<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:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or 240.14a-12
</TABLE>
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)(4) 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 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
N/A
(4) Proposed maximum aggregate value of transaction:
N/A
(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
<PAGE> 2
DIGITAL GENERATION SYSTEMS, INC.
------------------------
NOTICE OF 1998 ANNUAL MEETING OF SHAREHOLDERS
APRIL 29, 1998
9:00 A.M.
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Shareholders (the
"Annual Meeting") of Digital Generation Systems, Inc., a California corporation
(the "Company"), will be held at the offices of the Company located at 219 East
44th Street, New York, New York 10017, on Wednesday, April 29, 1998, at 9:00
a.m., local time, for the following purposes:
1. To elect directors to serve until the Company's 1999 Annual Meeting of
Shareholders and until their successors are duly elected and qualified.
2. To consider and vote upon a proposal to amend the Company's 1992 Stock
Option Plan to increase the number of shares of the Company's Common
Stock reserved for issuance thereunder from 2,450,000 shares to
2,950,000 shares.
3. To consider and vote upon a proposal to amend the Company's Amended and
Restated Articles of Incorporation to increase the authorized number of
shares of the Company's Common Stock from 30,000,000 shares to
40,000,000 shares, and to increase the authorized number of shares of
the Company's Preferred Stock from 5,000,000 shares to 15,000,000
shares.
4. To ratify the appointment of Arthur Andersen LLP as independent
accountants for the Company for the fiscal year ending December 31,
1998.
5. To transact such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice of 1998 Annual Meeting of Shareholders. The
Company's Board of Directors has fixed the close of business on March 27, 1998
as the record date for the determination of shareholders entitled to notice of,
and to vote at, the Annual Meeting or any adjournment or postponement thereof.
By order of the Board of Directors
DIGITAL GENERATION SYSTEMS, INC.
John B. Goodrich
Secretary
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 HEREWITH FOR THAT PURPOSE. ANY SHAREHOLDER
ATTENDING THE ANNUAL MEETING MAY VOTE IN PERSON EVEN IF SUCH SHAREHOLDER
RETURNED A PROXY CARD.
<PAGE> 3
DIGITAL GENERATION SYSTEMS, INC.
875 BATTERY STREET
SAN FRANCISCO, CALIFORNIA 94111
------------------------
PROXY STATEMENT
FOR
1998 ANNUAL MEETING OF SHAREHOLDERS
APRIL 29, 1998
The enclosed proxy is solicited on behalf of the Board of Directors of
Digital Generation Systems, Inc., a California corporation (the "Company"), for
use at the Company's 1998 Annual Meeting of Shareholders (the "Annual Meeting")
to be held at the offices of the Company located at 219 East 44th Street, New
York, New York, 10017, on Wednesday, April 29, 1998, at 9:00 a.m., local time,
or at any adjournment or postponement thereof, for the purposes set forth herein
and in the accompanying Notice of 1998 Annual Meeting of Shareholders. The
principal executive offices of the Company are located at 875 Battery Street,
San Francisco, California 94111, and the Company's telephone number at such
address is (415) 276-6600. These proxy solicitation materials were mailed on or
about [ ] to all shareholders entitled to vote at the Annual Meeting.
INFORMATION CONCERNING SOLICITATION AND VOTING
RECORD DATE
The Company's Board of Directors has fixed the close of business on March
27, 1998 (the "Record Date") as the record date for the determination of
shareholders entitled to notice of, and to vote at, the Annual Meeting or any
adjournment or postponement thereof.
SHARES OUTSTANDING AND VOTING RIGHTS AND PROCEDURES
As of the Record Date, the Company had issued and outstanding
[ ] shares of Common Stock and 4,950,495 shares of Series A
Convertible Preferred Stock. Each share of the Company's Common Stock and Series
A Convertible Preferred Stock issued and outstanding on the Record Date will be
entitled to one vote on all matters submitted for consideration and to be voted
upon by the shareholders at the Annual Meeting. Except with respect to the
election the Company's Board of Directors, as more fully described below, the
holders of the Company's Common Stock and Series A Convertible Preferred Stock
will vote together as a single class on all matters submitted for consideration
and to be voted upon by the shareholders at the Annual Meeting.
The holders of the Company's Series A Convertible Preferred Stock on the
Record Date are entitled, voting separately as a class, to elect one member of
the Company's Board of Directors, and the holders of the Company's Common Stock
on the Record Date are entitled, voting separately as class, to elect the
remaining members of the Company's Board of Directors. No shareholder will be
entitled to cumulate votes for the election of any members of the Company's
Board of Directors.
An automated system administered by the Company's transfer agent will
tabulate the votes at the Annual Meeting. The required quorum for the Annual
Meeting is a majority of the shares entitled to vote at the Annual Meeting,
including shares of the Company's Common Stock and Series A Convertible
Preferred Stock, issued and outstanding as of the Record Date. 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
a proposal submitted to the shareholders for purposes of determining whether the
requisite majority of voting shares has been voted in favor of any such
proposal. While there is no definitive statutory or case law authority in
California with respect 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
<PAGE> 4
whether a quorum is present at the Annual Meeting. The Company further believes
that neither abstentions nor broker non-votes should be counted as having been
"voted" with respect to a proposal submitted to the shareholders for purposes of
determining whether the requisite majority of the voting shares has been voted
in favor of any such proposal. 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 other proposals set forth herein in
the foregoing manner.
SOLICITATION OF PROXIES
The enclosed proxy, and all other similar proxies distributed by the
Company, are being solicited on behalf of the Board of Directors of the Company,
and the cost of such solicitation, including preparation, assembly, printing and
mailing costs, will be entirely borne by the Company. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of the Company's voting securities
beneficially owned by others to forward to such beneficial owners. The Company
may reimburse persons and institutions representing beneficial owners of the
Company's voting securities for their costs of forwarding solicitation materials
to such beneficial owners. In addition to the original solicitation of the
enclosed proxy (and all other similar proxies distributed by the Company) by
mail, proxies also may be solicited by certain of the Company's directors,
officers and other regular employees by telephone, telegram, facsimile or
personal solicitation. No additional compensation will be paid to any of the
Company's directors, officers or other regular employees for such services.
REVOCABILITY OF PROXIES
Any proxy delivered to the Company pursuant to this solicitation may be
revoked by the person delivering such proxy at any time before it is voted at
the Annual Meeting either 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. Attendance at the Annual Meeting will not,
by itself, revoke a proxy previously delivered to the Company pursuant to this
solicitation.
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING OF SHAREHOLDERS
Proposals of shareholders of the Company intended to be presented by such
shareholders at the Company's 1999 Annual Meeting of Shareholders must be
received by the Company no later than [ , 1998] for inclusion in the
Company's proxy statement and form of proxy relating to such annual meeting.
2
<PAGE> 5
PROPOSALS RELATING TO ELECTION OF DIRECTORS
PROPOSAL ONE
ELECTION OF DIRECTORS BY COMMON SHAREHOLDERS
The Company's Board of Directors is comprised of six members, all of whom
are to be elected at the Annual Meeting. The holders of the Company's Series A
Convertible Preferred Stock on the Record Date are entitled, voting separately
as a class, to elect one member of the Company's Board of Directors, and the
holders of the Company's Common Stock on the Record Date are entitled, voting
separately as a class, to elect the remaining five members of the Company's
Board of Directors. The holders of the Company's Common Stock will not be
entitled to cumulate votes for the election of the five members of the Company's
Board of Directors to be elected by such common shareholders.
The Board of Directors of the Company has nominated the five persons named
below for election as directors at the Annual Meeting by the holders of the
Company's Common Stock. Unless otherwise directed, the proxy holders will vote
the proxies received by them from the holders of the Company's Common Stock for
the five nominees named below. All of the nominees named below currently hold
office as directors of the Company. In the event that any of the nominees named
below is unable or declines to serve as a director at the time of the Annual
Meeting, the proxies received by the Company from the holders of the Company's
Common Stock will be voted for an alternative nominee who shall be designated by
the present Board of Directors to fill the vacancy. The Company does not expect,
however, that any of the nominees named below will be unable or will decline to
serve as a director of the Company at the Annual Meeting. The directors elected
at the Annual Meeting by the holders of a majority of the Company's Common Stock
will hold office until the Company's 1999 Annual Meeting of Shareholders and
until their successors are duly elected and qualified.
NOMINEES TO THE BOARD OF DIRECTORS
The name of each of the nominees for election as a director at the Annual
Meeting by the holders of the Company's Common Stock, and certain information
relating to each nominee, is set forth below.
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE POSITION(S) WITH THE COMPANY DIRECTOR SINCE
--------------- --- ---------------------------- --------------
<S> <C> <C> <C>
Henry W. Donaldson............. 52 President, Chief Executive Officer and Director 1993
Kevin R. Compton............... 39 Director 1994
Jeffrey M. Drazan.............. 38 Director 1992
Richard H. Harris.............. 68 Director 1992
Leonard S. Matthews............ 75 Director 1993
</TABLE>
There are no family relationships among any of the nominees named above,
the nominee named in "PROPOSAL TWO" set forth herein, or the executive officers
of the Company.
Set forth below is certain biographical information for each person
nominated for election to the Company's Board of Directors at the Annual Meeting
by the holders of the Company's Common Stock.
Henry W. Donaldson joined the Company in March 1993, and since such date
has served as the Company's President and Chief Executive Officer and as a
member of the Company's 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 boards of directors of privately-held companies. Mr.
Compton holds a B.S. in Business Administration from the University of Missouri.
3
<PAGE> 6
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 as a director of 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 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 May 1992 to the present, Mr. Matthews has been
Chairman of the Board of Next Century Media, an interactive television company.
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. Mr. Matthews holds a B.S.
in Business Administration & Marketing from Northwestern University.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The five nominees for election to the Company's Board of Directors by the
holders of the Company's Common Stock receiving the highest number of
affirmative votes of the shares of Common Stock entitled to be voted at the
Annual Meeting will be elected as directors of the Company to serve until the
Company's 1999 Annual Meeting of Shareholders and until their successors are
duly elected and qualified. Votes withheld on the enclosed proxy with respect to
the election of any of the nominees named above will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting, but will have no other legal effect under California law.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF
PROPOSAL NUMBER ONE FOR ELECTION OF THE NAMED NOMINEES
TO THE BOARD OF DIRECTORS OF THE COMPANY BY THE
HOLDERS OF THE COMPANY'S COMMON STOCK.
4
<PAGE> 7
PROPOSAL TWO
ELECTION OF DIRECTOR BY PREFERRED SHAREHOLDERS
As noted above, the Company's Board of Directors is comprised of six
members, all of whom are to be elected at the Annual Meeting, and the holders of
the Company's Series A Convertible Preferred Stock on the Record Date are
entitled, voting separately as a class, to elect one member of the Company's
Board of Directors.
The Company is a party to a Preferred Stock Purchase Agreement, dated July
14, 1997, as amended (the "Preferred Stock Purchase Agreement"), the terms of
which provide that (i) the purchasers of the Company's Series A Convertible
Preferred Stock thereunder have the right to designate one person to serve on
the Company's Board of Directors, and (ii) the Company has the obligation to
take all necessary action and use its best efforts to cause such designee to be
nominated for and elected to the Board of Directors of the Company. Accordingly,
at the request of the holders of a majority of the Company's Series A
Convertible Preferred Stock, the Board of Directors of the Company has nominated
the person named below for election as a director at the Annual Meeting by the
holders of the Company's Series A Convertible Preferred Stock. Unless otherwise
directed, the proxy holders will vote the proxies received by them from the
holders of the Company's Series A Convertible Preferred Stock for the nominee
named below. The nominee named below currently holds office as a director of the
Company. In the event that the nominee named below is unable or declines to
serve as a director at the time of the Annual Meeting, the proxies received by
the Company from the holders of the Company's Series A Convertible Preferred
Stock will be voted for an alternative nominee who shall be designated by the
holders of a majority of the Company's Series A Convertible Preferred Stock
present in person or represented at the Annual Meeting. In the absence of any
such alternative designation by the holders of a majority of the Company's
Series A Convertible Preferred Stock present or represented at the Annual
Meeting, the proxies received by the Company from the holders of the Company's
Series A Convertible Preferred Stock 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, however, that the nominee named below will be unable or will
decline to serve as a director of the Company at the Annual Meeting. The
director elected at the Annual Meeting by the holders of a majority of the
Company's Series A Convertible Preferred Stock will hold office until the
Company's 1999 Annual Meeting of Shareholders and until his or her successor is
duly elected and qualified.
NOMINEE TO THE BOARD OF DIRECTORS
The name of the nominee for election as a director at the Annual Meeting by
the holders of the Company's Series A Convertible Preferred Stock, and certain
information about him, are set forth below.
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE POSITION WITH THE COMPANY DIRECTOR SINCE
--------------- --- ------------------------- --------------
<S> <C> <C> <C>
Lawrence D. Lenihan, Jr............................. 33 Director 1997
</TABLE>
There are no family relationships between the nominee named above, the
nominees named in "PROPOSAL ONE" set forth herein, or executive officers of the
Company.
Set forth below is certain biographical information for the person
nominated for election to the Company's Board of Directors at the Annual Meeting
by the holders of the Company's Series A Convertible Preferred Stock.
Lawrence D. Lenihan, Jr. has been a member of the Board of Directors since
July 1997. Mr. Lenihan has been a managing member of the General Partner for
Pequot Private Equity Fund, L.P. since February 1997. He is also a Principal at
Dawson-Samberg Capital Management, Inc. Mr. Lenihan was a Principal at Broadview
Associates, LLC prior to his position at Dawson-Samberg. He currently serves as
a director of Sanctuary Woods Multimedia Corporation, developer of educational
software. Mr. Lenihan holds a B.S.E.E. from Duke University and an M.B.A. from
the Wharton School.
5
<PAGE> 8
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The nominee for election to the Company's Board of Directors by the holders
of the Company's Series A Convertible Preferred Stock receiving the highest
number of affirmative votes of the shares of the Series A Convertible Preferred
Stock entitled to be voted at the Annual Meeting will be elected as a director
of the Company to serve until the Company's 1999 Annual Meeting of Shareholders
and until his or her successor is duly elected and qualified. Votes withheld on
the enclosed proxy with respect to the election of the nominee named above will
be counted for purposes of determining the presence or absence of a quorum for
the transaction of business at the Annual Meeting, but will have no other legal
effect under California law.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF
PROPOSAL NUMBER TWO FOR ELECTION OF THE NAMED NOMINEE
TO THE BOARD OF DIRECTORS OF THE COMPANY BY THE
HOLDERS OF THE COMPANY'S SERIES A
CONVERTIBLE PREFERRED STOCK.
MATTERS RELATING TO THE BOARD OF DIRECTORS
BOARD MEETINGS
The Company's Board of Directors held nine meetings during the Company's
fiscal year ended December 31, 1997 (the "Last Fiscal Year"). During the Last
Fiscal Year, no director attended fewer than 75% of the total number of meetings
of the Company's Board of Directors held during the period for which he served
as a director, and the total number of meetings held by the committees of the
Board of Directors on which he served during the period for which he served as a
director.
BOARD COMMITTEES AND COMMITTEE MEETINGS
The Company's Board of Directors has a standing audit committee (the "Audit
Committee") and a standing compensation committee (the "Compensation
Committee").
The members of the Audit Committee are Kevin R. Compton and Leonard S.
Matthews. The Audit Committee held four meetings during the Last Fiscal Year.
The functions performed by the Audit Committee include reviewing with the
Company's 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;
nominating independent accountants; and providing such additional information as
the Audit Committee may deem necessary to make the Company's Board of Directors
aware of significant financial matters that require the attention of the Board
of Directors.
The members of the Compensation Committee are Jeffrey M. Drazan, Richard H.
Harris and Leonard S. Matthews. The Compensation Committee held five meetings
during the Last Fiscal Year. The functions performed by the Compensation
Committee include reviewing and approving the compensation to be paid or
provided to the Company's executive officers, the aggregate compensation of all
employees of the Company, and the terms of compensation plans of all types
maintained by the Company.
The Company currently has no standing nominating committee. Nominations for
the election of directors at the Annual Meeting were made by the Company's Board
of Directors. However, under the terms of the Preferred Stock Purchase Agreement
described above, the Company has agreed to take all necessary action and use its
best efforts to cause the person designated by the holders of a majority of the
Company's Series A Convertible Preferred Stock to be nominated for and elected
to the Company's Board of Directors. In addition, the holders of the Company's
Series A Convertible Preferred Stock have the right, voting separately as a
class, to elect one member of the Company's Board of Directors. Accordingly, the
Board of Directors has nominated Lawrence D. Lenihan, Jr., the person designated
by the holders of a majority of the Company's Series A Convertible Preferred
Stock, for election to the Company's Board of Directors by such preferred
shareholders. See "PROPOSAL TWO -- Election of Director by Preferred
Shareholders."
6
<PAGE> 9
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, 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 Last Fiscal Year, or at any
other time, an officer or employee of the Company. Mr. Drazan, however, 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."
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 the
Compensation Committee.
SUMMARY OF DIRECTOR COMPENSATION
The Company's directors who are also officers of the Company do not receive
any additional compensation for their services as members of the Company's Board
of Directors. The Company's non-employee directors, however, receive options
under the Company's 1995 Director Option Plan. The Company also reimburses each
member of its Board of Directors, including directors who are also officers of
the Company, for documented reasonable expenses incurred in connection with
attendance at meetings of the Company's Board of Directors and the committees
thereof.
7
<PAGE> 10
PROPOSAL RELATING TO COMPENSATION PLANS
PROPOSAL THREE
AMENDMENT OF 1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (the "Option Plan") was adopted by the
Company's Board of Directors in October 1992 and approved by the shareholders of
the Company in May 1993. To date, a total of 2,450,000 shares of the Company's
Common Stock have been reserved for issuance under the Option Plan. As of the
Record Date, options to purchase an aggregate of 1,983,457 shares, having a
weighted average exercise price of $3.7468 per share and expiring from January
20, 2000 to February 27, 2007, were outstanding under the Option Plan, and
12,376 shares remained available for future grant thereunder.
On January 21, 1998, the Company's Board of Directors unanimously adopted
resolutions declaring it advisable and in the best interests of the Company and
its shareholders to amend the Option Plan to reserve an additional 500,000
shares of the Company's Common Stock for issuance thereunder, thereby increasing
the number of shares of the Company's Common Stock reserved for issuance
thereunder from 2,450,000 shares to 2,950,000 shares. The foregoing resolutions
further directed that the proposed amendment to the Option Plan be submitted to
the shareholders of the Company for their approval at the Annual Meeting.
Accordingly, at the Annual Meeting the Company's shareholders will be asked to
approve the proposed amendment to the Option Plan described above. The Company
believes that the proposed increase in the number of shares reserved for
issuance under the Option Plan is necessary in order to provide the means for
incentivising eligible employees and independent contractors by aligning their
interests directly with those of the Company's 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. A copy of the Option Plan, as in effect before incorporating the
amendment contemplated by the foregoing proposal, is attached as an exhibit to
the Company's Annual Report on Form 10K filed with the Securities and Exchange
Commission on March [ ], 1998, and the description herein is qualified in its
entirety by reference thereto.
SUMMARY OF TERMS OF OPTION PLAN
The material 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 with the
Company, to provide additional incentive to employees and consultants of the
Company, and to promote the success of the Company's business.
Administration. The Compensation Committee of the Company's Board of
Directors (the "Compensation Committee") administers the Option Plan. As the
administrator of the Option Plan, the Compensation Committee has complete
discretion, within the limits set forth in the Option Plan, to determine the
terms of the options granted thereunder, including the exercisability of such
options, the number of shares issuable upon the exercise of such options, the
exercise price of such options, and the form of consideration payable upon such
exercise. The Compensation Committee is constituted in a manner intended to
comply with the requirements of Rule 16-b3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pertaining to the
disinterested administration of employee benefit plans. If 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) of the Exchange Act will be exempt from such
liability to the extent provided by Rule 16b-3. Members of the Compensation
Committee 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," as defined in
Section 422 of the Internal Revenue Code, as well as grants of nonstatutory
stock options to employees (including officers and employee directors) and
consultants. However, no incentive stock options may be granted to any
individual employee which, when aggregated with all other incentive stock
options granted to such employee by the Company, would result in shares of the
Company's Common Stock having an aggregate fair market value in excess of
$100,000 becoming first available for purchase by such employee upon the
exercise of incentive stock options during any calendar year.
8
<PAGE> 11
Terms of Options. Each option granted under the Option Plan is evidenced by
a written stock option agreement between the Company and the optionee thereof,
and is generally subject to the terms and conditions set forth below. The
specific terms of any individual option granted under the Option Plan, however,
may vary from those terms set forth below.
(a) Exercise of the Option. The Compensation Committee determines when
options granted under the Option Plan may be exercised. The current form of
the stock option agreement generally employed by the Company to grant
options under the Option Plan provides that options will be exercisable
cumulatively to the extent of 25% of the shares issuable upon the exercise
of such option on the first anniversary of the vesting commencement date of
such option, and to the extent of an additional 1/36th of the remaining
shares issuable upon the exercise of such option at the end of each full
month thereafter. An option granted under the Option Plan is exercised by
giving written notice of exercise to the Company, specifying the number of
shares of the Company's Common Stock to be purchased upon such exercise,
and tendering to the Company full payment of the purchase price therefor.
The terms of the Option Plan specify that the permissible form of payment
for shares issuable upon the exercise of an option granted thereunder will
be set forth in the stock option agreement relating thereto and may consist
of cash, check, promissory note, exchange of shares of the Company's 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 liability of the
Company to the option holder exercising such option, 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 form of stock option agreement currently employed by
the Company to grant options under the Option Plan, however, only permits
payment for shares upon exercise of the option by cash, check or surrender
of other shares of the Company's Common Stock.
(b) Option Price. Subject to the following limitations, the exercise
price for options granted under the Option Plan is determined by the
Company's Board of Directors or the Compensation Committee in accordance
with the terms of the Option Plan. The option price of incentive stock
options may not be less than 100% of the fair market value of the Company's
Common Stock on the date of grant thereof. With respect to any participant
under the Option Plan who owns voting securities of the Company possessing
more than 10% of the voting power of all classes of the Company's
outstanding capital stock (a "10% shareholder"), however, the exercise
price of any incentive stock option granted under the Option Plan must
equal at least 110% of the fair market value of the Company's Common Stock
on the date of grant thereof. The exercise price of nonstatutory stock
options granted under the Option Plan is determined by the Company's Board
of Directors; provided, however, that the exercise price of nonstatutory
stock options granted under the Option Plan intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of
the Internal Revenue Code may not be less than 100% of the fair market
value of the Company's Common Stock on the date of grant thereof.
(c) Termination of Employment. Options granted under the Option Plan
generally 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
Company's Board of Directors) after the termination of the option holder's
status as an employee or consultant of the Company, but in no event later
than the expiration of the option term thereof.
(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 the
termination of the option holder's employment with the Company as a result
of death or disability, but in no event later than the expiration of the
option term thereof.
(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
thereof, or five years in the case of an "incentive stock option" granted
to a 10% shareholder. Under the form of stock option agreement currently
employed by the Company to grant options under the Option Plan, each option
has a term of seven years from the date of grant thereof. No option may be
exercised by any person after the expiration of such term.
9
<PAGE> 12
(f) Nontransferability of Options. Options granted under the Option
Plan are not generally transferable by the option holder thereof except by
will or by the laws of descent or distribution, and are exercisable during
the lifetime of the option holder only by such option holder.
Adjustment upon Changes in Capitalization. In the event any change, such as
a stock split or dividend, is made in respect of the Company's capital stock
which results in an increase or decrease in the number of issued and outstanding
shares of the Company's Common Stock without receipt of consideration by the
Company, an appropriate adjustment will be made in the exercise price and in the
number of shares issuable upon the exercise of each outstanding option granted
under the Option Plan.
Merger or Sale of All Assets. Except as described below, in the event of a
merger of the Company with or into another corporation or other legal entity, or
the sale of substantially all of the assets of the Company, each outstanding
option granted under the Option Plan will be assumed, or an equivalent option or
right will be substituted, by the successor corporation or entity, or a parent
or subsidiary thereof. In the event that an outstanding option granted under the
Option Plan is not assumed or substituted as described above, the option holder
thereof will have the right to exercise such option, to the extent such option
holder was otherwise entitled to exercise such option, for a period of 15 days
after receiving notice of such merger or sale, and such 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 under the
Option Plan will 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 in the Option Plan 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 Company's Board of Directors during a 24-month period, which
changes are not initiated by the Board of Directors.
Amendment and Termination. The Company's Board of Directors may, at any
time and from time to time, amend or terminate the Option Plan as and in any
manner it deems appropriate; provided, however, that the Company must obtain
shareholder approval of the following amendments to the Option Plan: (i) any
increase in the number of shares reserved for issuance thereunder, other than in
connection with an adjustment pursuant to changes in capitalization of the
Company, dissolution or liquidation of the Company, or a merger, sale of
substantially all assets or a change in control of the Company, or (ii) any
change in the designation of the class of persons eligible to be granted options
thereunder. In addition, the Company must obtain shareholder approval of any
amendment to the Option Plan in such a manner and to the extent necessary to
comply with applicable laws and regulations. The terms of the Option Plan also
provide that 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 Section 422 of the Internal
Revenue Code, or nonstatutory stock 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 of an option
granted under the Option Plan may subject the option holder to the alternative
minimum tax. Any gain or loss realized by a former option holder upon the sale
or exchange of the shares purchased by exercising an option granted under the
Option Plan more than two years after the grant of such option and one year
after the exercise of such option will be treated as long-term capital gain or
loss. If these holding periods are not satisfied, the former option holder will
recognize ordinary income at the time of sale or exchange of such shares equal
to the difference between the exercise price of the option exercised to acquire
such shares, and the lower of (i) the fair market value of such shares at the
date of the exercise of such option, and (ii) the sale price of such shares. A
different rule for measuring ordinary income upon such a premature disposition
may apply if the former option holder 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 former option holder. 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.
10
<PAGE> 13
All options that do not qualify as "incentive stock options" under the
Internal Revenue Code are referred to as nonstatutory stock options. An optionee
will not recognize any taxable income at the time he is granted a nonstatutory
stock option. However, upon the exercise of such option, the option holder
thereof will recognize taxable income generally measured as the excess of the
then fair market value of the shares purchased over the purchase price therefor.
Any taxable income recognized in connection with the exercise of a nonstatutory
stock option by an option holder who is also an employee of the Company will be
subject to tax withholding by the Company. Upon resale of such shares by such
option holder, any difference between the sale price and the option holder's
purchase price therefor, 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 option
holder with respect to shares acquired upon exercise of a nonstatutory stock
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 Internal Revenue Code for a
more complete explanation of the tax treatment of the grant and exercise of
options under the Option Plan. In addition, this summary does not discuss the
tax consequences of an option holder's death, or the income tax laws of any
municipality, state or foreign country in which an option holder 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 and Series A Convertible Preferred Stock present or
represented, and voting together as a group, at the Annual Meeting will be
required to approve the proposed amendment to the Option Plan.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF
PROPOSAL NUMBER THREE FOR ADOPTION OF AN AMENDMENT TO THE
OPTION PLAN TO RESERVE AN ADDITIONAL 500,000 SHARES OF THE
COMPANY'S COMMON STOCK FOR ISSUANCE THEREUNDER.
MATTERS RELATING TO COMPENSATION PLANS
SUMMARY OF PROPOSED AMENDMENT
As described above, the Company's Board of Directors has adopted, subject
to shareholder approval, an amendment to the Option Plan to increase the number
of shares of the Company's Common Stock reserved for issuance thereunder from
2,450,000 shares to 2,950,000 shares.
SUMMARY OF PLAN BENEFITS
Option grants under the Option Plan are made at the discretion of the
Company's Board of Directors and the Compensation Committee, and as a result,
future grants of options under the Option Plan are not determinable. The
following table, therefore, sets forth the number of options granted under the
Option Plan during the Company's fiscal year ended December 31, 1997 to (i) the
Chief Executive Officer and each of the four other most highly compensated
executive officers of the Company as of December 31, 1997, (ii) all current
executive officers of the Company as a group (the "Executive Group"), (iii) all
current directors of the Company who are not executive officers as a group (the
"Non-Executive Director Group"), and (iv) all employees of the Company,
including all current officers of the Company who are not executive officers, as
a group (the "Non-Executive Officer Employee Group").
11
<PAGE> 14
SUMMARY TABLE OF PLAN BENEFITS
<TABLE>
<CAPTION>
1992 STOCK OPTION PLAN
--------------------------
EXERCISE PRICE NUMBER OF
NAME AND POSITION ($/SHARE)(1) SHARES
----------------- -------------- ---------
<S> <C> <C>
Henry W. Donaldson.......................................... 4.5625 80,000
President and Chief Executive Officer
Ken K. Cheng................................................ 4.5625 187,500
Senior Vice President and Chief Operating Office
Robert H. Howard............................................ 3.8750 150,000
Vice President, Sales
Gregory G. Schott........................................... 4.5625 65,000
Vice President, Operations
Thomas P. Shanahan.......................................... 4.5625 87,500
Vice President, Finance and Chief Financial Officer
Executive Group (3 persons)(2).............................. 4.5625 267,500(3)
Non-Executive Director Group (5 persons).................... -- --
Non-Executive Officer Employee Group........................ 5.6565 629,000
</TABLE>
- ---------------
(1) Exercise prices shown on a weighted-average basis.
(2) The Executive Group consists of Mr. Donaldson, Mr. Cheng and Paul W. Emery,
the Company's Vice President, Finance and Chief Financial Officer who was
elected in January 1998. Mr. Emery was not granted any options under the
Option Plan during the Company's fiscal year ended December 31, 1997.
(3) Does not include options to purchase 87,500 shares of the Company's Common
Stock, at an exercise price of $4.5625 per share, granted to Thomas P.
Shanahan during the Company's fiscal year ended December 31, 1997 because
Mr. Shanahan is no longer a current executive officer of the Company.
12
<PAGE> 15
PROPOSAL RELATING TO AMENDMENT OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
PROPOSAL FOUR
AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED SHARES OF COMMON STOCK AND PREFERRED STOCK
On January 21, 1998, the Company's Board of Directors unanimously adopted
resolutions declaring it advisable and in the best interests of the Company and
its shareholders to amend and restate Article III(A) of the Company's Amended
and Restated Articles of Incorporation (the "Articles") to increase the
authorized number of shares of the Company's Common Stock from 30,000,000 shares
to 40,000,000 shares, and to increase the authorized number of shares of the
Company's Preferred Stock from 5,000,000 to 15,000,000 shares. The foregoing
resolutions further directed that the proposed amendment to the Company's
Articles be submitted to the shareholders of the Company for their approval at
the Annual Meeting. Accordingly, at the Annual Meeting the Company's
shareholders will be asked to approve the proposed amendment to the Company's
Articles described above. A copy of the proposed amended and restated Article
III(A) of the Company's Articles is attached as Exhibit A hereto, and the
description herein is qualified in its entirety by reference thereto.
SUMMARY OF AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The Company's authorized capital stock currently consists of 30,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock. The Company's
Common Stock is not subject to any preemptive rights. The Company's Articles
provide that the Company's Preferred Stock may be divided into any number of
series, and that the Company's Board of Directors may fix the number of, and
determine the rights, preferences, privileges and restrictions granted to or
imposed upon, any such series.
The number of shares of the Company's Common Stock issued and outstanding
as of the Record Date was [ ] shares, and the number and series of
shares of the Company's Preferred Stock issued and outstanding as of the Record
Date was 4,950,495 shares of the Company's Series A Convertible Preferred Stock.
Accordingly, the total number of shares of the Company's Common Stock available
for future issuance, whether upon the conversion of outstanding convertible
securities of the Company, the exercise of outstanding options to purchase
shares of the Company's Common Stock, or otherwise, is [ ] shares, and
the total number of shares of the Company's Preferred Stock available for future
issuance is 49,505 shares. If the proposed amendment to Article III(A) of the
Company's Articles is adopted by the Company's shareholders at the Annual
Meeting, the Company will have available for issuance [ ] shares of
Common Stock and 10,049,505 shares of Preferred Stock.
PURPOSES AND EFFECTS OF THE PROPOSED AMENDMENT
The principal purpose underlying the proposed amendment described above is
to enhance and strengthen the Company's financial flexibility. In this regard,
the Company's Board of Directors believes that the complexities of modern
business financing and acquisition structuring require greater flexibility in
the Company's capital structure than currently exists. If the proposed amendment
described above is adopted by the Company's shareholders at the Annual Meeting,
additional shares of such Common Stock and Preferred Stock would then be
available for issuance by the Company from time to time upon a determination by
the Company's Board of Directors that an issuance of shares of the Company's
Common Stock and/or Preferred Stock was warranted by a proper corporate purpose.
Such proper corporate purposes could include, among other things, the
declaration and payment of stock dividends in respect of the Company's issued
and outstanding shares of capital stock, the subdivision of the Company's issued
and outstanding shares of capital stock through stock splits, the issuance of
the Company's Common Stock, Preferred Stock or securities convertible into
shares of the Company's Common Stock or Preferred Stock, in exchange for cash as
a means of obtaining working capital for use in the Company's business and
operations, the issuance of the Company's Common Stock, Preferred Stock, or
securities convertible into the Company's Common Stock or Preferred Stock, to
finance all or part of the consideration paid by the Company to complete the
acquisition of other
13
<PAGE> 16
businesses or properties, and the issuance of shares of the Company's Common
Stock, Preferred Stock, or securities convertible into shares of the Company's
Common Stock or Preferred Stock, pursuant to the exercise of options granted
under the Company's stock option plans. With the exception of the stock option
plans currently maintained by the Company, the Company does not have any present
plans, agreements, understandings or arrangements that will or could result in
the issuance by the Company of shares of the Company's Common Stock, Preferred
Stock, or securities convertible into shares of the Company's Common Stock or
Preferred Stock. In the event that the Company's Board of Directors does
undertake a plan, or otherwise enter into an agreement, understanding or
arrangement, to issue shares of the Company's Common Stock, Preferred Stock, or
securities convertible into shares of the Company's Common Stock or Preferred
Stock, the Board of Directors intends to issue such shares of its capital stock
only upon terms and conditions that the Board of Directors deems advisable and
in the best interests of the Company and its shareholders.
In addition to enhancing the Company's financial flexibility, the proposed
amendment to increase the authorized number of shares of the Company's Common
Stock and Preferred Stock could have certain anti-takeover effects. For example,
although the Company has no present intention to do so, shares of the Company's
Common Stock and/or Preferred Stock could be issued in a private placement or
public offering, or rights to purchase shares of the Company's Common Stock
and/or Preferred Stock could be issued, to create voting impediments to or
otherwise frustrate third party attempts to effect a takeover or otherwise gain
control of the Company through a public tender offer, proxy contest or other
means. In addition, the proposed amendment to increase the authorized number of
shares of the Company's Common Stock and Preferred Stock, could discourage an
attempt by a third party to acquire control of the Company through a public
tender offer, proxy contest or other means. The effects of the proposed
amendment to increase the authorized number of shares of the Company's Common
Stock and Preferred Stock, therefore, could deprive the Company's shareholders
of benefits that could result from such an attempt to takeover, or otherwise
gain control of, the Company. Such benefits could include, among other things,
the realization of a premium over the market price of their shares of the
Company's capital stock in a tender offer, or even the temporary increase in the
market price for such shares that such an attempt could cause. The Company's
Board of Directors, however, is not aware of any present efforts or attempt to
takeover, or otherwise gain control of, the Company through a public tender
offer, proxy contest or any other means.
Despite the potential anti-takeover effects of the proposed amendment to
increase the authorized number of shares of the Company's Common Stock and
Preferred Stock described above, the Company's Board of Directors believes that
strengthened financial flexibility offered by the proposed amendment far
outweighs any of the disadvantageous anti-takeover effects of such amendment. To
the extent that the proposed amendment may have certain anti-takeover effects,
the Company's Board of Directors believes that the proposed amendment and the
anti-takeover effects thereof may encourage third parties seeking to acquire or
otherwise gain control over the Company to negotiate directly with the Board of
Directors. In this regard, the Company's Board of Directors further believes
that such negotiations will enable to the Board of Directors to consider a
takeover transaction proposed by a third party in a nondisruptive atmosphere and
to effectively discharge its fiduciary obligation to consider and act upon any
proposed takeover transaction in a manner that best serves the interests of the
Company's shareholders by maximizing shareholder value.
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 and Series A Convertible Preferred Stock entitled to vote
at the Annual Meeting, voting together as a group, will be required to approve
the proposed amendment to the Company's Articles described above.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF
PROPOSAL NUMBER FOUR FOR THE ADOPTION OF AN AMENDMENT TO
THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION TO INCREASE THE AUTHORIZED
NUMBER OF SHARES OF COMMON STOCK
AND PREFERRED STOCK
14
<PAGE> 17
PROPOSAL RELATING TO INDEPENDENT PUBLIC ACCOUNTANTS
PROPOSAL FIVE
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
SUMMARY OF PROPOSAL
The Company's Board of Directors has appointed Arthur Andersen LLP,
independent accountants, to audit the financial statements of the Company for
the current fiscal year ending December 31, 1998. Arthur Andersen LLP has
audited the Company's consolidated financial statements since 1991. At the
Annual Meting, the Company's shareholders are being asked to ratify the
appointment of Arthur Andersen LLP as independent accountants to audit the
financial statements of the Company for the current fiscal year ending December
31, 1998. 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 respond to any
appropriate questions. In the event that the Company's shareholders fail to
ratify the appointment of Arthur Andersen LLP as independent accountants to
audit the Company's financial statements for the current fiscal year ending
December 31, 1998, the Company's Board of Directors will reconsider its
selection.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of the holders of a majority of the shares of the
Company's Company Stock and Series A Convertible Preferred Stock present or
represented, and voting together as a group, at the Annual Meeting will be
required to approve the proposed ratification of Arthur Anderson LLP,
independent accountants, to audit the financial statements of the Company for
the current fiscal year ending December 31, 1998.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE IN
FAVOR OF PROPOSAL NUMBER FIVE FOR RATIFICATION
OF THE SELECTION OF ARTHUR ANDERSEN LLP.
15
<PAGE> 18
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the shares of the Company's Common Stock
beneficially owned as of the Record Date by (i) persons known by the Company to
be the beneficial owner of more than five percent of any class of the Company's
voting securities, including the Company's Common Stock and Series A Convertible
Preferred Stock, (ii) each director (and nominee for election as a director) of
the Company, (iii) the Chief Executive Officer of the Company and the four other
most highly compensated executive officers of the Company as of December 31,
1997 (the "Named Executive Officers"), and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENTAGE OWNERSHIP
----------------------- ---------------------
PREFERRED COMMON PREFERRED COMMON
NAME AND ADDRESS OF SHAREHOLDER(1) STOCK STOCK(2) STOCK STOCK(3)
---------------------------------- --------- --------- ---------- --------
<S> <C> <C> <C> <C>
FIVE-PERCENT SHAREHOLDERS:
Entities and individuals affiliated with
Dawson-Samberg Capital Management, Inc................... 2,524,752(4) 2,524,752(5) 50.99
354 Pequot Avenue
Southport, Connecticut 06490
Entities and individuals affiliated with
Sierra Ventures.......................................... -- 2,017,464(6) --
3000 San Hill Road
Building 4, Suite 210
Menlo Park, California 94025
Entities and individuals affiliated with
Coral Partners........................................... -- 1,269,206(7) --
60 South Sixth Street, Suite 3510
Minneapolis, Minnesota 55402
Entities and individuals affiliated with
London Merchant Securities plc........................... -- 1,222,500(8) --
33 Robert Adam Street
London WIM 5AH
Entities and individuals affiliated with
Kleiner Perkins Caufield & Byers......................... -- 1,167,592(9) --
2750 Sand Hill Road
Menlo Park, California 94025
Entities and individuals affiliated with
Glynn Capital Management and Crown Advisors, Ltd......... -- 1,079,666(10) --
3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, California 94025
Entities and individuals affiliated with
Technology Crossover Ventures............................ 848,657(11) 992,457(12) 17.14
56 Main Street, Suite 210
Millburn, New Jersey 07041
Entities and individuals affiliated with
The Mayfield Fund........................................ -- 973,301(13) --
2800 Sand Hill Road
Menlo Park, California 94025
GE Capital Information Technology Solutions.............. 828,656(14) 828,656(15) 16.73
700 Canal Street
Stamford, Connecticut 06902
AT&T Venture Company, L.P................................ -- 744,342(16) --
3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, California 94025
Entities affiliated with Integral Capital Partners....... 728,430(17) 728,430(18) 14.71
2750 Sand Hill Road
Menlo Park, California 94025
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENTAGE OWNERSHIP
----------------------- ---------------------
PREFERRED COMMON PREFERRED COMMON
NAME AND ADDRESS OF SHAREHOLDER(1) STOCK STOCK(2) STOCK STOCK(3)
---------------------------------- --------- --------- ---------- --------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Lawrence D. Lenihan, Jr.................................. 2,524,752(19) 2,527,252(20) 50.99
Jeffrey M. Drazan(21).................................... -- 2,048,190 --
Kevin R. Compton(22)..................................... -- 1,178,136 --
Henry W. Donaldson(23)................................... -- 668,515 --
Ken K. Cheng(24)......................................... -- 243,569 --
Robert H. Howard(25)..................................... -- 37,499 -- *
Thomas P. Shanahan(26)................................... -- 63,426 -- *
Richard H. Harris(27).................................... -- 38,831 -- *
Leonard S. Matthews(28).................................. -- 41,782 -- *
Gregory G. Schott(29).................................... -- 52,916 -- *
All directors and executive officers as a group
(10 persons) (19-29)................................... 2,524,752 6,900,116(30) 50.99
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise indicated in the footnotes hereto, the persons and
entities named in this table have sole voting and investment power with
respect to all shares of the Company's Common Stock and Series A
Convertible Preferred 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) Amounts include shares of the Company's Common Stock issuable upon the
conversion of issued and outstanding shares of the Company's Series A
Convertible Preferred Stock, which shares of Common Stock are deemed to be
beneficially owned by the holder of such shares of Series A Convertible
Preferred Stock pursuant to Rule 13d-3 promulgated under the Securities and
Exchange Act of 1934, as amended.
(3) With respect to each holder of the Company's Series A Convertible Preferred
Stock, percentages account for shares of the Company's Common Stock
issuable upon the conversion of the Company's Series A Convertible
Preferred Stock beneficially owned by such holder.
(4) Based on a filing with the Securities and Exchange Commission, dated
December 8, 1997, indicating beneficial ownership as of such date. Consists
of 1,487,733 shares of Series A Convertible Preferred Stock owned directly
by Pequot Private Equity Fund, L.P., 424,328 shares of Series A Convertible
Preferred Stock owned directly by Pequot Partners Fund, L.P., 188,363
shares of Series A Convertible Preferred Stock owned directly by Pequot
Offshore Private Equity Fund, Inc. and 424,328 shares of Series A
Convertible Preferred Stock owned directly by Pequot International Fund,
Inc. Dawson-Samberg Capital Management, Inc. has sole voting and
dispositive power with respect to all such shares and, therefore, may be
deemed to the beneficial owner of all such shares.
(5) Based on a filing with the Securities and Exchange Commission, dated
December 8, 1997, indicating beneficial ownership as of such date. Consists
of 1,487,733 shares of Common Stock issuable upon the conversion of Series
A Convertible Preferred Stock owned directly by Pequot Private Equity Fund,
L.P., 424,328 shares of Common Stock issuable upon the conversion of Series
A Convertible Preferred Stock owned directly by Pequot Partners Fund, L.P.,
188,363 shares of Common Stock issuable upon the conversion of Series A
Convertible Preferred Stock owned directly by Pequot Offshore Private
Equity Fund, Inc. and 424,328 shares of Common Stock issuable upon the
conversion of Series A Convertible Preferred Stock owned directly by Pequot
International Fund, Inc. Dawson-Samberg Capital Management, Inc. has sole
voting and dispositive power with respect to all such shares and,
therefore, may be deemed to the beneficial owner of all such shares.
(6) Based on a filing with the Securities and Exchange Commission, dated
February 14, 1997, indicating beneficial ownership as of December 31, 1997.
SV Associates IV, L.P. ("SV Associates") is the general
17
<PAGE> 20
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's
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.
Such individuals, however, disclaim beneficial ownership of all such
shares, except to the extent of their pecuniary interest therein.
(7) Based on a filing with the Securities and Exchange Commission, dated
February 5, 1998, indicating beneficial ownership as of December 31, 1997.
Includes 1,259,633 shares of Common Stock owned directly by Coral Partners
II, limited partnership ("Coral Partners II"), 6,037 shares owned by Yuval
Almog, 2,870 shares owned by Peter H. McNerney, and 666 shares owned by
Linda L. Watchmaker. The general partner of Coral Partners II 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 the
Company's Common Stock directly owned by Coral Partners II. Mr. Almog, Mr.
McNerney, Ms. Watchmaker and Coral Management disclaim beneficial ownership
of all shares held by Coral Partners II, except to the extent of their
pecuniary interest therein arising from general partnership interests
therein.
(8) Based on a filing with the Securities and Exchange Commission, dated
February 20, 1998, indicating beneficial ownership as of such date.
Includes 430,000 shares owned directly by Lion Investments Limited
("Lion"), and 792,500 shares owned directly by Westpool Investment trust
plc ("Westpool"). Lion and Westpool are wholly-owned subsidiaries of London
Merchant Securities plc.
(9) Based on a filing with the Securities and Exchange Commission, dated
February 17, 1998, indicating beneficial ownership as of December 31, 1997.
All such shares are owned directly by Kleiner Perkins Caufield & Byers VI,
L.P., a California limited partnership, 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. KPCB VI Associates and each of such affiliates have shared
voting and dispositive power with respect to all such shares.
(10) Based on a filing with the Securities and Exchange Commission, dated July
31, 1997, indicating beneficial ownership as of such date. Includes 207,770
shares owned directly by Crown Associates III, Limited Partnership, 100,605
shares owned directly by Crown-Glynn Associates, Limited Partnership,
256,825 shares owned directly by The Crown Trust, 77,500 shares owned
directly by Glynn Emerging Opportunity Fund, 24,000 shares owned directly
by Glynn Investment L.P., 27,700 shares owned directly by Glynn Buckley
Investments, LP, 89,166 shares owned directly by Glynn Ventures III, a
California Limited Partnership, and 51,400 shares owned directly by
McMorgan Fund II. The foregoing entities share voting and dispositive power
with respect to such shares with one or more of the following affiliated
entities, each of which may be deemed to beneficially own such shares:
Crown Capital Management, Ltd.; 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; Darryl 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.
(11) Based on a filing with the Securities and Exchange Commission, dated
September 5, 1997, indicating beneficial ownership as of such date.
Consists of 262,128 shares of Series A Convertible Preferred Stock owned
directly by Technology Crossover Ventures, L.P., 20,758 shares of Series A
Convertible Preferred Stock owned directly by Technology Crossover
Ventures, C.V., 270,650 shares of Series A Convertible Preferred Stock
owned directly by Technology Crossover Ventures II, L.P., 208,079 shares of
Series A Convertible Preferred Stock owned directly by TCV II (Q), L.P.,
36,927 shares of Series A Convertible Preferred Stock owned directly by TCV
II Strategic Partners, L.P., 41,323 shares of
18
<PAGE> 21
Series A Convertible Preferred Stock owned directly by Technology Crossover
Ventures II, C.V., and 8,792 shares of Series A Convertible Preferred Stock
owned directly by TCV II, V.O.F. Each of the foregoing entities has sole
voting and dispositive power with respect to the shares owned directly by
such entity, and disclaims beneficial ownership of the shares held by any
other affiliated entity or individual. The foregoing entities share voting
and dispositive power with respect to such shares with one or more of the
following persons and entities whom or which may be deemed to beneficially
own such shares: Technology Crossover Management, L.L.C. ("TCM"),
Technology Crossover Management II, L.L.C. ("TCMII"), Jay C. Hoag and
Richard H. Kimball. However, TCM and TCM II disclaim beneficial ownership
of all such shares except to the extent of their respective pecuniary
interest therein.
(12) Based on a filing with the Securities and Exchange Commission, dated
September 5, 1997, indicating beneficial ownership as of such date.
Includes an aggregate of the 848,657 shares of the Company's Series A
Convertible Preferred Stock described in footnote 11 above, which are
currently convertible, at the option of holder, into shares of the
Company's Common Stock on a one-for-one basis. Consists of 133,246 shares
of Common Stock and 262,128 shares of Common Stock issuable upon the
conversion of Series A Convertible Preferred Stock owned directly by
Technology Crossover Ventures, L.P.; 10,554 shares of Common Stock and
20,758 shares of Common Stock issuable upon the conversion of Series A
Convertible Preferred Stock owned directly by Technology Crossover
Ventures, C.V.; 270,650 shares of Common Stock issuable upon the conversion
of Series A Convertible Preferred Stock owned directly by Technology
Crossover Ventures II, L.P.; 208,079 shares of Common Stock issuable upon
the conversion of Series A Convertible Preferred Stock owned directly by
TCV II (Q), L.P.; 36,927 shares of Common Stock issuable upon the
conversion of Series A Convertible Preferred Stock owned directly by TCV II
Strategic Partners, L.P.; 41,323 shares of Common Stock issuable upon the
conversion of Series A Convertible Preferred Stock owned directly by
Technology Crossover Ventures II, C.V., and 8,792 shares of Common Stock
issuable upon the conversion of Series A Convertible Preferred Stock owned
directly by TCV II, V.O.F. Each of the foregoing entities has sole voting
and dispositive power with respect to the shares owned directly by such
entity, and disclaims beneficial ownership of the shares held by any other
affiliated entity or individual. The foregoing entities share voting and
dispositive power with respect to such shares with one or more of the
following persons and entities whom or which may be deemed to beneficially
own such shares: Technology Crossover Management, L.L.C. ("TCM"),
Technology Crossover Management II, L.L.C. ("TCMII"), Jay C. Hoag and
Richard H. Kimball. TCM and TCM II, however, disclaim beneficial ownership
of all such shares except to the extent of their respective pecuniary
interest therein.
(13) Based on a filing with the Securities and Exchange Commission, dated
February 18, 1998, indicating beneficial ownership as of December 31, 1997.
Consists of 973,301 shares owned by Mayfield VII, a California Limited
Partnership ("Mayfield VII"). The general partner of Mayfield VII is
Mayfield VII Management Partners, a California Limited Partnership, which
has shared voting and dispositive power with respect to the shares held by
Mayfield VII and Mayfield Associates. F. Gibson Myers, Jr., A. Grant
Heidrich III, Michael J. Levinthal, William D. Unger, Wendell G. Van Auken,
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 such entities.
(14) Consists of 828,656 shares of Series A Convertible Preferred Stock.
(15) Consists of 828,656 shares of Common Stock issuable upon the conversion of
shares of Series A Convertible Preferred Stock.
(16) The general partner of AT&T Venture Company, L.P. is Mr. Neal Douglas.
(17) Based on a filing with the Securities and Exchange Commission, dated
September 3, 1997, indicating beneficial ownership as of such date.
Consists of 594,180 shares of Series A Convertible Preferred Stock owned
directly by Integral Capital Partners III, L.P., a Delaware limited
partnership ("ICP3"), and 134,250 shares of Series A Convertible Preferred
Stock owned directly by Integral Capital Partners International III, L.P.,
a Cayman Islands exempted limited partnership ("ICPI3"). Integral Capital
Management III, L.P., a Delaware limited partnership ("ICM3"), is the
general partner of ICP3 and
19
<PAGE> 22
the investment general partner of ICPI3 sharing voting and dispositive
power over the shares of Series A Convertible Preferred Stock owned
directly by such entities. Accordingly, ICMI3 may be deemed to be the
beneficial owner of all such shares of Series A Convertible Preferred Stock
held by such entities. ICM3, however, disclaims beneficial ownership of all
such shares held by such entities except to the extent of its pecuniary
interest therein.
(18) Based on a filing with the Securities and Exchange Commission, dated
September 3, 1997, indicating beneficial ownership as of such date.
Consists of 594,180 shares of Common Stock issuable upon the conversion of
Series A Convertible Preferred Stock owned directly by Integral Capital
Partners III, L.P., a Delaware limited partnership ("ICP3"), and 134,250
shares of Common Stock issuable upon the conversion of Series A Convertible
Preferred Stock owned directly by Integral Capital Partners International
III, L.P., a Cayman Islands exempted limited partnership ("ICPI3").
Integral Capital Management III, L.P., a Delaware limited partnership
("ICM3"), is the general partner of ICP3 and the investment general partner
of ICPI3 sharing voting and dispositive power over the shares of Series A
Convertible Preferred Stock owned directly by such entities. Accordingly,
ICMI3 may be deemed to be the beneficial owner of all such shares of Series
A Convertible Preferred Stock held by such entities. ICM3, however,
disclaims beneficial ownership of all such shares held by such entities
except to the extent of its pecuniary interest therein.
(19) Consists of 2,524,752 shares of Series A Convertible Preferred Stock owned
by entities affiliated with Dawson-Samberg Capital Management, Inc., of
which Mr. Lenihan is a fund manager. Mr. Lenihan disclaims beneficial
ownership of all such shares held by such entities.
(20) Includes 2,524,752 shares of Common Stock issuable upon the conversion of
shares of Series A Convertible Preferred Stock owned by entities affiliated
with Dawson-Samberg Capital Management, Inc., of which Mr. Lenihan is a
fund manager. Mr. Lenihan disclaims beneficial ownership of all such shares
held by such entities. Also includes 2,500 shares of Common Stock subject
to stock options exercisable within 60 days of the Record Date.
(21) Includes 30,554 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 such entities,
except to the extent of his pecuniary interest therein arising from general
partnership interests therein.
(22) Includes 10,554 shares subject to stock options exercisable within 60 days
of the Record Date and 1,167,592 shares owned by entities associated with
Kleiner Perkins Caufield & Byers, of which Mr. Compton is a general
partner. Mr. Compton disclaims beneficial ownership of all such shares held
by such entities, except to the extent of his pecuniary interest therein
arising from general partnership interests therein.
(23) Includes 116,350 shares subject to stock options exercisable within 60 days
of the Record Date.
(24) Includes 124,530 shares subject to stock options exercisable within 60 days
of the Record Date.
(25) Consists of 37,499 shares subject to stock options exercisable within 60
days of the Record Date.
(26) Includes 7,031 shares subject to stock options exercisable within 60 days
of the Record Date.
(27) Includes 3,000 shares owned by Mr. Harris, 20,000 shares owned by Mr.
Harris' four children, and 10,554 shares subject to stock options
exercisable within 60 days of the Record Date.
(28) Includes 25,077 shares subject to stock options exercisable within 60 days
of the Record Date.
(29) Includes 42,916 shares subject to stock options exercisable within 60 days
of the Record Date.
(30) Includes an aggregate of 407,565 shares subject to stock options
exercisable within 60 days of the Record Date.
20
<PAGE> 23
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 ("10% shareholders"), 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 10%
shareholders are also required by the Commission's rules and regulations to
provide the Company with copies of all forms that they file under Section 16(a)
of the Exchange Act. 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, 1997 to December
31, 1997, its executive officers, directors and 10% shareholders filed all
required reports under Section 16(a) of the Exchange Act on a timely basis.
CERTAIN TRANSACTIONS
In July 1997, the Company entered into a Preferred Stock Purchase Agreement
with certain investors (the "Series A Investors"), including certain affiliates
of Dawson-Samberg Capital Management, Inc., pursuant to which the Company issued
and sold an aggregate of 4,950,495 shares of the Company's Series A Convertible
Preferred Stock for an aggregate purchase price of approximately $17.5 million,
or $3.535 per share (the "Private Placement"). In connection with the Private
Placement, the Company agreed to appoint one person to the Company's Board of
Directors designated by the Series A Investors, and pursuant thereto, the
Company's Board of Directors elected Lawrence D. Lenihan, Jr. to serve a
director. The Company also agreed to take all necessary action and use its best
efforts to cause a designee of the holders of the Company's issued and
outstanding shares of Series A Convertible Preferred Stock to be nominated for
and elected to the Board of Directors of the Company at each successive annual
meeting of shareholders of the Company at which directors are elected.
Accordingly, at the request of the holders of a majority of the Company's issued
and outstanding Series A Convertible Preferred Stock, the Company's Board of
Directors has nominated Lawrence D. Lenihan, Jr. for election to the Company's
Board of Directors by the holders of the Company's Series A Convertible
Preferred Stock. See "PROPOSAL TWO -- Election of Director by Preferred
Shareholders" set forth herein.
21
<PAGE> 24
EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE OFFICER COMPENSATION
The following table sets forth a summary of the total compensation of the
Company's Chief Executive Officer and four other most highly compensated
executive officers as of December 31, 1997 (the "Named Executive Officers")
during the Company's fiscal year ended December 31, 1997 (the "Last Fiscal
Year"), and the total compensation paid to each Named Executive Officer during
the Company's two previous fiscal years.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-----------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
---------------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL YEAR SALARY($) BONUS($) AWARDS OPTIONS COMPENSATION
------------------ ---- ---------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Henry W. Donaldson................... 1997 225,000 50,000 -- 80,000 162(3)
President and 1996 193,750 50,000 -- -- 672(3)
Chief Executive Officer 1995 175,000 35,000 -- 162,500 720(3)
Ken K. Cheng......................... 1997 180,000 50,000 -- 187,500 172(4)
Senior Vice President and 1996 164,688 48,500 -- 150,000 199(4)
Chief Operating Officer 1995 111,333 17,500 -- 70,000 138(4)
Robert H. Howard..................... 1997 82,452 -- -- 150,000 25,586(5)
Vice President, Sales 1996 -- -- -- -- --
1995 -- -- -- -- --
Gregory G. Schott.................... 1997 136,164 17,500 -- 140,000 194(6)(7)
Vice President, Operations 1996 112,498 18,750 -- 80,000 50(6)
1995 90,000 -- -- 60,000 43(6)
Thomas P. Shanahan(8)................ 1997 137,083 27,000 -- 87,500 119(9)(10)
Vice President, Finance and 1996 140,000 33,250 -- 50,000 442(9)
Chief Financial Officer 1995 126,000 14,000 -- 67,500 264(9)
</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 as of December
31, 1997 of $1,218,750 (net of consideration for the shares paid by Mr.
Donaldson) based on the closing price of $2.50 for the Company's Common
Stock as reported on the Nasdaq National Market on such date.
(3) Includes taxable benefits to Mr. Donaldson from premiums for a group term
life insurance policy payable to beneficiaries designated by Mr. Donaldson.
(4) Includes taxable benefits to Mr. Cheng from premiums for a group term life
insurance policy payable to beneficiaries designated by Mr. Cheng and the
value of the Company's Common Stock received by Mr. Cheng in lieu of cash
compensation.
(5) Includes commissions, moving expenses and taxable benefits to Mr. Howard
from premiums for a group term life insurance policy payable to
beneficiaries designated by Mr. Howard.
(6) Includes taxable benefits to Mr. Schott from premiums for a group term life
insurance policy payable to beneficiaries designated by Mr. Schott.
(7) Excludes $49,094 deemed to be ordinary income by virtue of disqualifying
dispositions of stock acquired upon the exercise of incentive stock
options.
(8) Mr. Shanahan no longer serves as the Chief Financial Officer or Vice
President, Finance of the Company.
22
<PAGE> 25
(9) Includes taxable benefits to Mr. Shanahan from premiums for a group term
life insurance policy payable to beneficiaries designated by Mr. Shanahan.
(10) Excludes $93,943 deemed to be ordinary income by virtue of disqualifying
dispositions of stock acquired upon the exercise of incentive stock
options.
SUMMARY OF STOCK OPTION GRANTS
The following table sets forth the number of options to purchase the
Company's Common Stock granted to the Named Executive Officers during the Last
Fiscal Year.
SUMMARY TABLE OF OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZED
PERCENTAGE VALUE AT
OF ASSUMED ANNUAL RATES
NUMBER OF TOTAL OPTION OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM(3)
OPTIONS FISCAL PRICE EXPIRATION --------------------
NAME GRANTED(1)(#) YEAR(2) ($/SH) DATE 5%($) 10%($)
---- ------------- ------------ -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Henry W. Donaldson......... 80,000 3.9 4.5625 2/27/04 148,592 346,282
Ken K. Cheng............... 187,500 9.2 4.5625 2/27/04 358,104 840,221
Robert H. Howard........... 150,000 7.4 3.875 4/22/04 236,627 551,442
Gregory G. Schott.......... 75,000 3.7 4.5625 2/27/04 139,305 324,639
15,000 0.7 4.5625 2/27/04 43,040 109,072
50,000 2.5 4.4375 10/15/04 90,325 210,497
Thomas P. Shanahan......... 87,500 4.3 4.5625 2/27/04 162,522 378,746
</TABLE>
- ---------------
(1) The options granted to purchase the underlying securities were granted under
the Company's 1992 Stock Option Plan (the "Option Plan"). Such options have
a term of 7 years, subject to earlier termination upon the occurrence of
certain events related to termination of employment of the option holders
and amendment or termination of the Option Plan. Each of such options was
granted with an exercise price that is no less than the fair market value of
the underlying Common Stock on the date of the grant, as determined by the
Company's Board of Directors. In the event of a merger of the Company with
or into another corporation or other legal entity, where vested options have
not been assumed or substituted by such successor corporation or other
entity, such options will be exercisable for a period of 15 days from the
date of notice thereof, and will terminate upon the expiration of such
period. Upon a change in control (as defined below), the unvested options
will be subject to accelerated vesting to the extent of 50% of the unvested
portion of such 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 Company's 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 2,037,000 shares of the
Company's Common Stock during the Last Fiscal Year.
(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 equal or exceed the assumed
5% and 10% levels or any other defined level. Unless the market price of the
Company's Common Stock appreciates over the option term, no value will be
realized from the option grants set forth in this table made to the Named
Executive Officers.
23
<PAGE> 26
SUMMARY OF OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information relating to exercises of
options to purchase the Company's Common Stock during the last Fiscal Year by
the Named Executive Officers, and the value of unexercised options held by the
Named Executive Officers as of December 31, 1997.
SUMMARY TABLE OF AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END(1)
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Henry W. Donaldson....... -- -- 81,507 160,993 51,952 66,798
Ken K. Cheng............. 20,000 92,000 60,728 231,772 83,415 57,335
Robert H. Howard......... -- -- -- 150,000 -- --
Gregory G. Schott........ 8,750 49,211 11,876 156,250 7,752 18,625
Thomas P. Shanahan....... 35,000 162,838 37,832 129,168 47,040 62,210
</TABLE>
- ---------------
(1) Amounts reflecting gains on outstanding stock options are based on the
closing price of $2.50 for the Company's Common Stock on December 31, 1997.
COMPENSATION COMMITTEE REPORT
The Compensation Committee reviews and approves the Company's compensation
policies. The following is the report of the Compensation Committee describing
the compensation policies applicable to the compensation of the Company's
executive officers for the Last Fiscal Year.
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 Compensation 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 Compensation Committee reviewed and approved fiscal 1997 base salaries for
the Chief Executive Officer and other executive officers at the beginning of
fiscal 1997. In establishing base salaries of executive officers, the
Compensation 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 Compensation 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
Compensation Committee focused on each executive's historical salary level,
which in most instances was based upon the date on which the executive was hired
by the Company, the executive's prior performance with the Company and expected
contribution to the Company's future success. In making its salary decisions,
the Compensation Committee exercised its discretion and judgment based upon
these factors. No specific formula was applied to determine the weight of each
factor.
24
<PAGE> 27
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 Compensation 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 Company's Board of Directors reviews
and approves the financial goals for the fiscal year. The Compensation Committee
evaluates the overall performance of the Company and approves performance
bonuses based on the extent to which the goals of the Board of Directors have
been achieved.
Stock Options. The Compensation Committee views stock option grants as an
important component of its long-term, performance-based compensation philosophy.
The Company provides long-term incentives to its Chief Executive Officer and its
other 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 Compensation Committee believes that stock options directly motivate its
executive officers to maximize long-term shareholder value. The options also
utilize 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 of Directors 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.
CEO Compensation. The compensation of Mr. Donaldson, the Chief Executive
Officer of the Company, consists of base salary, an annual bonus and stock
options. For the Last Fiscal Year, the Committee increased Mr. Donaldson's base
salary to $225,000 based upon the improvement in the financial performance of
the Company in 1996 and the Compensation Committee's knowledge of increased base
salary levels for similar positions in the industry. In January 1998, Mr.
Donaldson was awarded an incentive bonus of $50,000 based on the financial and
operational performance of the Company during the Last Fiscal Year.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Employment Agreements. None of the Named Executive Officers have employment
agreements with the Company, and their employment may be terminated at any time.
Restricted Stock Purchase Agreement. The Company is a party to four
Restricted Stock Purchase Agreements, dated March 18, 1994, March 14, 1995,
March 15, 1995 and March 15, 1995 (the "Donaldson Stock Purchase Agreements"),
pursuant to which Mr. Donaldson purchased an aggregate of 487,500 shares (as
adjusted) of the Company's Common Stock. The terms of the Donaldson Stock
Purchase Agreements provide that the Company will have the right to repurchase
shares of the Company's Common Stock issued to Mr. Donaldson thereunder upon the
occurrence of certain events, including the termination of Mr. Donaldson's
employment with the Company. The Company's right to repurchase such shares,
however, terminates with respect to such shares according to a defined vesting
schedule. In addition, in the event of the acquisition of the Company by merger
or sale of assets, the Company's right to repurchase such shares will terminate
with respect to 50% of the shares which remain subject to such right of
repurchase on the date of any such change of control of the Company. As of the
Record Date, an aggregate of 40,630 shares of the Company's Common Stock held by
Mr. Donaldson will continue to be subject to the Company's right to repurchase
such shares in accordance with the terms of the Donaldson Stock Purchase
Agreements.
Option Plan. The Option Plan provides that upon a change in control (as
defined below), the unvested options granted to each of the Company's executive
officers will 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
Company's Board of Directors during a 24-month period, which changes are not
initiated by the Board of Directors.
25
<PAGE> 28
PERFORMANCE COMPARISON GRAPH
Set forth below are line graphs comparing the cumulative total return to
shareholders of the Company's Common Stock from January 1, 1997 to December 31,
1997, to the cumulative total return over such period of the Nasdaq
Non-Financial Stocks and Nasdaq Computer and Data Processing Services Stocks
Indexes.
<TABLE>
<CAPTION>
Measurement Period Nasdaq C Data Nasdaq Non-
(Fiscal Year Covered) Digital Generation Processing financial Stocks
<S> <C> <C> <C>
1/31/96 100 100 100
12/31/96 76 125 121
12/31/97 23 163 142
</TABLE>
OTHER MATTERS
The Company knows of no other matters to be submitted at the Annual
Meeting. If any other matters properly come before the Annual 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 Annual 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.
By Order of the Board of Directors
DIGITAL GENERATION SYSTEMS, INC.
/s/ JOHN B. GOODRICH
John B. Goodrich
Secretary
Dated:
26
<PAGE> 29
EXHIBIT A
TEXT OF PROPOSED AMENDMENT
TO
ARTICLES OF INCORPORATION
Article III(A) of the Company's Articles currently reads as follows:
"(A) Classes of Stock. The Company is authorized to issue 35,000,000
shares of its capital stock, which are divided into two classes designated
"Common Stock" and "Preferred Stock," respectively. The Company is
authorized to issue 30,000,000 shares of Common Stock and 5,000,000 of
Preferred Stock."
If the amendment to the foregoing provision of the Company's Articles
proposed by the Company's Board of Directors is approved by the shareholders of
the Company at the Annual Meeting, Article III(A) of the Company's Articles will
be amended and restated in its entirety to read as follows:
"(A) Classes of Stock. The Company is authorized to issue 55,000,000
shares of its capital stock, which are divided into two classes designated
"Common Stock" and "Preferred Stock," respectively. The Company is
authorized to issue 40,000,000 shares of Common Stock and 15,000,000 of
Preferred Stock."
A-1
<PAGE> 30
DIGITAL GENERATION SYSTEMS, INC.
1992 STOCK OPTION PLAN
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.
(a) 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.
-1-
<PAGE> 31
(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.
(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.
(a) 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.
(v) 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
-2-
<PAGE> 32
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.
(vi) 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.
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.
-3-
<PAGE> 33
(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 canceled 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 canceled 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.
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.
-4-
<PAGE> 34
(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;
(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.
-5-
<PAGE> 35
(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.
(i) An Option may not be exercised for a fraction of a Share.
(ii) 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.
(iii) 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.
(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
-6-
<PAGE> 36
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 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
-7-
<PAGE> 37
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
-8-
<PAGE> 38
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."
(f) "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.
(a) 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
-9-
<PAGE> 39
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.
(a) 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.
(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,
during 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.
-10-
<PAGE> 40
DIGITAL GENERATION SYSTEMS, INC.
PROXY FOR
1998 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 1998 Annual Meeting of
Shareholders and Proxy Statement, each dated [ ], and hereby appoints Henry W.
Donaldson and Paul W. Emery, 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 1998 Annual Meeting of
Shareholders of Digital Generation Systems, Inc., to be held at the offices of
the Company located at 219 East 44th Street, New York, New York, 10017, on
Wednesday, April 29, 1998 at 9:00 a.m., local time, and any adjournment(s) or
postponement(s) thereof, and to vote all shares of the Company's Common Stock
and Series A Convertible Preferred Stock which the undersigned would be entitled
to vote if then and there personally present, on the matters set forth below.
1. Proposal to elect five nominees as members of the Company's Board of
Directors by the holders of the Company's Common Stock:
INSTRUCTION: ONLY HOLDERS OF COMMON STOCK SHOULD COMPLETE THIS ITEM.
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.
___ FOR all nominees ___ WITHHOLD AUTHORITY ___ ABSTAIN
listed below (except to vote for all
as indicated) nominees listed below
Henry W. Donaldson Kevin R. Compton Jeffery M. Drazan
Richard H. Harris Leonard S. Matthews
2. Proposal to elect one nominee as a member of the Company's Board of
Directors by the holders of the Company's Series A Convertible Preferred
Stock:
INSTRUCTION: ONLY HOLDERS OF SERIES A CONVERTIBLE PREFERRED STOCK SHOULD
COMPLETE THIS ITEM.
___ FOR the nominee ___ WITHHOLD AUTHORITY ___ ABSTAIN
listed below to vote for the
nominee listed below
Lawrence D. Lenihan, Jr.
<PAGE> 41
3. Proposal to amend the Company's 1992 Stock Option Plan to increase the
number of shares of the Company's Common Stock reserved for issuance
thereunder from 2,450,000 shares to 2,950,000 shares.
_____ FOR _____ AGAINST _____ ABSTAIN
4. Proposal to amend the Company's Amended and Restated Articles of
Incorporation to increase the authorized number of shares of the
Company's Common Stock from 30,000,000 shares to 40,000,000 shares, and
to increase the authorized number of shares of the Company's Preferred
Stock from 5,000,000 shares to 15,000,000 shares.
_____ FOR _____ AGAINST _____ ABSTAIN
5. Proposal to ratify the appointment of Arthur Andersen LLP as independent
accountants for the Company's fiscal year ending December 31, 1998.
_____ FOR _____ AGAINST _____ ABSTAIN
In their discretion, the proxies are authorized to vote upon such other
matter(s) which may properly come before the Annual Meeting and at any
adjournment(s) or postponement(s) thereof.
THIS PROXY WILL BE VOTED AS DIRECTED AND, IF NO DIRECTION IS INDICATED, THIS
PROXY WILL BE VOTED FOR THE LISTED NOMINEES FOR ELECTION AS DIRECTORS, FOR THE
PROPOSED AMENDMENTS TO THE COMPANY'S 1992 STOCK OPTION PLAN, FOR THE PROPOSED
AMENDMENTS TO THE COMPANY'S AMENDED AND RESTATED ARTICLES OF INCORPORATION
RELATING TO THE INCREASE IN THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK AND
PREFERRED STOCK, AND FOR THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN
LLP AS INDEPENDENT ACCOUNTANTS FOR THE COMPANY'S FISCAL YEAR ENDING DECEMBER 31,
1998.
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.)
