger Sub) in all material respects with the requirements of the
Exchange Act and the applicable rules and regulations thereunder.
6.16 TAX MATTERS
The representations set forth in the numbered paragraphs of the form of Tax
Matters Certificate of Digital attached hereto as Exhibit 6.16 (the "Digital Tax
Matters Certificate") are true and correct in all respects, and such
representations are hereby incorporated herein by reference with the same effect
as if set forth herein in their entirety.
6.17 CUSTOMERS AND SUPPLIERS
The Digital Disclosure Statement sets forth (a) a complete and accurate
list of the customers of Digital accounting for 5% or more of Digital's sales
during the fiscal year last ended, showing the approximate total sales by
Digital to each such customer during the fiscal year last ended and the
nine-month period ended September 30, 1996, and (b) a complete and accurate list
of the suppliers of Digital from whom Digital has purchased 5% or more of the
goods or services purchased by Digital in the fiscal year last ended. Digital
has no reasonable basis to expect any material modification to its relationship
with any customer or supplier named in the Digital Disclosure Statement.
6.18 ORDERS, COMMITMENTS AND RETURNS
Digital Disclosure Statement contains an accurate summary of Digital's
total backlog of orders (including all accepted and unfulfilled sales orders)
and the aggregate of all outstanding purchase orders issued by Digital (which
include all contracts or commitments for the purchase by Digital of materials or
other supplies). All such sale and purchase commitments were made in the
ordinary course of business. Except as set forth in Digital Disclosure
Statement, there are no outstanding material claims against Digital to return
products by reason of alleged failure to conform to customer expectations,
defective products, missed delivery dates or otherwise, or of products in the
possession of customers under an understanding that such products would be
returnable.
6.19 POOLING MATTERS
Digital has not taken any action, or become aware of any action taken by
any shareholder of Digital, involving any recapitalization or repurchase or
redemption of any securities of Digital, or any grant or acceleration of any
options to acquire securities of Digital, or any purchase or sale of securities
of the Company, and to Digital's knowledge there have occurred no other events
with respect to or involving Digital or its shareholders that, taken
individually or together, would, to Digital's knowledge, affect the ability of
Digital to account for the transactions contemplated by this Agreement as a
"pooling of interests" transaction
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in accordance with generally accepted accounting principles, and Digital is not
aware of any facts, excluding actions by the Company, that otherwise could
prevent such accounting treatment.
6.20 FULL DISCLOSURE
The Digital Financial Statements, the S-3 Registration Statement and all
information in the Digital Disclosure Statement and the Exhibits hereto do not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements so made or information so delivered
not misleading and, to Digital's knowledge, no other information furnished by
Digital to the Company or its representatives in connection with this Agreement
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements so made or information so
delivered not misleading.
ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS
7.1 CONDUCT OF BUSINESS OF THE COMPANY
Except as contemplated by this Agreement or as set forth in the Company
Disclosure Statement, during the period from the date of this Agreement to the
Effective Time, (a) the Company will conduct its operations according to its
ordinary course of business and consistent with past practice, (b) the Company
will not enter into any material transaction other than in the ordinary course
of business and consistent with past practice, and (c) to the extent consistent
with the foregoing, with no less diligence and effort than would be applied in
the absence of this Agreement, the Company will seek to preserve intact its
current business organizations, keep available the services of its current
officers and employees and preserve its relationships with customers, suppliers
and others having business dealings with it with the objective that their
goodwill and ongoing businesses shall be unimpaired at the Effective Time.
Without limiting the generality of the foregoing, and except as otherwise
permitted in this Agreement, prior to the Effective Time, the Company will not
without the prior written consent of Digital:
(a) except for Shares issued upon exercise of Options and Warrants
outstanding as of the date hereof, issue, deliver, sell, dispose of, pledge
or otherwise encumber, or authorize or propose the issuance, delivery,
sale, disposition or pledge or other encumbrance of (i) any additional
shares of its capital stock of any class (including the Shares), or any
securities or rights convertible into, exchangeable for or evidencing the
right to subscribe for any shares of its capital stock, or any rights,
warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any shares of its capital stock or any
securities or rights convertible into, exchangeable for or evidencing the
right to subscribe for any shares of its capital stock, or (ii) any other
securities in respect of, in lieu of or in substitution for Shares
outstanding on the date hereof;
(b) except for shares of Restricted Stock that the Company is required
to repurchase in accordance with the terms of the applicable Restricted
Stock Agreement, redeem, purchase or otherwise acquire, or propose to
redeem, purchase or otherwise acquire, any of its outstanding securities
(including the Shares);
(c) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or make any
other actual, constructive or deemed distribution in respect of any shares
of its capital stock or otherwise make any payments to the Company's
shareholders in their capacity as such;
(d) (i) grant any material increases in the compensation of any of its
directors, officers or key employees, except in the ordinary course of
business and consistent with past practice, (ii) pay or agree to pay any
pension, retirement allowance or other material employee benefit not
required or contemplated by any Employee Benefit Plan as in effect on the
date hereof to any such director, officer or key employee, whether past or
present, (iii) enter into any new, or materially amend any existing,
employment
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agreement with any such director, officer or key employee, (iv) enter into
any new, or materially amend any existing, severance agreement with any
such director, officer or key employee, or (v) except as may be required to
comply with applicable law, amend any existing, or become obligated under
any new, Employee Benefit Plan;
(e) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of the Company (other than the Merger);
(f) make any acquisition, by means of merger, consolidation or
otherwise, of (i) any direct or indirect ownership interest in or assets
comprising any business enterprise or operation or (ii) except in the
ordinary course of business and consistent with past practice, any other
assets in excess of $50,000;
(g) adopt any amendments to its Articles of Incorporation or Bylaws;
(h) incur any indebtedness for borrowed money or guarantee any such
indebtedness or, except in the ordinary course of business and consistent
with past practice, make any loans, advances or capital contributions to,
or investments in, any other Person;
(i) engage in the conduct of any business the nature of which is
materially different than the business the Company is currently engaged in;
(j) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Company or its Subsidiaries;
(k) enter into any contract, arrangement or understanding requiring
the purchase of equipment, materials, supplies or services over a period
greater than 12 months and for the expenditure of greater than $75,000 per
year which is not cancelable without penalty on 30 days' or less notice,
except in the ordinary course of business for the distribution of products
or the production of inventory; or
(l) authorize or announce an intention to do any of the foregoing, or
enter into any contract, agreement, commitment or arrangement to do any of
the foregoing.
7.2 NO SOLICITATIONS
(a) The Company shall not, directly or indirectly, through any officer,
director, employee, representative or agent of the Company or any of its
Subsidiaries, solicit or encourage the initiation of any inquiries or proposals
regarding any merger, sale of substantial assets, sale of shares of capital
stock (including, without limitation, by way of a tender offer) or similar
transactions involving the Company or any of its Subsidiaries (any of the
foregoing inquiries or proposals being referred to herein as an "Acquisition
Proposal"); provided, however, that nothing contained in this Agreement shall
prevent the Board of Directors of the Company from referring any third party to
this Section 7.2 or from making a copy of this Section 7.2 available to any
third party. Nothing contained in this Section 7.2 shall prevent the Board of
Directors of the Company from considering, negotiating, approving and
recommending to the shareholders of the Company (after consulting with its
financial advisors, and determining after consulting with counsel that the Board
of Directors is required to do so in order to discharge properly its fiduciary
duties) an unsolicited bona fide Acquisition Proposal which the Board of
Directors determines in good faith would result in a transaction more favorable
to the Company's shareholders from a financial point of view than the
transaction contemplated by this Agreement (any such Acquisition Proposal being
referred to herein as a "Superior Proposal").
(b) The Company shall immediately notify Digital after receipt of any
Acquisition Proposal or any request for nonpublic information relating to the
Company or any of its Subsidiaries in connection with an Acquisition Proposal or
for access to the properties, books or records of the Company or any of its
Subsidiaries by any Person that informs the Board of Directors of the Company or
such Subsidiary that it is considering making, or has made, an Acquisition
Proposal. Such notice to Digital shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact.
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(c) If the Board of Directors of the Company receives a request for
material nonpublic information by a party who makes a bona fide Acquisition
Proposal and the Board of Directors of the Company determines that such proposal
is a Superior Proposal then, and only in such case, the Company may, subject to
the execution of a confidentiality and standstill agreement substantially
similar to that then in effect between the Company and Digital, provide such
party with access to information regarding the Company.
(d) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Digital and
Merger Sub) conducted heretofore with respect to any of the foregoing. The
Company agrees not to release any third party from any confidentiality or
standstill agreement to which the Company is a party.
(e) The Company shall ensure that the officers, directors and employees of
the Company and its Subsidiaries, and any investment banker or other advisor or
representative retained by the Company, are aware of the restrictions described
in this Section 7.2.
7.3 CONSENT SOLICITATION AND MEETING OF SHAREHOLDERS
(a) The Company will take all action necessary in accordance with
applicable law and its Articles of Incorporation and Bylaws to prepare and
circulate to its Shareholders as promptly as practicable forms of written
consent and related materials (the "Company Consent Solicitation") soliciting
such Shareholders' approval of the Merger. Subject to the fiduciary duties of
the Company's Board of Directors under applicable law as advised by counsel, the
Board of Directors of the Company shall recommend and declare advisable such
approval, and the Company shall take all lawful action to solicit, and use all
reasonable efforts to obtain, such approval. Pursuant to the terms of the
shareholders agreement attached hereto as Exhibit 7.3 (the "Shareholders
Agreement"), the Company Affiliates each have agreed to vote all Shares owned by
them or over which they have voting control, or to execute or cause to be
executed consents, to grant their approval of the Merger and this Agreement.
(b) Digital will take all action necessary in accordance with applicable
law, Rule 4460 of the Rules of the Nasdaq/NM, and Digital's Articles of
Incorporation and Bylaws to convene a meeting of its shareholders (the "Digital
Shareholders Meeting") as promptly as practicable to consider and vote upon the
approval of the issuance of Digital Common Shares in the Merger (the "Issuance")
and the approval of the Digital Stock Incentive Plan. Subject to the fiduciary
duties of Digital's Board of Directors under applicable law as advised by
counsel, the Board of Directors of Digital shall recommend and declare advisable
such approvals and Digital shall take all lawful action to solicit, and use all
reasonable efforts to obtain, such approval. Pursuant to the terms of the
Shareholders Agreement, the directors of Digital executing such agreement each
have agreed to vote all Digital Common Shares owned by them or to which they
have the right to vote in favor of approval of the Issuance.
(c) Digital, as the sole shareholder of Merger Sub, will act by written
consent to approve the Merger and the adoption of this Agreement by Merger Sub,
which consent Digital and Merger Sub represent and warrant will constitute the
requisite approval of the Merger and this Agreement by Merger Sub.
7.4 REGISTRATION STATEMENT/PROXY MATERIALS
Digital and the Company will, as promptly as practicable, prepare and file
with the SEC preliminary proxy materials (requesting confidential treatment
thereof) that will constitute a proxy statement in connection with the vote of
Digital's shareholders with respect to the Issuance and the Digital Stock
Incentive Plan, and the Company Consent Solicitation in connection with the vote
of the Company's shareholders with respect to the Merger, together with any
amendments thereof or supplements thereto (in each case, in the form or forms
mailed to Digital's and the Company's shareholders, the "Proxy
Statement/Prospectus"). Digital will also prepare and file with the SEC a
registration statement on Form S-4 (the "S-4 Registration Statement"),
containing the Proxy Statement/Prospectus, in connection with the registration
under the Securities Act of the Digital Common Shares issuable upon conversion
of the Shares and the other transactions contemplated hereby. The S-4
Registration Statement will contain pro forma financial statements accounting
for the Merger as a pooling of interests (unless Digital shall have irrevocably
and unconditionally
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waived in writing the condition set forth in Section 8.2(f)). Digital and the
Company will use all reasonable efforts to have the S-4 Registration Statement
declared effective as promptly as practicable, and also will take any other
action required to be taken under federal or state securities laws, and will use
all reasonable efforts to cause the Proxy Statement/Prospectus to be mailed to
shareholders of Digital and the Company at the earliest practicable date. If at
any time prior to the Effective Time any event relating to or affecting the
Company or Digital shall occur as a result of which it is necessary, in the
opinion of counsel for the Company or of counsel for Digital, to supplement or
amend the S-4 Registration Statement in order to make such document not
misleading in light of the circumstances existing at the time approval of the
shareholders of the Company or of Digital is sought, the Company and Digital
will forthwith prepare and file with the SEC an amendment or supplement to the
S-4 Registration Statement so that such document, as so supplemented or amended,
will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances existing at such time, not misleading.
7.5 S-3 REGISTRATION STATEMENT
If necessary to ensure that the Merger will qualify for
pooling-of-interests accounting treatment, Digital will (a) as promptly as
practicable, prepare and file with the SEC a registration statement on Form S-3
(the "S-3 Registration Statement"), containing a prospectus in connection with
the registration and sale of a number of Digital Common Shares that it estimates
to be sufficient to ensure that all requirements for pooling-of-interests
accounting treatment will be satisfied and (b) prior to the Closing, sell the
actual number of such Digital Common Shares that it determines, in consultation
with KPMG Peat Marwick LLP, will be sufficient to ensure that such requirements
are satisfied. Digital will use all reasonable efforts to have the S-3
Registration Statement declared effective as promptly as practicable. If at any
time prior to the Effective Time any event relating to or affecting Digital
shall occur as a result of which it is necessary, in the opinion of counsel for
Digital, to supplement or amend the S-3 Registration Statement in order to make
such document not misleading in light of the circumstances existing at the time
approval of the shareholders of the Company or of Digital is sought, Digital
will forthwith prepare and file with the SEC an amendment or supplement of the
S-3 Registration Statement so that such document, as so supplemented or amended,
will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances existing at such time, not misleading.
7.6 REASONABLE EFFORTS
The Company and Digital shall, and shall use all reasonable efforts to
cause their respective Subsidiaries to: (a) promptly make all filings and seek
to obtain all Authorizations required under all applicable laws with respect to
the Merger and the other transactions contemplated hereby and will cooperate
with each other with respect thereto; (b) use all reasonable efforts to promptly
take, or cause to be taken, all other actions and do, or cause to be done, all
other things necessary, proper or appropriate to satisfy the conditions set
forth in Article VIII and to consummate and make effective the transactions
contemplated by this Agreement on the terms and subject to the conditions set
forth herein as soon as practicable (including seeking to remove promptly any
injunction or other legal barrier that may prevent such consummation); (c) not
take any action which might reasonably be expected to impair the ability of the
parties to consummate the Merger at the earliest possible time (regardless of
whether such action would otherwise be permitted or not prohibited hereunder);
and (d) not take any action (regardless of whether such action would otherwise
be permitted or not prohibited hereunder) that prevents Digital from accounting
for the Merger as a pooling of interests. After the time, if any, that the S-4
Registration Statement shall have been declared effective, Digital shall
promptly notify the Company if at any time it has reason to believe that KPMG
Peat Marwick LLP will not be able to deliver the opinion referred to in Section
8.2(f) at the Closing, and each of Digital and the Company shall promptly advise
the other of any fact or circumstance of which it becomes aware (and which has
not theretofore been disclosed to the other) which it believes would adversely
impact the ability to satisfy such condition set forth in Section 8.2(f). During
the period of 60 days prior to the Closing, Digital will not repurchase or
otherwise acquire in the public market, or announce any intention or proposal to
repurchase or otherwise acquire in the public market, any shares of its capital
stock.
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7.7 ACCESS TO INFORMATION
Subject to currently existing contractual and legal restrictions applicable
to the Company (which the Company represents and warrants are not material) or
to Digital (which Digital represents and warrants are not material), and upon
reasonable notice, each of the Company and Digital shall (and shall cause each
of its Subsidiaries to) afford to officers, employees, counsel, accountants and
other authorized representatives of the other party (the "Respective
Representatives") access, during normal business hours throughout the period
prior to the Effective Time or until this Agreement is terminated, to its
properties, books and records (including, without limitation, the work papers of
independent accountants) and, during such period, shall (and shall cause each of
its Subsidiaries to) furnish promptly to such Respective Representatives all
information concerning its business, properties and personnel as may reasonably
be requested, provided that no investigation pursuant to this Section 7.7 shall
affect or be deemed to modify any of the respective representations or
warranties made by Digital or the Company. The use and protection of all
information provided by one party to the other pursuant to this Section 7.7
shall be governed by the Confidentiality Agreement.
7.8 INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) From and after the Effective Time, Digital shall, and shall cause the
Surviving Corporation to, indemnify, defend and hold harmless the present and
former officers, directors and employees of the Company, whether any such person
is or was an officer, director, employee or agent of the Company, or is or was
serving at the request of the Company as an officer, director or employee or
agent of another Person (collectively, the "Company Indemnitees"), against all
losses, expenses, claims, damages or liabilities arising out of actions or
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement) to the fullest
extent permitted or required under applicable law (and shall also advance
expenses as incurred to the fullest extent permitted under applicable law,
provided that the person to whom expenses are advanced provides an undertaking
to repay such advances if it is ultimately determined in a final and binding
decision by a court or arbitrator that such person is not entitled to
indemnification). Digital and Merger Sub agree that all rights to
indemnification, including provisions relating to advances of expenses incurred
in defense of any action, suit or proceeding, whether civil, criminal,
administrative or investigative (each, a "Company Claim"), existing in favor of
the Company Indemnitees as provided in the Company's Articles of Incorporation
or Bylaws, as in effect as of the date hereof, with respect to matters occurring
through the Effective Time, shall survive the Merger and shall continue in full
force and effect for a period of not less than six years from the Effective
Time; provided, however, that all rights to indemnification in respect of any
Company Claim asserted, made or commenced within such period shall continue
until the final disposition of such Company Claim.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the Closing, the parties hereto agree to
cooperate and use their respective reasonable efforts to vigorously defend
against the above and respond thereto.
(c) If a Company Indemnitee is successful with respect to any action, suit
or proceeding initiated by such Company Indemnitee to enforce the provisions of
this Section 7.8, then Digital shall pay all reasonable, out-of-pocket expenses
(including, without limitation, reasonable attorneys fees) incurred by such
Company Indemnitee in connection with such action, suit or proceeding.
(d) This Section 7.8 is intended to benefit the Company Indemnitees and
shall be binding on all successors and assigns of Digital, Merger Sub, the
Company and the Surviving Corporation.
7.9 QUOTATION OF DIGITAL COMMON SHARES
Digital will use all reasonable efforts to cause the Digital Common Shares
to be issued pursuant to this Agreement, and upon exercise of the Replacement
Options, to be quoted for trading on the Nasdaq/NM.
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7.10 AFFILIATES OF DIGITAL AND THE COMPANY
Set forth in the Company Disclosure Statement are the names of all Persons
who may be deemed to be "affiliates" of the Company for purposes of Rule 145
under the Securities Act (the "Company Affiliates"). Each such Company Affiliate
has executed the Shareholders Agreement, which provides that such Company
Affiliate will not sell, pledge, transfer or otherwise dispose of any Digital
Common Shares issued to such Company Affiliate pursuant to the Merger, except
pursuant to an effective registration statement or in compliance with Rule 145
or an exemption from the registration requirements of the Securities Act. Each
of Digital and the Company shall use all reasonable efforts to cause their
respective Affiliates not to take any action that would impair Digital's ability
to account for the Merger as a pooling of interests. In accordance with the
foregoing, each Company Affiliate and each Affiliate of Digital has also agreed
in such written agreement that such Person will not, after the thirtieth day
prior to the Effective Time, sell or in any other way reduce such Person's risk
relative to any Digital Common Shares received in the Merger or otherwise held
by such Person (within the meaning of the SEC's Codification of Financial
Reporting Policies Section 201.01, reprinted in 7 Fed. Sec. L. Rep. (CCH)
Paragraph 72,951) until such time as results covering at least 30 days of
combined operations of Digital and the Company (which financial results Digital
agrees to publish in accordance with past practice) have been published by
Digital, in the form of a quarterly earnings report, an effective registration
statement filed with the SEC, a report to the SEC on Form 10-K, 10-Q or 8-K, or
any other public filing or press release or other announcement which includes
the combined sales and net income of Digital and the Company, except for certain
transactions permitted by the Shareholders Agreement.
7.11 CERTAIN COVENANTS OF DIGITAL
Except as otherwise permitted in this Agreement, prior to the Effective
Time, Digital will not, without the prior written consent of the Company:
(a) except for Digital Common Shares issued under the Digital
Employee Stock Purchase Plan or upon exercise of options granted under the
Digital Option Plans, and except for option grants under the Digital Option
Plans, issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional shares of its capital stock of any
class, or any securities or rights convertible into, exchangeable for, or
evidencing the right to subscribe for any shares of its capital stock, or
any rights, warrants, options, calls, commitments or any other agreements
of any character to purchase or acquire any shares of its capital stock or
any securities or rights convertible into, exchangeable for, or evidencing
the right to subscribe for any shares of its capital stock or (ii) any
other securities in respect of, in lieu of, or in substitution for, Digital
Common Shares outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem,
purchase or otherwise acquire, any of its outstanding securities;
(c) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or make any
other actual, constructive or deemed distribution in respect of any shares
of its capital stock or otherwise make any payments to Digital's
shareholders in their capacity as such;
(d) adopt a plan of complete or partial liquidation, dissolution,
merger or consolidation, restructuring, recapitalization or other
reorganization of Digital (other than the Merger);
(e) make any acquisition, by means of merger, consolidation or
otherwise, of (i) any direct or indirect ownership interest in or assets
comprising any business enterprise or operation or (ii) except in the
ordinary course of business and consistent with past practice, any other
assets; provided, however, that this covenant shall not restrict any
acquisition of assets the value of which is less than 10% of Digital's
total assets;
(f) adopt any amendments to its Articles of Incorporation, or take any
other action requiring a vote of the holders of Digital Common Shares,
which would adversely affect the terms and provisions of the Digital Common
Shares or the rights of the holders of such shares, including, without
limitation, the
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authorization or issuance of any shares of capital stock with rights
superior to the Digital Common Shares; or
(g) authorize or announce an intention to do any of the foregoing, or
enter into any contract, agreement, commitment or arrangement to do any of
the foregoing.
7.12 TAX MATTERS
Neither the Company nor Digital shall take any action that would cause its
representations set forth in Sections 5.16 and 6.16 not to be true in all
material respects from and after the date hereof until the Effective Time. Each
party agrees to report the Merger on all tax returns and other filings as a
tax-free reorganization under Section 368(a) of the Code except where, in the
opinion of tax counsel to such party, there is not "substantial authority," as
defined in Section 6662 of the Code, to support such a position.
7.13 S-1 REGISTRATION STATEMENT
The Company shall withdraw the S-1 Registration Statement prior to the
Closing Date.
7.14 WARRANTS
The Company shall provide the holders of outstanding Warrants with timely
notice of the approval of the Merger in accordance with the terms of the
Warrants.
7.15 TERMINATION OF AGREEMENTS
All outstanding agreements under which the Company is required to register
Shares shall be terminated, or amended in a manner acceptable to Digital, in
each case in accordance with their respective terms and effective as of the
Effective Time.
7.16 BOARD REPRESENTATION
At or prior to the Closing, Digital's Board of Directors shall appoint
Kamran Kheirolomoom to serve as a director of Digital effective as of the
Effective Time. In addition, prior to the Effective Time, the Company and
Digital shall identify one additional director (the "Designee") to serve as a
director of Digital effective as of the Effective Time or as soon as practicable
thereafter. Digital shall take all requisite action to amend its Bylaws, if
necessary, to increase the size of its Board of Directors in order to effect the
appointments contemplated by this Section 7.16. In connection with the first
annual meeting of Digital shareholders following the Effective Time, Digital
will nominate Mr. Kheirolomoom and the Designee to serve as directors of Digital
for terms to be determined by Digital.
7.17 NOTICE TO COMPANY SHAREHOLDERS
Promptly upon receipt of the approval required by Section 8.1(a) through
the Company Consent Solicitation or otherwise, the Company will deliver to its
shareholders the notices required by Chapter 13 of the CCC (after consultation
with Digital and Digital's reasonable agreement to any Share valuation required
to be included in such notice), thereby commencing the 30-day period for receipt
of notice from any dissenting shareholder. The Company will continue to use its
reasonable best efforts to solicit consents from shareholders and otherwise to
identify any dissenting shareholders prior to completion of such 30-day period.
7.18 DIGITAL NOTICE OF CERTAIN EVENTS
Digital shall immediately notify the Company after receipt of any inquiries
or proposals regarding any merger, sale of substantial assets, sale of shares of
capital stock other than pursuant to the S-3 Registration Statement (including,
without limitation, by way of a tender offer) or similar transaction involving
Digital or any of its Subsidiaries (a "Digital Acquisition Proposal") or any
request for nonpublic information relating to Digital or any of its Subsidiaries
in connection with a Digital Acquisition Proposal or for access to the
properties, books or records of Digital or any of its Subsidiaries by any Person
that informs the Board of
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Directors of Digital or such Subsidiary that it is considering making, or has
made, a Digital Acquisition Proposal. Such notice to the Company shall be made
orally and in writing and shall indicate in reasonable detail the identity of
the offeror and the terms and conditions of such proposal, inquiry or contact.
ARTICLE VIII
CONDITIONS
8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS
The respective obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Effective Time of each of the following conditions, any or all of which may be
waived in whole or in part by the party being benefited thereby, to the extent
permitted by applicable law:
(a) Company Shareholder Approval
This Agreement and the transactions contemplated hereby shall have been
duly approved or ratified by the requisite holders of Shares in accordance with
applicable provisions of the CCC and the Articles of Incorporation and Bylaws of
the Company.
(b) Digital Shareholder Approval
The Issuance shall have been duly approved by the requisite holders of
Digital Common Shares in accordance with applicable provisions of the WBCA, the
Articles of Incorporation and Bylaws of Digital and Rule 4460 of the Rules of
the Nasdaq/NM.
(c) Authorizations
All Authorizations required in connection with the execution and delivery
of this Agreement and the performance of the obligations hereunder shall have
been made or obtained.
(d) No Injunction, Illegality
There shall not be in effect any judgment, writ, order, injunction or
decree of any court or Governmental Body of competent jurisdiction restraining,
enjoining or otherwise preventing consummation of the transactions contemplated
by this Agreement or permitting such consummation only subject to any condition
or restriction unacceptable to either of Digital or the Company, each in its
reasonable judgment, and there shall not be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger that makes the consummation of the Merger illegal.
(e) Registration Statement
The S-4 Registration Statement shall have been declared effective by the
SEC under the Securities Act and shall be effective at the Effective Time. No
stop order suspending effectiveness shall have been issued by the SEC, no
action, suit, proceeding or investigation by the SEC to suspend the
effectiveness thereof shall have been initiated and be continuing, and all
necessary approvals under state securities laws or the Securities Act or
Exchange Act relating to the issuance or trading of the Digital Common Shares
shall have been received.
(f) Tax Opinion
Digital and the Company shall have received an opinion of Perkins Coie to
the effect that (i) the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code; (ii) each
of Digital, Merger Sub and the Company will be a party to the reorganization
within the meaning of Section 368(b) of the Code; (iii) no gain or loss will be
recognized by the Company, Digital or
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Merger Sub as a result of the Merger; (iv) no gain or loss will be recognized by
a shareholder of the Company as a result of the Merger with respect to the
Shares converted solely into Digital Common Shares; and (v) no gain or loss will
be recognized by Digital or holders of Options that qualify as "incentive stock
options" under the Code upon the exchange of such Options for Replacement
Options. In rendering such opinion, Perkins Coie shall receive and rely upon
representations contained in certificates of the Company, Digital, Merger Sub
and certain significant shareholders of the Company, including, without
limitation, the Digital Tax Matters Certificate and the Company Tax Matters
Certificate.
8.2 CONDITIONS TO OBLIGATIONS OF DIGITAL AND MERGER SUB
The respective obligations of Digital and Merger Sub to consummate the
transactions contemplated by this Agreement are subject to the fulfillment at or
prior to the Effective Time of each of the following conditions, any or all of
which may be waived in whole or in part by Digital and Merger Sub, as the case
may be, to the extent permitted by applicable law:
(a) Representations and Warranties True
The representations and warranties of the Company contained in Article V or
otherwise required hereby to be made after the date hereof in a writing
expressly referred to herein by or on behalf of the Company or any Company
Affiliate pursuant to this Agreement that (i) are qualified as to materiality
shall be true and correct and (ii) are not so qualified shall be true and
correct in all material respects on and as of the date made. The Company shall
have delivered a revised Company Disclosure Statement dated one day prior to the
Closing Date, reflecting any changes that would be required in order to make the
representations and warranties of the Company contained in Article V or
otherwise required hereby to be true and correct, on and as of the Effective
Time, with the same force and effect as if made on and as of the Effective Time,
except (A) for changes contemplated by this Agreement and (B) that the accuracy
of representations and warranties which address matters only as of a particular
date will be determined as of such date.
(b) Performance
The Company shall have performed or complied in all material respects with
all agreements and conditions contained herein required to be performed or
complied with by it prior to or at the time of Closing.
(c) Consents Obtained
All material consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by the Company for
the authorization, execution and delivery of this Agreement and the consummation
by it of the transactions contemplated hereby shall have been obtained and made
by the Company, except where the failure to receive such consents, etc. would
not have a material adverse effect on the Company or Digital.
(d) Officers' Certificate
The Company shall have delivered to Digital a certificate, dated the date
of the Closing, signed by the President or any Vice President of the Company,
certifying as to the fulfillment of the conditions specified in Sections 8.2(a)
through (c).
(e) Opinion of Counsel for the Company
Digital shall have received from Wilson Sonsini Goodrich & Rosati, or other
counsel for the Company satisfactory to Digital, an opinion, dated the Closing
Date, substantially in the form attached hereto as Exhibit 8.2(e).
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(f) Pooling Opinion
Digital shall have received an opinion of KPMG Peat Marwick LLP, in form
and substance reasonably satisfactory to Digital, that the Merger will qualify
for pooling-of-interests accounting treatment if consummated in accordance with
this Agreement.
(g) FIRPTA Certificate
Digital shall have received a certificate from the Company pursuant to
Section 1445 of the Code (and a certificate or certificates under any analogous
provisions under state or local law) to the effect than an interest in the
Company is not a "United States real property interest" within the meaning of
Section 897 of the Code (and any analogous provisions under state or local law).
(h) Employment Agreements
Employment agreements with the Company's officers listed in Exhibit 8.2(h)
hereto, as entered into or amended and restated with the concurrence of Digital,
shall be in effect at the Effective Time.
8.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the transactions contemplated
by this Agreement are subject to the fulfillment at or prior to the Effective
Time of each of the following conditions, any or all of which may be waived in
whole or in part by the Company to the extent permitted by applicable law:
(a) Representations and Warranties True
The representations and warranties of Digital and Merger Sub contained in
Article VI or otherwise required hereby to be made after the date hereof in a
writing expressly referred to herein by or on behalf of Digital and Merger Sub
pursuant to this Agreement that (i) are qualified as to materiality shall be
true and correct and (ii) are not so qualified shall be true in all material
respects on and as of the date made. Digital shall have delivered a revised
Digital Disclosure Statement dated one day prior to the Closing Date, reflecting
any changes that would be required in order to make the representations and
warranties of Digital contained in Article VI or otherwise required hereby to be
true and correct, on and as of the Effective Time, with the same force and
effect as if made at and as of the Effective Time, except (A) for changes
contemplated by this Agreement and (B) that the accuracy of representations and
warranties which address matters only as of a particular date will be determined
as of such date.
(b) Performance
Digital shall have performed or complied in all material respects with all
agreements and conditions contained herein required to be performed or complied
with by it prior to or at the Closing.
(c) Consents Obtained
All material consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by Digital or
Merger Sub for the authorization, execution and delivery of this Agreement and
the consummation by it of the transactions contemplated hereby shall have been
obtained and made by Digital and Merger Sub, except where the failure to receive
such consents, etc. would not have a material adverse effect on the Company or
Digital.
(d) Officers' Certificate
Digital shall have delivered to the Company a certificate, dated the date
of the Closing, signed by the President or any Vice President of Digital,
certifying as to the fulfillment of the conditions specified in Sections 8.3(a)
through (c).
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(e) Opinion of Counsel for Digital
The Company shall have received from Perkins Coie, or other counsel for
Digital satisfactory to the Company, an opinion, dated the Closing Date,
substantially in the form attached hereto as Exhibit 8.3(e).
(f) Pooling Opinion
The Company shall have received a copy of the opinion referred to in
Section 8.2(f).
ARTICLE IX
TERMINATION
9.1 TERMINATION
This Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time, before or after the approval by the
shareholders of the Company or Digital:
(a) by mutual written consent duly authorized by the Boards of
Directors of Digital and the Company; or
(b) by either Digital or the Company if the Merger shall not have been
consummated by February 15, 1997 (provided that the right to terminate this
Agreement under this Section 9.1(b) shall not be available to any party
whose breach of any representation, warranty, covenant or agreement set
forth in this Agreement has been the cause of or resulted in the failure of
the Merger to occur on or before such date); or
(c) by either Digital or the Company if a court of competent
jurisdiction or Governmental Body shall have issued a nonappealable final
order, decree or ruling or taken any other action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, except if the party relying on such order, decree or ruling or
other action has not complied with its obligations under Section 7.6; or
(d) by Digital or the Company if, at either the Digital Shareholders
Meeting (including any adjournment or postponement thereof), or pursuant to
the Company Consent Solicitation, the requisite vote of the shareholders of
Digital or the Company shall not have been obtained; or
(e) by Digital if (i) the Board of Directors of the Company shall fail
to recommend or withdraw, modify or change its recommendation of this
Agreement or the Merger in a manner adverse to Digital or shall have
resolved to do any of the foregoing; (ii) the Board of Directors of the
Company shall have recommended to the shareholders of the Company an
Alternative Transaction; or (iii) a tender offer or exchange offer for 25%
or more of the outstanding shares of Company voting stock is commenced
(other than by Digital or an Affiliate of Digital) and the Board of
Directors of the Company recommends that the shareholders of the Company
tender their shares in such tender offer or exchange offer; or
(f) by Digital, upon a breach of any representation, warranty,
covenant or agreement on the part of the Company set forth in this
Agreement such that the conditions set forth in Section 8.2(a) or 8.2(b)
would not be satisfied; or
(g) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Digital set forth in this Agreement
such that the conditions set forth in Section 8.3(a) or 8.3(b) would not be
satisfied; or
(h) by Digital if any condition set forth in Section 8.1 or Section
8.2 cannot reasonably be expected to be satisfied by the date set forth in
Section 9.1(b); or by the Company if any conditions set forth in Section
8.1 or Section 8.3 cannot reasonably be expected to be satisfied by the
date set forth in Section 9.1(b); or
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(i) by the Company if the Board of Directors of Digital shall fail to
recommend or withdraw, modify or change its recommendation of the Issuance
in a manner adverse to the Company or shall have resolved to do any of the
foregoing; or
(j) by the Company or Digital if the Board of Directors of the Company
shall have resolved to accept a Superior Proposal.
9.2 EFFECT OF TERMINATION
In the event of the termination of this Agreement pursuant to Section 9.1,
this Agreement shall forthwith become void and there shall be no liability on
the part of any party hereto or any of its Affiliates, directors, officers or
shareholders except (a) as set forth in Sections 11.1 and 11.2 and (b) nothing
herein shall relieve any party from liability for any willful breach hereof.
ARTICLE X
SURVIVAL AND REMEDIES
10.1 SURVIVAL
All representations and warranties contained in this Agreement, the
Operative Documents or any certificate delivered pursuant hereto or thereto
shall survive the Effective Time for a period of six months, and shall not be
deemed waived or otherwise affected by any investigation made or any knowledge
acquired with respect thereto, or by any notice delivered pursuant to Section
11.3. The covenants and agreements contained in this Agreement or in the other
Operative Documents shall survive the Effective Time and shall continue until
all obligations with respect thereto shall have been performed or satisfied or
shall have been terminated in accordance with their terms. The Confidentiality
Agreement shall survive termination of this Agreement as provided therein.
10.2 EXCLUSIVE REMEDY
After the Effective Time, the reduction in the Share Consideration
described in Section 4.2 will be the sole and exclusive remedy of Digital and
Merger Sub for a breach of any representation, warranty or covenant contained
herein, except with respect to any claim based on fraud in the inducement or a
similar theory and except for the remedy of specific performance provided for in
Section 11.7 with respect to the obligations of the holders of the Holdback
Shares and the Shareholder Representative pursuant to Section 4.2 to be
performed after the Effective Time and the obligations set forth in the
Confidentiality Agreement, to the extent incorporated herein, to be performed
after the Effective Time.
ARTICLE XI
MISCELLANEOUS AND GENERAL
11.1 FEES AND EXPENSES
(a) Except as set forth in this Section 11.1 or as otherwise provided
herein, all fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, whether or not the Merger is consummated; provided, however, that
Digital shall pay 70% and the Company shall pay 30% of all fees and expenses,
other than attorneys' fees, incurred in relation to the printing and filing of
the Proxy Statement/Prospectus (including any preliminary materials relating
thereto) and the S-4 Registration Statement (including financial statements and
exhibits) and any amendments or supplements thereto.
(b) The Company shall pay Digital a fee of $4,000,000, plus actual,
documented and reasonable out-of-pocket expenses of Digital relating to the
transactions contemplated by this Agreement (including, but not
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limited to, fees and expenses of Digital's counsel, accountants and financial
advisers, but excluding any discretionary fees paid to such financial advisors),
upon the earliest to occur of the following events:
(i) the termination of this Agreement by Digital or the Company
pursuant to Section 9.1(d) as a result of the failure to receive the
requisite vote for approval and adoption by the shareholders of the
Company;
(ii) the termination of this Agreement by Digital pursuant to Section
9.1(e);
(iii) the termination of this Agreement by Digital pursuant to Section
9.1(f) after a breach by the Company of this Agreement; or
(iv) the termination of this Agreement by the Company or Digital
pursuant to Section 9.1(j);
provided, however, that in the event an Alternative Transaction is consummated
by the Company within six months of such event, the Company shall pay Digital an
additional fee of $2,000,000, plus actual, documented and reasonable
out-of-pocket expenses (including, but not limited to, fees and expenses of
Digital's counsel) incurred by Digital in connection with the collection of such
additional fee.
(c) As used herein, "Alternative Transaction" means any of (i) a
transaction pursuant to which any Person (or group of Persons) other than
Digital, the Company or their Affiliates (a "Third Party") acquires more than
25% of the outstanding shares of the Company or Digital, as applicable, whether
from such party or pursuant to a tender offer or exchange offer or otherwise,
(ii) a merger or other business combination involving the Company or Digital
pursuant to which any Third Party acquires more than 25% of the outstanding
equity securities of the Company or Digital, as applicable, or the entity
surviving such merger or business combination, or (iii) any other transaction
pursuant to which any Third Party acquires control of assets (including for this
purpose the outstanding equity securities of Subsidiaries of the Company or
Digital, as applicable, and the entity surviving any merger or business
combination, including any of them) of the Company or Digital, as applicable, or
any of their respective Subsidiaries having a fair market value (as determined
by the Board of Directors of the Company in good faith) equal to more than 25%
of the fair market value of all the assets of the Company or Digital, as
applicable, and their respective Subsidiaries, taken as a whole, immediately
prior to such transaction.
(d) Digital shall pay the Company a fee of $4,000,000, plus actual,
documented and reasonable out-of-pocket expenses of the Company relating to the
transactions contemplated by this Agreement (including, but not limited to, fees
and expenses of the Company's counsel, accountants and financial advisers, but
excluding any discretionary fees paid to such financial advisors), upon the
earliest to occur of the following events:
(i) termination of this Agreement by Digital or the Company pursuant
to Section 9.1(d) as a result of the failure to receive the requisite vote
for approval and adoption by the shareholders of Digital at the Digital
Shareholders Meeting;
(ii) termination of this Agreement by the Company pursuant to Section
9.1(g) after a breach by Digital of this Agreement; or
(iii) the termination of this Agreement by the Company pursuant to
Section 9.1(i);
provided, however, that in the event an Alternative Transaction is consummated
by Digital within six months of such event, Digital shall pay the Company an
additional fee of $2,000,000, plus actual, documented and reasonable
out-of-pocket expenses (including, but not limited to, fees and expenses of the
Company's counsel) incurred by the Company in connection with the collection of
such additional fee.
(e) The fees payable pursuant to Sections 11.1(b) and 11.1(d)
(collectively, the "Fees") shall be paid (i) in the case of Fees payable upon
termination of this Agreement, within one business day after the first to occur
of the events described in Section 11.1(b) or 11.1(d) and (ii) in the case of
Fees payable as a result of an Alternative Transaction, within one business day
after consummation of the Alternative Transaction; provided, however, that in no
event shall Digital or the Company, as the case may be, be required to pay such
Fees to the other, if, immediately prior to the termination of this Agreement,
the party to receive the fee was in material breach of its obligations under
this Agreement.
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11.2 DISCLOSURE STATEMENTS
Any disclosure made with reference to one or more Sections of the Company
Disclosure Statement or the Digital Disclosure Statement shall be deemed
disclosed with respect to each other section therein as to which such disclosure
is relevant provided that such relevance is reasonably apparent.
11.3 NOTICES, ETC.
All notices, requests, demands or other communications required by or
otherwise with respect to this Agreement shall be in writing and shall be deemed
to have been duly given to any party when delivered personally (by courier
service or otherwise), when delivered by facsimile (subject to confirmation of
receipt), or seven days after being mailed by first-class mail, postage prepaid
and return receipt requested, in each case to the applicable addresses set forth
below:
If to the Company:
ViewStar Corporation
1101 Marina Village Parkway
Alameda, CA 94501
Attn: Kamran Kheirolomoom, President
Facsimile: (510) 337-2226
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
Attn: Robert B. Jack, Esq.
Facsimile: (415) 493-6811
If to Digital:
Digital Systems International, Inc.
6464 -- 185th Avenue N.E.
Redmond, WA 98052-5032
Attn: Patrick S. Howard, President
Facsimile: (206) 869-4511
with a copy to:
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, WA 98101-3099
Attn: Evelyn Cruz Sroufe, Esq.
Facsimile: (206) 583-8500
or to such other address as such party shall have designated by notice so given
to each other party.
11.4 AMENDMENTS, WAIVERS, ETC.
This Agreement may not be amended, changed, supplemented, waived or
otherwise modified except by an instrument in writing signed by the party (or,
in the case of Section 7.8, the Company Indemnitees) against whom enforcement is
sought.
11.5 NO ASSIGNMENT
This Agreement shall be binding upon and shall inure to the benefit of and
be enforceable by the parties and their respective successors and assigns;
provided, however, that except as otherwise expressly set forth in
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this Agreement, neither the rights nor the obligations of any party may be
assigned or delegated without the prior written consent of the other parties.
11.6 ENTIRE AGREEMENT
Except as otherwise provided herein, this Agreement (together with the
Confidentiality Agreement, to the extent set forth in Section 7.7) embodies the
entire agreement and understanding among the parties relating to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter. There are no representations, warranties or covenants by
the parties hereto relating to such matter other than those expressly set forth
in this Agreement (including the Company Disclosure Statement and the Digital
Disclosure Statement) and any writings expressly required hereby.
11.7 SPECIFIC PERFORMANCE
The parties acknowledge that money damages are not an adequate remedy for
violations of this Agreement and that any party may, in its sole discretion,
apply to a court of competent jurisdiction for specific performance or
injunctive or such other relief as such court may deem just and proper to
enforce this Agreement or to prevent any violation hereof and, to the extent
permitted by applicable law, each party waives any objection to the imposition
of such relief.
11.8 REMEDIES CUMULATIVE
Except as set forth in Section 10.2, all rights, powers and remedies
provided under this Agreement or otherwise available in respect hereof at law or
in equity shall be cumulative and not alternative, and the exercise or beginning
of the exercise of any thereof by any party shall not preclude the simultaneous
or later exercise of any other such right, power or remedy by such party.
11.9 NO WAIVER
The failure of any party hereto to exercise any right, power or remedy
provided under this Agreement or otherwise available in respect hereof at law or
in equity, or to insist upon compliance by any other party hereto with its
obligations hereunder, and any custom or practice of the parties at variance
with the terms hereof, shall not constitute a waiver by such party of its right
to exercise any such or other right, power or remedy or to demand such
compliance.
11.10 NO THIRD PARTY BENEFICIARIES
This Agreement is not intended to be for the benefit of and shall not be
enforceable by any Person who is not a party hereto, except for the
indemnification provisions contained in Section 7.8, which provisions may be
enforced by any Company Indemnitee referred to therein and the provisions of
Article IV relating to the reduction in the Share Consideration, which
provisions may be enforced by any officer, director or Affiliate of Digital who
has incurred Digital Losses.
11.11 JURISDICTION
Each party hereby irrevocably submits to the exclusive jurisdiction of the
United States District Court for the Western District of Washington or any court
of the state of Washington located in the city of Seattle or the United States
District Court for the Northern District of California or any court of the state
of California located in the city of San Francisco in any action, suit or
proceeding arising in connection with this Agreement, and agrees that any such
action, suit or proceeding shall be brought only in such court (and waives any
objection based on forum non conveniens or any other objection to venue
therein); provided, however, that such consent to jurisdiction is solely for the
purpose referred to in this Section 11.11 and shall not be deemed to be a
general submission to the jurisdiction of said courts or in the state of
Washington other than for such purpose. Digital and the Company hereby waive any
right to a trial by jury in connection with any such action, suit or proceeding.
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11.12 PUBLIC ANNOUNCEMENTS
Digital and the Company will agree upon the timing and content of the
initial press release to be issued describing the transactions contemplated by
this Agreement, and will not make any public announcement thereof prior to
reaching such agreement unless required to do so by applicable law or
regulation. To the extent reasonably requested by either party, each party will
thereafter consult with and provide reasonable cooperation to the other in
connection with the issuance of further press releases or other public documents
describing the transactions contemplated by this Agreement.
11.13 GOVERNING LAW
This Agreement and all disputes hereunder shall be governed by and
construed and enforced in accordance with the internal laws of the state of
Washington, without regard to principles of conflict of laws.
11.14 NAME, CAPTIONS, ETC.
The name assigned to this Agreement and the section captions used herein
are for convenience of reference only and shall not affect the interpretation or
construction hereof. Unless otherwise specified (a) the terms "hereof " and
"herein" and similar terms refer to this Agreement as a whole and (b) references
herein to Articles or Sections refer to articles or sections of this Agreement.
11.15 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one instrument. Each counterpart may consist of a number of copies, each signed
by less than all, but together signed by all, the parties hereto.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties set forth below.
<TABLE>
<S> <C>
DIGITAL SYSTEMS INTERNATIONAL, INC. VIEWSTAR CORPORATION
By: /s/ PATRICK S. HOWARD By: /s/ KAMRAN KHEIROLOMOOM
---------------------------------- -------------------------------------
Name: Patrick S. Howard Name: Kamran Kheirolomoom
---------------------------------- -------------------------------------
Title: President and Chief Title: President and Chief
Executive Officer Executive Officer
VISION MERGER CORPORATION
By: /s/ PATRICK S. HOWARD
----------------------------------
Name: Patrick S. Howard
----------------------------------
Title: President
</TABLE>
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ANNEX II
SHAREHOLDERS AGREEMENT
This SHAREHOLDERS AGREEMENT (this "Agreement"), dated as of October 14,
1996, is made and entered into among Digital Systems International, Inc., a
Washington corporation ("Digital"), ViewStar Corporation, a California
corporation ("ViewStar"), certain shareholders of Digital listed on Schedule A
attached hereto who are also directors or executive officers of Digital
(individually, a "Digital Shareholder" and collectively, the "Digital
Shareholders"), and certain shareholders of ViewStar listed on Schedule B
attached hereto (individually, a "ViewStar Shareholder" and collectively, the
"ViewStar Shareholders").
RECITALS
A. Concurrently herewith, Digital, Vision Merger Corporation, a wholly
owned subsidiary of Digital ("Merger Sub"), and ViewStar have entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Merger
Sub will merge with and into ViewStar (the "Merger"). Capitalized terms used and
not defined herein shall have the meanings assigned to such terms in the Merger
Agreement.
B. Approval of the Merger Agreement by ViewStar's shareholders and approval
of the issuance of Digital Common Shares in the Merger (the "Issuance") by
Digital's shareholders are each conditions to the consummation of the Merger.
C. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the Code.
D. It is also intended that the Merger shall be recorded for accounting
purposes as a pooling of interests.
E. As a condition to the parties' entering into the Merger Agreement,
ViewStar has required that the Digital Shareholders agree, and Digital has
required that the ViewStar Shareholders agree, and the Digital Shareholders and
the ViewStar Shareholders have each agreed, to enter into this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the parties hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF EACH VIEWSTAR SHAREHOLDER
Each ViewStar Shareholder represents and warrants to Digital and the
Digital Shareholders that:
(a) General Representations.
(i) As of the date hereof such ViewStar Shareholder owns
beneficially or of record the number of Shares set forth on Schedule B
hereto, and there are no outstanding proxies with respect to such
Shares.
(ii) Such ViewStar Shareholder has the requisite power to enter
into this Agreement and to carry out his, her or its obligations
hereunder. If such ViewStar Shareholder is a corporation or other
entity, the execution and delivery of this Agreement by such ViewStar
Shareholder and the consummation by it of the transactions contemplated
hereby have been duly authorized by all necessary corporate or other
action on the part of such ViewStar Shareholder.
(iii) This Agreement is a legal and valid agreement and obligation
binding upon such ViewStar Shareholder, enforceable against such
ViewStar Shareholder in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws of general application which may affect the
enforcement of creditors' rights generally and by general equitable
principles.
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(iv) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and compliance with
the terms hereof will not, conflict with, or result in any violation of
or default (with or without notice or lapse of time or both) under, any
provision of (A) in the case of a ViewStar Shareholder which is a
corporation or other entity, its charter, bylaws or other organizational
documents or (B) in the case of any ViewStar Shareholder, any agreement,
instrument, permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to such
ViewStar Shareholder or to his, her or its property or assets.
(v) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court or Governmental
Body, is required by or with respect to such ViewStar Shareholder in
connection with the execution and delivery of this Agreement or the
consummation by such ViewStar Shareholder of the transactions
contemplated hereby.
(b) Pooling Covenants and Representations.
(i) During the period from the execution hereof until 30 days prior
to the Effective Time, without the consent of Digital (which shall not
be unreasonably withheld) such ViewStar Shareholder will not sell,
transfer or otherwise dispose of any securities of ViewStar or any
shares of capital stock of Digital held by such Shareholder except for
(A) transfers or other dispositions of a number of Shares less than 10%
of the sum of (1) the number of Shares held by such ViewStar Shareholder
and (2) the number of Shares subject to currently exercisable options
held by such ViewStar Shareholder, (B) transfers or other dispositions
by operation of law upon the death of such ViewStar Shareholder or by
the estate of such ViewStar Shareholder if necessary to pay estate
taxes, or (C) other transfers or dispositions that will not prevent
Digital from accounting for the Merger as a pooling of interests, taking
into account the actions of other Affiliates.
(ii) From and after 30 days prior to the Effective Time, such
ViewStar Shareholder will not sell, transfer or otherwise dispose of any
securities of ViewStar, any Digital Common Shares received by such
ViewStar Shareholder in the Merger or any other shares of capital stock
of Digital until after such time as results covering at least 30 days of
combined operations of Digital and ViewStar have been published by
Digital, in the form of a quarterly earnings report, an effective
registration statement filed with the SEC, a report to the SEC on Form
10-K, 10-Q or 8-K, or any other public filing or press release or other
announcement which includes the combined sales and net income of Digital
and ViewStar, except as provided in Section 1(e) and except for
transfers or other dispositions that, taking into account the actions of
other Affiliates, will not prevent Digital from accounting for the
Merger as a pooling of interests.
(c) Securities Act Covenants and Representations.
(i) Such ViewStar Shareholder has been advised that the offering,
sale and delivery of Digital Common Shares pursuant to the Merger will
be registered under the Securities Act on a Registration Statement on
Form S-4. Such ViewStar Shareholder has also been advised, however, that
to the extent such ViewStar Shareholder is considered an Affiliate of
ViewStar at the time the Merger Agreement is submitted for a vote of the
shareholders of ViewStar, any public offering or sale by such ViewStar
Shareholder of any Digital Common Shares received by such ViewStar
Shareholder in the Merger will, under current law, require either (A)
further registration under the Securities Act of such Digital Common
Shares to be sold by such ViewStar Shareholder, (B) compliance with Rule
145 promulgated by the SEC under the Securities Act or (C) the
availability of another exemption from such registration under the
Securities Act.
(ii) Such ViewStar Shareholder has read this Agreement and the
Merger Agreement and has discussed their requirements and other
applicable limitations upon such ViewStar Shareholder's ability to sell,
transfer or otherwise dispose of Digital Common Shares, to the extent
such ViewStar Shareholder believed necessary, with such ViewStar
Shareholder's counsel or counsel for ViewStar.
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(iii) Such ViewStar Shareholder also understands that stop transfer
instructions will be given to Digital's transfer agent with respect to
Digital Common Shares and that a legend will be placed on the
certificates for the Digital Common Shares issued to such ViewStar
Shareholder in the Merger, or any substitutions.
(d) Tax Covenants and Representations.
In addition to, and not in lieu of, the representations set forth in
clauses (b) and (c) above, each ViewStar Shareholder represents and warrants to
Digital that, except for distributions permitted by clause (e) below, such
ViewStar Shareholder has no plan or intention to sell, transfer or otherwise
dispose of a number of Digital Common Shares to be received by such ViewStar
Shareholder in the Merger that would reduce such ViewStar Shareholder's
ownership of Digital Common Shares to a number of shares having a value, as of
the date of the Merger, of less than 75% of the value of all of the formerly
outstanding capital stock of ViewStar held by such ViewStar Shareholder as of
the same date. Furthermore, each ViewStar Shareholder that will make a
distribution permitted by clause (e) below represents and warrants that it does
not, and to its knowledge its partners do not, have any plan or intention to
sell, transfer or otherwise dispose of a number of Digital Common Shares to be
received by such ViewStar Shareholder in the Merger that would, taking into
account any sales, transfers or dispositions by the ViewStar Shareholder
described in the previous sentence, reduce the aggregate number of Digital
Common Shares held by such ViewStar Shareholder and its partners to a number
having a value, as of the Effective Time, of less than 75% of the value of all
of the Digital Common Shares received by such ViewStar Shareholder in the
Merger. For purposes of these representations, shares of ViewStar capital stock
exchanged for cash or other property and Shares exchanged for cash in lieu of
fractional Digital Common Shares will be treated as outstanding ViewStar capital
stock, and any Digital Common Shares held by such ViewStar Shareholder on the
date hereof and otherwise sold, redeemed or disposed of prior to or subsequent
to the Effective Time will be considered in making this representation. Such
representations will be relied upon by Perkins Coie in connection with the
opinion contemplated by Section 8.2(f) of the Merger Agreement.
(e) Certain Partnerships.
Notwithstanding the representations contained in clauses (b) through (d)
above, after the Effective Time a ViewStar Shareholder which is and has been
since its formation a general or limited partnership for income tax purposes, as
determined under Section 7701 of the Code and the underlying Treasury
Regulations, may distribute all or part of the Digital Common Shares received by
such ViewStar Shareholder in the Merger to all of its partners for no additional
consideration and in a transaction in which no gain or loss is recognized for
income tax purposes; provided, however, that (i) any such transfer shall be made
pro rata based on each partner's ownership interest in such ViewStar
Shareholder, (ii) prior to any distribution pursuant to this clause (e), each
partner of such ViewStar Shareholder shall agree in writing to be bound by the
terms of clause (b) above to the same extent as the ViewStar Shareholder that
transferred the Digital Common Shares to such partner and (iii) the partnership
interest in the ViewStar Shareholder held by each partner at the time of the
distribution has been continuously held by such partner, and is unchanged from
the proportionate interest held by such partner, since the execution of the
Merger Agreement.
2. REPRESENTATIONS AND WARRANTIES OF DIGITAL SHAREHOLDERS
Each Digital Shareholder represents and warrants to Digital and the
ViewStar Shareholders that:
(a) General Representations.
(i) As of the date hereof, such Digital Shareholder owns
beneficially or of record, the number of Digital Common Shares set forth
on Schedule A hereto, and there are no outstanding proxies with respect
to such Shares.
(ii) Such Digital Shareholder has the requisite power to enter into
this Agreement and to carry out his or her obligations hereunder.
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(iii) This Agreement is a legal and valid agreement and obligation
binding upon such Digital Shareholder, enforceable against such Digital
Shareholder in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other
similar laws of general application which may affect the enforcement of
creditors' rights generally and by general equitable principles.
(iv) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and compliance with
the terms hereof will not, conflict with, or result in any violation of
or default (with or without notice or lapse of time or both) under, any
provision of any agreement, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to such Digital Shareholder or to his or her
property or assets.
(v) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court or Governmental
Body, is required by or with respect to such Digital Shareholder in
connection with the execution and delivery of this Agreement or the
consummation by such Digital Shareholder of the transactions
contemplated hereby.
(b) Pooling Covenants and Representations.
(i) During the period from the execution hereof until 30 days prior
to the Effective Time, without the consent of Digital (which shall not
be unreasonably withheld) such Digital Shareholder will not sell,
transfer or otherwise dispose of any securities of Digital held by such
Shareholder except for (A) transfers or other dispositions of a number
of Digital Common Shares less than 10% of the sum of (1) the number of
Digital Common Shares held by such Digital Shareholder and (2) the
number of Digital Common Shares subject to currently exercisable options
held by such Digital Shareholder, (B) transfers or other dispositions by
operation of law upon the death of such Digital Shareholder or by the
estate of such Digital Shareholder if necessary to pay estate taxes, or
(C) other transfers or dispositions that will not prevent Digital from
accounting for the Merger as a pooling of interests, taking into account
the actions of other Affiliates.
(ii) From and after 30 days prior to the Effective Time, such
Digital Shareholder will not sell, transfer or otherwise dispose of any
securities of Digital until after such time as results covering at least
30 days of combined operations of Digital and ViewStar have been
published by Digital, in the form of a quarterly earnings report, an
effective registration statement filed with the SEC, a report to the SEC
on Form 10-K, 10-Q or 8-K, or any other public filing or announcement
which includes the combined sales and net income, except for transfers
or other dispositions that, taking into account the actions of other
Affiliates, will not prevent Digital from accounting for the Merger as a
pooling of interests.
3. REPRESENTATIONS AND WARRANTIES OF DIGITAL AND VIEWSTAR
(a) Digital represents and warrants to the ViewStar Shareholders that:
(i) Digital is a corporation duly organized, validly existing and in
good standing under the laws of the state of Washington.
(ii) Digital has the requisite corporate power to enter into this
Agreement and to carry out its obligations hereunder.
(iii) This Agreement is a legal and valid agreement and obligation
binding upon Digital, enforceable against Digital in accordance
with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other
similar laws of general application which may affect the
enforcement of creditors' rights generally and by general
equitable principles.
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(b) ViewStar represents and warrants to Digital and the Digital
Shareholders that:
(i) ViewStar is a corporation duly organized, validly existing and in
good standing under the laws of the state of California.
(ii) ViewStar has the requisite corporate power to enter into this
Agreement and to carry out its obligations hereunder.
(iii) This Agreement is a legal and valid agreement and obligation
binding upon ViewStar, enforceable against ViewStar in
accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws of general application which may affect
the enforcement of creditors' rights generally and by general
equitable principles.
4. OBLIGATION OF THE VIEWSTAR SHAREHOLDERS TO APPROVE MERGER
(a) Each ViewStar Shareholder hereby irrevocably agrees to attend any
special meeting of the shareholders of ViewStar called for the purpose of
approving the Merger Agreement and/or the Merger (the "ViewStar Shareholders
Meeting"), in person or by proxy, and to vote (or cause to be voted) all Shares,
and any other voting securities of ViewStar, whether issued heretofore or
hereafter, that such ViewStar Shareholder owns or has the right to vote, for
approval and adoption of the Merger Agreement and the Merger, such agreement to
vote to apply also to any adjournment or adjournments of the ViewStar
Shareholders Meeting. In the event that ViewStar should elect to solicit
consents to the Merger in lieu of holding the ViewStar Shareholders Meeting,
each ViewStar Shareholder hereby irrevocably agrees to execute (or cause to be
executed) a consent or consents with respect to all Shares, and any other voting
securities of ViewStar, whether issued heretofore or hereafter, that such
ViewStar Shareholder owns or has the right to vote, for approval and adoption of
the Merger Agreement and the Merger.
(b) To the extent inconsistent with the foregoing provisions of this
Section 4, each ViewStar Shareholder hereby revokes any and all previous proxies
with respect to such ViewStar Shareholder's Shares or any other voting
securities of ViewStar.
5. OBLIGATION OF DIGITAL SHAREHOLDERS TO APPROVE ISSUANCE
(a) Each Digital Shareholder hereby agrees to attend the Digital
Shareholders Meeting, in person or by proxy, and to vote (or cause to be voted)
all Digital Common Shares, and any other voting securities of Digital, whether
issued heretofore or hereafter, that such Digital Shareholder owns or has the
right to vote, for approval of the Issuance, such agreement to vote to apply
also to any adjournment or adjournments of the Digital Shareholders Meeting.
(b) To the extent inconsistent with the foregoing provisions of this
Section 5, each Digital Shareholder hereby revokes any and all previous proxies
with respect to such Digital Shareholder's Digital Common Shares or any other
voting securities of Digital.
6. TERMINATION OF AGREEMENTS
Subject to and effective upon consummation of the Merger, each ViewStar
Shareholder hereby irrevocably waives, and agrees to execute any agreement
providing for the termination of, any and all preemptive rights, rights of first
refusal or first offer or any registration rights with respect to any Shares or
other securities of ViewStar or any securities issued in exchange therefor.
7. TERMINATION
This Agreement shall terminate on the earliest of: (i) mutual written
consent of the parties hereto or (ii) the date on which the Merger Agreement is
terminated in accordance with Article IX thereof. Upon the termination of this
Agreement pursuant to this Section 7, none of the parties to this Agreement
shall have any further obligation hereunder.
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8. NOTICES
All notices, requests, demands or other communications required by or
otherwise with respect to this Agreement shall be in writing and shall be deemed
to have been duly given to any party when delivered personally (by courier
service or otherwise), when delivered by facsimile and confirmed by return
facsimile, or seven days after being mailed by first-class mail, postage prepaid
and return receipt requested in each case to the applicable addresses set forth
below:
If to Digital:
Digital Systems International, Inc.
6464 185th Avenue NE
Redmond, Washington 98052
Attn.: General Counsel
Facsimile: (206) 869-4511
with a copy to:
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
Attn.: Michael E. Stansbury
Facsimile: (206) 583-8500
If to ViewStar:
ViewStar Corporation
1101 Marina Village Parkway
Alameda, California 94501
Attn: President
Facsimile: (510) 337-2226
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attn.: Robert B. Jack
Facsimile: (415) 493-6811
If to the Digital Shareholders, to their respective addresses set forth on
Schedule A hereto, with copies to:
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
Attn.: Michael E. Stansbury
Facsimile: (206) 583-8500
If to the ViewStar Shareholders, to their respective addresses set forth on
Schedule B hereto, with copies to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attn.: Robert B. Jack
Facsimile: (415) 493-6811
or to such other address as such party shall have designated by notice so
given to each other party.
6
<PAGE> 211
9. TRANSFER; ASSIGNMENT
Neither this Agreement nor any of the rights, interests or obligations in
this Agreement shall be assigned by any of the parties hereto without the prior
written consent of the other parties hereto. Subject to the preceding sentence,
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective heirs, legal representatives,
successors and permitted assigns.
10. AMENDMENT
This Agreement cannot be amended or modified except by a written instrument
executed by the parties to this Agreement who propose to be bound by the
amendment or modification.
11. HEADINGS
The headings in this Agreement are inserted for convenience of reference
only and are not intended to be a part of or affect the meaning or
interpretation of this Agreement.
12. ENTIRE AGREEMENT
This Agreement supersedes any and all oral or written agreements and
understandings heretofore made relating to the subject matter hereof and
contains the entire agreement of the parties hereto relating to the subject
matter hereof.
13. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
internal laws of the state of Washington without regard to conflicts-of-laws
principles.
14. REMEDIES
Each party hereto acknowledges that the other parties to this Agreement may
not have an adequate remedy at law for money damages in the event that this
Agreement is not performed by such party in accordance with its terms and,
therefore, agrees that each party shall be entitled to specific performance of,
and injunctive relief to prevent any violation of, the terms hereof, in addition
to any other remedy or relief available at law or in equity, and further agrees
not to take action, directly or indirectly, in opposition to any other party's
seeking such specific enforcement or injunctive relief.
15. SEVERABILITY
If any term of this Agreement or the application thereof to any party or
circumstance shall be held invalid or unenforceable to any extent, the remainder
of this Agreement and the application of such term to the other parties or
circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by applicable law; provided, however, that in such
event the parties shall negotiate in good faith in an attempt to agree to
another provision (in lieu of the term or application held to be invalid or
unenforceable) that will be valid and enforceable and will carry out the
parties' intentions hereunder.
16. NO WAIVER
The failure of any party hereto to exercise any right, power or remedy
provided under this Agreement or otherwise available in respect hereof at law or
in equity, or to insist upon compliance by any other party hereto with its
obligations hereunder, and any custom or practice of the parties at variance
with the terms hereof, shall not constitute a waiver by such party of its right
to exercise any such or other right, power or remedy or to demand such
compliance.
7
<PAGE> 212
17. NO THIRD PARTY BENEFICIARIES
This Agreement is not intended to be for the benefit of and shall not be
enforceable by any Person who or which is not a party hereto.
18. LIMITATION ON LIABILITY
No ViewStar Shareholder shall have any liability hereunder for any actions
or omissions of any other ViewStar Shareholder or any Digital Shareholder, and
no Digital Shareholder shall have any liability hereunder for any actions or
omissions of any other Digital Shareholder or any ViewStar Shareholder.
19. COUNTERPARTS
This Agreement may be executed in several counterparts, each of which will
be deemed an original but all of which together constitute one and the same
instrument.
20. AFFILIATE STATUS
The execution of this Agreement by each of the ViewStar Shareholders and
Digital Shareholders shall not be deemed to be an admission by such ViewStar
Shareholder or Digital Shareholder that such ViewStar Shareholder or Digital
Shareholder is an "affiliate" of ViewStar or Digital, as the case may be, within
the meaning of Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
8
<PAGE> 213
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
<TABLE>
<S> <C>
DIGITAL SYSTEMS INTERNATIONAL, INC. VIEWSTAR CORPORATION
By /s/ Patrick S. Howard By /s/ Kamran Kheirolomoom
------------------------------------------ ------------------------------------------
Its Patrick S. Howard, Pres./CEO Its President and Chief Executive Officer
DIGITAL SHAREHOLDERS: VIEWSTAR SHAREHOLDERS:
Inman & Bowman
/s/ Tom A. Alberg /s/ Grant M. Inman
- --------------------------------------------- ---------------------------------------------
Tom A. Alberg By Grant M. Inman, General Partner of
Inman & Bowman Management, the
General Partner of Inman & Bowman
/s/ H. Robert Gill
- --------------------------------------------- Inman & Bowman Entrepreneurs
H. Robert Gill
/s/ Grant M. Inman
---------------------------------------------
/s/ Harvey N. Gillis By Grant M. Inman, General Partner of
- --------------------------------------------- Inman & Bowman Management, the
Harvey N. Gillis General Partner of Inman & Bowman
Entrepreneurs
/s/ Patrick S. Howard Institutional Venture Management IV
- ---------------------------------------------
Patrick S. Howard /s/ Geoffrey Y. Yang
---------------------------------------------
By Geoffrey Y. Yang
/s/ David J. Ladd Its General Partner
- ---------------------------------------------
David J. Ladd Institutional Venture Partners IV
/s/ Geoffrey Y. Yang
/s/ Robert S. Leventhal ---------------------------------------------
- --------------------------------------------- By Geoffrey Y. Yang
Robert S. Leventhal Its General Partner
/s/ Cynthia Stroum
- ---------------------------------------------
Cynthia Stroum
/s/ Thomas R. Clark
- ---------------------------------------------
Thomas R. Clark
/s/ Steve L. Adams
- ---------------------------------------------
Steve L. Adams
</TABLE>
9
<PAGE> 214
<TABLE>
<S> <C>
/s/ John J. Flavio J.P. Morgan Investment Corporation
-------------------------------------------
John J. Flavio /s/ Thomas M. Snell
---------------------------------------------
/s/ Edmund D. Wilsbach By Thomas M. Snell
------------------------------------------- Its Managing Director
Edmund D. Wilsbach
Sixty Wall Street SBIC Fund
/s/ [Illegible]
By
---------------------------------------------
Its
------------------------------------------
Mayfield Associates
/s/ W.S. Van Aucken
---------------------------------------------
By W.S. Van Aucken
Its General Partner
Mayfield Associates Fund II
/s/ W.S. Van Aucken
---------------------------------------------
By W.S. Van Aucken
Its General Partner
Mayfield VI
/s/ W.S. Van Aucken
---------------------------------------------
By W.S. Van Aucken
Its General Partner
Mayfield VII
/s/ W.S. Van Aucken
---------------------------------------------
By W.S. Van Aucken
Its General Partner
</TABLE>
10
<PAGE> 215
<TABLE>
<S> <C>
Technology Partners West Fund II
/s/ William Hart
---------------------------------------------
By William Hart
Its Managing Partner
Technology Partners West Fund III
/s/ William Hart
---------------------------------------------
By William Hart
Its Managing Partner
Technology Partners West Fund IV, L.P.
/s/ William Hart
---------------------------------------------
By William Hart
Its Managing Partner
TPW Venture Partners IX
/s/ William Hart
---------------------------------------------
By William Hart
Its Managing Partner
Wongfratis Company
/s/ Y. Hon Wong
---------------------------------------------
By Y. Hon Wong
Its Partner
/s/ Kamran Kheirolomoom
---------------------------------------------
Kamran Kheirolomoom
/s/ Gayle A. Crowell
---------------------------------------------
Gayle A. Crowell
/s/ Robert I. Pender, Jr.
---------------------------------------------
Robert I. Pender, Jr.
/s/ John E. Ardell, III
---------------------------------------------
John E. Ardell, III
/s/ Umang Gupta
---------------------------------------------
Umang Gupta
</TABLE>
11
<PAGE> 216
SCHEDULE A
TO SHAREHOLDERS AGREEMENT
<TABLE>
<CAPTION>
DIGITAL COMMON
DIGITAL COMMON SHARES SUBJECT TO
SHARES BENEFICIALLY OUTSTANDING
DIGITAL SHAREHOLDERS OWNED OPTIONS
- ------------------------------------------------------------ ------------------- -----------------
<S> <C> <C>
Tom A. Alberg............................................... 11,100 10,000
c/o Madrona Investment Group LLC
1201 Third Avenue, 40th Floor
Seattle, WA 98101
H. Robert Gill.............................................. 0 5,000
6368 Swallow Lane
Boulder, CO 80303-1456
Harvey N. Gillis............................................ 30,000 10,000
c/o Advanced Technology Labs
22100 Bothell--Everett Highway
Bothell, WA 98021
Patrick S. Howard........................................... 6,000 175,000
c/o Digital Systems International, Inc.
6464 -- 185th Avenue NE
Redmond, WA 98052
David J. Ladd............................................... 0 7,000
c/o Octel Communications
1001 Murphy Ranch Rd.
Milpitas, CA 95035
Robert S. Leventhal......................................... 750 7,000
1261 Parkside Drive E.
Seattle, WA 98112-3717
Cynthia Stroum.............................................. 97,774 10,000
1420 Fifth Avenue, Suite 3000
Seattle, WA 98101
Thomas R. Clark............................................. 4,093 115,000
c/o Digital Systems International, Inc.
6464 -- 185th Avenue NE
Redmond, WA 98052
Steve L. Adams.............................................. 0 100,000
c/o Digital Systems International, Inc.
6464 -- 185th Avenue NE
Redmond, WA 98052
John J. Flavio.............................................. 3,868 83,000
c/o Digital Systems International, Inc.
6464 -- 185th Avenue NE
Redmond, WA 98052
Edmund D. Wilsbach.......................................... 0 70,600
c/o Digital Systems International, Inc.
6464 -- 185th Avenue NE
Redmond, WA 98052
</TABLE>
12
<PAGE> 217
SCHEDULE B
TO SHAREHOLDERS AGREEMENT
<TABLE>
<CAPTION>
SHARES OF COMPANY
COMMON STOCK
SHARES ISSUABLE SHARES ISSUABLE ISSUABLE UPON
SHARES OF UPON EXERCISE OF UPON EXERCISE OF CONVERSION OF
COMPANY OUTSTANDING OUTSTANDING COMPANY
VIEWSTAR SHAREHOLDERS COMMON OPTIONS WARRANTS PREFERRED STOCK TOTALS
- --------------------------------- --------- ---------------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Inman & Bowman................... 430,162 14,414 248,998 704,790
Inman & Bowman Entrepreneurs..... 7,950 146 3,119
ATTN: Grant Inman
4 Orinda Way
Building D, Suite 150
Orinda, CA 94563
Institutional Venture Mgmt IV.... 5,156 171 2,966 552,813
Institutional Venture
Partners IV.................... 338,525 11,246 194,749
ATTN: Geoffrey Yang
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94108
JP Morgan Investment
Corporation.................... 426,393 11,821 205,345 654,760
Sixty Wall Street SBIC Fund...... 11,201
ATTN: Donald Patrick
60 Wall Street
New York, NY 10260
Mayfield Associates.............. 21,686 618 11,219 1,141,504
Mayfield Associates Fund II...... 7,531 366 5,749
Mayfield VI...................... 520,477 14,832 269,258
Mayfield VII..................... 159,830 7,772 122,167
ATTN: F. Gibson Myers
2800 Sand Hill Road, Suite 250
Menlo Park, CA 94025
Technology Partners West
Fund II........................ 69,165 893 22,551 378,523
Technology Partners West
Fund III....................... 69,164 893 22,551
Technology Partners West
Fund IV........................ 136,600 1,786 44,813
TPW Venture Partners IX.......... 8,657 1,451
ATTN: William Hart
1550 Tiburon Blvd., Suite A
Belvedere, CA 94920
Wongfratris Company.............. 233,497 6,471 118,557 358,525
ATTN: Hon Wong
51 Jordan Place
Palo Alto, CA 94303
Kamran Kheirolomoom.............. 263,428 71,428 334,856
c/o Viewstar Corporation
1101 Marina Village Parkway
Alameda, CA 94501
Gayle Crowell.................... 85,714 42,857 128,571
25205 Palomares Road
Castro Valley, CA 94552
Robert Pender.................... 45,714 24,287 70,001
c/o ViewStar Corporation
1101 Marina Village Parkway
Alameda, CA 94501
</TABLE>
13
<PAGE> 218
<TABLE>
<CAPTION>
SHARES OF COMPANY
COMMON STOCK
SHARES ISSUABLE SHARES ISSUABLE ISSUABLE UPON
SHARES OF UPON EXERCISE OF UPON EXERCISE OF CONVERSION OF
COMPANY OUTSTANDING OUTSTANDING COMPANY
VIEWSTAR SHAREHOLDERS COMMON OPTIONS WARRANTS PREFERRED STOCK TOTALS
- --------------------------------- --------- ------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
J. E. Ardell III................. 10,714 3,764 14,478
25570 Hatton Road
Carmel, CA 93923
Umang Gupta...................... 18,571
523 Harvard Road
San Mateo, CA 94402
--------- ------- ------ --------- ---------
Total of Columns................. 2,840,363 157,143 71,429 1,288,458 4,357,393
========= ======= ====== ========= =========
</TABLE>
14
<PAGE> 219
ANNEX III
[DAIN BOSWORTH INCORPORATED LETTERHEAD]
October 9, 1996
The Board of Directors
Digital Systems International, Inc.
6464 -- 185th Avenue N.E.
Redmond, WA 98052
Ladies and Gentlemen:
You have requested our opinion, as of the date hereof, as to the fairness,
from a financial point of view, to the common stockholders of Digital Systems
International, Inc. ("Digital Systems" or the "Company") of the consideration to
be paid in connection with the proposed merger of ViewStar Corporation, a
privately held Californian corporation ("ViewStar") with and into Digital
Systems (the "Merger"), pursuant to the Agreement and Plan of Merger dated as of
October 9, 1996 (the "Merger Agreement"). Digital Systems shall be the surviving
corporation and the separate existence of ViewStar shall cease to exist. In the
Merger, each outstanding share of the common stock of ViewStar will be converted
into the right to receive 0.693 shares of Common Stock of Digital Systems (the
"Exchange Ratio"). Outstanding options to acquire shares of ViewStar common
stock will be converted into options to acquire Digital Systems common stock,
adjusted for the Exchange Ratio. The Merger is intended to qualify as a tax-free
reorganization and to be accounted for as a "pooling of interests." The terms
and conditions of the Merger are set out more fully in the Merger Agreement.
Dain Bosworth Incorporated ("Dain Bosworth"), as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements, and valuations for estate, corporate, and other
purposes. In the ordinary course of business, Dain Bosworth has published
research materials regarding Digital Systems and other companies in the
telecommunications industry. Also, Dain Bosworth has acted as a market maker in
the equity securities of the Company and such other companies and, accordingly,
periodically may have positions in such securities. Our duties as financial
advisor to the Company in connection with the Merger have included assisting
Digital Systems in negotiating and structuring certain terms of the Merger
Agreement and the Merger, and assisting in matters related to closing the
Merger. We will receive fees for such services, a substantial portion of which
are contingent upon the consummation of the Merger, and will be indemnified
against certain liabilities that may arise from activities related to our
engagement.
In connection with this opinion, we have, among other things, reviewed (i)
the Merger Agreement; (ii) certain historical financial information for Digital
Systems and ViewStar; (iii) certain limited projected financial information for
Digital Systems and ViewStar prepared for financial planning purposes and
furnished by the managements of Digital Systems and ViewStar, respectively; and
(iv) certain publicly available data relative to Digital Systems and ViewStar.
We made inquiries of the management of ViewStar regarding the past and current
business operations, financial condition, and future prospects for ViewStar. In
addition, we have held discussions with senior management of both companies to
understand their reasons for completing the Merger.
We have compared financial information on ViewStar to similar information
for certain companies deemed comparable to ViewStar and have reviewed stock
market information on such companies that have publicly traded securities. Also,
we have reviewed, to the extent publicly available, the financial terms of
certain acquisition transactions involving companies operating businesses deemed
similar to that of ViewStar and analyzed the general economic outlook for
companies in the software service industry.
<PAGE> 220
October 9, 1996
Page 2
In conducting our review and in rendering our opinion, we have assumed and
relied upon the accuracy, completeness and fairness of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independent verification of such information. It is
understood that we were retained by the Board of Directors of the Company, and
that the Board of Directors has not looked to us for independent verification
with respect to the financial and other information provided to us or publicly
available, including the projections provided to us by ViewStar. We have further
relied upon the assurances of management of ViewStar and the Company that they
are not aware of any facts that would make the information supplied to us, or
publicly available, inaccurate or misleading. With respect to the financial
projections for Digital Systems and ViewStar, we have assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgment of the respective managements of
Digital Systems and ViewStar as to their future financial performance.
Management of Digital Systems has confirmed to us the reasonableness of
ViewStar's projections.
We did not make an independent appraisal of the assets or liabilities of
ViewStar, and we do not express an opinion regarding the liquidation value or
solvency of either company separately, or the combined companies following the
Merger. Furthermore, we do not express any opinion as to the prices at which
shares of Digital Systems' common stock may trade following the date of this
opinion, at the closing date for the Merger, or at any later time in the future.
Our opinion as expressed herein is limited to the fairness to the stockholders
of Digital Systems, from a financial point of view, of the consideration to be
paid by the Company in connection with the Merger, and does not address the
Company's underlying business decision to proceed with the Merger. Our opinion
is based solely on information available to us on or before the date hereof and
reflects general market, economic, financial, monetary and other conditions as
of the date hereof.
Our opinion is directed to the Board of Directors of the Company and is not
intended to be and does not constitute a recommendation to any shareholder of
the Company as to how such shareholder should vote on the proposed Merger. We
hereby consent, however, to the inclusion of this opinion as an exhibit to any
proxy or registration statement distributed in connection with the Merger.
Based upon the foregoing, and other matters that we considered relevant, it
is our opinion that, as of the date hereof, the consideration to be paid by
Digital Systems in connection with the Merger is fair to the Company's
stockholders from a financial point of view.
Very truly yours,
/s/ DAIN BOSWORTH INCORPORATED
DAIN BOSWORTH INCORPORATED
<PAGE> 221
ANNEX IV
CALIFORNIA CORPORATIONS CODE, CHAPTER 13
DISSENTERS' RIGHTS
sec. 1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
sec. 1301. Notice to holders of dissenting shares in reorganizations; demand
for purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any
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<PAGE> 222
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
sec. 1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof,
(a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the shares
are dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or
(b) if the shares are uncertificated securities, written notice of the
number of shares which the shareholder demands that the corporation purchase.
Upon subsequent transfers of the dissenting shares on the books of the
corporation, the new certificates, initial transaction statement, and other
written statements issued therefor shall bear a like statement, together with
the name of the original dissenting holder of the shares.
sec. 1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
sec. 1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of
issues; appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
2
<PAGE> 223
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
sec. 1305. Report of appraisers; confirmation; determination by court;
judgment; payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
sec. 1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
sec. 1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
sec. 1308. Rights of dissenting shareholders pending valuation; withdrawal of
demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
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<PAGE> 224
sec. 1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
sec. 1310. Suspension of right to compensation or valuation proceedings;
litigation of shareholders' approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
sec. 1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
sec. 1312. Right of dissenting shareholder to attack, set aside or rescind
merger or reorganization; restraining order or injunction; conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
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(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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ANNEX V
DIGITAL SYSTEMS INTERNATIONAL, INC.
1996 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the Digital Systems International, Inc. 1996 Stock Incentive
Compensation Plan (the "Plan") is to enhance the long-term shareholder value of
Digital Systems International, Inc., a Washington corporation (the "Company"),
by offering opportunities to employees, directors, officers, consultants,
agents, advisors and independent contractors of the Company and its Subsidiaries
(as defined in Section 2) to participate in the Company's growth and success,
and to encourage them to remain in the service of the Company and its
Subsidiaries and to acquire and maintain stock ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 AWARD
"Award" means an award or grant made pursuant to the Plan, including,
without limitation, awards or grants of Options and Stock Awards, or any
combination of the foregoing.
2.2 BOARD
"Board" means the Board of Directors of the Company.
2.3 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure
of confidential information or trade secrets, or conviction or confession of a
crime punishable by law (except minor violations), in each case as determined by
the Plan Administrator, and its determination shall be conclusive and binding.
2.4 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 COMMON STOCK
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
2.6 CORPORATE TRANSACTION
"Corporate Transaction" means any of the following events:
(a) Consummation of any merger or consolidation of the Company in
which the Company is not the continuing or surviving corporation, or
pursuant to which shares of the Common Stock are converted into cash,
securities or other property, if following such merger or consolidation the
holders of the Company's outstanding voting securities immediately prior to
such merger or consolidation own less than 66 2/3% of the outstanding
voting securities of the surviving corporation;
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or substantially all
of the Company's assets other than a transfer of the Company's assets to a
majority-owned subsidiary corporation (as the term "subsidiary corporation"
is defined in Section 8.3) of the Company;
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(c) Approval by the holders of the Common Stock of any plan or
proposal for the liquidation or dissolution of the Company; or
(d) Acquisition by a person, within the meaning of Section 3(a)(9) or
of Section 13(d)(3) (as in effect on the date of adoption of the Plan) of
the Exchange Act of a majority or more of the Company's outstanding voting
securities (whether directly or indirectly, beneficially or of record).
Ownership of voting securities shall take into account and shall include
ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the
date of adoption of the Plan) pursuant to the Exchange Act.
2.7 DISABILITY
"Disability" means a mental or physical impairment of the Holder which is
expected to result in death or which has lasted or is expected to last for a
continuous period of 12 months or more and which causes the Holder to be unable,
in the opinion of the Company and two independent physicians, to perform his or
her duties for the Company and to be engaged in any substantial gainful
activity. Total disability shall be deemed to have occurred on the first day
after the Company and the two independent physicians have furnished their
opinion of total disability to the Plan Administrator.
2.8 EARLY RETIREMENT
"Early Retirement" means early retirement as that term is defined by the
Plan Administrator from time to time for purposes of the Plan.
2.9 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.10 FAIR MARKET VALUE
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing price
for the Common Stock as such price is officially quoted in the composite tape of
transactions on such exchange for a single trading day. If there is no such
reported price for the Common Stock for the date in question, then such price on
the last preceding date for which such price exists shall be determinative of
Fair Market Value.
2.11 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Holder:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the
Holder's reasonable judgment, represents a substantial reduction in the
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Holder of any duties or responsibilities
that, in the Holder's reasonable judgment, are materially inconsistent with
such status, title, position or responsibilities; or any removal of the
Holder from or failure to reappoint or reelect the Holder to any of such
positions, except in connection with the termination of the Holder's
employment for Cause, for Disability or as a result of his or her death, or
by the Holder other than for Good Reason;
(b) a reduction in the Holder's annual base salary;
(c) the Successor Corporation's requiring the Holder (without the
Holder's consent) to be based at any place outside a 35-mile radius of his
or her place of employment prior to a Corporate Transaction,
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except for reasonably required travel on the Successor Corporation's
business that is not materially greater than such travel requirements prior
to the Corporate Transaction;
(d) the Successor Corporation's failure to (i) continue in effect any
material compensation or benefit plan (or the substantial equivalent
thereof) in which the Holder was participating at the time of a Corporate
Transaction, including, but not limited to, the Plan, or (ii) provide the
Holder with compensation and benefits substantially equivalent (in terms of
benefit levels and/or reward opportunities) to those provided for under
each material employee benefit plan, program and practice as in effect
immediately prior to the Corporate Transaction;
(e) any material breach by the Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent
plan of the Successor Corporation; or
(f) any purported termination of the Holder's employment or service
for Cause by the Successor Corporation that does not comply with the terms
of the Plan or any substantially equivalent plan of the Successor
Corporation.
2.12 GRANT DATE
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
2.13 HOLDER
"Holder" means the person to whom an Award is granted, a permitted assignee
or transferee or, for a Holder who has died, the personal representative of the
Holder's estate, the person(s) to whom the Holder's rights under the Award have
passed by will or the applicable laws of descent and distribution or the
beneficiary designated pursuant to Section 11.
2.14 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 with the intention that it qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
2.15 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.16 OPTION
"Option" means the right to purchase Common Stock granted under Section 7.
2.17 PLAN ADMINISTRATOR
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
2.18 RESTRICTED STOCK
"Restricted Stock" means shares of Common Stock granted under Section 9,
the rights of ownership of which are subject to restrictions prescribed by the
Plan Administrator.
2.19 RETIREMENT
"Retirement" means retirement as of the individual's normal retirement date
under the Company's 401(k) Plan or other similar successor plan applicable to
salaried employees or, if no such plan exists, as that term is defined by the
Plan Administrator from time to time for purposes of the Plan.
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2.20 SECURITIES ACT
"Securities Act" means the Securities Act of 1933, as amended.
2.21 STOCK AWARD
"Stock Award" means an Award granted under Section 9.
2.22 SUBSIDIARY
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Plan Administrator, and any entity that may
become a direct or indirect parent of the Company.
2.23 SUCCESSOR CORPORATION
"Successor Corporation" has the meaning set forth under Section 12.2.
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board. If and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in
selecting the Plan Administrator and the membership of any committee acting as
Plan Administrator of the Plan with respect to any persons subject or likely to
become subject to Section 16 under the Exchange Act the provisions regarding (a)
"outside directors," as contemplated by Section 162(m) of the Code, and (b)
"nonemployee directors," as contemplated by Rule 16b-3 under the Exchange Act.
The Board may delegate the responsibility for administering the Plan with
respect to designated classes of eligible persons to different committees,
subject to such limitations as the Board deems appropriate. Committee members
shall serve for such term as the Board may determine, subject to removal by the
Board at any time.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 12.1, a
maximum of 1,500,000 shares of Common Stock shall be available for issuance
under the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares.
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4.2 LIMITATIONS
(a) Subject to adjustment from time to time as provided in Section 12.1,
not more than an aggregate of 300,000 shares shall be available for issuance
pursuant to grants of Stock Awards under the Plan.
(b) Subject to adjustment from time to time as provided in Section 12.1,
not more than 100,000 shares of Common Stock may be made subject to Awards under
the Plan to any individual in the aggregate in any one fiscal year of the
Company except that the Company may make additional one-time grants of up to
300,000 shares to newly hired individual, such limitation to be applied in a
manner consistent with the requirements of, and only to the extent required for
compliance with, the exclusion from the limitation on deductibility of
compensation under Section 162(m) of the Code.
4.3 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) shall again be
available for issuance in connection with future grants of Awards under the
Plan; provided, however, that for purposes of Section 4.2, any such shares shall
be counted in accordance with the requirements of Section 162(m) of the Code.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and key
employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF AWARDS
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards may
include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options and Stock Awards. Awards may be granted singly or in combination.
6.2 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, and the persons holding such
Awards shall be deemed to be Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
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7.2 OPTION EXERCISE PRICE
Subject to Section 6.2, the exercise price for shares purchased under an
Option shall be as determined by the Plan Administrator, but shall not be less
than 100% of the Fair Market Value of the Common Stock on the Grant Date.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be 10 years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall become exercisable, which provisions may be waived or modified by
the Plan Administrator at any time. If not so established in the instrument
evidencing the Option, the Option will become exercisable according to the
following schedule, which may be waived or modified by the Plan Administrator at
any time:
<TABLE>
<CAPTION>
PERIOD OF HOLDER'S CONTINUOUS EMPLOYMENT OR SERVICE WITH THE PERCENT OF TOTAL OPTION
COMPANY OR ITS SUBSIDIARIES FROM THE OPTION GRANT DATE THAT IS EXERCISABLE
----------------------------------------------------------------- -----------------------
<S> <C>
After 1 year........................................ 25%
After 2 years....................................... 50%
After 3 years....................................... 75%
After 4 years....................................... 100%
</TABLE>
Unless the Plan Administrator determines otherwise, the vesting schedule of an
Option shall be adjusted proportionately to the extent a Holder's hours of
employment or service are reduced after the date of grant.
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5. The Plan
Administrator may determine at any time that an Option may not be exercised as
to less than ten shares at any one time (or the lesser number of remaining
shares covered by the Option).
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check, or, unless the Plan Administrator at any time
determines otherwise, a combination of cash and/or check and one or both of the
following alternative forms: (a) tendering (either actually or, if and so long
as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange
Act, by attestation) Common Stock already owned by the Holder for at least six
months (or any shorter period necessary to avoid a charge to the Company's
earnings for financial reporting purposes) having a Fair Market Value on the day
prior to the exercise date equal to the aggregate Option exercise price or (b)
if and so long as the Common Stock is registered under Section 12(b) or 12(g) of
the Exchange Act, delivery of a properly executed exercise notice, together with
irrevocable instructions, to (i) a brokerage firm designated by the Company to
deliver promptly to the Company the aggregate amount of sale or loan proceeds to
pay the Option exercise price and any withholding tax obligations that may arise
in connection with the exercise and (ii) the Company to deliver the certificates
for such purchased shares directly to such brokerage firm, all in accordance
with the regulations of the Federal Reserve Board. In addition, the exercise
price for shares purchased under an Option may be paid, either singly or in
combination with one or more of the alternative forms of payment authorized by
this Section 7.5, by (y) a promissory note delivered pursuant to Section 10; or
(z) such other consideration as the Plan Administrator may permit.
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7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Plan Administrator at any time.
In case of termination of the Holder's employment or services other than by
reason of death or Cause, the Option shall be exercisable, to the extent of the
number of shares purchasable by the Holder at the date of such termination, only
(a) within one year if the termination of the Holder's employment or services is
coincident with Retirement, Early Retirement at the Company's request or
Disability or (b) within three months after the date the Holder ceases to be an
employee, director, officer, consultant, agent, advisor or independent
contractor of the Company or a Subsidiary if termination of the Holder's
employment or services is for any reason other than Retirement, Early Retirement
at the Company's request or Disability, but in no event later than the remaining
term of the Option. Any Option exercisable at the time of the Holder's death may
be exercised, to the extent of the number of shares purchasable by the Holder at
the date of the Holder's death, by the personal representative of the Holder's
estate, the person(s) to whom the Holder's rights under the Award have passed by
will or the applicable laws of descent and distribution or the beneficiary
designated pursuant to Section 11 at any time or from time to time within one
year after the date of death, but in no event later than the remaining term of
the Option. Any portion of an Option that is not exercisable on the date of
termination of the Holder's employment or services shall terminate on such date,
unless the Plan Administrator determines otherwise. In case of termination of
the Holder's employment or services for Cause, the Option shall automatically
terminate upon first notification to the Holder of such termination, unless the
Plan Administrator determines otherwise. If a Holder's employment or services
with the Company are suspended pending an investigation of whether the Holder
shall be terminated for Cause, all the Holder's rights under any Option likewise
shall be suspended during the period of investigation.
A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
The effect of a Company-approved leave of absence on the terms and conditions of
an option shall be determined by the Plan Administrator, in its sole discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the optionee holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
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8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary
corporation" shall have the meanings attributed to those terms for purposes of
Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option designated
as an Incentive Stock Option must be exercised within three months after
termination of employment for reasons other than death, except that, in the case
of termination of employment due to total disability, such Option must be
exercised within one year after such termination. Employment shall not be deemed
to continue beyond the first 90 days of a leave of absence unless the Holder's
reemployment rights are guaranteed by statute or contract. For purposes of this
Section 8.5, "total disability" shall mean a mental or physical impairment of
the Holder that is expected to result in death or that has lasted or is expected
to last for a continuous period of 12 months or more and that causes the Holder
to be unable, in the opinion of the Company and two independent physicians, to
perform his or her duties for the Company and to be engaged in any substantial
gainful activity. Total disability shall be deemed to have occurred on the first
day after the Company and the two independent physicians have furnished their
opinion of total disability to the Plan Administrator.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Holder must hold the shares issued upon the
exercise of an Incentive Stock Option for two years after the Grant Date of the
Incentive Stock Option and one year from the date of exercise. A Holder may be
subject to the alternative minimum tax at the time of exercise of an Incentive
Stock Option. The Plan Administrator may require a Holder to give the Company
prompt notice of any disposition of shares acquired by the exercise of an
Incentive Stock Option prior to the expiration of such holding periods.
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 10 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. STOCK AWARDS
9.1 GRANT OF STOCK AWARDS
The Plan Administrator is authorized to make Awards of Common Stock on such
terms and conditions and subject to such restrictions, if any (which may be
based on continuous service with the Company or the achievement of performance
goals related to operating profit as a percentage of revenues, revenue and
profit growth, profit-related return ratios, such as return on equity, or cash
flow, where such goals may be stated in absolute terms or relative to comparison
companies), as the Plan Administrator shall determine, in its sole discretion,
which terms, conditions and restrictions shall be set forth in the instrument
evidencing the Award. The terms, conditions and restrictions that the Plan
Administrator shall have the power to determine shall include, without
limitation, the manner in which shares subject to Stock Awards are held during
the periods they are subject to restrictions and the circumstances under which
forfeiture of Restricted Stock shall occur by reason of termination of the
Holder's services.
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9.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Holder's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall deliver, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, a stock certificate for the
appropriate number of shares of Common Stock.
9.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Restricted Stock under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
SECTION 10. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (including a Holder who is an officer or director of the
Company) in acquiring shares of Common Stock pursuant to an Award granted under
the Plan, the Plan Administrator, in its sole discretion, may authorize, either
at the Grant Date or at any time before the acquisition of Common Stock pursuant
to the Award, (a) the extension of a loan to the Holder by the Company, (b) the
payment by the Holder of the purchase price, if any, of the Common Stock in
installments, or (c) the guarantee by the Company of a loan obtained by the
grantee from a third party. The terms of any loans, installment payments or loan
guarantees, including the interest rate and terms of and security for repayment,
will be subject to the Plan Administrator's discretion. Loans, installment
payments and loan guarantees may be granted with or without security. The
maximum credit available is the purchase price, if any, of the Common Stock
acquired, plus the maximum federal and state income and employment tax liability
that may be incurred in connection with the acquisition.
SECTION 11. ASSIGNABILITY
No Option granted under the Plan may be assigned or transferred by the
Holder other than by will or by the laws of descent and distribution, and,
during the Holder's lifetime, such Awards may be exercised only by the Holder or
a permitted assignee or transferee of the Holder (as provided below).
Notwithstanding the foregoing, and to the extent permitted by Section 422 of the
Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit a Holder of such Awards
to designate a beneficiary who may exercise the Award or receive compensation
under the Award after the Holder's death; provided, however, that any Award so
assigned or transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the Award.
SECTION 12. ADJUSTMENTS
12.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend or other change in the Company's corporate or capital structure results
in (a) the outstanding shares, or any securities exchanged therefor or received
in their place, being exchanged for a different number or class of securities of
the Company or of any other corporation or (b) new, different or additional
securities of the Company or of any other corporation being received by the
holders of shares of Common Stock of the Company, then the Plan Administrator
shall make proportional adjustments in (i) the maximum number and class of
securities subject to the Plan as set forth in Section 4.1, (ii) the maximum
number and class of securities that may be made subject to Awards to any
individual as set forth in Section 4.2, and (iii) the number and class of
securities that are subject to any outstanding Award and the per share price of
such securities, without any change in the aggregate price to be paid therefor.
The determination by the Plan Administrator as to the terms of any of the
foregoing adjustments shall be conclusive and binding.
9
<PAGE> 236
12.2 CORPORATE TRANSACTION
Except as otherwise provided in the instrument that evidences the Award, in
the event of any Corporate Transaction, each Award that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested, except that such acceleration will not occur if, in the
opinion of the Company's accountants, it would render unavailable "pooling of
interest" accounting for a Corporate Transaction that would otherwise qualify
for such accounting treatment. Such Award shall not so accelerate, however, if
and to the extent that (a) such Award is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation or parent thereof
(the "Successor Corporation") or to be replaced with a comparable award for the
purchase of shares of the capital stock of the Successor Corporation or (b) such
Award is to be replaced with a cash incentive program of the Successor
Corporation that preserves the spread existing at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to such Award. The determination of Award
comparability above shall be made by the Plan Administrator, and its
determination shall be conclusive and binding. All such Awards shall terminate
and cease to remain outstanding immediately following the consummation of the
Corporate Transaction, except to the extent assumed by the Successor
Corporation. Any such Awards that are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time shall be accelerated in
the event that the Holder's employment or services should subsequently terminate
within two years following such Corporate Transaction, unless such employment or
services are terminated by the Successor Corporation for Cause or by the Holder
voluntarily without Good Reason.
12.3 FURTHER ADJUSTMENT OF AWARDS
Subject to Section 12.2, the Plan Administrator shall have the discretion,
exercisable at any time before a sale, merger, consolidation, reorganization,
liquidation or change in control of the Company, as defined by the Plan
Administrator, to take such further action as it determines to be necessary or
advisable, and fair and equitable to Holders, with respect to Awards. Such
authorized action may include (but shall not be limited to) establishing,
amending or waiving the type, terms, conditions or duration of, or restrictions
on, Awards so as to provide for earlier, later, extended or additional time for
exercise, lifting restrictions and other modifications, and the Plan
Administrator may take such actions with respect to all Holders, to certain
categories of Holders or only to individual Holders. The Plan Administrator may
take such action before or after granting Awards to which the action relates and
before or after any public announcement with respect to such sale, merger,
consolidation, reorganization, liquidation or change in control that is the
reason for such action.
12.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 13. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant or exercise of any Award. Subject to the Plan and applicable law, the Plan
Administrator, in its sole discretion, may permit the Holder to satisfy
withholding obligations, in whole or in part, by electing to have the Company
withhold shares of Common Stock or by transferring shares of Common Stock to the
Company, in such amounts as are equivalent to the Fair Market Value of the
withholding obligation. The Company shall have the right to withhold from any
Award or any shares of Common Stock issuable pursuant to an Award or from any
cash amounts otherwise due or to become due from the Company to the Holder an
amount equal to such taxes. The Company may also deduct from any Award any other
amounts due from the Holder to the Company or a Subsidiary.
10
<PAGE> 237
SECTION 14. AMENDMENT AND TERMINATION OF PLAN
14.1 AMENDMENT OF PLAN
The Plan may be amended only by the Board as it shall deem advisable;
however, to the extent required for compliance with Section 422 of the Code or
any applicable law or regulation, shareholder approval will be required for any
amendment that will (a) increase the total number of shares as to which Awards
may be granted under the Plan or that may be issued as Stock Awards, (b) modify
the class of persons eligible to receive Options, or (c) otherwise require
shareholder approval under any applicable law or regulation.
14.2 TERMINATION OF PLAN
The Company's shareholders or the Board may suspend or terminate the Plan
at any time. The Plan will have no fixed expiration date; provided, however,
that no Incentive Stock Options may be granted more than 10 years after the
earlier of the Plan's adoption by the Board and approval by the shareholders.
14.3 CONSENT OF HOLDER
The amendment or termination of the Plan shall not, without the consent of
the Holder of any Award under the Plan, impair or diminish any rights or
obligations under any Award theretofore granted under the Plan. Any change or
adjustment to an outstanding Incentive Stock Option shall not, without the
consent of the Holder, be made in a manner so as to constitute a "modification"
that would cause such Incentive Stock Option to fail to continue to qualify as
an Incentive Stock Option.
SECTION 15. GENERAL
15.1 AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by a written agreement
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
15.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
None of the Plan, participation in the Plan as a Holder or any action of
the Plan Administrator taken under the Plan shall be construed as giving any
Holder or employee of the Company any right to be retained in the employ of the
Company or limit the Company's right to terminate the employment or services of
the Holder.
15.3 REGISTRATION; CERTIFICATES FOR SHARES
The Company shall be under no obligation to any Holder to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
11
<PAGE> 238
15.4 NO RIGHTS AS A SHAREHOLDER
No Award shall entitle the Holder to any cash dividend, voting or other
right of a shareholder unless and until the date of issuance under the Plan of
the shares that are the subject of such Award, free of all applicable
restrictions.
15.5 COMPLIANCE WITH LAWS AND REGULATIONS
It is the Company's intention that, if and so long as any of the Company's
equity securities are registered pursuant to Section 12(b) or 12(g) of the
Exchange Act, the Plan shall comply in all respects with Rule 16b-3 under the
Exchange Act and, if any Plan provision is later found not to be in compliance
with such Rule 16b-3, the provision shall be deemed null and void, and in all
events the Plan shall be construed in favor of its meeting the requirements of
Rule 16b-3. Notwithstanding anything in the Plan to the contrary, the Board, in
its sole discretion, may bifurcate the Plan so as to restrict, limit or
condition the use of any provision of the Plan to Holders who are officers or
directors subject to Section 16 of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other Holders. Additionally,
in interpreting and applying the provisions of the Plan, any Option granted as
an Incentive Stock Option pursuant to the Plan shall, to the extent permitted by
law, be construed as an "incentive stock option" within the meaning of Section
422 of the Code.
15.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Holder, and no Holder shall
have any rights that are greater than those of a general unsecured creditor of
the Company.
15.7 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 16. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's shareholders at any time within 12
months of such adoption or, if earlier, and to the extent required for
compliance with Rule 16b-3 under the Exchange Act, at the next annual meeting of
the Company's shareholders after adoption of the Plan by the Board.
Adopted by the Board on October 9, 1996 and approved by the Company's
shareholders on , 199 .
12
<PAGE> 239
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 240
DIGITAL SYSTEMS INTERNATIONAL, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS -- DECEMBER 20, 1996
The undersigned hereby appoint(s) Patrick S. Howard and John J. Flavio and
each of them as proxies, with full power of substitution, to represent and vote
as designated all shares of Common Stock of Digital Systems International, Inc.
held of record by the undersigned on November 19, 1996 at the Special Meeting of
Shareholders of the Company to be held at the Company's offices, located at 6464
185th Avenue N.E., Redmond, Washington, at 9:00 a.m., local time, on Friday,
December 20, 1996, with authority to vote upon the matters listed below and with
discretionary authority as to any other matters that may properly come before
the meeting or any adjournment or postponement thereof.
<TABLE>
<S> <C> <C> <C>
(1) APPROVAL OF ISSUANCE OF COMMON STOCK (THE "ISSUANCE") PURSUANT TO AGREEMENT
AND PLAN OF MERGER, DATED AS OF OCTOBER 14, 1996, BY AND AMONG DIGITAL
SYSTEMS INTERNATIONAL, INC., VISION MERGER CORPORATION AND VIEWSTAR
CORPORATION FOR AGAINST ABSTAIN
[ ] N N
(2) APPROVAL OF ADOPTION OF 1996 DIGITAL STOCK INCENTIVE COMPENSATION PLAN FOR AGAINST ABSTAIN
[ ] N N
</TABLE>
IMPORTANT -- PLEASE DATE AND SIGN ON THE OTHER SIDE
<PAGE> 241
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
SHAREHOLDER IN THE SPACE PROVIDED. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED "FOR" THE ISSUANCE AND ADOPTION OF THE 1996 STOCK INCENTIVE PLAN.
The Board of Directors recommends a vote "FOR" the Issuance and adoption of
the 1996 Stock Incentive Plan.
Date
--------------------------------------
Signature(s)
--------------------------------------
Date
--------------------------------------
Signature(s)
--------------------------------------
Please sign exactly as your name
appears hereon. Attorneys, trustees,
executors and other fiduciaries acting
in a representative capacity should
sign their names and give their
titles. An authorized person should
sign on behalf of corporations,
partnerships, associations, etc. and
give his or her title. If your shares
are held by two or more persons, each
person must sign. Receipt of the
notice of meeting and the proxy
statement/prospectus is hereby
acknowledged.
[ ] I plan to attend the Special
Meeting
<PAGE> 242
THIS CONSENT IS SOLICITED BY THE
BOARD OF DIRECTORS OF VIEWSTAR CORPORATION
The shareholder of ViewStar Corporation whose signature appears below does
by this consent approve* the Plan and Agreement of Merger dated as of October
14, 1996, among ViewStar Corporation, Digital Systems International, Inc. and
Vision Merger Corporation. This consent is given with regard to any and all
shares of Common Stock and Preferred Stock held by the signing shareholder.
Receipt of the Proxy Statement/Prospectus of Digital Systems International, Inc.
and the consent solicitation of ViewStar Corporation contained therein is hereby
acknowledged.
Date: -------------------------------------------
--------------------- Name(s) of Shareholder(s)
-------------------------------------------
Signature(s)
(Individuals should sign exactly as name appears on the stock certificate.
Trustees, officers and partners signing for trusts, corporations and
partnerships should indicate name and title of the individual who signs. The
space below is provided for trusts, corporations and partnerships.)
-------------------------------------
By
----------------------------------
-------------------------------------
* ANY SHAREHOLDER WHO WISHES TO DISAPPROVE SHOULD STRIKE THE WORD "APPROVE"
AND WRITE "DISAPPROVE" ABOVE IT, OR SIMPLY NOT SIGN THIS CONSENT.
