SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
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Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Soliciting Material Pursuant to
sec.240.14a-11(c) or sec.240.14a-12
[ ] Definitive Proxy Statement [ ] Confidential, for Use of the
Commission Only
[ ] Definitive Additional Materials (as permitted by Rule 14a-6(e)(2))
DIGITAL VIDEO SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
160 Knowles Drive
Los Gatos, CA 95032
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, JANUARY 6, 1999
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Digital Video Systems, Inc. (the "Company") will be held at the offices
of Digital Video Systems, Inc., located at 160 Knowles Drive, Los Gatos,
California, on Wednesday, January 6, 1999 at 10:00 a.m. local time for
the following purposes, as more fully described in the attached Proxy
Statement:
(1) To elect five directors of the Company to serve until
the next annual meeting of stockholders or until their successors
are duly elected and qualified;
(2) To ratify the adoption by the Company's Board of
Directors of the Company's 1998 Stock Option Plan;
(3) To ratify the appointment by the Company's Board of
Directors of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending March 31, 1999;
(4) To consider and vote upon a proposal (i) to approve
the transactions contemplated by that certain Letter Agreement
(the "Investment Agreement"), dated as of October 15, 1998, among
the Company and Oregon Power Lending Institution ("OPLI"),
including the issuance by the Company of (A) up to $10,000,000
face value of Series C Convertible Preferred Stock (the "Preferred
Stock"), (B) options (the "Options") to purchase up to 3,000,000
shares of the Company's common stock ("Common Stock") and (C)
shares of Common Stock upon the conversion of the Preferred Stock
and the exercise of the Options, and (ii) to approve the
convertibility of one or more demand promissory notes issued or to
be issued in lieu of a portion of the Preferred Stock to be issued
under the Investment Agreement and the issuance of Common Stock
upon conversion thereof;
(5) To approve the change of the Company's name to Digital
Versatile Systems, Inc. and the amendment and restatement of the
Company's Amended and Restated Certificate of Incorporation to
reflect such change and to incorporate previously filed
amendments, as appropriate; and
(6) To transact such other business as may properly be
brought before the Annual Meeting or any and all adjournments thereof.
The Board of Directors has fixed the close of business on Tuesday,
December 1, 1998 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting.
Only stockholders at the close of business on such record date are
entitled to vote at the Annual Meeting.
Accompanying this Notice are a Proxy and Proxy Statement. IF YOU
WILL NOT BE ABLE TO ATTEND THE ANNUAL MEETING TO VOTE IN PERSON, PLEASE
COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED POSTAGE PAID ENVELOPE. The Proxy may be revoked at any
time prior to its exercise at the Annual Meeting.
By Order of the Board of Directors,
/s/ Edward M. Miller, Jr.
Edward M. Miller, Jr.
Chief Executive Officer
Los Gatos, California
December 2, 1998
DIGITAL VIDEO SYSTEMS, INC.
160 Knowles Drive
Los Gatos, CA 95032
ANNUAL MEETING OF STOCKHOLDERS
JANUARY 6, 1999
PROXY STATEMENT
INTRODUCTION
This Proxy Statement (the "Proxy Statement") is furnished to the
holders of Common Stock par value $.0001 (the "Common Stock") of
Digital Video Systems, Inc., a Delaware corporation (the "Company"), in
connection with the solicitation of proxies by and on behalf of the
Company's Board of Directors (the "Board of Directors"). The proxies
solicited hereby are to be voted at the Company's Annual Meeting of
Stockholders to be held on January 6, 1999, and at any and all
adjournments thereof (the "Annual Meeting"). The holders of the
Company's Series C Convertible Preferred Stock, par value $.0001 (the
"Preferred Stock") which is not subject to the proxy solicitation
requirements of the Securities Exchange Act of 1934, as amended, are
also being sent copies of this Proxy Statement. The holders of the
Preferred Stock have no right to vote with respect to the election of
the director nominees named herein. The holders of the Preferred Stock
have agreed to vote "FOR" all other matters to be voted upon at the
Annual Meeting and discussed herein.
This Proxy Statement and the accompanying form of proxy are first
being mailed to stockholders on or about December 15, 1998.
PURPOSE OF ANNUAL MEETING
At the Annual Meeting, holders of Common Stock will be asked: (i)
to elect five directors of the Company to serve until the next annual
meeting of stockholders or until their successors are duly elected and
qualified; and all stockholders of the Company will be asked: (ii) to
ratify the adoption of the 1998 Stock Option Plan; (iii) to ratify the
appointment by the Board of Directors of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending March 31,
1999; (iv) to approve the transactions contemplated by the Investment
Agreement, including the issuance of the Preferred Stock, the Options
and Common Stock upon the conversion and exercise of the Preferred Stock
and Options, respectively, and to approve the convertibility of the
Demand Note and any additional demand notes with substantially similar
terms, and the issuance of Common Stock upon the conversion thereof; (v)
to approve the change of the Company's name to Digital Versatile
Systems, Inc. and the amendment and restatement of the Company's Amended
and Restated Certificate of Incorporation to reflect such change and to
incorporate previously filed amendments, as appropriate; and (vi) to
transact such other business as may properly be brought before the
Annual Meeting or any and all adjournments thereof. The Board of
Directors recommends a vote in favor of (i.e., "FOR"): (a) the
election of the five nominees for directors of the Company listed below,
and (b) the proposals set forth in (ii), (iii), (iv) and (v) above.
QUORUM AND VOTING RIGHTS
The presence, in person or by proxy, of the holders of a majority
of the outstanding shares of the Company's capital stock entitled to
vote is necessary to constitute a quorum at the Annual Meeting. Only
stockholders of record at the close of business on Monday, November 30,
1998 (the "Record Date") will be entitled to notice of, and to vote at,
the Annual Meeting. As of the Record Date, there were 25,156,470 shares
of Common Stock outstanding and entitled to vote and 2000 shares of
Preferred Stock outstanding and entitled to vote. Holders of Common
Stock as of the Record Date are entitled to one vote for each share
held. Holders of the Preferred Stock are entitled to one vote for each
share of Common Stock into which their Preferred Stock is convertible.
The 2,000 shares of Preferred Stock currently outstanding are
convertible into 4,255,319 shares of Common Stock and, therefore, have
that number of votes. Only holders of Common Stock will be permitted to
vote for the five directors nominated herein. With respect to all other
proposals contained herein, the Common Stock and Preferred Stock will
vote together as a single class. All shares of Common or Preferred
Stock represented by properly executed proxies will, unless the proxies
have previously been revoked, be voted in accordance with the
instructions indicated in the proxies. If no instructions are
indicated, the shares will be voted in favor of (i.e., "FOR"): (i) the
election of the five nominees for directors of the Company listed herein
(votes of holders of Common Stock only); (ii) the ratification of the
adoption of the 1998 Stock Option Plan; (iii) the ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors
for the fiscal year ending March 31, 1999; (iv) the change of the
Company's name to Digital Versatile Systems, Inc. and the amendment and
restatement of the Company's Amended and Restated Certificate of
Incorporation to reflect such change and to incorporate previously filed
amendments, as appropriate and (v) the transactions contemplated by the
Investment Agreement and the convertibility of the Demand Note and any
additional demand notes with substantially similar terms, and the
issuance of Common Stock upon the conversion thereof. With respect to
any other item of business that may come before the Annual Meeting, the
proxy holders will vote the proxy in accordance with their best judgement.
In the election of directors, the five candidates receiving the
highest number of votes of holders of Common Stock will be elected as
directors. The holders of Preferred Stock have the right to elect two
(2) members to the Board of Directors and such directors have already
been elected. See "ELECTION OF DIRECTORS - Management of the Company."
The other matters submitted for stockholder approval at the Annual
Meeting will be decided by the affirmative vote of the majority of the
votes represented in person or by proxy and entitled to vote on each
such matter. Abstentions with respect to any matter are treated as
shares present or represented and entitled to vote on that matter and
thus have the same effect as negative votes. Brokers holding shares of
record generally are not entitled to vote on certain matters unless they
receive voting instructions from their customers. If a broker which is
the record holder of certain shares indicates on a proxy that it does
not have discretionary authority to vote on a particular matter as to
such shares, or if shares are not voted in other circumstances in which
proxy authority is defective or has been withheld with respect to a
particular matter, these nonvoter shares will be counted for quorum
purposes but are not deemed to be present or represented for purposes of
determining whether stockholder approval of that matter has been
obtained. Any stockholder executing a proxy has the power to revoke the
proxy at any time prior to its exercise. A proxy may be revoked prior
to exercise by: (a) filing with the Company a written revocation of the
proxy; (b) appearing at the Annual Meeting and casting a vote contrary
to that indicated on the proxy; or (c) submitting a duly executed proxy
bearing a later date.
The cost of preparing, printing, assembling and mailing this Proxy
Statement and other material furnished to stockholders in connection
with the solicitation of proxies will be borne by the Company. In
addition to the solicitation of proxies by use of the mails, officers,
directors and regular employees of the Company may solicit proxies by
written communications, by telephone, telegraph or personal call. These
persons are to receive no special compensation for any solicitation
activities. The Company will reimburse banks, brokers and other persons
holding Common Stock in their names, or those of their nominees, for
their expenses in forwarding proxy solicitation materials to beneficial
owners of Common Stock.
TABLE OF CONTENTS
Page
PROPOSAL 1 - ELECTION OF DIRECTORS 4
Nominees 4
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF
THE FIVE PERSONS NOMINATED FOR DIRECTOR HEREIN. 4
Meetings; Attendance; Committees 4
Management of the Company 5
Compensation Of Directors And Executive Officers 9
Option Repricing 11
Director Compensation 11
Employment and Consulting Agreements 12
Stock Option Plans 14
1997 Employee Stock Purchase Plan 16
1998 Stock Option Plan 17
Certain Transactions 17
Security Ownership Of Certain Beneficial Owners And Management 19
Escrow Securities 21
Potential Change of Control 23
PROPOSAL 2 - PROPOSAL TO APPROVE COMPANY'S 1998 STOCK OPTION PLAN 25
Certain Federal Income Tax Consequences 1998 Plan 26
Vote Required; Board Recommendation 27
PROPOSAL 3 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS 28
PROPOSAL 4 - APPROVAL OF PRIVATE PLACEMENT AND ISSUANCES OF
SECURITIES 29
Background 29
Why The Company Is Requesting Shareholder Approval Of The
Proposal 4 Matters 30
Investment Agreement 31
Options 32
Registration Rights 32
Preferred Stock 32
Demand Note 34
Nasdaq Listing Obligation; Change Of Control 35
Possible Disadvantages Of Approving The Proposal 4 Matters 35
Consequences If Shareholder Approval Is Not Obtained 36
Interests Of Certain Persons 37
No Appraisal Or Dissenters' Rights; No Preemptive Rights 37
Irrevocable Proxies By Certain Shareholders 37
Vote Required; Board Recommendation 37
PROPOSAL 5 - AMENDMENT AND RESTATEMENT TO THE COMPANY'S AMENDED
AND RESTATED CERTIFICATE OF INCORPORATION 38
Vote Required; Board Recommendation 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 38
Overview 38
Results Of Operations For Three Months Ended September 30,
1998 Compared To The Three Months Ended September 30, 1997 41
Results Of Operations For Fiscal Year Ended March 31, 1998
(Fiscal 1998) Compared To Year Ended March 31, 1997 (Fiscal 1998) 43
Consolidated revenue: 44
Liquidity And Capital Resources 48
Charge to income in the event of release of escrow security 49
Seasonality 49
Year 2000 49
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 50
SUBMISSION OF STOCKHOLDER PROPOSALS 51
OTHER MATTERS 51
ANNEX I - Investment Agreement A-I-1
ANNEX II - Fifth Amended and Restated Certificate of
Incorporation A-II-1
ANNEX III - Demand Note A-III-1
EXHIBIT 1 - 1998 STOCK OPTION PLAN OF DIGITAL VIDEO SYSTEMS, INC. A-1
PROPOSAL 1 -
ELECTION OF DIRECTORS
Nominees
At the Annual Meeting, five directors, who will constitute five of
the seven members of the Board of Directors, are to be elected to serve
until the next Annual Meeting or until their successors are duly elected
and qualified. All nominees have consented to being named herein and
have agreed to serve if elected. The names of such nominees are as
follows:
Edmund Y. Sun
Sanford C. Sigoloff
Philip B. Smith
Young Sam Cho
Cary S. Fitchey
Management proxies will be voted FOR the election of all of the
above-named nominees unless the stockholders indicate that the proxy
shall not be voted for all or any one of the nominees. Nominees
receiving the highest number of affirmative votes cast, up to the number
of directors to be elected, will be elected as directors. Abstentions,
broker nonvotes, and instructions on the accompanying proxy card to
withhold authority to vote for one or more of the nominees will result
in the respective nominees receiving fewer votes. If for any reason any
nominee should, prior to the Annual Meeting, become unavailable for
election as a Director, an event not now anticipated, the proxies will
be voted for such substitute nominee, if any, as may be recommended by
management. In no event, however, shall the proxies be voted for a
greater number of persons than the number of nominees named. Only
holders of Common Stock may vote with respect to the election of the
above-named director nominees.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF
THE FIVE PERSONS NOMINATED FOR DIRECTOR HEREIN.
Meetings; Attendance; Committees
During the fiscal year ended March 31, 1998, the Board of
Directors of the Company met four times and the audit committee met four
times. There were no compensation committee, risk management committee,
nominating committee or executive committee meetings held during the
fiscal year. No incumbent member who was a director during the fiscal
year attended fewer than 75% of the aggregate of all meetings of the
Board of Directors and all meetings of the committees of the Board of
Directors on which he served.
The Company's compensation committee was formed to make
recommendations to the Board concerning salaries and incentive
compensation for officers and employees of the Company. The
compensation committee currently consists of Messrs. Smith and Sigoloff.
The audit committee reviews the scope of the audit and other accounting
related matters. The Company's audit committee currently consists of
Messrs. Smith and Sigoloff. The Company's risk management committee was
formed to establish systems and policies to supervise and manage the
Company's risk of doing business outside the United States. The risk
management committee currently consists of Messrs. Smith and Sigoloff.
The nominating committee was formed to make recommendations to the Board
of Directors as to candidates to serve on the Board of Directors. The
nominating committee currently consists of Mr. Smith. The Board of
Directors also has an executive committee, which committee is authorized
to exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Company, to the
fullest extent permitted by law. The executive committee currently
consists of Mr. Watson, who is Chairman of the committee, Mr. Fitchey
and Mr. Chen. The Company also has a committee of "outside directors"
within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended, comprised of Messrs. Smith and Sigoloff, to make
grants of options to executive officers under the Company's stock option
plans. The Company has no other committees of its Board of Directors.
Management of the Company
Set forth below is certain information with respect to the
directors and executive officers of the Company as of November 2, 1998
and with respect to the director nominees:
<TABLE>
<CAPTION>
Director
Name Age Position Since
- ----------------------- ---- ------------------------------- --------
<S> <C> <C> <C>
Dr. Edmund Y. Sun (1) 50 Chairman of the Board 1992
Edward M. Miller (1) 47 Chief Executive Officer and --
President of U.S. Operations
Sung Hee Lee (1) 44 President and Chief Operating --
Officer of Asian Operations
John W. Smuda (1) 42 Chief Financial Officer --
Robert Werbicki 46 Executive Vice President, --
Computer Products
Sanford C. Sigoloff 68 Director 1996
Philip B. Smith 63 Director 1995
Young Sam Cho 45 Director 1998
Douglas Watson(2) 46 Director 1998
Michael Chen (2) 46 Director 1998
Cary S. Fitchey 43 Director Nominee --
</TABLE>
_______________
(1) Effective June 23, 1998, Dr. Sun resigned as Chief Executive Officer,
Mr. Parkinson resigned as President and Chief Operating Officer, Mr.
Miller was appointed Chief Executive Officer and President of U.S.
Operations, Mr. Lee was appointed President and Chief Operating
Officer of Asian Operations and Mr. Smuda was appointed Chief
Financial Officer.
(2) Elected by the holders of the Preferred Stock as of November 1, 1998.
Dr. Edmund Y. Sun founded the Company in 1992 and has served as its Chairman
of the Board since that time. In June 1998, Dr. Sun was appointed Chief
Technology Officer of the Company and he resigned this position effective
November 1, 1998. From October 1992 to June 1998, Dr. Sun served as the
Company's Chief Executive Officer and from October 1992 to May 1996, he served
as the Company's President. Dr. Sun founded C-Cube Microsystems Inc. ("C-Cube"),
a public company involved in the development of full color still and motion
picture compression technology, and was its Chief Executive Officer from March
1989 to September 1991, and Chairman of the Board from August 1988 until April
1993. Dr. Sun was also previously a founder, vice President, and Chief Technical
Officer of Weitek Corporation, a pubic company involved in high speed three
dimensional shaded graphics systems and the use of high speed chips in various
computer applications. Dr. Sun is a director of CSK Laboratories, Inc., a
privately held company involed in computer hardware. Dr. Sun has a Ph.D in
Applied Physics and an MS in Electrical Engineering from the California
Institute of Technology, and a BS in Electrophysics from the National Chiao
Tung University in Taiwan.
Edward M. Miller was appointed the Company's Chief Executive
Officer and President of U.S. Operations in June 1998. Mr. Miller
served as the Chief Financial Officer of the Company from January 1998
to June 1998. Prior to joining the Company, Mr. Miller served as Vice
President of Finance for SteriGenics International, Inc.
("SteriGenics"), a provider of microorganism reduction services for the
Healthcare Industry. Mr. Miller previously worked for Quality
Technologies Corporation ("QTC"), a spinoff of General Instrument
Corporation ("GI") and an optoelectronics manufacturing company, where
he had served as Vice President of Finance. Mr. Miller worked for GI
during the 1980's, holding several positions in the areas of finance,
strategic planning and operations. During his tenure with GI,
Mr. Miller served as Assistant to the Chief Financial Officer, Financial
Controller for GI's UK operations, and Manager of Financial Analysis
Europe. Earlier in his career at GI, Mr. Miller served as Corporate
Credit Manager for 16 divisional and subsidiary operations within GI's
Components Product Group. Mr. Miller received his B.A. in Business
Administration from Ohio University.
Sung Hee Lee was appointed President and Chief Operating Officer
of the Company's Asian operations in June 1998. Mr. Lee served as a
director of the Company from March 1994 to June 1998. Prior to joining
the Company, Mr. Lee founded the Multimedia Business Division of Hyundai
Electronics Industries Co., Ltd. ("Hyundai") and served as its director
from March 1993 to June 1998. From May 1991 until March 1993, Mr. Lee
served as a Senior Manager of the Marketing Department of Hyundai's
Information Systems Business Sector, and from January 1989 until May
1991, he served as a Senior Manager of Hyundai's Computer Export
Department. Mr. Lee is a member of the Board of Directors of Wanyan
Electronics Co., Ltd., in China. He received his M.S. in Industrial
Engineering from the Korea Advanced Institute of Science & Technology.
John W. Smuda was appointed the Company's Chief Financial Officer
in June 1998. Since joining the Company in November 1997 as Vice
President for Business Development, Mr. Smuda has worked closely with
senior management to shape the Company's financial operations and
programs. Prior to joining the Company, Mr. Smuda served as a Vice
President of Spencer Trask Securities, Inc. from 1992 to 1995 and The
Private Equity Partnership, L.P. from 1992 to 1997. Mr. Smuda provided
these firms with analysis of development stage technology and
biotechnology companies. In addition, Mr. Smuda developed the business
plans for some of the companies for which these firms raised capital.
Prior to obtaining an MBA from Columbia University in 1992, Mr. Smuda
was a research scientist at the National Institutes of Health and the
Naval Research Laboratories. Mr. Smuda received his MBA in Finance and
Management from Columbia University, earned his Ph.D. in Biochemistry
from Georgetown University, and received a B.S. in Chemistry from
Monmouth College.
Sanford C. Sigoloff has served as a Director of the Company since
June 1996. Mr. Sigoloff has been Chairman of the Board, President and
Chief Executive Officer of Sigoloff & Associates, Inc. (a management
consulting company) since 1989. He served as Chief Executive Officer of
L.J. Hooker Corporation (a retail conglomerate) from August 1989 to June
1992. From March 1982 until 1988, Mr. Sigoloff served as Chairman of
the Board, President and Chief Executive Officer of Wickes Companies,
Inc. (a furniture retail chain). Mr. Sigoloff is a director of Sun
America, Inc., Kaufman and Broad Home Corporation, and Movie Gallery,
Inc., which are public companies. Mr. Sigoloff is an adjunct full
professor at the John E. Anderson Graduate School of Management at the
University of California at Los Angeles.
Philip B. Smith has served as a Director of the Company since
November 1995. Mr. Smith has been a Vice Chairman of the Board of
Spencer Trask Securities, Inc. since 1991. He was formerly a Managing
Director of Prudential Securities in its merchant banking division from
1985 to 1991. Mr. Smith is a founding General Partner of Lawrence
Venture Associates, a venture capital limited partnership headquartered
in New York City and was the General Partner from 1984 to 1985. From
1981 to 1984, he served as Executive Vice President and Group Executive
of the international banking and worldwide corporations group at Irving
Trust Company. Prior to joining Irving Trust Company, he was at
Citibank for 15 years, where he founded Citicorp Venture Capital and
served as its President and Chief Executive Officer. Since 1988, Mr.
Smith has also been the managing general partner of The Private Equity
Partnership, L.P. Mr. Smith is a director of Movie Gallery, Inc., and
KLS Enviro Resources, Inc., both publicly held companies. Mr. Smith is
an adjunct professor at Columbia University Graduate School of Business.
He holds a B.S.E. from Princeton University and an MBA from Harvard
University.
Young Sam Cho is a director nominee. Mr. Cho has been the
Director of the Corporate Planning Department of Hyundai since June
1994. From March 1990 until May 1994, Mr. Cho served as General Manager
of Hyundai Electronics Europe Gmbh (Hyundai's European Sales
Subsidiary). Mr. Cho received a B.A. degree in Business Administration
from Seoul National University.
Douglas Watson has served as Director since November 1998. Mr.
Watson is currently President and CEO of Astoria Metal Corporation, a
ship repair and dismantling firm which he founded in 1992, and currently
operates in San Francisco. From 1986 to 1992, Mr. Watson was President
and CEO of West State, Inc., a ship repair firm that he founded and
operated out of Portland, Oregon. During the period from its founding to
its sale in 1994 by Mr. Watson, West State generated total revenues of
$360 million, had a credit line of $40 million, and employed thousands
of marine workers. During the period from 1986 to 1994, Mr. Watson
organized and operated many smaller companies dealing with finance, real
estate, engineering and marine specialty work. From 1973 through 1985,
Mr. Watson worked in the marine repair and construction industry holding
increasingly responsible positions. At the time that he founded West
State, Inc. in 1986, Mr. Watson was the Operations Manager for
Dillingham Ship Repair. In addition to his marine business experience,
Mr. Watson has an extensive background in commercial and industrial real
estate. His portfolio included over 30 companies at one time which were
instrumental in the founding of his own companies.
Michael S. Chen has served as Director since November 1998. Mr. Chen holds
a BS degree in Physics from National Taiwan University, a MSEE degree and Ph.D.
candidacy from Stanford University, specialized in computer aided
modeling and simulation for integrated circuits. He also received
management training in the Acadamy of National Defense Management in
Taiwan and worked as an officer in managerial functions during his 2-
year military service in the China Airforce. He was in charge of QRA
for several mass-produced consumer opto-electronic systems at Texas
Instruments, Taiwan Limited. While pursuing his graduate study at
Stanford University, he worked as a TA and a Research Assistant at the
Department of EE. During the 5 years at Xerox Palo Alto Research
Center, he had worked as an MRS (Member of the Research Staff) and a
Senior MRS, developing and enhancing various IC CAE (Computer Aided
Engineering) packages. He also worked for 4 years at Cadence Design
Systems, Inc., a world leader of ICCAD systems, with hands-on
experience in developing products and managing engineering team
efforts. As President of EMEE, Inc. since 1992, Mr. Chen has developed
and patented a microprocessor based device for use on automobiles and
other applications, raised 7-figure funding, and managed productization
and marketing through major international tier-1 suppliers for
automotive OEM's.
Cary S. Fitchey has served as a Director since October 1998. Mr.
Fitchey is currently the Managing Partner of British Pacific Partners
("BPP"). BPP was formed in June 1988 to make investments in potential
industry consolidation opportunities, and to provide a variety of
advisory services primarily in turnaround situations. Previously, Mr.
Fitchey was one of five partners with Dartford Partnership, a
partnership formed to make investments in branded products concentrating
on the food and beverage categories. While at Dartford, Mr. Fitchey
also developed and managed a joint venture in South Africa with PepsiCo,
Inc., which featured Pepsi's return to that country after its departure
in the 1980s due to the international sanctions. Before joining
Dartford as a partner in 1993, Mr. Fitchey was Managing Director of
Triad Partners, Ltd., an advisory and investment company he founded in
1985 to provide services to corporate clients in the areas of strategic
management, acquisitions, divestitures, licensing, restructuring, and
takeover defense related situations. From 1983 to 1985, Mr. Fitchey
served as the Vice President of Business Planning for PepsiCo, Inc.,
where he was responsible for the development of overall corporate
strategies and where his work led to the acquisition of several major
franchised bottlers and the divestiture of various nonstrategic
businesses. From 1976 to 1983, Mr. Fitchey was a vice president with
A.T. Kearney and Strategic Planning Associates, both international
management consulting firms. Mr. Fitchey received an MBA from the University
of Michigan in 1976 and a BSIM degree from Purdue University in 1974.
Robert Werbicki has served as the Company's Executive Vice
President, Computer Products since August 1997. In 1995, he founded
Synchrome Technology Inc., a development and marketing company that
integrates CD-ROM drives into finished peripheral add-on personal
computer products, and develops and markets multimedia audio software.
He served as its President from 1995 to 1997. From 1993 to 1995, Mr.
Werbicki served as General Manager and consultant to Mountain Network
Solutions and Nakamichi Peripherals Corporation. From 1990 to 1993 he
held various executive positions at Rexon Inc., including President of
Rexon/Tacmar Inc., President of Sytron, Rexon's software development and
marketing subsidiary, and General Manager of the Wangtek DAT Division.
Mr. Werbicki received his B.S.E.E. degree from the University of the
Pacific and a Bachelor of Commerce degree from the University of Toronto.
Directors serve until the next annual meeting or until their
successors are elected or appointed. Officers are elected by and serve
at the discretion of the Board of Directors. There are no family
relationships among the officers or directors of the Company.
Pursuant to the underwriting agreement entered into by the Company
in connection with the initial public offering of the Company's
securities in May 1996 (the "IPO"), the Company agreed for a period of
five years commencing on May 9, 1996, if requested by the underwriter,
D.H. Blair Investment Banking Corp. (the "Underwriter"), to nominate a
designee of the Underwriter who is reasonably acceptable to the Company
to the Company's Board of Directors. To date, the Underwriter has not
designated a director.
Compensation Of Directors And Executive Officers
The following table sets forth the compensation for the fiscal
years ended March 31, 1998 and March 31, 1997, and the twelve-month
period ended March 31, 1996, respectively, paid by the Company to its
Chief Executive Officer and the other executive officers of the Company
who earned in excess of $100,000 (collectively, the "Named Executive
Officers") based on salary and bonus for the fiscal year ended March 31, 1998:
<TABLE>
<CAPTION>
Long Term
Annual Compensation(1) Compensation
----------------------------- Awards
Other --------------
Fiscal Annual Securities
Year Compen- Underlying
Name and Principal Position Ended(2) Salary($) sation Options(#)
- ---------------------------- --------- --------- --------- --------------
<S> <C> <C> <C> <C>
Dr. Edmund Y. Sun(3) 1998 165,157 -- --
Chairman of the Board 1997 159,751 -- --
and Chief Technology 1996 131,709 -- --
Officer
Edward M. Miller(4) 1998 41,409 -- 135,000
Chief Executive Officer 1997 -- -- --
and President of U.S. 1996 -- -- --
Operations
Thomas R. Parkinson(5) 1998 393,166 -- 900,000 (6)
Director, former 1997 -- -- --
President and Chief 1996 -- -- --
Operating Officer
Robert Werbicki 1998 144,806 -- 100,000
Vice President, 1997 -- -- --
Executive Computer 1996 -- -- --
Products
Gary Franza 1998 138,439 $89,861 (7) 125,000
Executive Vice President 1997 -- -- --
New Media Division 1996 -- -- --
David Keller(8) 1998 112,465 -- 80,000
Former General Manager 1997 -- -- --
and Vice President of 1996 -- -- --
the New Media Division
___________
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the
foregoing executive officers which are available generally to all
employees of the Company and certain perquisites and other personal
benefits received by the foregoing executive officers of the Company,
the value of which did not exceed the lesser of $50,000 or 10% of the
executive officer's cash compensation in the table.
(2) In June 1996, the Company changed its fiscal year end from
December 31 to March 31.
(3) Dr. Sun also served as President of the Company from its inception
through May 1996 and as Chief Executive Officer of the Company from
its inception through June 1998.
(4) Mr. Miller was appointed Chief Executive Officer of the Company
and President of U.S. Operations effective June 23, 1998. Mr. Miller
served as Chief Financial Officer of the Company from January 1998 to
June 1998. In connection with his appointment as the Company's Chief
Executive Officer in June 1998, Mr. Miller was granted options to
purchase an additional 215,000 shares of Common Stock at an exercise
price of $1.125 per share.
(5) Mr. Parkinson resigned as President and Chief Operating Officer of
the Company on June 23, 1998, effective July 3, 1998.
(6) Options to acquire 900,000 shares of Common Stock were granted to
Mr. Parkinson on March 28, 1997 in connection with his employment
with the Company, which commenced on April 15, 1997. In connection
with Mr. Parkinson's resignation as the Company's President, 702,083
of such options were cancelled as of July 3, 1998.
(7) Represents payments made to Mr. Franza as a consultant prior to
his employment by the Company as Executive Vice President of the New
Media Division in August 1997.
(8) Mr. Keller's employment as General Manager and Vice President of
the New Media Division was terminated as of May 19, 1998.
The following table provides information on stock options granted
during the fiscal year ended March 31, 1998:
Options Granted in Fiscal Year Ended March 31, 1998
</TABLE>
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
% of
Total
Options
Number of Granted Exercise
Securities to or Base
Underlying Employees Price Expir-
Options in Fiscal (per ation
Name Granted Year share) Date
- --------------------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Dr. Edmund Y. Sun -- -- -- --
Edward M. Miller 135,000 6.5% $1.44 03/17/08
Thomas R. Parkinson 702,083 (1) 33.9% $3.75 07/03/98
197,917 (2) 9.5% $3.75 03/28/07
Robert Werbicki 100,000 (3) 4.8% $4.69 09/17/07
Gary Franza 125,000 (4) 6.0% $4.69 09/17/07
David Keller 80,000 (5) 3.9% $4.69 11/11/98
</TABLE>
____________________
(1) All of such options were cancelled effective as of July 3, 1998.
(2) Such options have been fully vested and are exercisable during the
term when Mr. Parkinson serves as a director of the Company and for
three months thereafter. Mr. Parkinson resigned as a director on
October 7, 1998 and, therefore, these options are exercisable at any
time before January 5, 1999.
(3) Pursuant to the Company's option repricing offer certain employees
(including Mr. Werbicki) were permitted to reprice their options in
exchange for agreeing to cancel options equal to 25% of their
outstanding nonescrowed options. 25,000 of such options were
cancelled as a result of the option repricing offer effective January
1998. The balance of such options (75,000) will expire March 17,
2007 unless earlier cancelled or terminated in accordance with the
terms of the Company's 1996 Stock Option Plan.
(4) Pursuant to the Company's option repricing offer (described in
footnote (3) above), 31,250 of such options were cancelled effective
January 1998.
(5) Pursuant to the Company's option repricing offer (described in
footnote (3) above), 20,000 of such options were cancelled effective
January 1998. 46,250 options were cancelled upon the termination of
Mr. Keller's employment with the Company on August 13, 1998 and
13,750 options expired on November 11, 1998.
Option Repricing
In January 1998, the Board of Directors approved an offer to each
of the Company's employees (other than Mr. Parkinson, who was at that
time the Company's President) who held stock options (the "Repricing
Offer"). Pursuant to the terms of the Repricing Offer, employees were
permitted to trade in 25% of their outstanding options in order to
reprice the remaining 75% of their options at an exercise price of $2.16
per share. (This offer did not include any options held in the
Company's performance escrow created in connection with its 1996 initial
public offering.) The Board's decision was based on the rationale that
employees and officers must be sufficiently incentivized to continue
their employment with the Company and to perform at a level that could
enhance stockholder return. Although most options granted during the
fiscal year ended March 31, 1998 had exercise prices significantly below
the offered repriced exercise price of $2.16 per share (the closing
price of the Company's Common Stock on Nasdaq on January 14, 1998), a
substantial number of outstanding options granted in prior fiscal years
had exercise prices far above the prevailing market price in January
1998. Three of the Named Executive Officers were offered the
opportunity to participate in the Repricing Offer because such officers
had joined the Company and had received option grants at a point in time
when the fair market value of the Common Stock (and therefore the
exercise prices of their options) was significantly higher than $2.16.
Director Compensation
Directors receive $15,000 per year (other than directors who are
employees of the Company) as compensation for serving on the Board of
Directors and are also entitled to participate in the Company's stock
option plans and from time to time to receive grants of options
thereunder to purchase shares of Common Stock. During the fiscal year
ended March 31, 1998, Mr. Parkinson received options to purchase 500,000
shares of Common Stock under the Company's 1996 Stock Option Plan (the
"1996 Plan") and options to purchase 400,000 shares of Common Stock
under the Company's 1993 Amended and Restated Stock Option Plan (the
"1993 Plan"), respectively, all at an exercise price of $3.75 per
share, pursuant to his employment agreement with the Company. In
connection with Mr. Parkinson's resignation as President on June 23,
1998, 358,333 options granted to Mr. Parkinson under the Company's 1993
Plan, and 343,750 options granted to Mr. Parkinson under the Company's
1996 Plan respectively, were cancelled. The total options cancelled of
702,083 included 266,667 Escrow Options (as herein defined). In June
1998, all nonemployee directors were granted options to purchase 100,000
shares of Common Stock pursuant to the Company's 1998 Stock Option Plan
(the "1998 Plan") at an exercise price of $1.125 per share. These
options vest pro rata over the 48-month period following the grant date,
if not earlier cancelled pursuant to the terms and conditions of the
1998 Plan.
Employment and Consulting Agreements
The Company entered into an employment agreement (the "Sun
Employment Agreement") with Dr. Sun, the Company's founder, Chairman of
the Board and then Chief Executive Officer, in March 1996. The term of
the Sun Employment Agreement commenced in May 1996 and will expire on
March 31, 2001; provided, however, that the Sun Employment Agreement can
be terminated by either party after March 31, 1999, if all of the Escrow
Securities (as defined herein) have been released.
The Sun Employment Agreement provides that in consideration for
Dr. Sun's services, he is to be paid an annual salary of $160,000, with
increases in salary and bonuses after the first year of employment as
deemed appropriate by the Board of Directors. In June 1998, Dr. Sun
resigned as Chief Executive Officer and was appointed Chief Technology
Officer. In connection with his appointment as Chief Technology
Officer, Dr. Sun was granted five-year options to purchase 400,000
shares of Common Stock at an exercise price of $1.125 per share. Such
options vest at a monthly rate of 2.083% over a four-year period
commencing on the date of grant, subject to acceleration of this vesting
schedule or forfeiture of these options under certain circumstances.
Dr. Sun resigned as Chief Technology Officer on November 1, 1998.
Dr. Sun's compensation package remains otherwise unchanged.
The Company entered into a two year employment agreement dated as
of March 28, 1997 with Thomas R. Parkinson, pursuant to which Mr.
Parkinson became the President and Chief Operating Officer of the
Company commencing on April 15, 1997. During the fiscal year ended
March 31, 1998, Mr. Parkinson received options to purchase 500,000
shares of Common Stock under the Company's 1996 Stock Option Plan and
options to purchase 400,000 shares of Common Stock under the Company's
1993 Amended and Restated Stock Option Plan.
Mr. Parkinson received an annual salary of $280,000 and was
eligible for an annual performance bonus ranging from $120,000 to
$200,000. Mr. Parkinson's salary and bonus would be mutually agreed to
by Mr. Parkinson and the Board after the first year. Mr. Parkinson
terminated his employment as the Company's President on July 3, 1998.
In connection with his termination as President, Mr. Parkinson and the
Company agreed that his options to purchase 197,917 shares of Common
Stock would vest on July 3, 1998. The remaining 702,083 options
(including 266,667 Escrow Options) were cancelled on July 3, 1998.
In December 1997 the Company entered into a fifteen-month
employment agreement with Edward M. Miller, pursuant to which Mr. Miller
became the Chief Financial Officer of the Company in January 1998. Upon
entering into such agreement, Mr. Miller received five-year options to
purchase 135,000 shares of Common Stock at $1.44 per share under the
Company's 1996 Plan. Such options vest at a monthly rate of 2.083% over
a four-year period commencing on March 1, 1998, subject to acceleration
of this vesting schedule or forfeiture of these options under certain
circumstances. Mr. Miller receives an annual salary of $135,000 and
will be eligible for an annual performance bonus ranging from $27,000 to
$67,500. Mr. Miller's employment as Chief Financial Officer was
renewable at the end of the fifteen-month term by mutual agreement of
the parties. On June 24, 1998, Mr. Miller was appointed Chief Executive
Officer of the Company and President of its U.S. Operations. Mr. Miller
was granted five-year options to purchase an additional 215,000 shares
of Common Stock at an exercise price of $1.125 per share under the
Company's 1998 Plan in connection with such appointment. Such options
vest at a monthly rate of 2.083% over a four-year period commencing on
the grant date, subject to acceleration of this vesting schedule or
forfeiture of these options under certain circumstances.
In August 1997, the Company entered into a three-year employment
agreement with Robert Werbicki, pursuant to which Mr. Werbicki became
the Company's Executive Vice President of Computer Products. Upon
entering into such agreement, Mr. Werbicki received five-year options to
purchase 100,000 shares of Common Stock at $4.69 per share under the
Company's 1996 Plan. Such options vest at a monthly rate of 2.083% over
a four year period commencing on September 1, 1997, subject to
acceleration of this vesting schedule or forfeiture of these options
under certain circumstances. Mr. Werbicki receives an annual salary of
$150,000. Mr. Werbicki is also eligible for a quarterly performance
bonus equal to a certain percentage of the gross margin from all
hardware sales under the Computer Products Division (the "Gross
Margin"). The first year's bonus is calculated based on 5% of the Gross
Margin, but no less than $75,000. The second year's bonus is 5% of the
Gross Margin, with no minimum bonus and the third year is between 2% to
5% of the Gross Margin, which will be negotiated and mutually agreed on
by Mr. Werbicki and the Company's President. Mr. Werbicki's employment
as Executive Vice President of the Computer Products Division is
renewable at the end of the initial three-year term by mutual agreement
of the parties.
In August 1997, the Company entered into a two year employment
agreement with Gary Franza, pursuant to which Mr. Franza became the
Executive Vice President of Business Development for the Company and
Chief Operating Officer of the Company's Atlanta, Georgia operations.
Upon entering into such agreement, Mr. Franza received five-year options
to purchase 125,000 shares of Common Stock at $4.69 per share under the
Company's 1996 Plan. Such options vest at a monthly rate of 2.083% over
a four-year period commencing on September 1, 1997, subject to
acceleration of this vesting schedule or forfeiture of these options
under certain circumstances. Mr. Franza receives an annual salary of
$180,000 and will be eligible for an annual performance bonus ranging
from $40,000 to $80,000.
In August 1997, the Company entered into a two year employment
agreement with David Keller, pursuant to which Mr. Keller became the
Vice President and General Manager of the Company's Atlanta, Georgia
operations. Upon entering into such agreement, Mr. Keller received
five-year options to purchase 80,000 shares of Common Stock at $4.69 per
share under the Company's 1996 Plan. Such options vest at a monthly
rate of 2.083% over a four-year period commencing on September 1, 1997,
subject to acceleration of this vesting schedule or forfeiture of these
options under certain circumstances. Mr. Keller received an annual
salary of $170,000 and was eligible for an annual performance bonus of
up to $51,000. Mr. Keller's employment was renewable at the end of the
initial two year term by mutual agreement of the parties. In May 1998,
Mr. Keller's employment with the Company was terminated. Pursuant to
the termination agreement, the Company made a $42,500 severance payment
to Mr. Keller and 46,250 options to purchase shares of the Common Stock
that were not vested as of August 13, 1998 were cancelled.
Stock Option Plans
In October 1993, the Board of Directors approved the Company's
1993 Stock Option Plan, which plan was subsequently approved by the
Company's stockholders in March 1994. In April 1996, the Board of
Directors and the stockholders of the Company approved the 1993 Amended
and Restated Stock Option Plan, as amended (the "1993 Plan"), which
effected certain amendments to the 1993 Stock Option Plan. The 1993
Plan provides for the grant of options to officers, directors, other key
employees and consultants of the Company to purchase up to an aggregate
of 3,762,532 shares of Common Stock. The 1993 Plan may be administered
by the Board of Directors or a committee thereof and is currently
administered by the Board of Directors, which has complete discretion to
select the optionees and to establish the terms and conditions of each
option, subject to the provisions of the 1993 Plan. Notwithstanding the
foregoing, grants of options to Named Executive Officers may be made
only by a committee of directors who qualify as "outside directors"
within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). Options granted under the 1993 Plan may
be "incentive stock options" as defined in Section 422 of the Code, or
nonqualified options, and will be designated as such.
The exercise price of incentive stock options may not be less than
100% of the fair market value of the Common Stock as of the date of
grant (110% of the fair market value if the grant is to an employee who
owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). The Code currently limits to $100,000
the aggregate value of Common Stock that may be acquired in any one year
pursuant to incentive stock options under the 1993 Plan or any other
option plan adopted by the Company. Nonqualified options may be granted
under the 1993 Plan at an exercise price not less than 85% of the fair
market value of the Common Stock on the date of grant. Nonqualified
options also may be granted without regard to any restriction on the
amount of Common Stock that may be acquired pursuant to such options in
any one year.
In general, upon termination of employment of an optionee, all
options granted to such person which were not exercisable on the date of
such termination would immediately terminate, and any options that are
exercisable would terminate 90 days (six months in the case of
termination by reason of death or disability) following termination of
employment.
Options may not be exercised more than ten years after the grant
(five years after the grant if the grant is an incentive stock option to
an employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the Company). Options granted under the
1993 Plan are not transferable and may be exercised only by the
respective grantees during their lifetime or by their heirs, executors
or administrators in the event of death. Under the 1993 Plan, shares
subject to options that have been cancelled or terminated are reserved
for subsequently granted options. The number of options outstanding and
the exercise price thereof are subject to adjustment in the case of
certain transactions such as mergers, recapitalizations, stock splits or
stock dividends. The 1993 Plan is effective for ten years, unless
sooner terminated or suspended.
During the fiscal year ended March 31, 1998, options to purchase
152,167 shares of Common Stock were granted under the 1993 Plan. As of
October 31, 1998 there were 937,482 options available for grant under
the 1993 plan.
In September 1996, the Company's Board of Directors approved the
1996 Plan, which was subsequently approved by the Company's stockholders
in September 1997. The purpose of the 1996 Plan is to enable the
Company to attract and retain top-quality employees, officers, directors
and consultants and to provide such employees, officers, directors and
consultants with an incentive to enhance stockholder return. The 1996
Plan became effective on the first day immediately following the date on
which the 1996 Plan was approved by the stockholders.
The 1996 Plan provides for the grant of options to officers,
directors, other key employees and consultants of the Company to
purchase up to an aggregate of 1,500,000 shares of Common Stock. The
1996 Plan may be administered by the Board of Directors or a committee
thereof, and is currently administered by the Board of Directors, which
has complete discretion to select the optionees and to establish the
terms and conditions of each option, subject to the provisions of the
1996 Plan. Notwithstanding the foregoing, grants of options to
executive officers may be made only by a committee of directors who
qualify as "outside directors" within the meaning of Section 162(m) of
the Code. Options granted under the 1996 Plan may be "incentive stock
options" as defined in Section 422 of the Code, or nonqualified options,
and will be designated as such.
The exercise price of incentive stock options may not be less than
100% of the fair market value of the Common Stock as of the date of
grant (110% of the fair market value if the grant is to an employee who
owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). The Code currently limits to $100,000
the aggregate value of Common Stock that may be acquired in any one year
pursuant to incentive stock options under the 1996 Plan or any other
option plan adopted by the Company. Nonqualified options may be granted
under the 1996 Plan at an exercise price not less than 85% of the fair
market value of the Common Stock on the date of grant. Nonqualified
options also may be granted without regard to any restriction on the
amount of Common Stock that may be acquired pursuant to such options in
any one year.
In general, upon termination of employment of an optionee, all
options granted to such person which were not exercisable on the date of
such termination would immediately terminate, and any options that are
exercisable would terminate 90 days (six months in the case of
termination by reason of death or disability) following termination of
employment.
Options may not be exercised more than ten years after the grant
(five years after the grant if the grant is an incentive stock option to
an employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the Company). Options granted under the
1996 Plan are not transferable and may be exercised only by the
respective grantees during their lifetime or by their heirs, executors
or administrators in the event of death. Under the 1996 Plan, shares
subject to cancelled or terminated options are reserved for subsequently
granted options. The number of options outstanding and the exercise
price thereof are subject to adjustment in the case of certain
transactions such as mergers, recapitalizations, stock splits or stock
dividends. The 1996 Plan is effective for ten years, unless sooner
terminated or suspended. The 1996 Plan provides that options covering
no more than 500,000 shares of Common Stock may be granted to any one
employee in any twelve month period.
During the fiscal year ended March 31, 1998, options to purchase
1,190,376 shares of Common Stock were granted under the 1996 Plan
(excluding 759,500 shares which were granted but then subsequently
cancelled under the Company's Repricing Offer). As of October 31, 1998
there were 622,261 options available for grant under the 1996 Plan.
1997 Employee Stock Purchase Plan
On July 31, 1997, the Company's Board of Directors adopted the
1997 Employee Stock Purchase Plan (the "1997 Plan"). The 1997 Plan was
approved by the Company's stockholders in September 1997. The 1997 Plan
is designed to provide eligible employees of the Company and its
participating subsidiaries (collectively "Participating Companies")
with added incentive to continue in the employment of the Participating
Companies by permitting them to purchase shares of Common Stock on a
discounted basis through payroll withholding. The 1997 Plan became
effective on the first day immediately following the date of its
approval by the Company's stockholders.
The 1997 Plan may be administered by the Board of Directors or a
committee thereof consisting of at least three persons (the
"Committee"), at least one of whom must be a member of the Company's
Board of Directors. The Committee has the authority to interpret the
1997 Plan and to establish rules and regulations thereunder.
Up to 500,000 shares of Common Stock in the aggregate may be
purchased under the 1997 Plan, subject to adjustment in the event of a
stock dividend, stock split or combination of shares.
Participation under the 1997 Plan is open to all active employees
of the Participating Companies, except (i) employees who have not been
continuously employed by the Participating Companies for at least two
years, (ii) employees whose customary employment by the Participating
Companies is less than 20 hours per week, or (iii) employees whose
customary employment by the Participating Companies is five months or
less in any calendar year. Employees who, immediately upon enrollment
in the Plan, would, together with certain relatives, own more than 5% of
the total combined voting power or value of all classes of stock of the
Company or any subsidiary corporation thereof are not eligible.
Payment for shares of Common Stock is to be made in installments
through payroll deductions over the 1997 Plan's designated offering
period (the "Offering Period").
Each eligible employee may enroll in the 1997 Plan as of the first
day of the Offering Period following the date which is ten days after
such employee first becomes eligible to participate in the 1997 Plan or
as of the first day of any subsequent Offering Period (or as of the
first day of each three month period ending on the close of a calendar
quarter during and within an Offering Period (an "Interim Offering Period").
Each eligible employee may authorize payroll deductions under the
1997 Plan in an amount not to exceed 10% of the participant's
compensation (before withholding or other deductions). For purposes of
the 1997 Plan, "compensation" means the annual base rate of pay,
determined by the Board of Directors (including commissions, but
exclusive of bonuses and certain other fringe benefits).
As of the last day of each Interim Offering Period, funds credited
to each participant's account will be applied to the purchase of whole
shares of Common Stock. No interest will be paid on amounts held in a
participant's account. The purchase price per share of Common Stock
under the 1997 Plan for any Offering Period shall be 85% of the fair
market value of the Common Stock on the first business day or the last
business day of such Offering Period, whichever is less.
1998 Stock Option Plan
In May 1998, the Board of Directors approved the Company's 1998
Stock Option Plan (the "1998 Plan"). For a description of the 1998
Plan, see "PROPOSAL TO APPROVE THE COMPANY'S 1998 STOCK OPTION PLAN."
Certain Transactions
In October 1996, the Company acquired all of the outstanding
capital stock of ViComp Technology, Inc. ("ViComp") for 491,253 shares
(the "Acquisition Shares") of Common Stock (the "ViComp
Acquisition"). Dr. Edmund Y. Sun, the Company's Chairman of the Board
and Chief Technology Officer, was a cofounder of ViComp and owned 57.3%
of the outstanding capital stock of ViComp (for which he had paid a
total of $1,000,000 in September 1995 and January 1996) at the time of
the ViComp Acquisition. The Company issued to Dr. Sun 281,520 shares of
Common Stock for his ViComp capital stock in the ViComp Acquisition
(57.3% of the total 491,253 shares of Common Stock issued in the ViComp
Acquisition).
Of the 281,520 Acquisition Shares issued to Dr. Sun, 140,760 were
deposited into an escrow and are subject to forfeiture and cancellation
under certain circumstances and may not be publicly resold until
released from such escrow. The remaining of 140,760 Acquisition Shares
issued to Dr. Sun were subject to a performance escrow relating to
ViComp and were cancelled under that escrow because certain milestones
were not reached by July 1997.
The ViComp Acquisition was unanimously approved by the
disinterested members of the Company's Board of Directors, and the
Company's Board of Directors was advised by Sutter Securities
Incorporated that the ViComp Acquisition is fair from a financial point
of view to the Company's stockholders other than Dr. Sun.
The Company borrowed $1,000,000 from Dr. Sun in June 1998. Under
the terms of the loan agreement between the Company and Dr. Sun, the
loan from Dr. Sun was converted into 1,331,479 shares of Common Stock in
July 1998 at a price of $0.7566 per share (100% of the average closing
price of the Company's common stock over the five trading days following
the Company's issuance of a press release on June 30, 1998 describing
the Company's earnings for fiscal 1998). Dr. Sun was granted
registration rights covering those shares.
In June 1998, the Company acquired an exclusive, perpetual,
worldwide, royalty free license to DVD-ROM technology owned by Hyundai
in exchange for 2,000,000 shares of Common Stock. In addition, the
Company, through a newly formed, wholly owned subsidiary, DVS Korea,
completed the acquisition of DVD-ROM manufacturing capabilities, a
related research and development team and management from Hyundai for
$1,000,000 in cash. The Company obtained a fairness opinion from
Houlihan Lokey Howard & Zukin Financial Advisors, Inc., a nationally
recognized independent valuation firm, with respect to the fairness of
the financial terms of the transaction to the Company.
In March 1996, the Company entered into an employment agreement
with Dr. Sun. During the fiscal year ended March 31, 1998, the Company
entered into employment agreements with the following executive
officers: Thomas R. Parkinson, Edward M. Miller, Robert Werbicki, Gary
Franza and David Keller. See "ELECTION OF DIRECTORS - Employment and
Consulting Agreements."
In August 1997, Mr. Werbicki sold substantially all of the assets
of Synchrome Technology, Inc. to the Company for $753,000 and became an
officer of the Company at that time. Pursuant to the purchase agreement,
Mr. Werbicki received an additional cash payment of $125,000 in February
1998, and the Company expects to make another cash payment of $125,000
when certain conditions are met pursuant to the purchase agreement.
Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of October 31,
1998, by (i) each person who is known by the Company to own beneficially
more than 5% of any class of the Company's voting securities; (ii) each
of the Company's directors and director nominees; (iii) each of the
Named Executive Officers; and (iv) all executive officers, directors and
director nominees of the Company as a group.
<TABLE>
<CAPTION>
Percentage
Amount and of
Nature of Outstanding
Title Beneficial Common Stock
Name and Address(1) of Class Ownership(2) Owned
- -------------------------------------------------- --------------- -----------
<S> <C> <C>
1. Dr. Edmund Y. Sun.................Common 9,079,828 (3) 37.0%
2. Thomas R. Parkinson...............Common 206,250 (4) *
3. Edward M. Miller..................Common 61,124 (5) *
4. Sung Hee Lee......................Common 31,248 (6) *
5. Philip B. Smith...................Common 149,246 (7) *
6. Sanford C. Sigoloff...............Common 97,877 (8) *
7. Young Sam Cho.....................Common 249 (9) *
8. Cary S. Fitchey...................Common 4,166 (10) *
9. Robert Werbicki...................Common 23,437 (11) *
10. Gary Franza.......................Common 29,296 (12) *
11. David Keller......................Common 13,750 (13) *
Hyundai Electronics Industries Common 5,896,999 (14) 24.2%
Company, Ltd.
10th Floor, Boram Building
705-19, Yeeksam-dong
Kongnam-Ku, Seoul, Korea
Oregon Power Lending Institution Common 2,000,000 (15) 7.3%
357 Castro Street, Suite 2 Preferred 2,000 (16) 100.0%
Mountain View, CA
All executive officers and directors and
director nominees as a group (11 persons)..... 39.8%
</TABLE>
(1) Except as otherwise indicated, the address of each stockholder is
c/o the Company at 160 Knowles Drive, Los Gatos, California 95032.
(2) Includes shares of Common Stock placed into an escrow by such
individual or entity in connection with the IPO. See "Escrow
Securities." Nature of beneficial ownership of securities is
direct and arises from sole voting power and sole investment power,
subject to community property laws where applicable. Shares
underlying options to purchase Common Stock exercisable within 60
days of October 31, 1998 are deemed to be outstanding for purposes
of calculating the number of shares owned by the holders of such
options.
(3) Includes 140,760 shares of Common Stock acquired by Dr. Sun in the
ViComp Acquisition, all of which have been deposited in escrow and
are subject to cancellation in certain circumstances. Also includes
280,334 shares owned by Dr. Sun's sons and 21,564 shares owned by
Dr. Sun's sister. Also includes options to purchase 66,666 shares
of Common Stock. Excludes options to purchase 333,334 shares of
Common Stock which are not exercisable within 60 days.
(4) Represents options to purchase 206,250 shares of Common Stock.
(5) Includes options to purchase 52,184 shares of Common Stock.
Excludes options to purchase 297,816 shares of Common Stock which
are not exercisable within 60 days.
(6) Includes options to purchase 31,248 shares of Common Stock.
Excludes options to purchase 218,752 shares of Common Stock which
are not exercisable within 60 days.
(7) Includes options to purchase 120,646 shares of Common Stock.
Excludes options to purchase 115,962 shares of Common Stock which
are not exercisable within 60 days.
(8) Represents options to purchase 97,877 shares of Common Stock.
Excludes options to purchase 138,731 shares of Common Stock which
are not exercisable within 60 days.
(9) Although Mr. Cho has been nominated by Hyundai to serve as a
director if elected, he does not have any right to vote or dispose
of the shares owned by Hyundai. Includes options to purchase 249
shares of Common Stock. Excludes options to purchase 1,751 shares
of Common Stock not exercisable within 60 days.
(10) Represents options to purchase 4,166 shares of Common Stock.
Excludes options to purchase 95,834 shares of Common Stock which are
not exercisable within 60 days.
(11) Represents options to purchase 23,437 shares of Common Stock.
Excludes options to purchase 51,564 shares of Common Stock which are
not exercisable within 60 days.
(12) Represents options to purchase 29,296 shares of Common Stock.
Excludes options to purchase 64,454 shares of Common Stock which are
not exercisable within 60 days.
(13) Represents options to purchase 13,750 shares of Common Stock.
(14) Mong Hun Chung is the Chairman and largest individual shareholder of
Hyundai and may be considered a beneficial owner of such shares.
(15) Represents options to purchase 2,000,000 shares of Common Stock,
which will become exercisable only if shareholder approval of
Proposal 4 is received. The terms of the Investment Agreement also
call for the issuance of additional options to purchase 1,000,000
shares of Common Stock, subject to shareholder approval of Proposal 4.
(16) OPLI paid for such shares prior to October 31, 1998 and, therefore,
had the right to receive such shares at such time, but the actual
shares were issued in early November. OPLI also has the right
pursuant to the Investment Agreement to purchase up to 7,000
additional shares of Preferred Stock and to convert the Demand Note
into 1,000 shares of Preferred Stock if shareholder approval of
Proposal 4 is received. The number of shares of Preferred Stock
which may be purchased is based on an assumed price of $1,000 per share.
Escrow Securities
In connection with the IPO and through March 31, 1998, the holders
of Common Stock and options to purchase Common Stock placed 8,086,321
shares (the "Escrow Shares") and options to purchase 1,985,656 shares
(the "Escrow Options"), and the Company had placed, through March 31,
1998, options issuable under the 1993 Plan to purchase 28,023 shares of
Common Stock (together with the Escrow Options and the Escrow Shares,
the "Escrow Securities") into escrow pursuant to an escrow agreement
(the "Escrow Agreement") with American Stock Transfer & Trust Company,
as escrow agent. The Escrow Securities are not assignable or
transferable; however, the Escrow Shares may be voted by the holders
thereof. Holders of any options in escrow may exercise their options
prior to their release from escrow; however, the shares issuable upon
any such exercise will continue to be held in escrow as Escrow Shares
pursuant to the Escrow Agreement.
All or a portion of the Escrow Securities may be released from
escrow based on the Company's Minimum Pretax Income amounts (as defined
and set forth below) or the trading price of the Company's Common Stock.
The Minimum Pretax Income amounts (i) shall be calculated exclusively of
any extraordinary earnings, including, but not limited to, any charge to
income resulting from the release of the Escrow Securities; and (ii)
shall be increased from the amounts established at the time of the IPO
proportionately, with certain limitations, in the event additional
shares of Common Stock or securities convertible into, exchangeable for
or exercisable into Common Stock are issued after the IPO. The Minimum
Pretax Income amounts as originally established at the time of the IPO
are described below.
Of the Escrow Securities, one-half (representing 5,050,000 shares
of issued or issuable shares of Common Stock) will be released from
escrow, on a pro rata basis, if, and only if, one or more of the
following conditions are met (none of such conditions having been met to
date):
(i) the Company's net income before provision for income taxes
and exclusive of any extraordinary earnings as audited and determined by
the Company's independent public accountants (the "Minimum Pretax
Income") amounts to at least $10.0 million for the fiscal year ended
March 31, 1997;
(ii) the Minimum Pretax Income amounts to at least $15.0 million
for the fiscal year ending March 31, 1998;
(iii) the Minimum Pretax Income amounts to at least $23.0
million for the fiscal year ending March 31, 1999;
(iv) the Minimum Pretax Income amounts to at least $31.0 million
for the fiscal year ending March 31, 2000;
(v) the Minimum Pretax Income amounts to at least $39.0 million
for the fiscal year ending March 31, 2001;
(vi) commencing on May 9, 1996 and ending 18 months thereafter,
the bid price of the Company's Common Stock averages in excess of $24.00
per share (subject to adjustment in the event of any reverse stock
splits or other similar events) for 60 consecutive business days;
(vii) commencing November 9, 1997 and ending 36 months
thereafter, the bid price of the Company's Common Stock averages in
excess of $48.00 per share (subject to adjustment in the event of any
reverse stock splits or other similar events) for 90 consecutive
business days; or
(viii) during the periods specified in (vi) or (vii) above,
the Company is acquired by or merged into another entity in a
transaction in which the value of the per share consideration received
by the stockholders of the Company on the date of such transaction or at
any time during the applicable period set forth in (vi) or (vii),
respectively, equals or exceeds the applicable levels set forth in (vi)
or (vii), respectively.
The remaining Escrow Securities (representing 5,050,000 shares of
issued or issuable shares of Common Stock) will be released from escrow,
on a pro rata basis, if, and only if, one or more of the following
conditions is met (none of such conditions having been met to date):
(i) the Minimum Pretax Income amounts to at least $15.0 million
for the fiscal year ended March 31, 1997;
(ii) the Minimum Pretax Income amounts to at least $21.0 million
for the fiscal year ending March 31, 1998;
(iii) the Minimum Pretax Income amounts to at least $32.0
million for the fiscal year ending March 31, 1999;
(iv) the Minimum Pretax Income amounts to at least $42.0 million
for the fiscal year ending March 31, 2000;
(v) the Minimum Pretax Income amounts to at least $53.0 million
for the fiscal year ending March 31, 2001;
(vi) commencing on May 9, 1996 and ending 18 months thereafter,
the bid price of the Company's Common Stock averages in excess
of $48.00 per share (subject to adjustment in the event of any
reverse stock splits or other similar events) for 60
consecutive business days;
(vii) commencing November 9, 1997 and ending 36 months
thereafter, the bid price of the Company's Common Stock
averages in excess of $96.00 per share (subject to adjustment
in the event of any reverse stock splits or other similar
events) for 90 consecutive business days; or
(viii) during the periods specified in (vi) or (vii) above,
the Company is acquired by or merged into another entity in a
transaction in which the value of the per share consideration
received by the stockholders of the Company on the date of
such transaction or at any time during the applicable period
set forth in (vi) or (vii), respectively, equals or exceeds
the applicable levels set forth in (vi) or (vii), respectively.
The bid price amounts set forth above are subject to adjustment in
the event of any stock splits, reverse stock splits or other similar
events.
Holders of Escrow Securities have agreed not to sell, transfer,
hypothecate, negotiate, pledge, assign, encumber or otherwise dispose of
any or all of the Escrow Securities unless and until (A) the Company
shall have given notice that the conditions for the release of the
Escrow Securities set forth in Paragraphs (a) and (b) above are met, or
(B) such disposition is (i) proposed in connection with an agreement by
which the Company is to be acquired by or merged into another entity in
which the consideration paid by the acquiror per share of the Company's
stock is no less than 80% of the minimum consideration required by
Paragraphs (a)(vi) and (vii) above as to a disposition of up to 50% of
the Escrow Securities or by Paragraphs (b)(vi) and (vii) above as to a
disposition of up to 100% of the Escrow Securities and (ii) approved by
at least 80% of the votes cast, in person or by proxy, by holders of the
Common Stock eligible to vote on such matter excluding the shares held
by the holders of the Escrow Securities, provided that the holders of at
least 50% of the Common Stock (excluding the shares held by the holders
of the Escrow Securities) actually vote on such matter, in person or by
proxy, or are present, in person or by proxy, at the meeting at which
the vote takes place. If the Company is acquired by or merges into
another company that thereafter owns all of the outstanding stock of the
Company except for the Escrow Securities, at any time from and after the
consummation of the merger or acquisition, holders of Escrow Securities
desiring to dispose of their Escrow Securities will be permitted to do
so if the acquiror gives notice as to conditions being met in Paragraphs
(a) and (b) above or consents in writing to the disposition, but no vote
or consent of the former stockholders of the Company will be required.
Any money, securities, rights or property distributed in respect
of the Escrow Securities, including any property distributed as
dividends or pursuant to any stock split, merger, recapitalization,
dissolution, or total or partial liquidation of the Company, shall be
held in escrow until release of the Escrow Securities. If none of the
applicable Minimum Pretax Income or bid price levels set forth above
have been met by July 15, 2001, the Escrow Securities, as well as any
dividends or other distributions made with respect thereto, will be
cancelled and contributed to the capital of the Company. The Company
expects that the release of the Escrow Securities to officers,
directors, employees and consultants of the Company will be deemed
compensatory and, accordingly, will result in a substantial charge to
reportable earnings, which would equal the fair market value of such
shares on the date of release. Such charge could substantially increase
the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period or periods during which such shares
are, or become probable of being, released from escrow. Although the
amount of compensation expense recognized by the Company will not affect
the Company's total shareholders' equity, it may have a negative effect
on the market price of the Company's securities.
The Minimum Pretax Income and bid price levels set forth above
were determined by negotiation between the Company and the Underwriter
of the IPO prior to the IPO and should not be construed to imply or
predict any future earnings by the Company or any increase in the market
price of its securities.
Potential Change of Control
Although the Company does not believe that the securities
issuances by the Company in the First Closing constitute a "change in
control" under the Nasdaq rules, if OPLI were to invest the maximum
amount permissible under the Investment Agreement and exercise the
Options, OPLI would become the largest shareholder of the Company and
would likely have the ability to control the Company. In the event a
change of control occurs as a result of the transactions contemplated by
the Investment Agreement, the approval sought hereby would also be
effective to satisfy the shareholder vote required thereby.
PROPOSAL 2 -
PROPOSAL TO APPROVE COMPANY'S 1998 STOCK OPTION PLAN
In May 1998, the Board of Directors unanimously adopted the
Company's 1998 Stock Option Plan (the "1998 Plan") in order to retain
the services of qualified officers, directors, employees and
consultants, and to provide such persons with benefits comparable to
those provided by corporations similar to the Company. The 1998 Plan
provides for the grant of options to officers, directors, other
employees and consultants of the Company to purchase up to an aggregate
of 4,000,000 shares of Common Stock. The 1998 Plan may be administered
by the Board of Directors or a committee thereof, and is currently
administered by the Board of Directors, which has complete discretion to
select the optionees and to establish the terms and conditions of each
option, subject to the provisions of the 1998 Plan. Options granted
under the 1998 Plan may be "incentive stock options" as defined in
Section 422 of the Code, or nonqualified options, and will be designated
as such.
The exercise price of incentive stock options may not be less than
the fair market value of the Common Stock as of the date of grant (110%
of the fair market value if the grant is to an employee who owns more
than 10% of the total combined voting power of all classes of capital
stock of the Company). The Code currently limits to $100,000 the
aggregate value of Common Stock that may become exercisable for the
first time in any one year pursuant to incentive stock options under the
1998 Plan or any other option plan adopted by the Company. Nonqualified
options may be granted under the 1998 Stock Option Plan at an exercise
price not less than 85% of the fair market value of the Common Stock on
the date of grant. Nonqualified options also may be granted without
regard to any restriction on the amount of Common Stock that may become
exercisable pursuant to such options in any one year.
In general, upon termination of employment of an optionee, all
options granted to such person which were not exercisable on the date of
such termination would immediately terminate, and any options that are
exercisable would terminate 90 days (six months in the case of
termination by reason of death or disability) following termination of
employment.
Options may not be exercised more than ten years after the grant
(five years after the grant if the grant is an incentive stock option to
an employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the Company). Options granted under the
1998 Plan are not transferable and may be exercised only by the
respective grantees during their lifetime or by their heirs, executors
or administrators in the event of death. Under the 1998 Plan, shares
subject to options that have been cancelled or terminated are available
for subsequently granted options. The number of options outstanding and
the exercise price thereof are subject to adjustment in the case of
certain transactions such as recapitalizations, stock splits or stock
dividends. The 1998 Plan is effective for ten years, unless sooner
terminated or suspended. The 1998 Plan provides that options covering
no more than 750,000 shares of Common Stock may be granted to any one
employee in any twelve month period.
Certain Federal Income Tax Consequences 1998 Plan
Incentive stock options under the 1998 Plan are afforded favorable
federal income tax treatment under the Code. If an option is treated as
an incentive stock option, the optionee will recognize no income upon
grant or exercise of the option unless the alternative minimum tax rules
apply. Upon an optionee's sale of the shares (assuming that the sale
occurs at least two years after grant of the option and at least one
year after exercise of the option), any gain will be taxed to the
optionee as long-term capital gain. If the optionee disposes of the
shares prior to the expiration of the above holding periods, then the
optionee will recognize ordinary income in an amount generally measured
as the difference between the exercise price and the lower of the fair
market value of the shares at the exercise date or the sale price of the
shares. Any gain or loss recognized on such a premature sale of the
shares in excess of the amount treated as ordinary income will be
characterized as capital gain or loss.
All other options granted under the 1998 Plan are nonstatutory
stock options and will not qualify for any special tax benefits to the
optionee. An optionee will not recognize any taxable income at the time
he or she is granted a nonstatutory stock option. However, upon
exercise of the nonstatutory stock option, the optionee will recognize
ordinary income for federal income tax purposes in an amount generally
measured as the excess of the then fair market value of each share over
its exercise price. Upon an optionee's resale of such shares, any
difference between the sale price and the fair market value of such
shares on the date of exercise will be treated as capital gain or loss
and will generally qualify for long-term capital gain or loss treatment
if the shares have been held for more than one year. Recently enacted
legislation provides for reduced tax rates for long-term capital gains
based on the taxpayer's income and the length of the taxpayer's holding period.
Subject to the limits on deductibility of employee remuneration
under Section 162(m) of the Code, the Company will generally be entitled
to a tax deduction in the amount that an optionee recognizes as ordinary
income with respect to an option. Options granted to executive officers
under the 1998 Plan are intended to qualify as performance-based
compensation for purposes of Section 162(m) of the Code, and the Company
will generally be entitled to a tax deduction in the amount recognized
by such officers upon exercise of the options. No tax authority or
court has ruled on the applicability of Section 162(m) to the 1998 Plan
and any final determination of the deductibility of amounts realized
upon exercise of an option granted under the 1998 Plan could ultimately
be made by the Internal Revenue Service or a court having final
jurisdiction with respect to the matter. The Company retains the right
to grant options under the 1998 Plan in accordance with the terms of the
1998 Plan regardless of any final determination as to the applicability
of Section 162(m) of the Code to these grants.
The foregoing does not purport to be a complete summary of the
federal income tax considerations that may be relevant to holders of
options or to the Company. It also does not reflect provisions of the
income tax laws of any municipality, state or foreign country in which
an optionee may reside, nor does it reflect the tax consequences of an
optionee's death.
Vote Required; Board Recommendation
Approval of this Proposal 2 is being sought to comply with listing
requirements imposed in connection with the Company's listing on the
Nasdaq National Market. Approval of the proposal requires the
affirmative vote of a majority of the total votes cast on the proposal
at the meeting, in person or by proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION
AND ADOPTION OF THE 1998 PLAN.
PROPOSAL 3 -
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Ernst & Young LLP as
independent auditors of the Company's financial statements for the
fiscal year ending March 31, 1999 subject to ratification by the
stockholders. Ernst & Young LLP has served as independent auditors of
the Company's financial statements for the fiscal years ended December
31, 1995, for the three months ended March 31, 1996 and for the fiscal
years ended March 31, 1997 and March 31, 1998. A representative of
Ernst & Young LLP will be available at the Annual Meeting to respond to
appropriate questions or make other statements such representative deems
appropriate.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING MARCH 31, 1999.
PROPOSAL 4 -
APPROVAL OF PRIVATE PLACEMENT AND ISSUANCES OF SECURITIES
At the Annual Meeting, the Company's shareholders will consider
and vote upon a proposal to approve the transactions contemplated by the
Investment Agreement and to approve the convertibility of the Demand
Note (as defined below) and any additional demand notes with
substantially similar terms which may be issued in connection with the
Third Closing and the issuance of Common Stock upon conversion thereof.
By voting in favor of this Proposal 4, the Company's shareholders will
be deemed to have approved the following matters (the "Proposal 4
Matters"): (i) the Investment Agreement to the extent it can result in
the issuance of an amount of Common Stock (or securities convertible
into Common Stock) equal to 20% or more of the Common Stock outstanding
before the issuance or 20% or more of the voting power outstanding
before the issuance, (ii) the transactions contemplated by the
Investment Agreement and the terms of the Options, (iii) the issuance by
the Company, in accordance with the terms of the Investment Agreement,
of up to the maximum number of shares of Preferred Stock issuable in the
Second, Third and Subsequent Closings under the Investment Agreement,
the Options and shares of Common Stock in connection with the conversion
of such Preferred Stock and the exercise of the Options and (iv) the
convertibility of the Demand Note (as defined below) and any additional
demand notes with substantially similar terms which may be issued in
connection with the Third Closing and the issuance of Common Stock upon
conversion thereof. See "- Background."
Background
THE DESCRIPTION OF THE PRIVATE PLACEMENT (AS DEFINED BELOW),
INVESTMENT AGREEMENT, PREFERRED STOCK AND DEMAND NOTE CONTAINED IN THIS
PROPOSAL 4 DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF ALL TERMS
RELATED THERETO, AND THE DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE INVESTMENT AGREEMENT, A COPY OF WHICH IS ATTACHED AS
ANNEX I TO THIS PROXY STATEMENT, THE FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF THE COMPANY (THE "CERTIFICATE"), A COPY
OF WHICH IS ATTACHED AS ANNEX II TO THIS PROXY STATEMENT AND THE DEMAND
NOTE, A COPY OF WHICH IS ATTACHED AS ANNEX III TO THIS PROXY STATEMENT,
AND WHICH ARE INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF THE
COMPANY ARE URGED TO READ CAREFULLY THE DOCUMENTS ATTACHED AS ANNEX I,
ANNEX II AND ANNEX III HERETO IN THEIR ENTIRETY FOR A MORE COMPLETE
DESCRIPTION OF THE PRIVATE PLACEMENT, INVESTMENT AGREEMENT, PREFERRED
STOCK AND DEMAND NOTE AND THE RIGHTS OF THE SHAREHOLDERS OF THE COMPANY
AND THE HOLDERS OF THE PREFERRED STOCK, OPTIONS AND DEMAND NOTE
THEREUNDER.
On November 3, 1998, the Company and OPLI entered into the
Investment Agreement, effective as of October 15, 1998, pursuant to
which the Company agreed to consummate a private placement (the "Private
Placement") the basic terms of which are as follows: (i) at a closing
consummated prior to the date hereof (the "First Closing"), the Company
issued to OPLI Preferred Stock with a face value of $2,000,000 and
Options to purchase 2,000,000 shares of Common Stock at an exercise
price of $0.75 per share, in exchange for the payment by OPLI of a
purchase price of $2,000,000, (ii) at a closing to be consummated in
November (the "Second Closing"), OPLI agreed to purchase and the
Company agreed to issue shares of Preferred Stock of the Company with a
minimum face value of $1,000,000 and a maximum face value of $2,000,000
(at OPLI's option) and additional options to purchase 1,000,000 shares
of Common Stock at an exercise price of $0.75 per share, in exchange for
the payment by OPLI of a purchase price equal to the face value of the
Preferred Stock purchased, (iii) OPLI has the option to acquire, during
the month of December 1998 (the "Third Closing"), up to $2,000,000 face
value of Preferred Stock and (iv) OPLI has the option to acquire, on or
before April 30, 1999 (the "Subsequent Closings") up to $4,000,000 face
value of Preferred Stock in two $2,000,000 tranches, in exchange for the
payment of a purchase price equal to the face value of the Preferred
Stock, which purchase price will be paid 50% in cash and 50% in letters
of credit issued to suppliers of the Company. The Second, Third and
Subsequent Closings are contingent upon Shareholder approval of the
Proposal 4 matters. In addition, the Options issued in the First
Closing are only exercisable if the Proposal 4 matters are approved by
the shareholders. Because the Second Closing was scheduled to take
place in November, and because the Annual Meeting will not occur until
January, the Company issued a demand promissory note to OPLI (the
"Demand Note") in the principal amount of $1,000,000, in lieu of the
amount of Preferred Stock OPLI was required to buy in the Second
Closing. The Company currently intends to extend the time period in to
which OPLI can make any additional investments as part of the Second
Closing to a reasonable time after the Annual Meeting. If OPLI so
requests, the Company also intends to extend the time period during
which OPLI can make additional investments as part of the Third Closing
or issue additional demand notes with substantially similar terms to the
Demand Note for all or part of the Preferred Stock which would be
issuable at the Third Closing. The proceeds from the sale of the Demand
Note, equal to the principal amount thereof, will be used by the Company
to satisfy its working capital requirements. The Demand Note will
become convertible into Preferred Stock with a face value equal to the
principal amount of the Demand Note, plus accrued and unpaid interest,
upon receipt of shareholder approval of the Proposal 4 Matters. The
Demand Note earns interest at a rate of 10% per annum. OPLI has
informed the Company that it intends to convert the Demand Note to
Preferred Stock immediately following approval of the Proposal 4
Matters, however it is under no obligation to do so. The issuance of
the securities to OPLI is being conducted as a private offering pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
The Company sold securities in the Private Placement in order to
obtain funds to meet its cash flow requirements, to fund inventory
purchases and to meet short-term purchase and other obligations.
Why The Company Is Requesting Shareholder Approval Of The Proposal 4 Matters
The Company is requesting that its shareholders approve the
Proposal 4 Matters because certain rules of the Nasdaq National Market
("Nasdaq") applicable to the Company require that the Company obtain
the approval of its shareholders before the issuance of Common Stock (or
securities convertible into Common Stock) constituting or having voting
power equal to or greater than 20% of the outstanding Common Stock, at a
price per share below the greater of the market or book value of such
stock. In connection with the conversion of the Preferred Stock and the
Demand Note and any additional demand notes with substantially similar
terms, and the exercise of the Options, shares of Common Stock may be
issued at a price per share below the greater of the market or book
value of such Common Stock and the amount and voting power of such
shares may exceed 20% of the outstanding Common Stock. Accordingly, the
Company is required under the Nasdaq rules to obtain the approval of its
shareholders of such issuances of securities. See "-- Nasdaq Listing
Obligation."
Investment Agreement
Pursuant to the terms of the Investment Agreement: (i) at the
First Closing, the Company issued Preferred Stock with a face value of
$2,000,000 and Options to purchase 2,000,000 shares of Common Stock at
an exercise price of $0.75 per share, in exchange for the payment by
OPLI of a purchase price of $2,000,000, (ii) the Company agreed to
issue, at the Second Closing, shares of Preferred Stock of the Company
with a minimum face value of $1,000,000 and a maximum face value of
$2,000,000 (at OPLI's option) and additional options to purchase
1,000,000 shares of Common Stock at an exercise price of $0.75 per
share, in exchange for the payment by OPLI of a purchase price equal to
the face value of the Preferred Stock purchased, (iii) the Company
agreed to issue (at OPLI's option), at the Third Closing, up to
$2,000,000 face value of Preferred Stock and (iv) the Company agreed to
issue (at OPLI's option), at the Subsequent Closings, up to $4,000,000
face value of Preferred Stock in two $2,000,000 tranches. All purchases
of Preferred Stock are to be made for cash, other than at the Subsequent
Closings, where the purchase price will be paid 50% in cash and 50% in
letters of credit issued to suppliers of the Company. Because the
Second Closing was scheduled to take place in November, and because the
Annual Meeting will not occur until January, the Company issued the
Demand Note to OPLI, in lieu of the amount of Preferred Stock OPLI was
required to buy in the Second Closing. The Company currently intends to
extend the time period in to which OPLI can make any additional
investments as part of the Second Closing to a reasonable time after the
Annual Meeting. The Demand Note will become convertible into Preferred
Stock with a face value equal to the principal amount of the Demand
Note, plus accrued and unpaid interest, upon receipt of shareholder
approval of the Proposal 4 Matters. If OPLI so requests, the Company
also intends to extend the time period during which OPLI can make
additional investments as part of the Third Closing or issue additional
demand notes with substantially similar terms to the Demand Note for all
or part of the Preferred Stock which would be issuable at the Third
Closing. See "- Background - Preferred Stock, - Options and - Demand Notes."
In connection with the sale and issuance of the Company's
securities pursuant to the Investment Agreement, the Company agreed to
file with the U.S. Securities and Exchange Commission (the "SEC") a
registration statement to permit the public sale of shares of Common
Stock issuable upon the conversion of the Preferred Stock and the
exercise of the Options within 60 days following the date of the first
conversion of the Preferred Stock. The Company currently intends to
also include the shares of Common Stock issuable upon the conversion of
the Demand Note in such registration. See "- Registration Rights."
Also pursuant to the Investment Agreement, the Company has granted
OPLI a right of first refusal to participate in future financings. The
right of first refusal will become exercisable at such time, within
eighteen months of the First Closing, that OPLI has converted at least
50% of all of the Preferred Stock issued in the First, Second, and Third
Closings and upon the conversion of the Demand Note (if it becomes
convertible). If at least 50% of the Preferred Stock issued in the
First, Second and Third Closings is not converted within eighteen months
of the First Closing, the right of first refusal will never become
effective. The right of first refusal provides that OPLI shall have the
right to purchase any securities offered to be purchased by a third
party investor on the same terms as offered by the third party investor.
The Company also agreed in the Investment Agreement to use its
best efforts to modify its current capital structure by eliminating, to
the extent reasonably possible, its outstanding Class A Warrants and
Class B Warrants. The Company has the option of determining how to
attempt to eliminate the Warrants and currently intends to do so by
offering the holders of such warrants the opportunity to exchange them
for shares of Common Stock in a registered public offering.
The Second, Third and Subsequent Closings are all contingent upon
the approval of the shareholders of the Company of the Proposal 4
Matters. The exercisability of the Option issued in the First Closing
is also contingent upon such approval. The Demand Note was issued in
lieu of the $1,000,000 face value of Preferred Stock which OPLI was
required to buy in the Second Closing, such that OPLI now has the
option, but not the obligation, to buy up to $1,000,000 face value of
Preferred Stock in the Second Closing. The Company currently intends to
extend the time period in to which OPLI can make any additional
investments as part of the Second and Third Closings to a reasonable
time after the Annual Meeting. If OPLI determines to purchase Preferred
Stock in the Second Closing, such closing will likely take place
immediately after shareholder approval is received. The Third Closing
is scheduled to take place during the month of December and the
Subsequent Closings will take place on or before April 30, 1998. If OPLI
so requests, the Company also intends to extend the time period during
which OPLI can make additional investments as part of the Third Closing
or issue additional demand notes with substantially similar terms to the
Demand Note for all or part of the Preferred Stock which would be
issuable at the Third Closing. The Second, Third and Subsequent
Closings will only take place if OPLI chooses to exercise its options to
purchase additional shares of Preferred Stock pursuant to the Investment
Agreement and there can be no assurances that OPLI will exercise its
option to purchase Preferred Stock in the Second, Third and Subsequent
Closings. In addition, there can be no assurances that the shareholder
approval upon which the Second, Third and Subsequent Closings are
conditioned will be received. If shareholder approval of the Proposal 4
Matters were not received and the holder of the Demand Note were to
demand payment, it is unlikely that the Company would have sufficient
financial resources to pay the Demand Note. See "- Consequences if
Shareholder Approval is Not Obtained."
Options
Pursuant to the terms of the Investment Agreement, the Company
issued to OPLI at the First Closing, Options to purchase 2,000,000
shares of Common Stock at an exercise price of $0.75 per share and the
Company agreed to issue to OPLI at the Second Closing, Options to
purchase 1,000,000 shares of Common Stock at an exercise price of $0.75
per share. The Options may be exercised at any time during the 24 month
period following the date of grant. The Options are transferable subject
to compliance with applicable securities laws. The terms of the Options
provide that, no holder thereof may receive shares of Common Stock upon
the exercise of the Options, unless shareholder approval of the Proposal
4 matters has been obtained.
Registration Rights
Pursuant to the terms of the Investment Agreement, the Company
agreed to file with the SEC a registration statement covering the shares
of Common Stock issuable upon the conversion of the Preferred Stock and
upon the exercise of the Options (collectively, the "Registrable
Securities") within 60 days following the first conversion of the
Preferred Stock into Common Stock.
Preferred Stock
Pursuant to the terms of the Investment Agreement, the Company has
already issued to OPLI $2,000,000 face value of Preferred Stock. In
addition, since the Company has issued OPLI the Demand Note in lieu of
the $1,000,000 of Preferred Stock it was required to purchase at the
Second Closing, OPLI now has the option, but not the obligation, to buy
up to $1,000,000 face value of Preferred Stock in the Second Closing.
The Company currently intends to extend the time period in to which OPLI
can make any additional investments as part of the Second Closing to a
reasonable time after the Annual Meeting. The 1,000,000 Options which
the Investment Agreement provided would be issued to OPLI at the Second
Closing, will be issued promptly after the Company receives shareholder
approval of the Proposal 4 Matters. At the Third Closing and at OPLI's
option, the Company will issue to OPLI shares of Preferred Stock with a
face value up to $2,000,000 and at the Subsequent Closings and at OPLI's
option, the Company will issue to OPLI shares of Preferred Stock with a
face value up to $4,000,000, in two tranches of up to $2,000,000 each.
If OPLI so requests, the Company also intends to extend the time period
during which OPLI can make additional investments as part of the Third
Closing or issue additional demand notes with substantially similar terms
to the Demand Note for all or part of the Preferred Stock which would be
issuable at the Third Closing. All purchases of Preferred Stock will be
made at a purchase price equal to the face value thereof. All purchases
of Preferred Stock are to be made for cash, other than at the Subsequent
Closings, where the purchase price will be paid 50% in cash and 50% in
letters of credit issued to suppliers of the Company. Attached to this
Proxy Statement as Annex I is the Investment Agreement and attached as
Annex II is the Certificate. The shareholders of the Company are urged
to review the Investment Agreement and the Certificate for a more complete
description of the terms of the Preferred Stock. Certain of the terms of
the Preferred Stock are described below.
Face Value, Dividends and Premium. The face value ("Face Value")
of the Preferred Stock is $1,000 per share. The Preferred Stock does not
bear dividends, but is entitled to share in any dividends paid to the
holders of Common Stock, pro rata, based on the number of shares of
Common Stock into which a share of Preferred Stock is convertible
immediately prior to the declaration of such dividend.
Redemption by the Company. The Company has no right to redeem the
Preferred Stock without the consent of the holders of the Preferred
Stock. The Certificate states that the Company and the holders of the
Preferred Stock may mutually agree in writing that the outstanding
Preferred Stock will be redeemed on October 31, 2001, for 125% of its
original Face Value. The Certificate does not preclude redemption
before or after such date or at any other price, nor does it give the
Company or the holders of the Preferred Stock the right to cause a
redemption at any time without the other's consent.
Optional Conversion. Shares of Preferred Stock may be converted
into shares of Common Stock at any time on or prior to October 31, 2001,
at the option of the holders thereof. Each share of Preferred Stock may
be converted into a number of shares of Common Stock equal to the face
value of the share of Preferred Stock ($1,000 for all the shares of
Preferred Stock issued in the First Closing) divided by the Conversion
Price. The Conversion Price is $0.47 and is subject to adjustment upon
the occurrence of certain events including stock splits, reverse stock
splits, reclassifications and dividends on the Common Stock consisting
of Common Stock or the right to receive Common Stock.
Mandatory Conversion. Outstanding shares of Preferred Stock
automatically will be converted into shares of Common Stock at the then-
effective Conversion Price upon the vote of holders of at least two-
thirds (2/3) of the outstanding Preferred Stock.
Reservation of Shares of Common Stock. The terms of the Preferred
Stock require the Company to reserve and keep available out of its
authorized but unissued shares of Common Stock, such number of shares of
Common Stock as from time to time shall be sufficient to effect the
conversion of all then outstanding Preferred Stock. If at any time the
number of authorized but unissued shares of Common Stock is not
sufficient, the Company is obligated to take such action, including the
solicitation of shareholder approval, as may be required to increase the
number of such shares so that it shall be sufficient to effect the
conversion of all then outstanding Preferred Stock.
Rank and Liquidation Preference. The Preferred Stock ranks prior
to the Common Stock as to the distribution of assets upon liquidation,
dissolution or winding up of the Company. Upon the occurrence of any
such event, the holders of the Preferred Stock will receive a
liquidation preference with respect to each share of Preferred Stock
equal to the Face Value thereof ($1,000) and such liquidation preference
will be paid by the Company prior to making distributions to any holders
of capital stock of the Company other than the holders of Preferred
Stock. Any assets and funds of the Company remaining available for
distribution following the payment of such liquidation preference will
be distributed to the holders of the Common Stock in proportion to the
number of shares of Common Stock held by each.
Voting Rights. Each holder of shares of Preferred Stock is
entitled to a number of votes equal to the number of shares of Common
Stock into which such shares of Preferred Stock could be converted.
Notwithstanding the foregoing, until the earlier of (i) such date when
less than 2,000 shares of Preferred Stock remain issued and outstanding
or (ii) October 31, 2001, the holders of the Preferred Stock, voting as
a separate class, shall be entitled to elect two (2) directors, and all
remaining directors shall be elected by the holders of Common Stock
voting together as a single class. In the case of any vacancy in the
office of a director occurring among the directors elected by a
specified group of stockholders, the remaining director or directors so
elected by such stockholders may, by affirmative vote of a majority
thereof elect a successor or successors to hold the office for the
unexpired term of the director or directors whose place or places shall
be vacant. Any director elected by the holders of the Preferred Stock
or Common Stock may be removed only by the affirmative vote of the
holders of a majority of the Preferred Stock or Common Stock, as the
case may be.
Demand Note
The Demand Note was issued to OPLI in lieu of the $1,000,000 face
value of Preferred Stock which OPLI was committed to purchase at the
Second Closing, in November 1998. The Demand Note was issued rather
than Preferred Stock due to the fact that the issuance of the Preferred
Stock would have required shareholder approval, which was not attainable
within the required time frame. The Demand Note has a principal amount
of $1,000,000, bears interest at a rate of 10% per annum and is payable
in full upon demand. If shareholder approval of the Proposal 4 Matters
is received, the Demand Note will become convertible into $1,000,000
face value of Preferred Stock. If the Proposal 4 Matters are not
approved, the Demand Note will not become convertible. If OPLI chooses
not to, or is unable to convert the Demand Note to Preferred Stock and
chooses to demand payment thereunder, it is unlikely that the Company
will have sufficient financial resources to pay the Demand Note.
Nasdaq Listing Obligation; Change Of Control
The Company's listing agreement regarding the trading of the
Common Stock on the Nasdaq National Market requires the Company to
comply with certain "non-quantitative designation criteria." These
criteria include the requirement that, with certain exceptions, issuers
whose securities are listed on the Nasdaq National Market obtain
shareholder approval before the issuance of Common Stock (or securities
convertible into Common Stock) having voting power equal to or greater
than 20% or more of the outstanding Common Stock at a price per share
below the greater of market or book value of such stock. Shareholder
approval is also required for transactions which result in a "change in
control." Although the Company does not believe that the securities
issuances by the Company in the First Closing constitute a "change in
control" under the Nasdaq rules, if OPLI were to invest the maximum
amount permissible under the Investment Agreement and exercise the
Options, OPLI would become the largest shareholder of the Company and
would likely have the ability to control the Company. In the event a
change of control occurs as a result of the transactions contemplated by
the Investment Agreement, the approval sought hereby would also be
effective to satisfy the shareholder vote required therefor. The
shareholders should consider carefully the fact that, if the Proposal 4
Matters are approved by the shareholders, the Investment Agreement may
give OPLI the right to gain effective control of the Company.
To assure continued compliance with the listing rules of the
Nasdaq National Market, the terms of the Investment Agreement provide
that the Second, Third and Subsequent Closings can only take place if
the approval sought hereby is obtained and that the option issued in the
first Closing is only exercisable if such approval is obtained. See "--
Consequences if Shareholder Approval is not Obtained."
The approval of the Proposal 4 Matters by the Company's
shareholders would result in the approval of the issuance by the Company
of shares of Preferred Stock, Options and shares of Common Stock upon
the conversion of the Preferred Stock and Demand Note and exercise of
the Options as described in this Proxy Statement and would free the
Company from the 20% limit under the Nasdaq rules with respect to the
transactions described herein. No further shareholder vote or approval
related to the transactions contemplated by the Investment Agreement
will be sought or required.
Possible Disadvantages Of Approving The Proposal 4 Matters
Potential for Dilution of Common Shareholders. If the Company's
shareholders approve the Proposal 4 Matters, the number of shares of
Common Stock that may be issued upon the conversion of the Preferred
Stock and the Demand Note, and any additional demand notes issued in
favor of OPLI with substantially similar terms in connection with the
Third Closing, and the exercise of the Options, assuming OPLI were to
invest the maximum amount permissible under the Investment Agreement,
would be approximately 24,276,595. To the extent the Conversion Price of
the Preferred Stock or the exercise price of the Options is less than
the net tangible book value of the outstanding shares of Common Stock,
the holders of such shares will suffer dilution to their net tangible
book value per share upon the conversion of the Preferred Stock or the
exercise of the Options. In addition, to the extent that the Conversion
Price of the Preferred Stock or the Demand Note, and any additional
demand notes issued in favor of OPLI with substantially similar terms in
connection with the Third Closing, or the exercise price of the Options
is lower than the market price of the outstanding Common Stock, such market
price may be adversely affected upon conversion of any of the foregoing.
Potential for Increased Number of Shares Available for Sale. The
approval of the Proposal 4 Matters could result in a greater number of
shares of Common Stock becoming eligible for sale into the public
market. The Company is required to file a registration statement within
60 days after the first conversion of the Preferred Stock into Common
Stock, which will allow the public sale of all of the shares of Common
Stock issuable upon the conversion of the Preferred Stock and the
exercise of the Options. Such sales, or the possibility of such sales,
could depress the market price of the Common Stock.
Potential Effects on the Company's Ability to Obtain Future Equity
Capital. The approval of the Proposal 4 Matters may impede the
Company's ability to obtain additional equity capital in the future
because of the factors noted above under "Nasdaq Listing Obligation;
Change Of Control" and "Possible Disadvantages Of Approving The
Proposal 4 Matters - Potential for Increased Dilution of Common Shareholders
and - Potential for Increased Number of Shares Available for Sale."
Potential for a Change of Control. The approval of the Proposal 4
Matters could result in the issuance of a large number of shares of
Common Stock, thereby possibly resulting in a change of control of the
Company if the holders converting the Preferred Stock and Demand Note
and exercising the Options were to retain such shares of Common Stock
rather than sell them.
Potential for Discouraging Certain Changes of Control. The
potential for the issuance of a large number of shares of Common Stock
following shareholder approval of the Proposal 4 Matters might tend to
have the effect of delaying, deferring or preventing a change in control
of the Company or discouraging tender offers for the Company.
The Board of Directors considered the disadvantages discussed
above and concluded that they are outweighed by the advantages available
to the Company by raising the proceeds from the Private Placement which
could be as much as $10,000,000 from the sale of the Preferred Stock and
$2.25 million from the exercise if the Options. The Board of Directors
considered the financing alternatives available to the Company and
determined that the terms of the Private Placement were the most
favorable available to the Company within the requisite time period.
The proceeds were needed to fund the Company's immediate needs: cash
flow requirements, inventory purchases, capital expenditures and other
obligations. In addition, the Board of Directors believed that the
reputation and financial resources of OPLI made the Private Placement an
attractive financing vehicle.
Consequences If Shareholder Approval Is Not Obtained
If the Company's shareholders do not approve the Proposal 4
Matters, (i) the terms of the Investment Agreement and the Nasdaq rules
will prohibit the Company from issuing 20% or more of the outstanding
shares of Common Stock, (ii) the Second, Third and Subsequent Closings
will not take place and shares of Preferred Stock and Options will not
be issued to OPLI at such Closings and the Company will not receive the
up to $8,000,000 of purchase price for such securities, (iii) the Demand
Note will not become convertible and, if the Company is required to
repay the Demand Note, it may not have the financial resources to do so.
Interests Of Certain Persons
None of OPLI or its affiliates was an executive officer or
director of the Company or, to the Company's knowledge, an affiliate or
associate of any such officer or director prior to the authorization by
the Board of Directors of the Company of the Private Placement. The
Holders of the Series C Preferred Stock have the right to appoint and
have appointed two members to serve on the Board of Directors. See
"ELECTION OF DIRECTORS - Management of the Company." To the Company's
knowledge, none of OPLI or its affiliates beneficially owned 5% or more
of the Common Stock prior to the date of the Private Placement. As of
the date of this Proxy Statement, OPLI and its affiliates own $2,000,000
face value of Preferred Stock convertible into 4,255,319 shares of
Common Stock, constituting 16.8% of the Common Stock outstanding
immediately prior to such issuance. OPLI also owns an Option
exercisable into 2,000,000 shares of the Common Stock, but such Option
is not exercisable until such time as shareholder approval of the
Proposal 4 Matters is received.
No Appraisal Or Dissenters' Rights; No Preemptive Rights
Under applicable Delaware law, shareholders are not entitled to
any statutory dissenters' rights or appraisal of their shares of Common
Stock in connection with the Private Placement. Existing shareholders
have no preemptive rights in respect of any of the securities to be
issued in the Private Placement.
Irrevocable Proxies By Certain Shareholders
Hyundai Electronic Industries has executed an Irrevocable Proxy
designating and appointing the Chairman of the Company as its proxy to
vote all shares of Common Stock held by such stockholder in favor of the
Proposal 4 Matters. As of October 31, 1998, such Irrevocable Proxy
covered 5,896,999 shares of Common Stock, representing approximately
23.44% of the shares of Common Stock outstanding on such date.
Vote Required; Board Recommendation
Approval of this Proposal 4 is being sought to comply with listing
requirements imposed in connection with the Company's listing on the
Nasdaq National Market. Approval of the proposal requires the
affirmative vote of a majority of the total votes cast on the proposal
at the meeting, in person or by proxy.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR THE APPROVAL OF THE PROPOSAL TO APPROVE THE
TRANSACTIONS CONTEMPLATED BY THE INVESTMENT AGREEMENT, INCLUDING THE
ISSUANCE OF THE SHARES OF THE PREFERRED STOCK, AND OPTIONS AND SHARES OF
THE COMMON STOCK UPON THE CONVERSION OF SHARES OF PREFERRED STOCK, THE
DEMAND NOTE, AND ANY ADDITIONAL DEMAND NOTES WHICH MAY BE ISSUED WITH
SUBSTANTIALLY SIMILAR TERMS, AND THE EXERCISE OF THE OPTIONS.
PROPOSAL 5 -
AMENDMENT AND RESTATEMENT TO THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
At the Annual Meeting, the Company's shareholders will consider
and vote upon a proposal to change the Company's name from "Digital
Video Systems, Inc." to "Digital Versatile Systems, Inc." and to amend
and restate the Company's Amended and Restated Certificate of
Incorporation to provide for such name change, to incorporate previously
filed amendments, to remove terms relating to series of stock which have
been retired and to clarify certain ambiguous language. The proposed
form of the Fifth Amended and Restated Certificate of Incorporation is
attached hereto as Annex II. The Company is considering changing its
name to better reflect its current lines of business which relate mainly
to Digital Versatile Disk (DVD) technology.
Vote Required; Board Recommendation
Approval of this Proposal 5 requires the affirmative vote of the
holders of a majority of the outstanding shares of capital stock
entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR THE APPROVAL OF THE PROPOSAL TO CHANGE THE
COMPANY'S NAME AND TO AMEND AND RESTATE THE COMPANY'S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO REFLECT SUCH NAME CHANGE AND TO
INCORPORATE PREVIOUSLY FILES AMENDMENTS, AS APPROPRIATE.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements within the meaning of
the "safe-harbor" provisions of the Private Securities Litigation Act
of 1995 that involve risks and uncertainties, including, without
limitation, statements with respect to the Company's strategy, proposed
sales of the Company's products, markets, and the development of the
Company's products. The Company's actual results may differ materially
from those described in these forward-looking statements due to a number
of factors, including, but not limited to, the uncertainty of market
acceptance of DVD-ROM, DVD Intelligent Loaders, DVD Players, Video CD
players and other Company products, planned growth of the Company's
operations, dependence on a limited number of suppliers of certain
components used in the Company's operations, risks associated with rapid
technological change and obsolescence and product development,
conducting business in foreign countries, such as China and South Korea,
and the competitive market for the Company's products, and other factors
described in Exhibit 99.1 to the Company's Form 10-KSB for the year
ended March 31, 1998 or in other documents the Company files from time-
to-time with the Securities and Exchange Commission.
Overview
The Company was founded in 1992 to develop, manufacture, and
market digital video compression and decompression hardware and software
for entertainment, business and educational uses. The Company's current
product offerings include DVD-ROM drives, Video CD players for the
commercial video market ("video engines"); video servers for the video-
on-demand markets; and, CD-R, CD-RW products for the computer peripheral
market. The Company has developed a DVD Intelligent Loader for DVD
player manufacturers, which it expects to commence marketing in the
current fiscal year. The Company has under development a fourth
generation DVD-ROM drive and intends to develop DVD recordable drives
and DVD video engines.
In May 1996, the Company completed the IPO and a follow-on
public offering, which together generated aggregate net proceeds of
approximately $43,700,000. These proceeds have been used principally to
repay $7,000,000 of bridge notes, make business acquisitions and fund
the growth in the Company's operations and the losses generated to date
by those operations. The Company currently does not have any agreements,
understanding, or commitments with respect to any proposed material
acquisitions, joint ventures or other strategic alliances but may seek
to enter into such transactions in the future to acquire complementary
businesses or technologies or to create strategic alliances. However,
the Company can give no assurances that any such transactions will be
consummated in the future.
In October 1996, the Company acquired ViComp Technology,
Inc. ("ViComp"), a development-stage company that designs MPEG-1
integrated circuits for use in Video CD players and components.
Pursuant to the terms of the acquisition, the Company issued 491,253
shares of its Common Stock for all of the outstanding ViComp capital
stock and granted options to certain ViComp shareholders exercisable for
189,557 shares of the Company's Common Stock. The transaction has been
accounted for as a purchase and, accordingly, the initial purchase price
and acquisition costs have been allocated to the identifiable assets and
liabilities, including in-process research and development of $1,800,000
that was immediately expensed.
While DVS retains the intellectual property developed by
ViComp, the Company has ceased the research and development program of
this subsidiary effective March 31, 1998, since market conditions have
made further development of an MPEG-1 decoder chip financially
unattractive. The Company has expensed a significant portion of assets,
primarily fixed assets, associated with this development in fiscal 1998
as they have no alternate use.
In August 1997, the Company completed the acquisition of the
business and certain assets and liabilities of the Digital Video
division (the "DV Business") of Arris Interactive L.L.C. ("Arris") in
a transaction accounted for as a purchase. The total purchase price of
approximately $3,500,000 included cash of $1,500,000, the issuance of
600,000 shares of Common Stock and related acquisition costs of
$141,000. Under the original purchase agreement, Arris was not entitled
to transfer or sell any shares of the Common Stock acquired in the
transaction until certain periods had elapsed and none of such shares
were registered under any state or federal securities laws. In addition,
the Company also initially agreed to pay Arris additional contingent
consideration of up to $5,000,000 if the DV Business, now known as the
Company's New Media Division, achieves certain revenue milestones. In
March 1998, the Company and Arris agreed to remove the restriction on
sale of the Common Stock by Arris and to cancel the provision for the
payment of contingent consideration to Arris set forth in the agreement.
Based on its experience to date, and the substantial cash drain created
by the New Media Division, the Company does not believe that it can
compete effectively in the digital ad insertion market. On September 30,
1998, the Company ceased operations of this division and has closed the
business.
In August 1997, the Company acquired substantially all of
the assets of Synchrome Technologies, Inc., a privately held developer
and manufacturer of multimedia and computer storage PC products. The
purchase price of $1,000,000 (including acquisition costs) was paid in
cash with the transaction being accounted for using the purchase method.
In August 1997, the Company, through its wholly-owned
subsidiary, D.V.S. H.K., Ltd., and Panyu Tian Le Electrical Appliance
Manufacturing Co., Ltd. ("Panyu") formed a joint venture (the "Panyu
Joint Venture") in China to manufacture and distribute Video CD players
and DVD players. As initially formed, the Panyu Joint Venture was owned
51% by the Company, through D.V.S. H.K., Ltd., and 49% by Panyu.
In December 1997, the Company, and Panyu entered into an
Ownership Shares Transfer Agreement (the "Transfer Agreement").
Pursuant to the Transfer Agreement, the Company purchased from Panyu its
entire 49% interest in the Panyu Joint Venture for a nominal amount,
thereby increasing the Company's interest in the venture to 100%. In
January 1998, the Company sold a 10% interest in the Panyu Joint Venture
for a nominal amount to Panyu Kembo Electrical Manufacturing Co., Ltd.
("Kembo") which is owned by Dr. An Yueh Zehan, a member of the law firm
representing the Company in China. Kembo holds the interest as a
nominee of the Company.
Since its inception in August 1997, the Panyu Joint Venture
has incurred losses of approximately $5,100,000. In addition, the Panyu
Joint Venture has current liabilities of approximately $2,500,000. The
Company has not been able to achieve a break-even level of Video CD
player production at the Panyu Joint Venture, and because of decreasing
margins due to intense competition, the Company does not believe that it
can compete effectively in the video CD player market and has begun the
process of closing the Panyu operation.
In June 1998, the Company completed the acquisition of a
perpetual, worldwide, royalty-free license to DVD-ROM technology owned
by Hyundai Electronics Industries, Co., Ltd. ("Hyundai") in exchange
for 2,000,000 shares of Common Stock. In addition, the Company, through
a newly formed, wholly-owned subsidiary, DVS-Korea, completed the
acquisition of DVD-ROM manufacturing capabilities, a related research
and development team and management from Hyundai for $1,000,000 in cash.
Effective July 3, 1998, Thomas Parkinson resigned as
President and Dr. Edmund Sun resigned as Chief Executive Officer of the
Company. Edward Miller was appointed Chief Executive Officer of the
Company at that time. Dr. Sun remains Chairman of the Board of Directors.
As part of an on-going restructuring effort, the Company has
closed its office in Japan, closed its New Media division, ceased
production of video CD players in China, and has reorganized and down-
sized its offices in Taiwan, Hong Kong, and Los Gatos.
Results Of Operations For Three Months Ended September 30, 1998
Compared To The Three Months Ended September 30, 1997
The following table sets forth for the periods indicated certain
income and expense items expressed as a percentage of the Company's
total revenues for the three months ended September 30, 1998 compared to
the three months ended September 30, 1997.
<TABLE>
<CAPTION>
Percent of Revenue
-------------------
Three Months Ended
September 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues 100.0% 100.0%
Gross margin 19.3% 13.4%
Research and development 55.0% 42.8%
Sales and marketing 21.2% 24.3%
General and administration 62.2% 51.4%
Acquired in process R & D 0.0% 16.6%
Operating loss -119.1% -121.7%
Net loss -119.8% -113.8%
</TABLE>
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Consolidated Revenue $3,476 $3,713 -6.4%
</TABLE>
Total revenue decreased $0.24 million to $3.47 million for the
three months ended September 30, 1998 compared with $3.71 million for
the three months ended September 30, 1997, as a result of decreasing
component revenue.
Product revenue increased $0.11 million to $3.08 million for the
three months ended September 30, 1998 compared with $2.97 million for
the three months ended September 30, 1997. Product revenue for the three
months ended September 30, 1998 includes DVD-ROM drives, video engine
100, 200 and 300, and computer peripheral products. The Company
recognized revenue from the sale of digital ad insertion products and
consumer video CD players from existing inventories. The latter two
product lines have been discontinued by the Company. For the three
months ended September 30, 1997, sales consisted almost entirely of
video CD players and related component kits.
For the three months ended September 30, 1998 development and
services revenue was $0.26 million compared to no significant
development and service revenue for the three months ended September 30,
1997.
Component revenue decreased $0.61 million to $0.13 million for the
three months ended September 30, 1998 compared to $0.74 million for the
three months ended September 30, 1997. Component revenue was derived
primarily from the liquidation of video CD inventory in Panyu. It is
anticipated that component revenue will continue to be insignificant in
absolute dollars and as percentage of total revenue in the future.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Gross margin $670 $499 34.3%
as a percentage of revenue 19.3% 13.4%
</TABLE>
The increase in the gross margin as a percentage of total revenue for
the three months ended September 30, 1998 compared to the same period
last year was due to decreased component sales, which have a low margin
and increased product sales from DVD-ROM drives and Commercial Video CD
players ("video engines"), which have a higher margin. This increase
was partially offset by the negative gross margin from the liquidation
of Consumer Video CD and ad insertion inventories.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Research and Development $1,911 $1,588 20.3%
as a percentage of revenue 55.0% 42.8%
Research and development expenses consist primarily of personnel
and equipment prototype costs required in connection with the Company's
product development efforts. Research and development expenses increased
$0.32 million, or 20%, to $1.91 million during the three months ended
September 30, 1998 compared to $1.58 million for the three months ended
September 30, 1997. The increase in these expenses was primarily
attributable to the growth in the Company's emerging DVD-ROM business. A
portion of the increase was due to product development programs and
expenses related to the New Media division, which has since been
discontinued. The Company expects that research and development expenses
will remain steady for the short-term as the Company devotes most of
these resources to DVD products, replacing research and development
expenses associated with the New Media division.
</TABLE>
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Sales and Marketing $738 $901 -18.1%
as a percentage of revenue 21.2% 24.3%
Sales and marketing expenses consist primarily of personnel and
consulting costs involved in the selling process and in the marketing of
the Company's products, sales commissions, and expenses of trade shows
and advertising. Sales and marketing expenses decreased $0.16 million,
or 18%, to $0.74 million during the three months ended September 30,
1998 compared to $0.90 million for the three months ended September 30,
1997. As the Company continues its marketing efforts, sales and
marketing expenses in dollar terms are expected to increase.
</TABLE>
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
General and Administrative $2,161 $1,910 13.1%
as a percentage of revenue 62.2% 51.4%
General and administrative expenses consist of administrative
salaries and benefits, insurance, facility, legal, accounting, investor
relations and other business support costs. These expenses increased
$0.25 million, or 13.1%, to $2.16 million for the three months ended
September 30, 1998 compared to $1.91 million for the three months ended
September 30, 1997. The Company expects that general and administrative
costs will increase in dollar terms to the extent the Company expands
its DVD business.
</TABLE>
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Other income ($24) $293 -108.2%
as a percentage of revenue -0.7% 7.9%
</TABLE>
The decrease in other income for the three months ended September
30, 1998 resulted from lower interest income due to declining cash
balances and short-term investments.
Results Of Operations For Fiscal Year Ended March 31, 1998 (Fiscal
1998) Compared To Year Ended March 31, 1997 (Fiscal 1997)
The following table sets forth for the periods indicated certain
income and expense items expressed as a percentage of the Company's
total revenues for the years ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Percent Of Revenue
----------------------
Year Ended March 31,
----------------------
1998 1997
---------- -----------
<S> <C> <C>
Revenues................................. 100.0% 100.0%
Gross margin............................. -16.4% -5.1%
Research and development................. 45.8% 19.6%
Sales and marketing...................... 32.7% 12.6%
General and administrative............... 53.6% 36.3%
Purchased in-process research and
development............................. 3.5% 12.9%
Operating (loss)......................... -152.0% -86.4%
Net (loss)............................... -145.8% -91.4%
</TABLE>
<TABLE>
<CAPTION>
March 31, March 31, %
Consolidated revenue 1998 1997 Change
(in thousands)
- ---------------------------------------- ---------- -----------
<S> <C> <C> <C>
Product revenue............... $14,524 $7,903 83.8%
Development and services reven 671 208 222.6%
Component revenue............. 2,443 6,010 -59.4%
---------- ----------
Total revenue.............. $17,638 $14,121 24.9%
========== ========== ===========
</TABLE>
Total revenue increased $3.52 million, or 24.9%, to $17.64 million
for fiscal 1998 compared to $14.12 million for fiscal 1997, as a result
of increasing product revenue, which was partially offset by decreasing
component revenue.
Product revenue consisted of revenue from sale of Video CD players
and subassemblies, digital advertisement insertion systems, and computer
peripheral products. Product revenue increased $6.62 million, or 83.8%,
to $14.52 million for fiscal 1998 compared to $7.90 million for fiscal
1997. The increase was due to newly acquired product lines in digital
advertisement insertion systems and computer peripheral products. The
increase was also attributed to the expansion of the Company's
operations in Asia, including the Panyu Joint Venture formed during
fiscal 1998.
For the year ended March 31, 1998, development and service revenue
increased $0.46 million, or 222.6%, to $0.67 million for fiscal 1998
compared to $0.21 million for fiscal 1997, as a result of the formation
of the Panyu Joint Venture in fiscal 1998. Prior to the sale by Panyu
of its 49% interest in the Panyu Joint Venture, the Joint Venture
assembled product on behalf of Panyu and held no ownership rights with
respect to the manufacturing inventory; therefore, revenue generated by
the Panyu Joint Venture was considered service revenue. Panyu also
acted as a distributor for the Company's finished goods.
Component revenue decreased $3.57 million, or 59.4%, to $2.44
million in fiscal 1998 compared to $6.01 million for fiscal 1997. The
decrease resulted from the Company's decision to sell finished goods and
sub-assemblies rather than component parts. Component revenue is
primarily derived from the sale of certain inventory parts in excess of
current manufacturing needs of the Company and was used to generate
working capital and strengthen customer relationships. It is
anticipated that component revenue will continue to decrease in absolute
dollars and as a percentage of total revenue in the future. There were
$1.4 million and $0 generated from product sales to related parties or
affiliates in fiscal 1998 and 1997, respectively.
International revenue represented approximately 71.9% and 91.2% of
total revenue for the years ended March 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
March 31, March 31, %
1998 1997 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Gross margin(loss)............ ($2,890) ($719) -301.9%
as a percentage of revenue.. -16.4% -5.1%
</TABLE>
Gross loss increased $2.17 million, or 301.9%, to $2.89 million
for fiscal 1998 compared to $0.72 million for fiscal 1997. Gross loss
as a percentage of revenue increased to 16.4 % in fiscal 1998 from 5.1%
in fiscal 1997.
Gross loss on product revenue increased $2.92 million, or 451.5%
to a gross loss of $3.57 million in fiscal 1998 from a gross loss of
$0.65 million in fiscal 1997. Product gross margin as a percentage of
product revenues decreased to negative 24.6% in fiscal 1998 from
negative 8.2% in fiscal 1997. The decrease in the gross margin and
gross margin percentage for fiscal 1998 was primarily due to the
recognition of the cost of all shipments made by the Panyu Joint Venture
while the Company deferred recognition of the associated revenue until
such time as cash is received and the negative effect that competition
had on the margin of receivables that were collected. In addition, the
Company recognized write-downs of inventory totaling $1.60 million as a
result of excess inventory and net realizable value. This decrease was
partly offset by a change in the mix of product shipped during the year.
Gross margin for development and service revenue increased $0.70
million to $0.65 for fiscal 1998 compared to a gross loss of $0.05
million for fiscal 1997. The increase was primarily a result of revenue
associated with sub-contracted assembly performed by the Panyu Joint
Venture. Accordingly, gross margin percentage for fiscal 1998 has
increased compared to fiscal 1997.
Gross margin for components revenue was minimal for fiscal 1998 and 1997.
<TABLE>
<CAPTION>
March 31, March 31, %
1998 1997 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Research and development...... $8,082 $2,761 192.7%
as a percentage of revenue.. 45.8% 19.6%
</TABLE>
Research and development expenses consist primarily of personnel
and equipment prototype costs required to conduct the Company's
development efforts. Research and development expenses increased $5.32
million, or 192.7%, to $8.08 million during fiscal 1998 compared to
$2.76 million for fiscal 1997. Research and development expenses as a
percentage of net revenues in fiscal 1998 increased to 45.8% from 19.6%
in fiscal 1997. The increase in these expenses both in dollar amount
and as a percentage of revenue is primarily attributable to the
retention of an additional 45 employees in the research and development
area resulting from the continued expansion of the Company's worldwide
operations, including the acquisition of the New Media Division in
August 1997. In addition, during fiscal 1998, the Company wrote off
approximately $1.9 million in intangible assets associated with and
equipment used for research and development projects undertaken by
ViComp and the New Media Division. Further, the Company increased its
funding of the development of its DVD player.
<TABLE>
<CAPTION>
March 31, March 31, %
1998 1997 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Sales and marketing........... $5,771 $1,785 223.3%
as a percentage of revenue.. 32.7% 12.6%
</TABLE>
Sales and marketing expenses consist primarily of personnel and
consulting costs involved in the selling process and in the marketing of
the Company's products, sales commissions, and expenses associated with
trade shows and advertising. Sales and marketing expenses increased
$3.99 million, or 223.3%, to $5.77 million during fiscal 1998 compared
to $1.78 million for fiscal 1997. Sales and marketing expenses as a
percentage of net revenues in fiscal 1998 increased to 32.7% in fiscal
1998 from 12.6% in fiscal 1997. The increase in these expenses both in
dollar amount and as a percentage of revenues for fiscal 1998 was
primarily due to business acquisitions that occurred during the year
which contributed to the retention of an additional 53 employees in the
sales and marketing area.
<TABLE>
<CAPTION>
March 31, March 31, %
1998 1997 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
General and administrative.... $9,447 $5,122 84.4%
as a percentage of revenue.. 53.6% 36.3%
</TABLE>
General and administrative expenses consist primarily of
administrative salaries and benefits, insurance, facility, legal,
accounting, investor relations and other business support costs.
General and administrative expenses increased $4.33 million, or 84.4%,
to $9.45 million during fiscal 1998 compared to $5.12 million for fiscal
1997. General and administrative expenses as a percentage of net
revenues in fiscal 1998 increased to 53.6% in fiscal 1998 from 36.3% in
fiscal 1997. The increase in these expenses and as a percentage of net
revenues for the year ended March 31, 1998 resulted from additional
administrative personnel associated with the business acquisitions made
during the year. During fiscal 1998, the Company increased its general
& administrative personnel from 18 to 107 employees. Higher legal,
consulting and accounting fees incurred due to expansion of the
Company's operation also contributed to the increase in general and
administrative expenses.
<TABLE>
<CAPTION>
March 31, March 31, %
1998 1997 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Purchased in-process research $617 $1,819 -66.1%
development..................
as a percentage of revenue.. 3.5% 12.9%
</TABLE>
Purchased in-process research and development expenses were $0.6
million and $1.8 million in fiscal 1998 and 1997, respectively.
Purchased in-process research and development expenses were incurred as
a result of the acquisition of the New Media Division in August 1997 and
ViComp in October 1996.
<TABLE>
<CAPTION>
March 31, March 31, %
1998 1997 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Other income and expense, net. $1,089 $559 94.8%
as a percentage of revenue.. 6.2% 4.0%
</TABLE>
The increase in other income during fiscal 1998 resulted primarily
from interest from funds raised in the Company's public offerings for a
full year in fiscal 1998 compared to a partial year's earning in fiscal
1997.
Extraordinary item. In fiscal 1997, the Company recorded an
extraordinary item of $1.3 million for the early extinguishment of
bridge notes. The bridge notes were issued in January and March 1996 and
were repaid in May 1996 from the proceeds of the IPO.
Income taxes. The Company incurred net losses and consequently
paid no federal or state income taxes in fiscal 1998 or 1997. For
federal and state tax purposes, the Company has net operating loss
carryforwards as of March 31, 1998 of approximately $31 million and $4.0
million, respectively, which will expire in various years beginning with
1999 if not utilized.
Due to the "change in ownership" provisions of the Internal
Revenue Code, the availability of the Company's net operating loss and
credit carryforwards may be subject to an annual limitation in future
periods. Such a limitation could substantially limit the eventual tax
utilization of these carryforwards.
The Company has established a valuation allowance against its
deferred tax assets of $6.0 million due to uncertainty surrounding the
realization of such assets. Management evaluates on a quarterly basis
the recoverability of the deferred tax assets and the level of the
valuation allowance. If it is determined that it is more likely than not
that the deferred tax assets are realizable, then the valuation
allowance will be appropriately reduced.
Liquidity And Capital Resources
As a result of the Company's significant operating losses and the
cost of acquiring and funding recent acquisitions, the Company's working
capital has been substantially reduced. As of September 30, 1998, the
Company had working capital of $0.5 million. At the same time, the
Company's cash, cash equivalents and short-term investments were $0.76
million, compared to working capital at March 31, 1998 of $8.3 million,
including cash and cash equivalents of $6.9 million. In October, the
Company received a $2 million investment and may receive up to an
additional $8 million, which will be used as working capital to support
the sale of DVD-ROM drives and for general corporate purposes. This
amount may be insufficient if demand for DVD-ROM drives exceeds
management's expectations.
The Company is actively seeking additional financing to meet its
working capital needs. Management intends to raise additional funds
from new and existing investors and financial institutions and to
continue to reduce the Company's operating costs by closing
nonperforming businesses and divisions.
The Company's goal is to bring to market higher-margin products
based on the Company's engineering capabilities, including DVD-ROM
drives, DVD intelligent loaders, and DVD players. In addition, the
Company intends to convert its video engine product lines to DVD-based
product lines. To meet the Company's objectives and to conserve
resources, the Company has closed its New Media division, its
manufacturing operations in Panyu and its office in Japan, and
operations at other locations are being streamlined. For the three-month
period ending December 31, 1998, the Company expects to incur a one-time
restructuring charge of approximately $500,000 in connection with
closing such divisions and facilities and otherwise streamlining the
Company's operations.
Net cash used in operating activities was $7.3 million for the six
months ended September 30, 1998 compared to $8.6 million for the six
months ended September 30, 1997. Substantially all of the net cash used
in operating activities in the six months ended September 30, 1998
represented the net loss of $9.1 million adjusted for non-cash charges
for depreciation and amortization of $1.04 million and acquired in-
process research and development of $0.5 million and net cash used to
fund an increase in restricted cash of $0.5 million and a decrease in
accounts payable of $0.97 million. Substantially all the net cash used
in operating activities for the six months ended September 30, 1997
represented the net loss of $6.2 million adjusted by non-cash charges
for depreciation and amortization of $0.58 million, purchased in-process
research and development of $0.62 million and net cash used to fund
increased in accounts receivable of $3.8 million and inventories of
$0.48 million, and decreases in accounts payable of $0.83 million.
Net cash provided by investing activities was negligible for the
six months ended September 30, 1998 compared to $5.1 million used in
investing activities for the six months ended September 30, 1997.
Substantially all of the cash provided by investing activities for the
six months ended September 30, 1998 consisted of the sale of short-term
investments of $1 million which was offset by the acquisition of
property and equipment of $0.87 million. Net cash used for the six
months ended September 30, 1997 was primarily for the purchase of short-
term investments and the acquisition of the New Media division from
Arris Interactive.
Net cash provided by financing activities for the six months ended
September 30, 1998 was $1,300,000 from the proceeds of short tem loans.
Net cash provided by financing activities was minimal for the six months
ended September 30, 1997.
The above activities resulted in a decrease in cash and cash
equivalents of $5.9 million for the six months ended September 30, 1998
compared to a decrease in cash and cash equivalents of $13.65 million
for the six months ended September 30, 1997.
Charge to income in the event of release of escrow securities
In the event the Company attains any of the earning or stock price
thresholds required for the release of all or a portion of the
securities placed in escrow in connection with the IPO, the release of
such securities will result, for financial reporting purposes, in
compensation expense to the Company. Accordingly, the Company will, in
the event of the release of the securities escrowed in connection with
the IPO, recognize, during the period that the conditions for such
release are met, a substantial non-cash charge to earnings for financial
reporting purposes for the period or periods during which such
securities are, or become probable of, being released from escrow. The
amount of this charge will be equal to the fair market value of such
securities on the date of release from escrow. See "ELECTION OF
DIRECTORS - Escrow Securities."
Seasonality
Historically the primary cause for seasonality in the Company's
business was the affect of Chinese New Year. Due to the change in focus
of the Company's business the Company does not expect Chinese New Year
to be a cause of seasonality in the future. The Company does not expect
to experience significant seasonality in the future, however, as the
Company is entering into new lines of business it is impossible to
predict whether this will be the case. There can be no assurances that
the Company will not experience seasonality in the future.
Year 2000
The Company is taking appropriate steps to ensure that its
computer systems will properly recognize date sensitive information when
the year changes to 2000 or "00". Systems that do not properly recognize
such information could generate erroneous data or cause a system to
fail. The Company is in the process of evaluating its computer systems
to identify those that could be affected by this issue.
Product Liability. While the Company believes that most of its
currently developed and actively marketed products are Year 2000
compliant for significantly all functionality, these products could
contain errors or defects related to the Year 2000. Versions of the
Company's products which are not the most currently released or which
are not currently being developed may not be Year 2000 compliant. The
Company sells some of its older product lines, which are not being
actively developed and updated, as such these products are not
necessarily Year 2000 compliant.
Corporate Systems. The Company will start an assessment of its
computer systems and software and will modify or replace portions of its
software so that its operating systems will function properly with
respect to dates in the Year 2000 and thereafter. The Company will
evaluate system interfaces with third-party systems, such as those of
key suppliers, distributors and financial institutions, for Year 2000
functionality. The Year 2000 project cost is not expected to be material.
The Company believes that, with modifications to existing software
and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. Most of the
Company's servers use the Windows NT operating system. Microsoft
Corporation has stated that Windows NT is Year 2000 compliant or
compliant with minor issues. The Company plans to upgrade or replace its
operating systems to this platform. However, if such modifications and
conversions are not made, or are not completed in a timely manner, the
Year 2000 issue could have a material adverse impact on the operations
of the Company. Additionally, the systems of other companies with which
the Company does business may not address any Year 2000 problems on a
timely basis, which could have an adverse affect on the Company's
systems or business transactions. The area of highest risk to the
Company related to the Year 2000 issue is noncompliance by key suppliers.
However, based upon publicly available information, the Company believes
that key suppliers, such as Matsushita, are Year 2000 compliant.
As testing of Year 2000 functionality of the Company's systems
must occur in a simulated environment, the Company will not be able to
test full system Year 2000 interfaces and capabilities prior to Year
2000.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") requires the Company's directors and certain of
its officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the
"Commission"). Officers, directors and greater than 10% stockholders
are required by the Commission's regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely upon a review
of the copies of the forms furnished to the Company and the
representations made by the reporting persons to the Company, the
Company believes that during the fiscal year ended March 31, 1998, its
directors, officers and 10% stockholders complied with all filing
requirements under Section 16(a) of the Exchange Act, with the following
exceptions: Dr. Sun filed a late Form 5 to report the cancellation of
140,760 shares of Common Stock pursuant to the terms of an escrow
agreement entered into in connection with the Company's purchase of
ViComp Technology, Inc.; Mr. Smith filed a late Form 4 to report the
acquisition of 18,738 shares of Common Stock upon the exercise of stock
options; Mr. Parkinson filed a late Form 3 reporting his appointment to
the office of President and the receipt of 900,000 stock options; Mr.
Franza filed a late Form 3 reporting his appointment to the office of
Executive Vice President of Business Development for the Company and
Chief Operating Officer of the Company's Atlanta, Georgia operations and
the receipt of 125,000 stock options; and Mr. Werbicki filed a late Form
3 to report his appointment to the office of Executive Vice President of
Computer Products and the receipt of 100,000 stock options.
SUBMISSION OF STOCKHOLDER PROPOSALS
Stockholders are advised that any stockholder proposal, including
nominations to the Board of Directors, intended for consideration at the
1999 Annual Stockholders Meeting must be received by the Company no
later than February 13, 1999 to be included in the proxy material for
the 1999 Annual Meeting. It is recommended that stockholders submitting
proposals direct them to Edward M. Miller, Chief Executive Officer of
the Company, and utilize certified mail, return receipt requested in
order to ensure timely delivery.
OTHER MATTERS
The Board of Directors knows of no matter to come before the
Annual Meeting other than as specified herein. If other business
should, however, be properly brought before the Annual Meeting, the
persons voting the proxies will vote them in accordance with their best
judgment.
THE STOCKHOLDERS ARE URGED TO COMPLETE, SIGN, AND RETURN PROMPTLY
THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors
/s/ Edward M. Miller, Jr.
Edward M. Miller, Jr.
Chief Executive Officer
December 2, 1998
DIGITAL VIDEO SYSTEMS, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS, JANUARY 6, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Edward M. Miller and John W.
Smuda, and each or either of them, as proxy holders with power to
appoint his substitute and hereby authorizes the proxy holders to
represent and vote, as designated below, all the shares of Digital Video
Systems, Inc. (the "Company") held of record by the undersigned on
November 30, 1998 at the Annual Meeting of Stockholders to be held on
January 6, 1999 at 10:00 a.m. or any and all adjournments thereof.
1. ELECTION OF DIRECTORS:
FOR all nominees listed below (except as marked to the
contrary below).
WITHHOLD AUTHORITY to vote for all nominees listed
below.
(INSTRUCTION: To withhold authority to vote for any nominee, draw a
line through such nominee's name.)
Edmund Y. Sun
Philip B. Smith
Sanford C. Sigoloff
Young Sam Cho
Cary S. Fitchey
2. Proposal to ratify the approval of the Company's 1998 Stock Option
Plan.
FOR AGAINST ABSTAIN
3. Proposal to ratify the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending March 31, 1999.
FOR AGAINST ABSTAIN
4. Proposal to approve the transaction contemplated by the Investment
Agreement and the convertibility of the Demand Note and any
additional demand notes with substantially similar terms, and the
issuance of Common Stock upon the conversion thereof.
FOR AGAINST ABSTAIN
5. Proposal to approve the Company's change of name to Digital
Versatile Systems, Inc. and the amendment and restatement of the
Company's Amended and Restated Certificate of Incorporation to
reflect such change and to incorporate previously filed
amendments.
FOR AGAINST ABSTAIN
6. In their discretion, the proxy holders are authorized to vote upon
such other business as may properly be brought before the Annual
Meeting or any and all adjournments thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED OR, IF NO CHOICE IS SPECIFIED, FOR
THE ELECTION OF THE NOMINEES, FOR PROPOSALS 2, 3, 4 AND 5 AND AS SAID
PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING AND ANY AND ALL ADJOURNMENTS THEREOF. IN THE EVENT ANY OF
THE NOMINEES IS UNAVAILABLE FOR ELECTION OR UNABLE TO SERVE, THE SHARES
REPRESENTED BY THIS PROXY MAY BE VOTED FOR A SUBSTITUTE NOMINEE SELECTED
BY THE BOARD OF DIRECTORS.
Dated: ________________, 1998
Signature
(Signature, if held jointly)
Please sign exactly as your name
appears hereon. When shares are held
by joint tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by the President or
other authorized officer. If a
partnership, please sign in partner-
ship name by an authorized partner.
PLEASE PROMPTLY MARK, SIGN, DATE, AND RETURN THIS PROXY
USING THE ENCLOSED ENVELOPE.
<PAGE>
ANNEX I - Investment Agreement
October 15, 1998
Mr. Donald Baker
Secretary & Treasurer
Oregon Power Lending Institution
357 Castro Street
Suite 2
Mountain View, CA 94041
Dear Don,
RE: Oregon Power Lending Institution and Digital Video Systems,
Inc. Investment Agreement
We are pleased to advise that Digital Video Systems, Inc.'s ("DVS")
Board of Directors has approved the following Investment Structure,
which is based upon your prior conversations and correspondence with
us. It is contemplated that in this transaction Oregon Power Lending
Institution ("OPLI") will have the right to acquire a total of
approximately 24,275,000 shares of DVS common stock. DVS currently
has outstanding approximately 25,337,000 shares of common stock, and
upon completion of this transaction (excluding exercise of the OPLI
option or any future issuances by DVS), the total outstanding shares
of DVS will be approximately 49,612,000 (the "Final Outstanding
Common Stock").
Because DVS is subject to Nasdaq rules, we are required to obtain
shareholder approval before we can sell 20% or more of our ownership
(or voting power) at a discount to the market price. Thus, we are
required to split the transaction into separate tranches, with the
tranches that follow the First Tranche being subject to shareholder
approval.
1) First Tranche. OPLI will make an initial investment of $1.5
million in cash by October 23rd and $500 thousand in cash on or
before November 5th (the "First Tranche"). In consideration
of and upon funding of the First Tranche, DVS will issue $2.0
million of convertible preferred shares ("Preferred Stock")
to OPLI. The shares of Preferred Stock issued in the First
Tranche will convert into 4,255,319 shares of DVS' common stock
("Common Stock"). This represents a conversion price of
approximately $0.47 per share of Common Stock.
2) Second Tranche. OPLI will make an investment of $1.0 to $2.0
million in cash during November 1998 (the "Second Tranche").
In consideration of and upon funding of the Second Tranche, DVS
will issue a minimum of $1.0 to a maximum of $2.0 million in
convertible preferred shares ("Preferred Stock") to OPLI.
The shares of Preferred Stock issued in the Second Tranche will
convert into a minimum of 2,127,660 to a maximum of 4,255,319
shares of DVS' common stock ("Common Stock"). This
represents a conversion price of approximately $0.47 per share
of Common Stock. The Second Tranche is subject to and
conditioned upon DVS obtaining the approval of its shareholders
to the Second Tranche, as well as subsequent Tranches. DVS
anticipates that it will obtain foregoing shareholder approval
within approximately 30 to 60 days from the date hereof.
3) Third Tranche. OPLI will have an option to make a third
investment of a maximum of $2.0 million in cash during December
1998 (the "Third Tranche"). In consideration of and upon
funding of the Third Tranche, DVS will issue up to a maximum of
$2.0 million of convertible preferred shares ("Preferred
Stock") to OPLI. The shares of Preferred Stock issued in the
Third Tranche will convert into a maximum of 4,255,319 shares
of DVS' common stock ("Common Stock"). This represents a
conversion price of approximately $0.47 per share of Common
Stock. Upon the full investment of $6.0 million and the
conversion of the $6.0 million into common shares issued in
association with the First, Second and Third Tranches, OPLI
will own approximately 33% of the Final Outstanding Common
Stock (including the shares of the common stock underlying the
Preferred Stock issued to OPLI in the First Tranche and Second
Tranche). The Third Tranche is subject to and conditioned upon
DVS obtaining the approval of its shareholders to the Second
Tranche, as well as subsequent Tranches.
4) Subsequent Tranche(s). OPLI will have the opportunity to
invest on or before April 30, 1999, an additional $4.0 million
in DVS (the "Subsequent Tranche(s)") for a total potential
investment (excluding exercise of OPLI's option) of $10.0
million. The subsequent Tranche(s) will be in increments of
$2.0 million. In consideration of and upon funding of the
Subsequent Tranche(s), DVS will issue up to an additional $4.0
million of Preferred Stock to OPLI. The maximum number of
preferred shares of DVS issued in the Subsequent Tranche(s)
will be convertible into 8,510,638 shares of DVS common stock.
This represents a conversion price of approximately $0.47 per
share of Common Stock. OPLI will fund the Subsequent
Tranche(s) with 50% in cash and 50% in Letter(s) of Credit
issued to DVS suppliers. The Subsequent Tranche(s) are subject
to and conditioned upon DVS obtaining the approval of its
shareholders to the Second Tranche, as well as subsequent
Tranches.
5) Option Grant. In connection with funding the First Tranche,
DVS will grant a stock option to purchase 2.0 million shares of
Common Stock at an exercise price of $0.75 per share. In
connection with the funding of the Second Tranche, DVS will
grant a stock option to purchase 1.0 million shares of Common
Stock at an exercise price of $0.75 per share. Both options
will expire twenty-four (24) months after the grant date. The
terms of the options will provide for OPLI to exercise this
option, in whole or in part, at any time prior to its
expiration by making a cash payment to DVS for the portion exercised.
6) Terms of Preferred Stock. All of the Preferred Stock issued in
the First Tranche, Second Tranche, Third Tranche, and
Subsequent Tranche(s) will have identical terms. The Preferred
Stock will have a term of three (3) years from the date of
November 1, 1998 and will be convertible by OPLI into DVS
common stock, at any time. Any shares of Preferred Stock not
converted at the end of the three-year term will, at OPLI's
option, probably be converted into shares of DVS common stock
or with the mutual agreement of both OPLI and DVS; DVS will
repurchase all or a portion of such outstanding Preferred Stock
at a price equal to 125% of the original investment. DVS will
file a registration statement for all common stock contemplated
in this transaction within 60 days following the first
conversion of the Preferred Stock into common stock to register
the common stock for public resale by OPLI.
7) Right of First Refusal. OPLI understands that DVS may need to
raise additional capital in order to operate and grow its
business. In order to do this DVS may be required to issue
shares of Common Stock or other securities that may be
convertible into Common Stock. Because any such issuance could
result in OPLI converting the Preferred Stock from the First
Tranche, Second Tranche and Third Tranche into less than 33% of
the total outstanding Common Stock after the conversion, DVS
hereby grants OPLI a right of first refusal to make an
additional investment in DVS on the same terms as have been
offered to DVS by a third-party investor (the "Right of First
Refusal") upon DVS accepting such third-party offer. The
Right of First Refusal shall remain in effect up until such
time as the term of the Preferred Stock expires; provided OPLI
has converted into Common Stock at least half of all Preferred
Stock issued to OPLI from the First Tranche, Second Tranche and
Third Tranche within an eighteen (18) months from the date of
issuance of the Preferred Stock associated with the First Tranche.
8) Board Seats. DVS will provide OPLI with up to two (2) seats on
the DVS' Board of Directors upon the completion of the funding
associated with the First Tranche. OPLI may designate these
individuals and DVS agrees to appoint them to DVS' Board of
Directors, subject to a standard due diligence review that will
take no more than five (5) business days.
9) Restructuring of Capital Structure. DVS will commit to using
its best efforts to restructure its current capital structure,
by eliminating, to the extent reasonably possible, its Class A
Warrants and Class B Warrants (the "Warrants"). DVS proposes
to swap the Warrants for Common Stock. If, however, another
less dilutive or less costly method to eliminate the Warrants
is available, DVS may use such alternative method. DVS
estimates that it will require approximately four (4) months to
complete this restructuring.
10) Confidentiality. Each party shall safeguard the secrecy and
confidentiality of the letter and will not allow the existence
of or the contents of this letter to be published, disseminated
or disclosed to any person (other than officers, directors and
employees of such party and its accountants and lawyers, all of
whom shall agree to maintain the confidentiality of this
letter) without the prior written consent of the other party,
except as is required by law or regulation applicable to the parties.
11) Binding Agreement. The undersigned, does hereby confirm and
acknowledge that this letter is a binding expression of the
terms of OPLI's investment in DVS and that such terms are
acceptable, subject to obtaining the approval of DVS's shareholders
shareholders for the Second Tranche, Third Tranche and subsequent Tranche(s).
If you agree to the points described above, please so indicate by
signing below and returning a signed copy of this letter to me by fax
at (408) 871-8222. Should you have any questions concerning the
information contained within this letter or the Subscription
Agreement, please feel free to contact me by telephone at (408) 874-8224.
We look forward to working with you in the future.
Very truly yours,
Edward M. Miller, Jr.
President and Chief Executive Officer
ACKNOWLEDGED AND AGREED TO:
OREGON POWER LENDING INSTITUTION
_________________________
Donald Baker
Secretary and Treasurer
Letter to: Mr. Donald Baker
October 15, 1998
Page 5 of 5
ANNEX II - Amended and Restated Certificate of Incorporation
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIGITAL VIDEO SYSTEMS, INC.
(originally incorporated on October 13, 1992
under the name Digital Video Systems, Inc.)
Edward M. Miller, Jr. certifies that:
One: He is the duly elected and acting President and Chief
Executive Officer of Digital Video Systems, Inc., a Delaware corporation
(the "Corporation").
Two: The Amended and Restated Certificate of Incorporation of
this Corporation shall be amended and restated to read in full as
follows:
ARTICLE I
The name of this Corporation is Digital Versatile Systems, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, Wilmington, Delaware 19801. The name of
its registered agent at such address is The Prentice-Hall Corporation
System, Inc., New Castle County.
ARTICLE III
The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE IV
A. The Corporation is authorized to issue two classes of
shares, which shall be designated as Common Stock, $.0001 par value per
share, and Preferred Stock, $.0001 par value per share. The total
number of shares of capital stock that the Corporation is authorized to
issue is Eighty Five Million (85,000,000). The total number of shares
of Common Stock which this Corporation shall have authority to issue is
Eighty Million (80,000,000) and the total number of shares of Preferred
Stock which this Corporation shall have authority to issue is Five
Million (5,000,000). The Preferred Stock may be issued from time to
time in one or more series.
B. The Preferred Stock shall be divided into series. The first
series shall consist of 11,000 shares and shall be designated "Series C
Convertible Preferred Stock."
The Board of Directors of the Corporation (the "Board of
Directors") is authorized to determine the number of additional series
into which shares of Preferred Stock may be divided, to determine the
designations, powers, preferences and voting and other rights, and the
qualifications, limitations and restrictions granted to or imposed upon
such additional Preferred Stock or any series thereof or any holders
thereof, to determine and alter the designations, powers, preferences
and rights, and the qualifications, limitations and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock or the
holders thereof, to fix the number of shares of that series and to
increase or decrease, within the limits stated in any resolution of the
Board of Directors originally fixing the number of shares constituting
any series (but not below the number of such shares then outstanding),
the number of shares of any such series subsequent to the issuance of
shares of that series.
C. The powers, preferences, rights, restrictions, and other
matters relating to the Series C Convertible Preferred Stock are as
follows:
1. Dividends.
The holders of the Series C Convertible Preferred Stock be
entitled to receive cash dividends as when and if declared by the Board
of Directors on the Common Stock in an amount per share of Series C
Convertible Preferred Stock equal to the amount of the dividend per
share of Common Stock multiplied by the number of shares of Common Stock
into which each share of Series C Convertible Preferred Stock is
convertible immediately prior to the declaration of such dividend.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of the Series C Convertible Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the
assets or surplus funds of the Corporation to the holders of the Common
Stock by reason of their ownership thereof, the amount of $1,000.00 per
share (as adjusted for any combinations or splits with respect to such
shares). If upon the occurrence of such event, the assets and funds
thus distributed among the holders of the Series C Convertible Preferred
Stock shall be insufficient to permit the payment to such holders of the
full aforesaid preferential amount, then the entire assets and funds of
the Corporation legally available for distribution shall be distributed
ratably among the holders of the Series C Convertible Preferred Stock in
proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) After payment to the holders of the Series C
Convertible Preferred Stock of the amounts set forth in Section C.2(a)
above, the entire remaining assets and funds of the Corporation legally
available for distribution, if any, shall be distributed among the
holders of the Common Stock in proportion to the shares of Common Stock
then held by them.
(c) For purposes of this Section C.2, (i) any
acquisition of the Corporation by means of merger or other form of
corporate reorganization in which outstanding shares of the Corporation
are exchanged for securities or other consideration issued, or caused to
be issued, by the acquiring corporation or its subsidiary (other than a
mere reincorporation transaction) or (ii) a sale of all or substantially
all of the assets of the Corporation, shall be treated as a liquidation,
dissolution or winding up of the Corporation and shall entitle the
holders of Series C Convertible Preferred Stock and Common Stock to
receive at the closing in cash, securities or other property (valued as
provided in Section C.2(e) below) amounts as specified in Sections
C.2(a) and C.2(b) above.
(d) Each holder of Series C Convertible Preferred
Stock shall be deemed to have consented under the Delaware General
Corporation Law to distributions made by the Corporation in connection
with the repurchase of shares of Common Stock issued to or held by
officers, directors, or employees of, or consultants to, the Corporation
or its subsidiaries upon termination of their employment or services
pursuant to agreements (whether now existing or hereafter entered into)
providing for the right of said repurchase between the Corporation and
such persons.
(e) Whenever the distribution provided for in this
Section C.2 shall be payable in securities or property other than cash,
the value of such distribution shall be the fair value of such
securities or other property as determined in good faith by the Board of
Directors.
(f) Nothing hereinabove set forth shall affect in any
way the right of each holder of Preferred Stock to convert such shares
at any time and from time to time into Common Stock in accordance with
Section C.4 hereof.
3. Voting Rights.
(a) Each holder of shares of the Series C Convertible
Preferred Stock shall be entitled to the number of votes equal to the
number of shares of Common Stock into which such shares of Series C
Convertible Preferred Stock could be converted and shall have voting
rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided herein or as required by
law, voting together with the Common Stock as a single class) and shall
be entitled to notice of any stockholders' meeting in accordance with
the Bylaws of the Corporation. Fractional votes shall not, however, be
permitted and any fractional voting rights resulting from the above
formula (after aggregating all shares into which shares of Series C
Convertible Preferred Stock held by each holder could be converted)
shall be rounded to the nearest whole number (with one-half being
rounded upward). Each holder of Common Stock shall be entitled to one
(1) vote for each share of Common Stock held.
(b) Notwithstanding the foregoing, at each annual or
special meeting called for the purpose of electing directors, the
holders of the Series C Convertible Preferred Stock, voting as a
separate class, shall be entitled to elect two (2) directors, and all
remaining directors shall be elected by the holders of Common Stock
voting together as a single class. The provisions of this Section
C.3(b) shall expire and be of no further force or effect upon the
occurrence of the earlier of (i) such date when less than 2,000 shares
of Series C Convertible Preferred Stock remain issued and outstanding or
(ii) October 31, 2001. In the case of any vacancy in the office of a
director occurring among the directors elected by a specified group of
stockholders, the remaining director or directors so elected by such
stockholders may, by affirmative vote of a majority thereof (or the
remaining director so elected if there is but one, or if there is no
such director remaining, by the affirmative vote of the holders of a
majority of the shares of that class) elect a successor or successors to
hold the office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been
elected by the holders of the Series C Convertible Preferred Stock or
Common Stock or any director so elected as provided in the preceding
sentence hereof, may be removed during the aforesaid term of office,
whether with or without cause, only by the affirmative vote of the
holders of a majority of the Series C Convertible Preferred Stock or
Common Stock, as the case may be.
4. Conversion.
The holders of the Series C Convertible Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right To Convert. Each share of Series C
Convertible Preferred Stock shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such share and
on or prior to October 31, 2001, at the office of the Corporation or any
transfer agent for such stock, into fully-paid and nonassessable shares
of Common Stock at a rate of 2,127.6595 shares of Common Stock for each
share of Series C Convertible Preferred Stock, as is determined by
dividing $1,000.00 by the Conversion Price applicable to such share,
determined as hereinafter provided, in effect on the date the
certificate is surrendered for conversion. The price at which shares of
Common Stock shall be deliverable upon conversion of shares of the
Series C Convertible Preferred Stock (the "Series C Conversion Price")
shall initially be $.47 per share of Common Stock. Such initial Series
C Conversion Price shall be adjusted as hereinafter provided.
(b) Right To Mutual Redemption. Each share of Series
C Convertible Preferred Stock shall be redeemed, if mutually agreed upon
in writing by both the Series C Convertible Preferred Stockholder and
the Corporation, on October 31, 2001, at an amount equal to 125% of the
face value of the Series C Convertible Preferred Stock certificate(s).
(c) Automatic Conversion. Each share of Series C
Convertible Preferred Stock shall automatically be converted into shares
of Common Stock at the then-effective Series C Conversion Price upon the
date specified by vote or written consent or agreement of holders of at
least two-thirds (2/3) of the shares of such series then outstanding.
(d) Mechanics of Conversion. Before any holder of
Series C Convertible Preferred Stock shall be entitled voluntarily to
convert the same into shares of Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of
the Corporation or of any transfer agent for such stock, and shall give
written notice to the Corporation at such office that he elects to
convert the same and shall state therein the number of shares to be
converted and the name or names in which he wishes the certificate or
certificates for shares of Common Stock to be issued. The Corporation
shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series C Convertible Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to
which he shall be entitled. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of
surrender of the shares of Series C Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
on such date.
(e) Adjustments to Conversion Prices for Stock
Dividends and for Combinations or Subdivisions of Common Stock. In the
event that this Corporation at any time or from time to time after
November 1, 1998, shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock for no consideration, or shall effect a subdivision
of the outstanding shares of Common Stock into a greater number of
shares of Common Stock (by stock split, reclassification or otherwise
than by payment of a dividend in Common Stock or in any right to acquire
Common Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise,
into a lesser number of shares of Common Stock, then the Conversion
Price for any series of Preferred Stock in effect immediately prior to
such event shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event
that this Corporation shall declare or pay, without consideration, any
dividend on the Common Stock payable in any right to acquire Common
Stock for no consideration, then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to
the maximum number of shares issuable upon exercise of such rights to
acquire Common Stock.
(f) Adjustments for Other Distributions. In the
event the Corporation at any time or from time to time makes, or fixes a
record date for the determination of holders of Common Stock entitled to
receive any distribution payable in securities of the Corporation other
than shares of Common Stock and other than as otherwise adjusted in this
Section C.4, then and in each such event provision shall be made so that
the holders of Series C Convertible Preferred Stock shall receive upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Corporation which
would have received had their Series C Convertible Preferred Stock been
converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and
including the date of conversion, retained such securities receivable by
them as aforesaid during such period, subject to all other adjustments
called for during such period under this Section C.4 with respect to the
rights of the holders of the Series C Convertible Preferred Stock.
(g) Adjustments for Reclassification and
Reorganization. If the Common Stock issuable upon conversion of the
Series C Convertible Preferred Stock shall be changed into the same or a
different number of shares of any other class or classes of stock,
whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares provided for in Section
C.4(e) above or a merger or other reorganization referred to in Section
C.2(d) above), the Series C Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series C
Convertible Preferred Stock shall be convertible into, in lieu of the
number of shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other class or
classes of stock equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders upon conversion of the
Series C Convertible Preferred Stock immediately before that change.
(h) No Impairment. The Corporation will not, by
amendment of its Fifth Amended and Restated Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section C.4 and in the taking of all such action as
may be necessary or appropriate in order to protect the conversion rights
of the holders of the Series C Convertible Preferred Stock against impairment.
(i) Certificates as to Adjustments. Upon the
occurrence of each adjustment or readjustment of any Conversion Price
pursuant to this Section C.4, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series C
Convertible Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series C Convertible
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price for such series of Preferred Stock at the time in
effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of the Series C Convertible Preferred Stock.
(j) Notices of Record Date. In the event that the
Corporation shall propose at any time: (i) to declare any dividend or
distribution upon its Common Stock, whether in cash, property, stock or
other securities, whether or not a regular cash dividend and whether or
not out of earnings or earned surplus; (ii) to offer for subscription
pro rata to the holders of any class or series of its stock any
additional shares of stock of any class or series or other rights; (iii)
to effect any reclassification or recapitalization of its Common Stock
outstanding involving a change in the Common Stock; or (iv) to merge or
consolidate with or into any other corporation, or sell, lease or convey
all or substantially all of its assets, or to liquidate, dissolve or
wind up; then, in connection with each such event, the Corporation shall
send to the holders of Series C Convertible Preferred Stock:
(1) at least twenty (20) days' prior written
notice of the date on which a record shall be taken
for such dividend, distribution or subscription rights
(and specifying the date on which the holders of
Common Stock shall be entitled thereto) or for
determining rights to vote, if any, in respect of the
matters referred to in (i) and (ii) above; and
(2) in the case of the matters referred to in
(iii) and (iv) above, at least twenty (20) days' prior
written notice of the date when the same shall take
place (and specifying the date on which the holders of
Common Stock shall be entitled to exchange their
Common Stock for securities or other property
deliverable upon the occurrence of such event or the
record date for the determination of such holders if
such record date is earlier).
(k) Issue Taxes. The Corporation shall pay any and
all issue and other taxes (other than income taxes) that may be payable
in respect of any issue or delivery of shares of Common Stock on
conversion of Series C Convertible Preferred Stock pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(l) Reservation of Stock Issuable Upon Conversion.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series C Convertible
Preferred Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding
shares of the Series C Convertible Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of
the Series C Convertible Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to the Corporation's
Fifth Amended and Restated Certificate of Incorporation.
(m) Fractional Shares. No fractional share shall be
issued upon the conversion of any share or shares of Series C
Convertible Preferred Stock. All shares of Common Stock (including
fractions thereof) issuable upon conversion of more than one share of
Series C Convertible Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance
of a fraction of a share of Common Stock, the Corporation shall, in lieu
of issuing any fractional share, pay the holder otherwise entitled to
such fraction a sum in cash equal to the fair market value of such
fraction on the date of conversion (as determined in good faith by the
Board of Directors).
(n) Notices. Any notice required by the provisions
of this Section C.4 to be given to the holders of shares of Series C
Convertible Preferred Stock shall be deemed given if deposited in the
United States mail, postage prepaid, and addressed to each holder of
record at his address appearing on the books of the Corporation.
5. No Reissuance of Series C Convertible Preferred Stock.
No share or shares of Series C Convertible Preferred Stock
acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
cancelled, retired and eliminated from the shares which the Corporation
shall be authorized to issue.
6. Protective Provisions.
In addition to any other rights provided by law, so long as
any shares of Series C Convertible Preferred Stock shall be outstanding,
the Corporation shall not, without first obtaining the affirmative vote
or written consent of the holders of not less than a majority of the
outstanding shares of Series C Convertible Preferred Stock, voting
together as a single class, amend or repeal any provision of, or add any
provision to: (i) the Corporation's Fifth Amended and Restated
Certificate of Incorporation; or (ii) the Corporation's Bylaws, if such
action would increase the authorized number of directors.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by
status:
A. The Board of Directors is expressly authorized to adopt,
amend, alter or repeal the Bylaws of the Corporation.
B. Elections of directors need not be by written ballot unless
the Bylaws of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place
within or without the State of Delaware as the Bylaws of the Corporation
may provide or as may be designated from time to time by the Board of
Directors.
ARTICLE VII
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the
application in a summary way of this Corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers
appointed for this Corporation under the provisions of Section 291 of
Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation,
as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of
the creditors or class of creditors, and/or of the stockholders or class
of stockholders of this Corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this Corporation
as a consequence of such compromise or arrangement, the said compromise
or arrangement and the said reorganization shall, if sanctioned by the
court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class
of stockholders, of this Corporation, as the case may be, and also on
this Corporation.
ARTICLE VIII
To the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same now exists, or as it may hereafter be
amended, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach
of fiduciary duty as a director, notwithstanding any provision of law
imposing such liability. No amendment to or repeal of this Article
VIII, nor the adoption of any provision of this Fifth Amended and
Restated Certificate of Incorporation inconsistent with this Article
VIII, shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment.
ARTICLE IX
A. Actions, Suits and Proceedings Other Than by or in the Right
of the Corporation. The Corporation shall indemnify each person who was
or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or
in the right of the Corporation), by reason of the fact that he or she
is or was, or has agreed to become, a director or officer of the
Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer, or trustee of, or in
a similar capacity with, another corporation, partnership, joint
venture, trust, or other enterprise (including any employee benefit
plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or
omitted in such capacity, against all expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by him or her or on his or her behalf in connection
with such action, suit, or proceeding and any appeal therefrom, if he or
she acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the Corporation, and,
with respect to any criminal action or proceeding had no reasonable
cause to believe such conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith
and in a manner which the person reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that
his or her conduct was unlawful. Notwithstanding anything to the
contrary in this Article, except as set forth in Section F below, the
Corporation shall not indemnify an Indemnitee seeking indemnification in
connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors.
B. Actions or Suits by or in the Right of the Corporation. The
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending, or completed
action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such Indemnitee is or
was, or has agreed to become, a director or officer of the Corporation,
or is or was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer or trustee of, or in a similar
capacity with, another corporation, partnership, joint venture, trust,
or other enterprise (including any employee benefit plan), or by reason
of any action alleged to have been taken or omitted in such capacity,
against all expenses (including attorneys' fees) and amounts paid in
settlement actually and reasonably incurred by Indemnitee or on
Indemnitee's behalf in connection with such action, suit, or proceeding
and any appeal therefrom, if Indemnitee acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the
best interests of the Corporation, except that no indemnification shall
be made in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be liable to the Corporation unless
and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of such liability but in view
of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys'
fees) which the Court of Chancery of Delaware or such other court shall
deem proper.
C. Indemnification for Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent that
an Indemnitee has been successful, on the merits or otherwise, in
defense of any action, suit, or proceeding referred to in Section A or B
of this Article, or in defense of any claim, issue, or matter therein,
or on appeal from any such action, suit, or proceeding, the Indemnitee
shall be indemnified against all expenses (including attorneys' fees)
actually and reasonably incurred by the Indemnitee or on the
Indemnitee's behalf in connection therewith. Without limiting the
foregoing, if any action, suit, or proceeding is disposed of, on the
merits or otherwise (including a disposition without prejudice),
without: (i) the disposition being adverse to the Indemnitee; (ii) an
adjudication that the Indemnitee was liable to the Corporation; (iii) a
plea of guilty or nolo contendere by the Indemnitee; (iv) an
adjudication that the Indemnitee did not act in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Corporation; and (v) with respect to any criminal
proceeding, an adjudication that the Indemnitee had reasonable cause to
believe his or her conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with
respect thereto.
D. Notification and Defense of Claim. As a condition preceding
to the right to be indemnified, the Indemnitee must notify the
Corporation in writing as soon as practicable of any action, suit,
proceeding, or investigation involving the Indemnitee for which
indemnity will or could be sought; except that any delay or failure to
so notify the Corporation shall relieve the Corporation of its
obligations hereunder only to the extent, if at all, that it is
prejudiced by reason of such delay or failure. With respect to any
action, suit, proceeding, or investigation of which the Corporation is
so notified, the Corporation will be entitled to participate therein at
its own expense and/or to assume the defense thereof at its own expense,
with legal counsel reasonably acceptable to the Indemnitee. After
notice from the Corporation to the Indemnitee of its election so to
assume such defense, the Corporation shall not be liable to the
Indemnitee for any legal or other expenses subsequently incurred by the
Indemnitee in connection with such claim, other than as proved below in
this Section D. The Indemnitee shall have the right to employ his or
her own counsel in connection with such claim, but the fees and expenses
of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the
Indemnitee unless: (i) the employment of counsel by the Indemnitee has
been authorized by the Corporation; (ii) counsel to the Indemnitee shall
have reasonably concluded that there may be a conflict of interest or
position on any significant issue between the Corporation and the
Indemnitee in the conduct of the defense of such action; or (iii) the
Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
counsel for the Indemnitee shall be at the expense of the Corporation
except as otherwise expressly provided by this Article. The Corporation
shall not be entitled, without the consent of the Indemnitee, to assume
the defense of any claim brought by or in the right of the Corporation
or as to which counsel for the Indemnitee shall have reasonably made the
conclusion provided for in clause (ii) above.
E. Advance of Expenses. Subject to the provisions of Section F
below, in the event that the Corporation does not assume the defense
pursuant to Section D of this Article of any action, suit, proceeding,
or investigation of which the Corporation receives notice under this
Article, any expenses (including attorneys' fees) incurred by an
Indemnitee in defending a civil or criminal action, suit, proceeding, or
investigation or any appeal therefrom shall be paid by the Corporation
in advance of the final disposition of such matter, provided, however,
that the payment of such expenses incurred by an Indemnitee in advance
of the final disposition of such matter shall be made only upon receipt
of an undertaking by or on behalf of the Indemnitee to repay all amounts
so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Corporation as
authorized in this Article. Such undertaking may be accepted without
reference to the financial ability of such person to make such repayment.
F. Procedure for Indemnification. In order to obtain
indemnification or advancement of expenses pursuant to Sections A, B, C
or E of this Article, the Indemnitee shall submit to the Corporation a
written request, including in such request such documentation and
information as is reasonably available to the Indemnitee and is
reasonably necessary to determine whether and to what extent the
Indemnitee is entitled to indemnification or advancement of expenses.
Any such indemnification or advancement of expenses shall be made
promptly, and in any event within 60 days after receipt by the
Corporation of the written request of the Indemnitee, unless with
respect to requests under Section A, B or E the Corporation determines
by clear and convincing evidence, within such 60-day period that the
Indemnitee did not meet the applicable standard of standard set forth in
Section A or B, as the case may be. Such determination shall be made in
each instance by (a) a majority vote of a quorum of the directors or the
Corporation consisting of persons who are not at that time parties to
the action, suit, or proceeding in question ("disinterested
directors"), (b) if no such quorum is obtainable, a majority vote of a
committee of two or more disinterested directors, (c) a majority vote of
a quorum of the outstanding shares of stock of all classes entitled to
vote for directors, voting as a single class, which quorum shall consist
of stockholders who are not at that time parties to the action, suit, or
proceeding in question, (d) independent legal counsel (who may be regular
legal counsel to the Corporation), or (e) a court of competent jurisdiction.
G. Remedies. The right to indemnification or advances as
granted by this Article shall be enforceable by the Indemnitee in any
court of competent jurisdiction if the Corporation denies such request,
in whole or in part, or if no disposition thereof is made within the 60-
day period referred to above in Section F. Unless otherwise provided by
law, the burden of proving that the Indemnitee is not entitled to
indemnification or advancement of expenses under this Article shall be
on the Corporation. Neither the failure of the Corporation to have made
a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee
has met the applicable standard of conduct, nor an actual determination
by the Corporation pursuant to Section F that the Indemnitee has not met
such applicable standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met the applicable
standard of conduct. The Indemnitee's expenses (including attorneys'
fees) incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such proceeding shall also
be indemnified by the Corporation.
H. Subsequent Amendment. No amendment, termination, or repeal
of this Article or of the relevant provisions of the General Corporation
Law of the State of Delaware or any other applicable laws shall affect
or diminish in any way the rights of any Indemnitee to indemnification
under the provisions hereof with respect to any action, suit,
proceeding, or investigation arising out of or relating to any actions,
transactions, or facts occurring prior to the final adoption of such
amendment, termination, or appeal.
I. Other Rights. The indemnification and advancement of
expenses provided by this Article shall not be deemed exclusive of any
other rights to which an Indemnitee seeking indemnification or
advancement of expenses may be entitled under any law (common or
statutory), agreement, or vote of stockholders or disinterested
directors or otherwise, both as to action in the Indemnitee's official
capacity and as to action in any other capacity while holding office for
the Corporation, and shall continue as to an Indemnitee who has ceased
to be a director or officer, and shall inure to the benefit of the
estate, heirs, executors, and administrators of the Indemnitee. Nothing
contained in this Article shall be deemed to prohibit, and the
Corporation is specifically authorized to enter into, agreements with
officers and directors providing indemnification rights and procedures
different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by its Board
of Directors, grant indemnification rights to other employees or agents
of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in
this Article.
J. Partial Indemnification. If an Indemnitee is entitled under
any provision of this Article to indemnification by the Corporation for
some or a portion of the expenses (including attorneys' fees),
judgments, fines or amounts paid in settlement actually and reasonably
incurred by or on Indemnitee's behalf in connection with any action,
suit, proceeding, or investigation and any appeal therefrom but not,
however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines, or amounts paid in
settlement to which the Indemnitee is entitled.
K. Insurance. The Corporation may purchase and maintain
insurance, at its expense, to protect itself and any director, officer,
employee, or agent of the Corporation or another corporation,
partnership, joint venture, trust, or other enterprise (including any
employee benefit plan) against any expense, liability, or loss incurred
by him or her in any such capacity, or arising out of his or her status
as such, whether or not the Corporation would have the power to
indemnify such person against such expense, liability, or loss under the
General Corporation Law of the State of Delaware.
L. Merger or Consolidation. If the Corporation is merged into
or consolidated with another corporation and the Corporation is not the
surviving corporation, the surviving corporation shall assume the
obligations of the Corporation under this Article with respect to any
action, suit, proceeding, or investigation arising out of or relating to
any actions, transactions, or facts occurring prior to the date of such
merger or consolidation.
M. Savings Clauses. If this Article or any portion hereof
shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify each
Indemnitee as to any expenses (including attorneys' fees) judgments,
fines, and amounts paid in settlement in connection with any action,
suit, proceeding, or investigation, whether civil, criminal, or
administrative, including any action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion
of this Article that shall not have been invalidated and to the fullest
extent permitted by applicable law.
N. Definitions. Terms used herein and defined in Section
145(h) and Section 145(i) of the General Corporation Law of the State of
Delaware shall have the respective meanings assigned to such terms in
such Section 145(h) and Section 145(i).
O. Subsequent Legislation. If the General Corporation Law of
the State of Delaware is amended after adoption of this Article to
expand further the indemnification permitted to Indemnitee, then the
Corporation shall indemnify such persons to the fullest extent permitted
by the General Corporation Law of the State of Delaware, as so amended.
ARTICLE X
The Corporation reserves the right to amend or repeal any
provision contained in this Fifth Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and
all rights conferred upon a stockholder herein are granted subject to
this reservation.
Three: The foregoing amendment and restatement of the Amended and
Restated Certificate of Incorporation has been duly approved by the
Board of Directors.
Four: The foregoing amendment and restatement of the Amended and
Restated Certificate of Incorporation was approved by the directors and
holders of the required number of shares of the Corporation in
accordance with Sections 242 and 245 of the Delaware General Corporation
Law. The number of shares voting in favor of the amendment equaled or
exceeded the vote required. The required vote was a majority of the
outstanding shares of Common Stock and majority of the outstanding
shares of Series C Convertible Preferred Stock.
IN WITNESS WHEREOF, the undersigned have executed this Fifth
Amended and Restated Certificate of Incorporation on December 2, 1998.
/s/ Edward Miller
Chief Executive Officer
<PAGE>
ANNEX III - Demand Note
CONVERTIBLE PROMISSORY NOTE
DIGITAL VIDEO SYSTEMS, INC.
$1,000,000.00 Los Gatos, California
November 12, 1998
FOR VALUE RECEIVED, DIGITAL VIDEO SYSTEMS, INC., a Delaware
corporation ("Maker"), promises to pay to the order of Oregon Power
Lending Institution ("Payee"), or as directed by Payee, on demand, in the
manner and at the place hereinafter provided, the principal amount of One
Million Dollars ($1,000,000.00), together with interest thereon, as
hereafter described.
Maker also promises to pay interest on the outstanding principal
amount hereof from the date hereof at a rate of 10.0% per annum. All
computations of interest shall be made on the basis of a 360-day year
consisting of twelve thirty-day months. In no event shall the interest
payable on this Note exceed the maximum rate of interest permitted to be
charged under applicable law.
1. Payments. All payments of principal and interest in respect of
this Note shall be made at a location within, and in lawful money of the
United States of America by corporate check at 357 Castro Street, Suite 2,
Mountain View, California 94041 or at such other place and in such other
manner as shall be designated by Payee in a notice to Maker.
2. Prepayments. This Note may be prepaid in whole or in part at
any time without penalty. Each prepayment made pursuant to this Note shall
be credited first on interest then due and the remainder on the principal;
and interest shall thereupon cease to accrue upon the principal so
credited. Upon prepayment of the entire principal amount hereof and all
accrued but unpaid interest thereon, all obligations of Maker hereunder
shall terminate, this Note shall be deemed canceled and all interest shall
cease to accrue. The prepayment of this Note in no way impacts the terms
of Investment Agreement.
3. Conversion Rights. Payee shall have the right, at any time, to
convert all or any portion of the outstanding principal amount under this
Note, together with all accrued and unpaid interest thereon, into fully
paid and non-assessable shares of Maker's Series C Convertible Preferred
Stock at the Conversion Price.
4. Exercise of Conversion Rights. Payee may exercise its rights
to convert all or any portion of the outstanding principal amount under
this Note, together with all accrued and unpaid interest thereon, into
shares of Series C Convertible Preferred Stock by surrendering this Note to
Maker, at its principal office or such other office or agency maintained by
Maker for that purpose, accompanied by a written notice of election to
convert outstanding amount under this Note, or a specified portion of such
amount (as provided in the notice), executed by Payee, which notice shall
specify a Conversion Date. Notwithstanding the foregoing, this Note shall
not be convertible into Series C Convertible Preferred Stock to the extent
that upon such conversion, Payee will become the record owner (together
with Preferred or Common Stock already owned by it) of Series C Convertible
Preferred Stock convertible in the aggregate into more than 20% of the
Common Stock of Maker, until such time as the issuance of such Series C
Convertible Preferred Stock issuable upon such a conversion is approved by
the requisite number of shareholders of Maker as required under the Nasdaq
corporate governance rules.
5. Conversion. As promptly as practicable after the surrender as
herein provided of this Note for conversion and delivery of the written
notice of election, Maker shall deliver or cause to be delivered
certificates representing the number of fully paid and non-assessable
shares of Series C Convertible Preferred Stock into which the outstanding
principal amount under this Note or such portion hereof as may be subject
to the written notice of election, together with all accrued and unpaid
interest thereon, may be converted in accordance with the provisions hereof.
6. Number of Shares; Conversion Calculation. The number of shares
of Series C Convertible Preferred Stock shall be determined by dividing the
amount to be converted by the Conversion Price on the applicable Conversion
Date, calculated to the nearest share of Series C Convertible Preferred
Stock. For the purpose of such calculation, fractions of less than 1/2
shall be disregarded and fractions of 1/2 or greater shall be rounded up to
the next full share. If only a portion of the outstanding principal amount
under the Note is used in such conversion, Maker shall execute and deliver
to or upon the order of Payee, a new note evidencing the unused portion of
the outstanding amount.
7. Conversion Record Date. Any conversion of the outstanding
principal and interest under this Note or any portion hereof shall be
deemed to have been made at the close of the Business Day on or following
the Conversion Date specified in the applicable written notice of election,
so that the rights of Payee shall cease at such time and the person or
persons entitled to receive any of the shares of Series C Convertible
Preferred Stock upon conversion shall be treated for all purposes as having
become the record holder or holders of such shares of Series C Convertible
Preferred Stock at such time.
8. Events of Default. The occurrence of the following shall
constitute an "Event of Default":
(a) failure of Maker to make any principal or interest payment
under this Note when due on written demand; or
(b) Maker shall file any petition or action for relief under any
bankruptcy, insolvency, reorganization, moratorium, creditor composition
law, or any other law for the relief of or relating to debtors, or an
involuntary petition shall be filed under the Bankruptcy Code against Maker
and such proceeding or case initiated by such petition shall remain
undismissed or unstayed and in effect for a period of 60 days or more, or a
custodian, receiver, trustee, assignee for the benefit of creditors, or
other similar official, shall be appointed to take possession, custody or
control of the properties of Maker.
9. Remedies. Upon the occurrence and during the continuance of
any Event of Default, Payee may (i) by notice to Maker, declare the
outstanding principal amount of this Note, together with accrued interest
thereon, to be due and payable, and the outstanding principal amount of
this Note, together with such interest, shall thereupon immediately become
due and payable without presentment, further notice, protest or other
requirements of any kind (all of which are hereby expressly waived by
Maker) or (ii) chose, without waiving its right of acceleration, not to
declare the outstanding principal amount of this Note, together with
accrued interest thereon, to be due and payable. If this Note is not paid
in accordance with the terms hereof, Maker agrees to pay all costs and
expenses of collection when incurred, including, without limitation,
reasonable attorneys' fees and expenses and court costs.
10. Definitions. The following terms in this Note shall have the
following meanings (and any of such terms may be used in the singular or
the plural):
"Bankruptcy Code" means Title 11 of the United States Code entitled
"Bankruptcy" as now and hereinafter in effect, or any successor thereto.
"Business Day" means any day other than a Saturday, Sunday or legal
holiday under the laws of the State of California or any day on which
banking institutions located in such state are authorized or required by
law or other governmental action to close.
"Common Stock" means the Common Stock of Maker.
"Conversion Date" means the date specified in any written notice of
election to convert delivered by Payee, which date shall be no earlier than
the date of actual delivery of such notice.
"Conversion Price" means One Thousand Dollars ($1,000.00) per share
of Series C Convertible Preferred Stock.
"Preferred Stock" means the convertible Series C Convertible
Preferred Stock of Maker.
11. Notices. All notices, requests, demands, and other
communications under this Note shall be in writing and shall be deemed to
have been delivered when delivered personally or mailed in a general or
branch post office and enclosed in a registered or certified post-paid
envelope or when sent by overnight courier, delivered to a telegraph
company or when scanned graphically or otherwise by telegraphic
communications equipment of the sending party and, in such case, addressed
to the appropriate addresses stated below or to such other changed
addresses the parties may have fixed by notice as provided herein:
If to Maker: Digital Video Systems, Inc.
160 Knowles Drive
Los Gatos; California 95032
Attn: Chief Executive Officer
Phone: (408) 874-8200
Fax: (408) 871-8220
And: Orrick, Herrington & Sutcliffe LLP
777 S. Figueroa Street, Suite 3200
Los Angeles, California 90017-5832
Attn: Blase P. Dillingham, Esq.
Phone: (213) 629-2020
Fax: (213) 612-2499
If to Payee: Oregon Power Lending Institution
357 Castro Street, Suite 2
Mountain View, California 94041
Attn: Donald Baker
Phone: (650) 962-8991
Fax: (650) 822-2907
12. Governing Law. This Note and the rights and obligation of
Maker and Payee hereunder shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principals of conflicts of law.
13. Effect On Successors In Interest. This Note shall be binding
upon and shall inure to the benefit of Maker and Payee and their respective
successors and assigns.
IN WITNESS THEREOF, Maker has caused this Note to be executed and
delivered by its duly authorized officer, as of the date and at the place
first written above.
DIGITAL VIDEO SYSTEMS, INC.
By: _________________________________
Name: Edward M. Miller, Jr.
Title: Chief Executive Officer
EXHIBIT 1
1998 STOCK OPTION PLAN
OF
DIGITAL VIDEO SYSTEMS, INC.
1. PURPOSES OF THE PLAN
The purposes of the 1998 Stock Option Plan ("Plan") of Digital
Video Systems, Inc., a Delaware corporation (the "Company"), are to:
(a) Encourage selected employees, directors and
consultants to improve operations and increase profits of the Company;
(b) Encourage selected employees, directors and
consultants to accept or continue employment or association with the
Company or its Affiliates; and
(c) Increase the interest of selected employees,
directors and consultants in the Company's welfare through participation
in the growth in value of the common stock of the Company (the "Common
Stock").
Options granted under this Plan ("Options") may be "incentive
stock options" ("ISOs") intended to satisfy the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder (the "Code"), or "nonqualified options"
("NQOs").
2. ELIGIBLE PERSONS
Every person who at the date of grant of an Option is an employee
of the Company or of any Affiliate (as defined below) of the Company is
eligible to receive NQOs or ISOs under this Plan. Every person who at
the date of grant is a consultant to, or nonemployee director of, the
Company or any Affiliate (as defined below) of the Company is eligible
to receive NQOs under this Plan. The term "Affiliate" as used in this
Plan means a parent or subsidiary corporation as defined in the
applicable provisions (currently Sections 424(e) and (f), respectively)
of the Code. The term "employee" includes an officer or director who
is an employee of the Company. The term "consultant" includes persons
employed by, or otherwise affiliated with, a consultant.
3. STOCK SUBJECT TO THIS PLAN; MAXIMUM NUMBER OF GRANTS
Subject to the provisions of Section 6.1.1 of this Plan, the total
number of shares of stock which may be issued under Options granted
pursuant to this Plan shall not exceed 4,000,000 shares of Common Stock.
The shares covered by the portion of any grant under this Plan which
expires, terminates or is cancelled unexercised shall become available
again for grants under this Plan. Where the exercise price of an Option
is paid by means of the optionee's surrender of previously owned shares
of Common Stock or the Company's withholding of shares otherwise
issuable upon exercise of the Option as permitted herein, only the net
number of shares issued and which remain outstanding in connection with
such exercise shall be deemed "issued" and no longer available for
issuance under this Plan. No eligible person shall be granted Options
during any twelvemonth period covering more than 750,000 shares.
4. ADMINISTRATION
(a) This Plan shall be administered by the Board of
Directors of the Company (the "Board") or by a committee (the
"Committee") to which administration of this Plan, or of part of this
Plan, is delegated by the Board (in either case, the "Administrator").
The Board shall appoint and remove members of the Committee in its
discretion in accordance with applicable laws. If necessary in order to
comply with Rule 16b3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and Section 162(m) of the Code, the
Committee shall, in the Board's discretion, be comprised solely of
"nonemployee directors" within the meaning of said Rule 16b3 and
"outside directors" within the meaning of Section 162(m) of the Code.
The foregoing notwithstanding, the Administrator may delegate
nondiscretionary administrative duties to such employees of the Company
as it deems proper and the Board, in its absolute discretion, may at any
time and from time to time exercise any and all rights and duties of the
Administrator under this Plan.
(b) Subject to the other provisions of this Plan, the
Administrator shall have the authority, in its discretion: (i) to grant
Options; (ii) to determine the fair market value of the Common Stock
subject to Options; (iii) to determine the exercise price of Options
granted; (iv) to determine the persons to whom, and the time or times at
which, Options shall be granted, and the number of shares subject to
each Option; (v) to construe and interpret the terms and provisions of
this Plan and of any option agreement and all Options granted under this
Plan; (vi) to prescribe, amend, and rescind rules and regulations
relating to this Plan; (vii) to determine the terms and provisions of
each Option granted (which need not be identical), including but not
limited to, the time or times at which Options shall be exercisable;
(viii) with the consent of the optionee, to modify or amend any Option;
(ix) to reduce the exercise price of any Option; (x) to accelerate or
defer (with the consent of the optionee) the exercise date of any
Option; (xi) to authorize any person to execute on behalf of the Company
any instrument evidencing the grant of an Option; and (xii) to make all
other determinations deemed necessary or advisable for the
administration of this Plan or any option agreement or Option. The
Administrator may delegate nondiscretionary administrative duties to
such employees of the Company, as it deems proper.
(c) All questions of interpretation, implementation,
and application of this Plan or any option agreement or Option shall be
determined by the Administrator, which determination shall be final and
binding on all persons.
5. GRANTING OF OPTIONS; OPTION AGREEMENT
(a) No Options shall be granted under this Plan after
10 years from the date of adoption of this Plan by the Board.
(b) Each Option shall be evidenced by a written stock
option agreement, in form satisfactory to the Administrator, executed by
the Company and the person to whom such Option is granted. In the event
of a conflict between the terms or conditions of an option agreement and
the terms and conditions of this Plan, the terms and conditions of this
Plan shall govern.
(c) The stock option agreement shall specify whether
each Option it evidences is an NQO or an ISO, provided, however, all
Options granted under this Plan to nonemployee directors and consultants
of the Company are intended to be NQOs.
(d) Subject to Section 6.3.3 with respect to ISOs,
the Administrator may approve the grant of Options under this Plan to
persons who are expected to become employees, directors or consultants
of the Company, but are not employees, directors or consultants at the
date of approval, and the date of approval shall be deemed to be the
date of grant unless otherwise specified by the Administrator.
6. TERMS AND CONDITIONS OF OPTIONS
Each Option granted under this Plan shall be subject to the terms
and conditions set forth in Section 6.1. NQOs shall be also subject to
the terms and conditions set forth in Section 6.2, but not those set
forth in Section 6.3. ISOs shall also be subject to the terms and
conditions set forth in Section 6.3, but not those set forth in Section 6.2
6.1 Terms and Conditions to Which All Options Are Subject. All
Options granted under this Plan shall be subject to the following terms
and conditions:
6.1.1 Changes in Capital Structure. Subject to Section
6.1.2, if the stock of the Company is changed by reason of a stock
split, reverse stock split, stock dividend, recapitalization,
combination or reclassification, or if the Company effects a spinoff of
the Company's subsidiary, appropriate adjustments shall be made by the
Board, in its sole discretion, in (a) the number and class of shares of
stock subject to this Plan and each Option outstanding under this Plan,
and (b) the exercise price of each outstanding Option; provided,
however, that the Company shall not be required to issue fractional
shares as a result of any such adjustments.
6.1.2 Corporate Transactions. In the event of a
Corporate Transaction (as defined below), the Administrator shall notify
each optionee at least 30 days prior thereto or as soon as may be
practicable. To the extent not previously exercised, all Options shall
terminate immediately prior to the consummation of such Corporate
Transaction unless the Administrator determines otherwise in its sole
discretion; provided, however, that the Administrator, in its sole
discretion, may permit exercise of any Options prior to their
termination, even if such Options would not otherwise have been
exercisable. The Administrator may, in its sole discretion, provide
that all outstanding Options shall be assumed or an equivalent option
substituted by an applicable successor corporation or any Affiliate of
the successor corporation in the event of a Corporate Transaction. A
"Corporate Transaction" means a liquidation or dissolution of the
Company, a merger or consolidation of the Company with or into another
corporation or entity, a sale of all or substantially all of the assets
of the Company, or a purchase of more than 50 percent of the outstanding
capital stock of the Company in a single transaction or a series of
related transactions by one person or more than one person acting in
concert.
6.1.3 Time of Option Exercise. Subject to Section 5
and Section 6.3.4, an Option granted under this Plan shall be
exercisable (a) immediately as of the effective date of the stock option
agreement granting the Option, or (b) in accordance with a schedule or
performance criteria as may be set by the Administrator and specified in
the written stock option agreement relating to such Option. In any
case, no Option shall be exercisable until a written stock option
agreement in form satisfactory to the Company is executed by the Company
and the optionee.
6.1.4 Option Grant Date. The date of grant of an
Option under this Plan shall be the effective date of the stock option
agreement granting the Option.
6.1.5 Nontransferability of Option Rights. Except with
the express written approval of the Administrator which approval the
Administrator is authorized to give only with respect to NQOs, no Option
granted under this Plan shall be assignable or otherwise transferable by
the optionee except by will or by the laws of descent and distribution.
During the life of the optionee, an Option shall be exercisable only by
the optionee.
6.1.6 Payment. Except as provided below, payment in
full, in cash, shall be made for all stock purchased at the time written
notice of exercise of an Option is given to the Company, and proceeds of
any payment shall constitute general funds of the Company. The
Administrator, in the exercise of its absolute discretion after
considering any tax, accounting and financial consequences, may
authorize any one or more of the following additional methods of payment:
(a) Acceptance of the optionee's full recourse
promissory note for all or part of the Option price, payable on such
terms and bearing such interest rate as determined by the Administrator
(but in no event less than the minimum interest rate specified under the
Code at which no additional interest or original issue discount would be
imputed), which promissory note may be either secured or unsecured in
such manner as the Administrator shall approve (including, without
limitation, by a security interest in the shares of the Company);
(b) Subject to the discretion of the Administrator
and the terms of the stock option agreement granting the Option,
delivery by the optionee of shares of Common Stock already owned by the
optionee for all or part of the Option price, provided the fair market
value (determined as set forth in Section 6.1.9) of such shares of
Common Stock is equal on the date of exercise to the Option price, or
such portion thereof as the optionee is authorized to pay by delivery of
such stock;
(c) Subject to the discretion of the Administrator,
through the surrender of shares of Common Stock then issuable upon
exercise of the Option, provided the fair market value (determined as
set forth in Section 6.1.9) of such shares of Common Stock is equal on
the date of exercise to the Option price, or such portion thereof as the
optionee is authorized to pay by surrender of such stock; and
(d) By means of so-called cashless exercises as
permitted under applicable rules and regulations of the Securities and
Exchange Commission and the Federal Reserve Board.
6.1.7 Withholding and Employment Taxes. In the case of
an employee exercising an NQO, at the time of exercise and as a
condition thereto, or at such other time as the amount of such
obligation becomes determinable, the optionee shall remit to the Company
in cash all applicable federal and state withholding and employment
taxes. Such obligation to remit may be satisfied, if authorized by the
Administrator in its sole discretion, after considering any tax,
accounting and financial consequences, by the optionee's (i) delivery of
a promissory note in the required amount on such terms as the
Administrator deems appropriate, (ii) tendering to the Company
previously owned shares of Common Stock or other securities of the
Company with a fair market value equal to the required amount, or (iii)
agreeing to have shares of Common Stock (with a fair market value equal
to the required amount) which are acquired upon exercise of the Option
withheld by the Company.
6.1.8 Other Provisions. Each Option granted under this
Plan may contain such other terms, provisions, and conditions not
inconsistent with this Plan as may be determined by the Administrator,
and each ISO granted under this Plan shall include such provisions and
conditions as are necessary to qualify the Option as an "incentive stock
option" within the meaning of Section 422 of the Code.
6.1.9 Determination of Value. For purposes of this
Plan, the fair market value of Common Stock or other securities of the
Company shall be determined as follows:
(a) If the stock of the Company is listed on a
securities exchange or is regularly quoted by a recognized securities
dealer, and selling prices are reported, its fair market value shall be
the closing price of such stock on the date the value is to be
determined, but if selling prices are not reported, its fair market
value shall be the mean between the high bid and low asked prices for
such stock on the date the value is to be determined (or if there are no
quoted prices for the date of grant, then for the last preceding
business day on which there were quoted prices).
(b) In the absence of an established market for the
stock, the fair market value thereof shall be determined in good faith
by the Administrator, with reference to the Company's net worth,
prospective earning power, dividend paying capacity, and other relevant
factors, including the goodwill of the Company, the economic outlook in
the Company's industry, the Company's position in the industry, the
Company's management, and the values of stock of other corporations in
the same or a similar line of business.
6.1.10 Option Term. Subject to Section 6.3.4, no Option
shall be exercisable more than 10 years after the date of grant, or such
lesser period of time as is set forth in the stock option agreement (the
end of the maximum exercise period stated in the stock option agreement
is referred to in this Plan as the "Expiration Date").
6.2 Terms and Conditions to Which Only NQOs Are Subject.
Options granted under this Plan which are designated as NQOs shall be
subject to the following terms and conditions:
6.2.1 Exercise Price. The exercise price of an
NQO shall be the amount determined by the Administrator as specified in
the option agreement.
(b) To the extent required by applicable laws, rules
and regulations, the exercise price of an NQO granted to any person who
owns, directly or by attribution under the Code (currently Section
424(d)), stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company or of any Affiliate
(a "Ten Percent Stockholder") shall in no event be less than 110% of
the fair market value (determined in accordance with Section 6.1.9) of
the stock covered by the Option at the time the Option is granted.
6.2.2 Termination of Employment. Except as otherwise
provided in the stock option agreement, if for any reason an optionee
ceases to be employed by the Company or any of its Affiliates, Options
that are NQOs held at the date of termination (to the extent then
exercisable) may be exercised in whole or in part at any time within
three months of the date of such termination (but in no event after the
Expiration Date). For purposes of this Section 6.2.2, "employment"
includes service as a director or as a consultant. For purposes of this
Section 6.2.2, an optionee's employment shall not be deemed to terminate
by reason of sick leave, military leave or other leave of absence
approved by the Administrator, if the period of any such leave does not
exceed 90 days or, if longer, if the optionee's right to reemployment by
the Company or any Affiliate is guaranteed either contractually or by statute.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options
granted under this Plan which are designated as ISOs shall be subject to
the following terms and conditions:
6.3.1 Exercise Price. The exercise price of an
ISO shall be not less than the fair market value (determined in
accordance with Section 6.1.9) of the stock covered by the Option at the
time the Option is granted.
(b) The exercise price of an ISO granted to any Ten
Percent Stockholder shall in no event be less than 110% of the fair
market value (determined in accordance with Section 6.1.9) of the stock
covered by the Option at the time the Option is granted.
6.3.2 Disqualifying Dispositions. If stock acquired by
exercise of an ISO granted pursuant to this Plan is disposed of in a
"disqualifying disposition" within the meaning of Section 422 of the
Code (a disposition within two years from the date of grant of the
Option or within one year after the transfer of such stock on exercise
of the Option), the holder of the stock immediately before the
disposition shall promptly notify the Company in writing of the date and
terms of the disposition and shall provide such other information
regarding the Option as the Company may reasonably require.
6.3.3 Grant Date. If an ISO is granted in anticipation
of employment as provided in Section 5(d), the Option shall be deemed
granted, without further approval, on the date the grantee assumes the
employment relationship forming the basis for such grant, and, in
addition, satisfies all requirements of this Plan for Options granted on
that date.
6.3.4 Term. Notwithstanding Section 6.1.10, no ISO
granted to any Ten Percent Stockholder shall be exercisable more than
five years after the date of grant.
6.3.5 Termination of Employment. Except as otherwise
provided in the stock option agreement, if for any reason an optionee
ceases to be employed by the Company or any of its Affiliates, Options
that are ISOs held at the date of termination (to the extent then
exercisable) may be exercised in whole or in part at any time within
three months of the date of such termination (but in no event after the
Expiration Date). For purposes of this Section 6.3.5, an optionee's
employment shall not be deemed to terminate by reason of sick leave,
military leave or other leave of absence approved by the Administrator,
if the period of any such leave does not exceed 90 days or, if longer,
if the optionee's right to reemployment by the Company or any Affiliate
is guaranteed either contractually or by statute.
7. MANNER OF EXERCISE
(a) An optionee wishing to exercise an Option shall
give written notice to the Company at its principal executive office, to
the attention of the officer of the Company designated by the
Administrator, accompanied by payment of the exercise price and
withholding taxes as provided in Sections 6.1.6 and 6.1.7. The date the
Company receives written notice of an exercise hereunder accompanied by
payment of the exercise price will be considered as the date such Option
was exercised.
(b) Promptly after receipt of written notice of
exercise of an Option and the payments called for by Section 7(a), the
Company shall, without stock issue or transfer taxes to the optionee or
other person entitled to exercise the Option, deliver to the optionee or
such other person a certificate or certificates for the requisite number
of shares of stock. An optionee or permitted transferee of the Option
shall not have any privileges as a stockholder with respect to any
shares of stock covered by the Option until the date of issuance (as
evidenced by the appropriate entry on the books of the Company or a duly
authorized transfer agent) of such shares.
8. EMPLOYMENT OR CONSULTING RELATIONSHIP
Nothing in this Plan or any Option granted hereunder shall
interfere with or limit in any way the right of the Company or of any of
its Affiliates to terminate any optionee's employment or consulting at
any time, nor confer upon any optionee any right to continue in the
employ of, or consult with, the Company or any of its Affiliates.
9. CONDITIONS UPON ISSUANCE OF SHARES
Shares of Common Stock 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 "Securities Act").
10. NONEXCLUSIVITY OF THIS PLAN
The adoption of this Plan shall not be construed as creating any
limitations on the power of the Company to adopt such other incentive
arrangements as it may deem desirable, including, without limitation,
the granting of stock options other than under this Plan.
11. MARKET STANDOFF
Each optionee, if so requested by the Company or any
representative of the underwriters in connection with any registration
of the offering of any securities of the Company under the Securities
Act, shall not sell or otherwise transfer any shares of Common Stock
acquired upon exercise of Options during the 180-day period following
the effective date of a registration statement of the Company filed
under the Securities Act; provided, however, that such restriction shall
apply only to the first registration statement of the Company to become
effective under the Securities Act after the date of adoption of this
Plan which includes securities to be sold on behalf of the Company to
the public in an underwritten public offering under the Securities Act.
The Company may impose stop transfer instructions with respect to
securities subject to the foregoing restriction until the end of such
180-day period.
12. AMENDMENTS TO PLAN
The Board may at any time amend, alter, suspend or discontinue
this Plan. Without the consent of an optionee, no amendment,
alteration, suspension or discontinuance may adversely affect
outstanding Options except to conform this Plan and ISOs granted under
this Plan to the requirements of federal or other tax laws relating to
incentive stock options. No amendment, alteration, suspension or
discontinuance shall require stockholder approval unless (a) stockholder
approval is required to preserve incentive stock option treatment for
federal income tax purposes or (b) the Board otherwise concludes that
stockholder approval is advisable.
13. EFFECTIVE DATE OF PLAN; TERMINATION
This Plan shall become effective upon adoption by the Board
provided, however, that no Option shall be exercisable unless and until
written consent of the stockholders of the Company, or approval of
stockholders of the Company voting at a validly called stockholders'
meeting, is obtained within twelve months after adoption by the Board.
If any Options are so granted and stockholder approval shall not have
been obtained within twelve months of the date of adoption of this Plan
by the Board, such Options shall terminate retroactively as of the date
they were granted. Options may be granted and exercised under this Plan
only after there has been compliance with all applicable federal and
state securities laws. This Plan (but not Options previously granted
under this Plan) shall terminate within ten years from the date of its
adoption by the Board.
