<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Digital Generation Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box)
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction
applies: N/A
--------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
N/A
-----------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: N/A
-----------------------------
4) Proposed maximum aggregate value of transaction: N/A
----------------
5) (5)Total fee paid: N/A
----------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: N/A
------------------------------------------
2) Form, Schedule, or Registration Statement No.: N/A
-------------------
3) Filing Party: N/A
----------------------------------------------------
4) Date Filed: N/A
------------------------------------------------------
1
<PAGE> 2
DIGITAL GENERATION SYSTEMS, INC.
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 11, 1997
8:30 A.M.
To The Shareholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Digital
Generation Systems, Inc., a California corporation (the "Company"), will be held
at the offices of PDR Productions, Inc., 219 East 44th Street, New York, New
York 10017, on Friday, April 11, 1997, at 8:30 a.m., local time, for the
following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To consider and vote upon a proposal to amend the Company's 1992 Stock
Option Plan (i) to increase by 700,000 the number of shares of the
Company's Common Stock reserved for issuance thereunder, and (ii) to
limit the number of options that may be granted to participants
thereunder in any fiscal year.
3. To consider and vote upon a proposal to amend the Company's 1995
Director Option Plan to increase by 25,000 the number of shares of the
Company's Common Stock reserved for issuance hereunder.
4. To ratify the appointment of Arthur Andersen LLP as independent
accountants for the Company for the fiscal year ending December 31,
1997.
5. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on February 20, 1997,
will be entitled to notice of and to vote at the Annual Meeting or any
adjournment or postponement thereof.
For the Board of Directors
DIGITAL GENERATION SYSTEMS, INC.
/s/ JOHN B. GOODRICH
John B. Goodrich
Secretary
San Francisco, California
March 18, 1997
IMPORTANT: ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING
IN PERSON. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED
TO MARK, SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE
IN THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY SHAREHOLDER
ATTENDING THE MEETING MAY VOTE IN PERSON EVEN IF SUCH SHAREHOLDER RETURNED A
PROXY CARD.
<PAGE> 3
DIGITAL GENERATION SYSTEMS, INC.
------------------------
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS
APRIL 11, 1997
The enclosed proxy is solicited on behalf of the Board of Directors of
Digital Generation Systems, Inc., a California corporation ("DG Systems" or the
"Company"), for use at DG Systems' Annual Meeting of Shareholders (the "Annual
Meeting") to be held on Friday, April 11, 1997, at the offices of PDR
Productions, Inc., 219 East 44th Street, New York, New York 10017, at 8:30 a.m.,
local time, for the purposes set forth in the accompanying Notice of Annual
Meeting of Shareholders, or at any adjournment or postponement thereof, for the
purposes set forth herein and in the accompanying Notice of Annual Meeting of
Shareholders.
DG Systems' principal executive offices are located at 875 Battery Street,
San Francisco, California 94111. The telephone number at that address is (415)
276-6600.
These proxy solicitation materials were mailed on or about March 18, 1997,
to all shareholders entitled to vote at the Annual Meeting.
INFORMATION CONCERNING SOLICITATION AND VOTING
RECORD DATE AND SHARES OUTSTANDING
Shareholders of record at the close of business on February 20, 1997 (the
"Record Date"), are entitled to notice of, and to vote at, the Annual Meeting.
At the Record Date, the Company had issued and outstanding 11,686,175 shares of
Common Stock.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company a written
notice of revocation or a duly executed proxy bearing a later date or by
attending the Annual Meeting and voting in person.
VOTING
Each share of Common Stock outstanding on the Record Date is entitled to
one vote. No shareholder shall be entitled to cumulate votes. An automated
system administered by the Company's transfer agent tabulates the votes. Votes
against a particular proposal are counted for purposes of determining the
presence or absence of a quorum and are also counted as having been "voted" with
respect to the proposal for purposes of determining whether the requisite
majority of voting shares has been obtained. While there is no definitive
statutory or case law authority in California as to the proper treatment of
abstentions and broker non-votes, the Company believes that both abstentions and
broker non-votes should be counted for purposes of determining whether a quorum
is present at the Annual Meeting. The required quorum is a majority of the
shares issued and outstanding on the Record Date. The Company further believes
that neither abstentions nor broker non-votes should be counted as having been
voted with respect to the election of directors or the other proposals set forth
herein for purposes of determining whether the requisite majority of the shares
has been obtained. In the absence of controlling precedent to the contrary, the
Company intends to treat abstentions and broker non-votes with respect to the
election of directors and the proposals set forth herein in this manner.
<PAGE> 4
SOLICITATION OF PROXIES
The cost of this solicitation will be borne by the Company. Proxies may
also be solicited by certain of the Company's directors, officers, and regular
employees, without additional compensation, personally or by telephone,
telegram, or facsimile.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Proposals of shareholders of the Company intended to be presented by such
shareholders at the Company's 1998 annual meeting of shareholders must be
received by the Company no later than November 17, 1997, in order that they may
be included in the proxy statement and form of proxy related to that meeting.
PROPOSAL ONE -- ELECTION OF DIRECTORS
NOMINEES
The Company's Board of Directors is comprised of five members, all of whom
are to be elected at the Annual Meeting. The Board of Directors has nominated
the persons named below for election as directors at the Annual Meeting. Unless
otherwise directed, the proxy holders will vote the proxies received by them for
the five nominees named below. All five nominees currently hold office as
directors of the Company. In the event that any of the five nominees is unable
or declines to serve as a director at the time of the Annual Meeting, the
proxies will be voted for any nominee who shall be designated by the present
Board of Directors to fill the vacancy. The Company does not expect that any
nominee will be unable or will decline to serve as a director. The directors
elected will hold office until the next annual meeting of shareholders and until
their successors are elected and qualified.
The names of the nominees and certain information about them are set forth
below.
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE POSITION(S) WITH THE COMPANY SINCE
- -------------------- --- ----------------------------------- --------
<S> <C> <C> <C>
Henry W. Donaldson 51 President, Chief Executive Officer 1993
and Director
Kevin R. Compton 38 Director 1994
Jeffrey M. Drazan 37 Director 1992
Richard M. Harris 67 Director 1992
Leonard S. Matthews 74 Director 1993
</TABLE>
There are no family relationships among directors or executive officers of
the Company.
HENRY W. DONALDSON joined the Company in March 1993, and since such date
has served as its President and Chief Executive Officer and as a Director of the
Board of Directors. He was formerly President of the Data Communications
Division of Rexel, Inc. (formerly Willcox & Gibbs), a distributor of electrical
parts and supplies, from September 1989 through January 1993. Mr. Donaldson
holds a B.A. in Mathematics from Hamilton College.
KEVIN R. COMPTON has been a member of the Board of Directors of the Company
since March 1994. Mr. Compton has been a general partner of Kleiner, Perkins,
Caufield & Byers, a venture capital investment firm, since December 1990. Mr.
Compton currently serves as a director of Global Village Communication, Inc., a
networking hardware and software company, Citrix Systems, a developer of server
software, and on numerous private boards. He holds a B.S. in Business
Administration from the University of Missouri.
JEFFREY M. DRAZAN has been a member of the Board of Directors of the
Company since July 1992. Mr. Drazan has been a general partner of Sierra
Ventures, a venture capital investment firm, since 1985. Mr. Drazan currently
serves on the boards of public companies FaxSav and Retix. Mr. Drazan holds a
B.S.E. in Engineering from Princeton and an M.B.A. from New York University.
RICHARD H. HARRIS has been a member of the Board of Directors of the
Company since July 1992. Since July 1992, Mr. Harris has been President and
Owner of Harris Classical Broadcasting, operating two FM audio stations in
Milwaukee, Wisconsin. From May 1984 to May 1986, Mr. Harris was Chairman of the
Radio Advertising Bureau. From June 1964 to April 1991, Mr. Harris held various
senior management
2
<PAGE> 5
positions with Westinghouse Broadcasting Company, including Chairman of the
Radio Group. Mr. Harris holds a B.A. in Communications and Economics from the
University of Denver and is a graduate of the Advanced Management Program at
Harvard University.
LEONARD S. MATTHEWS has been a member of the Board of Directors of the
Company since April 1993. From January 1979 to January 1989, Mr. Matthews was
President and Chief Executive Officer of the American Association of Advertising
Agencies. Previously, Mr. Matthews had been president of two of the world's
leading advertising agencies, Leo Burnett and Young & Rubicam. From May 1992 to
the present, Mr. Matthews has been Chairman of the Board of Next Century Media,
an interactive television company. Mr. Matthews holds a B.S. in Business
Administration & Marketing from Northwestern University.
VOTE REQUIRED
The five nominees receiving the highest number of affirmative votes of the
shares entitled to be voted shall be elected as directors of the Company. Votes
withheld from any director are counted for purposes of determining the presence
or absence of a quorum but have no other legal effect under California law.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held four meetings during the fiscal year ended
December 31, 1996 ("fiscal 1996"). The Board of Directors of DG Systems has
standing audit and compensation committees.
The members of the Audit Committee are Kevin R. Compton and Leonard S.
Matthews. The Audit Committee held four meetings during fiscal 1996. The
purposes of the Audit Committee are to review with DG Systems' management and
independent accountants such matters as internal accounting controls and
procedures, the plan and results of the annual audit, and suggestions of the
accountants for improvements in accounting procedures; to nominate independent
accountants; and to provide such additional information as the Committee may
deem necessary to make the Board of Directors aware of significant financial
matters that require the Board's attention.
The members of the Compensation Committee are Jeffrey M. Drazan, Richard H.
Harris and Leonard S. Matthews. The Compensation Committee held four meetings
during fiscal 1996. The purposes of the Compensation Committee are to review and
approve the compensation to be paid or provided to DG Systems' executive
officers, the aggregate compensation of all employees of DG Systems, and the
terms of compensation plans of all types.
The Company currently has no standing nominating committee. Nominations for
the election of directors at the Annual Meeting were made by the full Board of
Directors of the Company.
During fiscal 1996, no director attended fewer than 75% of the aggregate
number of meetings of the Board of Directors and meetings of its committees on
which he served.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Jeffrey M. Drazan, Richard H.
Harris and Leonard S. Matthews. Neither Mr. Drazan, Mr. Harris nor Mr. Matthews
was at any time during the Company's 1996 fiscal year or at any other time an
officer or employee of the Company. No executive officer of the Company serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of the Company's
Board of Directors or Compensation Committee. Mr. Drazan is a general partner of
SV Associates, L.P., which is the general partner of Sierra Ventures IV, a
California limited partnership, and Sierra Ventures IV International, a
California limited partnership, which owned 1,939,792 shares and 77, 672 shares
of the Company's Common Stock, respectively, as of the Record Date. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
COMPENSATION COMMITTEE REPORT
The Compensation Committee (the "Committee") of the Board of Directors
review and approves the Company's compensation policies. The following is the
report of the Committee describing compensation policies applicable to the
Company's executive officers' compensation for the fiscal year ended December
31, 1996.
3
<PAGE> 6
Compensation Philosophy
The Company's philosophy in setting its compensation policies for executive
officers is to maximize shareholder value over time. The primary goal of the
Company's executive compensation program is therefore to closely align the
interests of the executive officers with those of the Company's shareholders. To
achieve this goal, the Company attempts to (i) offer compensation opportunities
that attract and retain executives whose abilities are critical to the long-term
success of the Company, motivate individuals to perform at their highest level
and reward outstanding achievement, (ii) maintain a portion of the executive
total compensation at risk, with payment of that portion tied to achievement of
financial, organizational and management performance goals, and (iii) encourage
executives to manage from the perspective of owners with an equity stake in the
Company. The Committee currently uses salary, incentive bonuses and stock
options to meet these goals.
Base Salary
The base salary component of total compensation is primarily designed to
attract, motivate, reward and retain highly skilled executives and to compensate
executives competitively within the industry and the marketplace. The Committee
reviewed and approved fiscal 1996 base salaries for the Chief Executive Officer
and other executive officers at the beginning of the fiscal year. In
establishing base salaries of executive officers, the Committee evaluates each
executive's salary history, scope of responsibility at the Company, prior
experience, past performance for the Company and recommendations from
management. The Committee also takes into account the salaries for similar
positions at comparable companies in the Company's industry, based on each
individual Committee member's industry experience. In reviewing and setting base
salaries for executive officers, the Committee focused significantly on each
executive's historical salary level, which in most instances was based upon the
date on which the executive was hired with the Company, the prior performance
with the Company and the expected contribution to the Company's future success.
In making its salary decisions, the Committee exercised its discretion and
judgment based upon these factors. No specific formula was applied to determine
the weight of each factor.
Incentive Bonuses
Each executive officer's annual bonus is based on qualitative and
quantitative factors and is intended to motivate and reward executive officers
by directly linking the amount of the bonus to performance targets. In addition,
incentive bonuses for executive officers are intended to reflect the Committee's
belief that the compensation of each executive officer should be contingent upon
the overall performance of the Company. To carry out this philosophy, the Board
of Directors reviews and approves the financial goals for the fiscal year. The
Committee evaluates the overall performance of the Company and approves
performance bonuses based on the extent to which the Board's goals have been
achieved.
Stock Options
The Committee views stock option grants as an important component of its
long-term, performance-based compensation philosophy. The Company provides
long-term incentives to the CEO and the executive officers through its 1992
Stock Option Plan, and its 1996 Supplemental Stock Option Plan (collectively the
"Plans"). The purpose of the Plans is to attract and retain the best employee
talent available and to create a direct link between compensation and the
long-term performance of the Company. The Committee believes that stock options
directly motivate its executive officers to maximize long-term shareholder
value. The options also utilized vesting periods that encourage key executives
to continue in the employ of the Company. All options granted to executive
officers to date have been granted at the fair market value of the Company's
Common Stock on the date of grant. The Board considers the grant of each option
subjectively, considering factors such as the individual performance of the
executive officer and the anticipated contribution of the executive officer to
the attainment of the Company's long-term strategic performance goals.
4
<PAGE> 7
CEO Compensation
The compensation of Mr. Donaldson, Chief Executive Officer of the Company,
consists of base salary, an annual bonus and stock options. For fiscal 1996, the
Committee increased Mr. Donaldson's base salary to $193,750 based upon the
improvement in the financial performance of the Company in 1995 and the
Committee members' knowledge of increased base salary levels for similar
positions in the industry. In January 1997, Mr. Donaldson was awarded an
incentive bonus of $50,000 based on the financial and operational performance of
the Company in 1996. In February 1997, the Committee granted Mr. Donaldson an
option to purchase 80,000 shares of the Company's Common Stock.
Other Compensation Considerations
The Committee has reviewed Section 162(m) of the Internal Revenue Code and
related regulations of the Internal Revenue Service, which restrict the
deductibility of executive compensation paid to any of the Company's five most
highly paid executive officers at the end of any fiscal year to the extent that
such compensation exceeds $1 million in any year and does not qualify for an
exemption under the statute or related regulations. The Company has requested
that shareholders approve an amendment to its 1992 Stock Option Plan qualifying
it as a performance-based plan, meaning that compensation realized in connection
with exercises of options granted under the Plan would be exempt under the
statute. The Committee does not believe that the other components of the
Company's compensation will be likely in the aggregate to materially exceed $1
million for any executive officer in 1997 and therefore has concluded that no
further action with respect to qualifying such compensation for deductibility is
necessary at this time. The Committee will continue to evaluate the advisability
of qualifying the deductibility of such compensation in the future.
<TABLE>
<S> <C> <C>
Jeffrey M. Drazan, Member Richard H. Harris, Member Leonard S. Matthews, Member
Compensation Committee Compensation Committee Compensation Committee
</TABLE>
DIRECTOR COMPENSATION
The Company's non-employee directors receive options under its 1995
Director Option Plan. The Company reimburses each member of the Board of
Directors and its committees for documented reasonable expenses incurred by such
member in connection with the attendance of such meetings.
The Company's directors who are also officers of the Company do not receive
any additional compensation for their services as members of the Board of
Directors.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
None of the officers named in the Summary Compensation Table have
employment agreements with the Company, and their employment may be terminated
at any time.
In connection with the acquisition of the Company by merger or asset sale,
50% of the unvested shares of restricted stock held by Mr. Donaldson will be
released from the Company's right of repurchase.
The Company's 1992 Stock Option Plan provides that upon a change in control
(as defined below), the unvested options granted to each of the Company's
executive officers shall be subject to accelerated vesting to the extent of 50%
of such unvested options. For purposes of this provision, a change in control is
defined as (i) a merger or acquisition of the Company resulting in a 50% or
greater change in the total voting power of the Company immediately following
such transaction or (ii) certain changes in the majority composition of the
Board of Directors during a 24-month period, which changes are not initiated by
the Board of Directors.
5
<PAGE> 8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the shares of Common Stock beneficially
owned as of the Record Date by persons known by the Company to beneficially own
greater than 5% of the Company's outstanding stock, by each director of the
Company, by the Chief Executive Officer and the four other most highly paid
officers of the Company, and by all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
FIVE-PERCENT SHAREHOLDERS, DIRECTORS, EXECUTIVE OFFICERS(1) BENEFICIALLY OWNED OWNERSHIP
- ----------------------------------------------------------------- ------------------ ----------
<S> <C> <C>
FIVE-PERCENT SHAREHOLDERS:
SV Associates IV, L.P. and affiliated entities(2)................ 2,017,464 17.26%
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, California 94025
Coral Partners II, a limited partnership, and affiliated
individuals(3)................................................. 1,358,371 11.62
60 South Sixth Street, Suite 3510
Minneapolis, Minnesota 55402
Entities affiliated with Kleiner, Perkins, Caufield & Byers(4)... 1,318,509 11.28
2750 Sand Hill Road
Menlo Park, California 94025
Entities affiliated with Glynn Capital Management and Crown
Advisors, Ltd.(5).............................................. 1,059,666 9.07
3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, California 94025
Entities affiliated with the Mayfield Fund(6).................... 1,005,776 8.61
2800 Sand Hill Road
Menlo Park, California 94025
AT&T Venture Company, L.P.(7).................................... 744,342 6.37
3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, California 94025
DIRECTORS AND EXECUTIVE OFFICERS:
Jeffrey M. Drazan(8)............................................. 2,042,741 17.44
Kevin R. Compton(9).............................................. 1,323,786 11.32
Henry W. Donaldson(10)........................................... 552,165 4.70
Ken K. Cheng(11)................................................. 119,039 1.01
Jon E. Reese(12)................................................. 59,114 *
Thomas P. Shanahan(13)........................................... 56,395 *
Richard H. Harris(14)............................................ 28,277 *
Leonard S. Matthews(15).......................................... 16,705 *
Gregory G. Schott(16)............................................ 10,000 *
All directors and executive officers as a group (9
persons)(8)-(17)............................................... 4,208,222 35.93
</TABLE>
- ---------------
* Less than 1%.
(1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and to the information
contained in the footnotes to this table. Unless otherwise indicated, the
business address of each beneficial owner listed is 875 Battery Street, San
Francisco, California 94111.
(2) Based on a filing with the Securities and Exchange Commission dated
February 14, 1997, indicating beneficial ownership as of December 31, 1996.
SV Associates IV, L.P. ("SV Associates") is the general partner of Sierra
Ventures IV, a California Limited Partnership, and Sierra Ventures IV
International, a Delaware Limited Partnership, which directly own 1,939,792
shares and 77, 672 shares, respectively, of the Company Common Stock, all
of which may be deemed to be beneficially owned by SV Associates. Mr.
Drazan and two other individuals are the general partners of SV Associates
and thus may be deemed to beneficially own such shares; however, such
individuals disclaim beneficial ownership of all such shares.
(3) Based on a filing with the Securities and Exchange Commission dated
February 14, 1997 indicating beneficial ownership as of December 31, 1996.
Includes 4,370 shares owned by Yuval Almog, 2,870
6
<PAGE> 9
shares owned by Peter McNerney, 1,666 shares owned by Dain Bosworth, Inc.,
Custodian for Yuval Almog IRA/SEP, and 666 shares owned by Linda
Watchmaker. The general partner of Coral Partners II, a limited
partnership, is Coral Management Partners II, Limited Partnership ("Coral
Management"), of which Mr. Almog, Mr. McNerney and Ms. Watchmaker are
general partners. Each of Mr. Almog, Mr. McNerney, Ms. Watchmaker and Coral
Management has shared voting and dispositive power with respect to the
1,259,633 shares of Common Stock directly owned by Coral Partners II, a
limited partnership. Mr. Almog, Mr. McNerney, Ms. Watchmaker and Coral
Management disclaim beneficial ownership of all shares held by Coral
Partners, except to the extent of their pecuniary interest therein arising
from general partnership interests therein.
(4) Based on a filing with the Securities and Exchange Commission dated
February 13, 1997 indicating beneficial ownership as of December 31, 1996.
All such shares are owned directly by Kleiner Perkins Caufield & Byers VI,
L.P. and beneficially owned by its general partner KPCB VI Associates,
L.P., A California Limited Partnership ("KPCB VI Associates"), and the
seven individual general partners of KPCB VI Associates. Each of KPCB VI
Associates and its affiliates named in this footnote have shared voting and
dispositive power with respect to all such shares.
(5) Based on a filing with the Securities and Exchange Commission dated
February 5, 1997, indicating beneficial ownership as of December 31, 1996.
Includes shares owned directly by the following entities: Crown Associates
III, Limited Partnership (207,770 shares); Crown-Glynn Associates, Limited
Partnership (100,605 shares); The Crown Trust (256,825 shares); Glynn
Emerging Opportunity Fund (77,500 shares); Glynn Investment L.P. (24,000
shares); Glynn Buckley Investments, LP (27,700 shares); Glynn Ventures III,
a California Limited Partnership (89,166 shares); and McMorgan Fund II
(51,400 shares). The foregoing entities share voting and dispositive power
with respect to such shares with one or more of the following affiliated
entities, which may be deemed to own beneficially such shares: Crown
Capital Management; Crown-Glynn Advisors, Ltd.; Glynn Capital Management;
and Crown Advisors Ltd (collectively, the "Investment Advisors"); and with
one or more of the following individuals, who are affiliated with one or
more of the Investment Advisors: David F. Bellet; John W. Glynn, Jr.;
Chester A. Siuda; Jeffrey S. Hamren; Daryl Messinger; Margaret S. McNamara;
and Steven Rosston. Also includes 20,000 shares directly owned by Mr.
Bellet and 30,000 shares directly owned by Mr. Glynn. Messrs. Bellet and
Glynn have sole voting and dispositive power with respect to the shares
directly owned by them.
(6) Includes shares owned by Mayfield VII, a California Limited Partnership
("Mayfield VII") (973,301 shares); and Mayfield Associates Fund II, a
California Limited Partnership ("Mayfield Associates") (32,475 shares). The
general partner of Mayfield VII is Mayfield VII Management Partners, a
California Limited Partnership, which has shared voting and dispositive
power over the shares held by Mayfield VII and Mayfield Associates. Messrs.
F. Gibson Myers, Jr., A. Grant Heidrich III, Michael J. Levinthal, William
D. Unger, Wendell G. Van Auken III, Kevin A. Fong and Yogen K. Dalal are
affiliated with Mayfield VII and Mayfield Associates and share voting and
dispositive power over the shares held by those entities.
(7) The general partner of AT&T Venture Company, L.P. is Mr. Neal Douglas.
(8) Includes 25,277 shares subject to stock options exercisable within 60 days
of the Record Date and 2,017,464 shares owned by entities associated with
Sierra Ventures, of which Mr. Drazan is a general partner. Mr. Drazan
disclaims beneficial ownership of all such shares held by those entities,
except to the extent of his pecuniary interest therein arising from general
partnership interests therein.
(9) Includes 1,318,509 shares owned by entities associated with Kleiner,
Perkins, Caufield & Byers, of which Mr. Compton is a general partner, and
5,277 shares subject to stock options exercisable within 60 days of the
Record Date. Mr. Compton disclaims beneficial ownership of all such shares
held by those entities, except to the extent of his pecuniary interest
therein arising from general partnership interests therein.
(10) Includes 52,340 shares subject to stock options exercisable within 60 days
of the Record Date.
(11) Includes 90,439 shares subject to stock options exercisable within 60 days
of the Record Date.
(12) Includes 59,114 shares subject to stock options exercisable within 60 days
of the Record Date.
(13) Includes 42,395 shares subject to stock options exercisable within 60 days
of the Record Date.
(14) Includes 3,000 shares owned by Mr. Harris, 20,000 shares owned by Mr.
Harris' four children, and 5,277 shares subject to stock options
exercisable within 60 days of the Record Date.
(15) Includes 16,705 shares subject to stock options exercisable within 60 days
of the Record Date.
(16) Consists of 10,000 shares subject to stock options exercisable within 60
days of the Record Date.
(17) Includes an aggregate of 306,824 shares subject to stock options
exercisable within 60 days of the Record Date.
7
<PAGE> 10
EXECUTIVE COMPENSATION
SUMMARY OF OFFICER COMPENSATION
The following table summarizes the total compensation of the Chief Executive
Officer of the Company and the four other most highly compensated executive
officers of the Company in fiscal 1996 as well as the total compensation paid to
each such individual for the Company's two previous fiscal years.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
-------------------------
ANNUAL COMPENSATION SECURITIES
-------------------- RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) STOCK AWARDS OPTIONS COMPENSATION($)
- --------------------------------- ----- --------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Henry W. Donaldson
President and Chief Executive
Officer........................ 1996 193,750 50,000 -- -- 672(3)
1995 175,000 35,000 -- 162,500 720(3)
1994 156,250 35,000 $5,000 -- 435(3)
Ken K. Cheng
Senior Vice President and Chief
Operating Officer.............. 1996 164,688 48,500 -- 150,000 199(4)
1995 111,333 17,500 -- 70,000 138(4)
1994 102,900 10,000 -- 30,000 806(4)
Jon E. Reese
Vice President, Sales.......... 1996 100,000 -- -- -- 38,688(5)
1995 100,000 12,000 -- 125,000 24,288(5)
1994 -- -- -- -- 37,425(6)
Gregory G. Schott
Vice President, Operations..... 1996 112,498 18,750 -- 80,000 50(7)
1995 90,000 -- -- 60,000 43(7)
1994 42,980 -- -- 30,000 43(7)
Thomas P. Shanahan
Vice President, Finance and
Chief Financial Officer........ 1996 140,000 33,250 -- 50,000 442(8)
1995 126,000 14,000 -- 67,500 264(8)
1994 21,000 -- -- 70,000 44(8)
</TABLE>
- ---------------
(1) All figures are rounded down to the nearest whole dollar.
(2) Mr. Donaldson holds 487,500 shares of the Company's Common Stock purchased
through restricted stock agreements with an aggregate value on December 31,
1996 of $3,907,812 (net of consideration for the shares paid by Mr.
Donaldson) based on the closing price of $8.375 for the Company's Common
Stock reported on the Nasdaq National Market on that date.
(3) Includes taxable benefits to Mr. Donaldson for premiums for a group term
life insurance policy payable to beneficiaries designated by Mr. Donaldson.
(4) Includes taxable benefits to Mr. Cheng for premiums for a group term life
insurance policy payable to beneficiaries designated by Mr. Cheng and Common
Stock in lieu of compensation.
(5) Includes commission and taxable benefits to Mr. Reese for premiums for a
group term life insurance policy payable to beneficiaries designated by Mr.
Reese.
(6) Mr. Reese was a consultant to the Company from August 1994 through December
1994.
(7) Includes taxable benefits to Mr. Schott for premiums for a group term life
insurance policy payable to beneficiaries designated by Mr. Schott.
(8) Includes taxable benefits to Mr. Shanahan for premiums for a group term life
insurance policy payable to beneficiaries designated by Mr. Shanahan.
8
<PAGE> 11
OPTIONS GRANTED DURING FISCAL 1996
The following table summarizes the grants of options to purchase the
Company's Common Stock made to the persons named in the Summary Compensation
Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL
% OF TOTAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED PRICE
SHARES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES IN FOR OPTION TERM(3)
OPTIONS FISCAL EXERCISE EXPIRATION -------------------
NAME GRANTED(1)(#) YEAR(2) PRICE($/SH) DATE 5%($) 10%($)
- ---------------------- ------------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Henry W. Donaldson.... -- -- -- -- -- --
Ken K. Cheng.......... 100,000 9.0 8.625 4/23/03 351,124 818,269
50,000 6.0 9.00 7/18/03 183,195 426,923
Jon E. Reese.......... -- -- -- -- -- --
Gregory G. Schott..... 65,000 7.8 9.00 7/18/03 238,154 555,000
15,000 1.8 10.125 10/9/23 61,828 144,086
Thomas P. Shanahan.... 50,000 6.0 10.125 10/9/03 206,095 480,288
</TABLE>
- ---------------
(1) The options shown in this table were granted at fair market value under the
Company's 1992 Stock Option Plan (the "1992 Plan"). These options have a
term of 7 years, subject to earlier termination in certain events related to
termination of employment and amendment or termination of the 1992 Plan.
Each of these options was granted at an exercise price to be no less than
the fair market value of the underlying stock on the date of the grant, as
determined by the Board of Directors. In the event of a merger of the
Company with or into another corporation, where vested options have not been
assumed or substituted by such successor corporation, such options will be
exercisable for a period of 15 days from the date of notice, and will
terminate upon the expiration of such period. Upon a change in control (as
defined below), the unvested options shall be subject to accelerated vesting
to the extent of 50% of such unvested options. For purposes of this
provision, a change in control is defined as (i) a merger or acquisition of
the Company resulting in a 50% or greater change in the total voting power
of the Company immediately following such transaction or (ii) certain
changes in the majority composition of the Board of Directors during a
24-month period, which changes are not initiated by the Board of Directors.
(2) Based on options granted for an aggregate of 832,500 shares during the year
ended December 31, 1996.
(3) Potential gains and net of exercise price, but before taxes associated with
exercise. The 5% and 10% assumed compounded annual rates of stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance provided to any executive officer or
any other holder of the Company's securities that the actual stock price
appreciation over the ten-year option term will be at the assumed 5% and 10%
levels or at any other defined level. Unless the market price of the Common
Stock appreciates over the option term, no value will be realized from the
option grants made to the persons named in this table.
9
<PAGE> 12
OPTION EXERCISES AND FISCAL 1996 YEAR-END VALUES
The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock and the fiscal year-end value
of unexercised options held by the persons named in the Summary Compensation
Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END(#) FISCAL-YEAR END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry W. Donaldson.......... -- -- 29,164 133,336 98,429 725,009
Ken K. Cheng................ 25,000 201,250 70,344 204,656 314,287 511,588
Jon E. Reese................ -- -- 50,520 74,480 344,670 462,205
Gregory G. Schott........... 23,124 199,921 5,626 111,250 24,617 198,906
Thomas P. Shanahan.......... 22,000 174,025 38,457 126,043 270,960 523,377
</TABLE>
- ---------------
(1) Amounts reflecting gains on outstanding stock options are based on the
closing price of the Company's Common Stock on December 31, 1996 of $8.375.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file certain reports of ownership with the Securities and
Exchange Commission (the "Commission") and with the National Association of
Securities Dealers. Such officers, directors and shareholders are also required
by Commission rules to provide the Company with copies of all Section 16(a)
forms that they file. Based solely on its review of copies of such forms
received by the Company, or on written representations from certain reporting
persons, the Company believes that, during the period from January 1, 1996 to
December 31, 1996, its executive officers, directors and ten percent
shareholders filed all required Section 16(a) reports on a timely basis, except
that seven partners of Kleiner Perkins Caufield and Byers each filed one late
Form 3 filing; Mr. Drazan, Mr. Matthews and Mr. Shanahan each filed one late
Form 4 filing; and Mr. Compton, Mr. Drazan, Mr. Harris and Mr. Matthews each
filed one late Form 5 filing.
10
<PAGE> 13
CHANGES TO BENEFIT PLANS
The Company has proposed an amendment to increase the share reserve under
the 1992 Stock Option Plan (the "Option Plan") and to cause the Option Plan to
comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"). Grants under the Option Plan are made at the discretion of the Board of
Directors and the Compensation Committee, and therefore future grants under the
Option Plan are not determinable. Accordingly, the following table sets forth
grants of stock options received under the Option Plan during the fiscal year
ended December 31, 1996 by (1) the Chief Executive Officer of the Company and
the four other most highly compensated executive officers of the Company as of
December 31, 1996; (2) all current executive officers as a group; (3) all
current directors who are not executive officers as a group; and (4) all
employees, including all officers who are not executive officers, as a group.
The Company has also proposed an amendment to increase the number of shares
reserved for issuance under the 1995 Director Option Plan (the "Director Plan").
The following table sets forth the options that will be granted under the
Director Plan, as amended, to the current directors who are not employees of the
Company as a group during the fiscal year ended December 31, 1997.
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
1992 STOCK OPTION PLAN 1995 DIRECTOR OPTION PLAN(2)
---------------------------- -----------------------------------
EXERCISE PRICE NUMBER EXERCISE PRICE NUMBER OF
NAME AND POSITION ($ PER SHARE)(1) OF SHARES ($ PER SHARE) OPTIONS GRANTED
- ----------------------------------------- ---------------- --------- ----------------- ---------------
<S> <C> <C> <C> <C>
Henry W. Donaldson....................... -- -- -- --
President and Chief Executive Officer
Ken K. Cheng............................. 8.750 150,000 -- --
Senior Vice President and Chief
Operating Officer
Jon E. Reese............................. -- -- -- --
Vice President, Sales
Gregory G. Schott........................ 9.000 65,000 -- --
Vice President, Operations
Thomas P. Shanahan....................... 10.125 50,000 -- --
Vice President, Finance and Chief
Financial Officer
Executive Officer Group.................. 9.430 200,000 -- --
(3 Persons)
Non-Executive Officer Director Group..... -- -- --(3) 10,000(4)
(4 persons)
Non-Executive Officer Employee Group..... 9.090 44,000 -- --
</TABLE>
- ---------------
(1) Exercise prices for these 1992 Stock Option Plan grants are shown on a
weighted-average basis.
(2) Only non-employee directors of the Company are eligible to participate in
the 1995 Director Option Plan.
(3) Future exercise prices of options granted under the 1995 Director Option
Plan are unknown, as they are based on the fair market value of the
Company's Common Stock on the date of grant.
(4) To be granted in fiscal 1997. Assumes that Messrs. Compton, Drazan, Harris
and Matthews continue to serve on the Board of Directors as non-employee
directors until the dates of their respective grants.
11
<PAGE> 14
PERFORMANCE GRAPH
Set forth below are line graphs comparing the cumulative total return to
shareholders of the Company's Common Stock at December 31, 1996 since February
6, 1996, the date of the Company's initial public offering, to the cumulative
total return over such period of the Nasdaq Non-Financial Stocks and Nasdaq
Computer and Data Processing Services Stocks Indexes.
COMPARISON OF CUMULATIVE TOTAL RETURN FROM FEBRUARY 5, 1996, THROUGH DECEMBER
31, 1996(1)
DIGITAL GENERATION SYSTEMS, INC., THE NASDAQ NON-FINANCIAL STOCKS INDEX AND
THE NASDAQ COMPUTER & DATA PROCESSING SERVICES STOCKS INDEX
<TABLE>
<CAPTION>
NASDAQ
COMPUTER &
DATA
NASDAQ NON- PROCESSING DIGITAL
MEASUREMENT PERIOD FINANCIAL SERVICES GENERATION
(FISCAL YEAR COVERED) STOCKS STOCKS SYSTEMS, INC.
<S> <C> <C> <C>
2/6/96 100 100 100
12/31/96 121 125 76
</TABLE>
- ---------------
(1) The Company's initial public offering commenced on February 6, 1996. For
purposes of this presentation, the Company has assumed that the initial
public offering price of $11.00 per share would have been the closing sales
price on February 5, 1996, the day prior to the commencement of trading.
Assumes that $100 was invested in the Company's Common Stock on February 6,
1996, at the Company's initial public offering price per share of $11.00 and
in each index, and that all dividends were reinvested. The Company has never
paid dividends on its Common Stock and has no present plans to do so.
Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns.
12
<PAGE> 15
PROPOSAL TWO -- AMENDMENT OF
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors in October 1992 and approved by the shareholders in May 1993.
A total of 1,750,000 shares of Common Stock has been reserved for issuance under
the Option Plan. At the Record Date, options to purchase an aggregate of
1,217,180 shares having an average exercise price of $3.912 per share and
expiring from January 20, 2000 to October 9, 2003, were outstanding and 210,427
shares remained available for future grant under the Option Plan.
In January 1997, the Board of Directors unanimously adopted, subject to
shareholder approval, amendments to the Option Plan to (i) reserve an additional
700,000 shares for issuance under the Option Plan and (ii) impose a limitation
on grants to any optionee in any fiscal year so that the aggregate grants in any
one year to any optionee may not exceed 250,000 shares per fiscal year,
provided, however, that new hires may receive additional option grants for no
more than 500,000 shares in the year they are hired. At the Annual Meeting, the
shareholders are being asked to approve these amendments to the Option Plan,
which are discussed below.
Increase in Shares Reserved Under the Option Plan. The increase in
the number of shares under the Option Plan is necessary in order to provide
incentive to eligible employees and independent contractors and to align
their interests directly with those of the shareholders. The Company also
believes that its ability to grant stock options is critical to its success
in attracting and retaining experienced and qualified employees and
independent contractors.
Limit Option Grants Under the Option Plan. The proposed amendment
would limit the number of shares subject to options granted to any optionee
under the Option Plan in any fiscal year of the Company to 250,000 in the
aggregate, provided that the Company could make an additional one-time
grant to a new hire of up to 500,000 shares. This limit would adjust
proportionately in connection with any stock splits, reverse stock splits
and the like. Under Section 162(m) of the Internal Revenue Code (the
"Code"), the allowable deduction for compensation paid or accrued with
respect to the chief executive officer and each of the four most highly
compensated employees of a publicly-held corporation is limited to no more
than $1,000,000 per year per individual. Compensation expense attributable
to stock options would be subject to these limitations unless, among other
things, the option plan under which the options are granted includes a
limit on the number of shares with respect to which awards may be made to
any one employee in a fiscal year. Such a potential compensation expense
deduction could arise, for example, upon the exercise by one of the
executive officers of a nonstatutory option or upon a disqualifying
disposition of stock received upon exercise of an incentive stock option.
Prior to the proposed amendment, the Option Plan did not contain any limit
on the number of options that could be granted to an optionee in a fiscal year.
The purpose of the proposed amendment to place a limit on the number of shares
which may be subject to options granted under the Option Plan to an optionee in
any fiscal year, which is intended to comply with Section 162(m) of the Code, is
to preserve the Company's ability to deduct in full any compensation expense
related to stock options granted under the Option Plan.
The essential features of the Option Plan are outlined below:
PURPOSE
The purposes of the Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, provide
additional incentive to employees and consultants of the Company and promote the
success of the Company's business.
ADMINISTRATION
The Compensation Committee of the Board of Directors administers the Option
Plan. The Compensation Committee is constituted in a manner intended to comply
with the requirements of Rule 16b-3 under the Securities Exchange Act of 1934
pertaining to the disinterested administration of employee benefit plans. If
13
<PAGE> 16
the Option Plan satisfies the disinterested administration and other
requirements of Rule 16b-3, discretionary grants of options under the Option
Plan to persons subject to liability under Section 16(b) will be exempt from
such liability to the extent provided by Rule 16b-3. Members of the Compensation
Committee of the Board of Directors receive no additional compensation for their
services in connection with the administration of the Option Plan.
ELIGIBILITY
The Option Plan provides for grants to employees, including officer and
employee directors, of "incentive stock options" within the meaning of Section
422 of the Code and for grants of nonstatutory stock options to employees
(including officers and employee directors) and consultants. The Compensation
Committee of the Board of Directors as the plan administrator has complete
discretion to determine the terms of the options granted, including the exercise
price, the number of shares subject to the option and the exercisability thereof
and the form of consideration payable upon exercise. There is a limit of
$100,000 on the aggregate fair market value of shares subject to all incentive
stock options which become exercisable for the first time in any one calendar
year.
TERMS OF OPTIONS
Each option is evidenced by a written stock option agreement between the
Company and the optionee and is generally subject to the terms and conditions
listed below, but specific terms may vary:
(a) Exercise of the Option. The Compensation Committee of the Board of
Directors determines when options granted under the Option Plan may be
exercised. The current form of the option agreement generally used under
the Option Plan provides that options will be exercisable cumulatively to
the extent of 25% of the option shares on the first anniversary of the
vesting commencement date of the option and 1/36th of the remaining option
shares at the end of each month thereafter. An option is exercised by
giving written notice of exercise to the Company, specifying the number of
shares of Common Stock to be purchased and tendering payment to the Company
of the purchase price. The Option Plan specifies that the permissible form
of payment for shares issued upon exercise of an option shall be set forth
in the option agreement and may consist of cash, check, promissory note,
exchange of shares of the Common Stock held for more than six months,
consideration received by the Company under a cashless exercise program
implemented by the Company in connection with the Option Plan, a reduction
in the amount of any Company liability to the optionee, any combination of
the foregoing methods of payment or such other consideration and method of
payment for the issuances of the shares to the extent permitted by
applicable laws. The current form of option agreement only permits payment
by cash, check or surrender of other shares of the Common Stock.
(b) Option Price. The option price of the options granted under the
Option Plan is determined by the Compensation Committee of the Board of
Directors in accordance with the Option Plan, but the option price of
incentive stock options and nonstatutory stock options may not be less than
100% and 85%, respectively, of the fair market value of the Company's
Common Stock. The exercise price of all nonstatutory stock options granted
under the Option Plan shall be determined by the Board of Directors. With
respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock (a
"10% Shareholder"), the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the date of
grant.
(c) Termination of Employment. Options granted under the Option Plan
must be exercised within one month (or such other period of time, not
exceeding three months in the case of an incentive stock option or six
months in the case of a nonstatutory stock option, as is determined by the
Board of Directors) of the end of the optionee's status as an employee or
consultant of the Company, but in no event later than the expiration of the
option term.
(d) Death or Disability. Options granted under the Option Plan must be
exercised within six months (or such other period of time, not exceeding
twelve months, as is determined by the Board of Directors) after such
optionee's termination by death or disability, but in no event later than
the expiration of the option term.
14
<PAGE> 17
(e) Termination of Options. The maximum term of an option granted
under the Option Plan may not exceed ten years from the date of grant (five
years in the case of an incentive stock option granted to a 10%
Shareholder). Under the current form of option agreement, each option has a
term of 7 years from the date of grant. No option may be exercised by any
person after such expiration.
(f) Nontransferability of Options. Options granted under the Option
Plan are not generally transferable by the optionee except by will or by
the laws of descent or distribution and are exercisable during the lifetime
of the optionee only by such optionee.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization which results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, an appropriate adjustment shall be made in the option price and in the
number of shares subject to each option.
MERGER OR SALE OF ALL ASSETS
In the event of a merger of the Company with or into another corporation,
or the sale of substantially all of the assets of the Company, each outstanding
option under the Option Plan shall be assumed or an equivalent option or right
substituted by the successor corporation or a parent or subsidiary of the
successor corporation. In the event that the option is not assumed or
substituted, the optionee shall have the right to exercise the option to the
extent the optionee was otherwise entitled to exercise the option, for a period
of 15 days after receiving notice of such merger or sale, and the option will
terminate upon the expiration of such period.
CHANGE IN CONTROL
Upon a change in control (as defined below), the unvested options granted
to each of the Company's executive officers shall be subject to accelerated
vesting to the extent of 50% of such unvested options. For purposes of this
provision, a change in control is defined as (i) a merger or acquisition of the
Company resulting in a 50% or greater change in the total voting power of the
Company immediately following such transaction or (ii) certain changes in the
majority composition of the Board of Directors during a 24-month period, which
changes are not initiated by the Board of Directors.
AMENDMENT AND TERMINATION
The Board of Directors may, at any time, amend or terminate the Option Plan
as it deems appropriate, provided that the Company shall obtain shareholder
approval of the following amendments to the Option Plan: (i) any increase in the
number of Shares subject to the Plan, other than in connection with an
adjustment under Section 11 of the plan, or (ii) any change in the designation
of the class of persons eligible to be granted Options. In addition, the Company
shall obtain shareholder approval of any amendment to the Option Plan in such a
manner and to the extent necessary to comply with applicable law or regulation.
In any event, the Option Plan will terminate automatically in October 2002.
FEDERAL INCOME TAX INFORMATION
Options granted under the Option Plan may be either "incentive stock
options," as defined in the Code, or nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of (i)
the fair market value of the shares at
15
<PAGE> 18
the date of the option exercise or (ii) the sale price of the shares. A
different rule for measuring ordinary income upon such a premature disposition
may apply if the optionee is also an officer, director or 10% shareholder of the
Company. The Company will be entitled to a deduction in the same amount as the
ordinary income recognized by the optionee. Any gain recognized on such a
premature disposition of the shares in excess of the amount treated as ordinary
income will be characterized as long-term or short-term capital gain, depending
on the holding period.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time he is granted a nonstatutory option. However, upon its
exercise, the optionee will recognize taxable income generally measured as the
excess of the then fair market value of the shares purchased over the purchase
price. Any taxable income recognized in connection with an option exercise by an
optionee who is also an employee of the Company will be subject to tax
withholding by the Company. Upon resale of such shares by the optionee, any
difference between the sales price and the optionee's purchase price, to the
extent not recognized as taxable income as described above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.
The Company will be entitled to a tax deduction in the same amount as the
ordinary income recognized by the optionee with respect to shares acquired upon
exercise of a nonstatutory option.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Option Plan and does not purport to be complete. Reference
should be made to the applicable provisions of the Code. In addition, this
summary does not discuss the tax consequences of the optionee's death or the
income tax laws of any municipality, state or foreign country in which an
optionee may reside.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of the holders of a majority of the shares of the
Company's Common Stock present or represented and voting at the Annual Meeting
will be required to approve the amendments to the Option Plan.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE
AMENDMENTS TO THE OPTION PLAN (I) TO INCREASE BY 700,000 THE NUMBER OF SHARES OF
THE COMPANY'S COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER, AND (II) TO LIMIT
THE NUMBER OF OPTIONS THAT MAY BE GRANTED TO PARTICIPANTS THEREUNDER IN ANY
FISCAL YEAR.
PROPOSAL THREE -- APPROVAL OF AMENDMENT TO
1995 DIRECTOR OPTION PLAN
The Company's 1995 Director Option Plan (the "Director Plan") was adopted
and approved by the Board of Directors and the shareholders, respectively, in
September 1995. The Board of Directors initially reserved 75,000 shares of the
Company's Common Stock for issuance to non-employee directors ("Outside
Directors") upon the exercise of the options issuable pursuant to the Director
Plan (the "Director Options"). At the Record Date, Director Options to purchase
an aggregate of 50,000 shares, having an average exercise price of $3.38 per
share and expiring from September 13, 2001 to September 13, 2006 were
outstanding and 25,000 shares remained available for future grant of Director
Options under the Director Plan.
In January 1997, the Board of Directors approved, subject to shareholder
approval, an amendment to the Director Plan to reserve an additional 25,000
shares for issuance under the Option Plan. This amendment is necessary because
the availability of an adequate number of shares reserved for issuance under the
Director Plan and the ability to grant stock options are important factors in
attracting and retaining qualified Outside Directors essential to the success of
the Company. At the Annual Meeting, the shareholders are being asked to approve
this amendment to the Director Plan.
16
<PAGE> 19
The essential features of the Director Plan are outlined below:
PURPOSE
The purposes of the Director Plan are to attract and retain the best
available individuals for service as directors of the Company, provide
additional incentive to the Outside Directors and encourage their continued
service on the Board of Directors.
ADMINISTRATION
The Director Plan provides for administration by the Board of Directors,
who receive no additional compensation in connection with such service. Members
of the Board of Directors who are eligible for Director Options may vote on
matters affecting the administration of the Director Plan. The interpretation
and construction of any provision of the Director Plan shall be within the sole
discretion of the Board of Directors, whose determination shall be final and
conclusive.
ELIGIBILITY AND PARTICIPATION
The Director Plan provides that Director Options may be granted only to
Outside Directors as reflected in the terms of the Director Plan and written
option agreements. All grants are automatic and are not subject to the
discretion of any person, except that an Outside Director may decline to accept
Director Options. As of the Record Date, 4 Outside Directors were eligible to
participate in the Director Plan.
AUTOMATIC GRANT OF DIRECTOR OPTIONS
The Director Plan provides that each non-employee director shall be
automatically granted an option to purchase 10,000 shares of Common Stock (the
"First Option") on the date on which the later of the following events occurs:
(i) the effective date of the Director Plan or (ii) the date on which such
person first becomes a non-employee director on or after the date of this
offering, provided, however, that the First Option shall not be granted if
immediately prior to becoming a non-employee director, such person was a
director of the Company.
In addition, each non-employee director who has been granted a First Option
shall thereafter be automatically granted an option to purchase 2,500 shares (a
"Subsequent Option") on the anniversary date of the First Option. The Subsequent
Option shall be exercisable only while the non-employee director remains a
director of the Company. Each First Option and each Subsequent Option shall have
a term of ten years. The shares subject to the First Option shall vest as to
1/36th of the shares on the first of each month after the date of grant,
provided that the optionee continues to serve as a director on such dates. The
Subsequent Option shares vest as to 1/12th of the shares on the first of each
month following the second anniversary of its date of grant, provided that the
optionee continues to serve as a director on such dates. The exercise prices of
the First Option and each Subsequent Option shall be 100% of the fair market
value per share of the Common Stock on the date of the grant of the option.
TERMS OF DIRECTOR OPTIONS
Each Director Option is evidenced by a written stock option agreement
between the Company and the Outside Director and is subject to the terms and
conditions listed below:
(a) Exercise of Director Options. The Director Options become
exercisable as described above under "Automatic Grant of Director Options."
A Director Option is exercised by giving written notice of exercise to the
Company and tendering full payment of the purchase price to the Company.
Payment for shares issued upon exercise of a Director Option may be by
cash, check, surrender of other shares of the Company's Common Stock or any
combination thereof.
(b) Option Price. The exercise price of Director Options granted under
the Director Plan is the fair market value of the Company's Common Stock on
the date of grant as determined by the Board of Directors in accordance
with the Director Plan. The Director Plan provides that because the
Company's
17
<PAGE> 20
Common Stock is currently traded on the Nasdaq National Market System, the
fair market value per share shall be the closing sales price (or the
closing bid, if no sales were reported) on such system on the date of grant
of the Director Option.
(c) Termination of Service as a Director. To the extent exercisable at
the time of termination, options granted under the Director Plan must be
exercised within three months of the end of the optionee's tenure as a
director of the company, but in no event later than the expiration of the
option term. No option granted under the Director Plan is transferable by
the optionee except by will or by the laws of descent or distribution, and
each option is exercisable during the lifetime of the optionee only by such
optionee.
(d) Death or Disability. Options granted under the Director Plan must
be exercised within 12 months after such optionee's termination as a
director by death or disability, but in no event later than the expiration
of the option term.
(e) Termination of Options. Options granted under the Director Plan
have a term of 10 years from the date of grant.
(f) Nontransferability of Director Options. A Director Option is
nontransferable by the Outside Director, other than by will or by the laws
of descent and distribution, and is exercisable during the Outside
Director's lifetime only by the Outside Director or, in the event of death,
by a person who acquires the rights to exercise the Director Option by
bequest or inheritance by reason of death of the Outside Director.
SECTION 16(B)
The administration and other terms of the Director Plan have been
structured so that options granted to the non-employee directors who administer
the Company's stock plans shall qualify as transactions exempt from Section
16(b) of the Exchange Act, pursuant to Rule 16b-3 promulgated thereunder.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; DISSOLUTION
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization which results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the price and in the number of
shares subject to each option. In the event of the proposed dissolution or
liquidation of the Company, all outstanding Director Options will automatically
terminate.
MERGER OR SALE OF ALL ASSETS
In the event of a merger of the Company with or into another corporation or
the sale of substantially all of the assets of the Company, outstanding options
under the Director Plan may be assumed or equivalent options may be substituted
by the successor corporation or parent or subsidiary thereof. If an option is
assumed or substituted for, the option or equivalent option shall continue to be
exercisable as provided in the Director Plan for so long as the optionee serves
as a director or a director of the successor corporation. If the successor
corporation does not assume an outstanding option or substitute for it an
equivalent option, the option shall become fully vested and exercisable,
including as to shares for which it would not otherwise be exercisable for a
period of 30 days from the date the optionee is notified by the Board of
Directors of the acceleration of the option.
AMENDMENT AND TERMINATION
The Board of Directors may, at any time, amend or terminate the Director
Plan, but no amendment or termination shall be made which would impair the
rights of any participant under any grant theretofore made, without his or her
consent. In addition, the Company shall obtain shareholder approval of any
amendment to the Director Plan in such a manner and to the extent necessary to
comply with applicable law or regulation.
18
<PAGE> 21
FEDERAL INCOME TAX INFORMATION
Director Options granted under the Director Plan are deemed nonstatutory
options under the Code. An optionee will not recognize any taxable income at the
time he is granted a nonstatutory option. However, upon exercise of a Director
Option, the optionee will recognize ordinary income for tax purposes measured by
the excess, if any, of the then fair market value of the shares over the option
price. Because all optionees are Directors, the date of taxation may be deferred
unless the optionee files an election with the Internal Revenue Service pursuant
to Section 83(b) of the Code within 30 days after the date of exercise. In such
circumstances, and absent the filing of such an election, such deferred income
will be recognized when the sale of the shares at a profit will no longer
subject the optionee to a suit under Section 16(b) of the Exchange Act.
Upon a resale of such shares by the optionee, assuming such shares
constitute capital assets in the hands of the optionee, any difference between
the sales price and the option price, to the extent not recognized as ordinary
income as provided above, will be treated as long-term or short-term capital
gain or loss, depending on the holding period. The Company will be entitled to a
tax deduction in the amount and at the time that the Outside Director recognizes
ordinary income with respect to shares acquired upon exercise of a Director
Option.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Director Plan and does not purport to be complete. Reference
should be made to the applicable provisions of the Code. In addition, this
summary does not discuss the tax consequences of the optionee's death or the
income tax laws of any state, municipality or foreign country in which the
optionee may reside.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of the holders of a majority of the shares of the
Company's Common Stock present or represented and voting at the Annual Meeting
will be required to approve the amendment to the Director Plan.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE
AMENDMENT TO THE DIRECTOR PLAN TO RESERVE AN ADDITIONAL 25,000 SHARES FOR
ISSUANCE UNDER THE DIRECTOR PLAN.
PROPOSAL FOUR -- RATIFICATION OF APPOINTMENT OF
INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company has appointed Arthur Andersen LLP,
independent accountants, to audit the financial statements of the Company for
the current fiscal year ending December 31, 1997. Arthur Andersen LLP has
audited the Company's consolidated financial statements since 1991. The Company
expects that a representative of Arthur Andersen LLP will be present at the
Annual Meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to answer any appropriate questions. In
the event that shareholders fail to ratify the appointment, the Board of
Directors will reconsider its selection.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative votes of the holders of a majority of the shares of Company
stock present or represented and voting at the Annual Meeting will be required
to approve this proposal. THE COMPANY'S BOARD OF DIRECTORS HAS APPROVED THIS
PROPOSAL AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE RATIFICATION OF THE
SELECTION OF ARTHUR ANDERSEN LLP.
19
<PAGE> 22
OTHER MATTERS
The Company knows of no other matters to be submitted at the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Board of Directors may recommend.
It is important that your shares be represented at the meeting, regardless
of the number of shares which you hold. You are, therefore, urged to mark, sign,
date, and return the accompanying proxy card as promptly as possible in the
postage-prepaid envelope enclosed for that purpose.
For the Board of Directors
DIGITAL GENERATION SYSTEMS, INC.
/s/ JOHN B. GOODRICH
John B. Goodrich
Secretary
Dated: March 18, 1997
20
<PAGE> 23
DIGITAL GENERATION SYSTEMS, INC.
PROXY FOR 1997 ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of DIGITAL GENERATION SYSTEMS, INC., a
California corporation, hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders and Proxy Statement, each dated March 18, 1997, and
hereby appoints Henry W. Donaldson and Thomas P. Shanahan and each of them,
proxies and attorneys-in-fact, with full power to each of substitution, on
behalf and in the name of the undersigned, to represent the undersigned at the
1997 Annual Meeting of Shareholders of DIGITAL GENERATION SYSTEMS, INC., to be
held on Friday, April 11, 1997 at 8:30 a.m., local time, at 219 East 44th
Street, New York, New York 10017, and any adjournment(s) thereof, and to vote
all shares of Common Stock which the undersigned would be entitled to vote if
then and there personally present, on the matters set forth below.
1. Election of directors:
__ FOR all nominees listed __ WITHHOLD AUTHORITY __ ABSTAIN
below (except as to vote for all nominees
indicated) listed below
INSTRUCTION: IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THAT NOMINEE'S NAME IN THE
LIST BELOW:
Henry W. Donaldson, Kevin R. Compton, Jeffery M. Drazan,
Richard H. Harris, Leonard S. Matthews
2. Proposal to amend the Company's 1992 Stock Option Plan (i) to increase
by 700,000 the number of shares of the Company's Common Stock reserved
for issuance thereunder, and (ii) to limit the number of options that
may be granted to participants thereunder in any fiscal year.
_____ FOR _____AGAINST _____ ABSTAIN
3. To consider and vote upon a proposal to amend the Company's 1995
Director Option Plan to increase by 25,000 the number of shares of
the Company's Common Stock reserved for issuance thereunder.
_____ FOR _____AGAINST _____ ABSTAIN
4. Proposal to ratify the appointment of Arthur Andersen LLP as
independent accountants for the fiscal year ending December 31, 1997.
_____ FOR _____AGAINST _____ ABSTAIN
In their discretion, the proxies are authorized to vote upon such other
matter(s) which may properly come before the meeting and at any adjournment(s)
thereof.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL
BE VOTED FOR THE LISTED NOMINEES IN THE ELECTION OF DIRECTORS, FOR THE AMENDMENT
TO THE 1992 STOCK OPTION PLAN, AND FOR THE RATIFICATION OF THE APPOINTMENT OF
ARTHUR ANDERSEN LLP AS INDEPENDENT ACCOUNTANTS FOR THE 1997 FISCAL YEAR.
Both of such attorneys or substitutes (if both are present and acting at
said meeting or any adjournments or postponements thereof, or, if only one shall
be present and acting, then that one) shall have and may exercise all of the
powers of said attorneys-in-fact hereunder.
Signature :__________________ Dated :___________________
Signature :__________________ Dated :___________________
(This Proxy should be marked, dated, signed by the shareholder(s) exactly as his
or her name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.)
<PAGE> 1
EXHIBIT 10.1
DIGITAL GENERATION SYSTEMS, INC.
1992 STOCK OPTION PLAN
(AS AMENDED JANUARY 23, 1997)
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected in
the terms of the written option agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Committee, if one has been appointed, or
the Board of Directors of the Company, if no Committee is appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one
is appointed.
(d) "Common Stock" shall mean the Common Stock of the Company.
(e) "Company" shall mean Digital Generation Systems, Inc., a
California corporation.
(f) "Consultant" shall mean any person who is engaged by the Company
or any Parent or Subsidiary to render consulting services and is
compensated for such consulting services, and any director of the Company
whether compensated for such services or not.
(g) "Continuous Status as an Employee or Consultant" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any
other leave of absence approved by the Board; provided that such leave is
for a period of not more than 90 days or reemployment upon the expiration
of such leave is guaranteed by contract or statute.
(h) "Employee" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment of a director's fee by the Company shall not be
sufficient to constitute "employment" by the Company.
(i) "Executive Officer" shall mean an officer of the Company at or
above the level of vice president.
(j) "Incentive Stock Option" shall mean an Option intended to qualify
as an incentive stock option within the meaning of Section 422A of the
Code.
(k) "Nonstatutory Stock Option" shall mean an Option not intended to
qualify as an Incentive Stock Option.
(l) "Option" shall mean a stock option granted pursuant to the Plan.
(m) "Optioned Stock" shall mean the Common Stock subject to an Option.
(n) "Optionee" shall mean an Employee or Consultant who receives an
Option.
(o) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(p) "Plan" shall mean this 1992 Stock Option Plan.
(q) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
<PAGE> 2
(r) "Subsidiary" shall mean a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 2,450,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. Notwithstanding any other provision of the Plan, shares
issued under the Plan and later repurchased by the Company shall not become
available for future grant or sale under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be administered by
different Committees with respect to different groups of Employees and
Consultants.
(ii) Section 162(m). To the extent that the Board determines it to be
desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan
shall be administered by a Committee of two or more "outside directors"
within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption
under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy applicable laws.
(b) Powers of the Board. Subject to the provisions of the Plan, the Board
shall have the authority, in its discretion: (i) to grant Incentive Stock
Options or Nonstatutory Stock Options; (ii) to determine, upon review of
relevant information, the fair market value of the Common Stock; (iii) to
determine the exercise price per share of Options to be granted, which exercise
price shall be determined in accordance with Section 8 of the Plan; (iv) to
determine the Employees or Consultants to whom, and the time or times at which,
Options shall be granted and the number of shares to be represented by each
Option; (v) to interpret the Plan; (vi) to prescribe, amend and rescind rules
and regulations relating to the Plan; (vii) to determine the terms and
provisions of each Option granted (which need not be identical) and, with the
consent of the holder thereof, modify or amend each Option; (viii) to accelerate
or defer (with the consent of the Optionee) the exercise date of any Option,
consistent with the provisions of Section 5 of the Plan; (ix) to authorize any
person to execute on behalf of the Company any instrument required to effectuate
the grant of an Option previously granted by the Board; (x) to reduce the
exercise price of any Option to the then current Fair Market Value if the Fair
Market Value of the Common Stock covered by such Option shall have declined
since the date the Option was granted; (xi) to allow Optionees to satisfy
withholding tax obligations by electing to have the Company withhold from the
Shares to be issued upon exercise of an Option that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Board may deem necessary or advisable; and (xii) to make
all other determinations deemed necessary or advisable for the administration of
the Plan.
(c) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(2)
<PAGE> 3
5. ELIGIBILITY; LIMITATIONS.
(a) Nonstatutory Stock Options may be granted only to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options.
(b) No Incentive Stock Option may be granted to an Employee which, when
aggregated with all other incentive stock options granted to such Employee by
the Company or any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as of the date of grant
of the Option covering such Share) in excess of $100,000 becoming first
available for purchase upon exercise of one or more incentive stock options
during any calendar year.
(c) Section 5(b) of the Plan shall apply only to an Incentive Stock Option
evidenced by an "Incentive Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall qualify as an
incentive stock option. Section 5(b) of the Plan shall not apply to any Option
evidenced by a "Nonstatutory Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall be a
Nonstatutory Stock Option.
(d) The Plan shall not confer upon any Optionee any right with respect to
continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his right or the Company's right to terminate
his employment or consulting relationship at any time, with or without cause.
(e) The following limitations shall apply to grants of Options:
(i) No Employee or Consultant shall be granted, in any fiscal year of
the Company, Options to purchase more than 250,000 Shares.
(ii) In connection with his or her initial service, an Employee or
Consultant may be granted Options to purchase up to an additional 500,000
Shares which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 11(a).
(iv) If an Option is cancelled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction
described in Section 11(a)), the cancelled Option will be counted against
the limits set forth in subsections (i) and (ii) above. For this purpose,
if the exercise price of an Option is reduced, the transaction will be
treated as a cancellation of the Option and the grant of a new Option.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the shareholders of
the Company as described in Section 17 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 13 of the
Plan.
7. TERM OF OPTION. The term of each Incentive Stock Option shall be ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Incentive Stock Option Agreement. The term of each Nonstatutory
Stock Option shall be ten (10) years and one (1) day from the date of grant
thereof or such shorter term as may be provided in the Nonstatutory Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, (a) if the Option is an Incentive Stock Option, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Incentive Stock Option Agreement, or (b) if the
Option is a Nonstatutory Stock Option, the term of the Option shall be five (5)
years and one (1) day from the date of grant thereof or such shorter term as may
be provided in the Nonstatutory Stock Option Agreement.
(3)
<PAGE> 4
8. EXERCISE PRICE AND CONSIDERATION.
(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value (as defined in Section 8(b)) per Share on
the date of grant.
(B) granted to any Employee, the per Share exercise price shall be
no less than 100% of the Fair Market Value (as defined in Section 8(b))
per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Board. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per
Share exercise price shall be no less than 100% of the Fair Market Value
(as defined in Section 8(b)) per Share on the date of grant.
(B) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value (as
defined in Section 8(b)) per Share on the date of grant pursuant to a
merger or other corporate transaction.
(b) The fair market value of the Common Stock (the "Fair Market Value")
shall be determined by the Board as follows:
(i) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or
system for the last market trading day prior to the time of determination,
as reported in The Wall Street Journal or such other source as the Board
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high bid and
low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Board.
(c) Form of Consideration. The Board shall determine the acceptable form of
consideration for exercising an Option, including the method of payment. In the
case of an Incentive Stock Option, the Board shall determine the acceptable form
of consideration at the time of grant. Such consideration may consist entirely
of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(4)
<PAGE> 5
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by applicable laws.
9. EXERCISE OF OPTION.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8 of the Plan. Until
the issuance (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the event of
termination of an Optionee's Continuous Status as an Employee or Consultant (as
the case may be), such Optionee may, but only within thirty (30) days (or such
other period of time, not exceeding three (3) months in the case of an Incentive
Stock Option or six (6) months in the case of a Nonstatutory Stock Option, as is
determined by the Board, with such determination in the case of an Incentive
Stock Option being made at the time of grant of the Option) after the date of
such termination (but in no event later than the date of expiration of the term
of such Option as set forth in the Option Agreement), exercise his Option to the
extent that he was entitled to exercise it at the date of such termination. To
the extent that he was not entitled to exercise the Option at the date of such
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section 9(b)
above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of his total and permanent disability (as
defined in Section 22(e)(3) of the Code), he may, but only within six (6) months
(or such other period of time not exceeding twelve (12) months as is determined
by the Board, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option) from the date of such termination
(but in no event later than the date of expiration of the term of such Option as
set forth in the Option Agreement), exercise his Option to the extent he was
entitled to exercise it at the date of such termination. To the extent that he
was not entitled to exercise the Option at the date of termination, or if he
does not exercise such Option (which he was entitled to exercise) within the
time specified herein, the Option shall terminate.
(5)
<PAGE> 6
(d) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his death an
Employee or Consultant of the Company and who shall have been in Continuous
Status as an Employee or Consultant since the date of grant of the Option,
the Option may be exercised, at any time within six (6) months following
the date of death (but in no event later than the date of expiration of the
term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that would have accrued had the Optionee continued living and
remained in Continuous Status as an Employee or Consultant six (6) months
after the date of death, subject to the limitation set forth in Section
5(b); or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the
time of grant of the Option) after the termination of Continuous Status as
an Employee or Consultant, the Option may be exercised, at any time within
six (6) months following the date of death (but in no event later than the
date of expiration of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the extent of
the right to exercise that had accrued at the date of termination.
10. NON-TRANSFERABILITY OF OPTIONS. Unless determined otherwise by the
Board, an Option may not be sold, pledged, assigned, hypothecated, transferred,
or disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised, during the life time of the Optionee, only by
the Optionee. If the Board makes an Option transferable, such Option shall
contain such additional terms and conditions as the Board deems appropriate.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION DISSOLUTION, LIQUIDATION,
MERGER, ASSET SALE OR CHANGE IN CONTROL.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, the Board shall notify the Optionee at least fifteen
(15) days prior to such proposed action. To the extent an Option has not been
previously exercised, such Option shall terminate prior to consummation of such
proposed dissolution or liquidation.
(c) Merger or Asset Sale. Subject to the provisions of Section 11(d)
hereof, in the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the Company, each
outstanding Option shall be assumed or an equivalent option substituted by the
successor corporation or a Parent or Subsidiary of the successor corporation. In
the event that the successor corporation refuses to assume or substitute for the
Option, the Board shall notify the Optionee that the Option shall be exercisable
to the extent that the Optionee is otherwise entitled to exercise the Option for
a period of fifteen (15) days from the date of such notice, and the Option shall
terminate upon the expiration of such period. For the purposes of
(6)
<PAGE> 7
this paragraph, the Option shall be considered assumed if, following the merger
or sale of assets, the option confers the right to purchase or receive, for each
Share of Optioned Stock subject to the Option immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets was not solely
common stock of the successor corporation or its Parent, the Board may, with the
consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
(d) Change in Control. In the event of a "Change in Control" of the
Company, as defined in Subsection (e) below, then the following provisions shall
apply:
(i) For each Optionee who is an Executive Officer and has any Option
outstanding on the date of such Change in Control which is not yet fully
exercisable and fully vested as of the date of such Change in Control, such
Option shall become exercisable and vested on the date of such Change in
Control with respect to fifty percent (50%) of the Shares covered by such
Option which are not exercisable or vested on the date of such Change in
Control without reference to this subsection (an "Outstanding Option");
(ii) Each Outstanding Option held by an Executive Officer which is
vested and exercisable on the date of such Change in Control shall be
assumed by the successor corporation (if any) or by a Parent or Subsidiary
of the successor corporation (if any);
(iii) Each Outstanding Option held by an Executive Officer which is
vested and exercisable on the date of such Change in Control shall remain
exercisable by the Optionee for a period of at least fifteen (15) days from
the date of the Change in Control;
(iv) Each Optionee who is an Executive Officer with an Outstanding
Option which is vested and exercisable on the date of such Change in
Control shall be provided with written notice of the period of
exercisability provided for in subsection (d)(iii) above promptly after the
date of the Change in Control by the Company or by the entity surviving
after the Change in Control.
(e) Definition of "Change in Control". For purposes of this Section 11, a
"Change in Control" means the happening of any of the following:
(i) when any "person" or "group" of persons, as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a
Subsidiary or a Company employee benefit plan, including any trustee of
such plan acting as trustee) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than fifty percent (50%) of the
combined voting power of the Company's then outstanding securities entitled
to vote generally in the election of directors; provided that "person"
shall not include any person (or any person acting as a group) which, as of
the date of the adoption of this 1992 Stock Option Plan, is the "beneficial
owner" of securities of the Company representing more than fifty percent
(50%) of the combined voting power of the Company's outstanding securities
entitled to vote generally in the election of directors; or
(ii) a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation; or
(iii) a change in the composition of the Board of Directors of the
Company, during any twenty-four month period, as a result of which fewer
than a majority of the directors are Incumbent Directors.
(7)
<PAGE> 8
"Incumbent Directors" shall mean directors who either (A) are directors of
the Company as of the date the Plan is approved by the shareholders, or (B)
are elected, or nominated for election, to the Board of Directors of the
Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include
an individual not otherwise an Incumbent Director whose election or
nomination is in connection with an actual or threatened proxy contest
relating to the election of directors to the Company).
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable; provided
that, the following revisions or amendments shall require approval of the
shareholders of the Company in the manner described in Section 17 of the Plan:
(i) any increase in the number of Shares subject to the Plan, other
than in connection with an adjustment under Section 11 of the Plan;
(ii) any change in the designation of the class of persons eligible to
be granted Options; or
(b) Shareholder Approval. If any amendment requiring shareholder approval
under Section 13(a) of the Plan is made subsequent to the first registration of
any class of equity securities by the Company under Section 12 of the Exchange
Act, such shareholder approval shall be solicited as described in Section 17 of
the Plan.
(c) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. SHAREHOLDER APPROVAL.
(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted.
(8)
<PAGE> 9
(b) If and in the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required approval of
the shareholders of the Company obtained after such registration shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder.
(c) If any required approval by the shareholders of the Plan itself or of
any amendment thereto is solicited at any time otherwise than in the manner
described in Section 17(b) hereof, then the Company shall, at or prior to the
first annual meeting of shareholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote for the Plan
substantially the same information which would be required (if proxies to
be voted with respect to approval or disapproval of the Plan or amendment
were then being solicited) by the rules and regulations in effect under
Section 14(a) of the Exchange Act at the time such information is
furnished; and
(ii) file with, or mail for filing to, the Securities and Exchange
Commission four copies of the written information referred to in subsection
(i) hereof not later than the date on which such information is first sent
or given to shareholders.
18. INFORMATION TO OPTIONEES. The Company shall provide to each optionee,
durnig the period for which such optionee has one or more options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
(9)
<PAGE> 1
EXHIBIT 10.3
DIGITAL GENERATION SYSTEMS, INC.
1995 DIRECTOR OPTION PLAN
(AS AMENDED JANUARY 23, 1997)
1. PURPOSES OF THE PLAN. The purposes of this 1995 Director Option Plan are
to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means Digital Generation Systems, Inc., a California
corporation.
(e) "Continuous Status as a Director" means the absence of any
interruption or termination of service as a Director.
(f) "Director" means a member of the Board.
(g) "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a Director's fee by the Company shall not be sufficient in and
of itself to constitute "employment" by the Company.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(i) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share
of Common Stock shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such system or
exchange (or the exchange with the greatest volume of trading in Common
Stock) on the date of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not on
the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the date of determination,
as reported in The Wall Street Journal or such other source as the Board
deems reliable, or;
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Board.
(j) "Option" means a stock option granted pursuant to the Plan.
(k) "Optioned Stock" means the Common Stock subject to an Option.
(l) "Optionee" means an Outside Director who receives an Option.
<PAGE> 2
(m) "Outside Director" means a Director who is neither (i) an
Employee, nor (ii) an affiliate of an institutional investor in the
Company, provided that, upon the date of the first annual meeting of
shareholders following an initial public offering, this subpart (ii) shall
no longer be applicable.
(n) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1995 Director Option Plan.
(p) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue
Code of 1986.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 100,000 Shares of Common Stock (the "Pool"). The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan shall not be returned to the Plan and shall not become available for
future distribution under the Plan.
4. ADMINISTRATION AND GRANTS OF OPTIONS UNDER THE PLAN.
(a) Procedure for Grants. All grants of Options to Outside Directors under
this Plan shall be automatic and nondiscretionary and shall be made strictly in
accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to
be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an Option to
purchase 10,000 Shares (the "First Option") on the date on which the later
of the following events occurs: (A) the effective date of this Plan, as
determined in accordance with Section 6 hereof, or (B) the date on which
such person first becomes an Outside Director, whether through election by
the shareholders of the Company or appointment by the Board to fill a
vacancy; provided, however, that no First Option shall be granted to an
Outside Director who, immediately prior to becoming an Outside Director,
was a Director.
(iii) After the First Option has been granted to an Outside Director,
such Outside Director shall thereafter be automatically granted an Option
to purchase 2,500 Shares (a "Subsequent Option") on the anniversary date of
the First Option.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any exercise of an Option made before the Company has obtained
shareholder approval of the Plan in accordance with Section 16 hereof shall
be conditioned upon obtaining such shareholder approval of the Plan in
accordance with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be as follows:
(A) the term of the First Option shall be ten (10) years.
(B) the options granted thereunder shall be exercisable only while
the Outside Director remains a Director of the Company, except as set
forth in Section 8 hereof.
(C) the exercise price per Share shall be the fair market value per
Share on the date of grant. In the event that the date of grant is not a
trading day, the exercise price per Share shall be the Fair Market Value
on the next trading day immediately following the date of grant, or, in
the event there is no trading market for the Shares at the date of
grant, at the Fair Market Value of such Shares as determined by the
Board of Directors.
-2-
<PAGE> 3
(D) the First Option shall become exercisable as to 1/36th of the
Shares on the first day of each month following the grant date, provided
that the Optionee continues to serve as a Director on such dates.
(vi) The terms of a Subsequent Option granted hereunder shall be as
follows:
(A) the term of the Subsequent Option shall be ten (10) years.
(B) the Subsequent Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth
in Section 8 hereof.
(C) the exercise price per Share shall be the fair market value per
Share on the date of grant. In the event that the date of grant is not a
trading day, the exercise price per Share shall be the Fair Market Value
on the next trading day immediately following the date of grant or, in
the event there is no trading market for the Shares at the date of
grant, at the Fair Market Value of such Shares as determined by the
Board of Directors.
(D) the Subsequent Option shall become exercisable as to 1/12th of
the Shares subject to the Subsequent Option on the first day of each
month following the second anniversary of its date of grant, provided
that the Optionee continues to serve as a Director on such dates.
(vii) In the event that any Option granted under the Plan would cause
the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the
remaining Shares available for Option grant shall be granted under Options
to the Outside Directors on a pro rata basis. No further grants shall be
made until such time, if any, as additional Shares become available for
grant under the Plan through action of the Board or the shareholders to
increase the number of Shares which may be issued under the Plan or through
cancellation or expiration of Options previously granted hereunder.
5. ELIGIBILITY. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof. An Outside Director who has been granted an Option may, if he
or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur
of its adoption by the Board or its approval by the shareholders of the Company
as described in Section 16 of the Plan. It shall continue in effect for a term
of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. FORM OF CONSIDERATION. The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (v) any combination of the foregoing methods of payment.
8. EXERCISE OF OPTION.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times as are set forth in Section 4
hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
-3-
<PAGE> 4
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. In the event an
Optionee's Continuous Status as a Director terminates (other than upon the
Optionee's death or total and permanent disability (as defined in Section
22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only
within three (3) months following the date of such termination, and only to the
extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of such termination, and to the extent that the Optionee does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's Continuous Status as a
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but
only within twelve (12) months following the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of termination, or if he or she does not exercise such Option (to the
extent otherwise so entitled) within the time specified herein, the Option shall
terminate.
(d) Death of Optionee. In the event of an Optionee's death, the Optionee's
estate or a person who acquired the right to exercise the Option by bequest or
inheritance may exercise the Option, but only within twelve (12) months
following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. NON-TRANSFERABILITY OF OPTIONS. Unless otherwise provided by the
Administrator, the Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Board makes an Option transferable, such
Option shall contain such additional terms and conditions as the Board deems
appropriate.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER, ASSET
SALE OR CHANGE OF CONTROL.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting
-4-
<PAGE> 5
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued Shares effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, to the extent that an Option has not been previously
exercised, it shall terminate immediately prior to the consummation of such
proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option may be assumed or an equivalent option may be
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation does not
agree to assume the Option or to substitute an equivalent option, each
outstanding Option shall become fully vested and exercisable, including as to
Shares as to which it would not otherwise be exercisable. If an Option becomes
fully vested and exercisable in the event of a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option shall
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if, following the merger or
sale of assets, the Option confers the right to purchase, for each Share of
Optioned Stock subject to the Option immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares).
11. AMENDMENT AND TERMINATION OF THE PLAN.
(a) Amendment and Termination. Except as set forth in Section 4, the Board
may at any time amend, alter, suspend, or discontinue the Plan, but no
amendment, alteration, suspension, or discontinuation shall be made which would
impair the rights of any Optionee under any grant theretofore made, without his
or her consent.
(b) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all
purposes, be the date determined in accordance with Section 4 hereof.
13. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder,
state securities laws, and the requirements of any stock exchange upon which the
Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares, if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
-5-
<PAGE> 6
14. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company at or prior to the first annual
meeting of shareholders held subsequent to the granting of an Option hereunder.
Such shareholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
-6-
