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Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934
Check the appropriate box:
[ ] Preliminary Information Statement
[_] Confidential, for use of the Commission Only (as permitted by Rule 14c-
5(d)(2)
[X] Definitive Information Statement
DIGITAL VIDEO SYSTEMS, INC.
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(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14c-5(g) and o-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: (Set forth the amount on which
the filing fee is calculated and state how it was determined.)
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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DIGITAL VIDEO SYSTEMS, INC.
280 HOPE STREET
MOUNTAIN VIEW, CALIFORNIA 94041
INFORMATION STATEMENT
DATED MARCH 25, 1999
REGARDING THE ISSUANCE OF COMMON STOCK AND SERIES C PREFERRED STOCK IN
CONNECTION WITH THAT CERTAIN INVESTMENT AGREEMENT ENTERED INTO
WITH OREGON POWER LENDING INSTITUTION
AND ALSO CONSTITUTING NOTICE OF ACTION TAKEN WITHOUT A MEETING
This Information Statement and Notice of Action Taken Without a
Meeting (collectively, the "Information Statement") is furnished to the
stockholders of Digital Video Systems, Inc., a Delaware corporation (the
"Company"), to provide information with respect to an action taken by
written consent (the "Written Consent") of holders of a majority of the
outstanding shares of the Company's common stock, par value $0.0001 per
share ("Common Stock"), that were entitled to vote on such action. This
Information Statement also constitutes notice of action taken without a
meeting as required by Section 228(d) of the Delaware General Corporation
Law ("DGCL").
The Written Consent approved (i) the transactions contemplated by
that certain Letter Agreement (the "Investment Agreement"), dated as of
October 15, 1998, between 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 and (C) shares of Common
Stock upon the conversion of the Preferred Stock and the exercise of the
Options, and (ii) 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 (collectively, clauses (i) and (ii), the
"Transactions").
_______________________________
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE NOT REQUESTED TO SEND US A
PROXY.
_______________________________
The Transactions were unanimously approved by the Company's Board
of Directors on October 14, 1998 and ratified on March 23, 1999.
Although approval of the Transactions by the Company's shareholders is
not required under governing Delaware law, such approval is required
under the Nasdaq Rules applicable to companies listed on the Nasdaq
National Market.
Under the Nasdaq Rules, the Company is required to 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 Transactions, 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, under the
Nasdaq Rules, the affirmative vote of the holders of a majority of the
outstanding shares of the Company's Common Stock is required to approve
the Transactions. On March 23, 1999, the holders of a majority of the
outstanding shares of the Company's Common Stock executed the Written
Consent. As a result, the Transactions were approved and no further
votes will be needed.
The record date for determining stockholders entitled to receive
this Information Statement has been established as the close of business
on March 23, 1999. On that date, the Company had outstanding and
entitled to vote 25,207,000 shares of Common Stock.
Under applicable federal securities laws, the Transactions cannot
be effected until at least 20 calendar days after this Information
Statement is sent or given to the stockholders of the Company. This
Information Statement is being mailed to stockholders on or about
April 5, 1999.
Private Placement
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 1998
(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 were contingent upon shareholder approval which has
been obtained by the Company through the Written Consent. In addition,
the Options issued in the First Closing were to be exercisable only if
the Transactions were also approved by the shareholders. Because the
Second and Third Closings were scheduled to take place in November and
December, respectively, and because shareholder approval through the
Written Consent was not obtained until March 23, 1999, the Company issued
demand promissory notes to OPLI (the "Demand Notes") in the aggregate
principal amount of $4,475,326 in lieu of the $2,000,000 of Preferred
Stock that OPLI was entitled to buy in the Second Closing, the $2,000,000
of the Preferred Stock which OPLI was entitled to buy in the Third
Closing and $475,326 of the Preferred Stock which OPLI was entitled to
buy in the Subsequent Tranches. In addition, effective as of October 15,
1998, the Company entered into an amendment to the Investment Agreement
extending the time periods during which OPLI has the right to make its
investments in the Company. The Investment Agreement, as amended,
provides that OPLI may purchase (i) the securities it was entitled to
purchase at the Second Closing at any time during the 30-day period
following shareholder approval of the Transactions, (ii) the securities
it is entitled to purchase at the Third Closing at any time during the
60-day period following shareholder approval of the Transactions and
(iii) the securities it is entitled to purchase at the Subsequent
Closings at any time during the 180-day period following shareholder
approval of the Transactions.
Each share of Preferred Stock may be converted into a number of
shares of Common Stock equal to the face value of the shares of Preferred
Stock ($1,000) divided by $0.47, subject to adjustment. The market price
of the Common Stock between October 5, 1998 and November 4, 1998 ranged
from a low of $0.50 to a high of $0.875.
Each Demand Note became 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
Transactions as evidenced by the Written Consent. The Demand Notes earn
interest at a rate of 10% per annum. On March 23, 1999, the Company and
OPLI entered into a Conversion Agreement whereby OPLI agreed irrevocably
and without exception to exercise its right to convert the Demand Notes
to Preferred Stock on the first day any action with respect to the
Transactions approved by the Written Consent may be taken in accordance
with applicable federal securities laws, currently expected to be April
26, 1999. 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.
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 and Third Closings were scheduled to
take place in November and December, respectively, and because
shareholder approval through the Written Consent was not obtained until
March 23, 1999, the Company issued the Demand Notes to OPLI, in the
aggregate principal amount of $4,475,326, in lieu of the $2,000,000 of
Preferred Stock that OPLI was entitled to buy in the Second Closing, the
$2,000,000 of the Preferred Stock OPLI was entitled to buy in the Third
Closing and $475,326 of the Preferred Stock which OPLI was entitled to
buy in the Subsequent Tranches. In addition, effective as of October 15,
1998, the Company entered into an amendment to the Investment Agreement
extending the time periods during which OPLI has the right to make its
investments in the Company. The Investment Agreement as amended,
provides that OPLI may purchase (i) the securities it was entitled to
purchase at the Second Closing at any time during the 30-day period
following shareholder approval of the Transactions, (ii) the securities
it is entitled to purchase at the Third Closing at any time during the
60-day period following shareholder approval of the Transactions and
(iii) the securities it is entitled to purchase at the Subsequent
Closings at any time during the 180-day period following shareholder
approval of the Transactions.
In connection with the sale and issuance of the Company's
securities pursuant to the Investment Agreement, the Company agreed to
file with the 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 any shares of Common Stock issuable upon the conversion of the
Demand Notes in such registration.
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 Notes (once they become
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 were all contingent upon
the approval of the shareholders of the Company which has been obtained
through the Written Consent. Where Demand Notes were issued in lieu of
Preferred Stock, the convertibility of such Demand Notes was also
contingent upon shareholder approval. The exercisability of the Option
issued in the First Closing was also contingent upon such approval. The
Demand Notes were issued in lieu of the $2,000,000 face value of
Preferred Stock that OPLI was entitled to buy in the Second Closing, the
$2,000,000 face value of Preferred Stock that OPLI was entitled to buy in
the Third Closing and $475,326 of the face value of Preferred Stock which
OPLI was entitled to buy in the Subsequent Closings, such that OPLI now
has the option, but not the obligation, to buy up to $3,524,674 face
value of Preferred Stock in the Subsequent Closings. The purchase by
OPLI of the final $3,524,674 face value of Preferred Stock it is entitled
to purchase in the 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 additional
Preferred Stock in the Subsequent Closings.
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
Transactions has been obtained. In addition, the Options to be issued at
the Second Closing will not be issued until such shareholder approval has
been obtained. The requisite shareholder approval was obtained upon the
execution of the Written Consent on March 23, 1999.
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. The Company currently intends to also
include any shares of Common Stock issuable upon the conversion of the
Preferred Stock issuable upon conversion of the Demand Notes in such
registration.
Preferred Stock
Pursuant to the terms of the Investment Agreement, as amended, 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 Notes
(aggregating $4,475,326) in lieu of the $2,000,000 of Preferred Stock it
was entitled to purchase in the Second Closing, the $2,000,000 of the
Preferred Stock it was entitled to purchase in the Third Closing and
$475,326 of the Preferred Stock which OPLI was entitled to buy in the
Subsequent Closings, OPLI now has the option, but not the obligation, to
buy up to $3,524,674 face value of Preferred Stock in the Subsequent
Closings. The 1,000,000 Options which the Investment Agreement provides
will be issued to OPLI at the Second Closing, will be issued promptly
after the first day any action with respect to the Transactions approved
by the Written Consent may be taken in accordance with applicable federal
securities laws, currently expected to be April 26, 1999. In the
Subsequent Closings and at OPLI's option, the Company will issue to OPLI
shares of Preferred Stock with a face value up to $3,524,674, in two
tranches: (i) the first tranche up to $1,524,674 and (ii) the second
tranche up to $2,000,000. The time period during which OPLI can make
additional investments as part of the Second, Third and Subsequent
Closings was extended pursuant to the First Amendment to the Investment
Agreement. All purchases of Preferred Stock will be made at a purchase
price equal to the face value thereof. Pursuant to the Investment
Agreement, 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.
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 will
automatically 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 Notes
The Demand Notes were issued to OPLI in lieu of $4,475,326 face
value of Preferred Stock which OPLI could otherwise have purchased. The
Demand Notes were 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 Notes have an aggregate principal amount of $4,475,326, bear
interest at a rate of 10% per annum and are payable in full upon demand.
Upon receipt of shareholder approval through the Written Consent, the
Demand Notes became convertible into a face value of Preferred Stock
equal to the aggregate principal amount thereof plus any accrued but
unpaid interest. On March 23, 1999, the Company and OPLI entered into a
Conversion Agreement whereby OPLI agreed irrevocably and without
exception to exercise its right to convert the Demand Notes to Preferred
Stock on the first day any action with respect to the Transactions
approved by the Written Consent may be taken in accordance with
applicable federal securities laws, currently expected to be April 26,
1999.
Use of Proceeds
The proceeds from the sale of the Preferred Stock and the Demand
Notes, have been used by the Company to satisfy its working capital
requirements and to support letters of credit for the benefit of
suppliers.
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, depending upon the amount ultimately invested by OPLI under the
Investment Agreement and the amount of the Options OPLI ultimately
exercises, OPLI could acquire sufficient equity in the Company to
constitute a "change in control." In the event a change in control
occurs as a result of the transactions contemplated by the Investment
Agreement, the Written Consent would also be effective to satisfy the
shareholder vote required therefor.
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 could only take place if the
approval received through the Written Consent was obtained and that the
Option issued in the First Closing would only be exercisable if such
approval was obtained and the terms of the Demand Notes provide that they
would only become convertible if the approval sought hereby was obtained.
The approval of the Transactions by the Company's shareholders
obtained through the Written Consent resulted 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
Notes and exercise of the Options as described in this Information
Statement and freed the Company from the 20% limit under the Nasdaq Rules
with respect to the Transactions which are described herein. No further
shareholder vote or approval related to the Transactions as contemplated
by the Investment Agreement will be sought or required.
Possible Disadvantages In Connection With The Transactions
Potential for Dilution of Common Shareholders. The number of
shares of Common Stock that may be issued upon the conversion of the
Preferred Stock and the Demand Notes, 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 24,176,596. 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
Notes, and any additional demand notes issued in favor of OPLI with
substantially similar terms in connection with the Third Closing or any
Subsequent 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
consummation of the Transactions 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. The Company currently intends to also include any shares of
Common Stock issuable upon conversion of the Demand Notes in such
registration, which would allow for the public sale of such shares. 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 consummation of the Transactions 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 In Connection With The Transactions -
Potential for Increased Dilution of Common Shareholders and - Potential
for Increased Number of Shares Available for Sale."
Potential for a Change of Control. The consummation of the
Transactions 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 Notes
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 the shareholder approval obtained through the Written Consent
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
$2,250,000 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 Had Not Been Obtained
If shareholder approval had not been obtained, (i) the terms of the
Investment Agreement and the Nasdaq Rules would have prohibited the
Company from issuing 20% or more of the outstanding shares of Common
Stock, (ii) the Second, Third and Subsequent Closings would not take
place and shares of Preferred Stock and Options would not be issued to
OPLI at such Closings and the Company would not receive the up to
$8,000,000 of purchase price (including conversion of the Demand Notes)
for such securities, and (iii) the Demand Notes would not become
convertible and, if the Company were required to repay the Demand Notes,
it would likely not have the financial resources to do so.
Dilution
The net tangible book value of the Company as of September 30, 1998
was $6,350,000 or $0.25 per share. "Net tangible book value per share"
represents the amount of total tangible assets of the Company less total
liabilities of the Company, divided by the number of shares of Common
Stock outstanding. After giving effect to the issuance of the 2,000
shares of Preferred Stock issued to OPLI, the net tangible book value of
the Company as of September 30, 1998 would have been $8,350,000 or $0.28
per share (assuming conversion of the Preferred Stock to Common Stock).
After giving effect to the issuance of $4,475,326 in Demand Notes to OPLI
alone and assuming conversion of all such Demand Notes to Common Stock,
the net tangible book value of the Company as of September 30, 1998 would
have been $10,825,326 or $0.31 per share. After giving effect to (i) the
issuance of the 2,000 shares of Preferred Stock issued to OPLI (and
assuming conversion thereof to Common Stock) and (ii) the issuance of
$4,475,326 in Demand Notes to OPLI and assuming conversion of all such
Demand Notes to Common Stock, the net tangible book value of the Company
as of September 30, 1998 would have been $12,825,326 or $0.33 per share.
The changes in net tangible book value per share and the dilution per
share to OPLI in each case is illustrated in the table below:
<TABLE>
<CAPTION>
Preferred
Stock
Issuance and
Preferred of Demand Demand
Stock(1) Notes(2) Notes(1)(2)
---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Price per share to OPLI..................... $0.47 $0.47 $0.47
Net tangible book value before investments.. $0.25 $0.25 $0.25
Increase attributable to OPLI............... $0.03 $0.06 $0.08
Pro Forma Net tangible book value
after investments......................... $0.28 $0.31 $0.33
Dilution to OPLI............................ $0.19 $0.16 $0.14
</TABLE>
(1) As adjusted to reflect the issuance of 2,000 shares of Preferred Stock
and assuming the conversion of such Preferred Stock into Common Stock.
(2) As adjusted to reflect the issuance of $4,475,326 in aggregate
principal amount of Demand Notes and assuming the conversion of the
principal amount of such Demand Notes into shares of Common Stock.
The following table shows the effect on the net tangible book value per
share of the Company and the dilution per share to OPLI at September 30,
1998, assuming (i) OPLI purchases the maximum amount of Preferred Stock
(or purchases convertible demand notes in lieu of such Preferred Stock)
issuable under the Investment Agreement, (ii) OPLI converts all such
Preferred Stock and Demand Notes to Common Stock and (iii) OPLI exercises
all options issued or issuable to it under the Investment Agreement. If
OPLI does all of the foregoing, the net tangible book value of the
Company would be $18,600,000, there would be 49,393,483 shares of Common
Stock outstanding and the net tangible book value per share would be
$0.38.
<TABLE>
<S> <C> <C>
Average price per share to OPLI(1)................... $0.50
Net tangible book value before investments............. $0.25
Increase attributable to OPLI.......................... $0.13
Pro Forma Net tangible book value after investments....... $0.38
Dilution to OPLI....................................... $0.12
</TABLE>
(1) Average is determined assuming the purchase by OPLI of $10,000,000
worth of Common Stock at $0.47 per share (21,176,596 shares) and the
purchase by OPLI, pursuant to options, of an additional $2,250,000 worth
of Common Stock at $0.75 per share (3,000,000 shares).
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. 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 Information 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 and Demand Notes convertible into a
face value of Preferred Stock equal to the aggregate principal amount
thereof (aggregating $4,475,326) plus any accrued but unpaid interest,
but such Option is not exercisable, and such Demand Notes are not
convertible until the first day any action with respect to the
Transactions approved by the Written Consent may be taken in accordance
with applicable federal securities laws, currently expected to be April
26, 1999.
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.
