AS FILED WITH THE COMMISSION ON OCTOBER 16, 1996 FILE NO. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DIGITAL POWER CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 3679 94-1721931
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
41920 Christy Street, Fremont, California 94538-3158; 510-657-2635
(Address and telephone number of principal executive offices)
41920 Christy Street, Fremont, California 94538-3158
(Address of principal place of business or intended principal place of
business)
Robert O. Smith, Chief Executive Officer
Digital Power Corporation
41920 Christy Street
Fremont, California 94538-3158
510-657-2635
(Name, address and telephone number of agent for service)
Copies to:
Daniel B. Eng, Esq. Charles B. Pearlman, Esq.
Bartel Eng Linn & Schroder Joel D. Mayersohn, Esq.
300 Capitol Mall, Suite 1100 Atlas, Pearlman, Trop & Borkson, P.A.
Sacramento, California 95814 New River Center, Suite 1900
Telephone: 916-442-0400 200 East Las Olas Boulevard
Fort Lauderdale, Florida 33302-4610
Telephone: 954-763-1200
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ X ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
blocks and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title of each Proposed maximum
class of maximum aggregate Amount of
securities to be Amount to be offering price(1) offering registration
registered registered price fee
<S> <C> <C> <C> <C>
Common Stock 1,150,000 $4.00 $4,600,000 $1,393.94
Common Stock Purchase Warrants 775,000 $.125 $96,875 29.36
Common Stock Underlying Warrants 775,000 $5.00 $3,875,000 $1,174.24
Total $2,597.54
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457 of the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
DIGITAL POWER CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-B
Registration Statement
ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
1. Front of Registration Statement
and Outside Front Cover Page of Outside Front Cover
Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front and Outside Back
Cover Pages
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution Dilution
7. Selling Security Holders Principal and Selling Stockholders
and Warrantholders
8. Plan of Distribution The Offering; Underwriting; Terms
of Offering
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons Management; Principal and Selling
Shareholders
11. Security Ownership of Certain
Beneficial Owners and Principal and Selling Stockholders
Management and Warrantholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Experts; Legal Matters
Counsel
14. Disclosure of Commission
Position on Indemnification for Underwriting
Securities Act Liabilities
15. Organization Within Last Five Summary; Business
Years
16. Description of Business Summary; Business
17. Management's Discussion and
Analysis or Plan of Operation Management's Discussion and
Analysis
18. Description of Property Business
19. Certain Relationships and
Related Transactions Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters Summary
21. Executive Compensation Management
22. Financial Statements Consolidated Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure Change in Accountants
Prospectus Subject to Completion
October 16, 1996
DIGITAL POWER CORPORATION
1,000,000 SHARES OF COMMON STOCK
NO PAR VALUE
700,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
_________________
Of the 1,000,000 shares of common stock, no par value ("Common Stock")
offered, 750,000 shares are being sold by Digital Power Corporation ("Digital
Power" or the "Company") and 250,000 shares are being sold by certain selling
stockholders of the Company (the "Selling Stockholders"). In addition, the
Company is selling 500,000 redeemable common stock purchase warrants
("Warrants"), and certain warrantholders may sell up to 200,000 Warrants,
entitling the holders thereof to purchase, during a three-year period from the
date of this Prospectus ("Exercise Period"), one share of Common Stock at an
exercise price of $5.00 per share, subject to adjustment. See "Principal and
Selling Stockholders and Warrantholders." The Company will not receive any
proceeds from the sale of shares by the Selling Stockholders or from the sale
of Warrants by certain warrantholders. Under certain conditions, the Company
shall have the right upon 30 days notice to call each Warrant for redemption at
$.125 per Warrant. See "Description of Securities." Further, the Company is
registering 700,000 shares of Common Stock that will be issued upon the
exercise of the Warrants. See "Management," "Certain Transactions," and
"Description Of Securities." Prior to this offering, there has been no public
market for the Common Stock or Warrants of the Company. It is currently
estimated that the initial public offering price per share of Common Stock will
be $4.00, and that the initial public offering price per Warrant will be $.125.
See "Underwriting" for the factors to be considered in determining the initial
public offering price.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK AND WARRANTS.
Application has been made for the listing of the Company's Common Stock
under the symbol "DPWR" and Warrants under the symbol "DPWRW" on the NASDAQ
SmallCap Market.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Public Underwriting Discounts Proceeds to Proceeds to Selling
and Commissions(1) Company(2) Stockholders(3)
<S> <C> <C> <C> <C>
Per Share $4.00 $0.40 $3.60 $3.60
Per Warrant. . . . . $0.125 $0.0125 $0.1125 $0.1125
Total{(4)} $4,087,500 $408,750 $2,756,250 $922,500
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting estimated expenses of $230,000 payable by the
Company, and additional compensation to be received by the
Underwriters in the form of a non-accountable expense allowance equal
to three percent (3%) of the proceeds from the offering of the Common
Stock and Warrants, or a total of $122,625 ($140,906 if the
Underwriters' over-allotment is exercised in full).
(3) Before expenses related to the Offering attributed to the Selling
Stockholder on a prorata basis.
(4) The Company has granted the Underwriters an option for 45 days to
purchase up to an additional 150,000 shares at the initial public
offering price per share, and up to additional 75,000 Warrants at
$.125 per Warrant solely to cover over-allotments, if any. If such
option is exercised in full, the total initial public offering price,
underwriting discount, and proceeds to Company will be $4,696,875,
$469,688, and $3,304,687, respectively.
The shares and Warrants offered hereby are offered by the
Underwriters, as specified herein, subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part.
It is expected that certificates for the shares of Common Stock and
Warrants will be ready for delivery in Boca Raton, Florida on or about
______________, 1996, against payment therefor immediately available funds.
WERBEL-ROTH SECURITIES, INC.
The date of this Prospectus is ___________, 1996.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OR WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NASDAQ SMALLCAP STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders annual reports
containing consolidated financial statements audited by its independent
auditors and quarterly reports containing unaudited consolidated financial
information for the first three quarters of each fiscal year.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation, or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
[Pictures of Power Supplies]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION, REPRESENTATIVES' WARRANTS, AND
OUTSTANDING OPTIONS AND WARRANTS WILL NOT BE EXERCISED. SEE "DESCRIPTION
OF SECURITIES" AND "UNDERWRITING."
THE COMPANY
Digital Power Corporation designs, develops, manufactures, and markets
switching power supplies for sale to manufacturers of computers and other
electronic equipment. Switching power supplies are critical components of
all computers and other electronic equipment. The electronic circuitry in
computers and other electronic equipment requires a steady and isolated
supply of direct current (DC) electrical power. In addition, the various
components and subassemblies within computers and other electronic
equipment often require different voltage levels of electrical power. The
power supply products of the Company satisfy these two requirements by
converting the alternating current (AC) electricity from a primary source,
such as a wall outlet, into the direct current required for the proper
functioning of electronic circuits, and by dividing the single electrical
current into as many as four discrete output voltages. The Company's power
supply products also monitor and regulate the DC output voltages being
delivered to protect the electronic equipment from harmful surges and drops
in voltage levels. Because the Company's products have a high "power-
density" (measured in watts per cubic inch), the power supply products of
the Company are generally smaller than those of competitors. Furthermore,
the Company's power supply products are extremely "flexible" in design.
This "flexibility" approach allows the Company to modify quickly and
inexpensively its base-design products to satisfy an OEM's specific power
supply needs, thereby enabling the Company to keep to a minimum its
expenses for non-recurring engineering ("NRE") of its base-design products.
As a result of the Company's "flexibility" approach, it has provided
samples of modified power supplies to OEM customers in as quickly as a few
days, an important capability given the increasing emphasis placed by OEMs
on "time-to-market". Digital Power's strategic objective is to exploit
this combination of power density, flexibility, and short time-to-market to
win an increasing share of the growing power supply market. Unless the
context otherwise indicates, the reference to "Digital Power" or the
"Company" herein shall mean Digital Power Corporation and its wholly owned
subsidiary Poder Digital, S.A. de C.V.
Micro-Tech Consultants of Santa Rosa, California reports that the
worldwide market for power supplies was about $15 billion in 1995, with
average projected sales growth of approximately 8.5% over the next five
years. This market is highly fragmented among power supply manufacturers.
The Company believes that there are over 400 different manufacturers
competing in the various market segments. The major segments of the
switching power supply market are typically characterized as either the
"captive market" or the "merchant market". The captive market represents
those original equipment manufacturers (OEMs) who design and manufacture
their own power supplies for use as a component in their own electronic
products, whereas the merchant market represents those OEMs who purchase
their power supplies from third-party manufacturers who specialize in the
development and production of power supplies. The Company believes the
merchant market is growing faster than any other segment of the entire
power supply market as OEMs increasingly buy their power supplies from
companies such as Digital Power rather than manufacturing their own power
supplies "in-house".
For the years ended December 31, 1994 and 1995, the Company had
revenues and income before income taxes of $6,249,333 and $144,976, and
$10,037,502 and $826,484, respectively. For the six months ended June 30,
1996, the Company had revenues and income before income taxes of $6,553,376
and $637,208.
<PAGE>
RISK FACTORS
For a discussion of considerations relevant to an investment in the
Common Stock and Warrants, see "Risk Factors."
THE OFFERING
Common Stock Offered:
Offering(1)..............................................750,000 shares
Selling Stockholders.....................................250,000 shares
Total..................................................1,000,000 shares
Common Stock to be outstanding after the Offering......2,353,275 shares
Warrants(1) . . . . . Exercisable until December , 1999, with each Warrant
exercisable for one share of Common Stock at a price
of $5.00, subject to adjustment.
See "Description of Securities."
Use of Proceeds . . . Repayment of approximately $1 million of indebtedness
and general corporate purposes, including product
development, advertising, and working capital.
See "Use of Proceeds."
Proposed NASDAQ SmallCap Market Symbol - Common Stock..............DPWR
Proposed NASDAQ SmallCap Market Symbol - Warrants ................DPWRW
(1) Assumes that the Underwriters have not exercised an over-allotment
option to purchase up to an additional 150,000 shares and up to 75,000 Warrants.
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The unaudited summary consolidated financial data presented below
should be read in conjunction with the more detailed financial statements
of the Company and notes thereto along with the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended Six Months Ended
DECEMBER 31 JUNE 30
<S> <C> <C> <C> <C>
1994 1995 1995 1996
Statement of Operations Data:
Revenues $6,249,333 $10,037,502 $4,947,952 $6,553,376
Income from operations 257,935 1,027,772 332,928 689,612
Income before Income
Taxes 144,976 826,484 270,511 637,208
Provision (Benefit) for 23,253 (277,400) 28,000 294,000
Income
Taxes 121,723 1,103,884 242,511 343,208
Net Income 0.02 0.80 0.16 0.24
Net Income per share $ 0.02 $ 0.66 $ 0.15 $ 0.20
Primary
Fully Diluted 1,226,208 1,258,858 1,242,395 1,276,778
Shares used in per share
calculation
</TABLE>
As at
JUNE 30, 1996
ACTUAL AS ADJUSTED(1)
Balance Sheet Data:
Working Capital $2,426,022 $4,003,494
Total Assets 5,443,277 6,877,652
Long-term debt 1,471,361 614,458
Stockholders' equity $1,533,759 $3,968,134
(1) Adjusted to give effect to the estimated net proceeds of this
offering to be received by the Company based upon an assumed public
offering price of $4.00 per share and $.125 per Warrant.
THE COMPANY
Digital Power provides switching power supplies to original
equipment manufacturers (OEMs). The Company designs, develops,
manufactures, and markets 50 watt to 750 watt power supplies. Power
supplies are complex subassemblies or modules integral to virtually
every electronic product. They can have numerous different
features, but the most important functions of a power supply are to
receive alternating current (AC) electricity from a primary source,
such as a wall electrical outlet, convert that AC current into
direct current (DC), reduce the voltage of an output to the desired
level, and regulate and filter the DC output voltages required for
the operation of the various electronic circuits. The Company
believes that its power supply products are superior to those of its
competitors because the Company's products combine high power-
density (measured in watts per cubic inch) with a high degree of
design flexibility, allowing the Company to modify its power
supplies in order to satisfy the specific and unique needs of its
OEM customers. The Company has increased its revenues and income
before income taxes from $6,249,333 and $144,976 in fiscal year
1994, to $10,037,502 and $826,484 in fiscal year 1995. For the six
months ended June 30, 1996, revenues and net income before income
taxes were $6,553,376 and $637,208.
According to independent market surveys conducted by Micro-
Tech, the total world market for electronic power supplies is in
excess of $15 billion, with approximately 50% of this market being
the "captive market" and the balance being the "merchant market".
Growing at an average annual rate of 13%, the merchant market is the
fastest growing segment of the power supply market, as OEMs continue
to outsource their power supply requirements. This merchant market
is highly fragmented according to the power level, technology,
packaging, and application of a particular power supply. One
segment of the merchant market involves industrial and office
automation, industrial and portable computing, and networking
applications. This is the market targeted and served by Digital
Power. The Company believes that its focus on high-efficiency,
high-density, design-flexible power supplies is ideally suited to
the rapid growth opportunities existing in this market segment.
Digital Power's products are sold domestically and in Canada
through a network of 13 manufacturers' representatives. Digital
Power also has 28 stocking distributors in the United States and
Europe. In addition, the Company has formed strategic relationships
with three of its customers to private label its products. Digital
Power's customers can generally be grouped into three broad
industries, consisting of the computer, telecommunication, and
instrument industries. The Company has a current base of over 150
active customers, including companies such as Ascend Communications,
AT&T, Westinghouse, Telex, Storage Dimensions, Motorola, Retix,
Stanford Telecommunications, 3Com, and Centillion Business Unit, a
wholly-owned subsidiary of Bay Networks. See "Business-Breakdown of
Product Market".
The Company's strategy is to continue the trend of its sales
and profit growth by making increased sales to existing customers,
while simultaneously targeting sales to new customers. The Company
believes that its "flexibility" concept allows customers a unique
choice between its products and products offered by other power
supply competitors. OEMs have typically had to settle for a
standard power supply product with output voltages and other
features predetermined by the manufacturer. Alternatively, if the
OEM's product required a different set of power supply parameters,
the OEM was forced to design this modification in-house, or pay a
power supply manufacturer for a custom product. Since custom-
designed power supplies are development-intensive and require a
great deal of time to design, develop, and manufacture, only OEMs
with significant volume requirements can economically justify the
expense and delay associated with their production. Furthermore,
since virtually every power conversion product intended for use in
commercial application requires certain independent safety agency
testing, (e.g. by Underwriters Laboratories) at considerable
expense, an additional barrier is presented to the smaller OEM. By
offering the OEM customer a new choice with the Digital Power
"flexibility" series, the Company believes it has gained a
competitive advantage. The Company's "flexibility" series is
designed around a standardized power platform, but allows the
customer to specify output voltages tailored to its exact
requirements within specific parameters. Furthermore, OEMs are
seeking power supplies with greater power density (measured in watts
per cubic inch). Digital Power's strategy in responding to this
demand has been to offer increasingly smaller power supply units or
packages. For example, the Company believes that its US100 series
of products, mounted on a 3" x 5" printed circuit board, is the
industry's smallest 100 watt off-line (A/C input) power supply.
In addition to the line of proprietary products offered, and in
response to requests from OEMs, the Company has recently begun
providing "value-added services" along with its products. The term
"value-added services" refers to the Company's incorporation of an
OEM's selected electronic components, enclosures, and cable
assemblies with the Company's power supply products to produce a
power subassembly that is compatible with the OEM's own equipment
and is specifically tailored to meet the OEM's needs. The Company
purchases the parts and components that the OEM itself would
otherwise attach to or integrate with the Company's power supply,
and the Company provides the OEM with that integration and
installation service thus saving the OEM time and money. The
Company believes that this value-added service is well-suited to
those OEMs who wish to reduce their vendor base and minimize their
investment in fixed costs since the OEMs are not required to
manufacture their own power subassemblies and thus are not required
to purchase individual parts from many vendors or build assembly
facilities.
Currently, almost all of the Company's manufacturing, including
its value-added services, is done at a 16,000 square foot facility
operated by the Company's wholly-owned subsidiary, Poder Digital,
S.A. de C.V., located in Guadalajara, Mexico. However, the Company
has recently entered into an agreement with a manufacturer in China
to manufacture the Company's products. In its initial phase, the
Company believes that the facility in China will complement its
manufacturing facility in Guadalajara, Mexico since the facility in
China will allow the Company to produce power supplies with
sufficient lead time at lower costs, while the Guadalajara facility
will continue to manufacture power supplies that need a quick
turnaround or modification.
Through its predecessor, Digital Power was originally formed in
1969. The Company's executive offices are located at 41920 Christy
Street, Fremont, California 94538-3158, and the Company's telephone
number is 510-657-2635.
RISK FACTORS
In addition to the other information presented in this
Prospectus, the following risk factors should be considered
carefully in evaluating the Company and its business before
purchasing the Common Stock and Warrants offered hereby. This
Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but
are not limited to, those discussed in "Risk Factors" and elsewhere
in this Prospectus.
CUSTOMER CONCENTRATION
For the six months ended June 30, 1996, one OEM accounted for
26.4% of the Company's total revenues, and for the fiscal year ended
December 31, 1995, three OEMs accounted for 18% in the aggregate of
total revenues. The one OEM account which accounted for 26.4% of
the Company's total revenues for the six months ended June 30, 1996
substantially contributed to the Company's increase in revenues for
such period. Recently, due to a decrease in market demand for its
products, this OEM has decreased the number of power supplies it has
purchased from the Company. In light of such decrease in demand, it
is unlikely that this OEM will continue to purchase power supplies
from the Company at the same rate that it had done during the first
six months of 1996. In addition during 1995, two distributors
accounted for 37% of revenues, and during 1994, one distributor
accounted for 16% of revenues. See "Risk Factors - Dependence on
Computer and Other Electronic Equipment Industries; Customers'
Product Obsolescence." The loss of any one of these OEM customers
would have an adverse effect on the Company's revenues. See
"Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON COMPUTER AND OTHER ELECTRONIC EQUIPMENT INDUSTRIES;
CUSTOMERS' PRODUCT OBSOLESCENCE
Substantially all of the Company's existing customers are in
the computer and other electronic equipment industries and produce
products which are subject to rapid technological change,
obsolescence, and large fluctuations in product demand. These
industries are characterized by intense competition and a demand on
OEMs serving these markets for increased product performance and
lower product prices. Given this industry environment in which they
operate, OEMs make similar demands on their suppliers, such as the
Company, for increased product performance and lower product prices.
Thus, in order to be successful, the Company must properly assess
developments in the computer and other electronic equipment
industries and identify product groups and customers with the
potential for continued and future growth. Factors affecting the
computer and other electronic equipment industries, in general, or
any of the Company's major customers or their products, in
particular, could have a material adverse effect on the Company's
results of operations. In addition, the computer industry is
inherently volatile. Recently, certain segments of the computer and
other electronic industries have experienced a softening in demand
for their products. Although this has not materially affected the
Company's customers, in the event that it affects all segments of
the computer and other electronic industries, the growth of the
Company could be adversely affected.
COMPETITION
The design, manufacture, and sale of power supplies is a highly
competitive industry. The Company's competition includes
approximately 400 companies located throughout the world, some of
whom have advantages over the Company in terms of labor and
component costs, and some of whom may offer products comparable in
quality to those of the Company. Certain of the Company's
competitors, including Computer Products, Inc., ASTEC America, Zytec
Corporation and Lambda Electronics, have substantially greater
fiscal and marketing resources and geographic presence than does the
Company. In addition, in light of the Company's limited revenues in
comparison to the total power supply market, many competitors may be
unaware or indifferent to the Company and its products. If the
Company continues to be successful in increasing its revenues, other
competitors may notice and increase competition for the Company's
customers. The Company also faces competition from current and
prospective customers who may decide to design and manufacture
internally the power supplies needed for their products. To remain
competitive, management believes that the Company must continue to
compete favorably on the basis of value by providing advanced
manufacturing technology, offering superior customer service and
design engineering services, continuously improving quality and
reliability levels, and offering flexible and reliable delivery
schedules. There can be no assurance that the Company will continue
to compete successfully in this market.
DILUTION
The initial public offering price is greater than the book
value per outstanding share of Common Stock. Accordingly,
purchasers in the offering will suffer an immediate and substantial
dilution of $2.31 in the net tangible book value per share of the
Common Stock from the initial public offering price. Additional
dilution will occur upon exercise of outstanding options granted by
the Company. See "Dilution."
DEPENDENCE ON GUADALAJARA, MEXICO FACILITY; FOREIGN CURRENCY
FLUCTUATIONS
The Company produces substantially all of its products at its
facility located in Guadalajara, Mexico. The products are then
delivered to Fremont, California for testing and distribution. The
Company believes that it has a good working relationship with its
employees in Guadalajara, Mexico and has recently signed a five-year
contract with the union representing the employees. Recently, the
Company has entered into a "turnkey" manufacturing contract with a
manufacturer located in China to produce its products in an attempt
to reduce its dependence on its Mexican facility. At this time the
purchase of products from the manufacturer located in China is
minimal and requires advance scheduling which affects the Company's
ability to produce products quickly. However, if the Company's
revenues grow as anticipated, the Company intends to manufacture
more of its products utilizing the Chinese manufacturer. In the
event that there is an unforeseen disruption at the Guadalajara
production plant or with the Chinese manufacturer, such disruption
may have an adverse effect on the Company's ability to deliver its
products and may adversely affect the Company's financial
operations.
Further, the Guadalajara, Mexico, facility conducts its
financial operations using the Mexican peso. Therefore, due to
financial conditions beyond the control of the Company, the Company
is subject to monetary fluctuations between the U.S. dollar and
Mexican peso. During fiscal 1995, the Mexican peso was devalued
against the U.S. dollar resulting in an approximate $85,000 loss to
the Company. See "Management's Discussion and Analysis and Results
of Operations."
SECURITY INTEREST IN THE COMPANY'S ASSETS
The Company has entered into a $1.5 million revolving credit
facility. As of June 30, 1996, the amount outstanding under the
credit facility and other loans was $1,614,458. Although the
Company intends to use part of the proceeds raised hereby to reduce
the credit facility, the credit facility is secured by substantially
all of the Company's assets. Therefore, in the event the Company is
unable to repay the credit facility, the bank will hold a first-
priority security interest in the Company's assets upon default.
See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NECESSITY TO MAINTAIN CURRENT PROSPECTUS; STATE BLUE SKY
REGISTRATION REQUIRED TO EXERCISE WARRANTS
The shares of Common Stock issuable on exercise of the Warrants
(except the Warrants issuable upon exercise of the Representatives'
Warrants) have been registered with the Commission. The Company
will be required, from time to time, to file post-effective
amendments to its registration statement in order to maintain a
current prospectus covering the issuance of such shares upon
exercise of the Warrants. The Company has undertaken to make such
filings and use its best efforts to cause such post-effective
amendments to become effective. If for any reason a required post-
effective amendment is not filed, it does not become effective or is
not maintained, the holders of the Warrants may be prevented from
exercising their Warrants. Holders of the Warrants have the right
to exercise the Warrants only if the underlying Shares of Common
Stock are qualified, registered or exempt from registration under
applicable securities laws of the state in which the various holders
of the Warrants reside. The Company cannot issue shares of Common
Stock to holders of the Warrants in states where such shares are not
qualified, registered or exempt. See "Description of Securities."
DEPENDENCE UPON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL
The Company's performance is substantially dependent on the
performance of its executive officers and key personnel, and on its
ability to retain and motivate such personnel. The loss of any of
the Company's key personnel, particularly Robert O. Smith or Claude
Adkins, could have a material adverse effect on the Company's
business, financial condition, and operating results. The Company
has "key person" life insurance policies on Mr. Smith in the
aggregate amount of $2 million. The Company also has an employment
agreement with Mr. Smith.
The Company's future success also depends on its continuing
ability to identify, hire, train, and retain other highly-qualified
creative, technical, and managerial personnel. Competition for
highly qualified personnel is intense. There can be no assurance
that the Company will be successful in attracting, assimilating, and
retaining such personnel, and the failure to do so could have a
material adverse effect on the Company's business, financial
condition, and operating results. Moreover, in the event of the
loss of any such personnel, there can be no assurance that the
Company would be able to prevent the unauthorized disclosure or use
of its proprietary technology, practices, procedures, or customer
lists.
CONCENTRATION OF STOCK OWNERSHIP
Upon the completion of the offering, the present directors,
executive officers, and stockholders owning more than 5% of the
outstanding Common Stock and their respective affiliates will
beneficially own approximately 28.49% of the outstanding Common
Stock of the Company (27.02% of the outstanding Common Stock if the
Underwriters' over-allotment option is exercised in full). As a
result of their ownership, the directors, executive officers, and
more than 5% stockholders and their respective affiliates
collectively will have substantial control of all matters requiring
stockholder approval, including the election of directors and
approval of significant corporate transactions. Under California
law, however, shareholders are entitled to cumulative voting. Such
concentration of ownership may also have the effect of delaying or
preventing a change in control of the Company. See "Principal
Stockholders" and "Description of Securities."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SECURITIES PRICES
Prior to the offering, there has been no public market for the
Company's Common Stock or Warrants, and there can be no assurance
that an active public market for the Company's Common Stock or
Warrants will develop or be sustained after the offering. The
initial offering price will be determined by negotiations between
the Company and the representative of the Underwriters based upon
several factors. The trading price of the Company's Common Stock or
Warrants could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its
competitors, changes in financial estimates by securities analysts,
the operating and stock price performance of other companies that
investors may deem comparable to the Company, and other events or
factors. Moreover, in some future quarter the Company's operating
results may fall below the expectations of securities analysts and
investors. In such event, the market price of the Company's Common
Stock or Warrants would likely be materially and adversely affected.
In addition, the stock market in general, and the market prices for
high-tech related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's
Common Stock or Warrants, regardless of the Company's operating
performance. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALES; NO PRIOR TRADING MARKET;
REGISTRATION RIGHTS
Sales of a substantial number of shares of the Company's Common
Stock in the public market could have the effect of depressing the
prevailing market price of its Common Stock. Upon the completion of
the offering, the Company will have outstanding 2,353,275 shares of
Common Stock (assuming no exercise of outstanding options and
Warrants of 1,459,900). Of these shares, the 1,000,000 shares sold
in the offering will be freely transferable without restriction or
further registration under the Securities Act of 1933 (the
"Securities Act") unless purchased by "affiliates" of the Company as
that term is defined in Rule 144 of the Securities Act
("Affiliates"), which shares will be subject to the resale
limitations of Rule 144 adopted under the Securities Act. The
remaining 1,353,275 shares will be "restricted securities" as that
term is defined under Rule 144 ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144
promulgated under the Securities Act, which rule is summarized
below. As a result of the contractual restrictions described below
and the provisions of Rule 144, additional shares will be available
for sale in the public market as follows: (i) 1,272,458 currently
outstanding shares will be eligible for sale upon expiration of
lock-up agreements 12 months after the date of this Prospectus; (ii)
1,459,900 additional shares will be issuable upon the exercise of
stock options and Warrants, to the extent exercisable as of such
date; and (iii) 80,817 currently outstanding shares will be eligible
for sale from time to time thereafter pursuant to Rule 144. See
"Shares Eligible for Future Sale."
Certain stockholders of the Company have entered into lock-up
agreements with Werbel-Roth Securities, Inc. providing that, with
certain limited exceptions, such stockholders will not offer, sell,
contract to sell, grant an option to purchase, make a short sale, or
otherwise dispose of or engage in any hedging or other transaction
that is designed or reasonably expected to lead to a disposition of
any shares of Common Stock for a period of 12 months after the date
of this Prospectus without the prior written consent of the
Underwriters. Other than the (i) 1,000,000 shares being offered
hereby, (ii) 1,459,900 shares subject to options and Warrants, and
(iii) 80,817 shares subject to Rule 144, as of the date of this
Prospectus, no shares of Common Stock of the Company will be
eligible for immediate sale in the public market until the
expiration of the 12 month lock-up agreements with the
representative of the Underwriters. The Underwriters may, in their
sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
Prior to the offerings, there has been no public market for the
Common Stock of the Company, and no predictions can be made as to
the effect, if any, that the sale or availability for sale of shares
of additional Common Stock will have on the trading price of the
Common Stock. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could
occur, could adversely affect the trading price of the Common Stock
and could impair the Company's future ability to raise capital
through an offering of its equity securities. See "Description of
Securities."
DEPENDENCE ON SUPPLIERS
In order to reduce dependence on any one supplier, the Company
attempts to obtain two suppliers for each component of its products.
However, for two line transformers in three of its products, the
Company is dependent on single suppliers. Currently, these products
account for approximately 10% of the Company's total sales.
Although the Company will seek to find other manufacturers of
transformers for these three products, unanticipated shortages or
delays in these parts may have an adverse effect on the Company's
results of operations.
NO PATENTS
The Company's products are not subject to any U.S. or foreign
patents. The Company believes that because its products are being
continually updated and revised, obtaining patents would not be
beneficial. Therefore, there can be no assurance that other
competitors or former employees will not obtain the Company's
proprietary information and develop it.
POSSIBLE DILUTION FROM WARRANTS AND OPTIONS
On completion of this Offering, options and Warrants to
purchase an aggregate of 1,459,900 shares of common stock will be
outstanding, including 700,000 shares underlying the Warrants,
150,000 shares underlying the Representatives' Warrants and 609,900
shares underlying the options issued to employees of the Company.
Holders of such options and Warrants will be able to purchase shares
of Common Stock at a price less than the offering price of the
Common Stock with a resulting dilution of the interests to the other
stockholders. Because of this potential dilutive effect, the
options and Warrants may have a detrimental impact on the terms
under which the Company may obtain financing through a sale of its
Common Stock in the future. For these reasons, any evaluation of
the favorability of market conditions for a subsequent stock
offering by the Company must take into account any outstanding
options or Warrants. See "Dilution," "Management-Stock Plans" and
"Description of Securities."
REDEEMABLE WARRANTS AND IMPACT ON INVESTORS
Provided that the closing bid price of the Common Stock has
been at least $6.00 per share for thirty (30) consecutive trading
days, the Warrants are subject to redemption by the Company. The
Company's exercise of this right would force the holder of the
Warrants to exercise the Warrants and pay the exercise price at a
time when it may be disadvantageous for the holder to do so, to sell
the Warrants at the then current market price when the holder might
otherwise wish to hold the Warrants for possible additional
appreciation, or to accept the redemption price. Holders who do not
exercise their Warrants prior to redemption by the Company will
forfeit their right to purchase the Shares of Common Stock
underlying the Warrants. See "Description of Securities."
NO DIVIDENDS
The Company has not paid cash dividends on its Common Stock
since its inception and does not anticipate any cash dividends on
the Common Stock in the foreseeable future. For the foreseeable
future, the Company intends to reinvest earnings of the Company, if
any, on the development and expansion of its business. See
"Dividend Policy."
AUTHORIZATION OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS
The Board of Directors is authorized to issue shares of
preferred stock and to determine the dividend, liquidation,
conversion, redemption and other rights, preferences, and limitation
of such shares without further vote or action of the stockholders.
Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, or other rights which could adversely
effect the voting power or the rights of the holders of the Common
Stock. In the event of such issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging
and delaying or preventing a change in control of the Company. The
Company has no present intention to issue any shares of its
preferred stock, although there can be no assurance that the Company
will not do so in the future. See "Description of Securities."
SUBSTANTIAL FLEXIBILITY IN USE OF PROCEEDS
The Company has not designated any specific use for the net
proceeds from the sale by the Company of the Common Stock offered
hereby, except for the application of approximately $1.0 million of
such net proceeds for the repayment of the Company's line of credit.
Rather, the Company intends to use the remaining net proceeds
primarily for general corporate purposes, including product
development, advertising and working capital. Accordingly,
management will have significant flexibility in applying the net
proceeds of the offering. See "Use of Proceeds."
PENNY STOCK REGULATION
The Commission has adopted rules that regulate broker-dealer
practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than
$5.00 (other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in
such securities is provided by the exchange or system). The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information
about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value
of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer
in writing before or with the customer's confirmation. In addition,
the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must
make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the
secondary market for a stock that becomes subject to the penny stock
rules. While the shares of Common Stock offered hereunder will not
initially be subject to penny stock regulation rules by virtue of
the fact that such registered securities will be quoted on the
NASDAQ SmallCap Market, there can be no assurance that the Company
will be able to continuously meet the NASDAQ SmallCap Market
maintenance criteria. See "Risk Factor-Maintenance Criteria for
NASDAQ Securities."
MAINTENANCE CRITERIA FOR NASDAQ SECURITIES
The National Association of Securities Dealers, Inc. (the
"NASD"), which administers the NASDAQ SmallCap Market, maintains
criteria for continued eligibility on the NASDAQ SmallCap Market.
In order to be included in the NASDAQ SmallCap Market, a company
must maintain $2,000,000 in total assets, a $200,000 market value of
the public float and $1,000,000 in total capital and surplus. In
addition, continued inclusion requires two market-makers and a
minimum bid price of $1.00 per share, provided however, that if a
company falls below such minimum bid price, it will remain eligible
for continued inclusion on the NASDAQ SmallCap Market if the market
value of the public float is at least $1,000,000 and the company has
$2,000,000 in capital and surplus. The failure to meet these
maintenance criteria in the future may result in the discontinuance
of the inclusion of the Company's securities on the NASDAQ SmallCap
Market. In such event, the Company's securities will be subject to
being delisted, and trading, if any, in the Common Stock of the
Company would thereafter be conducted in the over-the-counter market
in the so-called "pink sheets," or the NASD's OTC Bulletin Board.
Consequently, an investor may find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, the Company's
securities.
If the Company's securities were subject to the regulations on
penny stocks, the market liquidity for the Company's securities
could be severely and adversely affected by limiting the ability of
broker-dealers to sell the Company's securities and the ability of
purchasers in this offering to sell their securities in the
secondary market at a time and price acceptable to them.
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 750,000
shares of Common Stock and 500,000 Warrants offered by the Company
hereby are estimated to be approximately $2,434,375 ($2,983,469 if
the Underwriters' over-allotment option is exercised in full) at an
assumed initial public offering price of $4.00 per share and $.125
per Warrant and after deducting the estimated underwriting discount
and offering expenses.
The Company intends to use approximately $1 million of such net
proceeds for the repayment of the Company's revolving credit
facility with San Jose National Bank, which bears interest at prime
plus 1% and is due in October, 1997. Proceeds from the revolving
credit facility were used for working capital. In addition, the
Company will use the net proceeds for general corporate purposes
including product development, product advertising, and working
capital. The amounts and timing of the Company's actual
expenditures will depend upon numerous factors, including the status
of the Company's product development efforts, competition, and
marketing and sales activities. Pending use of the net proceeds of
the sale of the shares of Common Stock and Warrants offered hereby,
the Company intends to invest such funds in short term, interest
bearing, investment grade obligations. Any additional proceeds
received upon the exercise of the Warrants, the Underwriters' over-
allotment option or the Representatives' Warrants, as well as income
from investments, if any, will be added to working capital.
As a forward looking statement based on its current operations,
the Company believes that the proceeds raised hereby will be
sufficient to meet the Company's financial needs for at least twelve
months following the date of the offering, and that no additional
financing will be required in the near future.
The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders or the Warrants by certain
Warrantholders.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since
its inception. The Company currently intends to retain future
earnings for use in the operation and expansion of the business.
The Company does not intend to pay any cash dividends in the
foreseeable future. The declaration of dividends in the future will
be at the discretion of the Board of Directors and will depend upon
the earnings, capital requirements, and financial position of the
Company.
On May 31, 1996, the Company issued a stock dividend in the
form of Common Stock valued at $1.80 per share on the cumulative
accrued but unpaid dividends on the Series A Preferred Stock. Since
such stock dividend, all of the Series A Preferred Stock has been
converted into Common Stock.
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the
Company at June 30, 1996, as adjusted to give effect to the sale of
750,000 shares of Common Stock and 500,000 Warrants offered by the
Company hereby assuming an initial public offering price per share
of $4.00 and per Warrant price of $.125 and net proceeds of
approximately $2,434,375, and the application of the net proceeds
therefrom.
June 30, 1996
ACTUAL AS ADJUSTED
Current portion of long-term debt $ 143,097 $ -0-
Long-term debt, less current portion 1,471,361 614,458
Stockholders' Equity
Series A Preferred stock, no par value;
500,000 shares authorized; no shares
issued and outstanding ---- ----
Common stock, no par value 5,000,000
shares authorized; 1,603,275 shares
issued and outstanding; 2,353,275
shares issued and outstanding as
adjusted(1) $5,539,115 $7,973,490
Accumulated deficit (3,505,356) (3,505,356)
Unearned ESOP plan shares (500,000) (500,000)
Total stockholders' equity 1,533,759 3,968,134
Total capitalization $3,148,217 $4,582,592
__________________________________________
(1) The above calculations do not include 609,900 shares of Common
Stock issuable upon the exercise of stock options. Of such
609,900 options, (i) 96,900 are immediately exercisable at an
exercise price of $0.50, (ii) 178,125 are immediately
exercisable at an exercise price of $1.80, (iii) 59,375 are
exercisable in May 1997 at an exercise price of $1.80, and (iv)
275,500 are exercisable in May 1998 at an exercise price of
$1.80.
<PAGE>
DILUTION
At June 30, 1996, the net tangible book value of the Company
was $1,533,759, or $0.96 per share. Net tangible book value per
share is determined by dividing the net tangible book value
(tangible assets less liabilities) of the Company at June 30, 1996,
by the number of shares of Common Stock outstanding. Without taking
into account any changes in net tangible book value after June 30,
1996, other than to give effect to the sale of the Company of
750,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $4.00 per share and 500,000 Warrants at an
assumed initial public offering price of $0.125 per Warrant, and
after deducting underwriting discounts and commissions and estimated
offering expenses payable to the Company, the pro forma net tangible
book value at June 30, 1996 would have been approximately
$3,968,134, or $1.69 per share. This amount represents an immediate
dilution to new investors of $2.31 per share and an immediate
increase in net tangible book value per share to existing
stockholders of $0.73 per share. The following table illustrates
this dilution per share:
Assumed public offering price per share $4.00
Net tangible book value per share at June 30, 1996 $0.96
Increase per share attributable to new investors .73
Pro forma net tangible book value per share after
the offering 1.69
Net tangible book value dilution per share to new
investors $2.31
The foregoing information assumes no exercise of outstanding
stock options. At June 30, 1996, there were outstanding options to
purchase 96,900 shares of Common Stock at an exercise price of $.50
per share, and outstanding options to purchase 513,000 shares of
Common Stock at an exercise price of $1.80 per share (of which
options 178,125 are immediately exercisable and 334,875 are subject
to vesting). To the extent outstanding options are exercised, there
will be further dilution to new investors.
The following table sets forth, as of the date of this
Prospectus, the number of shares of Common Stock purchased, the
percentage of shares of Common Stock purchased, the total gross
consideration paid, the percentage of total consideration paid, and
the average price per share paid by the existing shareholders and by
the investors purchasing shares of Common Stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
<S> <C> <C> <C> <C> <C>
Average Price
NUMBER PERCENT NUMBER PERCENT PER SHARE
Existing 1,603,275 68.13% $5,539,115 64.87% $ 3.45
shareholders
New investors 750,000 31.87% $3,000,000 35.13% $ 4.00
Total 2,353,275 100.00% $8,539,115 100.00% $ 3.63
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data
presented below for the years ended December 31, 1995 and 1994, are
derived from and should be read in conjunction with the more
detailed financial statements of the Company and the notes thereto,
which have been audited by Hein + Associates LLP, independent
auditors, whose report is included elsewhere in this Prospectus.
The selected consolidated statements of operations data for the six
months ended June 30, 1996 and 1995 and consolidated balance sheet
data as of June 30, 1996 are derived from the unaudited consolidated
financial statements of the Company. In the opinion of the Company,
such unaudited consolidated financial statements include all
necessary adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of results for such
periods. The selected consolidated financial data presented below
should be read along with the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" which follows this section.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
<S> <C> <C> <C> <C>
1994 1995 1995 1996
Statement of Operations Data:
Revenues: $6,249,333 $10,037,502 $4,947,952 $6,553,376
Cost and expenses:
Cost of sales 4,663,124 7,494,427 3,885,875 4,975,557
Engineering and product
development 408,966 481,475 243,048 314,659
Sales and marketing 500,338 452,654 234,066 240,621
General and administrative 418,970 581,174 252,035 332,927
Total operating expenses 1,328,274 1,515,303 729,149 888,207
Income from operations 257,935 1,027,772 332,928 689,612
Interest expense, net 102,509 116,030 55,566 52,198
Translation loss (10,450) (85,258) (6,851) (206)
Income before income taxes 144,976 826,484 270,511 637,208
Provision (Benefit) for income
taxes 23,253 (277,400) 28,000 294,000
Net income 121,723 1,103,884 242,511 343,208
Net income per share:
Primary 0.02 0.80 0.16 0.24
Fully diluted $0.02 $0.66 $0.15 $0.20
Shares used in per share
calculations 1,226,208 1,258,858 1,242,395 1,276,778
</TABLE>
<PAGE>
Balance Sheet Data:
Working capital $2,426,022
Total assets 5,443,277
Long-term debt 1,471,361
Stockholders' equity $1,533,759
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION
The following discussion and analysis should be read in
connection with the Company's Consolidated Financial Statements and
the notes thereto and other financial information included elsewhere
in the Prospectus.
OVERVIEW
The Company designs, develops, manufactures, and markets
electronic power supplies for use in converting electric power into
a form suitable for the operation of electronic circuitry. Revenues
are generated from the sale of the Company's power supplies to OEMs
in the computer and other electronic equipment industries.
RESULTS OF OPERATIONS
The table below sets forth certain statements of operations
data as a percentage of revenues for the six months ended June 30,
1996 and 1995 and the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
<S> <C> <C> <C> <C>
1994 1995 1995 1996
Revenues 100% 100% 100% 100%
Cost of goods sold 74.62 74.66 78.54 75.92
Gross margin 25.38 25.34 21.46 24.08
Selling, general and
administrative 14.71 10.30 9.82 8.75
Engineering and product
development 6.54 4.8 4.91 4.8
Total operating expense 21.25 15.1 14.73 13.55
Operating income 4.13 10.24 6.73 10.53
Net interest expense 1.64 1.16 1.12 .8
Translation loss .17 .85 .14 .0
Income before income taxes 2.32 8.23 5.47 9.73
Provision (Benefit) for .37 (2.76) .57 4.49
Income taxes
Net Income 1.95% 10.99% 4.9% 5.24%
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1995.
REVENUES
Revenues for the six months ended June 30, 1996 increased by
$1,605,424, or 32.45% over the six months ended June 30, 1995. This
increase in revenues was due primarily to substantially increased
sales to a single OEM and, to a lesser extent, to increased sales to
the Company's 28 stocking distributors.
Due to market conditions, sales of the OEM's products have
slowed which in turn has affected the sales of the Company's power
supplies to the OEM. In light of such decrease in purchases, it
will be unlikely that the OEM will purchase the same number of power
supplies it purchased during the first six months of the year. See
"Risk Factors - Customer Concentration."
GROSS MARGINS
Gross margins were 24.08% for the six months ended June 30,
1996 compared to 21.46% for the six months ended June 30, 1995. The
improvement in gross margins can primarily be attributed to greater
capacity utilization as fixed overhead costs declined on a per unit
basis.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by
$87,447, from $486,101 for the six months ended June 30, 1995, to
$573,548 for the six months ended June 30, 1996. The increase
primarily related to one-time bonuses to certain employees which
increased employee compensation expense. As a percentage of
revenues, however, selling, general and administrative expenses
decreased from 9.82% for the six months ended June 30, 1995 to 8.75%
for the six months ended June 30, 1996 since the increase in
revenues during this period was greater than the increase in
selling, general and administrative expenses.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 4.80% of
revenues for the six months ended June 30, 1996, and 4.91% of
revenues for the six months ended June 30, 1995. This slight
decrease as a percentage of revenues was due to a greater increase
in revenues than the increase in engineering and product development
expenses.
INTEREST EXPENSE
Interest expense was 0.8% of revenues for the six months ended
June 30, 1996 and 1.12% of revenues for the six months ended June
30, 1995. This decrease was primarily due to a one percentage point
reduction in interest rate of the line of credit loan which took
place in September 1995.
TRANSLATION LOSS
The primary currency of the Company's subsidiary, Poder
Digital, is the Mexican peso. During 1995, the Mexican peso was
devalued against the United States dollar. As a result of such
devaluation, the Company experienced a translation loss of $6,851
for the six months ended June 30, 1995 related to Poder Digital's
operations using Mexican pesos. The Company did not experience a
similar loss for the six months ended June 30, 1996.
INCOME BEFORE INCOME TAXES
Income before income taxes for the six months ended June 30,
1996 was $637,208 compared to $270,511 for the same period during
1995. This increase of $366,697 was primarily due to the
substantial increase in revenues over expenses during the six months
ended June 30, 1996.
INCOME TAX
The Company's income tax expense was 4.49% of revenues for the
six months ended June 30, 1996 and 0.57% of revenues for the six
months ended June 30, 1995. Through December 31, 1995, the Company
had net operating loss tax carry-forwards (NOLs) which resulted in
minimal federal tax liability for the Company in 1995. Through June
30, 1996, the Company began providing for year-end tax liability at
an estimated average annual rate of approximately 40%.
NET INCOME
Net income was $343,208 for the six months ended June 30, 1996
and $242,511 for the six months ended June 30, 1995. The increase
in net income was due to increased revenues and a decreased cost of
goods sold as a percentage of sales. As previously discussed,
during the fourth quarter of 1995, the Company recognized a one-time
tax benefit of $277,400 due to its prior net operating losses.
Because of the tax benefit recognized during the fourth quarter of
1995, it is unlikely that the Company's net income for 1996 will
exceed the Company's 1995 net income.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994
REVENUES
Revenues in 1995 increased by $3,788,169, or 60.62%. The
majority of this increase, $1,957,293 (51.67%) was due to increased
sales through the Company's stocking distributors who resell the
Company's products to OEMs. Direct sales by the Company to OEMs
accounted for $1,294,886 (34.18%) of the increase in sales and the
balance of $535,990 (14.15%) was generated by the Company's three
private label customers.
GROSS MARGINS
Gross margins were 25.34% of revenues during 1995 and 25.38% of
revenues during 1994. This slight decrease in gross margins was due
to increased costs to the Company. These increased costs primarily
resulted from increased sheet metal costs and increased costs
associated with certain Japanese-sourced materials, such as
capacitors. Japanese-sourced materials became more expensive
because of the weakening of the Japanese yen against the dollar. In
addition, the Company's administrative costs of its Mexican facility
increased due to the appointment of a new plant manager and several
other key management personnel to strengthen the operations of that
facility. These increases in costs were offset by an approximate 5%
increase in selling prices instituted during 1995.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 10.30% of
revenues in 1995 and 14.71% of revenues in 1994. Selling, general
and administrative expenses declined during 1995 primarily due to
the Company's decision to terminate its relationship with its
manufacturer's representative in the Northern California territory
and to manage sales directly, resulting in a decrease in commissions
to 1.42% of revenues in 1995 from 3.87% of revenues in 1994.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 4.80% of
revenues in 1995, and 6.54% of revenues in 1994. During 1994, the
Company had entered into several custom product development
contracts which were engineering-intensive but did not result in the
expected revenues. In 1995, the Company directed its engineering
resources to a greater degree on the development of modifiable
standard products with a resulting decline in engineering expenses
as a percentage of revenues.
INTEREST EXPENSE
Interest expense was 1.16% of revenues during 1995 and 1.64% of
revenues during 1994. Interest expense relates primarily to a line
of credit and two equipment term loans with San Jose National Bank.
The two term loans in the aggregate principal amount of $170,000,
and the line of credit, are secured by the Company's accounts
receivables and the Company's assets. Proceeds from the two term
loans were used to acquire equipment, and proceeds from the line of
credit were used for working capital. Because the Company's
borrowings did not increase in 1995, interest expense, as a
percentage of revenues, decreased in 1995. In addition, the
interest rate on the line of credit loan decreased by one percentage
point in September 1995.
TRANSLATION LOSS
The primary currency of the Company's subsidiary, Poder
Digital, is the Mexican peso. During the fiscal year ended 1995,
the Mexican peso was devalued against the United States dollar. As
a result of the devaluation, the Company incurred a $85,258
translation loss related to Poder Digital's operations. During
1994, the Company experienced a translation loss of $10,450.
INCOME BEFORE INCOME TAXES
Income before income taxes increased by $681,508 from $144,976
during 1994 to $826,484 in 1995. This substantial increase was
primarily due to the increase in revenues from the sale of the
Company's power supplies.
INCOME TAX
During the fourth quarter of 1995, the Company recognized an
income tax benefit of $277,400 as compared to a tax provision of
$23,253 during 1994. The recognition of the tax benefit during 1995
is due to the Company's utilization of its prior net operating loss
carryforward.
NET INCOME
Net income was $1,103,884 in 1995 and $121,723 in 1994, an
increase of $982,161, or 807%. The increase in net income was due
to a substantial increase in sales without a corresponding increase
in expenses related to such sales, and due to a $277,400 tax
benefit.
The Company does not believe that its business is seasonal.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996 and December 31, 1995, the Company's
working capital was $2,426,022 and $2,211,358, respectively. For
the past two fiscal years and the six months ended June 30, 1996,
the Company has relied on cash flows from operations supplemented by
bank borrowings to finance working capital and capital improvements.
The Company's bank borrowings consist of a $120,000 promissory note
bearing interest at 10% per annum and due December 8, 1998, a
$50,000 promissory note bearing interest at 10.5% per annum and due
May, 1999, and a $1.5 million line of credit bearing interest at
prime plus 1% and due October 15, 1997. Proceeds from the
promissory notes were used to acquire equipment, and the line of
credit is used to supplement the Company's working capital. The
promissory notes and line of credit are secured by substantially all
of the Company's assets. The Company does not anticipate any
material capital expenditures during 1997. As of June 30, 1996 and
December 31, 1995, the Company's bank borrowings totalled $1,614,458
and $1,054,145, respectively. See Note 6 of Notes to Consolidated
Financial Statements. Part of the proceeds raised hereby will be
used to reduce the Company's borrowings by approximately $1 million.
In addition, the Company is a guarantor of a $500,000 term loan
granted to the Company's employee stock ownership plan ("ESOP").
The $500,000 term loan is included in the total amount of the
Company's bank borrowings as of June 30, 1996 stated in the
preceding paragraph. The $500,000 is due in June 2001 and bears
interest at 10.5% per annum. Proceeds from the loan were used to
acquire the Company's Common Stock by the ESOP. Principal and
interest on the loan will be paid by the ESOP through contributions
made by the Company to the ESOP in the amount of approximately
$10,750 per month. This amount will be a monthly deduction against
revenues through June 2001.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
The requirements of the Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets," issued in March 1995 ("FAS 121") and the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," issued in October 1995 ("FAS 123"), are effective for
financial statements for years that begin after December 15, 1995.
The Company adopted FAS 121 effective January 1, 1996. The adoption
had no effect on the Company's financial position.
FAS 123 encourages, but does not require, companies to
recognize compensation expense based on fair value for grants of
stock, stock options, and other equity instruments granted to
employees. Companies that do not adopt the fair value accounting
rules must disclose the impact of adopting the new method in the
notes to the financial statements. The Company currently does not
intend to adopt the fair value accounting prescribed by FAS 123 and
will be subject only to the disclosure requirements prescribed by
FAS 123.
<PAGE>
BUSINESS
OVERVIEW
Digital Power Corporation designs, develops, manufactures, and
markets switching power supplies for sale to manufacturers of
computers and other electronic equipment. Switching power supplies
are critical components of all computers and other electronic
equipment. The electronic circuitry in computers and other
electronic equipment requires a steady and isolated supply of direct
current (DC) electrical power. In addition, the various components
and subassemblies within computers and other electronic equipment
often require different voltage levels of electrical power. The
power supply products of the Company satisfy these two requirements
by converting the alternating current (AC) electricity from a
primary source, such as a wall outlet, into the direct current
required for the proper functioning of electronic circuits, and by
dividing the single electrical current into as many as four discrete
output voltages. The Company's power supply products also monitor
and regulate the DC output voltages being delivered to protect the
electronic equipment from harmful surges and drops in voltage
levels. Because the Company's products have a high "power-density"
(measured in watts per cubic inch), the power supply products of the
Company are generally smaller than those of competitors. For
example, the Company believes that its US100 series of power
supplies, on a 3"x 5" printed circuit board, is the smallest 100
watt off-line (AC input) power supply available in the industry.
Furthermore, the Company's power supply products are extremely
"flexible" in design. This "flexibility" approach allows the
Company to modify quickly and inexpensively its base-design products
to satisfy an OEM's specific power supply needs, thereby enabling
the Company to keep to a minimum its expenses for non-recurring
engineering ("NRE") of its base-design products. Because of this
reduced NRE expense related to the "flexibility" line of switching
power supplies, the Company does not charge its customers for its
NRE expenses incurred in tailoring a power supply to a customer's
specific requirements. However, many competitors of the Company do
charge their customers for NRE expenses. As a result of the
Company's "flexibility" approach, it has provided samples of
modified power supplies to OEM customers in as quickly as a few
days, an important capability given the increasing emphasis placed
by OEMs on "time-to-market". Digital Power's strategic objective is
to exploit this combination of power density, flexibility, and short
time-to-market to win an increasing share of the growing power
supply market.
THE INDUSTRY
The market for power supplies is large, as all electronic
systems require a steady supply of low voltage electrical power.
Almost all of these systems require direct current (DC) voltages,
not the alternating current (AC) voltages provided by utility
companies. Furthermore, the voltage levels produced by standard
power sources must be significantly lowered in order to allow proper
functioning of an electronic component. For example, internal
computer microprocessors, as well as memory and logic circuitry in
telecommunications systems, generally operate on a voltage level of
5 volts DC or less. However, most electrical outlets produce at
least 115 volts AC. Therefore, the incoming voltage of 115 volts AC
must be both converted to DC and reduced to 5 volts. This is the
function performed by a typical power supply. Those products which
accept and convert alternating current from a primary power source
into the direct current required by electronic systems are generally
referred to as "power supplies". Those products which convert one
level of DC voltage into a higher or lower level of DC voltage as
required by a particular electronic device are generally referred to
as "DC/DC converters".
Electronic systems are sensitive to variations in voltage, and
therefore require protection from the surges and drops in the AC
voltage which commonly occur over electrical lines. Power supplies
perform this essential function by regulating or maintaining the
output voltages within a narrow range of values.
Finally, power supplies divide a charge of electricity into
multiple lower voltage outputs. Most electronic systems have a
number of subsystems, each of which may require a different incoming
operating voltage. Power supplies can provide multiple outputs of
different voltage levels. Certain voltage levels are common in the
electronics field. Increasingly, Digital Power has received
requests from OEMs for "non-standard" voltage outputs. Digital
Power believes that its "flexibility" series of power supplies are
ideally suited for these non-standard voltage applications.
THE MARKET
According to Micro-Tech, the worldwide market for electronic
power supplies was estimated to be $15 billion in 1995. The power
supply manufacturing industry is highly fragmented and Digital Power
believes there are approximately 400 power supply competitors in the
world. The electronic power supply market is typically split into
captive and merchant segments. The captive segment of the market,
that portion represented by OEMs who design and manufacture power
supplies for use in their own products, is estimated to account for
50% of the total market according to Micro-Tech. The balance of the
power supply market is served by merchant power supply manufacturers
such as Digital Power that design and manufacture power supplies for
sale to OEMs. Micro-Tech forecasts that the merchant segment of the
market will experience the greatest rate of growth, increasing from
52.5% of the total market in 1996 to 62.8% of the total market in
2000. The Company believes that the increase is due, in part, to
the fact that power supplies are becoming an increasingly complex
component to the OEMs, with constantly changing requirements such as
power factor correction (PFC) and filtering specifications to
minimize electromagnetic interference (EMI).
POWER FACTOR CORRECTION. The alternating current electricity
delivered by utility companies over power lines is delivered in
smooth waves, known as harmonic waves, or sine waves. This smooth
harmonic wave form of AC electricity that reaches a power supply is
known as "apparent power", and it is measured in watts (watts equal
volts multiplied by amperes). Although the electricity reaches a
switching power supply in a smooth harmonic wave form, the switching
power supply does not draw on the electricity in a smooth harmonic
fashion. Rather, in the process of "rectifying" the alternating
current into direct current form, a switching power supply will draw
current off the AC harmonic wave form in short bursts, each of which
is shorter in duration than the wave frequency. The amount of power
drawn off the line by the switching power supply in these short
bursts is known as the "real input power". The real input power
cannot be greater than the apparent power, and in fact is almost
always less than the apparent power. Therefore, a percentage, or
factor, can be arithmetically determined by dividing the real input
power by the apparent power, giving a coefficient known as the
"power factor" of the power supply. Ideally, a switching power
supply would have a power factor of one, where all the apparent
power is drawn off by the power supply, resulting in the real input
power equaling the apparent power. In practice, however, this is
not possible. In fact, most switching power supplies without the
special feature known as "power factor correction" have an
approximate power factor of only .60.
The reason why power factor of less than one can be a
significant problem relates to the power that is not drawn off the
power line, or the differential amount between one and the power
factor (1 - .60 = .40 in the example given above). This
differential of missing power is reflected back onto the power line
in a harmonically distorted fashion, since the originally smooth
harmonic wave form has now been disrupted by the power that has been
drawn off by the power supply and exhibits a kind of "ripple" in the
wave form. The harmonically distorted wave form circulates as
wasted heat energy in the power line, as well as in wall sockets,
electrical wiring in the building, and in distribution transformers
along the power line. This problem of harmonic distortion and
wasted heat energy grows as additional switching power supplies are
connected to and draw power from a power line. A large enough
number of switching power supplies drawing power from a line without
power factor correction will result in: (i) a significant
uncompensated loss of electrical power (in the form of heat) to the
electrical utility company; (ii) potential damage to power lines and
transformers caused by excessive heat; and (iii) "dirty" electrical
power for "downstream" consumers of electricity. A low power factor
is generally not a problem for the piece of electronic equipment
itself served by the switching power supply.
In response to these problems, manufacturers of power supplies
have developed certain circuitry within power supplies known as
"power factor correction", or PFC. With PFC, most power supplies
can be improved to perform at a power factor of approximately .99.
Historically, PFC has only been installed in high wattage switching
power supplies because of the comparatively greater amount of
harmonic distortion reflected back onto the line by these power
supplies. However, PFC is rapidly becoming critical at all power
levels, not only because it allows equipment designers to power more
circuits from a standard outlet, but also because of regulatory
requirements established in the European Union, such as European
Normatives EN61000-3-2 and EN61000-3-3. These two normative
standards, known more fully as "Limits For Harmonic Current
Emissions," and "Limitation Of Voltage Fluctuations And Flicker On
Low Voltage Supply Systems For Equipment With Rated Current <16A
[less than 16 amperes]," respectively, upgrade the former generic
standard IEC555.2 and place pressure on manufacturers of power
supplies to develop products with PFC at lower and lower power
levels.
ELECTROMAGNETIC INTERFERENCE (EMI). EMI is universally
undesirable because it potentially interferes with the operation of
other electronic equipment. In the United States, the Federal
Communications Commission ("FCC") has mandated certain EMI limits
which cannot be exceeded by OEM equipment. The European Union (EU)
has issued an electromagnetic compatibility (EMC) directive that
applies certain requirements to products sold in Europe beginning
January 1, 1996. The EU created these directives to insure
conformity with safety and quality standards and to assess product
compliance throughout its jurisdiction. One of these requirements
involves Conformity European ("CE") marking. OEMs may add the "CE"
mark to their equipment if it meets the requirements for radiated
and conducted noise emissions and for noise susceptibility. The
power supply, if part of an OEM system, does not itself need CE
certification. However, since it is one of the major noise
generators within an OEM system, there is a growing demand for the
power supply to have the CE mark. A pre-approved power supply
provides added assurance that the OEM will meet the applicable
standards with little trouble.
Digital Power plans to address the market demands discussed
above for PFC and EMI features by developing and introducing a line
of power supply products which incorporate PFC and provide filtering
from EMI which meets or exceeds the requirements for "CE" marking.
The power supply market can be further segmented between custom
and standard power supplies. Power supplies designed and
manufactured by an OEM for use in its own equipment are an example
of a custom design, as the product is not intended for resale.
However, custom power supplies are also common in the merchant
market, as certain OEMs contract with power supply manufacturers to
design a product that meets the form, fit, and function requirements
of their specific application. Standard, "off-the-shelf" power
supplies are intended for sale to many customers whose electronic
equipment can operate from "standard" output voltages, such as 5
volts, 12 volts or 24 volts DC. A subset of the standard segment of
the market has evolved, commonly known as "modified", comprising
power supply products which have the performance characteristics of
a standard power supply, but need certain, usually minor,
modifications. These modifications may include slight mechanical
changes to the sheet metal chassis, but more typically involve an
adjustment to the output voltages from one of the "standard" output
voltages (e.g. 5 volts to 7 volts, or 15 volts to 18.5 volts).
Digital Power primarily serves the North American power
electronics market with AC/DC power supplies and DC/DC converters
ranging from 50 watts to 750 watts of total output power. AC/DC
power supplies represent the largest part of the merchant power
electronics market with sales in North America alone expected to
grow from about $4.9 billion in 1996 to $6.7 billion in 2000.
During the same period, DC/DC converter sales in North America are
forecasted to grow from $1.5 billion in 1996 to $2.1 billion in
2000.
STRATEGY
Digital Power's strategy is to be the supplier of choice to
OEMs requiring a high quality power solution where size, rapid
modification, and time-to-market are critical to their business
success. Target market segments would include telecommunications,
networking, switching, mass storage, and industrial and office
automation products. While many of these segments would be
characterized as computer-related, the Company does not participate
in the personal computer (PC) power supply market. The power supply
market for PCs is very competitive with standard power supplies
producing low margins.
PRODUCT STRATEGY
Digital Power has eight series of base designs from which
thousands of individual models can be produced. Each series has its
own printed circuit board (PCB) layout that is common to all models
within the series regardless of the number of output voltages
(typically one to four) or the rating of the individual output
voltages. A broad range of output ratings, from 3.3 volts to 48
volts, can be produced by simply changing the power transformer
construction and a small number of output components. Designers of
electronic systems can determine their total power requirements only
after they have designed the system's electronic circuitry and
selected the components to be used in the system. Since the
designer has a finite amount of space for the system and may be
under competitive pressure to further reduce its size, a burden is
placed on the power supply manufacturer to maximize the power
density of the power supply. A typical power supply consists of a
PCB, electronic components, a power transformer and other
electromagnetic components, and a sheet metal chassis. The larger
components are typically installed on the PCB by means of
pin-through-hole assembly where the components are inserted into
pre-drilled holes and soldered to electrical circuits on the PCB.
Other components can be attached to the PCB by surface mount
interconnection technology (SMT) which allows for a reduction in
board size since the holes are eliminated and components can be
placed on both sides of the board. The Company's US100 series is an
example of a product using this manufacturing technology.
PRODUCTS
Digital Power's "flexibility" concept applies to all of the
Company's US, UP/SP, and DP product series. A common printed
circuit board is shared by each model in a particular family,
resulting in a reduction in parts inventory while allowing for rapid
modifiability into thousands of output combinations. The following
is a description of the Company's products.
US50/DP50 SERIES
The US50 series of power supplies are compact, economical, high
efficiency, open frame switchers that deliver up to 50 watts of
continuous or 60 watts of peak power from one to four outputs. The
90-264 VAC universal input allows them to be used worldwide without
jumper selection. Flexibility options include chassis and cover,
power good signal, an isolated V4 output, and UL544 (medical) safety
approval. All US50 series units are also available in 12VDC, 24VDC,
or 48VDC inputs. This optional DC input unit (DP50 series)
maintains the same pin-out, size, and mounting as the US50 series.
US70/DP70 SERIES
The US70 series of power supplies is similar to the US50
series, a compact, economical, highly efficient, open frame switcher
that delivers up to 65 watts with a 70 watt peak. This unit is
offered with one to four outputs, a universal input rated from 90 to
264 VAC, and is only slightly larger than the US50 series. The US70
series is differentiated from competitive offerings by virtue of its
smaller size, providing up to four outputs while competitors
typically are limited to three outputs. Flexibility options include
cover, power good signal, an isolated V4 output, and UL544 (medical)
safety approval. The DP70 is the same as the US70 except the input
is 48 volts DC. The Company also offers 12 & 24 VDC DC input on
this series where the model series changes to DN&DM. This type of
product is ideal for low profile systems with the power supply
measuring 3.2" x 5" x 1.5".
US100/DP100 SERIES
The US100/DP100 is the industry's smallest 100 watt switcher.
Measuring only 5" x 3.3" x 1.5", this series delivers up to 100
watts of continuous or 120 watt peak power from one to four outputs.
The 90-264VAC universal input allows them to be used worldwide.
This product is ideal in applications where OEMs have upgraded their
systems, requiring an additional 30-40 watts of output power but
being unable to accommodate a larger unit. The US100 fits in the
same form factor and does not require any tooling or mechanical
changes by the OEM. Flexibility options include a cover and
adjustable post regulators on V3 and/or V4 outputs. Fully custom
models are also available. All US100 series units are also
available with 12VDC, 24VDC, or 48 VDC inputs. This optional DC
input unit (DP100) maintains the same pin-out, size, and mounting as
the US100 series.
UP300 SERIES
The UP300 series are economical, high efficiency, open frame
switchers that deliver up to 300 watts of continuous, 325 watt, peak
power from one to two outputs. The 115/230VAC auto-selectable input
allows them to be used worldwide. On-board EMI filtering is a
standard feature. Flexibility options include a cover, power
fail/power good signal, and an isolated 2nd output. The UP300 is
also available as the SP300 series, which is jumper selectable
between 115 and 230VAC and provides the OEM an even more economical
solution. This product can be used in network switching systems or
other electronic systems where a lot of single output current, such
as 5, 12, 24, 48 volt current might be required.
US250/DP250 SERIES
The US250 series are economical, high efficiency, open frame
switchers that deliver up to 250 watts of continuous or 300 watts of
peak power from one to four outputs. The 115/230VAC auto-selectable
input allows them to be used worldwide. Flexibility options include
cover, power fail/power good signal, enable/inhibit, and an isolated
V3 output. All US250 series units are also available with 12VDC,
24VDC, or 48VDC inputs. This optional DC input unit (DP250)
maintains the same pin-out, size, and mounting as the US250 series.
US350 SERIES
The US350 series is a fully-featured unit that has active power
factor correction and was designed to be field-configurable by the
Company's international and domestic sales channels. This feature
allows the stocking distributor to lower its inventory costs but
still maintain the required stock to rapidly provide power supplies
with the unique combination of output voltages required by an OEM.
This unit delivers 350 watts from one to four outputs modules and
meets the total harmonic distortion spec IEC 555.2. The US350 has
an on-board EMI filter and operates from 90-264 VAC input. This
unit measures 9" x 5" x 2.5" and can operate without any minimum
loads and has an optional internal fan and power fail/power good
signal.
US750 SERIES
The newest product under development by the Company is the
US750 series. The US750 is a fully modular power supply measuring
3" x 10.25" x 5" and delivers 750 watts from one to four power
outputs. This product can be configured to meet many different
applications. It comes with optional N+1 parallelability, hot
swapability, frequency synching, power good/power fail, and remote
on/off. The Company anticipates that this product will be available
for sale during the first quarter of 1997.
The Company also produces two products designated as the KD
series in a 150 watt and 200 watt product. These designs were
acquired in 1987 under a licensing agreement with KDK Electronics.
They are still offered for sale but are expected to continue to
decline as a percentage of Digital's revenues. The licensing
agreement with KDK Electronics, as amended, provides that in the
event total historical sales of KD products reaches $20 million,
then KDK Electronics will be granted a stock option to purchase
100,000 shares of Digital's Common Stock for $3.50 per share with
Digital paying the exercise price. Due to changing market
conditions, the KD series is expected to be phased out prior to
reaching the $20 million sales level. Therefore, no common stock is
anticipated to be granted to KDK Electronics under the licensing
agreement. In addition, KDK Electronics will be paid a royalty
equal to 5% on the first $20 million total sales of the KD series
products with the royalty decreasing on sales over that amount. KD
products accounted for 23%, 14%, and 9% of revenues in 1994, 1995,
and for the six months ended June 30, 1996, respectively. Total
cumulative sales of KD products were $14,211,423 as of June 30,
1996.
VALUE-ADDED SERVICE
Digital Power offers its customers various types of value-added
services, which may include the following additions to its standard
product offerings.
Electrical (power): Paralleled power supplies for (N+1)
redundancy, hot swapability, output OR'ing diodes, AC input
receptacle with fuse, external EMI filter, on/off switch, cabling
and connectors, and battery backup with charger.
Electrical (control and monitoring): AC power fail detect
signal, DC output(s) OK signal, inhibit, output voltage margining,
and digital control interface.
Mechanical: Custom hot-plug chassis for (N+1) redundant
operation, locking handle, cover, and fan.
These services incorporate one of the Company's base products
along with additional enclosures, cable assemblies, and other
electronic components to arrive at a power subassembly. This
strategy matches perfectly with those OEMS wishing to reduce their
vendor base, as the turnkey sub-assembly allows customers to
eliminate other vendors.
QUALITY MANAGEMENT METHODS
Digital Power's emphasis on quality begins with the initial
design stage and continues through the production processes to the
end product. To execute this strategy, the Company utilizes
sophisticated design techniques including computer modeling and
computer aided design combined with advanced management methods such
as just-in-time (JIT) manufacturing, statistical process control
(SPC), and total quality commitment (TQC). The Company believes
that these techniques lower production costs while simultaneously
improving production efficiencies and the quality of the end-
product.
SAFETY AND REGULATORY AGENCIES
All of the Company's power supplies meet or exceed established
international safety standards including Underwriters Laboratory
Incorporated (UL) in the United States; Canadian Standards
Associations (CSA) in Canada, or the UL equivalent (cUL); and
Technischer Uberwachungs-Verein (TUV) or Verband Deutscher
Electrotechniker (VDE) in Germany. In addition the Company has been
site-approved by the British Approval Board for Telecommunications
(BABT) in the United Kingdom. The Company plans to achieve ISO 9001
certification, a European model for quality assurance, by the second
quarter of 1997.
SUPPLIERS
Other than certain fabricated parts such as printed circuit
boards and sheet metal chassis which are readily available from many
suppliers, the Company uses no custom components. Typically, two
suppliers are qualified for every component, with the exception
being two line transformers, one manufactured by Tamura and the
second one manufactured by Spitznagel. These transformers are
designed into three of the Company's products, which products
accounted for approximately 10% of the Company's sales in 1995.
MANUFACTURING STRATEGY
Consistent with its product flexibility strategy, the Company
aims to maintain a high degree of flexibility in its manufacturing
processes in order to respond to rapidly changing market conditions.
With few exceptions, the competitive nature of the power supply
industry has placed continual downward pressure on selling prices.
In order to achieve low cost manufacturing with a labor-intensive
product, manufacturers have the option of automating much of the
labor out of their product, or producing their product in a low
labor cost environment. Given the high fixed costs of automation
and the resistance this places on making major product changes,
Digital Power believes that its flexible manufacturing strategy is
best achieved through a highly variable cost of operation. In 1986,
the Company established a wholly-owned subsidiary in Guadalajara,
Mexico to assemble its products. This manufacturing facility
performs materials management, sub-assembly, final assembly, and
test functions for the majority of the Company's power supply
products. In addition, Digital has entered into an agreement with
Fortron/Source Corp. to manufacture Digital's products at a facility
located in China on a turnkey basis. Purchases from Fortron/Source
will be made pursuant to purchase orders and the agreement may be
terminated upon 120 days notice. Although the Company has just
recently begun to manufacture its products through Fortron/Source,
the Company believes that it will be able to produce high volume
power supplies through Fortron/Source at a cost lower than at its
Guadalajara, Mexico, facility.
SALES, MARKETING AND CUSTOMERS
Digital Power markets its products domestically through a
network of 13 independent manufacturers representatives. Each
representative organization is responsible for managing sales in a
particular geographic territory. Generally, the representative has
exclusive access to all potential customers in the assigned
territory and is compensated by commissions at 5% of net sales after
the product is shipped, received, and paid for by the customer.
Typically, either the Company or the representative organization may
terminate the agreement with 30 days written notice.
In certain territories, the Company has entered into agreements
with 28 stocking distributors who buy and resell the Company's
products. For the six months ended June 30, 1996, and for the years
ended December 31, 1995 and 1994, distributor sales accounted for
38.9%, 39.7%, and 32.4%, respectively, of the Company's total sales.
Over this same period, one distributor accounted for 23.1%, 27%, and
16%, respectively, of total sales. In addition, international sales
through stocking distributors accounted for less than 5% of the
Company's sales. In general, the agreements with stocking
distributors are subject to annual renewal and may be terminated
upon 90 day's written notice. Although these agreements may be
terminated by either party in the event a stocking distributor
decides to terminate its agreement with the Company, the Company
believes that it would be able to continue the sale of its products
through direct sales to the customers of the stocking distributor.
Further, and in general, stocking distributors are eligible to
return 25% of their previous six-month's sales for stock rotation.
For the past three years, stock rotations have not exceeded one
percent of total sales.
The Company has also entered into agreements with three private
label customers who buy and resell the Company's products. Under
these agreements, the Company sells its products to the private
label company who then resells the products with its label to its
customers. The Company believes that these private label agreements
expand its market by offering the customer a second source for the
Company's products. The private label agreements may be terminated
by either party. Further, the private label agreement requires that
any product subject to a private label be available for 5 years.
For the six months ended June 30, 1996, and for the years ended
December 31, 1995 and 1994, private label sales accounted for 8.4%,
10.2%, and 7.8%, respectively, of total sales.
The Company's promotional efforts to date have included product
data sheets, feature articles in trade periodicals, and trade shows.
Part of the proceeds raised hereby will be used for future
promotional activities, including space advertising in
industry-specific publications, a full line product catalog,
application notes, and direct mail to an industry-specific mail
list.
The Company's products are warranted to be free of defects for
a period ranging from one to two years from date of shipment. No
significant warranty returns have been experienced. As of June 30,
1996, the Company's warranty reserve was $149,125.
BREAKDOWN OF PRODUCT MARKET
The table below sets forth the percentage of Digital Power's
revenues generated by particular market segments served by Digital
Power's customers, and indicates representative customers within
those market segments.
<TABLE>
<CAPTION>
PRODUCT OR MARKET SERVED BY CUSTOMER PERCENTAGE OF REVENUES REPRESENTATIVE CUSTOMERS
<S> <C> <C>
Communications 28% Westinghouse
STM Wireless
Stanford Telecommunications
Multipoint Networks
ADC
AT&T
Network Switches, Routers, Hubs 24% Bay Networks
Ascend Communications
Digital Link
Whitetree
3COM
Computer Peripheral/Mass Storage 12% Storage Dimensions
Motorola
Photography/Visual Equipment 9% N View
Photometrics
Optivision
Semiconductor Mfg. Equipment 7% Applied Materials
Asyst Technologies
Enclosures 6% Elma
Sigma/Trimm
Broadcast Equipment 5% Leitch Video
Office Automation 4% Quartet Ovonics
Patapsco
Medical Equipment 3% OEC Diasonics
Test Equipment 2% Analogic
Orion Instruments
</TABLE>
BACKLOG
Digital Power typically does not build finished goods for
stock. Upon receipt of a purchase order from a customer, a work
order is issued to the Company's production department to build a
specified quantity of a model to be delivered on a specified
shipment date. Backlog consists of purchase orders on-hand
generally having a scheduled delivery date within the next six
months. The Company's backlog was $5,810,098 at June 30, 1996, and
$3,276,498 at December 31, 1995. Variations in the magnitude and
duration of purchase orders received by the Company and customer
delivery requirements may result in substantial fluctuations in
backlog from period to period. Although the Company may have a
binding purchase order, customers may cancel or reschedule
deliveries and backlog may not be a meaningful indicator of future
financial results.
COMPETITION
The merchant power supply manufacturing industry is highly
fragmented and serviced by approximately 400 competitors worldwide.
Many of the Company's competitors are located in low cost
environments where they may have advantages in terms of labor and
component costs. In addition, they may offer products comparable in
quality to those of Digital Power and have significantly greater
financial and marketing resources. Representative examples of the
Company's competitors are Computer Products, Inc., ASTEC America,
Zytec Corporation, and Lambda Electronics. The Company believes it
has a competitive position with its targeted customers who need a
high-quality, compact product which can be readily modified to meet
the customer's unique requirements. To remain competitive, the
Company must continue to offer innovative products at competitive
prices while demonstrating flexibility in meeting the customer's
requirements for rapid time-to-market.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are primarily
directed toward the development of new standard power supply
platforms which may be readily modified to provide a broad array of
individual models. Improvements are constantly sought in power
density, modifiability, and efficiency, while the Company attempts
to anticipate changing market demands for increased functionality,
such as PFC and improved EMI filtering. Internal research is
supplemented through the utilization of consultants who specialize
in various areas, including component and materials engineering, and
electromagnetic design enhancements to improve efficiency, while
reducing the cost and size of the Company's products. Product
development is performed at Digital Power's headquarters in
California by three engineers who are supported and assisted by five
technicians. The Company's total expenditures for research and
development were $408,966, $481,475, and $314,659 for the years
ended December 31, 1994, 1995, and the six month period ended June
30, 1996, respectively, and represented 6.54%, 4.8%, and 4.8% of the
Company's total revenues for the corresponding periods.
EMPLOYEES
As of June 30, 1996, the Company had approximately 345 full-
time employees with 300 of these employed at its wholly-owned
subsidiary Poder Digital located in Guadalajara, Mexico. The
employees of Digital Power's Mexican operation are members of a
national labor union, as are most employees of Mexican companies.
The Company has not experienced any work stoppages at either of its
facilities and believes its employee relations are good.
FACILITIES
The Company's headquarters are located in approximately 9,500
square feet of leased office, research and development space in
Fremont, California. The Company pays $5,890 per month, subject to
adjustment, and the lease expires on January 31, 2001. The
Company's manufacturing facility is located in 16,000 square feet of
leased space in Guadalajara, Mexico. The Company pays approximately
$3,500 per month, subject to adjustment, and the lease expires in
February, 2001. The Company believes that its existing facilities
are adequate for the foreseeable future and has no plans to expand
them.
LEGAL PROCEEDINGS
The Company knows of no material litigation or claims pending,
threatened, or contemplated to which the Company is or may become a
party.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the Executive Officers and Directors of
the Company as of September 30, 1996, and certain information about
such persons, are set forth below. The Company's Bylaws provide for
a Board of Directors of not less than five nor more than nine
members, with the actual number to be set by resolution of the
Board. Each of the Company's Directors is elected at the annual
meeting of shareholders of the Company and serves until the next
annual meeting until such person's successor is elected and
qualified, or until such person's earlier death, resignation, or
removal.
As part of the Underwriting Agreement, the Underwriters shall
have the option to designate a member to the Board of Directors, or,
at the Underwriters' option, designate an individual to attend the
Board's meetings for a period of five years. At this time, the
Underwriters have not indicated whether they intend to exercise such
right. See "Underwriting."
Executive Officers are appointed by, and serve at the
discretion of, the Board of Directors. Except as discussed below,
the Company has no employment agreements with any of its Executive
Officers or Directors. The Company has not paid any fees or other
remuneration to the Directors for their services as Directors. The
Directors do, however, receive stock options and Warrants from the
Company for their services. In August of 1996, each Director
received Warrants to purchase 20,000 shares of Common Stock at $5.00
per share for services as a Director. See "Principal and Selling
Stockholders and Warrantholders." The Company has agreed to
register the Common Stock underlying such options and Warrants. No
family relationship exists between any of the Officers or Directors.
Name Age Position
Edward L. Lammerding 66 Chairman of the Board
Philip M. Lee 72 Director
Thomas W. O'Neil, Jr. 67 Director
Robert O. Smith 52 Director, Chief Executive
Officer, and President
Claude Adkins 54 Director, Executive Vice President,
and Vice President-Engineering
Philip G. Swany 46 Chief Financial Officer and
Vice President-Finance
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS.
EDWARD L. LAMMERDING. Mr. Lammerding is Chairman of the Board of
the Company and has been a Director since 1989. Since November,
1995, Mr. Lammerding has also served as Chairman of the Board of
3Net Systems, and since 1983 he has served as Chairman of the Board
of Sierra Resources Corporation, a venture capital investment firm.
Currently, Mr. Lammerding is serving as a director or trustee of
three other organizations, including Public Affairs Information,
Inc., a legislative bill reporting service, Unicube U.S.A., Inc., a
hospital curtain manufacturer, and Fulton Water Co., a domestic
water supply company. Mr. Lammerding also serves on the board of
the California State Lottery Commission, St. Mary's College, and the
Marine Corps Historical Foundation. Mr. Lammerding received an A.B.
in Economics from St. Mary's College.
PHILIP M. LEE. Mr. Lee has served as a Director of the Company
since 1991. He has over 40 years experience in supermarket
management and is a general partner of J & P Properties, a real
estate management and investment company. Mr. Lee is also a
director of Sierra Resources Corporation. He received a certificate
in management from American River College.
THOMAS W. O'NEIL, JR. Mr. O'Neil has served as a Director of the
Company since 1991. He is a certified public accountant and has
been a partner of Schultze, Wallace and O'Neil, CPAs, since 1991.
Mr. O'Neil is a retired partner of KPMG Peat Marwick. Mr. O'Neil is
also a director of the California Exposition and State Fair,
Chairman of the Board of the Regional Credit Association, and a
director of 3Net Systems, Inc.
ROBERT O. SMITH. Mr. Smith joined the Company in November 1989 as
its Chief Executive Officer and as a Director, and in May 1996 he
was also made President of the Company. From 1980 through 1989, Mr.
Smith held various executive positions with Computer Products, Inc.,
a manufacturer of power conversion products and industrial
automation systems (including positions as Vice President/Group
Controller of the Power Conversion Group, General Manager of the
Compower Division, and President of the Boschert subsidiary). From
1978 to 1980, Mr. Smith was Cost Accounting Manager at Harris
Computer Systems. Mr. Smith received a B.S. in Business
Administration from the Ohio University and completed numerous
courses in the M.B.A. program at Kent State University.
CLAUDE ADKINS. Mr. Adkins was the Company's President from
September 1987 to May 1996, and Executive Vice President and Vice
President of Engineering from May 1996 to the present. Mr. Adkins
has been responsible for marketing power supplies and for new
product development for the Company since the inception of the power
supply line of products. From August 1975 to January 1978, Mr.
Adkins was a technical sales representative for Richards Associates,
a manufacturer's representative organization in San Jose,
California. He received an A.A. degree from El Camino Junior
College, and a B.S. degree in Industrial Technology and Electronics
from California State University at Long Beach.
PHILIP G. SWANY. Mr. Swany joined the Company as its Controller in
1981. In February 1992, he left the Company to serve as the
Controller for Crystal Graphics, Inc., a 3-D graphics software
development company. In September 1995, Mr. Swany returned to the
Company where he was made Vice President-Finance. In May 1996, he
was named Chief Financial Officer and Secretary of the Company. Mr.
Swany received a B.S. degree in Business Administration - Accounting
from Menlo College, and attended graduate courses in business
administration at the University of Colorado.
COMMITTEES OF THE BOARD.
The Board has an Audit Committee and a Compensation Committee.
The Audit Committee consists of Messrs. Lammerding and O'Neil, and
the Compensation Committee consists of Messrs. O'Neil and Lee.
The primary functions of the Audit Committee are to review the
scope and results of audits by the Company's independent auditors,
the Company's internal accounting controls, the non-audit services
performed by the independent accountants, and the cost of accounting
services.
The Compensation Committee administers the Company's 1996 Stock
Option Plan and approves compensation, remuneration, and incentive
arrangements for officers and employees of the Company.
EXECUTIVE COMPENSATION.
The following table sets forth the Compensation of the
Company's president and chief executive officer during the past
three years. No other officer received annual compensation in
excess of $100,000.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
Annual Compensation Awards Payouts
Securities All Other
Name and Other Annual Restricted Underlying LTIP Compensation
Principal Position Year Salary ($) Compensation ($) Stock Options (#) Payouts
Award(s) ($)
($)
Robert O. Smith 1995 $ 105,000 $0 $0 0 $0 $0
President and CEO 1994 $ 100,000 $0 $0 0 $0 $0
1993 $ 100,000 $0 $0 104,922(1) $0 $0
</TABLE>
(1) During fiscal year 1993, Mr. Smith received a ten year
option to acquire 104,922 shares of Common Stock at $.50 per
share. During fiscal year 1996, Mr. Smith exercised his
option to acquire 8,022 shares of Common Stock.
The Company and Mr. Smith entered into an
employment contract which terminates on December
31, 1999. Under the terms of Mr. Smith's
employment contract, Mr. Smith shall serve as
president and chief executive officer of the
Company and his salary shall be $150,000 per
annum effective January 1, 1997, increasing in an
amount to be determined by Mr. Smith and the
Board such that Mr. Smith shall receive $200,000
per annum by January 1, 1999. Mr. Smith's
current salary for 1996 is $110,000. In
addition, pursuant to Mr. Smith's contract, he
shall have the right to receive on the first
business day of each January during the term of
his contract options to acquire 100,000 shares of
Common Stock at the market value as of such date.
Finally, pursuant to Mr. Smith's employment
contract, in the event there is a change in
control, Mr. Smith shall be granted a five year
consulting contract at $200,000 per year.
LIMITATION OF LIABILITY AND INDEMNIFICATION
MATTERS
Sections 204 and 317 of the California
General Corporation Law permit indemnification of
directors, officers, and employees of
corporations under certain conditions subject to
certain limitations. Article V of the Company's
Amended and Restated Articles of Incorporation
states that the Company may provide
indemnification of its agents, including its
officers and directors, for breach of duty to the
Company in excess of the indemnification
otherwise permitted by Section 317 of the
Corporations Code, subject to the limits set
forth in Section 204 of the Corporations Code.
Article VI of the Bylaws provides that the
Company shall, to the maximum extent and in the
manner permitted in the Corporations Code,
indemnify each of its agents, including its
officers and directors, against expenses,
judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection
with any proceeding arising by reason of the fact
that any such person is or was an agent of the
Company.
Pursuant to Section 317 of the California
Corporations Code, the Company is empowered to
indemnify any person who was or is a party or is
threatened to be made a party to any proceeding
(other than an action by or in the right of the
Company to procure a judgment in its favor) by
reason of the fact that such person is or was an
officer, director, employee, or other agent of
the Company or its subsidiaries, against
expenses, judgments, fines, settlements, and
other amounts actually and reasonably incurred in
connection with such proceeding, if such person
acted in good faith and in a manner such person
reasonably believed to be in the best interests
of the Company and, in the case of a criminal
proceeding, the Company has no reasonable cause
to believe the conduct of such person was
unlawful. In addition, the Company may
indemnify, subject to certain exceptions, any
person who was or is a party or is threatened to
be made a party to any threatened, pending, or
completed action by or in the right of the
Company to procure a judgment in its favor by
reason of the fact that such person is or was an
officer, director, employee, or other agent of
the Company or its subsidiaries, against expenses
actually and reasonably incurred by such person
in connection with the defense or settlement of
such action if such person acted in good faith
and in a manner such person believed to be in the
best interest of the Company and its
shareholders. The Company may advance expenses
incurred in defending any proceeding prior to
final disposition upon receipt of an undertaking
by the agent, officer, director, or employee to
repay that amount if it shall be determined that
the agent is not entitled to indemnification as
authorized by Section 317. In addition, the
Company is permitted to indemnify its agents in
excess of Section 317.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted
to directors, officers, and controlling persons
of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been
advised that in the opinion of the Commission
such indemnification is against public policy as
expressed in the Securities Act and is therefore
unenforceable.
STOCK PLANS
EMPLOYEE STOCK PURCHASE PLAN. The Company
adopted an Employee Stock Ownership Plan ("ESOP")
in conformity with ERISA requirements. As of
September 30, 1996, the ESOP owns, in the
aggregate, 173,333 shares of the Company's Common
Stock. In June 1996, the ESOP entered into a
$500,000 loan with San Jose National bank to
finance the purchase of shares. The Company has
guaranteed the repayment of the loan, and it is
intended that Company contributions to the ESOP
will be used to pay off the loan. See
"Management's Discussion and Analysis." The
Company intends to make a monthly contribution of
approximately $10,750 per month to the ESOP. All
employees of the Company participate in the ESOP
on the basis of level of compensation and length
of service. Participation in the ESOP is subject
to vesting over a six-year period. The shares of
the Company's Common Stock owned by the ESOP are
voted by the ESOP trustees. Mr. Smith, President
and Chief Executive Officer of the Company, is
one of two trustees of the ESOP.
1996 STOCK OPTION PLAN. The Company has
established a 1996 Stock Option Plan (the "1996
Plan"). The purpose of the 1996 Plan is to
encourage stock ownership by employees, officers,
and directors of the Company to give them a
greater personal interest in the success of the
business and to provide an added incentive to
continue to advance in their employment by or
service to the Company. A total of 513,000
shares of Common Stock are authorized to be
issued under the Plan, of which 275,500 shares
have been issued pursuant to the 1996 Plan at an
exercise price of $1.80 per share. In connection
with the issuance of the stock options, the
Company obtained a letter from its investment
banker that the value of the stock options do not
exceed $1.80 per share. The stock options to
acquire 275,500 shares vest after two years. The
1996 Plan provides for the grant of incentive or
non-statutory stock options. The exercise price
of any incentive stock option granted under the
1996 Plan may not be less than 100% of the fair
market value of the Common Stock of the Company
on the date of grant. The fair market value for
which an optionee may be granted incentive stock
options in any calendar year may not exceed
$100,000. Shares subject to options under the
1996 Plan may be purchased for cash. Unless
otherwise provided by the Board, an option
granted under the 1996 Plan is exercisable for
ten years. The 1996 Plan is administered by the
Compensation Committee which has discretion to
determine optionees, the number of shares to be
covered by each option, the exercise schedule,
and other terms of the options. The 1996 Plan
may be amended, suspended, or terminated by the
Board, but no such action may impair rights under
a previously granted option. Each option is
exercisable, during the lifetime of the optionee,
only so long as the optionee remains employed by
the Company. No option is transferrable by the
optionee other than by will or the laws of
descent and distribution. Pursuant to the 1996
Plan, Messrs. Smith, Adkins, and Swany received
options to acquire 61,500, 29,500, and 24,250
shares of Common Stock, respectively.
401(K) PLAN
The Company has adopted a tax-qualified
employee savings and retirement plan (the "401(k)
Plan"), which generally covers all of the
Company's full-time employees. Pursuant to the
401(k) Plan, employees may make voluntary
contributions to the 401(k) Plan up to a maximum
of six percent of eligible compensation. These
deferred amounts are contributed to the 401(k)
Plan. The 401(k) Plan permits, but does not
require, additional matching and Company
contributions on behalf of Plan participants.
The Company matches contributions at the rate of
$.25 for each $1.00 contributed. The Company can
also make discretionary contributions. The
401(k) Plan is intended to qualify under Sections
401(k) and 401(a) of the Internal Revenue Code of
1986, as amended. Contributions to such a
qualified plan are deductible to the Company when
made and neither the contributions nor the income
earned on those contributions is taxable to Plan
participants until withdrawn. All 401(k) Plan
contributions are credited to separate accounts
maintained in trust.
CERTAIN TRANSACTIONS
SIERRA RESOURCES CORPORATION
Sierra Resources Corporation is a venture
capital company registered as a business
development company under the Securities Act of
1933. Edward L. Lammerding, Chairman of the
Company, is the founder of Sierra Resources
Corporation and, since 1983, has served as its
chairman of the board. Sierra Resources
Corporation is a principal shareholder of the
Company. Previously, but not within the past two
fiscal years, Sierra Resources has assisted the
Company in financing through loans. In August
1996, Sierra Resources received Warrants to
purchase 100,000 shares of common stock at $5.00
per share for providing certain administrative
and financial advice to the Company.
PRINCIPAL AND SELLING STOCKHOLDERS AND
WARRANTHOLDERS
The following table sets forth certain
information with respect to the beneficial
ownership of the Company's Common Stock as of
September 30, 1996, and as adjusted to reflect
the sale of the Common Stock offered by the
Company and the Selling Stockholders, for (i)
each director, (ii) all directors and officers of
the Company as a group, (iii) each person known
to the Company to own beneficially five percent
(5%) or more of the outstanding shares of the
Company's Common Stock, and (iv) all other
Selling Stockholders.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Prior To Offering(1) After Offering(2)
Name of Selling Shareholder Number Percent Shares To Be Number Percent
Sold
<S> <C> <C> <C> <C> <C>
Edward L. Lammerding
629 J Street
Sacramento, CA 95814 422,131(3) 24.4 40,136 381,995 15.3
Philip M. Lee
41920 Christy Street
Fremont, CA 94538 410,178(4) 23.7 6,000 404,178 15.0
Thomas W. O'Neil, Jr.
455 Capitol Mall
Sacramento, CA 95814 63,100(5) 3.9 14,600 48,500 2.0
Robert O. Smith
41920 Christy Street
Fremont, CA 94538 154,400(6) 8.8 10,000 144,400 5.8
Claude Adkins
41920 Christy Street
Fremont, CA 94538 136,500(7) 5.7 15,000 121,500 5.0
Alaric Corporation 10,500 * 5,500 5,000 *
Callopy, Christine N. 2,000 * 600 1,400 *
Castillo, Joaquin 4,000 * 2,000 2,000 *
Davis, Devere J. & Lois M. 9,700 * 1,000 8,700 *
Flores, Louis 48,700 2.9 20,000 28,700 1.2
Gong, Sherman 3,000 * 1,000 2,000 *
Greenslate, Norman C. & Dolores 6,300 * 2,000 4,300 *
Harris, Patricia A. 2,000 * 500 1,500 *
Haug, Bruce 1,500 * 1,500 0 0
Kai, Jimmy T. 6,500 * 1,900 4,600 *
Lammerding Assoceights (A & S
Part) 27,766(8) 1.6 9,366 18,400 *
Lammerding, Claire M. 2,000(8) * 600 1,400 *
Lammerding, Jerome C. 2,000(8) * 600 1,400 *
Lammerding, Joseph E. 2,000(8) * 600 1,400 *
Lammerding, Mary C. 2,000(8) * 600 1,400 *
Lee Family Trust 86,266 5.1 30,266 56,000 2.3
Lucas, David 8,000 * 3,000 5,000 *
Marquez, Jose 72,200 5.0 10,000 62,200 2.5
Moore, Elizabeth 63,366 3.7 20,366 43,000 1.8
Muir, Sharon 2,700 * 2,700 0 0
Mulhern, Iva Trust 17,933 1.0 6,933 11,000 *
Mulhern, James M. 17,933 1.0 6,933 11,000 *
Old Timers, Ltd. 18,700 1.1 6,000 12,700 *
Retzer, William K. & Mary J. 62,500 3.7 16,500 46,000 1.9
Rushford Hintz, Florence 750 * 750 0 0
Catherine
Rushford, Daniel Lee 750 * 750 0 0
Rushford, James William 750 * 750 0 0
Rushford, Michael Dennis 750 * 750 0 0
Sierra Resources Corp. 180,412 10.6 1,800 178,612 7.3
Skinner, Marjorie V. 7,200 * 2,200 5,000 *
Takehara, Kenji 6,300 * 3,000 3,300 *
Takehara, Rusby F. 6,300 * 3,000 3,300 *
Taricco, Richard P. & Peggy L. T. 5,700 * 800 4,900 *
Officers and Directors as a group
(6 persons) 904,897(9) 45.0 117,802 787,095 28.5
</TABLE>
Footnotes to table:
* Less than 1%.
(1) The persons named in the table have sole
voting and investment power with respect to
all of the Common Stock shown as
beneficially owned by them, subject to
community property laws where applicable and
the information contained in the footnotes
to the table.
(2) Assuming no exercise of the Underwriters'
over-allotment option.
(3) Includes 27,500 shares subject to options
and Warrants exercisable within 60 days.
Also includes 180,412 shares and 100,000
shares subject to Warrants exercisable
within 60 days owned by Sierra Resources
Corporation of which Mr. Lammerding is
president and chairman of the board and has
dispositive and voting power.
(4) Includes 27,500 shares subject to options
and Warrants exercisable within 60 days.
Also includes 86,266 shares held by a family
trust for which Mr. Lee serves as a trustee
and 180,412 shares and 100,000 shares
subject to Warrants exercisable within 60
days held by Sierra Resources Corporation
for which Mr. Lee serves as a director and
has dispositive and voting power.
(5) Includes 27,500 shares subject to options
and Warrants exercisable within 60 days.
(6) Includes 154,400 shares subject to options
and Warrants exercisable within 60 days.
(7) Includes 57,500 shares subject to options
and Warrants exercisable within 60 days.
(8) Represents shares to Mr. Lammerding's adult
children and shares of a family corporation
to which Mr. Lammerding disclaims beneficial
ownership.
(9) Includes a total of 409,400 shares subject
to options and Warrants exercisable within
60 days.
The following table sets forth certain
information with respect to the beneficial
ownership of the Company's Warrants as of
September 30, 1996, and as adjusted to reflect
the sale of the Warrants offered by the Company
and the Selling Stockholders, for each director
and all other selling Warrantholders. The
selling Warrantholders may sell all or none of
their Warrants.
Warrants Beneficially Owned
Warrants Beneficially Owned
Prior to Offering(1)
After Offering(2)
<TABLE>
<CAPTION>
Warrants
Name of Warrantholder Number Percent to be Sold Number Percent
<S> <C> <C> <C> <C> <C>
Edward L. Lammerding
629 J Street
Sacramento, CA 95814 120,000(3) 60.0 20,000 100,000 0
Philip M. Lee
41920 Christy Street
Fremont, CA 94538 120,000(3) 60.0 20,000 100,000 0
Thomas W. O'Neil
455 Capitol Mall
Sacramento, CA 95814 20,000 10.0 20,000 0 0
Robert O. Smith
41920 Christy Street
Fremont, CA 94538 20,000 10.0 20,000 0 0
Claude Adkins
41920 Christy Street
Fremont, CA 94538 20,000 10.0 20,000 0 0
Sierra Resources Corp. 100,000 50.0 100,000 0 0
</TABLE>
Footnotes to table:
(1) The persons named in the table have sole
voting and investment power with respect to
all of the Common Stock shown as
beneficially owned by them, subject to
community property laws where applicable
and the information contained in the
footnotes to the table.
(2) Assuming no exercise of the Underwriters'
over-allotment option.
(3) Includes Warrants to acquire 100,000 shares
of Common Stock owned by Sierra Resources
Corporation for which Messrs. Lammerding
and Lee are directors and may have
dispositive and voting power.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock
consists of 10,000,000 shares of Common
Stock, no par value, and 2,000,000 shares of
Preferred Stock, no par value. As of June
30, 1996, there were outstanding 1,603,275
shares of Common Stock held of record by
stockholders and no shares of Preferred Stock
outstanding.
COMMON STOCK
Each stockholder is entitled to one vote
for each share of Common Stock held on all
matters submitted to a vote of stockholders.
Each holder of Common Stock has the right to
cumulate his votes, which means each share
shall have the number of votes equal to the
number of directors to be elected and all of
which votes may be cast for any one nominee.
Subject to such preferences as may apply to
any Preferred Stock outstanding at the time,
the holders of outstanding shares of Common
Stock are entitled to receive dividends out
of assets legally available therefor at such
times and in such amounts as the Board of
Directors may from time to time determine.
The Common Stock is not entitled to
preemptive rights and is not subject to
conversion or redemption. Upon the
liquidation, dissolution, or winding up of
the Company, the holders of Common Stock and
any participating Preferred Stock outstanding
at that time would be entitled to share
ratably in all assets remaining after the
payment of liabilities and the payment of any
liquidation preferences with respect to any
outstanding Preferred Stock. Each
outstanding share of Common Stock now is, and
all shares of Common Stock that will be
outstanding after completion of the offering
will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized,
subject to any limitations prescribed by
California law, to provide for the issuance
of shares of Preferred Stock in one or more
series, to establish from time to time the
number of shares to be included in each such
series, to fix the powers, designations,
preferences, and rights of the shares of each
wholly-unissued series and any
qualifications, limitations, or restrictions
thereon, and to increase or decrease the
number of shares of any such series (but not
below the number of shares of such series
then outstanding) without any further vote or
action by the stockholders. The Board of
Directors may authorize the issuance of
Preferred Stock with voting or conversion
rights that could adversely affect the voting
power or other rights of the holders of
Common Stock. Thus, the issuance of
Preferred Stock may have the effect of
delaying, deterring, or preventing a change
in control of the Company. The Company has
no current plans to issue any shares of
Preferred Stock.
WARRANTS
The Company is offering 500,000 Warrants
at a price of $.125 per Warrant entitling the
holder of each Warrant to purchase,
commencing during a three-year period from
the effective date of this Prospectus, a
share of Common Stock at an exercise price of
$5.00 per share. The Company shall have the
right to call each Warrant for redemption
upon not less than thirty (30) days written
notice for a redemption price of $.125 per
Warrant provided that the closing bid price
of the Common Stock has been at least $6.00
per share for thirty (30) consecutive trading
days ending within three (3) trading days of
the date on which notice of redemption is
given.
Further, the Company has issued Warrants
to purchase 200,000 shares, in the aggregate,
to its Directors and an affiliate of the
Company. The Warrants have the same term,
exercise price, and are subject to
redemption, as the Warrants offered through
this offering.
In addition, the Underwriters shall
receive Warrants ("Representatives'
Warrants") which shall entitle the holder to
purchase an aggregate of 100,000 shares of
Common Stock and 50,000 Warrants, similar but
not identical to, the Warrants. The
Representatives' Warrants are not exercisable
for a one year period. See "Underwriting."
STOCK OPTIONS
In addition to the stock options to
purchase 275,500 shares of Common Stock
issued pursuant to the 1996 Plan, the Company
issued options in 1993 to purchase 237,500
shares of Common Stock at $1.80 per share.
The options expire in 2003 and were issued to
employees and directors of the Company. Of
the options to purchase 237,500 shares,
options to purchase 178,125 shares are
immediately exercisable and the remaining
options to purchase 59,375 vest in May 1997.
In addition, Mr. Smith was issued an
option in 1993 that expires in 2003 to
acquire 104,922 shares of Common Stock at
$0.50 per share of which 96,900 options are
currently outstanding.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the
Company's Common Stock and Warrants is
American Securities Transfer, Inc., located
at 1825 Lawrence Street, Suite 444, Denver,
Colorado, 80202-1817, phone number (303) 298-
5370.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares
of the Company's Common Stock in the public
market could have the effect of depressing
the prevailing market price of its Common
Stock. Upon the completion of the offerings,
the Company will have outstanding 2,353,275
shares of Common Stock. Of these shares, the
1,000,000 shares sold in the offering will be
freely transferable without restriction or
further registration under the Securities Act
of 1933 (the "Securities Act") unless
purchased by "affiliates" of the Company as
that term is defined in Rule 144 of the
Securities Act ("Affiliates"), which shares
will be subject to the resale limitations of
Rule 144 adopted under the Securities Act.
Of the other shares outstanding upon the
completion of the offering, 1,353,275 shares
will be "restricted securities" as that term
is defined under Rule 144 ("Restricted
Shares"). Restricted Shares may be sold in
the public market only if registered or if
they qualify for an exemption from
registration under Rule 144 promulgated under
the Securities Act, which rule is summarized
below. As a result of the contractual
restrictions described below, and the
provisions of Rule 144, additional shares
will be available and eligible for sale in
the public market as follows: (i) 1,272,458
currently outstanding shares upon expiration
of lock-up agreements 12 months after the
date of this Prospectus, (ii) 1,459,900
additional shares issuable upon the exercise
of stock options and Warrants, to the extent
exercisable as of such date, and (iii) 80,817
currently outstanding shares from time to
time thereafter pursuant to Rule 144.
Certain stockholders of the Company have
entered into lock-up agreements with the
representative of the Underwriters providing
that, with certain limited exceptions, such
stockholders will not offer, sell, contract
to sell, grant an option to purchase, make a
short sale, or otherwise dispose of or engage
in any hedging or other transaction that is
designed or reasonably expected to lead to a
disposition of any shares of Common Stock for
a period of 12 months after the date of this
Prospectus without the prior written consent
of Werbel-Roth Securities, Inc. Other than
(i) the 1,000,000 shares being offered
hereby, (ii) 1,459,900 shares subject to
stock options and Warrants, and (iii) 80,817
shares owned by holders owning 5,000 or less
shares of Common Stock as of the date of this
Prospectus, no shares of Common Stock of the
Company will be eligible for immediate sale
in the public market until the expiration of
the 12 month lock-up agreement with the
representative of the Underwriters. Werbel-
Roth Securities, Inc., may, in its sole
discretion and at any time without notice,
release all or any portion of the securities
subject to lock-up agreements.
In general, under Rule 144 as currently
in effect, a person (or persons whose shares
are aggregated) who has beneficially owned
Restricted Shares for at least two years will
be entitled to sell in any three-month period
a number of shares that does not exceed the
greater of (i) 1% of the then outstanding
shares of the Company's Common Stock
(approximately 23,532 shares immediately
after the offering), or (ii) the average
weekly trading volume of the Company's Common
Stock in the NASDAQ SmallCap Market during
the four calendar weeks immediately preceding
the date on which notice of the sale is filed
with the Commission. Such sales pursuant to
Rule 144 are subject to certain requirements
relating to manner of sale, notice, and
availability of current public information
about the Company. The Commission has
recently proposed to reduce the two year
holding periods under Rule 144 to one year.
If enacted, such modification will have a
material effect on the timing of when certain
shares of Common Stock become eligible for
resale.
Prior to the offerings, there has been
no public market for the Common Stock of the
Company, and no predictions can be made of
the effect, if any, that the sale or
availability for sale of shares of additional
Common Stock will have on the trading price
of the Common Stock. Nevertheless, sales of
substantial amounts of such shares in the
public market, or the perception that such
sales could occur, could adversely affect the
trading price of the Common Stock, and could
impair the Company's future ability to raise
capital through an offering of its equity
securities. See "Description of Securities."
<PAGE>
UNDERWRITING
Subject to the terms and conditions of
the Underwriting Agreement, the Underwriters
named below (the "Underwriters"), through
their representative, Werbel-Roth Securities,
Inc., have severally agreed to purchase from
the Company and the Selling Stockholders the
following respective numbers of shares of
Common Stock and Warrants at the initial
public offering price less the underwriting
discounts and commissions set forth on the
cover page of this Prospectus:
UNDERWRITERS NUMBER OF SHARES NUMBER OF WARRANTS
Werbel-Roth Securities, Inc.
Total 1,000,000 500,000
The Underwriting Agreement provides that
the obligations of the Underwriters are
subject to certain conditions precedent and
that the Underwriters will purchase all
shares of Common Stock and Warrants offered
hereby if any of such shares or Warrants are
purchased.
The Company and the Selling Stockholders
have been advised by the representative of
the Underwriters that the Underwriters
propose to offer the shares of Common Stock
and Warrants to the public at the initial
public offering prices set forth on the cover
page of this Prospectus and to certain
dealers at such price less a concession not
in excess of $______ per share and $______
per Warrant. The Underwriters may allow, and
such dealers may re-allow, a concession not
in excess of $______ per share and $_______
per Warrant to certain other dealers. After
the initial public offering, the public
offering price and other selling terms may be
changed by the representative of the
Underwriters. Further, the Company has
agreed to reimburse the Underwriters on a
non-accountable basis for their expenses in
the amount of 3% of the gross proceeds from
the offering.
At the closing of the sale of Shares
being offered hereby, the Company will sell
to the Underwriters Representatives'
Warrants, for nominal consideration,
entitling the Underwriters to purchase an
aggregate of 100,000 shares of Common Stock
and 50,000 Warrants, similar but not
identical to, the Warrants. The
Representatives' Warrants shall be non-
exercisable and non-transferable (other than
a transfer to affiliates of the Underwriters
or members of the selling group) for a period
of twelve months following the date of this
Prospectus. The Representatives' Warrants
and the underlying securities shall contain
the usual anti-dilution provisions and shall
not be redeemable. The Representatives'
Warrants will be exercisable after twelve
months from the effective date of this
Prospectus and for a period of four years
thereafter; and if the Representatives'
Warrants are not exercised during this term,
they shall, by their own terms, automatically
expire. The exercise price of each of the
Representatives' Warrants shall be 120% of
the public offering price per Share and price
per Warrant. In addition, the Company has
granted to the Underwriters a single demand
registration right and unlimited piggy back
registration rights, related to the Common
Stock and Warrants underlying the
Representatives' Warrants.
The Underwriters may designate that the
Representatives' Warrants be issued in
varying amounts directly to their officers,
directors, shareholders, employees, and other
proper persons and not to the Underwriters;
however, such designation will only be made
by the Underwriters if they determine and
represent to the Company that such issuance
would not violate the interpretation of the
Board of Governors of the NASD relating to
the review of corporate financing
arrangements and would not require
registration of the Representatives' Warrants
or underlying securities.
Upon written request of the then
holder(s) of a majority of the total
Representatives' Warrants and the underlying
securities issued upon the exercise of the
Representatives' Warrants, at any time within
the period commencing on the date of the
definitive Prospectus and ending five years
thereafter, the Company will file, not more
than once, a registration statement under the
Act, registering or qualifying, as the case
may be, the Representatives' Warrants and/or
the underlying securities. The filing shall
be made within sixty (60) days of such
notice, and the Company agrees to use its
best efforts to cause the above filing to
become effective. All expenses of such
registration or qualification, including, but
not limited to, legal, accounting, printing,
and mailing fees, will be borne by the
Company.
In addition to the above, the Company
understands and agrees that if, at any time
during the term of the Representatives'
Warrants and for a period of five years
thereafter, it should file a registration
statement with the SEC pursuant to the
Securities Act for a public offering of
securities, either for the account of the
Company or for the account of any other
person, the Company, at its own expense, will
offer to said holder(s) the opportunity to
register or qualify the Representatives'
Warrants and the underlying securities for
public offering. The Company shall give such
holder(s) notice by registered mail at least
thirty (30) days prior to filing any such
registration statement with the Commission.
In addition, the Company has granted to
the Underwriters an over-allotment option,
exercisable not later than 45 days after the
date of this Prospectus, to purchase up to
150,000 additional shares of Common Stock and
75,000 Warrants at the initial public
offering price less the underwriting
discounts and commissions set forth on the
cover page of this Prospectus. To the extent
that the Underwriters exercise such option,
each of the Underwriters shall have a firm
commitment to purchase approximately the same
percentage thereof that the number of shares
of Common Stock and Warrants to be purchased
by it shown in the above table bears to
1,000,000, and the Company will be obligated,
pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may
exercise such option only to cover over-
allotments made in connection with the sale
of Common Stock and Warrants hereby. If
purchased, the Underwriters will offer such
additional shares on the same terms as those
on which the 1,000,000 shares are being
offered.
The Company and the Selling Stockholder
have agreed to indemnify the Underwriters
against certain liabilities, including
liabilities under the Securities Act.
Stockholder's of the Company owning more
than 5,000 shares of Common Stock not being
sold in the initial public offering have
agreed not to offer, sell, or otherwise
dispose of any of such Common Stock for a
period of 12 months after the date of this
Prospectus without the prior written consent
of the representative of the Underwriters.
See "Shares Eligible for Future Sale."
The representative of the Underwriters
has advised the Company and the Selling
Stockholders that the Underwriters do not
intend to confirm sales to any accounts over
which they exercise discretionary authority.
As part of the Underwriting Agreement,
the Underwriters shall have the right to
designate a member of the Board of Directors,
or at the Underwriters' option, to designate
one individual to attend the meetings of the
Company's Board of Directors for a period of
five years. Further, for a period of five
years, the Underwriters shall have a right of
first refusal to sell the Company's
securities in a public or private offering.
The preceding is a brief summary of the
Underwriting Agreement and is qualified in
its entirety by the Underwriting Agreement
itself which has been filed as an exhibit to
the Registration Statement of which this
Prospectus is a part.
Prior to this offering, there has been
no public market for the Common Stock or
Warrants of the Company. Consequently, the
initial public offering price for the Common
Stock has been determined by negotiations
between the Company, the Selling
Stockholders, and the representative of the
Underwriters. Among the factors considered
in such negotiations were the prevailing
market conditions, the results of operations
of the Company in recent periods, the market
capitalization, the stage of development of
other companies which the Company and the
representative of the Underwriters believes
to be comparable to the Company, estimates of
the business potential of the Company, the
present state of the Company's development,
and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common
Stock and Warrants offered by the Company and
Common Stock offered by the Selling
Stockholders will be passed upon by Bartel
Eng Linn & Schroder, Sacramento, California.
Certain legal matters in connection with this
offering will be passed upon for the
Underwriters by Atlas, Pearlman, Trop, and
Borkson, P.A., Fort Lauderdale, Florida.
EXPERTS
The audited consolidated financial
statements of the Company as of December 31,
1995, and for each of the two years in the
period ended December 31, 1995, have been
included in this Prospectus and Registration
Statement in reliance upon the report of Hein
+ Associates LLP, independent certified
public accountants, appearing elsewhere
herein and in the Registration Statement, and
upon the authority of such firm as experts in
accounting and auditing.
CHANGE IN ACCOUNTANTS
In June 1996, the Company decided to
retain Hein + Associates LLP as the Company's
independent accountants and dismissed
Villanueva, Purcell & Co., the Company's
former accountants. The decision to change
independent accountants was ratified and
approved by the Company's Board of Directors
in June 1996. During the relationship
between the Company and Villanueva, Purcell &
Co., there were no disagreements regarding
any matters with respect to accounting
principles or practices, financial statement
disclosure, or audit scope or procedure,
which disagreements, if not resolved to the
satisfaction of the former accountants, would
have caused Villanueva, Purcell & Co. to make
reference to the subject matter of the
disagreement in connection with its report.
The former accountants' reports for the years
ended December 31, 1994 and 1993 are not a
part of the financial statements of the
Company included in this Prospectus. Such
reports did not contain an adverse opinion or
disclaimer of opinion or qualification of
modifications as to uncertainty, audit scope
or accounting principles. Prior to retaining
Hein + Associates LLP, the Company had not
consulted with Hein + Associates LLP
regarding accounting principles.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2,
including amendments thereto, relating to the
shares of Common Stock and Warrants offered
hereby, has been filed by the Company with
the Commission under the Securities Act.
This Prospectus does not contain all of the
information set forth in the Registration
Statement and the exhibits thereto.
Statements contained in this Prospectus as to
the contents of any contract or other
document referred to are not necessarily
complete and, in each instance, reference is
made to the copy of such contract or other
document filed as an exhibit to the
Registration Statement, each such statement
being qualified in all respects by such
reference. For further information with
respect to the Company and the Common Stock
and Warrants offered hereby, reference is
made to such Registration Statement and
exhibits. A copy of the Registration
Statement may be inspected by anyone without
charge at the public reference facilities
maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the regional
offices of the Commission located at Room
1228, 75 Park Place, New York 10007, and
Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any part of the Registration
Statement and the exhibits thereto may be
obtained from those offices upon the payment
of certain fees prescribed by the Commission.
In addition, the Commission maintains a Web
site (http://www.sec.gov) that contains
reports proxy and information statements and
other information regarding issuers that file
electronically with the Commission.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED BALANCE SHEETS - December 31, 1995
and June 30, 1996 (unaudited) F-3
CONSOLIDATED STATEMENTS OF INCOME - For the Years Ended
December 31, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996 (unaudited) F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -
For the Years Ended December 31, 1994 and December 31, 1995
and for the six months ended June 30, 1996 (unaudited) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996 (unaudited) F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Digital Power Corporation and Subsidiary
Fremont, California
We have audited the accompanying consolidated balance sheet of Digital Power
Corporation and Subsidiary as of December 31, 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Power Corporation and
Subsidiary as of December 31, 1995, and the results of their operations and
their cash flows for the years ended December 31, 1994 and 1995 in conformity
with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
August 31, 1996
<PAGE>
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
<S> <C> <C> <C>
1995 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 202,917 $ 84,614
Temporary investment 100,000 107,173
Accounts receivable - trade, net of allowance for
doubtful accounts of $120,000 and $120,000 (unaudited) 1,616,497 2,249,457
Other receivables 57,858 52,262
Inventory, net 1,557,226 2,142,454
Prepaid expenses and deposits 27,792 62,480
Deferred income taxes 240,856 139,000
Total current assets 3,803,146 4,837,440
PROPERTY AND EQUIPMENT, net 357,680 546,013
DEPOSITS 18,364 30,643
DEFERRED OFFERING COSTS - 29,181
DEFERRED INCOME TAXES 139,000 -
TOTAL ASSETS $ 4,318,190 $ 5,443,277
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 46,014 $ 143,097
Current portion of capital lease obligations 11,925 12,474
Debenture payable 5,000 -
Accounts payable 1,131,586 1,486,381
Accrued liabilities 397,263 769,466
Total current liabilities 1,591,788 2,411,418
LONG-TERM DEBT, less current portion 1,008,131 1,471,361
OBLIGATIONS UNDER CAPITAL LEASE, less current 31,690 26,739
portion
Total liabilities 2,631,609 3,909,518
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 9)
STOCKHOLDERS' EQUITY:
Series A cumulative redeemable convertible
preferred stock, no par value, 1,000,000 shares
authorized, 415,302 and 0 (unaudited) shares issued and 747,569 -
outstanding (Aggregate liquidation preference of
$1,100,000)
Common stock, no par value, 5,000,000 shares
authorized, 963,722 and 1,603,275 (unaudited)
shares issued and outstanding 4,398,322 5,539,115
Accumulated deficit (3,459,310) (3,505,356)
Unearned employee stock ownership plan shares - (500,000)
Total stockholders' equity 1,686,581 1,533,759
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,318,190 $ 5,443,277
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995 1995 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 6,249,333 $ 10,037,502 $ 4,947,952 $ 6,553,376
COST OF GOODS SOLD 4,663,124 7,494,427 3,885,875 4,975,557
Gross Margin 1,586,209 2,543,075 1,062,077 1,577,819
OPERATING EXPENSES:
Engineering and product
development 408,966 481,475 243,048 314,659
Marketing and selling 500,338 452,654 234,066 240,621
General and 418,970 581,174 252,035 332,927
administrative
Total operating 1,328,274 1,515,303 729,149 888,207
expenses
INCOME FROM OPERATIONS 257,935 1,027,772 332,928 689,612
OTHER INCOME (EXPENSE):
Interest income 523 3,116 2,967 7,339
Interest expense (103,032) (119,146) (58,533) (59,537)
Translation loss (10,450) (85,258) ( 6,851) (206)
Other income (112,959) (201,288) (62,417) (52,404)
(expense)
INCOME BEFORE INCOME TAXES 144,976 826,484 270,511 637,208
PROVISION (BENEFIT) FOR INCOME
TAXES 23,253 (277,400) 28,000 294,000
NET INCOME $ 121,723 $1,103,884 $ 242,511 $ 343,208
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 30,357 $1,012,518 $ 196,828 $ 305,139
NET INCOME PER COMMON
SHARE:
Primary $ 0.02 $ 0.80 $ 0.16 $ 0.24
Fully diluted $ 0.02 $ 0.66 $ 0.15 $ 0.20
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 1,226,208 1,258,858 1,242,395 1,276,778
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED
EMPLOYEE
STOCK TOTAL
PREFERRED STOCK COMMON STOCK ACCUMULATED OWNERSHIP STOCKHOLDERS'
<S> <C> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT DEFICIT PLAN SHARES EQUITY
BALANCES, January 1, 1994 415,302 $ 747,569 963,722 $ 4,398,322 $ (4,684,917) $ - $ 460,974
Net income - - - - 121,723 - 121,723
BALANCES, December 31, 1994 415,302 747,569 963,722 4,398,322 (4,563,194) - 582,697
Net income - - - - 1,103,884 - 1,103,884
BALANCES, December 31, 1995 415,302 747,569 963,722 4,398,322 (3,459,310) - 1,686,581
Net income (unaudited) - - - - 343,208 - 343,208
Dividend on preferred stock - - 216,229 389,213 (389,254) - (41)
(unaudited)
Conversion of preferred stock (415,302) (747,569) 415,302 747,569 - - -
(unaudited)
Exercise of stock options - - 8,022 4,011 - - 4,011
(unaudited)
ESOP loan and share purchases - - - - - (500,000) (500,000)
(unaudited)
BALANCES, June 30, 1996 - - 1,603,275 $ 5,539,115 $ (3,505,356) $ (500,000) $ 1,533,759
(unaudited)
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
<S> <C> <C> <C> <C>
1994 1995 1995 1996
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 121,723 $ 1,103,884 $ 242,511 $ 343,208
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 60,334 70,140 5,077 44,238
Deferred income taxes - (374,689) - 240,856
Warranty expense 15,000 30,000 - 89,125
Inventory reserve 140,000 195,000 260,000 240,496
Bad debt expense 17,521 55,000 15,000 -
Interest income - - - (7,173)
Foreign currency translation
adjustment
10,450 85,258 6,851 206
Changes in operating assets
and liabilities:
Accounts receivable (622,302) (465,047) (340,388) (632,960)
Other receivables (9,895) (39,855) (101,036) 5,596
Inventory (475,396) (594,983) (242,599) (825,724)
Prepaid expenses 6,620 (17,879) (6,987) (34,688)
Other assets - - (1,316) (12,279)
Accounts payable 344,826 266,721 241,826 354,795
Other accrued liabilities
6,452 5,485 12,562 283,078
Net adjustments (506,390) (784,849) (151,010) (254,434)
Net cash provided by (used
in) operating activities
(384,667) 319,035 91,501 88,774
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment (71,682) (254,530) (52,301) (232,571)
Purchase of temporary
investment (100,000) - - -
Net cash used in investing
activities (171,682) (254,530) (52,301) (232,571)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs - - - (29,181)
Proceeds from exercise of
stock options - - - 4,011
Payments of preferred stock dividend - - - (41)
Proceeds from notes payable 1,762,768 120,000 - 50,000
Principal payments on notes
payable (1,620,750) (1,276) (1,276) (17,552)
Principal payments on capital
lease obligations (4,478) (9,054) (4,035) (4,402)
Payment of debenture - - - (5,000)
Proceeds from line of credit 4,039,000 9,422,788 4,509,788 5,795,000
Principal payments on line of
credit (3,801,750) (9,344,924) (4,492,310) (5,767,135)
Net cash provided by
financing 374,790 187,534 12,167 25,700
activities
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (10,450) (85,258) (6,851) (206)
NET INCREASE (DECREASE) IN CASH (192,009) 166,781 44,516 (118,303)
CASH AND CASH EQUIVALENTS,
beginning of period 228,145 36,136 36,136 202,917
CASH AND CASH EQUIVALENTS,
end of period $ 36,136 $ 202,917 $ 80,652 $ 84,614
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash payments for:
Interest $ 105,634 $ 121,931 $ 57,880 $ 58,383
Income taxes $ 31,498 $ 55,803 $ 10,000 $ 69,500
Non-cash investing and
financing transactions:
Property and equipment
acquired with capital lease $ 46,368 $ 10,779 $ 2,814 $ -
Conversion of preferred stock
to common stock $ - $ - $ - $ 747,569
Preferred stock dividend of
common stock $ - $ - $ - $ 389,213
Notes payable for unearned
employee stock ownership plan
shares $ - $ - $ - $ 500,000
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
1. NATURE OF OPERATIONS:
Digital Power Corporation ("DPC"), and its wholly owned subsidiary
Poder Digital, S.A. de C.V. ("PD") which is located in Guadalajara,
Mexico, (collectively referred to as the "Company") are engaged in
the design, manufacture and sale of switching power supplies.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its subsidiary. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
STATEMENT OF CASH FLOWS - For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORY - Inventory is stated at the lower of cost (first-in,
first-out) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation of equipment and furniture is calculated using the
straight-line method over the estimated useful lives (ranging from
5 to 10 years) of the respective assets. Leasehold improvements
are amortized over the shorter of the estimated useful life or the
term of the lease. The cost of normal maintenance and repairs is
charged to operating expense as incurred. Material expenditures
which increase the life of an asset are capitalized and depreciated
over the estimated remaining useful life of the asset. The cost of
fixed assets sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current
operations.
DEFERRED OFFERING COSTS - Direct costs incurred by the Company in
connection with its proposed initial public offering of common
stock have been deferred, and will be charged against the proceeds
of the offering when completed. Should the offering not be
completed such costs will be expensed.
INCOME TAXES - The Company accounts for income taxes under the
liability method, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statements
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
REVENUE RECOGNITION - Sales revenue is recognized when the products
are shipped to customers, including distributors. Customers
receive a one or two year product warranty and sales to
distributors are subject to a right of return. The Company
provides a reserve for estimated warranty costs and a reserve for
estimated product returns.
FOREIGN CURRENCY TRANSLATION - Gains and losses from the effects of
exchange rate fluctuations on transactions denominated in foreign
currencies are included in results of operations. Assets and
liabilities of the Company's foreign subsidiary are translated into
U.S. dollars at period-end exchange rates, and their revenues and
expenses are translated at average exchange rates for the period.
Translation adjustments are accumulated in a separate component of
stockholders' equity until such time as the foreign subsidiary is
sold or substantially liquidated. Deferred taxes have not been
allocated to the cumulative foreign currency translation adjustment
included in stockholders' equity because there is no intent to
repatriate earnings of the foreign subsidiary.
NET INCOME PER COMMON SHARE - Net income per common share is
calculated upon net income applicable to common shareholders, which
represents net income adjusted for cumulative preferred dividends
applicable to the period.
The weighted average common shares is based upon actual common
stock and common stock equivalents outstanding. Additionally,
common stock equivalents issued during the prior year at less than
the $4.00 proposed initial public offering price have been included
for all periods presented in the computation using the "treasury
stock method" and the anticipated public offering price.
Fully diluted net income per common share is computed using the "if
converted" method for preferred stock.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying
notes. The actual results could differ from those estimates.
The Company's financial statements are based upon a number of
significant estimates, including the allowance for doubtful
accounts, technological obsolescence of inventories, the estimated
useful lives selected for property and equipment, realizability of
deferred tax assets, allowance for sales returns, and warranty
reserve. Due to the uncertainties inherent in the estimation
process, it is at least reasonably possible that these estimates
will be further revised in the near term and such revisions could
be material.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective January 1, 1996, the
Company adopted Financial Accounting Standards Board Statement 121
(FAS 121) entitled "Accounting for Impairment of Long-Lived
Assets."
In the event that facts and circumstances indicate that the cost of
assets or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine
if a write-down to market value or discounted cash flow value is
required. Adoption of FAS 121 had no effect on the unaudited June
30, 1996 financial statements.
STOCK-BASED COMPENSATION - In October 1995, the Financial
Accounting Standards Board issued a new statement titled
"Accounting for Stock-Based Compensation" (FAS 123) which the
Company adopted January 1, 1996. FAS 123 encourages, but does not
require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees
based on fair value. Companies that do not adopt the fair value
accounting rules must disclose the impact of adopting the new
method in the notes to the financial statements. Transactions in
equity instruments with non-employees for goods or services must be
accounted for on the fair value method. The Company has elected
not to adopt the fair value accounting prescribed by FAS 123 for
employees, but is subject to the disclosure requirements prescribed
by FAS 123.
ACCRUED WARRANTY COSTS - Estimated warranty costs are provided for
at the time of sale of the warranted product. The Company
generally extends warranty coverage for one year from the time of
sale.
CONCENTRATIONS OF CREDIT RISK - Credit Risk represents the
accounting loss that would be recognized at the reporting date if
counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet)
that arise from financial instruments exist for groups of customers
or groups counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly effected by changes in economic or
other conditions described below. In accordance with FASB
Statement No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS
WITH CONCENTRATIONS OF CREDIT RISK, the credit risk amounts shown
do not take into account the value of any collateral or security.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments under SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, are determined at discrete points
in time based on relevant market information. These estimated
involve uncertainties and cannot be determined with precision. The
estimated fair values of the Company's financial instruments, which
includes all cash, accounts receivables, accounts payable, long-
term debt, and other debt, approximates the carrying value in the
consolidated financial statements at December 31, 1995.
INTERIM FINANCIAL INFORMATION - The June 30, 1995 and 1996
financial statements have been prepared by the Company without
audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of the
Company's financial position as of June 30, 1996, and the results
of their operations and cash flows for the six month periods ended
June 30, 1995 and 1996. The results of operations for the six
month periods ended June 30, 1995 and 1996 are not necessarily
indicative of those that will be obtained for the entire fiscal
year.
<PAGE>
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
3. INVENTORY:
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, 1995 JUNE 30, 1996
<S> <C> <C>
Raw Materials $ 110,318 $ 114,260
Work-in-process 1,718,952 2,573,864
Finished goods 127,956 94,826
Allowance for obsolescence (400,000) (640,496)
$ 1,557,226 $ 2,142,454
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, 1995 JUNE 30, 1996
<S> <C> <C>
Machinery and equipment $ 1,004,955 $ 1,182,785
Office equipment and furniture 272,614 314,663
Leasehold improvements 23,409 11,177
1,300,978 1,508,625
Accumulated Depreciation (943,298) (962,612)
$ 357,680 $ 546,013
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
December 31, 1995 JUNE 30, 1996
<S> <C> <C>
Accrued payroll and benefits $ 87,712 $ 292,875
Accrued commissions and royalties 58,665 68,000
Accrued warranty expense 60,000 149,125
Accrued income taxes 46,000 50,500
Other 144,886 208,966
$ 397,263 $ 769,466
</TABLE>
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1995 JUNE 30, 1996
<S> <C> <C>
$1,500,000 line of credit bearing
interest at the bank's prime rate
plus one percent (total of 9.5% at
December 31, 1995), maturing October
15, 1997, collateralized by
substantially all assets of DPC $ 924,145 $ 952,010
Unsecured note payable, due on demand,
interest at 12% 10,000 10,000
Note payable, due in monthly
installments of $3,881 including
interest at 10%, due December 1998,
collateralized by substantially
all assets of DPC 120,000 152,448
Employee stock ownership plan loan
See Note 11 - 500,000
1,054,145 1,614,458
Less current portion (46,014) (143,097)
$ 1,008,131 $ 1,471,361
</TABLE>
Aggregate maturities of long-term debt are due as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
1996 $ 46,014
1997 964,020
1998 44,111
$ 1,054,145
7. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under agreements classified as
capital leases. Equipment under these leases has a cost of $61,680 and
accumulated amortization of $15,420 at December 31, 1995. Following is a
schedule of future minimum lease payments under capital leases at
December 31, 1995:
YEARS ENDING
DECEMBER 31, AMOUNT
1996 $ 16,787
1997 16,696
1998 14,689
1999 5,375
Total future minimum lease payments 53,547
Less, amount representing interest (9,932)
Present value of net minimum lease payments 43,615
Less current portion (11,925)
$ 31,690
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
The preferred stock has one series authorized, Series A cumulative
redeemable convertible preferred stock ("Series A"), and an
additional 500,000 shares of preferred stock has been authorized,
but the rights, preferences, privileges and restrictions on these
shares has not been determined. DPC's Board of Directors is
authorized to create new series of preferred stock and fix the
number of shares as well as the rights, preferences, privileges and
restrictions granted to or imposed upon any series of preferred
stock.
The holders of Series A are entitled to one vote for each share of
common stock into which the Series A can be converted, and vote
together with the common shareholders as a single class. Dividends
on Series A are at an annual rate of $.22 per share and are
cumulative from the date of issuance, and shall be paid prior to
dividends on common stock. The Company had never declared a
dividend through December 31, 1995, and the accumulated dividends
on Series A were approximately $483,000 at December 31, 1995.
Shares of Series A are convertible into common stock at any time at
the option of the holder at a rate of one share of common stock for
each share of Series A. The conversion rate is subject to
adjustment under certain circumstances. Additionally, conversion
is automatic on the effective date of a firm commitment for an
underwritten public offering of $1,000,000 or more.
The Company may redeem the Series A in whole or in part, by paying
$1.80 per share plus any dividends in arrears. Partial
redemptions shall be pro-rata among all Series A holders.
In the event of a liquidation, dissolution, or winding up of the
Company, Series A holders are entitled to receive a liquidation
preference of $1.80 per share of Series A plus all dividends in
arrears. The liquidation preference on the Series A was
approximately $1,100,000 at December 31, 1995.
Additionally, see Note 13.
STOCK OPTIONS
The Company has issued non-qualified options covering 104,922
shares exercisable at $.50 per share. Upon issuance, the Company
recorded compensation expense for the difference between the
exercise price and the fair market value of the underlying common
stock of $1.80 per share. Such options expire in 2003. Subsequent
to December 31, 1995, 8,022 of such option were exercised.
In May 1993 the Company issued options to purchase 237,500 shares
of its common stock at $1.80 per share. Such options are subject
to a four year vesting plan. The exercise price of $1.80 per share
approximated the fair market value at the date of grant.
In May 1996, the Company adopted the 1996 Stock Option Plan
covering 513,000 shares. Under the plan, the Company can issue
either incentive or non-statutory stock options. Immediately
thereafter, the Company issued options to purchase 275,500 shares
of its common stock at $1.80 per share. Such options become 100%
vested two years after issuance. The exercise price was based upon
a letter from its investment banker as to the fair market value
of such options based upon their terms, conditions and
restrictions.
The following table sets forth activity for all options:
EXERCISE PRICE
NUMBER PER SHARE
BALANCES
January 1, 1994,
December 31, 1994 and
December 31, 1995 342,422 $ .50 - $ 1.80
ISSUED 275,500 $ 1.80
EXERCISED (8,022) $ .50
BALANCE, JUNE 30, 1996 609,900 $ .50 - $ 1.80
AT DECEMBER 31, 1995 AND JUNE 30, 1996 OPTIONS TO PURCHASE 223,672
AND 275,025 SHARES RESPECTIVELY AT PRICES RANGING FROM $.50 TO $1.80
PER SHARE WERE EXERCISABLE.
9. COMMITMENTS:
The Company leases office space in California, and a manufacturing
facility in Guadalajara, Mexico under the terms of operating leases.
The total future minimum lease payments are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
1996 $ 118,423
1997 105,640
1998 108,880
1999 109,174
2000 112,579
Thereafter 10,378
$ 565,074
Lease payments on the manufacturing facility in Mexico are to be made in
Mexican Pesos. The above schedule was prepared using the conversion rate
in effect at December 31, 1995. Changes in the conversion rate will have
an impact on the Company's required minimum payments and its operating
results. Additionally, lease payments on the facility in Mexico will
increase on an annual basis in proportion to the increase in the minimum
wage in the Guadalajara, Mexico area.
Rent expense was $116,337 and $116,699 for 1994 and 1995, respectively.
The Company has a royalty agreement with a third party on various
products, and any derivatives from the base design of these products.
Commitments under this agreement are as follows:
5% of first $20,000,000 in sales of these products
4% of next $25,000,000 in sales of these products
3% of next $33,333,333 in sales of these products
2% of next $50,000,000 in sales of these products
1% of next $100,000,000 in sales of these products
As of December 31, 1995, the Company had sold approximately $13,630,000
of product subject to this agreement.
If the Company sells an additional $6,370,000 of these products after
December 31, 1995, the Company is required to grant 100,000 shares of
common stock to the third party in the royalty agreement. Due to
changing market demand, the Company's management currently expects to
replace these products with products it is in the process of designing,
and Company's management believes the Company will therefore not have to
grant the 100,000 shares of common stock.
The Company sold approximately $1,448,000 and $1,453,000 of these
products in 1994 and 1995, respectively, and had royalty expenses of
approximately $72,400 and $72,600 for 1994 and 1995, respectively.
The Company has an employment contract with its President/CEO which
terminates on December 31, 1999. Under the terms of the employment
contract, he shall serve as president and chief executive officer of the
Company and his salary shall be $150,000 per annum effective January 1,
1997, increasing in an amount to be determined by the employee and the
Board such that he shall receive $200,000 per annum by January 1, 1999.
His current salary for 1996 is $110,000. In addition, pursuant to the
contract, he shall have the right to receive on the first day of each
January during the term of his contract options to acquire 100,000 shares
of Common Stock at the market value as of such date. Finally, pursuant
to the employment contract, in the event there is a change in control,
the employee shall be granted a five year consulting contract at $200,000
per year.
10. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND OTHER
RISKS AND UNCERTAINTIES:
Sales to unaffiliated customers which represent more than 10% of the
Company's net sales for 1994 and 1995 were as follows (both customers are
distributors):
CUSTOMER 1994 1995
A 16% 27%
B - % 10%
The Company operates primarily in one industry segment: the manufacture
and sale of switching power supplies. Additionally, most of the
Company's sales are to customers located in California. Financial
instruments that subject the Company to credit risk consist primarily of
accounts receivable. The Company frequently sells large quantities of
inventory to its customers. At December 31, 1995, approximately
$1,053,000 or 65% of the Company's net accounts receivable were due from
five customers.
As of December 31, 1995, the Company maintained cash in a bank that was
approximately $352,000 in excess of the federally insured limit.
11. EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) profit sharing plan (the "Plan") covering
substantially all employees of DPC. Eligible employees may make
voluntary contributions to the Plan, which are matched by the Company at
a rate of $.25 for each $1.00 contributed, up to a maximum of six percent
of eligible compensation. The Company can also make discretionary
contributions. The Company made matching contributions to the Plan of
$5,593 and $9,594 for 1994 and 1995, respectively. The Board of
Directors of DPC elected not to make a discretionary contribution to the
Plan for 1994 or 1995.
The Company also has an employee stock ownership plan (the "ESOP")
covering substantially all employees of DPC. The Company can make
discretionary contributions of cash or company stock (as defined in the
ESOP plan document) up to deductible limits prescribed by the Internal
Revenue Code. The Board of Directors of DPC elected to make no
contributions to the ESOP for 1994 or 1995.
Effective June 13, 1996, the ESOP obtained a $500,000 loan guaranteed by
the Company for the purpose of acquiring common stock of Company from
existing stockholders. The loan bears interest at 10.5% per annum
requires monthly payments of principle and interest of $10,784 through
July 2001. Immediately upon the funding of the loan, the ESOP purchased
approximately 154,000 shares of the Company's common stock from existing
shareholders.
In accordance with the AICPA Statements of Position 93-6 entitled
"Employers Accounting for Employee Stock Ownership Plans", the Company
has recorded the $500,000 loan as a debt on its books with a
corresponding charge to stockholder's equity.
12. INCOME TAXES:
Income tax expense is comprised of the following:
FOR YEARS ENDED DECEMBER 31,
1994 1995
Federal $ - $ (351,150)
State 23,253 73,750
Foreign - -
$ 23,253 $ (277,400)
The components of the net deferred tax asset at December 31, 1995 are as
follows:
Net book value of fixed assets $ (3,695)
Net operating loss carryforward 383,551
Total deferred tax asset $ 379,856
As of December 31, 1995, DPC has net operating loss carryforwards for
federal income tax purposes of approximately $1,044,000 which begin to
expire in 2002. As of December 31, 1995, PD has a net operating loss
carryforward of approximately $58,000 which expires in 1999.
Total income tax expense differed from the amounts computed by applying
the U.S. federal statutory tax rates to pre-tax income as follows:
FOR YEARS ENDED DECEMBER 31,
1994 1995
Total expense computed by
applying $ 49,292 $ 281,005
the U.S. statutory rate
State income taxes 23,253 73,750
Effect of income taxable in 27,197 (14,857)
Mexico
Utilization of temporary (76,489) (261,135)
difference
Effect of valuation allowance - (356,163)
$ 23,253 $ (277,400)
13. SUBSEQUENT EVENTS:
On May 31, 1996, DPC signed a letter of intent for a proposed public
offering of 1,000,000 shares of DPC common stock at $4.00 per share. Of
the 1,000,000 shares, 750,000 are being sold by the Company and 250,000
shares are being sold by certain existing shareholders.
On May 31, 1996, all of the 415,302 issued and outstanding shares of
Series A preferred stock were converted into 415,302 shares of common
stock. Additionally, the Company declared a dividend on the Series A
preferred stock for all unpaid dividends through the conversion date and
issued an aggregate of 216,229 shares of common stock to holders of
Series A preferred stock effective immediately prior to such conversion.
On August 19, 1996, the shareholders of the Company approved an amendment
to the Company's articles of incorporation increasing the number of
authorized shares of common stock from 5,000,000 shares to 10,000,000
shares and preferred stock from 1,000,000 to 2,000,000.
In addition, on August 19, 1996, the Company issued 200,000 Common Stock
purchase warrants to certain Company directors and affiliates. Each
warrant entitles the holder to purchase one share of common stock at
$5.00.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary ............................................3
The Company ...................................................6
Risk Factors...................................................7
Use of Proceeds...............................................14
Dividend Policy...............................................14
Capitalization................................................15
Dilution......................................................16
Selected Consolidated Financial Data .........................17
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................18
Business......................................................23
Management....................................................32
Certain Transactions..........................................36
Principal and Selling Stockholders and Warrantholders.........36
Description of Securities.....................................39
Shares Eligible For Future Sale...............................41
Underwriting..................................................42
Legal Matters.................................................44
Experts.......................................................44
Change in Accountants.........................................44
Additional Information........................................44
Index To Consolidated Financial Statements...................F-1
UNTIL ___________, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
Digital Power Corporation
1,000,000 shares of Common Stock
No Par Value
700,000 Redeemable Common Stock Purchase Warrants
Werbel-Roth Securities, Inc.
________________, 1996
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 204 and 317 of the California Corporations Code ("Corporations
Code") permit indemnification of directors, officers, and employees of
corporations under certain conditions subject to certain limitations. Article
IV of the Company's Amended and Restated Articles of Incorporation ("Articles")
provides that the liability of the directors for monetary damages shall be
eliminated to the fullest extent permissible under California Law. Article V
of the Company's Articles states that the Company may provide indemnification
of its agents, including its officers and directors, for breach of duty to the
Company in excess of the indemnification otherwise permitted by Section 317 of
the Corporations Code, subject to the limits set forth in Section 204 of the
Corporations Code. Article VI of the Bylaws provides that the Company shall,
to the maximum extent and in the manner permitted in the Corporations Code,
indemnify each of its agents, including its officers and directors, against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact any such person is or was an agent of the Company.
Pursuant to Section 317 of the Corporations Code, the Company is
empowered to indemnify any person who was or is a party or is threatened to be
made a party to any proceeding (other than an action by or in the right of the
Company to procure a judgment in its favor) by reason of the fact that such
person is or was an officer, director, employee, or other agent of the Company
or its subsidiaries, against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with such proceeding, if
such person acted in good faith and in a manner such person reasonably believed
to be in the best interests of the Company and, in the case of a criminal
proceeding, has no reasonable cause to believe the conduct of such person was
unlawful. In addition, the Company may indemnify, subject to certain
exceptions, any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action by or in the right of the
Company to procure a judgment in its favor by reason of the fact that such
person is or was an officer, director, employee, or other agent of the Company
or its subsidiaries, against expenses actually and reasonably incurred by such
person in connection with the defense or settlement of such action if such
person acted in good faith and in a manner such person believed to be in the
best interest of the Company and its shareholders. The Company may advance
expenses incurred in defending any proceeding prior to final disposition upon
receipt of an undertaking by the agent to repay that amount if it shall be
determined that the agent is not entitled to indemnification as authorized by
Section 317. In addition, the Company is permitted to indemnify its agents in
excess of Section 317.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by the
Company in connection with the issuance and distribution of the securities
being registered hereunder. No expenses shall be borne by the Selling
Stockholders except for commissions and expenses related to the sale of their
shares. All of the amounts shown are estimates, except for the SEC and NASD
registration fees.
SEC registration fee $2,597.54
NASD registration fee $1,357.19
Printing and engraving expenses * $________
Accounting fees and expenses * $________
Legal fees and expenses * $________
Transfer agent and registrar fees * $________
Fees and expenses for qualification
under state securities laws $________
Miscellaneous * $________
TOTAL $________
*estimated
Item 26. Recent Sales of Unregistered Securities.
(a) On May 21, 1996, the board approved the issuance of stock options to
acquire 275,500 shares of Common Stock at $1.80 per share to employees and
directors pursuant to a stock option plan. The stock option plan was approved
by the shareholders on August 19, 1996. The Company believes that the issuance
of the stock options is exempt from registration pursuant to section 4(2) of
the Securities Act and Regulation D promulgated thereunder.
(b) On May 31, 1996, the Company sold 8,022 shares of Common Stock at
$.50 per share to one employee upon the exercise of an outstanding option. The
Company believes that the issuance of Common Stock is exempt from registration
pursuant to section 4(2) of the Securities Act.
(c) On August 19, 1996, the board granted Warrants to acquire 200,000
shares of Common Stock at $5.00 per share to the directors and an affiliate of
the Company. The Company believes that the issuance of the Warrants is exempt
from registration pursuant to section 4(2) of the Securities Act.
Item 27. Exhibits.
1.1 Underwriting Agreement between Digital Power Corporation and
Werbel Roth Securities, Inc.
3.1 Amended and Restated Articles of Incorporation for Digital Power
Corporation
3.2 Amendment to Articles of Incorporation
3.3 Bylaws of Digital Power Corporation
4.1 Specimen Stock Certificate*
4.2 Specimen Warrant
4.3 Representatives' Warrant
5.1 Opinion of Bartel Eng Linn & Schroder re Legality*
10.1 Revolving Credit Facility with San Jose National Bank
10.2 KDK Contract
10.3 Agreement with Fortron/Source Corp.
10.4 Employment Agreement with Robert O. Smith*
10.5 1996 Stock Option Plan
16.1 Letter on change of certifying accountant
21.1 Subsidiary of the small business issuer
23.1 Consent of Hein + Associates LLP is contained on page II-6
23.2 Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5
23.3 Consent of Micro-Tech Consultants
24.1 Power of attorney is contained on signature page
*To be filed by Amendment
Item 28. Undertakings
The Company hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer, or controlling person of the Company in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The Company undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Digital Power Corporation and Subsidiary:
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated August 31, 1996, relating to the consolidated financial statements
of Digital Power Corporation and Subsidiary. We also consent to the reference
to our firm under the caption "Experts" in the Prospectus.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
October 15, 1996
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fremont, California on October 10, 1996.
DIGITAL POWER CORPORATION,
A CALIFORNIA CORPORATION
/S/ ROBERT O. SMITH
Robert O. Smith,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert O. Smith or Edward L. Lammerding
as his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or any of them, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURES DATE
/S/ ROBERT O. SMITH October 10, 1996
Robert O. Smith, Chief Executive Officer
(Principal Executive Officer)
/S/ PHILIP G. SWANY October 10, 1996
Philip G. Swany, Chief Financial Officer
(Principal Accounting and
Financial Officer)
/S/ EDWARD L. LAMMERDING October 10, 1996
Edward L. Lammerding,
Chairman of the Board
/S/ THOMAS W. O'NEIL October 10, 1996
Thomas W. O'Neil, Jr., Director
/S/ PHILIP M. LEE October 10, 1996
Philip M. Lee, Director
/S/ CLAUDE ADKINS October 10, 1996
Claude Adkins, Director
<PAGE>
DIGITAL POWER CORPORATION
REGISTRATION STATEMENT ON
FORM SB-2
EXHIBITS
DATED OCTOBER 16, 1996
1,000,000 SHARES OF COMMON STOCK
500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
DIGITAL POWER CORPORATION
UNDERWRITING AGREEMENT
Boca Raton, Florida
__________, 1996
WERBEL-ROTH SECURITIES, INC.
As Representative of the
The Underwriters listed on Schedule A hereto
150 East Palmetto Park Road
Suite 380
Boca Raton, Florida 33432
Ladies and Gentlemen:
Digital Power Corporation., a California corporation (the "Company")
confirms its agreement with Werbel-Roth Securities, Inc. ("Werbel-Roth")
and each of the underwriters named in Schedule A hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted
as hereinafter provided in Section 12), for whom Werbel-Roth is acting as
representative (in such capacity, Werbel-Roth shall hereinafter be referred
to as "you" or the "Representative"), with respect to the sale by the
Company and certain selling securityholders of the Company named in
Schedule B herein, ("Selling Securityholders") and the purchase by the
Underwriters, acting severally and not jointly, of an aggregate of
1,000,000 shares of Common Stock, no par value per share, of the Company
from the Company and the Selling Securityholder's shares, of which 750,000
shares shall be offered by the Company and 250,000 shall be offered by the
Selling Securityholders, (collectively the "Shares") and 500,000
Redeemable Common Stock Purchase Warrants, each of which, upon exercise,
entitles the holder thereof to purchase one share of Common Stock during
the three years following the date hereof at a price of $5.00 per share
("Warrants"), from the Company, in the respective amounts. The Company
shall have the right to call each Warrant for redemption upon not less than
thirty (30) days written notice for a redemption price of $.125 per Warrant
provided that the closing bid price of the Common Stock has been at least
$6.00 per share for thirty (30) consecutive days ending within three (3)
trading says of the date on which notice of redemption is given. The
Shares and Warrants are hereinafter referred to as the "Securities."
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also sell to the Underwriters acting severally and not
jointly, up to an aggregate of 150,000 shares of Common Stock (the "Option
Shares") and 75,000 Warrants (the "Option Warrants") for the purpose of
covering over-allotments, if any. Such Option Shares and Option Warrants
are hereinafter collectively referred to as the "Option Securities."
The Company also proposes to issue and sell to you warrants (the
"Representative's Warrants") pursuant to the Representative's Warrant
Agreement (the "Representative's Warrant Agreement") for the purchase of an
additional 100,000 shares of Common Stock (the "Underlying Shares") and
50,000 warrants (the "Underlying Warrants"), similar but not identical to,
the Warrants. The underlying shares, underlying warrants and Common Stock
underlying the Warrants issuable upon exercise of the Representative's
Warrants are hereinafter referred to as the "Representative's Securities."
The Securities, the Option Securities, the Representative's Warrants and
the Representative's Securities are more fully described in the
Registration Statement and the Prospectus referred to below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The Company and the Selling Securityholders represents
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (hereinafter defined) and the Option
Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. ________), including any
related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Securities, the Option Securities, the Representative's
Warrants and the Representative's Securities (collectively, hereinafter
referred to as the "Securities"), under the Securities Act of 1933, as
amended (the "Act"), which registration statement and amendment or
amendments have been prepared by the Company in conformity with the
requirements of the Act, and the rules and regulations (the "Regulations")
of the Commission under the Act. The Company will promptly file a further
amendment to said registration statement in the form heretofore delivered
to the Underwriters and will not file any other amendment thereto to which
the Underwriters shall have objected in writing after having been furnished
with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time
the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as
a part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all
information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430(A) of the Rules and Regulations), is hereinafter
called the "Registration Statement", and the form of prospectus in the form
first filed with the Commission pursuant to Rule 424(b) of the Regulations,
is hereinafter called the "Prospectus." For purposes hereof, "Rules and
Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or Prospectus or any part of any
thereof and no proceedings for a stop order suspending the effectiveness of
the Registration Statement or any of the Company's securities have been
instituted or are pending or threatened. Each of the Preliminary
Prospectus, the Registration Statement and Prospectus at the time of filing
thereof conformed with the requirements of the Act and the Rules and
Regulations, and none of the Preliminary Prospectus, the Registration
Statement or Prospectus at the time of filing thereof contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein and necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty does not apply to statements
made or statements omitted in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriters by or
on behalf of the Underwriters expressly for use in such Preliminary
Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and
each Option Closing Date (as defined herein), if any, and during such
longer period as the Prospectus may be required to be delivered in
connection with sales by the Underwriters or a dealer, the Registration
Statement and the Prospectus will contain all statements which are required
to be stated therein in accordance with the Act and the Rules and
Regulations, and will conform to the requirements of the Act and the Rules
and Regulations; neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that this representation and warranty does not apply to statements
made or statements omitted in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of any
Underwriter expressly for use in the Preliminary Prospectus, Registration
Statement or Prospectus or any amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the state of its
incorporation. Except as set forth in the Prospectus, the Company does not
own an interest in any corporation, partnership, trust, joint venture or
other business entity. The Company is duly qualified and licensed and in
good standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of its operations
require such qualification or licensing. The Company has all requisite
power and authority (corporate and other), and has obtained any and all
necessary authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials
and bodies, to own or lease its properties and conduct its business as
described in the Prospectus; the Company is and has been doing business in
compliance with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits; and the Company has not received any
notice of proceedings relating to the revocation or modification of any
such authorization, approval, order, license, certificate, franchise, or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the earnings, position, prospects,
value, operation, properties, business or results of operations of the
Company. The disclosures in the Registration Statement concerning the
effects of federal, state, local, and foreign laws, rules and regulations
on the Company's business as currently conducted and as contemplated are
correct in all material respects and do not omit to state a material fact
necessary to make the statements contained therein not misleading in light
of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set
forth therein on the Closing Date based upon the assumptions set forth
therein, and the Company is not a party to or bound by any instrument,
agreement or other arrangement providing for it to issue any capital stock,
rights, warrants, options or other securities, except for this Agreement,
Representative's Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company
conform or, when paid for and issued, will conform, in all respects to all
statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and
non-assessable and the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the Company or
similar contractual rights granted by the Company. The Securities are not
and will not be subject to any preemptive or other similar rights of any
shareholder, have been duly authorized and, when paid for, issued and
delivered in accordance with the terms hereof, will be validly issued,
fully paid and nonassessable and will conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders; all corporate action required to be taken
for the authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities will be in
due and proper form. Upon the issuance and delivery pursuant to the terms
hereof of the Securities to be sold by the Company hereunder, the
Representatives or the Representative, as the case may be, will acquire
good and marketable title to such Securities free and clear of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever.
(f) The financial statements of the Company together with the
related notes and schedules thereto, included in the Registration
Statement, each Preliminary Prospectus and the Prospectus fairly present
the financial position, income, changes in cash flow, changes in
shareholders' equity and the results of operations of the Company at the
respective dates and for the respective periods to which they apply and
such financial statements have been prepared in conformity with generally
accepted accounting principles and the Rules and Regulations, consistently
applied throughout the periods involved. There has been no adverse change
or development involving a material prospective change in the condition,
financial or otherwise, or in the earnings, position, prospects, value,
operations, properties, business, or results of operations of the Company
whether or not arising in the ordinary course of business, since the date
of the financial statements included in the Registration Statement and the
Prospectus and the outstanding debt, the property, both tangible and
intangible, and the businesses of the Company conform in all respects to
the descriptions thereof contained in the Registration Statement and the
Prospectus. Financial information set forth in the Prospectus under the
headings "Summary Financial Information," "Selected Financial Data,"
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly present, on the basis stated
in the Prospectus, the information set forth therein, and have been derived
from or compiled on a basis consistent with that of the audited and
unaudited financial statements included in the Prospectus.
(g) The Company (i) has paid, accrued or otherwise reserved for,
all federal, state, local, and foreign taxes required to be paid,
including, but not limited to, withholding taxes and amounts payable under
Chapters 21 through 24 of the Internal Revenue Code of 1986 (the "Code"),
and has furnished all information returns it is required to furnish
pursuant to the Code, (ii) has established adequate reserves for such Taxes
which are not due and payable, and (iii) does not have any tax deficiency
or claims outstanding, proposed or assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable
by or on behalf of the Representatives in connection with (i) the issuance
by the Company of the Securities, (ii) the purchase by the Representatives
of the Securities from the Company and the purchase by the Representative
of the Representatives Warrants from the Company, (iii) the consummation by
the Company of any of its obligations under this Agreement, or (iv) resales
of the Securities in connection with the distribution contemplated hereby.
(i) The Company has, including, but not limited to, general
liability, product and property insurance, which insures the Company and
its employees against such losses and risks generally insured against by
comparable businesses. The Company (A) has not failed to give notice or
present any insurance claim with respect to any matter, including but not
limited to the Company's business, property or employees, under the
insurance policy or surety bond in a due and timely manner, (B) has no
disputes or claims against any underwriter of such insurance policies or
surety bonds or has failed to pay any premiums due and payable thereunder,
or (C) has not failed to comply with all conditions contained in such
insurance policies and surety bonds. There are no facts or circumstances
under any such insurance policy or surety bond which would relieve any
insurer of its obligation to satisfy in full any valid claim of the
Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding, domestic or foreign,
pending or threatened against (or circumstances that may give rise to the
same), or involving the properties or business of, the Company which (i)
questions the validity of the capital stock of the Company, this Agreement
or the Representative's Warrant Agreement, or of any action taken or to be
taken by the Company pursuant to or in connection with this Agreement or
the Representative's Warrant Agreement, (ii) is required to be disclosed in
the Registration Statement which is not so disclosed (and such proceedings
as are summarized in the Registration Statement are accurately summarized
in all respects), or (iii) might materially and adversely affect the
condition, financial or otherwise, or the earnings, position, prospects,
shareholders' equity, value, operations, properties, business or results of
operations of the Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, the Representative's
Securities, enter into this Agreement and the Representative's Warrant
Agreement and to consummate the transactions provided for in such
agreements; and this Agreement, and the Representative's Warrant Agreement
have each been duly and properly authorized, executed and delivered by the
Company. Each of this Agreement and the Representative's Warrant Agreement
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms subject to bankruptcy,
insolvency, and creditor's rights and the application of equitable
principles in any action legal or equitable, and none of the Company's
issue and sale of the Securities, the Representative's Securities,
execution or delivery of this Agreement or the Representative's Warrant
Agreement its performance hereunder and thereunder, its consummation of the
transactions contemplated herein and therein, or the conduct of its
business as described in the Registration Statement, the Prospectus, and
any amendments or supplements thereto, conflicts with or will conflict with
or results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result
in the creation or imposition of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any
kind whatsoever upon, any property or assets (tangible or intangible) of
the Company pursuant to the terms of, (i) the articles of incorporation or
bylaws of the Company, (ii) any license, contract, indenture, mortgage,
deed of trust, voting trust agreement, shareholders agreement, note, loan
or credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which its
properties or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (iii) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Company or any of its activities or properties.
(l) Except as described in the Prospectus, no consent, approval,
authorization or order of, and no filing with, any court, regulatory body,
government agency or other body, domestic or foreign, is required for the
issuance of the Securities pursuant to the Prospectus and the Registration
Statement, the issuance of the Representative's Warrants, the performance
of this Agreement and the Representative's Warrant Agreement and the
transactions contemplated hereby and thereby, including without limitation,
any waiver of any preemptive, first refusal or other rights that any entity
or person may have for the issue and/or sale of any of the Securities, or
the Representative's Warrants, except such as have been or may be obtained
under the Act or may be required under state securities or Blue Sky laws in
connection with the Representatives' purchase and distribution of the
Securities, and the Representative's Warrants to be sold by the Company
hereunder.
(m) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as
exhibits to the Registration Statement to which the Company is a party or
by which they may be bound or to which its assets, properties or business
may be subject have been duly and validly authorized, executed and
delivered by the Company and constitute the legal, valid and binding
agreements of the Company enforceable against the Company, as the case may
be, in accordance with respective terms. The descriptions in the
Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with
respect thereto by Form SB-2, and there are no contracts or other documents
which are required by the Act to be described in the Registration Statement
or filed as exhibits to the Registration Statement which are not described
or filed as required, and the exhibits which have been filed are complete
and correct copies of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and Prospectus, and except as
may otherwise be indicated or contemplated herein or therein, the Company
has not (i) issued any securities or incurred any liability or obligation,
direct or contingent, for borrowed money, (ii) entered into any transaction
other than in the ordinary course of business, or (iii) declared or paid
any dividend or made any other distribution on or in respect of its capital
stock of any class, and there has not been any material change in or
affecting the general affairs, management, financial operations,
shareholders equity or results of operations of the Company.
(o) No default exists in the due performance and observance of
any term, covenant or condition of any material license, contract,
indenture, mortgage, installment sale agreement, lease, deed of trust,
voting trust agreement, shareholders agreement, partnership agreement,
note, loan or credit agreement, purchase order, or any other material
agreement or instrument evidencing an obligation for borrowed money, or any
other material agreement or instrument to which the Company is a party or
by which the Company may be bound or to which the property or assets
(tangible or intangible) of the Company is subject or affected.
(p) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in material
compliance with all federal, state, local, and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations
involving the Company by the U.S. Department of Labor, or any other
governmental agency responsible for the enforcement of such federal, state,
local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or threatened against or involving the Company, or any
predecessor entity, and none has ever occurred. No representation question
exists respecting the employees of the Company, and no collective
bargaining agreement or modification thereof is currently being negotiated
by the Company. No grievance or arbitration proceeding is pending under
any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or, is imminent.
(q) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan" or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain
or contribute, now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code, which could subject the
Company to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and ERISA
as they relate to any such ERISA Plan. Determination letters have been
received from the Internal Revenue Service with respect to each ERISA Plan
which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder. The Company
has never completely or partially withdrawn from a "multi-employer plan."
(r) The Company, nor any of its officers, directors, partners,
"affiliates" or "associates" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) has ever taken or will take,
directly or indirectly, any action designed to or which has constituted or
which might be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or
otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or
held by the Company are in dispute so far as known by the Company or are in
any conflict with the right of any other person or entity. The Company (i)
owns or has the right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all patents, trademarks, service marks,
trade names and copyrights, technology and licenses and rights with respect
to the foregoing, used in the conduct of its business as now conducted or
proposed to be conducted without infringing upon or otherwise acting
adversely to the right or claimed right of any person, corporation or other
entity under or with respect to any of the foregoing; and (ii) is not
obligated or under any liability whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant
to, any patent, trademark, service mark, trade name, copyright, know-how,
technology or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(t) The Company owns and has the unrestricted right to use all
trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
inventions, designs, processes, works of authorship, computer programs and
technical data and information (collectively herein "intellectual
property") that are material to the development, manufacture, operation and
sale of all products and services sold or proposed to be sold by the
Company free and clear of and without violating any right, lien, or claim
of others, including without limitation, former employers of its employees;
provided, however, that the possibility exists that other persons or
entities, completely independently of the Company, as the case may be, or
its employees or agents, could have developed trade secrets or items of
technical information similar or identical to those of the Company. The
Company is not aware of any such development of similar or identical trade
secrets or technical information by others.
(u) The Company has taken reasonable security measures to
protect the secrecy, confidentiality and value of all its intellectual
property in all material aspects.
(v) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
stated in the Prospectus, to be owned or leased by it free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects,
or other restrictions or equities of any kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and payable.
(w) Hein + Associates, LLP, whose report is filed with the
Commission as a part of the Registration Statement, are independent
certified public accountants as required by the Act and the Rules and
Regulations and have been retained by the Company as its auditors.
(x) Except as provided herein and in the Registration Statement,
the Company has caused to be duly executed legally binding and enforceable
agreements ("Lock-up Agreements") pursuant to which the Company's
shareholders and holders of securities exchangeable or exercisable for or
convertible into shares of Common Stock have agreed not to, directly or
indirectly, publicly offer to sell, sell, grant any option for the sale of,
assign, transfer, pledge, hypothecate or otherwise encumber or dispose of
any shares of Common Stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for any
shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for
a period of not less than twenty-four (24) months following the effective
date of the Registration Statement without the prior written consent of the
Representative. On or before the Closing Date, the Company shall deliver
instructions to the Transfer Agent authorizing it to place appropriate
legends on the certificates representing the securities subject to the
Lock-up Agreements and to place appropriate stop transfer orders on the
Company's ledgers. Except for the issuance of shares of capital stock by
the Company in connection with a dividend, recapitalization, reorganization
or similar transaction or as a result of the exercise of warrants or
outstanding options disclosed in the Registration Statement, the Company
shall not, for a period of TWELVE (12) months following the Closing Date,
directly or indirectly, offer, sell, issue or transfer any shares of its
capital stock, or any security exchangeable or exercisable for, or
convertible into, shares of the capital stock, without the prior written
consent of the Representative. Prior to the effective date of the
Registration Statement, the Company will cause each of its shareholders
owning more than 5,000 Shares and private warrantholders to enter into a
written agreement with the Representative that (i) such shareholders and
warrantholders will not sell or otherwise dispose of any shares of the
Company's Common Stock owned directly or indirectly by them or beneficially
by them (as defined by the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and rules promulgated thereunder) on the effective date of
the Registration Statement for a period of twelve (12) months from the
effective date without the Representative's prior written consent and (ii)
they will permit all certificates evidencing Such Common Stock to be
stamped at closing with an appropriate restrictive legend, and will cause
the transfer agent for the Company to note such restriction on the transfer
books and records of the Company.
(y) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities
hereunder or any other arrangements, agreements, understandings, payments
or issuances with respect to the Company, or any of its officers,
directors, shareholders, partners, employees or affiliates that may affect
the Representatives' compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD").
(z) Upon the effective date of the Registration Statement the
Company will have the Shares and the Warrants and underlying Shares
registered on the National Association of Securities Dealers Automated
Quotation System, Interdealer Quotation system ("NASDAQ") and will use its
best efforts to maintain such listing for not less than five years. The
Company shall also prior to the effective date of the Registration
Statement make application for a listing on an accelerated basis of the
Company's securities in Standard & Poor's.
(aa) To the Company's best knowledge, no funds or assets of the
Company have been used for illegal purposes; no unrecorded funds or assets
of the Company been established for any purpose; no accumulation or use of
the Company's corporate funds or assets have been made without being
properly accounted for in the respective books and records of the Company;
all payments by or on behalf of the Company have been duly and properly
recorded and accounted for in the Company's books and records; no false or
artificial entry has been made in the books and records of the Company for
any reason; no payment has been made by or on behalf of Company with the
understanding that any part of such payment is to be used for any purpose
other than that described in the documents supporting such payments; the
Company has not made, directly or indirectly, any illegal contributions to
any political party or candidate. The Company's internal accounting
controls are sufficient to cause the Company to comply with the Foreign
Corrupt Practices Act of 1977, as amended.
(bb) Except as set forth in the Prospectus, no officer, director,
shareholder or partner of the Company, or any "affiliate" or "associate"
(as these terms are defined in Rule 405 promulgated under the Rules and
Regulations) of any of the foregoing persons or entities has or has had,
either directly or indirectly, (i) an interest in any person or entity
which (A) furnishes or sells services or products which are furnished or
sold or are proposed to be furnished or sold by the Company; or (B)
purchases from or sells or furnishes to the Company any goods or services,
or (ii) a beneficiary interest in any contract or agreement to which the
Company is a party or by which it may be bound or affected. Except as set
forth in the Prospectus under "Management" or "Certain Transactions," there
are no existing material agreements, arrangements, understandings or
transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company, and any officer, director,
Principal Shareholder (as such term is defined in the Prospectus) of the
Company, or any partner, affiliate or associate of any of the foregoing
persons or entities.
(cc) Any certificate signed by any officer of the Company and
delivered to the Representatives or to Representatives' Counsel (as defined
herein) shall be deemed a representation and warranty by the Company to the
Representatives as to the matters covered thereby.
(dd) The minute book of the Company has been made available to
the Representatives and contains a complete summary of all meetings and
actions of the directors and shareholders of the Company since the time of
its incorporation, and reflects all transactions referred to in such
minutes accurately in all respects.
(ee) Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or
other convertible or exchangeable securities of the Company have the right
to include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company or to
require the Company to file a registration statement under the Act and no
person or entity holds any anti-dilution rights with respect to any
securities of the Company.
(ff) The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with Robert O. Smith in
the form filed as Exhibit 10.___ of the Registration Statement, and (ii)
has purchased keyman life insurance on the life of Robert O. Smith. The
policy shall provide for coverage in the amount of $1,000,000, and the
policy shall name the Company as the sole beneficiary thereof.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SECURITYHOLDERS
(a) The Selling Securityholders will have on the Closing Date,
good, valid and marketable title to securities listed on Schedule B hereto
to be sold by such Selling Securityholders to the Representatives, free and
clear of any liens, charges, claims, encumbrances, pledges, security
interests, restrictions, equities, stockholders' agreements, voting trusts
or defects in title whatsoever; and upon delivery of such Securities and
payment of the purchase price therefor as contemplated in this Agreement,
each of the Representatives will receive good and marketable title to such
Securities purchased by it from such Selling Securityholders, free and
clear of any lien, charge, claim, encumbrance, pledge, security interest,
restriction, equity, shareholders' agreement, voting trust, community
property right or defect in title whatsoever; and other than as described
in the Registration Statement and the Prospectus or created hereby, there
are no outstanding options, warrants, rights, or other agreements or
arrangements requiring such Selling Securityholders at any time to transfer
any Securities to be sold hereunder by such Selling Securityholders.
(b) Such Selling Securityholders have duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to
the Representative, a Power of Attorney (the "Power of Attorney") with
___________ as attorney-in-fact, (an "Attorney-in-Fact"), and a Letter of
Transmittal and Custody Agreement (the "Custody Agreement") with
____________________ as custodian (the "Custodian"); each of the Power of
Attorney and Custody Agreement constitutes a valid and binding obligation
of such Selling Securityholders, enforceable in accordance with its terms
subject to bankruptcy, insolvency and creditor's right; such Selling
Securityholder's Attorney-in-Fact, acting alone, is authorized to execute
and deliver the certificate(s) evidencing the Securities to be sold to the
Representatives on behalf of such Selling Securityholders, to authorize the
delivery of those Securities to be sold by such Selling Securityholders
under this Agreement and to duly endorse (in blank or otherwise) the
certificate or certificates representing such Securities or a stock power
or powers with respect thereto, to accept payment therefor, and otherwise
to act on behalf of such Selling Securityholders in connection with this
Agreement.
(c) All authorizations, approvals, consents and orders necessary
for the execution and delivery by such Selling Securityholders of the Power
of Attorney and the Custody Agreement, the execution and delivery by or on
behalf of such Selling Securityholders of this Agreement, and the sale and
delivery of Securities to be sold by such Selling Securityholders under
this Agreement have been obtained and are in full force and effect; such
Selling Securityholders have full right, power and authority to enter into
and perform her obligations under this Agreement and such Power of Attorney
and Custody Agreement and to sell, transfer and deliver the Securities to
be sold by such Selling Securityholders under this Agreement.
(d) On the Closing Date, certificates in negotiable form for the
Securities to be sold by such Selling Securityholders under this Agreement
on the Closing Date, together with a stock power or powers duly endorsed in
blank by such Selling Securityholders, will have been placed in custody
with the Custodian for the purpose of effecting delivery hereunder and
thereunder.
(e) The performance of this Agreement and the consummation of
the transactions herein contemplated by such Selling Securityholders, will
not conflict with or result in a breach of, or default under, (i) any
license, contract, indenture, mortgage, deed of trust, voting trust
agreement, shareholders' agreement, note, loan or credit agreement, the
Bylaws, the Articles of Incorporation or other agreement or instrument to
which such Selling Securityholders is a party or by which such Selling
Securityholders is or may be bound or to which any of her property is or
may be subject, or (ii) any statute, judgment, decree, order, rule or
regulation applicable to such Selling Securityholders of any arbitrator,
court, regulatory body or administrative agency or other governmental
agency or body, domestic or foreign, having jurisdiction over such Selling
Securityholders or any of such Selling Securityholders's activities or
properties; this Agreement when executed and delivered by the Selling
Securityholders and, to the extent this Agreement is a binding agreement of
the Representatives, constitutes the valid and binding agreement of such
Selling Securityholders, enforceable in accordance with its terms except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium or other laws of general application relating to or affecting
enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law.
(f) Such Selling Securityholders have reviewed and are familiar
with the Registration Statement as originally filed with the Commission and
all amendments and supplements thereto, if any, filed with the Commission
prior to the date hereof, and with the Preliminary Prospectus and the
Prospectus, as supplemented, if applicable, to the date hereof, and has no
knowledge of any fact, condition or information not disclosed in the
Registration Statement and Prospectus, as so supplemented, if applicable,
which has adversely affected or could adversely affect the condition,
financial or otherwise, or the earnings, position, prospects, value,
operation, properties, business or results of operations of the Company;
and the information relating to such Selling Securityholders and the
Securities and other securities of the Company owned by Selling
Securityholders that is set forth in such Registration Statement and
Prospectus, as so supplemented, does not and at the Closing Date, will not
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make such information, in light of the
circumstances under which they were made, not misleading and all
information furnished by or on behalf of such Selling Securityholders for
use in the Registration Statement, the Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto is, and, at the Closing
Date will be true and complete in all material respects; and such Selling
Securityholders are not prompted to sell the Securities to be sold by such
Selling Securityholders under this Agreement by any information concerning
the Company which is not set forth in the Prospectus, as so supplemented.
(g) Nothing has come to the attention of such Selling
Securityholders to cause such Selling Securityholders to believe that the
Company's representations and warranties contained in this Agreement are
not accurate in all material respects.
(h) There is not pending or threatened against such Selling
Securityholders any action, suit or proceeding (or circumstances that may
give rise to the same) which (i) questions the validity of this Agreement,
the Custody Agreement, the Power of Attorney or of any action taken or to
be taken by such Selling Securityholders pursuant to or in connection with
any of the foregoing; or (ii) which is required to be disclosed in the
Registration Statement and the Prospectus which is not disclosed and such
proceedings which are summarized in all material respects.
(i) No stamp duty or similar tax is payable by or on behalf of
the Representatives in connection with (i) the sale of the Securities to be
sold by such Selling Securityholders; (ii) the purchase by the
Representatives of the Securities to be sold by such Selling
Securityholders; (iii) the consummation by such Selling Securityholders of
any of its obligations under this Agreement, the Custody Agreement or the
Power of Attorney; or (iv) resales of the Securities in connection with the
distribution contemplated hereby.
(j) Except as set forth in the Prospectus, such Selling
Securityholders does not have any registration rights with respect to any
securities of the Company; and such Selling Securityholders do not have any
right of first refusal or other similar right to purchase any securities of
the Company upon the issuance or sale thereof by the Company or upon the
sale thereof by any other stockholder of the Company.
(k) Such Selling Securityholders have not since the filing of
the initial Registration Statement (i) sold, bid for, purchased, attempted
to induce any person to purchase, or paid anyone any compensation for
soliciting purchases of, Common Stock, or (ii) paid or agreed to pay to any
person any compensation for soliciting another to purchase any securities
of the Company (except for the sale of the Securities to the
Representatives under this Agreement and except as otherwise permitted by
law).
(l) Such Selling Securityholders have not taken, and will not
take, directly or indirectly, any action which has constituted or which
might reasonably be expected to cause or result in stabilization of the
price of any security of the Company to facilitate the distribution of the
Securities.
(m) Such Selling Securityholders will review the Prospectus and
will comply with all agreements and satisfy all conditions on its part to
be complied with or satisfied pursuant to this Agreement, the Custody
Agreement and the Power of Attorney at or prior to the Closing Date and
will advise one of its Attorneys-in-Fact prior to the Closing Date, as the
case may be, if any statement to be made on behalf of such Selling
Securityholders in this Agreement contains any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading if made
as of such Closing Date, as the case may be.
(n) Any certificate signed by or on behalf of such Selling
Securityholders and delivered to the Representatives shall be deemed a
representation and warranty by such Selling Securityholders to the
Representatives as to the matters covered thereby.
<PAGE>
3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES AND
REPRESENTATIVE'S WARRANTS.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions
herein set forth, the Company and the Selling Securityholders agree to sell
to each Representative, and each Representative, severally and not jointly,
agrees to purchase from the Company and the Selling Securityholders, as the
case may be, at a price of $4.00 per share of Common Stock and $.125 per
Warrant, that number of Securities set forth in Schedule A opposite the
name of such Representative, subject to such adjustment as the
Representative in its sole discretion shall make to eliminate any sales or
purchases of fractional shares of Common Stock or Warrants, plus any
additional number of Securities which such Representative may become
obligated to purchase pursuant to the provisions of Section 1 hereof.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but subject to the
terms and conditions herein set forth, the Company hereby grants an option
to the Representatives, severally and not jointly, to purchase all or any
part of the Option Shares (up to an aggregate of an additional 150,000
shares of Common Stock and 75,000 Warrants) at the initial offering price,
less the Representative's discount. The option granted hereby will expire
45 days after (i) the date the Registration Statement becomes effective, if
the Company has elected not to rely on Rule 430A under the Rules and
Regulations, or (ii) the date of this Agreement if the Company has elected
to rely upon Rule 430A under the Rules and Regulations, and may be
exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering
and distribution of the Securities upon notice by the Representative to the
Company setting forth the number of Option Securities as to which the
several Representatives are then exercising the option and the time and
date of payment and delivery for any such Option Securities. Any such time
and date of delivery (an "Option Closing Date") shall be determined by the
Representative, but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Date, as
hereinafter defined, unless otherwise agreed upon by the Representative and
the Company. Nothing herein contained shall obligate the Representatives
to make any over-allotments. No Option Securities shall be delivered
unless the Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
securities for, the Securities shall be made at the offices of the
Representative at 150 East Palmetto Park Road, Suite 380, Boca Raton,
Florida 33432, or at such other place as shall be agreed upon by the
Representative and the Company. Such delivery and payment shall be made at
10:00 a.m. (Florida time) on __________, 1996, or at such other time and
date as shall be agreed upon by the Representative and the Company, but not
less than THREE (3) nor more than TEN (10) full business days after the
effective date of the Registration Statement (such time and date of payment
and delivery being herein called "Closing Date"). In addition, in the
event that any or all of the Option Securities are purchased by the
Representatives, payment of the purchase price for and delivery of
certificates for, such Option Securities shall be made at the above-
mentioned firm office of the Representative or at such other place as shall
be agreed upon by the Representative and the Company on the Option Closing
Date as specified in the notice from the Representative to the Company.
Delivery of the certificates for the Securities and the Option Securities,
if any, shall be made to the Representatives against payment by the
Representatives, severally and not jointly, of the purchase price for the
Securities and the Option Securities, if any, by New York Clearing House
funds. In the event such option is exercised, each of the Representatives,
acting severally and not jointly, shall purchase that proportion of the
total number of Option Securities then being purchased which the number of
Securities set forth in Schedule A hereto opposite the name of such
Representative bears to the total number of Securities, subject in each
case to such adjustments as the Representative in its discretion shall make
to eliminate any sales or purchases of fractional shares. Certificates for
the Securities and the Option Securities, if any, shall be in definitive,
fully registered form, shall bear no restrictive legends and shall be in
such denominations and registered in such names as the Representatives may
request in writing at least two (2) business days prior to the Closing Date
or the Option Closing Date, as the case may be. The certificates for the
Securities and the Option Securities, if any, shall be made available to
the Representative at such office or such other place as the Representative
may designate for inspection, checking and packaging no later than 9:30
a.m. on the last business day prior to the Closing Date or the Option
Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative the Representative's Warrants for nominal consideration,
which warrants shall entitle the holders thereof to purchase an aggregate
of 100,000 shares of Common Stock and 50,000 Warrants, similar
but not identical to, the Warrants. The Representative's Warrants shall
be non-exercisable and non-transferable (other than a transfer to affiliates
of the Representative or members of the selling group) for a period of 12
months following the date of the definitive Prospectus. The Representative's
Warrants and the underlying securities shall contain the usual anti-dilution
provisions and shall not be redeemable. The Representative's Warrants will be
exercisable 12 months after the date of the definitive Prospectus used in the
offering and for a period of four years thereafter; and if the
Representative's Warrants are not exercised during this term, they shall, by
their terms, automatically expire. The exercise price of each of the
Representative's Warrants shall be 120% of the public offering price per Share
and Offered Warrants.
The Company and the Representative agree that the Representative
may designate that the Representative's Warrants be issued in varying
amounts directly to its officers, directors, shareholders, employees, and
other proper persons and not to the Representative; however, such
designation will only be made by the Representative if it determines and
represents to the Company that such issuance would not violate the
interpretation of the Board of Governors of the NASD relating to the review
of corporate financing arrangements and would not require registration of
the Representative's Warrants or underlying securities.
4. PUBLIC OFFERING OF THE SECURITIES. As soon after the
Registration Statement becomes effective as the Representative deems
advisable, the Representatives shall make a public offering of the
Securities (other than to residents of or in any jurisdiction in which
qualification of the Securities is required and has not become effective)
at the price and upon the terms set forth in the Prospectus. The
Representative may from time to time increase or decrease the public
offering price after distribution of the Securities has been completed to
such extent as the Representative, in its sole discretion deems advisable.
The Representatives may enter into one or more agreements as the
Representatives, in each of their sole discretion, deem advisable with one
or more broker-dealers who shall act as dealers in connection with such
public offering.
5. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants
and agrees with each of the Representatives as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after
the effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the
Securities by the Representatives of which the Representative shall not
previously have been advised and furnished with a copy, or to which the
Representative shall have objected or which is not in compliance with the
Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative and confirm the notice
in writing, (i) when the Registration Statement, as amended, becomes
effective, if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said
Rule 430A and when any post-effective amendment to the Registration
Statement becomes effective; (ii) of the issuance by the Commission of any
stop order or of the initiation, or the threatening, of any proceeding,
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution of
proceedings for that purpose; (iii) of the issuance by the Commission or by
any state securities commission of any proceedings for the suspension of
the qualification of any of the Securities for offering or sale in any
jurisdiction or of the initiation, or the threatening, of any proceeding
for that purpose; (iv) of the receipt of any comments from the Commission;
and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or
for additional information. If the Commission or any state securities
commission authority shall enter a stop order or suspend such qualification
at any time, the Company will make every effort to obtain promptly the
lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to
Rule 424(b)(1) (or, if applicable and if consented to by the
Representative, pursuant to Rule 424(b)(4)) not later than the Commission's
close of business on the earlier of (i) the second business day following
the execution and delivery of this Agreement; and (ii) the fifth business
day after the effective date of the Registration Statement.
(d) The Company will give the Representative notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to
the Prospectus (including any revised prospectus which the Company proposes
for use by the Representatives in connection with the offering of the
Securities which differs from the corresponding prospectus on file at the
Commission at the time the Registration Statement becomes effective,
whether or not such revised prospectus is required to be filed pursuant to
Rule 424(b) of the Rules and Regulations) and will furnish the
Representative with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may be,
and will not file any such prospectus to which the Representative or Atlas,
Pearlman, Trop & Borkson, P.A. ("Representatives' Counsel"), shall object.
(e) The Company shall endeavor in good faith, in cooperation
with the Representative, at or prior to the time the Registration Statement
becomes effective, to qualify the Securities for offering and sale under
the securities laws of such jurisdictions as the Representative may
designate to permit the continuance of sales and dealings therein for as
long as may be necessary to complete the distribution, and shall make such
applications, file such documents and furnish such information; HOWEVER,
the Company shall not be required to qualify as a foreign corporation or
file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Representative agrees that such
action is not at the time necessary or advisable, use all reasonable
efforts to file and make such statements or reports at such times as are or
may reasonably be required by the laws of such jurisdiction to continue
such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable effort to
comply with all requirements imposed upon it by the Act and the Exchange
Act, as now and hereafter amended and by the Rules and Regulations, as from
time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Securities in accordance with the provisions
hereof and the Prospectus, or any amendments or supplements thereto. If at
any time when a prospectus relating to the Securities or the
Representative's Securities is required to be delivered under the Act, any
event shall have occurred as a result of which, in the opinion of counsel
for the Company or Representatives' Counsel, the Prospectus, as then
amended or supplemented, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will notify the
Representative promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of the
Act, each such amendment or supplement to be reasonably satisfactory to
Representatives' Counsel, and the Company will furnish to the
Representatives copies of such amendment or supplement as soon as available
and in such quantities as the Representatives may reasonably request.
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company
shall make generally available to its securityholders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and will deliver to
the Representative, an earnings statement which will be in the detail
required by, and will otherwise comply with, the provisions of Section
11(a) of the Act and Rule 158(a) of the Rules and Regulations, which
statement need not be audited unless required by the Act, covering a period
of at least twelve (12) consecutive months after the effective date of the
Registration Statement.
(h) During a period of five (5) years after the date hereof,
the Company will furnish to its shareholders, as soon as practicable,
annual reports (including financial statements audited by independent
public accountants) and will deliver to the Representative:
i) Concurrently with furnishing such quarterly reports to
its shareholders, statements of income of the Company for each quarter
in the form furnished to the Company's shareholders and certified by
the Company's principal financial or accounting officer;
ii) concurrently with furnishing such annual reports to its
shareholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
shareholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
certified public accountants;
iii) as soon as they are available, copies of all reports
(financial or other) mailed to shareholders;
iv) as soon as they are available, copies of all reports
and financial statements furnished to or filed with the Commission,
the NASD, NASDAQ or any other securities exchange;
v) every press release and every material news item or
article of interest to the financial community in respect of the
Company, or its affairs which was released or prepared by or on behalf
of the Company; and
vi) any additional information of a public nature
concerning the Company or its business which the Representative may
request.
During such five-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiary are
consolidated, and will be accompanied by similar financial statements for
any significant subsidiary which is not so consolidated.
(i) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which
may be the same entity as the Transfer Agent) for its Common Stock.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative
may designate, copies of each Preliminary Prospectus, the Registration
Statement and any pre-effective or post-effective amendments thereto (two
of which copies will be signed and will include all financial statements
and exhibits), the Prospectus, and all amendments and supplements thereto,
including any prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such
quantities as the Representative may reasonably request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true copies of
duly executed, legally binding and enforceable Lock-up Agreements pursuant
to which for a period of twenty-four (24) months from the effective date of
the Registration Statement, shareholders of the Company owning shares of
Common Stock and holders of securities exchangeable or exercisable for or
convertible into shares of Common Stock (owning Warrants) agree that it or
he or she will not directly or indirectly, publicly issue, offer to sell,
sell, grant an option for the sale of, assign, transfer, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common Stock
or securities convertible into, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common
Stock (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) or dispose of any beneficial interest therein without the prior
written consent of the Representative. On or before the Closing Date, the
Company shall deliver instructions to the Transfer Agent authorizing it to
place appropriate legends on the certificates representing the securities
subject to the Lock-up Agreements and to place appropriate stop transfer
orders on the Company's ledgers. Except for the issuance of shares of
capital stock by the Company in connection with a dividend,
recapitalization, reorganization or similar transaction or as a result of
the exercise of warrants or outstanding options disclosed in the
Registration Statement, the Company shall not, for a period of twenty-four
(24) months following the Closing Date, directly or indirectly, offer,
sell, issue or transfer any shares of its capital stock, or any security
exchangeable or exercisable for, or convertible into, shares of the capital
stock, without the prior written consent of the Representative, except the
Company may issue options, not to exceed 120,000 options (without the prior
written consent of the Representative) pursuant to the Company's Stock
Option Plan.
(l) The Company shall apply the net proceeds from the sale of
the Securities in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus. No portion of the net proceeds
will be used, directly or indirectly, to acquire any securities issued by
the Company.
(m) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form
SR as may be required pursuant to Rule 463 under the Act) from time to
time, under the Act, the Exchange Act, and the Rules and Regulations, and
all such reports, forms and documents filed will comply as to form and
substance with the applicable requirements under the Act, the Exchange Act,
and the Rules and Regulations.
(n) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two full business days prior
thereto, a copy of the latest available unaudited interim financial
statements of the Company (which in no event shall be as of a date more
than thirty (30) days prior to the date of the Registration Statement)
which have been read by the Company's independent public accountants, as
stated in their letters to be furnished pursuant to Section 7(1) hereof.
(o) The Company shall cause the Common Stock and Warrants to be
quoted on NASDAQ and for a period of five years from the date hereof, use
its best efforts to maintain the NASDAQ listing of the Common Stock or,
upon the written consent of the Representative, quotation on a principal
stock exchange.
(p) For a period of five years from the Closing Date, the
Company shall furnish to the Representative at the Company's sole expense,
(i) daily consolidated transfer sheets relating to the Common Stock if such
transfer sheets have been furnished to the Company by its transfer agent at
no additional cost, (ii) the list of holders of all of the Company's
securities and (iii) a Blue Sky "Trading Survey" for secondary sales of the
Company's securities prepared by counsel.
(q) As soon as practicable, (i) but in no event more than ten
business days before the effective date of the Registration Statement, file
a Form 8-A with the Commission providing for the registration under the
Exchange Act of the Securities; and (ii) but in no event more than 30 days
from the effective date of the Registration Statement, take all necessary
and appropriate actions to be included in Standard and Poor's Corporation
Descriptions and to continue such inclusion for a period of not less than
five (5) years.
(r) Until the completion of the distribution of the Securities,
the Company shall not without the prior written consent of the
Representative and Representatives' Counsel, issue, directly or indirectly
any press release or other communication or hold any press conference with
respect to the Company or its activities or the offering contemplated
hereby, other than trade releases issued in the ordinary course of the
Company's business consistent with past practices with respect to the
Company's operations.
(s) For a period equal to the lesser of (i) five (5) years from
the date hereof, and (ii) the sale to the public of the Representative's
Securities, the Company will not take any action or actions which may
prevent or disqualify the Company's use of Form SB-2 (or other appropriate
form) for the registration under the Act of the Representative's
Securities.
(t) For a period of five (5) years after the effective date of
the Registration Statement, the Representative shall have the right to
designate one individual to be elected to the Company's Board of Directors
(the "Board") and the Company shall use its best efforts to cause such
designee to be elected to the Board. In the event the Representative shall
not have designated such individual at the time of any meeting of the Board
or such person is unavailable to serve, then for a period of two (2) years
after the effective date of the Registration Statement, the Company shall
timely notify the Representative of each meeting of the Board and an
individual selected by the Representative shall be permitted to attend all
meetings of the Board. In addition, the Company shall send to the
Representative's designee all notices and other correspondence and
communications sent by Company to members of the Board at least two (2)
days before any meeting, if applicable. The Company shall reimburse the
Representative's designee for all reasonable expenses incurred in
connection with his service on, or attendance of, meetings of the Board to
the same extent as is provided to all non-employee members of the Board of
Directors.
(u) On or before the effective date of the Registration
Statement, the Company shall have an authorized capital stock acceptable to
the Representative including, without limitation, any stock option plans of
the Company.
(v) On or before the effective date of the Registration
Statement, the Company shall have (i) entered into an employment agreement
with Robert O. Smith in the form filed as Exhibit 10.___ of the
Registration Statement, and (ii) has purchased keyman life insurance on the
life of Robert O. Smith. The policy shall provide for coverage in the
amount of $1,000,000, and the policy shall name the Company as the sole
beneficiary thereof.
(w) If the transactions contemplated by this Agreement are
consummated, during the five (5) year period from the Effective Date, the
Representative and its successors will have the right of first refusal (the
"Right of First Refusal") to act (1) as underwriter, placement agent or
investment banker for any and all public or private offerings of the
securities, whether equity, debt or a combination of equity and debt of the
Company, or any successor to or any current or future subsidiary of the
Company (collectively referred to in this Section (w) as the "Company") by
the Company (the "Subsequent Company Offerings") or any secondary offering
(the "Secondary Offering") of the Company's securities by any principal
shareholder of the Company (the "Principal Shareholders") and (2) to act as
the Company's investment banker on such other transactions as may arise
from time to time, including without limitation, acting as financial
advisor or intermediary in connection with merger and acquisition
opportunities introduced to the Company by Werbel-Roth. Accordingly, if
during such period the Company intends to make a Subsequent Company
Offering, the Company receives notification from any of the such Principal
Shareholders of its securities of such holders' intention to make a
Secondary Offering, or the Company proposes a merger, acquisition or
disposition of assets, the Company shall notify the Representative in
writing of such intention and of the proposed terms of the offering or
transaction. The Company shall thereafter promptly furnish the
Representative with such information concerning the business, condition and
prospects of the Company as the Representative may reasonably request. If,
within thirty (30) business days of the receipt of such notice of intention
and statement of terms, the Representative does not accept in writing such
offer to act as underwriter, placement agent or investment banker with
respect to such offering upon the terms proposed, the Company and each of
the Principal Shareholders shall be free to negotiate terms with other
underwriters with respect to such offering and to effect such offering on
such proposed terms within six (6) months after the end of such ten (10)
business days. Before the Company and/or any of the Principal Shareholders
shall accept any modified proposal from such other underwriter, placement
agent or investment banker, the Representative's preferential right shall
be reinstated in the same procedure with respect to such modified proposal
as provided above shall be adopted. The failure by the Representative to
exercise its Right of First Refusal in any particular instance shall not
affect in any way such right with respect to any other Subsequent Company
Offering or Secondary Offering.
(x) The Representative and its successors will have a Right of
First Refusal for a period of five (5) years from the Effective Date to
purchase for the Representative's account or to sell for the account of the
Company's principal stockholders any securities sold pursuant to Rule 144
under the Act. Each of the principal stockholders agrees to consult with
the Representative with respect to any such sales and will offer the
Representative the exclusive opportunity to purchase or sell such
securities on terms at least as favorable to such principal stockholders as
they can secure elsewhere. If the Representative fails to accept in
writing any such proposal for sale by such principal stockholders within
three (3) business days after receipt of a notice containing such proposal,
then the Representative shall have no claim or right with respect to any
such sales contained in any such notice. If, thereafter, such proposal is
modified in any material respect, such principal stockholders shall adopt
the same procedure as with respect to the original proposal.
(y) The Company shall on the Closing Date, enter into a
financial advisory agreement ("Consulting Agreement") with the
Representative for a term of three (3) years commencing on the Effective
Date which will provide that the Representatives will be paid a consulting
fee of one percent of the gross proceeds from the Company's offering of
Securities.
6. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on each of the Closing Date
and the Option Closing Date (to the extent not paid as fees of
Representatives' Counsel, except as provided in (iv) below) incident to the
performance of the obligations of the Company under this Agreement and the
Representative's Warrant Agreement, including, without limitation, (i) the
fees and expenses of accountants and counsel for the Company, (ii) all
costs and expenses incurred in connection with the preparation,
duplication, printing, filing, delivery and mailing of the Registration
Statement and the Prospectus and any amendments and supplements thereto and
the printing, mailing and delivery of this Agreement, the Agreement Among
Representatives, the Selected Dealer Agreements, if any, the Selling
Agreements, if any, and related documents, including the cost of all copies
thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Representatives
and such dealers as the Representatives may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of
the Securities including, but not limited to, (x) the purchase by the
Representatives of the Securities and the purchase by the Representative of
the Representative's Warrants from the Company, and (y) the consummation by
the Company of any of its obligations under this Agreement and the
Representative's Warrant Agreement, (iv) the qualification of the
Securities under state or foreign securities or "Blue Sky" laws and
determination of the statues of such securities under legal investment
laws, including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum," "Legal Investments
Survey," if any, and the "Final Blue Sky Memorandum" and disbursements and
fees of counsel in connection therewith, it being agreed that
Representative's Counsel shall perform the required "Blue Sky" legal
services for the account of the Company,(v) advertising costs
and expenses, consisting of the Company's travel costs and preparation
expenses in connection with the "road show," information meetings and
presentations, bound volumes and prospectus memorabilia and one "tomb-
stone" advertisement in The Wall Street Journal, with expenses relating to
travel, postage and tomb-stone advertising shall not exceed $15,000 in
the aggregate, (vi) fees and expenses of the transfer agent and registrar,
(vii) the fees payable to the Commission and the NASD, and (viii) the fees and
expenses incurred in connection with the listing of the Securities with NASDAQ
and any other exchange.
(b) The Selling Securityholders agree that they will pay all
stock transfer taxes, stamp duties and other similar taxes, if any, payable
(i) upon the sale, issuance or delivery of the Securities sold by such
Selling Securityholders, (ii) upon the purchase by the Representatives of
the Securities sold by such Selling Securityholders, (iii) upon resales of
the Securities sold by such Selling Securityholders in connection with the
distribution contemplated hereby or (iv) in connection with the
consummation by such Selling Securityholders of any of their obligations
under this Agreement and further authorizes the payment of any such amount
(and any amounts payable pursuant to Section 5(c) hereof) by deduction from
the proceeds of the Shares to be sold by them under this Agreement.
(c) If this Agreement is terminated by the Representatives in
accordance with the provisions of Section 6 or Section 12, the Company
shall reimburse and indemnify the Representative for all of its actual
out-of-pocket expenses, including the fees and disbursements of
Representatives' Counsel, less any amounts already paid pursuant to Section
5(d) hereof.
(d) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 6, it will pay to the
Representative on the Closing Date by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds received by the Company from the
sale of the Securities and Option Securities, if any, of which has been
paid upon the execution of the Letter of Intent between the parties hereto.
The Company also agrees to pay certain due diligence fees and expenses
incurred by the Representative in connection with (i) background
investigation of officers, directors and the shareholder of the Company,
pursuant to judgment, UCC and Commission searches and (ii) due diligence
meetings for syndicate members and others.
7. CONDITIONS OF THE REPRESENTATIVES' OBLIGATIONS. The obligations
of the Representatives hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company and Selling
Securityholders herein as of the date hereof and as of the Closing Date and
each Option Closing Date, if any, with respect to the Company as if they
had been made on and as of the Closing Date or each Option Closing Date, as
the case may be; the accuracy on and as of the Closing Date of the
statements of the Selling Securityholders and officers of the Company made
pursuant to the provisions hereof; and the performance by the Company and
the Selling Securityholder and on and as of the Closing Date and each
Option Closing Date, if any, of its or their covenants and obligations
hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 12:00 P.M., Florida time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the
Representative, and, at Closing Date and each Option Closing Date, if any,
no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or contemplated by the Commission and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of Representatives'
Counsel. If the Company has elected to rely upon Rule 430A of the Rules
and Regulations, the price of the Securities and any price-related
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission
for filing pursuant to Rule 424(b) of the Rules of Regulations within the
prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Representative of such timely filing,
or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements
of Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company or the
Selling Securityholders that either the Registration Statement, or any
amendment thereto, or the Prospectus, contains an untrue statement of fact
which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to
be stated therein or is necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall
have received from Company's Counsel, and shall have used its best efforts
to cause such counsel to deliver such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Representative's Warrants, the Registration Statement, the Prospectus and
other related matters as the Representative may request and
Representatives' Counsel shall have received such papers and information as
they request to enable them to pass upon such matters.
(d) At the Closing Date, the Representatives shall have received
the favorable opinion of Bartel Eng Linn & Schroder, counsel to the
Company, dated the Closing Date, addressed to the Representatives and in
form and substance reasonably satisfactory to Representatives' Counsel, to
the effect that:
i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction, (B) is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction where the nature of its
properties or the conduct of its business requires such registration
and the failure to register or so qualify would have a material
adverse effect on the Company, (C) has all requisite corporate power
and authority, and has obtained any and all necessary authorizations,
approvals, orders, licenses, certificates, franchises and permits of
and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; (D) the Company
is and has been doing business in material compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, state and local laws, rules and
regulations; and, (E) the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially adversely
affect the business, condition, financial or otherwise, or the
earnings, affairs, position, prospects, value, operation, properties,
business or results of operations of the Company. The disclosures in
the Registration Statement concerning the effects of federal, state
and local laws, rules and regulations on the Company's business as
currently conducted and as contemplated are correct in all material
respects or do not omit to state a material fact necessary to make the
statements contained therein not misleading in light of the
circumstances in which they were made.
ii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "Capitalization", and to our
knowledge, the Company is not a party to or bound by any instrument,
agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this
Agreement and the Representative's Warrant Agreement and as described
in the Prospectus. The Securities, the Representative's Warrants and
all other securities issued or issuable by the Company conform in all
material respects to all statements with respect thereto contained in
the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; the holders
thereof have no rights to rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and
none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company. The Securities
and the Representative's Securities to be sold by the Company
hereunder and under the Representative's Warrant Agreement are not and
will not be subject to any preemptive or other similar rights of any
shareholder, have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof, will be validly issued,
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject
to any liability solely as such holders; all corporate action required
to be taken for the authorization, issue and sale of the Securities
and the Representative's Securities has been duly and validly taken;
and the certificates representing the Securities and the
Representative's Warrants are in due and proper form. Subject to
compliance with the registration provisions of the Act and applicable
state registration and qualification provisions, the Representative's
Warrants constitute valid and binding obligations of the Company to
issue and sell, upon exercise thereof and payment therefor, the number
and type of securities of the Company called for thereby. Upon the
issuance and delivery pursuant to this Agreement of the Securities and
the Representative's Warrants to be sold by the Company, and upon
payment in full therefor the Representatives and the Representative,
respectively, will acquire good and marketable title to the Securities
and Representative Warrants free and clear of any pledge, lien,
charge, claim, encumbrance, security interest, or other restriction
(excluding securities law restrictions) or equity of any kind
whatsoever, except with respect to any actions that may have been
taken or omitted to be taken by the Representatives or the
Representative after the date hereof. No transfer tax is payable by
or on behalf of the Representatives in connection with (A) the
issuance by the Company of the Securities, (B) the purchase by the
Representatives and the Representative of the Securities and the
Representative's Securities, respectively, from the Company, (C) the
consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (D) resales of
the Securities in connection with the distribution contemplated
hereby.
iii) the Registration Statement has become effective under
the Act, and, if applicable, filing of all pricing information has
been timely made in the appropriate form under Rule 430A, and no stop
order suspending the use of the Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof or
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or, to the best of such counsel's knowledge, threatened or
contemplated under the Act.
iv) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments a statements or
supplements thereto (other than the financial statements and the notes
thereto and other financial and statistical data included therein, as
to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations.
v) to the best of such counsel's knowledge, (A) there are
no agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed
as exhibits to the Registration Statement other than those described
in the Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated, in whole
or in part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct
copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other documents to
which the Company is a party or by which it is bound, including any
document to which the Company is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or
amendment thereto, are accurate and fairly represent the information
required to be shown by Form SB-2; or (C) there is not pending or
threatened against the Company any action, arbitration, suit,
proceeding, inquiry, investigation, litigation, legal, statutory,
regulatory, governmental or other proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against, or
involving the properties or business of the Company which (x) is
required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all respects), (y) questions
the validity of the capital stock of the Company or this Agreement or
the Representative's Warrant Agreement, or of any action taken or to
be taken by the Company pursuant to or in connection with any of the
foregoing; (D) no statute or regulation or legal or governmental
proceeding required to be described in the Prospectus is not described
as required; and (E) there is no action, suit or proceeding, pending
or threatened, against or affecting the Company before any court or
arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) which in any manner draws into
question the validity or enforceability of this Agreement or the
Representative's Warrant Agreement;
vi) the Company has full legal right, power and authority
to enter into each of this Agreement and the Representative's Warrant
Agreement, and to consummate the transactions provided for therein;
and each of this Agreement and the Representative's Warrant Agreement
has been duly authorized, executed and delivered by the Company. Each
of this Agreement and the Representative's Warrant Agreement, assuming
due authorization, execution and delivery by each other party thereto
constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms (except
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may be
limited by applicable law), and none of the Company's execution or
delivery of this Agreement and the Representative's Warrant Agreement,
its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its
business as described in the Registration Statement, the Prospectus,
and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company pursuant to the terms
of, (A) the articles of incorporation or by-laws of the Company; (B)
any license, contract, indenture, mortgage, deed of trust, voting
trust agreement, shareholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is
a party or by which it is or may be bound or to which any of its
properties or assets (tangible or intangible) is or may be subject, or
any indebtedness, or (C) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency
or body (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
vii) no consent, approval, authorization or order,and no
filing with, any court, regulatory body, government agency or other
body (other than such as may be required under Blue Sky laws, as to
which no opinion need be rendered) is required in connection with the
issuance of the Securities pursuant to the Prospectus, the issuance of
the Representative's Warrants, and the Registration Statement, the
performance of this Agreement and the Representative's Warrant
Agreement, and the transactions contemplated hereby and thereby;
viii) the properties and business of the Company conform in
all material respects to the description thereof contained in the
Registration Statement and the Prospectus;
ix) the Company is not in breach of, or in default under,
any term or provision of any material license, contract, indenture,
mortgage, installment sale agreement, deed of trust, lease, voting
trust agreement, shareholders' agreement, partnership agreement, note,
loan or credit agreement or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which
any of the Company may be bound or to which the property or assets
(tangible or intangible) of any of the Company is subject or affected;
and the Company is not in violation of any term or provision of its
Articles of Incorporation or by-laws or in violation of any franchise,
license, permit, judgment, decree, order, statute, rule or regulation;
x) the statements in the Prospectus under "PROSPECTUS
SUMMARY - THE COMPANY," "BUSINESS," "MANAGEMENT," "SELLING
SECURITYHOLDERS," "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,"
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,"
"DESCRIPTION OF SECURITIES," and "SHARES ELIGIBLE FOR FUTURE SALE"
have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions are correct in all material respects;
xi) the Securities will be listed on NASDAQ upon the
effective date of the Registration statement.
xii) the person listed under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the
Prospectus are the respective "beneficial owners" (as such phrase is
defined in Regulation 13d-3 under the Exchange Act) of the securities
set forth opposite their respective names thereunder as and to the
extent set forth therein;
xiii) except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
xiv) except as described in the Prospectus, there are no
claims, payments, issuances, arrangements or understandings for
services in the nature of a finder's or origination fee with respect
to the sale of the Securities hereunder or financial consulting
arrangement or any other arrangements, agreements, understandings,
payments or issuances that may affect the Representatives'
compensation, as determined by the NASD;
xv) assuming due execution by the parties thereto other
than the Company, the Lock-up Agreements hereof are legal, valid and
binding obligations of parties thereto, enforceable against the party
and any subsequent holder of the securities subject thereto in
accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable law);
xvi) except as described in the Prospectus, the Company
does not (A) maintain, sponsor or contribute to any ERISA Plans, (B)
maintain or contribute, now or at any time previously, to a defined
benefit plan, as defined in Section 3(35) of ERISA, and (C) has never
completely or partially withdrawn from a "multi-employer plan;"
xvii) except as set forth in the Prospectus, no officer,
director of shareholder of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under
the Rules and Regulations) of any of the foregoing persons or entities
has or has had, either directly or indirectly, (A) an interest in the
person or entity which (x) furnishes or sells services or products
which are furnished or sold or are proposed to be furnished or sold by
the Company, or (y) purchases from or sells or furnishes to the
Company any goods or services, or (B) a beneficial interest in any
contract or agreement to which the Company is a party or by which they
may be bound or affected. Except as set forth in the Prospectus under
"Management" or "Certain Transactions," there are no existing material
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or Principal Shareholder
of the Company, or any affiliate or associate of any such person or
entity.
Such counsel shall state that during the course of its participation
in the preparation of the Registration Statement and the Prospectus and the
amendments thereto, no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or any
amendment thereto, at the time such Registration Statement or amendment
became effective or the Preliminary Prospectus or Prospectus or amendment
or supplement thereto as of the date of such opinion contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading (it being understood that such counsel need express no opinion
with respect to the financial statements and schedules and other financial
and statistical data included in the Preliminary Prospectus, the
Registration Statement or Prospectus).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States
and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon
an opinion or opinions (in form and substance satisfactory to
Representatives' Counsel) of other counsel acceptable to Representatives'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to
the extent they deem proper, on certificates and written statements of
responsible officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of
the Company, provided that copies of any such statements or certificates
shall be delivered to Representatives' Counsel if requested. The opinion
of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and that the
Representative and they are justified in relying thereon.
(e) At the Closing Date, the Representative shall have received
the favorable opinion of Bartel Eng Linn & Schroder with respect to the
Selling Securityholders dated the Closing Date, addressed to the
Representatives and in form and substance satisfactory to Representatives'
Counsel, to the effect that:
i) The Selling Securityholders have full right, power and
authority to enter into and to perform its obligations under this
Agreement, his Power of Attorney, Custody Agreement and to sell,
transfer and deliver the Securities to be sold by such Selling
Securityholders under this Agreement.
ii) This Agreement and the Powers of Attorney have been
duly executed and delivered by or on behalf of the Selling
Securityholders, and are the valid and binding obligations of such
Selling Securityholders, enforceable against such Selling
Securityholders in accordance with their respective terms;
iii) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
hereby, including the issuance, sale and delivery of the Securities to
be sold by the Selling Securityholders, will not result in a breach or
violation of, or constitute a default under, any will, license,
contract indenture, mortgage, voting trust agreement, shareholders'
agreement, deed of trust, note, loan or credit agreement, or other
agreement or instrument to which such Selling Securityholders are a
party or by which such Selling Securityholders are or may be bound or
to which any of such Selling Securityholders's property are or may be
subject or any indebtedness, statue, judgment, decree, order, rule or
regulation applicable to such Selling Securityholders of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic
or foreign having jurisdiction over such Selling Securityholders or
any of their activities or properties;
iv) To the best of such counsel's knowledge, no consent,
approval, authorization, order, registration, filing, qualification,
license or permit of or with any court or any public, governmental or
regulatory agency or body having jurisdiction over such Selling
Securityholders, or any of their respective properties or assets is
required for the execution, delivery and performance of this
Agreement, the consummation of the transactions contemplated hereby,
including the issuance, sale and delivery of the Securities to be sold
by such Selling Securityholders, except the registration under the Act
of the Shareholder Securities and such consents, approvals,
authorizations, orders, registrations, filings, qualifications,
licenses and permits as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Shareholder Securities to be sold by the Representatives; and
v) Upon delivery of the Securities set forth on Schedule B
hereto to be sold by such Selling Securityholders, and the receipt of
payment therefor pursuant hereto, good, valid and marketable title to
such Securities and, free and clear of all liens, charges,
encumbrances, equities, claims, pledges, security interests,
restrictions, shareholders' agreements, voting trusts, community
property rights, or defects in title whatsoever will pass to the
Representatives.
(f) At each Option Closing Date, if any, the Representatives
shall have received the favorable opinion of Bartel Eng Linn & Schroder,
counsel to the Company, dated the Option Closing Date, addressed to the
Representatives and in form and substance satisfactory to Representatives'
Counsel confirming as of such Option Closing Date the statements made by
Bartel Eng Linn & Schroder, in the opinion delivered on the Closing Date
with respect to the Option Securities.
(g) On or prior to each of the Closing Date and the Option
Closing Date, if any, Representatives' Counsel shall have been furnished
such documents, certificates and opinions as they may reasonably require
for the purpose of enabling them to review or pass upon the matters
referred to in subsection (c) of this Section 6, or in order to evidence
the accuracy, completeness or satisfaction of any of the representations,
warranties or conditions of the Company, or herein contained.
(h) Prior to each of the Closing and each Option Closing Date,
if any (1) there shall been no adverse change or development involving a
prospective change in the condition, financial or otherwise, prospects,
shareholder's equity with the business activities of the Company, whether
or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and
Prospectus; (2) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the
Registration Statement and Prospectus which is adverse to the Company; (3)
the Company shall not be in default under any provision of any instrument
relating to any outstanding indebtedness; (4) the Company shall not have
issued any securities (other than Securities and the Representatives
Warrants) or declared or paid any dividend or made any distribution in
respect of its capital stock of any class and there has not been any change
in the capital stock or change in the debt (long or short term) or
liabilities or obligations of the Company (contingent or otherwise); (5) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and
Prospectus; (6) no action, suit or proceeding, at law or in equity, shall
have been pending or threatened (or circumstances giving rise to same)
against the Company or affecting any of its properties or business before
or by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding
may materially adversely affect the business, operations, prospects or
financial condition or income of the Company, except as set forth in the
Registration Statement and Prospectus; and (7) no stop order shall have
been issued under the Act and no proceedings therefor shall have been
initiated, threatened or contemplated by the Commission.
(i) At each of the Closing Date and each Option Closing Date, if
any, the Representatives shall have received a certificate of the Company
signed by the principal executive officer and by the chief financial or
chief accounting officer of the Company, dated the Closing Date or Option
Closing Date, as the case may be, to the effect that each of such persons
has carefully examined the Registration Statement, the Prospectus and this
Agreement, and that:
i) The representations and warranties of the Company in
this Agreement are true and correct in all material respects, as if
made on and as of the Closing Date or the Option Closing Date, as the
case may be, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this Agreement on
its part to be performed or satisfied at or prior to such Closing Date
or Option Closing Date, as the case may be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or,
to the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Act;
iii) Each Preliminary Prospectus, the Registration
Statement and the Prospectus and, if any, each amendment and each
supplement thereto, contain all statements and information required to
be included therein; and
iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
(a) the Company has not incurred up to and including the Closing Date
or the Option Closing Date, as the case may be, other than in the
ordinary course of its business, any material liabilities or
obligations, direct or contingent; (b) the Company has not paid or
declared any dividends or other distributions on its capital stock;
(c) the Company has not entered into any transactions not in the
ordinary course of business; (d) there has not been any change in the
capital stock or long-term debt or any increase in the short-term
borrowings (other than any increase in the short-term borrowings in
the ordinary course of business) of the Company; (e) the Company has
not sustained any material loss or damage to its property or assets,
whether or not insured; (f) there is no litigation which is pending or
threatened (or circumstances giving rise to same) against the Company
or any affiliated party of the foregoing which is required to be set
forth in an amended or supplemented Prospectus which has not been set
forth; and (g) there has occurred no event required to be set forth in
an amended or supplemented Prospectus, which has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (i) are to such documents as amended and supplemented at the
date of such certificate.
(j) At the Closing Date, if any, the Representative shall have
received a certificate of an Attorney-in-Fact for the Selling
Securityholders, dated as of such date, to the effect that (i) the
representations and warranties of such Selling Securityholders, contained
herein are true and correct with the same force and effect as though
expressly made at and as of such Closing Date, (ii) such Selling
Securityholders have reviewed the Prospectus, and any supplements thereto,
and the information relating to such Selling Securityholders and such
Selling Securityholders's shares of Common Stock and other securities of
the Company owned by such Selling Securityholders that is set forth in the
Prospectus, and any supplements thereto, does not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make such information not misleading, and all of the information
furnished by or on behalf of such Selling Securityholders for use in the
Prospectus is true, correct and complete in all respects.
(k) The Representative shall have the obligation to satisfy the
requirements set forth by the rules and regulations of the NASD as to the
amount of compensation allowable or payable by the Representative and,
accordingly, by the Closing Date, the Representatives will have received
clearance from the NASD as to the amount of compensation allowable or
payable to the Representatives, as described in the Registration Statement.
(l) At the time this Agreement is executed, the Representatives
shall have received a letter, dated such date, addressed to the
Representatives in form and substance satisfactory (including the
non-material nature of the changes or decreases, if any, referred to in
clause (iii) below) in all respects to the Representatives and
Representatives' Counsel, from ___________________:
i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the Rules and
Regulations thereunder and that the Representative may rely upon the
opinion of Hein + Associates, LLP, with respect to the financial
statements and supporting schedules included in the Registration
Statement;
iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the
latest available unaudited interim financial statements), a reading of
the latest available minutes of the shareholders and board of
directors and the various committees of the boards of directors of the
Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to its attention
which would lead it to believe that (A) the unaudited financial
statements and supporting schedules of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the Rules and Regulations or are not fairly presented in conformity
with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
of the Company included in the Registration Statement, or (B) at a
specified date not more than five days prior to the effective date of
the Registration Statement, there has been any change in the capital
stock or long-term debt of the Company, or any decrease in the
shareholder's equity or net assets of the Company as compared with
amounts shown in the June 30, 1996 balance sheet included in the
Registration Statement, other than as set forth in or contemplated by
the Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease; and (C) during
the period from June 30, 1996, to a specified date not more than five
(5) days prior to the effective date of the Registration Statement,
there was any decrease in net revenues, net earnings or increase in
net earnings per common share of the Company, as compared with the
corresponding period beginning June 30, 1996, other than as set forth
in or contemplated by the Registration Statement, or, if there was any
such decrease, setting forth the amount of such decrease; setting
forth, at a date not later than five (5) days prior to the date of the
Registration Statement, the amount of liabilities of the Company
(including a break-down of commercial paper and notes payable to
banks).
iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company
set forth in the Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and information may be
derived from the general accounting records, including work sheets, of
the Company and excluding any questions requiring an interpretation by
legal counsel, with the results obtained from the application of
specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and
found them to be in agreement;
v) stating that they have not during the immediately
preceding five-year period brought to the attention of any of the
Company's management any "weakness," as defined in Statement of
Auditing Standard No. 60 "Communication of Internal Control Structure
Related Matters Noted in an Audit," in any of the Company's internal
controls;
vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may reasonably
request.
(m) At Closing Date and each Option Closing Date, if any, the
Representatives shall have received from Bartel Eng Linn & Schroder, a
letter, dated as of the Closing Date or the Option Closing Date, as the
case may be, to the effect that they reaffirm those statements made in the
letter furnished pursuant to SUBSECTION (l) of this Section, except that
the specified date referred to shall be a date not more than five days
prior to Closing Date or the Option Closing Date, as the case may be, and,
if the Company has elected to rely on Rule 430A of the Rules and
Regulations, to the further effect that they have carried out procedures as
specified in subsection (l) of this Section with respect to certain
amounts, percentages and financial information as specified by the
Representative and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
subsection (l).
(n) On each of Closing Date and Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Representatives' accounts the appropriate number of Securities.
(o) No order suspending the sale of the Securities in any
jurisdiction, which in the judgment of the Representative is material to
Closing of the transaction, designated by the Representative pursuant to
subsection (e) of Section 4 hereof shall have been issued on either the
Closing Date or the Option Closing Date, if any, and no proceedings for
that purpose shall have been instituted or shall be contemplated.
(p) On or before the Closing Date, the Company shall have
executed and delivered to the Representative, (i) the Representative's
Warrant Agreement substantially in the form filed as Exhibit ____ to the
Registration Statement in final form and substance satisfactory to the
Representative, and (ii) the Representative's Warrants in such
denominations and to such designees as shall have been provided to the
Company.
(q) Upon the effective date of the Registration Statement, the
Securities shall have been duly approved for quotation on NASDAQ, subject
to official notice of issuance.
(r) On or before Closing Date, there shall have been delivered
to the Representative all of the Lock-up Agreements, in form and substance
reasonably satisfactory to Representatives' Counsel.
(s) On or before the Closing Date, the Company shall have
executed and delivered to the Representative the Consulting Agreement
substantially in the form filed as Exhibit ____.
If any condition to the Representatives' obligations hereunder to
be fulfilled prior to or at the Closing Date or the relevant Option Closing
Date, as the case may be, is not so fulfilled, the Representative may
terminate this Agreement or, if the Representative so elects, it may waive
any such conditions which have not been fulfilled or extend the time for
their fulfillment.
8. INDEMNIFICATION.
(a) The Company and the Selling Securityholders, severally but
not jointly agrees to indemnify and hold harmless each of the
Representatives (for purposes of this Section 8 "Representative" shall
include the officers, directors, partners, employees, agents and counsel of
the Representative, including specifically each person who may be
substituted for an Representative as provided in Section 12 hereof), and
each person, if any, who controls the Representative ("controlling person")
within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, from and against any and all losses, claims, damages,
expenses or liabilities, joint or several (and actions in respect thereof),
whatsoever (including but not limited to any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which the Representative or such controlling person may become
subject under the Act, the Exchange Act or any other statute or at common
law or otherwise or under the laws of foreign countries, arising out of or
based upon any untrue statement or alleged untrue statement of a material
fact contained (i) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any
new registration statement and prospectus in which is included securities
of the Company issued or issuable upon exercise of the Securities; or (iii)
in any application or other document or written communication (in this
Section 8 collectively called "application") executed by the Company or
based upon written information furnished by the Company in any jurisdiction
in order to qualify the Securities under the securities laws thereof or
filed with the Commission, any state securities commission or agency,
NASDAQ or any other securities exchange; or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made),
unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect
to any Representative by or on behalf of such Representative expressly for
use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, or in any
application, as the case may be.
The indemnity agreement in this subsection (a) shall be in
addition to any liability which the Company or the Selling Securityholders
may have at common law or otherwise.
(b) Each of the Representatives agree severally, but not
jointly, to indemnify and hold harmless the Company, each of its directors,
proposed directors, each of its officers who has signed the Registration
Statement, counsel for the Company, the Selling Securityholders, and each
other person, if any, who controls the Company within the meaning of the
Act, to the same extent as the foregoing indemnity from the Company and the
Selling Securityholders to the Representatives but only with respect to
statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict
conformity with, written information furnished to the Company with respect
to any Preliminary Prospectus, the Registration Statement or Prospectus or
any amendment thereof or supplement thereto or in any such application,
provided that such written information or omissions only pertain to
disclosures in the Preliminary Prospectus, the Registration Statement or
Prospectus directly relating to the transactions effected by the
Representatives in connection with this Offering. The Company acknowledges
that the statements with respect to the public offering of the Securities
set forth under the heading "Underwriting" and the stabilization legend in
the Prospectus have been furnished by the Representatives expressly for use
therein and constitute the only information furnished in writing by or on
behalf of the Representatives for inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, suit or proceeding,
such indemnified party shall, if a claim in respect thereof is to be made
against one or more indemnifying parties under this Section 8, notify each
party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure so to notify an indemnifying party
shall not relieve it from any liability which it may have under this
Section 8 except to the extent that it has been prejudiced in any material
respect by such failure or from any liability which it may have otherwise).
In case any such action is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and
to the extent it may elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified
party, to assume the defense thereof with counsel reasonably satisfactory
to such indemnified party. Notwithstanding the foregoing, the indemnified
party or parties shall have the right to employ its or their own counsel in
any such case but the fees and expenses of such counsel shall be at the
expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying
parties in connection with the defense of such action at the expense of the
indemnifying party, (ii) the indemnifying parties shall not have employed
counsel reasonably satisfactory to such indemnified party to have charge of
the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties
shall have reasonably concluded, based upon an opinion of counsel, that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in
any of which events such fees and expenses of one additional counsel shall
be borne by the indemnifying parties. In no event shall the indemnifying
parties be liable for fees and expenses of more than one counsel, in
addition to any local counsel, separate from their own counsel for all
indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. Anything in this Section 7 to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement effected without its written consent; provided, however, that
such consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 8, but it is judicially determined (by the entry
of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding
the fact that the express provisions of this Section 8 provides for
indemnification in such case or (ii) contribution under the Act may be
required on the part of any indemnified party, then each indemnifying party
shall contribute to the amount paid as a result of such losses, claims,
damages, expenses or liabilities (or actions in respect thereof) (A) in
such proportion as is appropriate to reflect the relative benefits received
by each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the Securities or (B)
if the allocation provided by clause (A) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party
to be indemnified on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In
any case where each of the Company or the Selling Securityholders are
contributing parties and the Representatives are the indemnified party, the
relative benefits received by the Company or Selling Securityholders on the
one hand, and the Representatives, on the other, shall be deemed to be in
the same proportion as the total net proceeds from the offering of the
Securities (before deducting expenses) bear to the total underwriting
discounts received by the Representatives hereunder, in each case as set
forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Selling Securityholders, or by the Representatives, and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The amount paid
or payable by an indemnified party as a result of the losses, claims,
damages, expenses or liabilities (or actions in respect thereof) referred
to above in this subdivision (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding
the provisions of this subdivision (d), the Representatives shall not be
required to contribute any amount in excess of the underwriting discount
applicable to the Securities purchased by the Representatives hereunder.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person, if any, who controls the Company within the
meaning of the Act, each officer of the Company who has signed the
Registration Statement, and each director of the Company shall have the
same rights to contribution as the Company, subject in each case to this
subparagraph (d). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against
such party in respect to which a claim for contribution may be made against
another party or parties under this subparagraph (d), notify such party or
parties from whom contribution may be sought, but the omission so to notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have
hereunder or otherwise than under this subparagraph (d), except to the
extent that such party or parties were adversely affected by such omission.
The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or
otherwise.
9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant
hereto, shall be deemed to be representations, warranties and agreements at
the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the indemnity
agreements contained in Section 7 hereof, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf
of any Representative, the Company, Selling Securityholders, any
controlling person of any Representative or the Company, and shall survive
termination of this Agreement or the issuance and delivery of the
Securities to the Representatives and the Representative, as the case may
be.
10. EFFECTIVE DATE. This Agreement shall become effective at 10:00
a.m., Florida time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Representative, in its discretion, shall release the
Securities for the sale to the public; provided, however, that the
provisions of Sections 6, 8 and 11 of this Agreement shall at all times be
effective. For purposes of this Section 10, the Securities to be purchased
hereunder shall be deemed to have been so released upon the earlier of
dispatch by the Representative of telegrams to securities dealers releasing
such shares for offering or the release by the Representative for
publication of the first newspaper advertisement which is subsequently
published relating to the Securities.
11. TERMINATION.
(a) Subject to subsection (b) of this Section 11, the
Representative shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in
the Representative's opinion will in the immediate future disrupt the
financial markets, AND SUCH EVENTS HAVE A MATERIAL AND ADVERSE IMPACT ON
THE MARKET FOR THE SECURITIES; or (ii) any material adverse change in the
financial markets shall have occurred; or (iii) if trading on the New York
Stock Exchange, the American Stock Exchange, or the over-the-counter market
shall have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have
been required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction; or (iv)
if the United States shall have become involved in a war or major
hostilities, or if there shall have been an escalation in an existing war
or major hostilities or a national emergency shall have been declared in
the United States; or (v) if a banking moratorium has been declared by a
state or federal authority; or (VI) if the Company shall have sustained a
loss material or substantial to the Company by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act
which, whether or not such loss shall have been insured, will, in the
Representative's opinion, make it inadvisable to proceed with the delivery
of the Securities; or (VII) if there shall have been such a material
adverse change in the conditions or prospects of the Company as in the
Representative's judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities; or (VIII) IF THERE SHALL
HAVE BEEN A material adverse change in the general market, political or
economic conditions, in the United States or elsewhere, THAT HAVE A
MATERIAL AND ADVERSE IMPACT ON THE SECURITIES MARKET GENERALLY
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 11(a), the Company shall promptly
reimburse and indemnify the Representative for all of its actual and
reasonable out-of-pocket expenses, including the fees and disbursements of
counsel for the Representatives (less amounts previously paid pursuant to
Section 6(c) above). Notwithstanding any contrary provision contained in
this Agreement, if this Agreement shall not be carried out within the time
specified herein, or any extension thereof granted to the Representative,
by reason of any failure on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement by it to be
performed or satisfied (including, without limitation, pursuant to Section
7 or Section 13) then, the Company shall promptly reimburse and indemnify
the Representative for all of its actual out-of-pocket expenses, including
the fees and disbursements of counsel for the Representatives (less amounts
previously paid pursuant to Section 6(d) above). In addition, the Company
shall remain liable for all reasonable Blue Sky counsel fees and expenses
and Blue Sky filing fees. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 7, 11, 12
and 13 hereof), and whether or not this Agreement is otherwise carried out,
the provisions of Section 6 and Section 8 shall not be in any way affected
by such election or termination or failure to carry out the terms of this
Agreement or any part hereof.
12. SUBSTITUTION OF THE REPRESENTATIVES. If one or more of the
Representatives shall fail (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section
6, Section 10 or Section 12 hereof) to purchase the Securities which it or
they are obligated to purchase on such date under this Agreement (the
"Defaulted Securities"), the Representative shall have the right, within 24
hours thereafter, to make arrangement for one or more of the non-defaulting
Representatives, or any other underwriters, to purchase all, but not less
than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representative shall
not have completed such arrangement within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the total number of Securities to be purchased on such date, the non-
defaulting Representatives shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Representatives, or
(b) if the number of Defaulted Securities exceeds 10% of the
total number of Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Representatives, or the
Company.
No action taken pursuant to this Section shall relieve any defaulting
Representative from liability in respect of any default by such
Representative under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or
in any other documents or arrangements.
13. DEFAULT BY THE COMPANY AND/ OR SELLING SECURITYHOLDERS. If the
Company or Selling Securityholders fail at the Closing Date or the Company
shall fail at any Option Closing Date, to sell and deliver the number of
Securities which it or they are obligated to sell hereunder on such date,
then this Agreement shall terminate (or, if such default shall occur with
respect to any Option Securities to be purchased on an Option Closing Date,
the Representatives may at the Representative's option, by notice form the
Representative to the Company, terminate the Representatives' obligation to
purchase Option Securities from the Company on such date) without any
liability on the part of any non-defaulting party other than pursuant to
Section 5, Section 7 and Section 10 hereof. No action taken pursuant to
this Section shall relieve the Company or Selling Securityholders from
liability, if any, in respect of such default.
14. NOTICES. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Representatives shall be
directed to the Representative at Werbel-Roth Equities, Inc., 150 East
Palmetto Park Road, Suite 380, Boca Raton, Florida 33432, Attention:
Howard Roth, with a copy to Atlas, Pearlman, Trop & Borkson, P.A., New
River Center, Suite 1900, 200 East Las Olas Boulevard, Fort Lauderdale,
Florida 33301, Attention: Joel D. Mayersohn, Esq. Notices to the Company
shall be directed to the Company at c/o Sierra Resources Corporation, 629
J. Street, Sacramento, CA 95814 Attention: Mr. Edward Lammerding, 41920
Christy Street, Fremont, CA 94538-3158 with a copy to Bartel Eng Linn &
Schroder, 300 Capitol Mall, Suite 1100, Sacramento, CA 95814, Attention:
Daniel B. Eng , Esq.
15. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Representatives, the Company, Selling
Securityholders and the controlling persons, directors and officers
referred to in Section 7 hereof, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed
to have any legal or equitable right, remedy or claim under or in respect
of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from any Representative shall be deemed to be a
successor by reason merely of such purchase.
16. CONSTRUCTION. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Florida without
giving effect to the choice of law or conflict of laws principles. The
parties hereto agree that any action, proceeding or claim against it
arising out of or in any way related to this Agreement shall be brought and
enforced in the courts of the State of Florida or the United States of
America for the Southern District of Florida and irrevocably submit to such
exclusive jurisdiction, and hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
18. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof.
This Agreement may not be amended except in a writing, signed by the
Representative and the Company.
If the foregoing correctly sets forth the understanding between the
Representatives and the Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
DIGITAL POWER CORPORATION
By:________________________________
Mr. Edward Lammerding,
Chairman of the Board
Confirmed and accepted as of
the date first above written. By:________________________________
for Selling Securityholders
WERBEL-ROTH SECURITIES, INC.
For itself and as Representative
of the several Representatives named
in Schedule A hereto.
By:______________________________
Howard Roth, President
<PAGE>
SCHEDULE A
Number of Shares Number of Warrants
NAMES OF REPRESENTATIVES TO BE PURCHASED TO BE PURCHASED
Werbel-Roth Securities Corp. 1,000,000 500,000
Total 1,000,000 500,000
<PAGE>
SCHEDULE B
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
DIGITAL POWER CORPORATION
Claude Adkins and Robert Smith certify that:
1. They are the President and Secretary, respectively, of
Digital Power Corporation, a California corporation.
2. The Articles of Incorporation of this corporation are
amended and restated to read as follows:
I.
The name of this corporation is Digital Power Corporation.
II.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be
incorporated by the California Corporation Code.
III.
(A) (I) This corporation is authorized to issue two
classes of shares to be designated respectively Preferred Stock
("Preferred") and Common Stock ("Common"). The total number of shares of
Preferred this corporation shall have authority to issue is 1,000,000 and
the total number of shares of Common the corporation shall have authority
to issue is 5,000,000.
The corporation shall from time to time in accordance with
the laws of the State of California increase the authorized amount of its
Common if at any time the number of Common shares remaining unissued and
available for issuance shall not be sufficient to permit conversion of the
Preferred.
(II) The Preferred authorized by these Articles of
Incorporation shall be issued in one or more series. The first series of
Preferred shall be designated Series A Preferred Stock (the "Series A
Preferred") and shall consist of Five Hundred Thousand (500,000) shares
with the rights, preferences, privileges and restrictions set forth in
paragraph (B) below. The Board of Directors is authorized to fix the
number of shares of any other series, and to determine the designation of
any such series. The Board of Directors is also authorized to determine or
alter the rights, preferences, privileges and restrictions granted to or
imposed upon any such series of Preferred, and, within the limitations and
restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any such
series, to increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares in any such series subsequent
to the issue of shares of that series.
(B) The relative rights, preferences, privileges and
restrictions granted to or imposed upon the respective classes and series
of the shares of capital stock or the holders thereof are as follows:
SECTION 1. GENERAL DEFINITIONS. For purposes of this
Article the following definitions shall apply:
A. 'JUNIOR SHARES' shall mean all Common and any
other shares of this corporation other than the Preferred.
B. 'SUBSIDIARY' shall mean any corporation at least
50%, of whose outstanding voting shares shall at the time be owned by the
corporation and/or one or more of such
subsidiaries.
SECTION 2. DIVIDEND RIGHTS OF PREFERRED. The holders
of the Series A Preferred shall be entitled to receive, out of any funds
legally available therefor, cash dividends on each outstanding share of
Series A Preferred, payable in preference and priority to any payment of
any dividend on Junior Shares at the rate of Twenty-two Cents ($.22) per
Share (as appropriately adjusted for any stock dividends, stock splits
recapitalization, consolidation or the like, with respect to such shares)
per annum out of any funds legally available therefor. Such dividends shall
be payable only when and as declared by the Board of Directors. The right
to such dividends on the Series A Preferred shall be cumulative, whether or
not declared.
In the event that the corporation shall have declared and unpaid
dividends outstanding immediately prior to, and in the event of, a
conversion of Preferred (as provided in Section 5 hereof, the corporation
shall pay in cash to the holder(s) of the Series A Preferred subject to
such conversion the full amount of any such dividends.
SECTION 3. LIQUIDATION PREFERENCE.
(A) In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary, the holders
of the Preferred 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 Junior Shares by reason of their ownership thereof, the
amount of (One Dollar and Eighty Cents ($1.80) per share for each share of
Series A Preferred (as appropriately adjusted for any stock dividends, stock
splits, recapitalization consolidation or the like with respect to such shares)
then held by them, and, in addition an amount equal to all cumulative but
unpaid dividends (whether or not declared) on such Series A Preferred. If,
upon the occurrence of such event, the assets and funds thus distributed
among the holders of the Preferred shall be insufficient to permit the
payment of the full preferential amount to such holders, then the entire
assets and funds of the corporation legally available for distribution
shall be distributed ratably among the holders of the Preferred in
proportion to the respective preferential amounts fixed for such series
upon a liquidation, dissolution or winding up of the corporation. After
payment has been made to the holders of the Preferred of the full amounts
to which they shall be entitled as aforesaid, the holders of Junior Shares
shall be entitled to receive all remaining assets of the corporation.
(B) For purposes of this Section 3, a merger or
consolidation of the corporation with or into any other corporations or
sale of all or substantially all of the assets of the Corporation, shall
not be treated as a liquidation, dissolution or winding up.
(C) For purposes of this Section 3, if the
distributions or consideration received by the shareholders of the
Corporation is other than cash, its value will be deemed to be its fair
market value as determined in good faith by the Board of Directors of the
Corporation, and the holders of the Preferred will receive the same type of
distribution or consideration. In the case of publicly traded securities
listed on an exchange, fair market value shall mean the average last
closing sale price as reported by such exchange or by a consolidated
transaction reporting system for the five-day period immediately preceding
the date of such distribution. In the case of publicly traded securities
not listed on an exchange, fair market value shall mean the average last
closing bid price as reported by the National Association of Securities
Dealers Automatic Quotation System, Inc. or such successor or similar
organization, for the five-day period immediately preceding the date of
such distribution.
SECTION 4. REDEMPTION.
(A) The corporation may, at any time it may lawfully
do so and at the option of the Board of Directors, redeem the Series A
Preferred in whole or in part, by paying in cash for each share to be
redeemed the price of One Dollar Eighty Cents ($l.80) per share (as
appropriately adjusted for any stock dividends, stock splits,
recapitalization or consolidation of Series A Preferred), together with an
amount equal to any accrued and unpaid dividends on Series A Preferred to
the date fixed for redemption. Such amount is the "Redemption Price." Any
partial redemption shall be pro-rata among the holders of the Series A
Preferred.
(B) At least thirty (30) days prior to the date fixed
for any redemption of Preferred (the "Redemption Date"), written notice
shall be mailed, postage prepaid, to each holder of record of Preferred to
be redeemed, at the post office address last shown on the records of the
corporation, notifying such holder of the election of the corporation to
redeem such shares, specifying the Redemption Date, the applicable
Redemption Price and the date on which such holder's Conversion Rights (as
defined in Section 5) as to such shares terminate, and calling upon such
holder to surrender to the corporation, in the manner and at the place
designated, the certificate or certificates representing the shares to be
redeemed (such notice is the "Redemption Notice"). On or after the
Redemption Date, each holder of Preferred to be redeemed shall surrender
the certificate or certificates representing such shares to the
corporation, in the manner and at the place designated in the Redemption
Notice, and thereupon the Redemption Price of such shares shall be payable
to the order of the person whose name appears on such certificate or
certificates as the owner of such shares, and each surrendered certificate
shall be canceled. From and after the Redemption Date, all rights of the
holders of Preferred designated for redemption in the Redemption Notice as
holders of Preferred of the corporation shall cease and terminate with
respect to such shares (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates), and
such shares shall not subsequently be transferred on the books of the
corporation or be deemed to be outstanding for any purpose whatsoever.
(C) On or prior to the Redemption Date, the
corporation shall deposit the Redemption Price of all shares of Preferred
designated for redemption in the Redemption Notice and not yet redeemed
with a bank or trust company having aggregate capital and surplus in excess
of One Hundred Million Dollars ($100,000,000) as a trust fund for the
benefit of the respective holders of such shares, together with irrevocable
instructions and authority to the bank or trust company to pay the
Redemption Price for such shares to their respective holders on or after
the Redemption Date upon receipt of notification from the corporation that
such holder has surrendered his share certificate to the corporation
pursuant to Section 4(b). Such instructions shall also provide that any
funds deposited by the corporation hereunder for the redemption of shares
which are subsequently converted into shares of Common (pursuant to Section
5 no later than the fifth (5th) day preceding the Redemption Date) shall be
returned to the corporation forthwith upon such conversion. The balance of
any funds deposited by the corporation pursuant to this Section 4(c)
remaining unclaimed at the expiration of one (1) year following the
Redemption Date shall be returned to the corporation.
SECTION 5. CONVERSION. The holders of Preferred shall
have conversion rights as follows (the "Conversion Rights"):
(A) RIGHT TO CONVERT. Each share of Preferred, at the
option of its holder, at the office of the corporation or any transfer
agent for the Preferred, at any time after the date of issuance of such
share or on or prior to the fifth (5th) business day prior to the
Redemption Date with respect to such share pursuant to Section 4 above,
shall be convertible into such number of fully paid and nonassessable
shares of Common as is determined by dividing $l.80 for each share of
Series A Preferred by the Conversion Price in effect at the time of the
conversion. The initial Conversion Price shall be $1.80 for each share of
Series A Preferred per share of Common. Such initial Conversion Price
shall be subject to adjustment as hereinafter provided. In the event of
delivery of a Redemption Notice pursuant to Section 4 above, the Conversion
Rights shall terminate as to the number of shares designated for redemption
at the close of business on the fifth (5th) day preceding the Redemption
Date, unless default is made in payment of the Redemption Price, in which
case the Conversion Rights for such shares shall continue.
(B) AUTOMATIC CONVERSION. Each share of Preferred
automatically shall be converted into shares of Common at its then
effective Conversion Price on the effective date of a firm commitment
underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, provided that the
aggregate gross proceeds to the Company are $l,000,000 or more.
(C) MECHANICS OF CONVERSION. No fractional shares of
Common shall be issued upon conversion of Preferred. In lieu of any
fractional shares to which the holder would otherwise be
entitled (after aggregating all shares into which shares of Preferred held
by such holder could be converted), the corporation shall pay cash equal to
such fraction multiplied by the then fair market value of the Common, as
determined by the Board of Directors. Before any holder of Preferred shall
be entitled to convert the same into full shares of Common, he shall
surrender the certificate or certificates therefor, duly endorsed, at the
office of the corporation or of any transfer agent for the Preferred, and
shall give written notice to the corporation at such office that he elects
to convert the same. The corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Preferred, a
certificate or certificates for the number of shares of Common to which he
shall be entitled, together with a check payable to the holder in the
amount of any cash amounts payable as the result of a conversion into
fractional shares of Common. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such
surrender of the shares of Preferred to be converted, or in the case of
automatic conversion, on the effective date of the offering or merger or
consolidation as provided in Section 5(b) above, and the person or persons
entitled to receive the shares of Common issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common on such date.
(D) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS.
If the corporation at any time or from time to time effects a subdivision
of the outstanding Common, the Conversion Price then in effect immediately
before that subdivision shall be proportionately decreased, and conversely,
if the corporation at any time or from time to time combines the
outstanding shares of Common, the Conversion Price then in effect
immediately before the combination shall be proportionately increased. Any
adjustment under this Section 5(d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(E) ADJUSTMENT FOR CERTAIN DIVIDENDS AND
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 entitled to receive, a dividend or other distribution payable in
additional shares of Common, then and in each such event the Conversion
Price then in effect shall be decreased as of the time of such issuance or,
in the event such a record date is fixed as of the close of business on
such record date, by multiplying the Conversion Price then in effect by a
fraction (I) the numerator of which is the total number of shares of Common
issued and outstanding immediately prior to the time of such issuance on
the close business on such record date, and (2) the denominator of which
shall be the total number of shares of Common issued and outstanding
immediately prior to the time of such issuance on the close of business on
such record date, plus the number of shares of Common issuable in payment
of such dividend or distribution; provided, however, that if such record
date is fixed and such dividend is not fully paid or if such distribution
is not fully made on the date fixed therefor, the Conversion Price shall be
recomputed accordingly as of the close of business on such record date and
thereafter the Conversion Price shall be adjusted pursuant to this Section
5(e) as of the time of actual payment of such dividends or distributions.
(F) ADJUSTMENTS FOR OTHER DIVIDENDS AND
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 entitled to receive, a dividend or other distribution payable in
securities of the corporation other than shares of Common, then and in each
such event provision shall be made so that the holders of the Preferred
shall receive upon conversion thereof, in addition to the number of shares
of Common receivable thereupon, the amount of securities of the corporation
which they would have received had their Preferred been converted into
Common 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 5(f) with respect to the rights of the holders of
Preferred.
(G) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. If the Common issuable upon the conversion of the Preferred
is changed into the same or a different number of shares of any class or
classes of stock, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or a stock
dividend or a reorganization, merger, consolidation or sale of assets, as
provided for elsewhere in this Section 5), then and in such event each
holder of Preferred shall have the right thereafter to convert such stock
into the kind and amount of stock and other securities and properly
receivable upon such reorganization, reclassification or other change, by
holders of the number of shares of Common into which such shares of
Preferred might have been converted immediately prior to such
reorganization, reclassification or change, all subject to further
adjustment as provided herein.
(H) REORGANIZATION OR SALES OF ASSETS. If at any
time or from time to time there is capital reorganization of the Common
(other than a consolidation, recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this
Section 5), or the sale of all or substantially all of the corporation's
properties and assets to any other person, then, as a part of such
reorganization or sale, provision shall be made so that the holders of the
Preferred thereafter shall be entitled to receive upon conversion of the
Preferred, the number of shares of stock or other securities
or property of the corporation, or of any successor corporation resulting
from such sale, to which holder of Common would have been entitled on such
capital reorganization or sale, deliverable upon conversion. In any such
case, appropriate adjustment shall be made in the application of the
provisions of this Section 5 with respect to the rights of the holders of
the Preferred after the reorganization or sale to the end that the provisions
of this Section 5 (including adjustment of the Conversion Price then in effect
and number of shares purchasable upon conversion of the Preferred) shall be
applicable after that event and be as nearly equivalent to the provisions
hereof as may be practicable. This section 5(h) shall apply to successive
reorganizations and sales.
(I) CERTIFICATE AS TO ADJUSTMENTS. Upon the
occurrence of each adjustment or readjustment of the Conversion Price
pursuant to this Section 5, the corporation at its expense promptly shall
compute such adjustment or readjustment in accordance with the terms hereof
and furnish to each holder of Preferred 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 Preferred, furnish or cause to
be furnished to such holder a like certificate setting forth (I) such
adjustments and readjustments, (II) the Conversion Price at the time in
effect, and (III) the number of shares of Common and the amount, if any, of
other property which at the time would be received upon the conversion of
Preferred.
(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, whether in cash, property, stock 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 outstanding Common involving a change in the
Common; or
(IV) to merge or consolidate with or into any
other corporation, or sell, lease or convey all or substantially all of its
property or business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the corporation shall
send to the holders of the Preferred:
(1) at least ten (10) days' prior written notice of the date on which a
record shall be taken for such dividend. Distribution or subscription rights
and a description thereof (and specifying the date on which the
holders of Common shall be entitled thereto) or for determining rights to vote
in respect of the matters referred to in (III) and (IV) above; and
(2) in the case of the matters referred to in (III) and (IV) above, at least
ten (10) days' prior written notice of the date when the same shall take place
(and specifying the date on which the holders of Common shall be entitled to
exchange their Common for securities or other property deliverable upon the
occurrence of such event).
Each such written notice shall be given by first class mail,
postage prepaid, addressed to the holders of Preferred at the address for
each such holder as shown on the books of the corporation.
SECTION 6. VOTING RIGHTS. Except as otherwise required
by law, each share of Common issued and outstanding shall have one vote and
each share of Series A Preferred issued and outstanding shall have the
number of votes equal to the number of whole Common shares into which the
Preferred is convertible, as adjusted from time to time pursuant to Section
5 hereof. The Series A Preferred Stock shall have the right to cumulate
the votes in the election of directors.
SECTION 7. CONSENT FOR CERTAIN REPURCHASES OF COMMON
STOCK DEEMED TO DISTRIBUTIONS. Each holder of an outstanding share of
Preferred shall be deemed to have consented, for purposes of Section 502,
503 and 506 of the General Corporation Law, to distributions made by the
corporation in connection with the repurchase of shares of Common issued to
or held by employees or consultants upon termination of their employment or
services pursuant to agreements providing for the right of said repurchase
between the corporation and such persons.
SECTION 8. RESIDUAL RIGHTS. All rights accruing to the
outstanding shares of the corporation not expressly provided for to the
contrary herein shall be vested in the Common.
<PAGE>
IV.
The liability of the directors of this corporation for monetary damage
shall be eliminated to the fullest extent permissible under California law.
V.
This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the Corporations Code) for breach of duty to
the corporation and its stockholders through bylaws provisions or through
agreements with the agents, or both, in excess of the indemnification
otherwise permitted by Section 317 of the Corporations Code, subject to the
limits on such excess indemnification set forth in section 204 of the
Corporations Code.
3. The foregoing amendment of Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment of Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding
shares of this corporation is 820,830 shares of Common Stock. The number
of shares voting in favor of the amendment and the restatement equalled or
exceeded the vote required. The percentage vote required was more than
fifty percent (50%) of the outstanding shares of Common Stock.
/S/ CLAUDE ADKINS
CLAUDE ADKINS, PRESIDENT
/S/ ROBERT SMITH
ROBERT SMITH, SECRETARY
The undersigned declares under penalty of perjury that the
matters set forth in the foregoing certificate are true of his own
knowledge.
Executed at Fremont, California on 9/29 , 1992.
/S/ CLAUDE ADKINS
CLAUDE ADKINS
/S/ ROBERT SMITH
ROBERT SMITH
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
Robert O. Smith, and Philip G. Swany, certify that:
1. They are the president and secretary, respectively, of Digital
Power Corporation, a California corporation.
2. The first paragraph of Section (a)(i) of Article III of the
Articles of Incorporation of this corporation is amended to read as
follows:
"III: (a) (i) This corporation is authorized to issue two
classes of shares to be designated respectively Preferred
Stock, no par value, ("Preferred") and Common Stock, no par
value, ("Common"). The total number of shares of Preferred
this corporation shall have authority to issue is 2,000,000
and the total number of shares of Common the corporation
shall have authority to issue is 10,000,000."
3. The foregoing Amendment of Articles of Incorporation has been
duly approved by the board of directors.
4. The foregoing Amendment of Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding
shares of Common stock as of August 19, 1996 of the corporation is
1,700,175. At present there are no outstanding shares of Preferred Stock.
The number of shares voting in favor of the amendment equaled or exceeded
the vote required. The percentage vote required was more than fifty
percent (50%).
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and
correct of our own knowledge.
DATE: 9/9/96
/S/ ROBERT O. SMITH
Robert O. Smith, President
/S/ PHILIP G. SWANY
Philip G. Swany, Secretary
BY-LAWS OF
DIGITAL POWER CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE.
The board of directors shall fix the location of the principal
executive office of the corporation at any place within or outside the
State of California. If the principal executive office is located outside
such state, and the corporation has one or more business offices in such
state, the board of directors shall fix and designate a principal business
office in the State of California.
1.2 OTHER OFFICES.
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS.
Meetings of shareholders shall be held at any place within or outside
the State of California designated by the board of directors. In the
absence of any such destination, shareholders' meetings shall be held at
the principal executive office of the corporation.
2.2 ANNUAL MEETING.
The annual meetings of shareholders shall be held on the second Friday
in May of each year at 10:00 a.m., or such other date or such other time as
may be fixed by the board of directors; provided, however, that should said
day fall upon a legal holiday, then any such annual meeting of shareholders
shall be held at the same time and place on the next date thereafter
ensuing which is not a legal holiday; provided, further, that if the board
of directors wishes to set an annual meeting date by resolution, then such
resolution must be passed by the board of directors not less than eighty
(80) days prior to the date adopted in the resolution. At such meetings,
directors shall be elected, reports of the affairs of the corporation shall
be considered, and any other business may be transacted which is within the
powers of the shareholders.
At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, or (b) or otherwise properly brought
before the meeting by or at the direction of the board of directors, or (c)
otherwise properly brought before the meeting by a shareholder. For
business to be properly brought before an annual meeting by a shareholder,
the shareholder must have given timely notice thereof in writing to the
Secretary of the corporation. To be timely, a shareholder's notice must be
delivered or mailed and received at the principal executive offices of the
corporation, not less than 40 days nor more than 60 days prior to the
meeting; provided, however, that in the event that less than 50 days'
notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder to be timely must be so
received not later than the close of business of the 10th day following the
day on which such notice of the date of the annual meeting was mailed or
such public disclosure was made. A shareholder's notice to the Secretary
shall set forth as to each matter the shareholder proposes to bring before
the annual meeting (a) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (b) the name and address, as they appear on
the corporation's books, of the shareholder proposing such business, (c)
the class and number of the shares of the corporation which are
beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business. Notwithstanding anything in the by-laws to
the contrary, no business shall be conducted at any annual meeting except
in accordance with the procedures set forth in this Article 2.2. The
Chairman of the annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Article 2.2, and if he
should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
2.3 SPECIAL MEETING.
A special meeting of the shareholders may be called at anytime by the
board of directors, or by the chairman of the board, or by the president,
or by one or more shareholders holding shares in the aggregate entitled to
cast not less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or
by telegraphic or other facsimile transmission to the chairman of the
board, the president, any vice president or the secretary of the
corporation. The officer receiving the request shall cause notice to be
promptly given to the shareholders entitled to vote, in accordance with the
provisions of Sections 2.4 and 2.5 of these by-laws, that a meeting will be
held at the time requested by the person or persons calling the meeting,
not less than thirty-five (35) nor more than sixty (60) days after the
receipt of the request. If the notice is not given within twenty (20) days
after receipt of the request, the person or persons requesting the meeting
may give the notice. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be
held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS.
All notices of meetings of shareholders shall be sent or otherwise
given in accordance with Section 2.5 of these by-laws not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
shareholder entitled to vote thereat. The notice shall specify the place,
date, and hour of the meeting.
In the case of a special meeting the notice shall specify the general
nature of the business to be transacted and no other business may be
transacted at said meeting.
In the case of the annual meeting the notice shall specify those
matters which the board of directors, at the time of the mailing of the
notice, intends to present for action by the shareholders, but any proper
matter may be presented at the meeting. The notice shall also state the
general nature of the business or proposal to be considered or acted upon
at such meeting before action may be taken at such meeting for approval of
(i) any transaction governed by Section 310 of the California Corporations
Code including a proposal to enter into a contract or other transaction
between the corporation and one or more of its directors, or between the
corporation and any corporation, firm, or association in which one or more
of the corporation's directors has a material financial interest or in
which one or more of its directors are directors; or (ii) a proposal to
amend the articles of incorporation in any manner other than may be
accomplished by the board of directors alone as permitted by subsections
(b) through (d) of Section 902 of that Code; or (iii) a proposal to
reorganize the corporation under Section 1201 of that Code; or (iv) a
proposal to wind up and dissolve the corporation under Section 1900 of that
Code; or (v) if the corporation is in the process of winding up and has
both preferred and common shares outstanding, a proposal for a plan of
distribution of the shares, obligations, or security of any other
corporation, domestic or foreign, or assets other than money which is not
in accordance with the liquidation rights of the preferred shares as
specified in the articles of incorporation of this corporation.
The notice of any meeting at which directors are to be elected shall
include the name of any candidates intended at the time of the notice to be
presented by the board of directors for election. Shareholders who intend
to present their own slate of candidates must give notice to the board of
directors of the name(s), address(es), and telephone number(s) of such
candidate(s) not less than seventy (70) days prior to the meeting date as
set forth in these by-laws or by resolution of the board. Notice shall be
deemed submitted to the board if it is delivered to the Secretary of the
corporation personally or by first-class mail, by telegraph, facsimile, or
other form of written communication, charges prepaid, addressed to the
corporation's principal executive office. Notice shall be deemed to have
been given at the time delivered personally, deposited in the mail,
delivered to a common carrier for transmission to the recipient, or
actually transmitted by facsimile or electronic means to the recipient by
the person giving the notice.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
Notice of any meeting of shareholders shall be given either personally
or by first-class mail or telegraphic or other written communication,
charges prepaid, addressed to the shareholder at the address of that
shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice. If no such
address appears on the corporation's books or is given, notice shall be
deemed to have been given if sent to that shareholder by first-class mail
or telegraphic or other written communication to the corporation's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice
shall be deemed to have been given at the time when delivered personally or
deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the
shareholder at that address, all future notices or reports shall be deemed
to have been duly given without further mailing if the same shall be
available to the shareholder on written demand of the shareholder at the
principal executive office of the corporation for a period of one (1) year
from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or
any transfer agent of the corporation giving the notice, shall be PRIMA
FACIE evidence of the giving of such notice.
2.6 QUORUM.
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a
duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE.
Any shareholders' meeting, annual or special, whether or not a quorum
is present, may be adjourned from time to time by the vote of the majority
of the shares represented at that meeting, either in person or by proxy,
but in the absence of a quorum, no other business may be transacted at that
meeting, except as provided in Section 2.6 of these by-laws.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place are announced at the meeting at
which the adjournment is taken, unless a new record date for the adjourned
meeting is fixed, or unless the adjournment is for more than forty-five
(45) days from the date set for the original meeting, in which case notice
of the adjourned meeting shall be given. Notice of any such adjourned
meeting shall be given to each shareholder of record entitled to vote at
the adjourned meeting in accordance with the provisions of Sections 2.4 and
2.5 of these by-laws. At any adjourned meeting the corporation may transact
any business which might have been transacted at the original meeting.
2.8 VOTING.
The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 2.11 of these
by-laws, subject to the provisions of. Sections 702 to 704, inclusive, of
the Code (relating to voting shares held by a fiduciary, in the name of a
corporation or in joint ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by
any shareholder before the voting has begun.
On any matter other than the election of directors, any shareholder
may vote part of the shares in favor of the proposal and refrain from
voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares which the
shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the
shares represented and voting at a duly-held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number,
or voting by classes, is required by the Code or by the articles of
incorporation.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e.
cast for any candidate a number of votes greater than the number
of votes which such shareholder normally is entitled to cast)
unless the candidates' names have been placed in nomination prior
to commencement of the voting and a shareholder has given notice
prior to commencement of the voting of the shareholder's intention
to cumulate votes. If any shareholder has given such a notice,
then every shareholder entitled to vote may cumulate votes for
candidates placed in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied
by the number of votes to which that shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among
any or all of the candidates, as the shareholder thinks fit. The candidates
receiving the highest number of votes, up to the number of directors to be
elected, shall be elected.
2.9 VALIDATION OF MEETINGS: WAIVER OF NOTICE; CONSENT.
The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, shall be as valid
as though had at a meeting duly held after regular call and notice, if a
quorum be present either in person or by proxy, and if, either before or
after the meeting, each person entitled to vote, who was not present in
person or by proxy, signs a written waiver of notice or a consent to the
holding of the meeting or an approval of the minutes thereof. The waiver of
notice or consent need not specify either the business to be transacted or
the purpose of any annual or special meeting of shareholders, except that
if action is taken or proposed to be taken for approval of any of those
matters specified in Section 2.4 of these by-laws, the waiver of notice or
consent shall state the general nature of the proposal. All such waivers,
consents and approvals shall be filed with the corporate records or made a
part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened, and except that attendance at a meeting is not
a waiver of any right to object to the consideration of a matter not
included in the notice of the meeting, if that objection is expressly made
at the meeting
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the
holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take that action at a meeting
at which all shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be
effective only if signed by the holders of all outstanding shares entitled
to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders,
or a transferee of the shares, or a personal representative of the
shareholder, or their respective proxy holders, may revoke the consent by a
writing received by the secretary of the corporation before written
consents of the number of shares required to authorize the proposed action
have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a
meeting. Such notice shall be given in the manner specified in Section 2.5
of these by-laws. In the case of approval of (i) a contract or transaction
in which a director has a direct or indirect financial interest, pursuant
to Section 310 of the Code, (ii) indemnification of a corporate "agent",
pursuant to Section 317 of the Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of the Code, and (iv) a distribution
in dissolution other than in accordance with the rights of outstanding
preferred shares, pursuant to Section 2007 of the Code, the notice shall be
given at least ten (10) days before the consummation of any action
authorized by that approval.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS.
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10)
days before the date of any such meeting nor more than sixty (60) days
before any such action without a meeting, and in such event only
shareholders of record on the date so fixed are entitled to notice and to
vote or to give consents, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date, except
as otherwise provided in the Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business
on the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held; and
(b) the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first
written consent is given or (ii) when prior action by the board has been
taken, shall be the day on which the board adopts the resolution relating
to that action, or the sixtieth (60th) day before the date of such other
action, whichever is later.
The record date for any other purpose shall be as provided in Article
VIII of these by-laws.
2.12 PROXIES.
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the
secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or
the shareholder's attorneyin-fact. A validly executed proxy which does not
state that it is irrevocable shall continue in full force and effect unless
(i) revoked by the person executing it, before the vote pursuant to that
proxy, by a writing delivered to the corporation stating that the proxy is
revoked, or by a subsequent proxy executed by the person executing the
prior proxy and presented to the meeting, or as to any meeting by
attendance at such meeting and voting in person by the person executing the
proxy or (ii) written notice of the death or incapacity of the maker of
that proxy is received by the corporation before the vote pursuant to that
proxy is counted; provided, however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy, unless
otherwise provided in the proxy. The revocability of a proxy that states on
its face that it is irrevocable shall be governed by the provisions of
Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION.
Before any meeting of shareholders, the board of directors may appoint
an inspector or inspectors of election to act at the meeting or its
adjournment. If no inspector of election is so appointed, the chairman of
the meeting may, and on the request of any shareholder or a shareholder's
proxy shall, appoint an inspector or inspectors of election to act at the
meeting. The number of inspectors shall be either one (1) or three (3). If
inspectors are appointed at a meeting pursuant to the request of one (1) or
more shareholders or proxies, the holders of a majority of shares or their
proxies present at the meeting shall determine whether one
(1) or three (3) inspectors are to be appointed. If any person appointed
as inspector fails to appear or fails or refuses to act, the chairman of
the meeting may, and upon the request of any shareholder or a shareholder's
proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) Determine the number of shares outstanding and the voting power
of each of the number of shares represented at the meeting, the existence
of a quorum, and the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS.
Subject to the provisions of the Code and any limitations in the
articles of incorporation and these by-laws relating to action required to
be approved by the shareholders or by the outstanding shares, the business
and affairs of the corporation shall be managed and all corporate powers
shall be exercised by or under the direction of the board of directors.
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office
expires.
3.2 NUMBER AND QUALIFICATION OF DIRECTORS.
The authorized number of directors shall be not less than five (5) not
more than nine (9) with the exact number of directors to be fixed, within
the limited specified, by approval of the board or the shareholders in the
manner provided in the by-laws and section 204(a) of the California
Corporations Code.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS.
Directors shall be elected at each annual meeting of shareholders to
hold office until the next such annual meeting. Each director, including a
director elected to fill a vacancy, shall hold office until the expiration
of the term for which elected and until a successor has been elected and
qualified.
3.4 VACANCIES.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, though less than a quorum, or by a sole remaining
director, except that a vacancy created by the removal of a director by the
vote or written consent of the shareholders or by court order may be
filled only by the vote of a majority of the outstanding shares entitled to
vote thereon represented at a duly held meeting at which a quorum is
present, or by the unanimous written consent of all shares entitled to vote
thereon. Each director so elected shall hold office until the next annual
meeting of the shareholders and until a successor has been elected and
qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist in the event of the death, resignation or removal of any director, or
if the board of directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or
convicted of a felony, or if the authorized number of directors is
increased, or if the shareholders fail, at any meeting of shareholders at
which any director or directors are elected, to elect the number of
directors to be elected at that meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election
other than to fill a vacancy created by removal, if by written consent,
shall require the consent of the holders of a majority of the outstanding
shares entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
Regular meetings of the board of directors may be held at any place
within or outside the State of California that has been designated from
time to time by resolution of the board. In the absence of such a
designation regular meetings shall be held at the principal executive
office of the corporation. Special meetings of the board may be held at any
place within or outside the State of California that has been designated in
the notice of the meeting or, if not stated in the notice or if there is no
notice, at the principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone
or similar communication equipment, so long as all directors participating
in the meeting can hear one another; and all such directors shall be deemed
to be present in person at the meeting.
3.6 REGULAR MEETINGS.
Regular meetings of the board of directors may be held without notice
if the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS.
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any
vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4)
days before the time of the holding of the meeting. If the notice is
delivered personally, or by telephone or telegram, it shall be delivered
personally or by telephone or to the telegraph company at least forty-eight
(48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director
or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director.
The notice need not specify the purpose or the place of the meeting, if the
meeting is to be held at the principal executive office of the corporation.
3.8 QUORUM.
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in
Section 3.10 of these by-laws. Every act or decision done or made by a
majority of the directors present at a duly held meeting at which a quorum
is present shall be regarded as the act of the board of directors, subject
to the provisions of Section 310 of the Code (as to approval of contracts
or transactions in which a director has a direct or indirect material
financial interest), Section 311 of the Code (as to appointment of
committees) and Section 317(e) of the Code (as to indemnification of
directors).
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any
action taken is approved by at least a majority of the required quorum for
that meeting.
3.9 WAIVER OF NOTICE.
The transactions of any meeting of the board of directors, however
called and noticed or wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice if a quorum is present and
if, either before or after the meeting, each of the directors not present
signs a written waiver of notice, a consent to holding the meeting or an
approval of the minutes thereof. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents and
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Notice of a meeting shall also be deemed given to
any director who attends the meeting without protesting, before or at its
commencement, the lack of notice to that director.
3.10 ADJOURNMENT.
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT.
Notice of the time and place of holding an adjourned meeting need not
be given, unless the meeting is adjourned for more than twenty-four (24)
hours, in which case notice of the time and place shall be given before the
time of the adjourned meeting, in the manner specified in Section 3.7 of
these by-laws, to the directors who were not present at the time of the
adjournment.
3.12 ACTION WITHOUT MEETING.
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, if all members of the board shall
individually or collectively consent in writing to that action. Such action
by written consent shall have the same force and effect as a unanimous
vote of the board of directors. Such written consent and any counterparts
thereof shall be filed with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECT0RS.
Directors and members of committees may receive such compensation, if
any, for their services, and such reimbursement of expenses, as may be
fixed or determined by resolution of the board of directors. This Section
3.13 shall not be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee or
otherwise, and receiving compensation for those services.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS.
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors as alternate members of
any committee, who may replace any absent member at any meeting of the
committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors.
Any committee, to the extent provided in the resolution of the
board, shall have all the authority of the board, except with
respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies in the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these by-laws or the adoption of new
by-laws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board
of directors; or
(g) the appointment of any other committees of the board of directors
or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES.
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these by-laws,
Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section
3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of
adjournment) and Section 3.12 (action without meeting), with such changes
in the context of those by-laws as are necessary to substitute the
committee and its members for the board of directors and its members,
except that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee; special meetings of committees may also be called by resolution
of the board of directors; and notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to
attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the
provisions of these by-laws.
ARTICLE V
OFFICERS
5.1 OFFICERS.
The officers of the corporation shall be a president, a secretary, and
a chief financial officer. The corporation may also have, at the discretion
of the board of directors, a chairman of the board, one or more vice
presidents, one or more assistant secretaries, one or more assistant
treasurers, and such other officers as may be appointed in accordance with
the provisions of Section 5.3 of these by-laws. Any number of offices may
be held by the same person.
5.2 ELECTION OF OFFICERS.
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5
of these by-laws, shall be chosen by the board, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS.
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may
require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in these
by-laws or as the board of directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by
the board of directors at any regular or special meeting of the board or,
except in case of an officer chosen by the board of directors, by any
officer upon whom such power of removal may be conferred by the board of
directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt
of that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall
not be necessary to make it effective. Any resignation is without prejudice
to the rights, if any, of the corporation under any contact to which the
officer is a party.
5.5 VACANCIES IN OFFICES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner
prescribed in these by-laws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD.
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and
perform such other powers and duties as may be from time to time assigned
to him by the board of directors or prescribed by these by-laws. If there
is no president, the chairman of the board shall also be the chief
executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these by-laws.
5.7 PRESIDENT.
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, if there be such an
officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors,
have general supervision, direction and control of the business and the
officers of the corporation. He shall preside at all meetings of the
shareholders and, in the absence of the chairman of the board, or if there
be none, at all meetings of the board of directors. He shall have the
general powers and duties of management usually vested in the office of
president of a corporation, and shall have such other powers and duties as
may be prescribed by the board of directors or these by-laws.
5.8 VICE PRESIDENTS.
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall
perform all the duties of the president and when so acting shall have all
the powers of, and be subject to all the restrictions upon, the president.
The vice presidents shall have such other powers and perform such other
duties as from time to time may be prescribed for them respectively by the
board of directors, these by-laws, the president or the chairman of the
board.
5.9 SECRETARY.
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation, or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and shareholders, with the time and
place of holding, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented
at shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the
names of all shareholders and their addresses, the number and classes of
shares held by each, the number and date of certificates evidencing such
shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required by these by-laws
or by law to be given, and he shall keep the seal of the corporation, if
one be adopted, in safe custody and shall have such other powers and
perform such other duties as may be prescribed by the board of directors or
by these by-laws.
5.10 CHIEF FINANCIAL OFFICER.
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including
accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, retained earnings, and shares. The books of account shall
at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all money and other
valuables in the name and to the credit of the corporation with
such depositaries as may be designated by the board of directors.
He shall disburse the funds of the corporation as may be ordered
by the board of directors, shall render to the president and directors,
whenever they request it, an account of all of his transactions as chief
financial officer and of the financial condition of the corporation, and
shall have such other powers and perform such other duties as may be
prescribed by the board of directors or these by-laws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, AND OFFICERS, EMPLOYEES
AND OTHER AGENTS
The corporation shall, to the maximum extent and in the manner
permitted by the Code, indemnify each of its agents against
expenses,judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of
the fact any such person is or was an agent of the corporation. For
purposes of this Article VI, an "agent" of the corporation includes any
person who is or was a director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or was a director, officer,
employee or agent of a corporation which was a predecessor corporation of
the corporation or of another enterprise at the request of such predecessor
corporation.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER.
The corporation shall keep at its principal executive office,
or at the office of its transfer agent or registrar, if either be
appointed and as determined by resolution of the board of directors, a
record of its shareholders, giving the names and addresses of all
shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding
at least five percent (5%) in the aggregate of the outstanding
voting shares of the corporation or who holds at least one percent
(1%) of such voting shares and has filed a Schedule 14B with the
Securities and Exchange Commission relating to the election of
directors, may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours on five (5) days'
prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such
transfer agent's usual charges for such list, a list of the names and
addresses of the shareholders who are entitled to vote for the election of
directors, and their shareholdings, as of the most recent record date for
which that list has been compiled or as of a date specified by the
shareholder after the date of demand. Such list shall be made available to
any such shareholder by the transfer agent on or before the later of five
(5) days after the demand is received or five (5) days after the date
specified in the demand as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the
written demand of any shareholder or holder of a voting trust certificate,
at any time during usual business hours, for a purpose reasonably related
to the holder's interests as a shareholder or as the holder of a voting
trust certificate.
Any inspection and copying under this Section 7.1 may be made in
person or by an agent or attorney of the shareholder or holder of a voting
trust certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BY-LAWS.
The corporation shall keep at its principal executive office, or if
its principal executive office is not in the State of California, at its
principal business office in such state, the original or a copy of these
by-laws as amended to date, which by-laws shall be open to inspection by
the shareholders at all reasonable times during office hours. If the
principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in such
state, the secretary shall, upon the written request of any shareholder,
furnish to that shareholder a copy of these by-laws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.
The accounting books and records, and the minutes of proceedings of
the shareholders and the board of directors and any committee or committees
of the board of directors, shall be kept at such place or places designated
by the board of directors or, in absence of such designation, at the
principal executive office of the corporation. The minutes shall be kept in
written form and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written
form.
The minutes and accounting books and records shall be open to
inspection upon the written demand of any shareholder or holder of a voting
trust certificate, at any reasonable time during usual business hours, for
a purpose reasonably related to the holder's interests as a shareholder or
as the holder of a voting trust certificate. The inspection may be made in
person or by an agent or attorney, and shall include the right to copy and
make extracts. Such rights of inspection shall extend to the records of
each subsidiary corporation of the corporation.
7.4 INSPECTION BY DIRECTORS.
Every director shall have the absolute right at any reasonable time to
inspect all books, records and documents of every kind and the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney,
and the right of inspection includes the right to copy and make extracts of
documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close
of the fiscal year adopted by the corporation. Such report shall be sent at
least fifteen (15) days before the annual meeting of shareholders to be
held during the next fiscal year and in the manner specified in Section 2.5
of these by-laws for giving notice to shareholders of the corporation.
The annual report shall contain a balance sheet as of the end of the
fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report of independent
accountants or, if there is no such report, the certificate of an
authorized officer of the corporation that the statements were prepared
without audit from the books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long
as the shares of the corporation are held by less than one hundred (100)
holders of record.
7.6 FINANCIAL STATEMENTS.
A copy of any annual financial statement and any income statement of
the corporation for each quarterly period of each fiscal year, and any
accompanying balance sheet of the corporation as of the end of each such
period, that has been prepared by the corporation shall be kept on file in
the principal executive office of the corporation for twelve (12) months;
and each such statement shall be exhibited at all reasonable times to any
shareholder demanding an examination of any such statement or a copy shall
be mailed to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a
written request to the corporation for an income statement of the
corporation for the three-month, six-month or nine-month period of the then
current fiscal year ended more than thirty (30) days before the date of the
request, and for a balance sheet of the corporation as of the end of that
period, the chief financial officer shall cause that statement to be
prepared, if not already prepared, and shall deliver personally or mail
that statement or statements to the person making the request within thirty
(30) days after the receipt of the request. If the corporation has not sent
to the shareholders its annual report for the last fiscal year, such report
shall likewise be delivered or mailed to the shareholder or shareholders
within thirty (30) days after the request.
The corporation shall also, on the written request of any shareholder,
mail to the shareholder a copy of the last annual, semi-annual or quarterly
income statement which it has prepared, and a balance sheet as of the end
of that period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared
without audit from the books and records of the corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.
For purposes of determining the shareholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or
entitled to exercise any rights in respect of any other lawful action
(other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not
be more than sixty (60) days before any such action, and in that case only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or
to exercise such rights, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date so
fixed, except as otherwise provided in the Code.
If the board of directors does not so fix a record date,
the record date for determining shareholders for any such purpose
shall be at the close of business on the day on which the board
adopts the applicable resolution or the sixtieth (60th) day before
the date of that action, whichever is later.
8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS.
All checks, drafts, or other orders for payment of money, notes, or
other evidences of indebtedness, issued in the name of or payable to the
corporation, shall be signed or endorsed by such person or persons and in
such manner as, from time to time, shall be determined by resolution of the
board of directors.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.
The board of directors, except as otherwise provided in these by-laws,
may authorize any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation, and such authority may be general or confined to specific
instances; and, unless so authorized or ratified by the board of directors
or within the agency power of an officer, no officer, agent or employee
shall have any power or authority to bind the corporation by any contract
or engagement or to pledge its credit or to render it liable for any
purpose or for any amount.
8.4 CERTIFICATES FOR SHARES.
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid, and the
board of directors may authorize the issuance of certificates or shares as
partly paid provided that these certificates shall state the amount of the
consideration to be paid for them and the amount paid. All certificates
shall be signed in the name of the corporation by the chairman of the board
or vice chairman of the board or the president or a vice president and by
the chief financial officer or an assistant treasurer or the secretary or
an assistant secretary, certifying the number of shares and the class or
series of shares owned by the shareholder. Any or all of the signatures on
the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed on a certificate shall have
ceased to be that officer, transfer agent or registrar before that
certificate is issued, it may be issued by the corporation with the same
effect as if that person were an officer, transfer agent or registrar at
the date of issue.
8.5 LOST CERTIFICATES.
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the
latter is surrendered to the corporation and cancelled at the same time.
The board of directors may, in case any share certificate or certificate
for any other security is lost, stolen or destroyed, authorize the issuance
of replacement certificates on such terms and conditions as the board may
require, including provision for indemnification of the corporation secured
by a bond or other adequate security sufficient to protect the corporation
against any claim that may be made against it, including any expense or
liability, on account of the alleged loss, theft or destruction of the
certificate or the issuance of the replacement certificate.
8.6 CONSTRUCTION AND DEFINITIONS.
Unless the context requires otherwise, the general provisions, rules
of construction and definitions in the Code shall govern the construction
of these by-laws. Without limiting the generality of this provision, the
singular number includes the plural, the plural number includes the
singular, and the term "person" includes both a corporation and a natural
person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS.
New by-laws may be adopted or these by-laws may be amended or repealed
by the vote or written consent of holders of a majority of the outstanding
shares entitled to vote; provided, however, that if the articles of
incorporation of the corporation set forth the number of authorized
directors of the corporation, the authorized number of directors may be
changed only by an amendment as required by applicable law.
9.2 AMENDMENT BY DIRECTORS.
Subject to the rights of the shareholders as provided in Section 9.1
of these by-laws, by-laws, other than a by-law or an amendment of a by-law
changing the authorized number of directors (except to fix the authorized
number of directors pursuant to a by-law providing for a variable number of
directors), may be adopted, amended, or repealed by the board of directors.
Certificate Number Number of Warrants
DIGITAL POWER CORPORATION
VOID AFTER 5:00 P.M. FREMONT, CALIFORNIA TIME
ON NOVEMBER __, 1999
OR EARLIER AS PROVIDED HEREIN
REDEEMABLE COMMON STOCK PURCHASE WARRANTS TO PURCHASE
SHARES OF COMMON STOCK OF DIGITAL POWER CORPORATION
THIS CERTIFIES THAT, for value received,
________________________________________________________________
or registered assigns, _______________________________________________
is the registered holder of the number of Redeemable Common Stock Purchase
Warrants (the "Warrants") set forth above. Each Warrant entitles the holder
thereof to purchase from Digital Power Corporation (the "Company"), subject to
the terms and conditions set forth hereinafter and in the Warrant Agreement
hereinafter referred to, one share of the Company's common stock, no par value
(the "Common Stock"), upon presentation and surrender of this Warrant
Certificate. However, Warrants shall not be exercisable by the holder in any
state where such exercise would be unlawful.
Unless sooner required in accordance with the terms hereof, this Warrant
Certificate must be presented and surrendered to American Securities Transfer,
Inc. (the "Warrant Agent"), along with the Purchase Price, at or prior to 5:00
p.m., Denver, Colorado time, on November __, 1999, at the corporate offices of
the Warrant Agent; otherwise the Warrants represented by this Warrant
Certificate shall become null and void.
Payment of the Purchase Price and any applicable taxes must accompany the
surrender of this Warrant Certificate. The purchase price per share of the
Common Stock is $5.00 (the "Purchase Price").
The Warrants represented by this Warrant Certificate are subject to
redemption by the Company upon the payment to the holder of $0.125 per Warrant.
The Warrants may be redeemed only in the event that the Common Stock of the
Company has traded at or above a price of $6.00 per share at closing for a
minimum of thirty (30) consecutive trading days ending within three days of the
date on which notice of redemption is given. In order to redeem the Warrants,
the Company must provide each registered holder of the Warrant with at least
thirty (30) days written notice of the Company's intention to redeem. Unless
the holder exercises his right to purchase the shares of Common Stock covered
by this Warrant Certificate on or prior to the close of business on such
redemption date, the holder shall forfeit his right to do so and shall be
entitled only to the redemption price.
This Warrant Certificate is subject to all of the terms, provisions, and
conditions of the Warrant Agreement dated as of November __, 1996 (the "Warrant
Agreement"), to all of which terms, provisions, and conditions the registered
holder of this Warrant Certificate consents by acceptance hereof. The Warrant
Agreement is hereby incorporated herein by reference and made a part hereof and
to which Warrant Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties, and immunities
hereunder of the holders of the Warrant Certificates. Copies of the Warrant
Agreement are available for inspection at the corporate offices of the Company
and the Warrant Agent.
This Warrant Certificate upon surrender at the corporate offices of the
Warrant Agent may be exchanged for another Warrant Certificate or Certificates
evidencing in the aggregate the same number of Warrants as the Warrant
Certificate or Certificates so surrendered. If the Warrants evidenced by this
Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof another Warrant Certificate or
Certificates evidencing the number of Warrants not so exercised. Reference is
made to the further provisions of the Warrant set forth on the reverse hereof
and such further provisions shall for all purposes have the same effect as if
fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and a
facsimile of its corporate seal to be printed hereon.
Digital Power Corporation.
By: Dated: Corporate Seal
President
Attest: Dated:
Secretary
Countersigned:
AMERICAN SECURITIES TRANSFER, INC.
DENVER, COLORADO as Warrant Agent
By: Dated:
Authorized Signature
DIGITAL POWER CORPORATION
The holder may exercise this Warrant, in whole or in part, by
surrendering this Warrant Certificate, with the "Form Of Election To Purchase",
properly completed and executed, together with payment of the Purchase Price,
in cash or by official bank or cashier's check, at the office of the Warrant
Agent, American Securities Transfer, Inc., Denver, Colorado. Upon the exercise
of the Warrants, if the number of Warrants exercised shall be less than all
Warrants represented hereby, the Warrant Agent shall deliver to the holder or
his assignee a new Warrant Certificate representing the number of Warrants not
exercised. No adjustment shall be made for any cash dividends on shares
issuable upon exercise of Warrants. No certificate for fractional shares shall
be issued, nor shall the Company or the Warrant Agent be required to make any
cash payments in lieu thereof upon exercise of the Warrant. The holder hereby
waives any right to receive fractional shares.
The Company and the Warrant Agent may deem and treat the registered
holder(s) hereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone) for the purpose of any exercise hereof, or any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected or bound by any notice to the contrary. In the
event of certain contingencies provided in the Warrant Agreement, the Purchase
Price or the number of shares of Common Stock subject to purchase upon the
exercise of each Warrant represented hereby are subject to modification or
adjustment. This Warrant Certificate shall be governed by and construed under
the laws of the State of California.
FORM OF ASSIGNMENT
(To Be Executed By The Registered Holder If Such Holder Desires To Transfer
Warrants Evidenced By This Warrant Certificate)
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto __________
______________________________ whose address is ______________________________
______________ Warrants, evidenced by this Warrant Certificate, and does
hereby irrevocably constitute and appoint ______________________ Attorney,
to transfer the said Warrants evidenced by this Warrant Certificate on the
books of the Company, with full power of substitution.
Dated:
NOTICE X___________________________________________
(Signature)
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
X_____________________________________________
(Signature)
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION AS DEFINED IN RULE 17 Ad-15
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED:
SIGNATURE(S) GUARANTEED BY:
<PAGE>
FORM OF ELECTION TO PURCHASE
(To Be Executed If Holder Desires To Exercise Warrants Evidenced By This
Warrant Certificate)
To Digital Power Corporation:
The undersigned hereby irrevocably elects to exercise
Warrants evidenced by this Warrant Certificate to purchase full shares of
Common Stock issuable upon exercise of said Warrants, and hereby makes payment
in full of the Purchase Price of such shares and any applicable taxes. The
undersigned requests that certificates for such shares be issued in the name
of:
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
____________________________________________________________________________
(Please print name and address)
and if said number of Warrants shall be less than all the Warrants evidenced by
this Warrant Certificate, requests that a new Warrant Certificate evidencing
the Warrants not so exercised be issued in the name of and delivered to:
____________________________________________________________________________
(Please print name and address)
Dated:__________________________
NOTICE X_____________________________________
(Signature)
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
X____________________________________
(Signature)
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION AS DEFINED IN RULE 17 Ad-15
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED:
SIGNATURE(S) GUARANTEED BY:
DIGITAL POWER CORPORATION
(A CALIFORNIA CORPORATION)
____________________________________________
UNDERWRITER'S WARRANT TO PURCHASE
SHARES OF COMMON STOCK AND
COMMON STOCK PURCHASE WARRANTS
____________________________________
NEITHER THIS UNDERWRITER'S WARRANT NOR THE SHARES OR
STOCK PURCHASE WARRANTS ISSUABLE UPON ITS EXERCISE HAVE
BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933
AS AMENDED (THE "SECURITIES ACT") OR THE SECURITIES
LAWS OF ANY STATE AND MAY NOT BE SOLD, OFFERED FOR
SALE, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
WITH RESPECT TO THE SECURITIES UNDER THE SECURITIES ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
THIS CERTIFIES THAT, for value received, WERBEL-ROTH SECURITIES, INC.
or its registered assigns (the "Underwriter"), is entitled to purchase at
any time or from time to time during the Exercise Period (as defined in
Subsection 1.2 below): (i) up to a maximum of One Hundred Thousand
(100,000) shares of fully paid and non-assessable common stock of DIGITAL
POWER CORPORATION, a California corporation (the "Company"), no par value
(the "Shares" and/or the "Common Stock", as applicable); and (ii) up to a
maximum of Fifty Thousand (50,000) stock purchase warrants, each of which
entitles the holder thereof to purchase a single share of the Common Stock
of the Company, or Fifty Thousand Shares in the aggregate (the "Stock
Purchase Warrants"). The Shares and the Stock Purchase Warrants shall be
purchased at the per Share purchase price and the per Stock Purchase
Warrant purchase price set forth in Subsection 1.1 below, subject to the
further provisions of this Underwriter's Warrant. The term "Underwriter's
Warrant" as used herein shall mean this Warrant instrument and the various
rights into which the rights granted under this Underwriter's Warrant are
subsequently divided. The term "Stock Purchase Warrant" as used herein
shall mean that form of warrant instrument attached hereto as Exhibit "A"
and the various rights granted thereunder.
1. EXERCISE OF WARRANT.
The terms and conditions under which this Underwriter's Warrant may be
exercised and the Common Stock subject hereto may be purchased are as
follows:
1.1 SHARE AND WARRANT PURCHASE PRICES. The Share purchase price
shall be equal to 120% of the per Share public offering price of the Common
Stock offered for sale by the Company in or around November 1996, subject
to adjustment as provided in Section 4, below, and this Section 1 (the
"Share Purchase Price"). The Stock Purchase Warrant purchase price shall
be equal to 120% of the per Warrant public offering price of the Stock
Purchase Warrants offered for sale by the Company in or around November
1996, subject to adjustment as provided in Section 4, below, and this
Section 1 (the "Warrant Purchase Price").
1.2 METHOD OF EXERCISE. The holder of this Underwriter's Warrant, on
or after the date hereof shown at the end of this instrument (the
"Effective Date"), and from time to time until four (4) years from the
Effective Date (the "Exercise Period"), may exercise in whole or in part
the purchase rights evidenced by this Underwriter's Warrant, provided that
the holder exercises the purchase rights evidenced by this Underwriter's
Warrant with respect to at least One Thousand (1,000) Shares of Common
Stock and/or One Thousand (1,000) Stock Purchase Warrants, unless the
remaining balance of such Shares or Stock Purchase Warrants is less than
One Thousand (1,000). Such exercise shall be effected by:
(a) the surrender of the Underwriter's Warrant, together with a
duly executed copy of the form of Subscription attached hereto, to the
Secretary of the Company at its principal offices;
(b) the payment to the Company in U.S. funds, by certified check
or bank draft payable to its order, of an amount equal to the
aggregate Share Purchase Price and Warrant Purchase Price for the
number of Shares and Stock Purchase Warrants for which the purchase
rights hereunder are being exercised; and
(c) the delivery to the Company, if necessary, to assure
compliance with federal and state securities laws, of an instrument
executed by the holder certifying that the Shares and Stock Purchase
Warrants are being acquired for the sole account of the holder and not
with a view to any resale or distribution prior to the filing of a
registration statement.
1.3 SATISFACTION WITH REQUIREMENTS OF SECURITIES ACT OF 1933.
Notwithstanding the provisions of Subsection 1.2(c) and Section 7, each and
every exercise of this Underwriter's Warrant is contingent upon the
Company's satisfaction that the issuance of Common Stock and Stock Purchase
Warrants upon the exercise is exempt from the requirements of the
Securities Act and all applicable state securities laws at the relevant
time(s). The holder of this Underwriter's Warrant agrees to execute any
and all documents deemed necessary by the Company to effect the exercise of
this Underwriter's Warrant, including, without limitation, a form of Stock
Purchase Warrant attached hereto as Exhibit "A".
1.4 ISSUANCE OF SHARES AND NEW UNDERWRITER'S WARRANT. In the event
the purchase rights evidenced by this Underwriter's Warrant are exercised
in whole or in part, one or more certificates for the purchased Shares
and/or Stock Purchase Warrants shall be issued as soon as practicable
thereafter to the person exercising such rights. Such holder shall also be
issued at such time a new Underwriter's Warrant representing the number of
Shares and/or Stock Purchase Warrants (if any) for which the purchase
rights under this Underwriter's Warrant remain unexercised and continuing
in force and effect.
1.5 DESIGNATION OF RECIPIENTS OF UNDERWRITER'S WARRANT. The
Underwriter may designate that the Underwriter's Warrant be issued in
varying amounts directly to its officers, directors, shareholders,
employees, and affiliates and not to the Underwriter; however, such
designation will only be made by the Underwriter if it determines and
represents to the Company that such issuance would not violate the
interpretation of the Board of Governors of the National Association of
Securities Dealers relating to the review of corporate financing
arrangements and would not require registration of the Underwriter's
Warrant or underlying securities.
1.6 REGISTRATION RIGHTS. Upon the written request of the then
holder(s) owning a majority of the Underwriter's Warrant and the underlying
securities issued upon the exercise of the Underwriter's Warrant (i.e.,
owning in aggregate at least 75,001 Shares or Stock Purchase Warrants
combined, or holding the right to purchase any combination thereof in
excess of 75,001), made at anytime within the Exercise Period, the Company
will file, not more than once, a registration statement under the
Securities Act, registering or qualifying, as the case may be, the
securities underlying the Underwriter's Warrant. The Company agrees to use
its best efforts to cause the above filing to become effective. The
registration statement must be filed within sixty (60) days of such written
request. All expenses of such registration or qualification, including,
but not limited to, legal, accounting, printing, and mailing fees, will be
borne by the Company. In addition to the above, the Company understands
and agrees that if, at any time during the Exercise Period and for a period
of five (5) years thereafter, it should file a registration statement with
the Securities Exchange Commission (the "SEC") pursuant to the Act for a
public offering of securities, either for the account of the Company or for
the account of any other person (except for a Form S-8 or Form S-4
registration statement), the Company, at its own expense, will offer to
said holder(s) the opportunity to register or qualify for public offering
the securities underlying this Underwriter's Warrant. In connection with
this paragraph, the Company shall give such holder(s) notice by registered
mail at least thirty (30) days prior to filing any such registration
statement with the SEC. In addition to the rights above provided, the
Company will cooperate with the then holder(s) of the Underwriter's Warrant
and the securities issued upon the exercise of the Underwriter's Warrant in
preparing and signing any registration statements or notification, in
addition to the registration statements and notifications discussed above,
required in order to sell or transfer the securities underlying the
Underwriter's Warrant and will supply all information required therefor,
but such additional registration statement or notification shall be at the
cost and expense of the then holder(s).
2. TRANSFERS.
2.1 TRANSFERS. Subject to Section 7 hereof, this Underwriter's
Warrant and all rights hereunder are transferable in whole or in part by
the holder with the same effect as with a negotiable instrument. To
transfer rights, the transfer form below must be completed. The transfer
shall be recorded on the books of the Company upon the surrender of this
Underwriter's Warrant, properly endorsed, to the Secretary of the Company
at its principal offices and the payment to the Company of all transfer
taxes and other governmental charges imposed on such transfer. In the
event of a partial transfer, the Company shall issue to the several holders
one or more appropriate new forms of Underwriter's Warrant.
2.2 LOCK-UP. Except as provided in Subsection 1.5 hereof, the holder
covenants and agrees to a restriction on the exercise, sale, transfer,
assignment, or hypothecation of the Underwriter's Warrant for a period of
twelve (12) months from the effective date of a registration statement
registering the Common Stock issuable upon the exercise of the
Underwriter's Warrant.
2.3 REGISTERED HOLDER. Each holder agrees that until such time as
any transfer pursuant to Subsection 2.1 is recorded on the books of the
Company, the Company may treat the registered holder of this Underwriter's
Warrant as the absolute owner; provided that nothing herein affects any
requirement that the transfer of any Share of Common Stock or Stock
Purchase Warrant issued or issuable upon the exercise hereof be subject to
securities law compliance.
2.3 FORM OF NEW UNDERWRITER'S WARRANT. All new forms of
Underwriter's Warrant issued in connection with transfers of this
Underwriter's Warrant shall bear the same date as this Underwriter's
Warrant and shall be substantially identical in form and provision to this
Underwriter's Warrant except for the number of Shares and Stock Purchase
Warrants purchasable thereunder.
3. FRACTIONAL SHARES OR FRACTIONAL STOCK PURCHASE WARRANTS.
Notwithstanding that the number of Shares or Stock Purchase Warrants
purchasable upon the exercise of this Underwriter's Warrant may have been
adjusted pursuant to the terms hereof, the Company shall nonetheless not be
required to issue fractions of Shares or fractions of Stock Purchase
Warrants upon the exercise of this Underwriter's Warrant or to distribute
certificates that evidence fractional Shares or fractional Stock Purchase
Warrants nor shall the Company be required to make any cash payments in
lieu thereof upon exercise of this Underwriter's Warrant. Holder hereby
waives any right to receive fractional Shares or fractional Stock Purchase
Warrants.
4. ANTI-DILUTION PROVISIONS.
4.1 STOCK SPLITS AND COMBINATIONS. If the Company shall at any time
subdivide or combine its outstanding Shares of Common Stock, this
Underwriter's Warrant shall, after that subdivision or combination,
evidence the right to purchase the number of Shares of Common Stock and
Stock Purchase Warrants that would have been issuable as a result of that
change with respect to the Shares of Common Stock and Stock Purchase
Warrants that were purchasable under this Underwriter's Warrant immediately
before that subdivision or combination. If the Company shall at any time
subdivide the outstanding shares of Common Stock, the Stock Purchase Price
and Warrant Purchase Price then in effect immediately before that
subdivision shall be proportionately decreased, and, if the Company shall
at any time combine the outstanding shares of Common Stock, the Stock
Purchase Price and Warrant Purchase Price then in effect immediately before
that combination shall be proportionately increased. Any adjustment under
this Section shall become effective at the close of business on the date
the subdivision or combination becomes effective.
4.2 RECLASSIFICATION, EXCHANGE, AND SUBSTITUTION. If the Common
Stock issuable upon exercise of this Underwriter's Warrant 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 above), the
holder of this Underwriter's Warrant shall, on its exercise, be entitled to
purchase for the same aggregate consideration, in lieu of the Common Stock
and Stock Purchase Warrants that the holder would have become entitled to
purchase but for such change, a number of shares of such other class or
classes of stock equivalent to the number of shares of Common Stock and
Stock Purchase Warrants that would have been subject to purchase by the
holder on exercise of this Underwriter's Warrant immediately before that
change.
4.3 REORGANIZATIONS, MERGERS, CONSOLIDATIONS, OR SALE OF ASSETS. If
at any time there shall be a capital reorganization of the Company's Common
Stock (other than a subdivision, stock split, combination,
reclassification, exchange, or substitution of shares provided for
elsewhere above) or merger or consolidation of the Company with or into
another corporation, or the sale of substantially all of the Company's
properties and assets as, or substantially as, an entirety to any other
person, then, as a part of such reorganization, merger, consolidation, or
sale, lawful provision shall be made so that the holder of this
Underwriter's Warrant shall thereafter be entitled to receive upon exercise
of this Underwriter's Warrant, during the period specified in this
Underwriter's Warrant and upon payment of the Stock Purchase Price and
Warrant Purchase Price then in effect, the number of shares of Common Stock
and Stock Purchase Warrants or other securities or property of the Company,
or of the successor corporation resulting from such merger or
consolidation, to which a holder of the Common Stock deliverable upon
exercise of this Underwriter's Warrant would have been entitled in such
capital reorganization, merger, consolidation, or sale if this
Underwriter's Warrant had been exercised immediately before that capital
reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment (as determined in good faith by the Company's Board
of Directors) shall be made in the application of the provisions of this
Underwriter's Warrant with respect to the rights and interests of the
holder of this Underwriter's Warrant after the reorganization, merger,
consolidation, or sale to the end that the provisions of this Underwriter's
Warrant (including adjustment of the Stock Purchase Price and Warrant
Purchase Price then in effect and number of Shares purchasable upon
exercise of this Underwriter's Warrant) shall be applicable after that
event, as near as reasonably may be, in relation to any Shares or Stock
Purchase Warrants or other property deliverable after that event upon
exercise of this Underwriter's Warrant. The Company shall, within thirty
(30) days after making such adjustment, give written notice (by first class
mail, postage prepaid) to the registered holder of this Underwriter's
Warrant at the address of that holder shown on the Company's books. That
notice shall set forth, in reasonable detail, the event requiring the
adjustment and the method by which the adjustment was calculated and
specify the Stock Purchase Price and Warrant Purchase Price then in effect
after the adjustment and the increased or decreased number of Shares and
Stock Purchase Warrants purchasable upon exercise of this Underwriter's
Warrant. When appropriate, that notice may be given in advance and include
as part of the notice required under other provisions of this Underwriter's
Warrant.
4.4 COMMON STOCK DIVIDENDS; DISTRIBUTIONS. In the event the Company
should at any time prior to the expiration of this Underwriter's Warrant
fix a record date for the determination of the holders of Common Stock
entitled to receive a dividend or other distribution (excluding a cash
dividend or distribution) payable in additional shares of Common Stock or
other securities or rights convertible into or entitling the holder thereof
to receive, directly or indirectly, additional shares of Common Stock
(hereinafter referred to as the "Common Stock Equivalents") without payment
of any consideration by such holder for the additional shares of Common
Stock or Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then, as of
such record date (or the date of such distribution, split, or subdivision
if no record date is fixed), the Stock Purchase Price shall be
appropriately decreased and the number of shares of Common Stock issuable
upon exercise of the Underwriter's Warrant shall be appropriately increased
in proportion to such increase of outstanding shares.
4.5 ADJUSTMENTS OF OTHER DISTRIBUTIONS. In the event the Company
shall declare a distribution payable in securities of other persons,
evidences of indebtedness issued by the Company or other persons, assets
(excluding cash dividends), or options or rights not referred to in
Subsection 4.4, then, in each such case for the purpose of this Subsection
4.5, upon exercise of this Underwriter's Warrant, the holder hereof shall
be entitled to a proportionate share of any such distribution as though
such holder was the holder of the number of Shares of Common Stock of the
Company into which this Underwriter's Warrant may be exercised as of the
record date fixed for the determination of the holders of Common Stock of
the Company entitled to receive such distribution.
4.6 CERTIFICATE AS TO ADJUSTMENTS. In the case of each adjustment or
readjustment of the Stock Purchase Price pursuant to this Section 4, the
Company will promptly compute such adjustment or readjustment in accordance
with the terms hereof and cause a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment
or readjustment is based, to be delivered to the holder of this
Underwriter's Warrant. The Company will, upon the written request at any
time of the holder of this Underwriter's Warrant, furnish or cause to be
furnished to such holder a certificate setting forth:
(a) Such adjustments and readjustments;
(b) The Stock Purchase Price and Warrant Purchase Price at the
time in effect; and
(c) The number of Shares of Common Stock and Stock Purchase
Warrants issuable upon exercise of the Underwriter's Warrant
and the amount, if any, of other property at the time
receivable upon the exercise of the Underwriter's Warrant.
4.7 RESERVATION OF STOCK ISSUABLE UPON EXERCISE. The Company 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 exercise of
this Underwriter's Warrant such number of its shares of Common Stock as
shall from time to time be sufficient to effect the exercise of this
Underwriter's Warrant and the underlying Stock Purchase Warrants, and if at
any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the exercise of this Underwriter's Warrant and
Stock Purchase Warrants, in addition to such other remedies as shall be
available to the holder of this Underwriter's Warrant, the Company will use
its best efforts to 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
purposes.
5. RIGHTS PRIOR TO EXERCISE OF UNDERWRITER'S WARRANT.
This Underwriter's Warrant does not entitle the holder to any of the
rights of a stockholder of the Company, including, without limitation, the
right to receive dividends or other distributions, to exercise any
preemptive rights, to vote, or to consent or to receive notice as a
stockholder of the Company. If, however, at any time prior to the
expiration of this Underwriter's Warrant and prior to its exercise, any of
the following events shall occur:
(a) the Company shall declare any dividend payable in any
securities upon its shares of Common Stock or make any distribution
(other than a regular cash dividend) to the holders of its shares of
Common Stock; or
(b) the Company shall offer to the holders of its shares of
Common Stock any additional shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock or any
right to subscribe for or purchase any thereof; or
(c) a dissolution, liquidation, or winding up of the Company
(other than in connection with a consolidation, merger, sale,
transfer, or lease of all or substantially all of its property,
assets, and business as an entirety) shall be proposed and action by
the Company with respect thereto has been approved by the Company's
Board of Directors,
then in any one or more of said events the Company shall give notice in
writing of such event to the holder at his last address as it shall appear
on the Company's records at least twenty (20) days prior to the date fixed
as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividends, distribution,
or subscription rights, or for the determination of stockholders entitled
to vote on such proposed dissolution, liquidation, or winding up. Such
notice shall specify such record date or the date of closing the transfer
books, as the case may be. Failure to publish, mail, or receive such
notice or any defect therein or in the publication or mailing thereof shall
not affect the validity of any action taken in connection with such
dividend, distribution, or subscription rights, or such proposed
dissolution, liquidation, or winding up. Each person in whose name any
certificate for shares of Common Stock is to be issued shall for all
purposes be deemed to have become the holder of record of such shares on
the date on which this instrument was surrendered and payment of the Stock
Purchase Price was made, irrespective of the date of delivery of such stock
certificate, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are closed, such person
shall be deemed to have become the holder of such shares of Common Stock at
the close of business on the next succeeding date on which the stock
transfer books are open.
6. NO RIGHT TO REDEEM WARRANTS.
The Company shall not have the right to redeem the Underwriter's
Warrant or underlying Stock Purchase Warrants at any time during the
Exercise Period.
7. RESTRICTED SECURITIES.
In order to enable the Company to comply with the Securities Act and
applicable state laws, the Company may require the holder as a condition of
the transfer or exercise of this Underwriter's Warrant to give written
assurances satisfactory to the Company that the Underwriter's Warrant is
being acquired, or in the case of an exercise hereof, that the Shares and
Stock Purchase Warrants subject to this Underwriter's Warrant are being
acquired, for its own account, for investment only, with no view to the
distribution of the same, and that any disposition of all or any portion of
this Underwriter's Warrant or the Shares or Stock Purchase Warrants
issuable upon the due exercise of this Underwriter's Warrant shall not be
made, unless and until:
(a) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration
statement; or
(b)(i) The holder has notified the Company of the proposed
disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed
disposition, and (ii) the holder has furnished the Company with
an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such
securities under the Securities Act and applicable state law.
The holder acknowledges that this Underwriter's Warrant is, and each
of the shares of Common Stock and Stock Purchase Warrants issuable upon the
due exercise hereof will be, restricted securities, that it understands the
provisions of Rule 144 of the Securities and Exchange Commission, and that
the certificate or certificates evidencing such shares of Common Stock and
Stock Purchase Warrants will bear a legend substantially similar to the
following:
"The Shares (or Stock Purchase Warrants) represented by this
certificate have not been registered under the Securities Act of
1933, as amended, or under the securities laws of any state.
They may not be sold, transferred, or otherwise disposed of in
the absence of an effective registration statement covering these
securities under the said Act or laws, or an opinion of counsel
satisfactory to the Company and its counsel that registration is
not required thereunder."
8. SUCCESSORS AND ASSIGNS.
The terms and provisions of this Underwriter's Warrant shall inure to
the benefit of, and be binding upon, the Company and the holder thereof and
their respective successors and permitted assigns.
9. LOSS OR MUTILATION.
Upon receipt by the Company of satisfactory evidence of the ownership
of and the loss, theft, destruction, or mutilation of any Underwriter's
Warrant, and (i) in the case of loss, theft, or destruction, upon receipt
by the Company of indemnity satisfactory to it, or (ii) in the case of
mutilation, upon receipt of such Underwriter's Warrant and upon surrender
and cancellation of such Underwriter's Warrant, the Company shall execute
and deliver in lieu thereof a new Underwriter's Warrant representing the
right to purchase an equal number of shares of Common Stock.
10. NOTICES.
All notices, requests, demands, and other communications under this
Underwriter's Warrant shall be in writing and shall be deemed to have been
duly given on the date of service if served personally on the party to whom
notice is to be given, or on the date of mailing if mailed to the party to
whom notice is to be given, by first class mail, registered or certified,
postage prepaid, and properly addressed as follows: if to the holder, at
his address as shown in the Company records; and if to the Company, at its
principal office. Any party may change its address for purposes of this
Section by giving the other party written notice of the new address in the
manner set forth above.
11. GOVERNING LAW.
This Underwriter's Warrant and any dispute, disagreement, or issue of
construction or interpretation arising hereunder whether relating to its
execution, its validity, the obligations provided herein, or performance,
shall be governed or interpreted according to the internal laws of the
State of California without regard to conflicts of law.
DATED: November __, 1996.
DIGITAL POWER CORPORATION
__________________________________________
Robert O. Smith, President
<PAGE>
SUBSCRIPTION
Mr. Philip G. Swany
Corporate Secretary
DIGITAL POWER CORPORATION
41920 Christy Street
Fremont, California 94538
Dear Mr. Swany:
WERBEL-ROTH SECURITIES, INC., for itself or for the benefit of one or more
of its officers, directors, shareholders, employees, or other related
persons, hereby elects to purchase, pursuant to the provisions of the
foregoing Underwriter's Warrant held by the undersigned,
___________________________ (_______) shares of the Common Stock of Digital
Power Corporation ("Digital") and ______________________________ (________)
Stock Purchase Warrants.
Payment of the total Stock Purchase Price and Warrant Purchase Price
required under such Underwriter's Warrant accompanies this Subscription.
DATED: _____________________, 1996.
By:_____________________________________
Its:____________________________________
WERBEL-ROTH SECURITIES, INC.
150 East Palmetto Park Road
Suite 380
Boca Raton, FL 33432
<PAGE>
TRANSFER OF UNDERWRITER'S WARRANT
Mr. Philip G. Swany
Corporate Secretary
DIGITAL POWER CORPORATION
41920 Christy Street
Fremont, California 94538
Dear Mr. Swany:
For value received, WERBEL-ROTH SECURITIES, INC. (or one of its
officers, directors, shareholders, employees, or related persons, as
applicable), hereby assigns this Underwriter's Warrant to
_______________________________________, whose address is
___________________________________________________________________________.
DATED: _____________________, 1996.
By:_____________________________________
Its:___________________________________
WERBEL-ROTH SECURITIES, INC.
150 East Palmetto Park Road
Suite 380
Boca Raton, FL 33432
<PAGE>
EXHIBIT "A"
DIGITAL POWER CORPORATION
(A CALIFORNIA CORPORATION)
____________________________________________
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
____________________________________
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON ITS
EXERCISE HAVE BEEN REGISTERED UNDER EITHER THE
SECURITIES ACT OF 1933 AS AMENDED (THE "SECURITIES
ACT") OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT
BE SOLD, OFFERED FOR SALE, TRANSFERRED, ASSIGNED,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT WITH RESPECT TO THE SECURITIES
UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THIS CERTIFIES THAT, for value received, WERBEL-ROTH SECURITIES, INC.
or its registered assigns (the "Underwriter"), is entitled to purchase at
any time or from time to time during the Exercise Period (as defined in
Subsection 1.2 below): (i) up to a maximum of Fifty Thousand (50,000)
shares of fully paid and non-assessable common stock of DIGITAL POWER
CORPORATION, a California corporation (the "Company"), no par value (the
"Shares" and/or the "Common Stock, as applicable). The Shares shall be
purchased at the per Share purchase price set forth in Subsection 1.1
below, subject to the further provisions of this Warrant and that certain
"Underwriter's Warrant To Purchase Shares Of Common Stock And Common Stock
Purchase Warrants" to which this form of Warrant is an Exhibit. The term
"Warrant" as used herein shall mean this Warrant instrument and the rights
granted hereunder.
1. EXERCISE OF WARRANT.
The terms and conditions under which this Warrant may be exercised and
the Common Stock subject hereto may be purchased are as follows:
1.1 SHARE PURCHASE PRICE. The Share purchase price shall be equal to
120% of the per Share public offering price of the Common Stock offered for
sale by the Company in or around November 1996, subject to adjustment as
provided in Section 4, below, and this Section 1 (the "Purchase Price").
1.2 METHOD OF EXERCISE. The holder of this Warrant, on or after the
date hereof shown at the end of this instrument (the "Effective Date") and
from time to time until four (4) years from the Effective Date (the
"Exercise Period"), may exercise in whole or in part the purchase rights
evidenced by this Warrant, provided that the holder exercises the purchase
rights evidenced by this Warrant with respect to at least One Thousand
(1,000) Shares of Common Stock, unless the remaining balance of such Shares
is less than One Thousand (1,000). Such exercise shall be effected by:
(a) the surrender of the Warrant, together with a duly executed
copy of the form of Subscription attached hereto, to the Secretary of
the Company at its principal offices;
(b) the payment to the Company in U.S. funds, by certified check
or bank draft payable to its order, of an amount equal to the
aggregate Purchase Price for the number of Shares for which the
purchase rights hereunder are being exercised; and
(c) the delivery to the Company, if necessary, to assure
compliance with federal and state securities laws, of an instrument
executed by the holder certifying that the Shares are being acquired
for the sole account of the holder and not with a view to any resale
or distribution prior to the filing of a registration statement.
1.3 SATISFACTION WITH REQUIREMENTS OF SECURITIES ACT OF 1933.
Notwithstanding the provisions of Subsection 1.2(c) and Section 7, each and
every exercise of this Warrant is contingent upon the Company's
satisfaction that the issuance of Common Stock upon the exercise is exempt
from the requirements of the Securities Act and all applicable state
securities laws at the relevant time(s). The holder of this Warrant agrees
to execute any and all documents deemed necessary by the Company to effect
the exercise of this Warrant.
1.4 ISSUANCE OF SHARES AND NEW WARRANT. In the event the purchase
rights evidenced by this Warrant are exercised in whole or in part, one or
more certificates for the purchased Shares shall be issued as soon as
practicable thereafter to the person exercising such rights. Such holder
shall also be issued at such time a new Warrant representing the number of
Shares for which the purchase rights under this Warrant remain unexercised
and continuing in force and effect.
2. TRANSFERS.
2.1 TRANSFERS. Subject to Section 7 hereof, this Warrant and all
rights hereunder are transferable in whole or in part by the holder with
the same effect as with a negotiable instrument. To transfer rights, the
transfer form below must be completed. The transfer shall be recorded on
the books of the Company upon the surrender of this Warrant, properly
endorsed, to the Secretary of the Company at its principal offices and the
payment to the Company of all transfer taxes and other governmental charges
imposed on such transfer. In the event of a partial transfer, the Company
shall issue to the several holders one or more appropriate new forms of
Warrant.
2.2 REGISTERED HOLDER. Each holder agrees that until such time as
any transfer pursuant to Subsection 2.1 is recorded on the books of the
Company, the Company may treat the registered holder of this Warrant as the
absolute owner; provided that nothing herein affects any requirement that
the transfer of any Share of Common Stock issued or issuable upon the
exercise hereof be subject to securities law compliance.
2.3 FORM OF NEW WARRANT. All new forms of Warrant issued in
connection with transfers of this Warrant shall bear the same date as this
Warrant and shall be substantially identical in form and provision to this
Warrant except for the number of Shares and Warrants purchasable
thereunder.
3. FRACTIONAL SHARES.
Notwithstanding that the number of Shares purchasable upon the
exercise of this Warrant may have been adjusted pursuant to the terms
hereof, the Company shall nonetheless not be required to issue fractions of
Shares upon the exercise of this Warrant or to distribute certificates that
evidence fractional Shares nor shall the Company be required to make any
cash payments in lieu thereof upon exercise of this Warrant. Holder hereby
waives any right to receive fractional Shares.
4. ANTI-DILUTION PROVISIONS.
4.1 STOCK SPLITS AND COMBINATIONS. If the Company shall at any time
subdivide or combine its outstanding Shares of Common Stock, this Warrant
shall, after that subdivision or combination, evidence the right to
purchase the number of Shares of Common Stock that would have been issuable
as a result of that change with respect to the Shares of Common Stock that
were purchasable under this Warrant immediately before that subdivision or
combination. If the Company shall at any time subdivide the outstanding
shares of Common Stock, the Purchase Price then in effect immediately
before that subdivision shall be proportionately decreased, and, if the
Company shall at any time combine the outstanding shares of Common Stock,
the Purchase Price then in effect immediately before that combination shall
be proportionately increased. Any adjustment under this Section shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
4.2 RECLASSIFICATION, EXCHANGE, AND SUBSTITUTION. If the Common
Stock issuable upon exercise of this Warrant 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 above), the holder
of this Warrant shall, on its exercise, be entitled to purchase for the
same aggregate consideration, in lieu of the Common Stock that the holder
would have become entitled to purchase but for such change, 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 purchase by the
holder on exercise of this Warrant immediately before that change.
4.3 REORGANIZATIONS, MERGERS, CONSOLIDATIONS, OR SALE OF ASSETS. If
at any time there shall be a capital reorganization of the Company's Common
Stock (other than a subdivision, stock split, combination,
reclassification, exchange, or substitution of shares provided for
elsewhere above) or merger or consolidation of the Company with or into
another corporation, or the sale of the Company's properties and assets as,
or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, or sale, lawful provision shall
be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified in this
Warrant and upon payment of the Purchase Price then in effect, the number
of shares of Common Stock or other securities or property of the Company,
or of the successor corporation resulting from such merger or
consolidation, to which a holder of the Common Stock deliverable upon
exercise of this Warrant would have been entitled in such capital
reorganization, merger, consolidation, or sale if this Warrant had been
exercised immediately before that capital reorganization, merger,
consolidation, or sale. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made
in the application of the provisions of this Warrant with respect to the
rights and interests of the holder of this Warrant after the
reorganization, merger, consolidation, or sale to the end that the
provisions of this Warrant (including adjustment of the Purchase Price then
in effect and number of Shares purchasable upon exercise of this Warrant)
shall be applicable after that event, as near as reasonably may be, in
relation to any Shares or other property deliverable after that event upon
exercise of this Warrant. The Company shall, within thirty (30) days after
making such adjustment, give written notice (by first class mail, postage
prepaid) to the registered holder of this Warrant at the address of that
holder shown on the Company's books. That notice shall set forth, in
reasonable detail, the event requiring the adjustment and the method by
which the adjustment was calculated and specify the Purchase Price then in
effect after the adjustment and the increased or decreased number of Shares
purchasable upon exercise of this Warrant. When appropriate, that notice
may be given in advance and include as part of the notice required under
other provisions of this Warrant.
4.4 COMMON STOCK DIVIDENDS; DISTRIBUTIONS. In the event the Company
should at any time prior to the expiration of this Warrant fix a record
date for the determination of the holders of Common Stock entitled to
receive a dividend or other distribution (excluding a cash dividend or
distribution) payable in additional shares of Common Stock or other
securities or rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock
(hereinafter referred to as the "Common Stock Equivalents") without payment
of any consideration by such holder for the additional shares of Common
Stock or Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then, as of
such record date (or the date of such distribution, split, or subdivision
if no record date is fixed), the Purchase Price shall be appropriately
decreased and the number of shares of Common Stock issuable upon exercise
of the Warrant shall be appropriately increased in proportion to such
increase of outstanding shares.
4.5 ADJUSTMENTS OF OTHER DISTRIBUTIONS. In the event the Company
shall declare a distribution payable in securities of other persons,
evidences of indebtedness issued by the Company or other persons, assets
(excluding cash dividends), or options or rights not referred to in
Subsection 4.4, then, in each such case for the purpose of this Subsection
4.5, upon exercise of this Warrant, the holder hereof shall be entitled to
a proportionate share of any such distribution as though such holder was
the holder of the number of Shares of Common Stock of the Company into
which this Warrant may be exercised as of the record date fixed for the
determination of the holders of Common Stock of the Company entitled to
receive such distribution.
4.6 CERTIFICATE AS TO ADJUSTMENTS. In the case of each adjustment or
readjustment of the Stock Purchase Price pursuant to this Section 4, the
Company will promptly compute such adjustment or readjustment in accordance
with the terms hereof and cause a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment
or readjustment is based, to be delivered to the holder of this Warrant.
The Company will, upon the written request at any time of the holder of
this Warrant, furnish or cause to be furnished to such holder a certificate
setting forth:
(a) Such adjustments and readjustments;
(b) The Purchase Price at the time in effect; and
(c) The number of Shares of Common Stock issuable upon exercise
of the Warrant and the amount, if any, of other property at
the time receivable upon the exercise of the Warrant.
4.7 RESERVATION OF STOCK ISSUABLE UPON EXERCISE. The Company 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 exercise of
this Warrant such number of its shares of Common Stock as shall from time
to time be sufficient to effect the exercise of this Warrant, and if at any
time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the exercise of this Warrant, in addition to such
other remedies as shall be available to the holder of this Warrant, the
Company will use its best efforts to 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 purposes.
5. RIGHTS PRIOR TO EXERCISE OF WARRANT.
This Warrant does not entitle the holder to any of the rights of a
stockholder of the Company, including, without limitation, the right to
receive dividends or other distributions, to exercise any preemptive
rights, to vote, or to consent or to receive notice as a stockholder of the
Company. If, however, at any time prior to the expiration of this Warrant
and prior to its exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any
securities upon its shares of Common Stock or make any distribution
(other than a regular cash dividend) to the holders of its shares of
Common Stock; or
(b) the Company shall offer to the holders of its shares of
Common Stock any additional shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock or any
right to subscribe for or purchase any thereof; or
(c) a dissolution, liquidation, or winding up of the Company
(other than in connection with a consolidation, merger, sale,
transfer, or lease of all or substantially all of its property,
assets, and business as an entirety) shall be proposed and action by
the Company with respect thereto has been approved by the Company's
Board of Directors,
then in any one or more of said events the Company shall give notice in
writing of such event to the holder at his last address as it shall appear
on the Company's records at least twenty (20) days prior to the date fixed
as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividends, distribution,
or subscription rights, or for the determination of stockholders entitled
to vote on such proposed dissolution, liquidation, or winding up. Such
notice shall specify such record date or the date of closing the transfer
books, as the case may be. Failure to publish, mail, or receive such
notice or any defect therein or in the publication or mailing thereof shall
not affect the validity of any action taken in connection with such
dividend, distribution, or subscription rights, or such proposed
dissolution, liquidation, or winding up. Each person in whose name any
certificate for Shares of Common Stock is to be issued shall for all
purposes be deemed to have become the holder of record of such shares on
the date on which this instrument was surrendered and payment of the
Purchase Price was made, irrespective of the date of delivery of such stock
certificate, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are closed, such person
shall be deemed to have become the holder of such shares of Common Stock at
the close of business on the next succeeding date on which the stock
transfer books are open.
6. COMPANY'S RIGHT TO REDEEM WARRANTS.
The Company shall not have the right to redeem the Warrant at any time
during the Exercise Period.
7. RESTRICTED SECURITIES.
In order to enable the Company to comply with the Securities Act and
applicable state laws, the Company may require the holder as a condition of
the transfer or exercise of this Warrant to give written assurances
satisfactory to the Company that the Warrant is being acquired, or in the
case of an exercise hereof, that the Shares subject to this Warrant are
being acquired, for its own account, for investment only, with no view to
the distribution of the same, and that any disposition of all or any
portion of this Warrant or the Shares issuable upon the due exercise of
this Warrant shall not be made, unless and until:
(a) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration
statement; or
(b) (i) The holder has notified the Company of the proposed
disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed
disposition, and (ii) the holder has furnished the Company with
an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such
securities under the Securities Act and applicable state law.
The holder acknowledges that this Warrant is, and each of the Shares
of Common Stock issuable upon the due exercise hereof will be, restricted
securities, that it understands the provisions of Rule 144 of the
Securities and Exchange Commission, and that the certificate or
certificates evidencing such shares of Common Stock will bear a legend
substantially similar to the following:
"The Shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
the securities laws of any state. They may not be sold,
transferred, or otherwise disposed of in the absence of an
effective registration statement covering these securities under
the said Act or laws, or an opinion of counsel satisfactory to
the Company and its counsel that registration is not required
thereunder."
8. SUCCESSORS AND ASSIGNS.
The terms and provisions of this Warrant shall inure to the benefit
of, and be binding upon, the Company and the holder hereof and their
respective successors and permitted assigns.
9. LOSS OR MUTILATION.
Upon receipt by the Company of satisfactory evidence of the ownership
of and the loss, theft, destruction, or mutilation of any Warrant, and (i)
in the case of loss, theft, or destruction, upon receipt by the Company of
indemnity satisfactory to it, or (ii) in the case of mutilation, upon
receipt of such Warrant and upon surrender and cancellation of such
Warrant, the Company shall execute and deliver in lieu thereof a new
Warrant representing the right to purchase an equal number of shares of
Common Stock.
10. NOTICES.
All notices, requests, demands, and other communications under this
Warrant shall be in writing and shall be deemed to have been duly given on
the date of service if served personally on the party to whom notice is to
be given, or on the date of mailing if mailed to the party to whom notice
is to be given, by first class mail, registered or certified, postage
prepaid, and properly addressed as follows: if to the holder, at his
address as shown in the Company records; and if to the Company, at its
principal office. Any party may change its address for purposes of this
Section by giving the other party written notice of the new address in the
manner set forth above.
11. GOVERNING LAW.
This Warrant and any dispute, disagreement, or issue of construction
or interpretation arising hereunder whether relating to its execution, its
validity, the obligations provided herein, or performance, shall be
governed or interpreted according to the internal laws of the State of
California without regard to conflicts of law.
12. CONSTRUCTION.
This Warrant shall be governed and construed in accordance with the
terms and conditions of that certain "Underwriter's Warrant To Purchase
Shares Of Common Stock And Common Stock Purchase Warrants" (the
"Underwriter's Warrant"), of which instrument this Warrant is an integral
part. In the event of a conflict between the terms of this Warrant and the
terms of the Underwriter's Warrant, the terms of the Underwriter's Warrant
shall govern and control.
DATED: November __, 1996.
DIGITAL POWER CORPORATION
__________________________________________
Robert O. Smith, President
<PAGE>
SUBSCRIPTION
Mr. Philip G. Swany
Corporate Secretary
DIGITAL POWER CORPORATION
41920 Christy Street
Fremont, California 94538
Dear Mr. Swany:
WERBEL-ROTH SECURITIES, INC., hereby elects to purchase, pursuant to the
provisions of the foregoing Warrant held by the undersigned,
___________________________ (_______) shares of the Common Stock of Digital
Power Corporation.
Payment of the total Purchase Price required under such Warrant accompanies
this Subscription.
DATED: _____________________, 1996.
By:_____________________________________
Its:____________________________________
WERBEL-ROTH SECURITIES, INC.
150 East Palmetto Park Road
Suite 380
Boca Raton, FL 33432
<PAGE>
TRANSFER OF WARRANT
Mr. Philip G. Swany
Corporate Secretary
DIGITAL POWER CORPORATION
41920 Christy Street
Fremont, California 94538
Dear Mr. Swany:
For value received, WERBEL-ROTH SECURITIES, INC., hereby assigns this
Warrant to _________________________________________________________, whose
address is ________________________________________________________________.
DATED: _____________________, 1996.
By:_____________________________________
Its:___________________________________
WERBEL-ROTH SECURITIES, INC.
150 East Palmetto Park Road
Suite 380
Boca Raton, FL 33432
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,500,000.00 08/12/1996 10/15/1997 1071513796R 50/75 UCC 1071513796R SLS
</TABLE>
References in the table area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: DIGITAL POWER CORPORATION (TIN: LENDER: SAN JOSE NATIONAL BANK
94-1721931) P.O. BOX 1957
41920 CHRISTY STREET ONE NORTH MARKET STREET
FREMONT, CA 94538 SAN JOSE, CA 95113
Principal Amt: $1,500,000.00 Initial Rate: 9.250% Date of Note: 08/12/96
PROMISE TO PAY. DIGITAL POWER CORPORATION ("Borrower") promises to pay to SAN
JOSE NATIONAL BANK ("Lender"), or order, in lawful money of the United States
of America, the principal amount of One Million Five Hundred Thousand & 00/100
Dollars ($1,500,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment of each
advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
one payment of all outstanding principal plus all accrued unpaid interest on
October 15, 1997. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning September 15, 1996, and all subsequent
interest payments are due on the same day of each month after that. Interest
on this Note is computed on a 365/360 simple Interest basis; that is, by
applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender
at Lender's address shown above or at such other place as Lender may designate
in writing. Unless otherwise agreed or required by applicable law, payments
will be applied first to accrued unpaid interest, then to principal, and any
remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prim Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate may or
may not be the lowest rate available from Lender at any given time. Lender
will tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each DAY. The Index
currently is 8.250% per annum. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 1.000 percentage point over
the Index, resulting in an initial rate of 9.250% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even
upon full prepayment of this Note, Borrower understands that Lender is entitled
to a minimum interest charge of $100.00. Other than Borrower's obligation to
pay any minimum interest charge, Borrower may pay without penalty all or a
portion of the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of Borrower's
obligation to continue to make payments of accrued unpaid interest. Rather,
they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $25.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or misleading
in any material respect either now or at the time made or furnished. (d)
Borrower becomes insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any creditor tries to take any of
Borrower's property on or in which Lender has a lien or security interest.
This includes a garnishment of any of Borrower's accounts with Lender. (f) Any
guarantor dies or any of the other events described in this default section
occurs with respect to any guarantor of this Note. (g) A material adverse
change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, if may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be sufficient
to cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay
upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 6.000 percentage points over the Index, and (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any increased
rate). Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees, and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law. This Note has been
delivered to Lender and accepted by Lender in the State of California. If
there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of SANTA CLARA County, the State of California.
Lender and Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Lender or Borrower against the
other. This Note shall be governed by and construed in accordance with the
laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pay sis later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a SECURITY AGREEMENT OF EVEN DATE HEREWITH
AND A UCC FILING DATED April 28, 1994, RECORDED AS INSTRUMENT #94106664 ON MAY
27, 1994, WITH THE SECRETARY OF STATE IN SACRAMENTO.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note, as well as directions for payment from Borrower's accounts,
may be requested orally or in writing by Borrower or by an authorized person.
Lender may, but need not, require that all oral requests be confirmed in
writing. The following party or parties are authorized to request advances
under the line of credit until Lender receives from Borrower at Lender's
address shown above written notice of revocation of their authority: CLAUDE
ADKINS, PRESIDENT; ROBERT SMITH, CEO/SECRETARY; JOSEPHINE JACKEWICZ,
CONTROLLER; and PHILIP G. SWANY. Borrower agrees to be liable for all sums
either: (a) advanced in accordance with the instructions of an authorized
person or (b) credited to any of Borrower's accounts with Lender. The unpaid
principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under
this Note if: (a) Borrower or any guarantor is in default under the terms of
this Note or any agreement that Borrower or any guarantor has with Lender,
including any agreement made in connection with the signing of this Note; (b)
Borrower or any guarantor ceases doing business or is insolvent; (c) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guarantee of this Note or any other loan with Lender; or (d)
Borrower has applied funds provided pursuant to this Note for purposes other
than those authorized by Lender.
LETTER AGREEMENT. THIS NOTE IS SUBJECT TO, AND SHALL BE GOVERNED BY, ALL THE
TERMS AND CONDITIONS OF THE LETTER AGREEMENT DATED AUGUST 9, 1996, BETWEEN THE
BORROWER(S) AND SAN JOSE NATIONAL BANK, WHICH LETTER AGREEMENT IS INCORPORATED
HEREIN BY REFERENCE.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo
enforcing any of its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses this Note, to
the extent allowed by law, waive any applicable statute of limitations,
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
DIGITAL POWER CORPORATION
By: /S/ ROBERT SMITH By: /S/ PHILIP G. SWANY
ROBERT SMITH, CEO/PRESIDENT PHILIP G. SWANY, SECRETARY
DIGITAL POWER CORPORATION
DESIGN ACQUISITION
THIS INITIAL AGREEMENT is made and entered into in San Jose, Santa
Clara County, California, this 10th day of November, 1987, by and between
DIGITAL POWER, INC., (hereinafter referred to as "DIGI-POWER") whose
principal place of business is 686 E. Gish Road, San Jose, California
95112, and Mr. Ki Dong Kang of KDK ELECTRONICS, (hereinafter referred to as
Mr. Kang) whose principal place of business is 15520 Orbit Drive, Saratoga,
California 95070.
For the design rights and transfer of technical know-how, Digital
Power will compensate Ki Dong Kang of KDK Electronics as follows:
1) $10,000 upon signing of an agreement and $10,000 on the 1st of
each of the following nine months.
2) Royalties are as follows:
5% on First $ 20,000,000 sales.
4% on Next $ 25,000,000 sales.
3% on Next $ 33,333,333 sales.
2% on Next $ 50,000,000 sales.
1% on Next $100,000,000 sales.
At this point royalties cease.
3) Stock option:
Option on 135,000 shares of Digital Power Stock at 3.50 per
share. Optionable when the 1st $20,000,000 in sales has been reached.
Digital Power will pay in the $472,500.00 to cover the purchase of
shares for Mr. Kang.
In return for the above compensation Digital Power owns all
rights to the following products developed by Mr. Kang.
See: Appendix "A"
Mr. Kang will give the necessary assistance to get technology and
know-how on these products into Digital Power manufacturing. On an
ongoing basis Digital Power will have access to 20 hours per month of
Mr. Kang's assistance, as long as the Royalty Agreement is in effect.
Digital Power reserves the first right of refusal on any new products
Mr. Kang develops in the future.
Mr. Kang promises not to sell or divulge to any other company any
of the technology purchased by Digital Power. Digital Power will
compensate Mr. Kang on any new projects which require Mr. Kang's
assistance. The compensation will be determined on a job by job basis
mutually agreed upon by both parties.
APPENDIX "A"
Products:
STANDARD PACKAGE (L or U Bracket)
1. 80-1OOW Family AC-DC 1.5 inch high 4 output
2. 150-200W Family AC-DC 1.5 inch high 4 output
3. 80-1OOW Family DC-DC 1.5 inch high
A. 12V input 4 outputs
B. 24V input 4 outputs
C. 48V input 4 outputs
4. 150-200W Family DC-DC 1.5 inch high
A. 12V input 4 outputs
B. 24V input 4 outputs
C. 48V input 4 outputs
5. Up to 500W Family-Natural progression
SLIM LINE
1. lOOW 4 output 0.8 inch high AC-DC
2. lOOW 4 output 0.8 inch high 12V input DC-DC Converter
3. 100W 4 output 0.8 inch high 24V input DC-DC Converter
SPECIAL
1) AC input module integrated P.S.
lOOW
2) 200W
/S/ KI DONG KANG
__________________________
/S/ CLAUDE ADKINS
__________________________
<PAGE>
SUPPLEMENTARY AGREEMENT
This is to clarify and supplement our agreement entered on November
10, 1987.
KDK Electronics Inc. has no obligation to Digital Power
Corp. for the two products group listed below.
1) New products developed after the agreement date,
November 10, 1987.
2) Products already developed by KDK but not implemented
to production line of Digital Power Corporation as of May 23,
1988.
May 23,1988 /S/ KI DONG KANG
__________________________
May 23,1988 /S/ CLAUDE ADKINS
__________________________
<PAGE>
AGREEMENT
1. 5% royalty on net sales of KD100, KD150 and KD200 power supplies
and any derivatives employing this base design.
2. 100,000 shares stock option when net sales of Item #1 reach
$20,000,000 (subject to terms and conditions of original agreement).
3. All past and future royalty payments paid out at 4% of total DPC
net sales on a monthly basis (3% for the first 12 payments), the first
payment due upon signing a new agreement.
4. This agreement applies only to designs incorporated by DPC as of
June 22, 1990. It is our understanding that KDK has in development various
features, enhancements or other products, the purchase of which would be
the subject of a new agreement.
5. KDK agrees not to sell or license these products to a competing
power supply manufacturer. However, KDK is free to manufacture these
products for sale to end customers, or to license the manufacture of these
products to an end customer who would employ them, not for resale, but as a
part of their product. If DPC does not achieve $3.5 million in net sales
from July, 1990 through June, 1991, then KDK is free to sell or license
these products to a competing power supply company.
6. DPC is developing new designs and KDK would inspect these designs
prior to this agreement to assure that they are not KDK designs.
7. There will be a 1% per month penalty charge on any payments
delayed over 10 days, plus an additional 1% per month interest charge for
balances owing beyond 30 days.
8. DPC will provide two monthly reports to KDK as follows:
NEW ORDERS SHIPMENTS
KDK Designs $ KDK Designs $
Old DPC Designs $ Old DPC Designs $
New DPC Designs $ New DPC Designs $
9. If Digital Power Corporation is sold or merged, by the time of
such events, unpaid royalty is due and prorated stock option may be
exercised based on total accrued royalty.
10. Mutually dismiss all litigations.
Date 6/29/90 /S/ KI DONG KANG KDK ELECTRONICS, INC.
Ki Dong Kang, President
Date 6/29/90 /S/ ROBERT O. SMITH DIGITAL POWER CORPORATION
Robert O. Smith, CEO
[FORTRON/SOURCE LETTERHEAD]
MANUFACTURING/RESALE AGREEMENT
Between: Digital Power Corp. And Fortron/Source Corp.
PURPOSE:
Fortron/Source and Digital Power wish to capitalize on each other's
strengths, which are respectively, high volume, cost-effective
manufacturing, and development/marketing of new, innovative products.
Accordingly, Fortron/Source agrees not to sell any Digital Power designs
(or modifications of the base design) to any entity other than Digital
Power, unless specifically agreed to, in advance, in writing.
INITIAL AGREEMENT:
Fortron/Source agrees (upon receipt of firm PO from Digital) to build a
test run of 1000 units of a particular model to be determined by Digital
Power, but in all likelihood, a US50-341. These units will be stocked
locally and exclusively for Digital Power, and delivered, as required at a
cost of $22.00 (or less if similar power supply), FOB Fremont, California.
Digital Power agrees to take delivery over a maximum of one year. from the
date originally received at Fortron/Source's Fremont facility. Based upon
the cost analysis provided by this initial test run, Fortron/Source will
then provide Digital Power with a firm quote for volume production.
Digital Power agrees to allow Fortron/Source to manufacture and sell the
model US155-201 (as F/S # SU150D23) to Standard MicroSystems, located in
N.Y. with Engineering in Mass. The cost for the first 250 kits on this
product, if purchased through Digital Power, will be $35.00. Also, the
Magnetic set will be available for $5.00 each. Any other kits purchased
through Digital Power will be available at $38.00 up to a maximum of 1000
pieces. Digital Power agrees to maintain current safety agency
requirements and multiple list Fortron/Source on the model. All agency
listing cost for this will be paid by Fortron/Source. Digital Power agrees
to ~protect~ Fortron/Source at this account for the duration of this
agreement by : not quoting on this model at SMC and not allowing another
Private label company to quote.
DESIGN OWNERSHIP:
This agreement does not constitute a transfer of ownership of the power
supply designs or their derivatives or yet to be developed products. As
such, Digital Power is authorizing only an alternate or secondary
manufacturing location with respect to the appropriate safety agency
certifications. Fortron/Source is not authorized to seek their own safety
agency certifications on these designs.
<PAGE>
[FORTRON/SOURCE LETTERHEAD]
Digital agrees to provide all BOM's (with individual component prices),
AVL's, artwork, test procedure or any such documentation necessary to
manufacture the product. Fortron/Source understands that this information
is proprietary and will abide by the Nondisclosure Agreement previously
signed.
NON-COMPETITIVE STRUCTURE:
Fortron agrees not to pursue any account with a Digital Power product
without written authorization, in advance, to do so. If given,
Fortron/Source will provide: Digital Power model number, price and volume
quoted and the customer name and address.
Fortron agrees to an inspection of its China facility by a Digital Power
representative when requested. Should any documents be needed to assure
shipments or agency compliance, they will be provided then.
COMMISSIONS AND ROYALTIES:
Each party will be responsible for paying their own sales representatives,
unless otherwise agreed upon.
Fortron/Source agrees to pay Digital Power $13.80 per US155-201 sold to
Standard MicroSystems. Once a cost analysis can be provide showing a
reduction in raw material cost (presently $35ea.), Fortron agrees to split
this difference with Digital Power. This difference is figured from $35 to
actual finished goods cost. Royalties will accrue and be due immediately
upon payment from third party customers.
TERMINATION:
Either party may terminate this agreement at will, effective any time, with
or without cause by written notice given to the other party not less than
one hundred and twenty (120) days prior to the effect of such notice. At
that time, each party agrees to release any and all proprietary documents.
Also, each party agrees to allow the other to minimize losses due to excess
inventory.
<PAGE>
[FORTRON/SOURCE LETTERHEAD]
SUMMARY:
This agreement is intended to be a start for future projects between
Fortron/Source and Digital Power. Digital Power desires to cost reduce
products, which Fortron/Source can provide. While Digital Power can
provide Fortron/Source with an expanded product line. Any future products
or agreements must be done in writing. May both parties enjoy mutual
profit and benefit with this partnership.
X /S/ JACKSON WONG X /S/
PRESIDENT CEO
Date 10/7/94 Date 10/11/94
For: Fortron/Source Corp. For: Digital Power Corp.
2925 Bayview Dr. 41920 Christy St.
Fremont, CA 94538 Fremont, CA 94538
510-440-0188 510-657-2635
DIGITAL POWER CORPORATION
1996 STOCK OPTION PLAN
1. PURPOSE; DEFINITIONS.
1.1 PURPOSE. The purpose of the Plan is to attract, retain, and
motivate officers, employees, consultants, and directors of the Company by
giving them the opportunity to acquire Stock ownership in the Company.
1.2 DEFINITIONS. For purposes of the Plan, the following terms shall
have the following meanings:
1.2.1 "ADMINISTRATOR" shall mean the Compensation Committee
referred to in Section 4 in its capacity as
administrator of the Plan in accordance with Section 4.
1.2.2 "BOARD" shall mean the Board of Directors of the
Company.
1.2.3 "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
1.2.4 "COMPANY" shall mean Digital Power Corporation, a
California corporation.
1.2.5 "DIRECTOR" shall mean a member of the Board.
1.2.6 "EFFECTIVE DATE" shall have the meaning set forth in
Section 2.
1.2.7 "ELIGIBLE PERSON" shall mean, in the case of the grant
of an Incentive Stock Option, all employees of the
Company, and in the case of a Non-qualified Stock
Option, any director (including a director who is also
a member of the Compensation Committee), officer, or
employee of the Company.
1.2.8 "FAIR MARKET VALUE" shall mean the value established by
the Administrator for purposes of granting Options
under the Plan.
1.2.9 "GRANT DATE" shall mean the date of grant of any
Option.
1.2.10 "INCENTIVE STOCK OPTION" shall mean an option which is
an option within the meaning of Section 422 of the
Code, the award of which contains such provisions as
are necessary to comply with that section.
1.2.11 "NON-QUALIFIED STOCK OPTION" shall mean an option which
is designated a Non-qualified Stock Option.
1.2.12 "OPTION" shall mean an option to purchase Common Stock
under this Plan. An Option shall be designated by the
Committee as either an Incentive Stock Option or a Non-
qualified Stock Option.
1.2.13 "OPTION AGREEMENT" shall mean the written option
agreement with respect to an Option.
1.2.14 "OPTIONEE" shall mean the holder of an Option.
1.2.15 "PLAN" shall mean this Digital Power Corporation 1996
Stock Option Plan, as amended from time to time.
1.2.16 "STOCK" shall mean the Common Stock, no par value, of
the Company, and any successor entity.
1.2.17 "TAX DATE" shall mean the date defined in Section 7.
1.2.18 "VESTING DATE" shall mean the date on which an Option
becomes wholly or partially exercisable, as determined
by the Administrator in its sole discretion.
2. EFFECTIVE DATE; TERM OF PLAN.
The Effective Date of this Plan shall be upon shareholder approval of
this Plan pursuant to California Corporation Code <section>600, which shall
occur within 12 months of the date of Board approval. This Plan, but not
Options already granted, shall terminate automatically ten years after its
adoption by the Board, unless terminated earlier by the Board under Section
13. No Options shall be granted after termination of this Plan but all
Options granted prior to termination shall remain in effect in accordance
with their terms.
3. NUMBER AND SOURCE OF SHARES OF STOCK SUBJECT TO THE PLAN.
Subject to the provisions of Section 8, the total number of shares of
Stock with respect to which Options may be granted under this Plan is
[_______________________] shares of Stock. The shares of Stock covered by
any canceled, expired, or terminated Option or the unexercised portion
thereof shall become available again for grant under this Plan. The shares
of Stock to be issued hereunder upon exercise of an Option may consist of
authorized and unissued shares or treasury shares.
4. ADMINISTRATION OF THE PLAN.
This Plan shall be administered by a committee of at least two members
of the Board to which administration of this Plan is delegated by the Board
(the "Compensation Committee"). The "Administrator" shall mean the
"Compensation Committee" referred to in this Section 4 in its capacity as
administrator of the Plan in accordance with this Section 4. The
Administrator may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper. Each member of the
Compensation Committee shall be a disinterested person within the meaning
of Rule 16b-3(c)(2)(i) of the Securities Exchange Act of 1934.
Subject to the express provisions of this Plan, the Administrator
shall have the authority to construe and interpret this Plan and any
agreements defining the rights and obligations of the Company and Optionees
under this Plan; to further define the terms used in this Plan; to
prescribe, amend, and rescind rules and regulations relating to the
administration of this Plan; to determine the duration and purposes of
leaves of absence which may be granted to Optionees without constituting a
termination of their employment for purposes of this Plan; and to make all
other determinations necessary or advisable for the administration of this
Plan.
Any decision or action of the Administrator in connection with this
Plan or Options granted or shares of Stock purchased under this Plan shall
be final and binding. The Administrator shall not be liable for any
division, action, or omission respecting this Plan, or any Options granted
or shares of Stock sold under this Plan. The Board at any time may abolish
the Compensation Committee and revest in the Board the administration of
the Plan.
To the extent permitted by applicable law in effect from time to time,
no member of the Compensation Committee or the Board of Directors shall be
liable for any action or omission of any other member of the Compensation
Committee or the Board of Directors nor for any act or omission on the
member's own part, excepting only the member's own willful misconduct or
gross negligence, arising out of or related to the Plan. The Company shall
pay expenses incurred by, and satisfy a judgment or fine rendered or levied
against, a present or former director or member of the Compensation
Committee or Board in any action against such person (whether or not the
Company is joined as a party defendant) to impose liability or a penalty on
such person for an act alleged to have been committed by such person while
a director or member of the Compensation Committee or Board arising with
respect to the Plan or administration thereof, or out of membership on the
Compensation Committee or Board, or by the Company, or all or any
combination of the preceding; provided, the director or Compensation
Committee member was acting in good faith, within what such director or
Compensation Committee member reasonably believed to have been within the
scope of his or her employment or authority, and for a purpose which he or
she reasonably believed to be in the best interests of the Company or its
shareholders. Payments authorized hereunder include amounts paid and
expenses incurred in settling any such action or threatened action. The
provisions of this section shall apply to the estate, executor,
administrator, heirs, legatees, or devisees of a director or Compensation
Committee member, and the term "person" as used in this section shall
include the estate, executor, administrator, heirs, legatees, or devisees
of such person.
5. GRANT OF OPTIONS; TERMS AND CONDITIONS OF GRANT.
5.1 GRANT OF OPTIONS. One or more Options may be granted to any
Eligible Person. Subject to the express provisions of the Plan, the
Administrator shall determine from the Eligible Persons those individuals
to whom Options under the Plan may be granted. Each Option so granted shall
be designated by the Administrator as either a Non-qualified Stock Option
or an Incentive Stock Option.
Subject to the express provisions of this Plan, the Administrator
shall specify the Grant Date, the number of shares of Stock covered by the
Option, the exercise price, and the terms and conditions for exercise of
the Options. If the Administrator fails to specify the Grant Date, the
Grant Date shall be the date of the action taken by the Administrator to
grant the Option. As soon as practicable after the Grant Date, the Company
shall provide the Optionee with a written Option Agreement in the form
approved by the Administrator, which sets out the Grant Date, the number of
shares of Stock covered by the Option, the exercise price, and the terms
and conditions for exercise of the Option.
The Administrator may, in its absolute discretion, grant Options under
this Plan to an Eligible Person at any time and from time to time before
the expiration of ten years from the Effective Date.
5.2 GENERAL TERMS AND CONDITIONS. Except as otherwise provided
herein, the Options shall be subject to the following terms and conditions
and such other terms and conditions not inconsistent with this Plan as the
Administrator may impose.
5.3 EXERCISE OF OPTION. In order to exercise all or any portion of
any Option granted under this Plan, an Optionee must remain as an officer,
employee, consultant, or director of the Company, until the Vesting Date.
The Option shall be exercisable on or after each Vesting Date in accordance
with the terms set forth in the Option Agreement.
5.4 OPTION TERM. Each Option and all rights or obligations
thereunder shall expire on such date as shall be determined by the
Administrator, but not later than 10 years after the grant of the Option (5
years in the case of an Incentive Stock Option when the Optionee owns more
than 10% of the total combined voting power of all classes of stock of the
Company), and shall be subject to earlier termination as hereinafter
provided.
5.5 EXERCISE PRICE. The Exercise Price of any Option shall be
determined by the Administrator, but in the case of Incentive Stock Options
shall not be less than 100% (110% in the case of an Optionee who owns more
than 10% of the total combined voting power of all classes of stock of the
Company) of the Fair Market Value of the Stock on the date the Incentive
Stock Option is granted, and [100% of the Fair Market Value of the Stock on
the date the Non-qualified Stock Option is granted].
5.6 METHOD OF EXERCISE. To the extent the right to purchase shares
of Stock has accrued, Options may be exercised, in whole or in part, from
time to time in accordance with their terms by written notice from the
Optionee to the Company stating the number of shares of Stock with respect
to which the Option is being exercised, and accompanied by payment in full
of the exercise price. Payment may be made in cash, certified check or, at
the absolute discretion of the Administrator, by non-certified check.
5.7 RESTRICTIONS ON STOCK; OPTION AGREEMENT. At the time it grants
Options under this Plan, the Company may retain, for itself or others,
rights to repurchase the shares of Stock acquired under the Option, or
impose other restrictions on such shares. The terms and conditions of any
such rights or other restrictions shall be set forth in the Option
Agreement evidencing the Option. No Option shall be exercisable until
after execution of the Option Agreement by the Company and the Optionee.
5.8 NON-ASSIGNABILITY OF OPTION RIGHTS. No Option shall be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of an Optionee, only the Optionee may exercise an
Option.
5.9 EXERCISE AFTER CERTAIN EVENTS.
5.9.1 TERMINATION AS AN EMPLOYEE, DIRECTOR, OR CONSULTANT. If
for any reason other than permanent and total disability or death (as
defined below) an Optionee ceases to be employed by or to be a consultant
or director of the Company, Options held at the date of such termination
(to the extent then exercisable) may be exercised, in whole or in part, at
any time within three months after the date of such termination or such
lesser period specified in the Option Agreement (but in no event after the
earlier of (i) the expiration date of the Option as set forth in the Option
Agreement, and (ii) ten years from the Grant Date).
If an Optionee granted an Incentive Stock Option terminates
employment but continues as a consultant, advisor, or in a similar capacity
to the Company, Optionee need not exercise the Option within three months
of termination of employment but shall be entitled to exercise within three
months of termination of services to the Company (one year in the event of
permanent disability or death). However, if Optionee does not exercise
within three months of termination of employment, the Option will not
qualify as an Incentive Stock Option.
5.9.2 PERMANENT DISABILITY AND DEATH. If an Optionee becomes
permanently and totally disabled (within the meaning of Section 22(e)(3) of
the Code), or dies while employed by the Company, or while acting as an
officer, consultant, or director of the Company,(or, if the Optionee dies
within the period that the Option remains exercisable after termination of
employment or affiliation), Options then held (to the extent then
exercisable) may be exercised by the Optionee, the Optionee's personal
representative, or by the person to whom the Option is transferred by will
or the laws of descent and distribution, in whole or in part, at any time
within one year after the disability or death or any lesser period
specified in the Option Agreement (but in no event after the earlier of (i)
the expiration date of the Option as set forth in the Option Agreement, and
(ii) ten years from the Grant Date).
5.10 COMPLIANCE WITH SECURITIES LAWS. The Company shall not be
obligated to issue any shares of Stock upon exercise of an Option unless
such shares are at that time effectively registered or exempt from
registration under the federal securities laws and the offer and sale of
the shares of Stock are otherwise in compliance with all applicable
securities laws. Upon exercising all or any portion of an Option, an
Optionee may be required to furnish representations or undertakings deemed
appropriate by the Company to enable the offer and sale of the shares of
Stock or subsequent transfers of any interest in such shares to comply with
applicable securities laws. Evidences of ownership of shares of Stock
acquired upon exercise of Options shall bear any legend required by, or
useful for purposes of compliance with, applicable securities laws, this
Plan, or the Option Agreement evidencing the Option.
6. LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS.
6.1 ONE HUNDRED THOUSAND DOLLARS RULE. The aggregate Fair Market
Value (determined as of the Grant Date) of the Stock for which Incentive
Stock Options may first become exercisable by any Optionee during any
calendar year under this Plan, together with that of Stock subject to
Incentive Stock Options first exercisable (other than as a result of
acceleration pursuant to Section 9(a)) by such Optionee under any other
plan of the Company or any Subsidiary, shall not exceed $100,000.
6.2 OPTION AGREEMENTS. There shall be imposed in the Option
Agreement relating to Incentive Stock Options such terms and conditions as
are required in order that the Option be an "incentive stock option" as
that term is defined in Section 422 of the Code.
6.3 TEN PERCENT RULE. No Incentive Stock Option may be granted to
any person who, at the time the Incentive Stock Option is granted, owns
shares of outstanding Stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company, unless the exercise
price of such Option is at least 110% of the Fair Market Value of the Stock
(determined as of the Grant Date) subject to the Option, and such Option by
its terms is not exercisable after the expiration of five years from the
Grant Date.
6.4 NON-EMPLOYEES. No Incentive Stock Option may be granted to any
person who is not an employee of the Company.
7. PAYMENT OF TAXES.
Upon the disposition by an Optionee or other person of shares of an
Option prior to satisfaction of the holding period requirements of Section
422 of the Code, or upon the exercise of a Non-qualified Stock Option, the
Company shall have the right to require such Optionee or such other person
to pay by cash, or check payable to the Company, the amount of any taxes
which the Company may be required to withhold with respect to such
transactions. Any such payment must be made promptly when the amount of
such obligation becomes determinable (the "Tax Date"). The Administrator
may, in lieu of such cash payment, withhold that number of Shares
sufficient to satisfy such withholding.
8. ADJUSTMENT FOR CHANGES IN CAPITALIZATION.
The existence of outstanding Options shall not affect the Company's
right to effect adjustments, recapitalizations, reorganizations, or other
changes in its or any other corporation's capital structure or business,
any merger or consolidation, any issuance of bonds, debentures, preferred
or prior preference stock ahead of or affecting the Stock, the dissolution
or liquidation of the Company's or any other corporation's assets or
business, or any other corporate act, whether similar to the events
described above or otherwise. Subject to Section 9, if the outstanding
shares of the Stock are increased or decreased in number or changed into or
exchanged for a different number or kind of securities of the Company or
any other corporation by reason of a recapitalization, reclassification,
stock split, combination of shares, stock dividend, or other event, an
appropriate adjustment of the number and kind of securities with respect to
which Options may be granted under this Plan, the number and kind of
securities as to which outstanding Options may be exercised, and the
exercise price at which outstanding Options may be exercised will be made.
9. DISSOLUTION, LIQUIDATION, MERGER.
9.1 COMPANY NOT THE SURVIVOR. In the event of a dissolution or
liquidation of the Company, a merger, consolidation, combination, or
reorganization in which the Company is not the surviving corporation, or a
sale of substantially all of the assets of the Company, any outstanding
Option shall become fully vested immediately upon the Company's public
announcement of any one of the foregoing. The Board of Directors shall
determine, in its sole and absolute discretion, when the Company shall be
deemed to survive for purposes of this paragraph. If the Optionee does not
exercise the entire Option within ninety (90) days, the Administrator, in
its sole and absolute discretion, may, with respect to the unexercised
portion of the Option:
9.1.1 cancel the Option upon payment to the Optionee in an amount
equal to the difference between the closing price of the stock underlying
the Option quoted the day before such liquidation, dissolution, merger,
consolidation, combination, reorganization and the exercise price of the
Option; or
9.1.2 assign the Option and all rights and obligations under it
to the successor entity, with all such rights and obligations being assumed
by the successor entity.
9.2 COMPANY IS THE SURVIVOR. In the event of a merger,
consolidation, combination, or reorganization in which the Company is the
surviving corporation, the Board of Directors shall determine the
appropriate adjustment of the number and kind of securities with respect to
which outstanding Options may be exercised, and the exercise price at which
outstanding Options may be exercised. The Board of Directors shall
determine, in its sole and absolute discretion, when the Company shall be
deemed to survive for purposes of this Plan.
10. CHANGE OF CONTROL.
If there is a "change of control" in the Company, all outstanding
Options shall fully vest immediately upon the Company's public announcement
of such a change. A "change of control" shall mean an event involving one
transaction or a related series of transactions, in which (i) the Company
issues securities equal to 25% or more of the Company's issued and
outstanding voting securities, determined as a single class, to any
individual, firm, partnership, limited liability company, or other entity,
including a "group" within the meaning of SEC Exchange Act Rule 13d-3, (ii)
the Company issues voting securities equal to 25% or more of the issued and
outstanding voting stock of the Company in connection with a merger,
consolidation, or other business combination, (iii) the Company is acquired
in a merger or other business combination transaction in which the bank is
not the surviving company, or (iv) all or substantially all of the
Company's assets are sold or transferred. See Section 9 with respect to
Options vesting upon the occurrence of either of the events described in
(iii) or (iv) of this Section 10 and the result upon the non-exercise of
the Options.
11. SUSPENSION AND TERMINATION.
In the event the Board or the Administrator reasonably believes an
Optionee has committed an act of misconduct specified below, the
Administrator may suspend the Optionee's right to exercise any Option
granted hereunder pending final determination by the Board or the
Administrator. If the Administrator determines that an Optionee has
committed an act of embezzlement, fraud, breach of fiduciary duty, or
deliberate disregard of the Company rules resulting in loss, damage, or
injury to the Company, or if an Optionee makes an unauthorized disclosure
of any Company trade secret or confidential information, engages in any
conduct constituting unfair competition, induces any Company customer to
breach a contract with the Company, or induces any principal for whom the
Company acts as agent to terminate such agency relationship, neither the
Optionee nor his estate shall be entitled to exercise any Option hereunder.
In making such determination, the Board or the Administrator shall act
fairly and in good faith and shall give the Optionee an opportunity to
appear and present evidence on the Optionee's behalf. The determination of
the Board or the Administrator shall be final and conclusive.
12. NO RIGHTS AS SHAREHOLDER OR TO CONTINUED EMPLOYMENT.
An Optionee shall have no rights as a shareholder with respect to any
shares of Stock covered by an Option. An Optionee shall have no right to
vote any shares of Stock, or to receive distributions of dividends or any
assets or proceeds from the sale of Company assets upon liquidation until
such Optionee has effectively exercised the Option and fully paid for such
shares of Stock. Subject to Sections 8 and 9, no adjustment shall be made
for dividends or other rights for which the record date is prior to the
date title to the shares of Stock has been acquired by the Optionee. The
grant of an Option shall in no way be construed so as to confer on any
Optionee the rights to continued employment by the Company.
13. TERMINATION; AMENDMENT.
The Board may amend, suspend, or terminate this Plan at any time and
for any reason, but no amendment, suspension, or termination shall be made
which would impair the right of any person under any outstanding Options
without such person's consent not unreasonably withheld. Further, any
amendment which materially increases the benefits accruing to participants
under this Plan shall be subject to the approval of the Company's
shareholders.
14. GOVERNING LAW.
This Plan and the rights of all persons under this Plan shall be
construed in accordance with and under applicable provisions of the laws of
the State of California.
Villanueva, Purcell & Co.
1550 The Alameda, Suite 204
San Jose, California 95126
October 4, 1996
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the information contained in the section
entitled "Change in Accountants" included in Digital Power Corporation's
Registration Statement on Form SB-2 to be filed with the Commission on or
about October 9, 1996, insofar as such comments relate to us.
Yours truly,
/s/ Villanueva, Purcell & Co.
Exhibit 16.1
Subsidiaries of Digital Power Corporation
Poder Digital, S.A. de C.V., a Corporation
incorporated under the Laws of Mexico
Exhibit 21.1
CONSENT
We have read those portions of the Form SB-2 Registration Statement (the
"Registration Statement") of Digital Power Corporation (the "Company")
in which our name has been cited by the Company, and consent to the inclusion
of our name in such capacity in the Registration Statement.
Micro-Tech Consultants
Date: October 10, 1996 /s/ Mohan Mankikar
Mohan Mankikar
Exhibit 23.3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form SB-2 as filed with the Commission on October 16, 1996 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000896493
<NAME> DIGITAL POWER CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<CASH> 84,614 202,917
<SECURITIES> 107,173 100,000
<RECEIVABLES> 2,421,719 1,794,355
<ALLOWANCES> 120,000 120,000
<INVENTORY> 2,142,454 1,557,226
<CURRENT-ASSETS> 4,837,440 3,803,146
<PP&E> 1,508,625 1,300,978
<DEPRECIATION> 962,612 943,298
<TOTAL-ASSETS> 5,443,277 4,318,190
<CURRENT-LIABILITIES> 2,411,418 1,591,788
<BONDS> 0 0
0 0
0 747,569
<COMMON> 5,539,115 4,398,322
<OTHER-SE> (4,005,356) (3,459,310)
<TOTAL-LIABILITY-AND-EQUITY> 5,443,277 4,318,190
<SALES> 6,553,376 10,037,502
<TOTAL-REVENUES> 6,553,376 10,037,502
<CGS> 4,975,557 7,494,427
<TOTAL-COSTS> 4,975,557 7,494,427
<OTHER-EXPENSES> 888,207 1,515,303
<LOSS-PROVISION> 1,286 90,974
<INTEREST-EXPENSE> 59,537 119,146
<INCOME-PRETAX> 637,208 826,484
<INCOME-TAX> 294,000 277,400
<INCOME-CONTINUING> 343,208 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 343,208 1,103,884
<EPS-PRIMARY> 0.24 0.80
<EPS-DILUTED> 0.20 0.66
</TABLE>
