Filed with the Securities and Exchange Commission on January 28, 1997.
Securities Act Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933,
AS AMENDED
PROTOSOURCE CORPORATION
-----------------------------------
(Exact Name of Small Business Issuer
As Specified In Its Charter)
California 7373 77-0190772
- ---------------------------- ----------------------- ---------------
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or Industrial Identification
organization) Classification Code No.) Number)
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 486-8638
----------------------------------------------------------
Address, including zip code, and telephone number, in-
cluding area code, of Registrant's principal executive offices)
Raymond J. Meyers, Chief Executive Officer
ProtoSource Corporation
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 486-8638
------------------------------------------------
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies of all communications to:
Gary A. Agron, Esq.
5445 DTC Parkway, Suite 520
Englewood, CO 80111
(303) 770-7254
(303) 770-7257 (Fax)
Approximate date of commencement of the Offering: As soon as practicable
after the effective date of the Offering.
<PAGE>
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 box
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 any of the securities 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 delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class Amount to Proposed Amount of
of Securities Be Maximum Price Offering Registration
to be Registered Registered Per Security Price Fee
=====================================================================================================================
<S> <C>
Common Stock, no 6,400,000
par value Shares $.31(1) $1,984,000 $ 602
Common Stock 4,400,000 $.06(2) $ 264,000 $ 80
Purchase Warrants Warrants
Common Stock, no
par value, underlying
Common Stock 4,400,000
Purchase Warrants Shares $.25 $1,100,000 $ 334
Totals................................................................. $3,348,000 $1,016
=====================================================================================================================
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(1) Represents the closing price per share of the Registrant's Common Stock on
the Electronic Bulletin Board of the NASD ("Bulletin Board") on January 24,
1997.
(2) Represents the highest estimated value of the common stock purchase
warrants based upon the closing price of the Registrant's Common Stock on
the Bulletin Board.
The Registrant hereby amends the 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.
(EXHIBIT INDEX LOCATED ON PAGE ------- OF THIS FILING)
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PROTOSOURCE CORPORATION
Cross Reference Sheet
Item Caption Location or Caption in Prospectus
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<S> <C> <C>
1. Forepart of Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back Cover Pages
Cover Page of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page; Risk Factors
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Selling Stockholders; Plan of Distribution
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Management; Principal Stockholders
Promoters and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Not Applicable
Counsel
14. Disclosure of Commission Position Item 25 -- Undertakings
on Indemnification for Securities
15. Organization Within Last Five Prospectus Summary; Certain Transactions
Years
16. Description of Business Risk Factors; Business
17. Management's Discussion and Management's Discussion and Analysis of
Analysis or Plan of Operations Financial Condition and Results of
Operations
(ii)
<PAGE>
18. Description of Property Business--Properties
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Price Range of Common Stock;
Related Stockholder Matters Description of Securities
21. Executive Compensation Management--Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accountants on Accounting and
Financial Disclosure
</TABLE>
(iii)
<PAGE>
Subject to Completion Dated January 28, 1997
PROTOSOURCE CORPORATION
6,400,000 Shares of Common Stock
4,400,000 Common Stock Purchase Warrants
4,400,000 Shares of Common Stock
Underlying Common Stock Purchase Warrants
ProtoSource Corporation (the "Company") is registering hereby (i) 6,400,000
shares of its no par value Common Stock ("Common Stock"), (ii) 4,400,000 Common
Stock Purchase Warrants ("Warrants"), each Warrant exercisable to purchase one
share of Common Stock at $.25 per share at any time until October 2001, and
(iii) 4,400,000 shares of Common Stock underlying the Warrants (collectively the
"Registered Securities"), all of which are being registered on behalf of certain
stockholders of the Company (the "Selling Stockholders"), some of whom are
officers, directors and principal stockholders of the Company. The Registered
Securities will be offered and sold (the "Offering") from time to time by the
Selling Stockholders in public or private open market transactions at prevailing
market prices less customary selling commissions. The Selling Stockholders may
be deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "1933 Act"). See "Selling Stockholders." None of the proceeds from
the sale of the Registered Securities will be received by the Company, although
the Company may receive cash proceeds from the exercise of the Warrants. The
Company will bear the expenses of the Offering, expected not to exceed $125,000.
The Company's Common Stock trades on the Electronic Bulletin Board
("Bulletin Board") of the National Association of Securities Dealers, Inc.
("NASD") under the symbol "PSCO." On January 24, 1997, the closing price of the
Common Stock was $.31 per share. See "Price Range of Common Stock."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION")
NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN
A TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS."
The date of this Prospectus is __________1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form SB-2 (the
"Registration Statement") under the 1933 Act with respect to the securities
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain items of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered by this Prospectus, reference
is made to such Registration Statement and the exhibits thereto. Statements
contained in this Prospectus as to the contents of any contract or other
documents 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 for a full statement of the provisions thereof; each such
statement contained herein is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") and, in accordance therewith,
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
public reference facilities of the Commission at 450 Fifth Street N.W.,
Washington, D.C. 20549; 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; 7 World Trade Center, New York, New York 10048; and 5757 Wilshire
Boulevard, Los Angeles, California 90036. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth Street
N.W., Washington, D.C. 20549 at prescribed rates.
The Company furnishes annual reports which include audited financial
statements to its stockholders. The Company may also furnish quarterly financial
statements to its stockholders and such other reports as may be authorized by
its Board of Directors.
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the detailed information and
financial statements that appear elsewhere herein. The share information
included herein does not reflect a one share for ten shares reverse stock split
expected to be approved by the Company's stockholders on or about February 28,
1997. Except for the historical information contained herein, the matters set
forth in this Prospectus include forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks and
uncertainties are detailed throughout the Prospectus and will be further
discussed from time to time in the Company's periodic reports filed with the
Commission. The forward-looking statements included in the Prospectus speak only
as of the date hereof.
The Company
Operating through its ProtoSource Network ("PSNW") division, the Company
provides Internet access and related services to individuals, public agencies
and businesses in five small Central California cities. As of December 31, 1996,
the Company had 2,500 subscribers for whom it provided Internet access. The
Company intends to acquire other small Internet providers in markets with
populations of less than 500,000 that are located initially in various Central
California cities between Sacramento and Bakersfield. The Company believes that
certain of these local Internet providers currently doing business in the
Company's target markets will not be able to effectively manage the financial
and administrative burdens imposed by the continuing consumer demand for local
Internet services, unless these providers are integrated into larger, more
diversified Internet products and services companies. The Company's long-term
plan is to target a select number of such target markets and increase revenues
through acquisition in such markets. The Company is not negotiating to acquire
nor has it entered into any agreement to acquire any such Internet related
companies.
The Company's strategy is to provide low cost direct Internet access to
subscribers in target markets by acquiring small Internet providers in these
markets or by establishing its own marketing operations in the target markets.
Thereafter, the Company will seek to generate additional revenues by (i)
increasing monthly Internet access fees, (ii) offering monthly community access
services, (iii) providing Internet consulting services, and (iv) generating
marketing service fees charged to businesses seeking a Web site on the Internet.
The Company was incorporated in the State of California as SHR Corporation
on July 1, 1988. In October 1994, the Company changed its name to "ProtoSource
Corporation." The Company's principal executive officers are located at 2300
Tulare Street, Suite 210, Fresno, California 93721, telephone (209) 486-8638.
3
<PAGE>
History
From July 1988 until August 1996, the Company's primary business was to
design, develop and market software programs (and related hardware) for the
agri-business industry including produce broker accounting programs, product
tracking programs, crop chemical usage reports, crop cost and billing systems
and fruit accounting programs. The programs were packaged under the Company's
"Classic" line of products and were divided by function, sophistication and the
size of the customer into "Classic" (appropriate for customers whose annual
sales are less than $10 million), "Classic Advantage" (appropriate for customers
whose annual sales are between $10 million and $100 million) and "Classic
Custom" (appropriate for customers whose annual sales exceed $100 million).
Prices ranged from $20,000 for a "Classic" program to $200,000 for a "Classic
Custom" program. The Company also sold customized computer system configurations
designed by it which integrated hardware and software. The Classic product line
together with the Company's design services and hardware and software sales is
collectively referred to as the "Classic Line."
In February 1995, the Company completed an initial public offering ("IPO")
of its securities, consisting of the sale of 690,000 Units to the public at
$5.50 per Unit. Each Unit consisted of one share of Common Stock and one common
stock purchase warrant (the "Public Warrants") to purchase an additional share
of Common Stock at $6.50 per share until February 1998. McClurg Capital
Corporation, the Representative of the Underwriters of the IPO (the "Prior
Representative") received warrants (the "Prior Representative's Unit Warrants")
to purchase 60,000 Units at $6.60 per Unit at any time until February 2000.
In December 1996, the Company sold the Classic Line to a Canadian company
for $300,000 in cash and an unsecured promissory note which the Company has not
valued on its financial statements. As a part of the transaction, the Company
received an exclusive worldwide license through December 2006 to market the
Classic Line based upon a royalty of 16% of gross sales. In January 1997, the
Company sold the remaining assets of the Classic Line (including the worldwide
license to market the Classic Line) to SSC Technologies, Inc. ("SSC"), a
privately-held company owned 25% by the Company and 75% by other stockholders
including four individuals who were previously officers and directors of the
Company. See "Certain Transactions."
In October 1996, the Company sold 6,000,000 shares of its Common Stock to a
group of investors for $.25 per share or a total of $1,500,000. Included in the
$1,500,000 was the conversion of $200,000 of debt to equity which was originally
represented by a bridge loan for which the Company issued 400,000 shares of its
Common Stock to the bridge lenders as additional consideration for the $200,000
loan. The Company also issued a total of 4,400,000 Warrants exercisable at $.25
per share in connection with the bridge loan and the private placement. The
6,400,000 shares, 4,400,000 Warrants and 4,400,000 shares underlying the
Warrants are being registered hereby. See "Selling Stockholders."
4
<PAGE>
The Offering
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<S> <C>
Securities offered........................................ 6,400,000 shares of Common Stock,
4,400,000 Warrants and 4,400,000 shares
of Common Stock underlying the Warrants
(the "Registered Securities") held by the
Selling Stockholders
Offering price............................................ Market prices of the Registered Securities
on the Bulletin Board
Common Stock outstanding(1)............................... 7,730,001 shares
Use of Proceeds........................................... None of the proceeds from the sale of the
Registered Securities will be received by
the Company. See "Use of Proceeds."
Bulletin Board symbols.................................... PSCO - Common Stock
PSCOW - Public Warrants
Transfer Agent............................................ Corporate Stock Transfer, Inc.
</TABLE>
- ----------
(1) Excludes shares of Common Stock issuable upon exercise of (i) the 4,400,000
Warrants, (ii) the 690,000 Public Warrants, (iii) warrants held by the
Prior Representative to purchase up to 60,000 Units (each Unit consisting
of one share of Common Stock and one Public Warrant) exercisable at $6.60
per Unit at any time until February 2000 (the "Prior Representative's Unit
Warrants"), and (iv) stock options to purchase up to 550,000 shares of
Common Stock at $.25 per share until October 2001 granted to the Company's
Chief Executive Officer. See "Dilution", "Capitalization", "Management
Executive Compensation", "Certain Transactions", "Description of
Securities" and "Underwriting."
5
<PAGE>
<TABLE>
<CAPTION>
Summary Financial Information
The following financial information has been derived from the financial statements of the
Company appearing elsewhere in this Prospectus and should be read in conjunction with such
financial statements. See "Financial Statements."
Nine Months Ended September 30, Year Ended December 31,
------------------------------- -----------------------
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues $ 1,072,435 1,511,308 $1,834,966 $1,831,390
Net loss (681,988) (538,910) (1,816,285) (373,096)
Net loss per share (.51) (.45) (1.47) (.62)
Weighted average number
of shares outstanding(1) 1,330,001 1,205,441 1,236,590 598,719
</TABLE>
September 30,
1996
-------------
Balance Sheet Data:
Working capital (deficit) $ (819,737)
Total assets 3,427,359
Long-term debt 1,734,190
Total liabilities 2,831,616
Stockholders' equity 595,743
- ----------
(1) For a description of net income per share and the number of shares used in
computing per share amounts, see Note 1 of Notes to Financial Statements.
6
<PAGE>
RISK FACTORS
In evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the other information presented
in this Prospectus.
Prospective purchasers of the Common Stock should carefully consider the
following risk factors and the other information contained in this Prospectus
before making an investment in the Common Stock. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business - Strategy." No assurance can be given that the future results covered
by the forward- looking statements will be achieved. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
Limited History of Operations; Significant Operating Losses; Deficit in
Working Capital. The Company was incorporated in July 1988 but has only provided
Internet access services since July 1995. Prior to August 1996, the Company was
engaged primarily in the agricultural software development business and incurred
significant operating losses of $373,096, $1,816,285 and $681,988 for the years
ended December 31, 1994 and 1995 and the nine months ended September 30, 1996
respectively. At September 30, 1996, the Company had a deficit in working
capital of $819,737 which could significantly limit its operations. See
"Financial Statements." There can be no assurance that the Company will achieve
profitability or positive cash flow from operations. The Company expects to
focus in the near term on building and increasing its Internet subscriber base,
which will require it to significantly increase its expenses for personnel,
marketing, network infrastructure and the development of new services. As a
result, the Company believes that it may incur further losses in the near term.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
the Internet. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract, retain and motivate
qualified persons, and continue to upgrade its technologies and commercialize
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks.
Risks Associated With Acquisitions. Although the Company intends to
increase revenues in part through acquisition of other Internet access
providers, it has no experience in this regard and may acquire companies with
limited operating or negative operating history. Should the Company acquire
other companies that incur operating losses, the Company's operating results
will be further adversely affected. The Company is not negotiating to acquire
nor has it entered into any agreements to acquire any such Internet related
companies and there can be no assurance it will complete any such acquisitions
in the future.
7
<PAGE>
Fluctuations in Operating Results. As a result of the Company's limited
Internet services operating history, the Company has limited historical
financial data on which to base future operating expenses. Moreover, the Company
may experience fluctuations in operating results in the future caused by various
factors, some of which are outside of the Company's control, including general
economic conditions, specific economic conditions in the Internet services
industry, user demand for the Internet, the amounts of capital expenditures and
other costs related to the expansion of operations, the timing of customer
subscriptions, the introduction of new Internet services by the Company or its
competitors, the mix of such services sold and the mix of channels through which
those services are sold. As a strategic response to a changing competitive
environment, the Company may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a material
adverse effect on the Company's business, results of operations and cash flow
from quarter to quarter. See "Business" and "Financial Statements."
Competition. The market for Internet services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist and intensify in the future. Almost all
of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical and marketing resources than the Company. Such
competition could materially adversely affect the Company's business, operating
results or financial condition. Moreover, because many of the Company's
competitors possess financial resources significantly greater than those of the
Company, such competitors could initiate and support prolonged price competition
to gain market share. If significant price competition were to develop, the
Company likely would be forced to lower its prices, possibly for a protracted
period, which would have a material adverse effect on its financial condition
and results of operations and could threaten its economic viability. In
addition, the Company believes that the Internet service and on-line services
business is likely to encounter consolidation in the near future, which could
result in increased price and other competition in the industry and consequently
have an adverse impact on the Company's business, financial condition and
results of operations. See "Business Competition."
New and Uncertain Market; New Entrants. The market for local Internet
service providers is in its early stages. Since this market is new and because
current and future competitors are likely to introduce new products, it is
difficult to predict the forms of competition or the competitors that may
develop. There can be no assurance that the Company's local Internet provider
business can compete against new or developing competitors or that any local
provider can maintain its customer base against formidable national or other new
local competitors, or that Internet access will remain attractive to
subscribers. See "Business Marketing."
8
<PAGE>
Few Barriers to Entry. There are few significant barriers to entry in the
Internet access business. Accordingly, the Company expects substantial
competition in its markets from new local Internet service providers, as well as
existing local and national Internet providers. The Company's success will
depend on its ability to compete against these new and existing providers.
Importance of Entering New Markets and Identifying Acquisitions. The
Company's business plan calls for it to continue to enter new local markets in
order to grow. Entry into new local markets depends in part on acquiring small
access providers in secondary markets at favorable prices. Because there are a
limited number of small access providers in the Company's target markets, there
can be no assurance that the Company can acquire such companies on favorable
terms, or at all, or that it can obtain financing for such acquisitions. Should
the Company be unable to locate companies in suitable local markets for
acquisitions its growth would be adversely affected. See "Business - Strategy."
Technological Changes. The Internet is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service and product introductions. The Company's future success will depend,
in part, on its ability to effectively use new technologies, to continue to
enhance its current Internet access and other services, to develop new services
that meet changing customer needs, to advertise and market its services and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost effective basis.
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to providing Internet access or other services
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that laws and regulations may be adopted with respect
to the Internet which may decrease the demand for Internet access, increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's operating results or financial condition.
Dependence on the Internet. The Company's business will depend in large
part upon a robust industry and infrastructure for providing Internet access and
carrying Internet traffic. Notwithstanding current interest and worldwide
subscriber growth, the Internet may not prove to be a viable marketplace because
of inadequate development of the necessary infrastructure or timely development
of complementary products, such as high speed modems. Because global commerce
and on-line exchange of information on the Internet, Web and other open area
networks are new and evolving, it is difficult to predict with any assurance
whether the Internet will prove to be economically viable in the long term. If
the necessary infrastructure or complementary products are not developed, or if
the Internet does not become an economically viable marketplace, the Company's
business, operating results and financial condition will be materially adversely
affected. See "Business - The Internet and the World Wide Web."
9
<PAGE>
Potential Liability for Information Disseminated On-Line. A pending action
against Prodigy alleging libel and negligence in connection with an electronic
message posted by a Prodigy subscriber through Prodigy's on-line access system
presents the potential, particularly if the plaintiff is successful, for
increased focus and attempts to impose liability upon Internet access and
service providers for information disseminated through their systems. The
Company does not carry any insurance against such liabilities.
Risk of System Failure; Limited Insurance. The success of the Company is
dependent upon its ability to offer high quality, uninterrupted access to the
Internet. Any system failure that causes interruptions in the Company's Internet
operations could have a material adverse effect on the Company. If the Company's
subscriber base expands, there will be increased stress placed upon the
Company's server hardware and traffic management systems. The Company's server
hardware is also vulnerable to damage from fire, earthquakes, power loss,
telecommunications failures and similar events. The Company carries property
damage and business interruption insurance with a basic policy limitation of
$500,000, subject to deductibles and exclusions. Such coverage, however, may not
be adequate to compensate the Company for all losses that may occur. Moreover,
significant or prolonged system failure could damage the reputation of the
Company and result in the loss of subscribers.
Possible Need for Additional Financing. The Company may be required to seek
debt or equity financing in the future. There can be no assurance that
additional financing will be available to the Company on acceptable terms, or at
all. Any future equity financing may involve substantial dilution to the
interests of the Company's stockholders. See "Financial Statements."
No Dividends. The Company does not intend to pay any cash dividends on its
Common Stock in the foreseeable future. Earnings, if any, will be used to
finance growth. See "Description of Securities - Dividends."
Possible Volatility of Securities Prices. The market price of the Common
Stock may be highly volatile, as has been the case with the securities of other
small capitalization companies. Factors such as the Company's operating results
or public announcements by the Company or its competitors may have a significant
effect on the market price of the Company's securities. In addition, market
prices for securities of many small capitalization companies have experienced
wide fluctuations in response to variations in quarterly operating results,
general economic indicators and other factors beyond the control of the Company.
The registration of the Registered Securities offered hereby coupled with
exercise of the Public Warrants could increase the volatility of the Common
Stock by increasing the number of shares of publicly traded Common Stock
outstanding.
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the open market or the availability of such shares for sale could
adversely affect the market price for the Common Stock. As of the date hereof,
there are 7,730,001 shares of the Company's Common Stock outstanding, of which
690,000 shares were registered for sale in the Company's IPO, 6,400,000 are
10
<PAGE>
being registered hereby and the remaining 640,001 shares may be sold under Rule
144 commencing in February 1997 subject to the agreement of the holders of
454,494 shares not to sell such shares until October 1999 without the prior
written consent of AAWC. Additionally, an aggregate of 4,400,000 Warrants and
the 4,400,000 shares underlying the Warrants are also being registered hereby
and may be sold at any time. See "Description of Securities - Common Stock
Eligible for Future Sale" and "Underwriting."
Control by Management; Authorization and issuance of Preferred Stock;
Prevention of Changes in Control. The Company's officers and directors own
approximately 32.7% of the issued and outstanding shares of Common Stock
(assuming exercise by them of outstanding stock options and common stock
purchase warrants), and can as a practical matter continue to elect all of the
Company's directors and control the affairs of the Company. The Company's
Articles of Incorporation authorizes the issuance of up to 5,000,000 shares of
Preferred Stock with such rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, under the Articles of
Incorporation, the Board of Directors may, without shareholder approval, issue
Preferred Stock with dividend, liquidation, conversion, voting, redemption or
other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. The issuance of any shares of Preferred Stock
having rights superior to those of the Common Stock may result in a decrease in
the value or market price of the Common Stock and could be used by the Board of
Directors as a device to prevent a change in control of the Company. The Company
has no other anti-takeover provisions in its Articles of Incorporation or
Bylaws. Holders of the Preferred Stock may have the right to receive dividends,
certain preferences in liquidation, and conversion rights. See "Description of
Securities - Use of Preferred Stock As Anti-Takeover Device" and "Principal
Stockholders."
Elimination of Director Liability. The Company's Articles of Incorporation
contains a provision eliminating a director's liability to the Company or its
stockholders for monetary damages for a breach of fiduciary duty, except in
circumstances involving a financial benefit to a director, the intentional
infliction of harm of the Company or certain wrongful acts, such as the breach
of a director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of criminal law. The Company's Bylaws contain
provisions obligating the Company to indemnify its directors and officers to the
fullest extent permitted under California law. These provisions could serve to
insulate officers and directors of the Company against liability for actions
which damage the Company or its stockholders. See "Description of Securities -
Limitation on Liability."
Risks Associated With Penny Stocks such as the Company's; Lack of
Liquidity. The Commission has adopted rules that define "penny stock" and such
definition currently includes the Common Stock of the Company. Accordingly,
broker-dealers dealing in the Company's securities are subject to specific
disclosure rules for transactions involving penny stocks which require the
broker-dealer among other things to (i) determine the suitability of purchasers
of the securities and obtain the written consent of purchasers to purchase such
securities and (ii) disclose the best (inside) bid and offer prices for such
securities and the price at which the broker-dealer last purchased or sold the
securities. The additional burdens imposed upon broker-
11
<PAGE>
dealers discourage them from effecting transactions in the Company's Common
Stock, which reduces the liquidity of the Company's Common Stock making it more
difficult for stockholders to sell the Common Stock should they desire to do so.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996, without giving effect to the exercise of (i) the 4,400,000
Warrants, (ii) the 690,000 Public Warrants, (iii) warrants held by the Prior
Representative to purchase up to 60,000 Units (each Unit consisting of one share
of Common Stock and one Public Warrant) exercisable at $6.60 per Unit at any
time until February 2000 (the "Prior Representative's Unit Warrants"), and (iv)
stock options to purchase 550,000 shares at $.25 per share until October 2001
granted to the Company's Chief Executive Officer. See "Dilution", "Management -
Executive Compensation", "Certain Transactions", "Description of Securities" and
"Underwriting."
September 30, 1996
------------------
Short-term debt: $ 316,008
Long-term debt: 1,734,190
Stockholders' equity:
Preferred Stock, 5,000,000 no par value
shares authorized, 900,000 shares
issued and outstanding --
Common Stock, 10,000,000 no par value
shares authorized, 1,330,001 shares
issued and outstanding 3,464,286
Retained earnings (deficit) (2,868,543)
----------
Total stockholders' equity 595,743
----------
Total capitalization $ 2,645,941
===========
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the NASDAQ Small Cap Market under
the symbol "PSCO" from February 9, 1995 until July 10, 1996 when it was delisted
from NASDAQ and commenced trading on the Electronic Bulletin Board under the
symbol "PSCO."
The following table sets forth for the quarters indicated the range of high
and low closing prices of the Company's Common Stock as reported by NASDAQ and
the Electronic Bulletin Board but does not include retail markup, markdown or
commissions.
Price
----------------
By Quarter Ended: High Low
- ----------------- ---- ---
March 31, 1997 (through January 24, 1997)............... $ .31 $ .21
December 31, 1996....................................... .75 .21
September 30, 1996...................................... 1.00 .56
June 30, 1996........................................... 1.75 .56
March 31, 1996.......................................... 2.13 .94
December 31, 1995....................................... 2.50 1.75
September 30, 1995...................................... 4.00 1.00
June 30, 1995........................................... 4.88 3.34
March 31, 1995.......................................... 5.00 4.25
As of January 24, 1997, the Company had approximately 355 record and
beneficial stockholders.
USE OF PROCEEDS
None of the proceeds of the Offering will be received by the Company. See
"Selling Stockholders."
14
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December
31, 1995 and 1994 has been derived from the Company's financial statements which
have been audited by Angell & Deering. The selected financial data is qualified
by, and should be read in conjunction with, the financial statements and the
notes thereto included elsewhere herein. See "Financial Statements."
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
------------------------------- -----------------------
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues $ 1,072,435 1,511,308 $1,834,966 $1,831,390
Net loss (681,988) (538,910) (1,816,285) (373,096)
Net loss per share (.51) (.45) (1.47) (.62)
Weighted average number
of shares outstanding(1) 1,330,001 1,205,441 1,236,590 598,719
</TABLE>
September 30,
1996
------------
Balance Sheet Data:
Working capital (deficit) $ (819,737)
Total assets 3,427,359
Long-term debt 1,734,190
Total liabilities 2,831,616
Stockholders' equity 595,743
- ----------
(1) For a description of net income per share and the number of shares used in
computing per share amounts, see Note 1 of Notes to Financial Statements.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Net Sales. For the nine months ended September 30, 1996, net sales were
$1,072,435 versus $1,511,308 in 1995, representing a decrease of $438,873. The
decrease in net sales is primarily attributed to obstacles encountered in the
development of the Classic Line in the first half of 1996 and decreases in
hardware equipment sales. The decrease was somewhat offset by an increase in
services revenues.
Gross Profit. For the nine months ended September 30, 1996, gross profit
was $393,248 versus $441,661 in 1995, representing a decrease of $48,413. The
decrease in gross profit is attributed to the decreases in software package
sales and equipment sales. The decrease was somewhat offset by an increase in
services revenues.
Sales and Marketing. Sales and marketing expenses were $384,808 in the nine
months ended September 30, 1996 versus $443,528 in 1995. The decreases in sales
and marketing expenses were caused by decreases in marketing expense evidencing
reduced marketing efforts and decreases in the Company's sales force.
Research and Development. Research and development expense decreased
$102,558 for the nine months ended September 30, 1996. The decrease in research
and development is attributed to a decrease in the number of full time
programmers involved in product development following completion of the Classic
Line.
General and Administrative. For the nine months ended September 30, 1996,
general and administrative costs were $419,624 versus $401,424 in 1995. The
increase in general and administrative costs is the result of increases in bad
debt expenses.
Operating Income. For the nine months ended September 30, 1996, the
operating loss was $624,310 versus an operating loss of $718,975 in 1995. The
operating loss in 1996 is attributed to the decreases in sales but was somewhat
decreased by increases in services revenues and decreases in expenses.
Interest Income (Expense). Net interest expense increased to $135,867 for
the nine months ended September 30, 1996 versus $74,011 in 1995 due to interest
expense related to the Company's office building and other capital leases. The
interest expense was somewhat offset by interest earned on cash and short term
investments.
16
<PAGE>
Other Income. Net other income was $78,189 for the nine months ended
September 30, 1996 generated by revenue from the Company's office building and
other miscellaneous sales.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Sales. For fiscal 1995, net sales were $1,835,000 versus $1,831,000 in
fiscal 1994. Software product sales increased by 95% from $145,000 in 1994 to
$283,000 in 1995. Hardware equipment sales decreased slightly from $984,000 in
1994 to $942,000 in 1995 due primarily to decreases in prices in the PC product
lines. Professional service fees decreased from $681,000 in 1994 to $610,000 in
1995 as a result of shifting programming resources from professional services to
packaged software development. The lower than expected sales were primarily the
results of development difficulties encountered in the Classic product lines.
The significant increases in software product sales can be attributed to the
acceptance of the new PC software products prior to the development obstacles
encountered. Management believes that focusing in PC product development will
increase the long-term profitability of the Company.
Gross Profit. For fiscal 1995, gross profit was $395,000 versus $557,000 in
1994, representing a decrease of $162,000 or 29.1%. As a percentage of sales,
gross profit declined to 21.5% in 1995 from 30.4% in 1994. The decrease in gross
profit is attributed to the increase in investment of software development which
increases cost of product sales and lower gross margin for PC hardware
equipment. Management believes that the gross margin will improve when the
software sales increase and software development costs decrease.
Sales and Marketing. Sales and marketing expenses were $641,000 in fiscal
1995 versus $275,000 in 1994. The increases in sales and marketing expenses were
caused by increases in sales personnel and increases in advertising and
marketing for the introduction of the Classic product lines. The Company
believes that the sales and marketing expenses will decrease to approximately
15% of total revenues when software sales increase.
Research and Development. Research and development increased from $232,000
in 1994, to $495,000 in 1996. The increase in research and development is
attributable to an increase in the number of full-time equivalent programmers
involved in product development activities from seven programmers in 1994 to
fifteen programmers in 1995. Management believes that the investment in research
and development will give the Company significant competitive advantages over
competitors and will increase long-term profitability of the Company. Management
expects that the Classic product will be completed in early 1996.
General and Administrative. General and administrative costs were
$1,080,000 in 1995 versus $257,000 in 1994. The increase in general and
administrative costs is the result of moving into a larger building, increases
in business transactions, increases of personnel and the significant increase in
the bad debts expenses resulted from the development difficulties that have been
resolved by the research and development team in the fall of 1995 which were
encountered in the development of the Classic product line in the second quarter
of 1995.
17
<PAGE>
Operating Loss. For fiscal 1995, the operating loss was $1,820,000 compared
to an operating loss of $208,000 in 1994. The increase in operating loss in 1995
is attributed to the significant increases in research and development by
$263,000 to develop the Classic product lines for PC, increases in marketing
expenses for the introduction of the new PC product lines and increases in
general and administrative expenses resulting from the move to larger facilities
and the significant increase of bad debt expenses due to the development
obstacles encountered in the second quarter of 1995.
Liquidity and Capital Resources
The Company's 1995 IPO generated net proceeds of $3,415,500 to the Company.
The Company used net proceeds from the IPO to repay short-term debt, to finance
business acquisitions, purchase capital assets for product development and for
marketing.
For the year ended December 31, 1995, the Company acquired $404,000 of
property and equipment and capitalized software development costs of $593,000.
Included in these transactions were the purchase of computer and related
teaching equipment for the expansion of the Company's Computer Center facility
and the acquisition of PSNW.
In September 1994, the Company acquired, under a 20-year capital lease (see
Note 7 to Financial Statements), a 20,000 square foot office building. The
Company formerly occupied approximately half of the space as its corporate
offices and subleases the other half to unrelated third parties. The capitalized
costs for the land, building and improvements was $1,760,000. The capital lease
payments for the building will increase annual cash outflows by approximately
$60,000 through 2014, net of sublease income. SSC sublet office space from the
Company at a monthly rental of $12,000 through February 28, 1998.
In December 1995, the Company sold its ownership of the Classic Line to a
limited partnership for $300,000 in cash and an unsecured promissory note which
the Company has not valued on its financial statements because payment of the
promissory note is contingent upon the limited partnership selling limited
partnership investment units in Canada. The Company also entered into a
Distribution Agreement with the limited partnership whereby the Company was
appointed as the exclusive distributor of the Classic line worldwide for a term
of twenty years.
At September 30, 1996, the Company had a working capital deficiency of
$819,737. In September and October 1996, the Company sold 6,000,000 shares of
its Common Stock for $.25 per share, generating gross proceeds of $1,500,000
which eliminated its working capital deficiency. Included in the $1,500,000 was
the conversion of $200,000 of bridge loans to equity.
In January 1997, the Company sold the remaining assets of the Classic Line
to SSC Technologies, Inc. ("SSC") for $770,850 evidenced by a promissory note
bearing interest at 10% per annum payable in January 2007 and the assumption by
SSC of all of the liabilities of the Classic Line, aggregating approximately
$500,000. Under the terms of the asset sales agreement (the "Divestiture
18
<PAGE>
Agreement"), the Company purchased 25% of the outstanding common stock of SSC
for $500,000 in cash and the remaining 75% of the outstanding common stock was
issued to other stockholders including Charles T. Howard, David L. Green, Ding
Yang and Steven L. Wilson who were previously officers and directors of the
Company (the "SSC Principals"). As a part of the Divestiture Agreement, the SSC
Principals also (i) cancelled 900,000 shares of Convertible Preferred Stock held
by them which were previously exercisable into an equal number of shares of
Common Stock, (ii) agreed not to sell an aggregate of 454,494 shares of Common
Stock owned by them until October 1999 except with the prior written consent of
Andrew, Alexander, Wise & Company, Incorporated ("AAWC"), (iii) agreed to
sublease office space from the Company at a monthly rental of $12,000 through
February 28, 1998, (iv) granted to Steven A. Kriegsman, a director of the
Company, an option to purchase up to 150,000 shares of Common Stock held by the
SSC principals at any time until October 2001, and (v) personally guaranteed on
a joint and several basis the $770,850 promissory note and all other obligations
of SSC to the Company.
Capital expenditures relating primarily to the purchase of computer
equipment, furniture and fixtures, acquisition, and software development
amounted to $448,210 for the nine months ended September 30, 1996. Capitalized
software development costs were $442,186 for the same period.
19
<PAGE>
BUSINESS
Introduction
Operating through PSNW, the Company provides Internet access and related
services to individuals, public agencies and businesses in five small Central
California cities. As of December 31, 1996, the Company has 2,500 subscribers
for whom it provided Internet access. The Company intends to acquire other small
Internet providers in markets with populations of less than 500,000 that are
located initially in various Central California cities between Sacramento and
Bakersfield. The Company believes that certain of these local Internet providers
currently doing business in the Company's target markets will not be able to
effectively manage the financial and administrative burdens imposed by the
continuing consumer demand for local Internet services, unless these providers
are integrated into larger, more diversified Internet products and services
companies. The Company's long-term plan is to target a select number of such
target markets and increase revenues through acquisition in such markets. The
Company is not negotiating to acquire nor has it entered into any agreement to
acquire any such Internet related companies.
The Company's strategy is to provide low cost direct Internet access to
subscribers in target markets by acquiring small Internet providers in these
markets or by establishing its own marketing operations in the target markets.
Thereafter, the Company will seek to generate additional revenues by (i)
increasing monthly Internet access fees, (ii) offering monthly community access
services, (iii) providing Internet consulting services, and (iv) generating
marketing service fees charged to businesses seeking a Web site on the Internet.
The Internet and the World Wide Web
The Internet is a worldwide network that links thousands of public and
private computer networks. The Internet began in 1969 as a project of the
Advanced Research Projects Agency ("ARPA") of the U.S. Department of Defense to
connect different types of computers across geographically disparate areas. The
ARPA network was designed to allow any computer on the network to communicate
with any other computer on the network through an open communications protocol
known as TCP/IP.
Initially, use of the Internet was limited to governmental, educational and
commercial organizations with a working knowledge of the UNIX operating system
and commands, and the primary use made of the Internet was the communication of
information via electronic mail. However, there has been a rapid growth in the
use and popularity of the Internet in the past several years. According to
industry sources, users in more than 130 countries throughout the world are
connected to the Internet including 24 million users in North America, 17.6
million of whom use the Web.
The dramatic growth in the number of Internet users is attributable to a
number of developments and factors. The first was the introduction in 1992 of
the World Wide Web ("Web"), a client/server system of hyperlinked multimedia
20
<PAGE>
databases which began to unlock the potential of the Internet as a mass medium.
The Web, developed by the European Laboratory for Research Physics ("CERN") in
Switzerland, advanced the potential of the Internet in several significant ways.
First, it enabled full multimedia presentation (including text, graphics, video
and audio) over the Internet. Second, through the Web's system of standardized
information protocols and a communications format called HyperText Transfer
Protocol ("HTTP"), users were allowed access to information ("navigate") on the
Web without entering complex alphanumeric commands. Third, using HyperText
Markup Language ("HTML"), document authors were able to link text or images in
one document to other documents anywhere else on the Web. When the user selected
or, if using a mouse, clicked on the hypertext in one document (often displayed
on the screen as highlighted words or images), the linked document was
automatically accessed and displayed.
The Web is based on a client/server system in which certain computers
("servers"), store information in files and respond to requests issued by remote
user computers to view or download files, thus allowing multiple, geographically
dispersed users to view and use the information stored on a single server. The
user must use software, known as a browser, that can read HTML documents and
follow their hypertext links to retrieve and display linked documents from
servers such as the Company.
An early limitation to growth of the Web was that the browser software
initially provided by CERN was text-based and contained limited retrieval and
display capabilities. In January 1993, the National Center for Supercomputing
Applications ("NCSA") at the University of Illinois at Urbana-Champaign
significantly advanced the use of Web technology with the introduction of NCSA
Mosaic for X Window on the UNIX platform, the first graphical user interface
browser for the Web. The NCSA Mosaic graphical user interface allows users to
access the diverse information archives, data protocols and data formats of the
Internet using point-and-click, mouse-driven commands. NCSA Mosaic, which is
offered to users on a free- with-copyright basis (making it available for use
without charge and without the right to distribute), served as a catalyst for
increased use of the Web. When NCSA released a version of NCSA Mosaic for
Windows in September 1993, the Web became accessible to personal computer users
for the first time.
The increased popularity of the Internet is also attributable to the
proliferation of information and services available on the Internet, as well as
the expanded use of home personal computers, which increasingly contain modems
as a standard feature. Among the types of publications and information available
to Internet users are newspapers, magazines, weather updates, government
documents and industry newsletters, as well as a variety of commercial products
and services such as the Internet Waterway.
In order to support the continued growth and popularity of the Internet,
certain infrastructure elements must expand to handle the resulting increases in
Internet demand and traffic. These elements include widespread, inexpensive
Internet access, either through Internet access providers such as the Company or
on-line services, and widely available high-speed communications channels to
accommodate the increasing number and size of files available for downloading.
21
<PAGE>
As business organizations have begun to realize the potential of the
Internet as an inexpensive and effective means of offering products and services
directly to customers and potential customers, businesses are increasingly
advertising and selling such products and services on the Web. For example,
business organizations are now using the Web to provide product information and
support to existing customers, to advertise products and services and to offer
products and services for sale by means of on-line catalogs. It is this market,
as well as Internet access, that the Company seeks to address. Industry sources
have estimated, based on registered Internet addresses, that the number of
commercial organizations as a percentage of total Internet users has increased
from approximately 30% at the beginning of 1993 to approximately 60% at the end
of 1994.
Computer users wishing to access the vast array of information and services
available on the Web use a browser that can read HTML documents, follow
hypertext links and interface with the diverse information archives and data
formats of the Web. The basic needs of most individual computer users casually
browsing the Web can be fulfilled by a number of different browsers available
today, including certain browsers that are available for no charge.
Strategy
The Company's strategy is to provide low cost direct Internet access to
subscribers by acquiring small Internet providers in target markets or by
establishing its own marketing operations in such markets. Thereafter, the
Company will seek to generate additional revenues by (i) increasing monthly
Internet access fees, (ii) offering monthly community access services, (iii)
providing Internet consulting services, and (iv) generating marketing service
fees charged to businesses seeking a Web site on the Internet.
Increasing Monthly Internet Access Fees. The Web is the driving force
behind the growth in Internet subscribers who use the Web to access information
as well as commerce and communication. The Company intends to continue to
provide low-priced direct Internet access through the Company's
telecommunication network infrastructure which is comprised of two high speed
dedicated data lines that connect directly to the backbone of the Internet. The
Company plans to add additional high-speed dedicated data lines, enhance
system-wide access software, and expand the number of points of presence (POPs)
in local markets in order to attract and support additional subscribers. By
increasing the number of POPs, the Company will offer more users access to the
Internet through local phone calls and promote continued growth in its
subscriber base.
The Company also provides Integrated Services Digital Network (ISDN) and
high-speed Internet access using dedicated data lines to business customers. The
Company believes that the demand for high-speed Internet access and the ability
to integrate Internet access into a corporate-wide computer network is becoming
increasingly more important.
22
<PAGE>
Offering Monthly Community Access Services. Local public agencies, (such as
city agencies, police departments and libraries), are seeking to provide
information resources directly to their citizens through Community Web sites.
Believing that its subscribers will be willing to pay a recurring fee for such
community information access, the Company intends to offer such access in 1997.
Providing Internet Consulting Services. The Company provides Internet
solutions to assist businesses and their employees, including consulting
services for network setup, Internet application implementation, Intranet
design, Internet security consulting and Web site implementation.
Generating Marketing Service Fees. The Company will continue to design and
develop Web sites for its clients with sophisticated graphics to attract user
attention. The Company also provides all necessary hardware and software and
stores its clients' Web pages on its dedicated servers, which are monitored and
maintained 24 hours a day, 365 days a year.
Acquisition Strategies
The Company will seek to acquire local Internet access providers in its
Central California target markets. The criteria for such acquisition candidates
calls for attracting companies that (i) are located in markets under 500,000
population; (ii) have been in business a minimum of one year; (iii) have at
least 300 subscribers; (iv) have current owners and staff with strong technical
backgrounds, (v) enjoy strong community contacts, and (vi) offer projected
annual growth rates in excess of 200%. The Company may also seek to acquire
other small companies that provide consulting and related Internet services. The
Company is not negotiating to acquire nor has it entered into any agreement to
acquire any such Internet related companies.
Marketing
The Company primarily markets to customers who are new to the Internet, and
who seek to access information using point-and-click graphical interface.
Marketing is conducted through a small sales force which contacts prospective
customers responding to advertisements in computer, professional and business
publications. The Company also seeks customers by participating in industry
trade shows and educational seminars and through referrals from existing
customers. In addition, the Company seeks strategic alliances with local
computer retailers who offer Internet access fee discounts to their customers
and through joint advertising efforts with television and radio stations. The
Company may also distribute Internet services through retail channels.
Direct mailings, telemarketing programs, co-marketing agreements and joint
promotional efforts among organizations and individual users are strategies that
the Company may employ in the future. Finally, the Company seeks to retain
business customers and individual users through what it perceives to be
responsive customer support and services programs.
23
<PAGE>
Competition
The Internet services business is highly competitive and there are few
significant barriers to entry. Currently, the Company competes with a number of
national and local California Internet service providers. In addition, a number
of multinational corporations, including giant communications carriers such as
AT&T, Cable and Wireless, MCI, Sprint and the regional Bell operating companies,
are offering, or have announced plans to offer, Internet access or on-line
services. The Company also faces significant competition from the on-line
service firms such as America Online (AOL), CompuServe, Delphi, Genie, Microsoft
and Prodigy. The Company believes that new competitors which may include
computer software and services, telephone, media, publishing, cable television
and other companies, are likely to enter the on-line services market.
The ability of some of the Company's competitors to bundle Internet access
software with other popular products and services could give those competitors
an advantage over the Company. For example, NETCOM, MCI and PSI offer retail
software packages and AOL and Prodigy bundle their software with new PCs.
Many of the Company's competitors possess financial resources significantly
greater than those of the Company and, accordingly, could initiate and support
prolonged price competition to gain market share. If significant price
competition were to develop, the Company might be forced to lower its prices,
possibly for a protracted period, which would have a material adverse effect on
its financial condition and results of operations and could threaten its
economic viability. In addition, the Company believes that the Internet service
and on-line services business are likely to consolidate in the future, which
could result in increased price and other competition in the industry and
consequently adversely impact the Company. A number of on-line services have
recently lowered their monthly service fees, which may cause the Company to
lower its monthly fees in order to compete.
The Company believes that the primary competitive factors among Internet
access providers are price, customer support, technical expertise, local
presence in a market, ease of use, variety of value-added services and
reliability. The Company believes it is able to compete favorably in these
areas. The Company's success in its markets will depend heavily upon its ability
to provide high quality Internet connectivity and value-added Internet services
targeted in select target markets. Other factors that will affect the Company's
success in these markets include the Company's continued ability to attract
additional experienced marketing, sales and management talent, and the expansion
of support, training and field service capabilities.
Employees
As of January 24, 1997, the Company employed 15 full-time individuals. The
Company believes it maintains good relations with its employees. None of the
Company's employees are represented by a labor union or covered by a collective
bargaining agreement.
24
<PAGE>
Properties
In September 1994, the Company acquired, under a 20-year non-cancelable
capital lease, an office building, including land and improvements at 2580 West
Shaw, Fresno, California 93711. The lease requires initial annual minimum lease
payments lease payments of $188,000, increasing every five years to a maximum
annual payment of $338,000 in 2009. Under the lease, the Company has an option
at any time to purchase the building and land for $1,800,000 through April 30,
1997. Such amount increases to $1,900,000 through April 30, 1998. After April
30, 1998, the option amount increases annually by the percentage increase in the
Consumers Price Index, as further described in the lease. Upon exercise of the
purchase option, the principal portion of the lease payments made by the Company
will be applied toward the down payment for the purchase price based upon an
amortized 20-year note with interest accrued at 9% per annum. The Company has
leased a portion of the building to the SSC Principals based upon monthly
payments to the Company of $12,000 through February 28, 1998. The Company also
receives lease payments from another tenant in the amount of $78,000 per year.
The Company leases 4,000 square feet of space for its corporate offices and
PSNW facilities at 2300 Tulare Street, Suite 210, Fresno, California 93721. The
lease is for five years, ending May 2001 and requires minimum annual payments of
$33,600 increasing every year to a maximum of $54,000 in 2001.
25
<PAGE>
MANAGEMENT
Officers and Directors
The name, age and position of each of the Company's executive officers and
directors are set forth below:
<TABLE>
<CAPTION>
Officer/Director
Name Age Position Since
---- --- -------- ----------------
<S> <C> <C> <C>
Raymond J. Meyers 40 Chief Executive Officer 1997
and Director
Andrew Chu 25 President, Chief Financial Officer 1995
and Director
Steven A. Kriegsman 55 Director 1997
Howard P. Silverman 56 Director 1997
</TABLE>
Directors hold office for a period of one year from their election at the
annual meeting of stockholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors.
In January 1997 in connection with the sale of the Company's Classic Line,
the SSC Principals resigned as officers and directors and the above four
individuals were elected executive officers and directors of the Company. See
"Certain Transactions."
Background
The following is a summary of the business experience, for at least the
last five years, of each executive officer and director of the Company:
Raymond J. Meyers became the Company's Chief Executive Officer in January
1997. From 1985 to 1996, he was employed by Transamerica Corporation holding a
variety of positions, most recently (from 1991 to 1996) as Director of Business
Services for Transamerica Telecommunications. Mr. Meyers graduated from Rutgers
University in 1979 with a Bachelor of Arts degree in Economics.
Andrew Chu became the Company's Chief Financial Officer in April 1995 and
its President and a director in January 1997. From 1992 to 1994, he was employed
at IDS Financial Services as a Financial Planner. He was the managing partner of
The Pacific Group, a consulting firm engaged in equity financing for small firms
from January 1994 to April 1995. Mr. Chu holds a B.S. degree with emphasis in
Finance from California State University of Fresno.
26
<PAGE>
Steven A. Kriegsman has been President of the Kriegsman Group, a
privately-held Los Angeles, California based investment banking firm since 1989.
He graduated from New York University in 1964 with a Bachelor of Science degree.
Howard P. Silverman has been an independent business consultant with
emphasis on the financing of public and private companies for more than five
years. He earned a Bachelor of Science degree from City College of New York and
an O.D. degree from the Illinois College of Optometry. He is a director of
Incomnet, Inc., a publicly-held reseller of long distance services.
Executive Compensation
None of the Company's executive officers or directors currently receive
compensation in excess of $100,000 per year except Mr. Meyers who receives a
salary of $130,000 per year. In connection with his employment, Mr. Meyers was
also granted options to purchase 550,000 shares of Common Stock at $.25 per
share at any time until October 2001. No executive officers or directors as a
group received compensation in excess of $100,000 for the calendar years ended
December 31, 1996, 1995 or 1994. Compensation for all officers and directors as
a group for the calendar year ended December 31, 1996 aggregated $64,000.
The following table discloses certain compensation paid to the Company's
executive officers for the calendar years ended December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Prin- Other All
cipal Annual Restricted Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts($) sation($)
- ---- ---- --------- -------- --------- ----------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James C. 1996 $61,925 $ 0 0 0 0 0 0
Robinson 1995 61,425 5,941 0 0 0 0 0
Chief Execu- 1994 57,226 25,000 0 0 0 0 0
tive Officer
</TABLE>
1995 Stock Option Plan
In November 1994, the Company adopted a stock option plan (the "Plan")
which provides for the grant of options intended to qualify as "incentive stock
options" and "nonqualified stock options" within the meaning of Section 422 of
the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock
options are issuable only to eligible officers, directors, key employees and
consultants of the Company.
27
<PAGE>
The Plan is administered by the Board of Directors. At December 31, 1995,
the Company had reserved 150,000 shares of Common Stock for issuance under the
Plan. Under the Plan, the Board of Directors determines which individuals shall
receive options, the time period during which the options may be partially or
fully exercised, the number of shares of Common Stock that may be purchased
under each option and the option price.
The per share exercise price of the Common Stock may not be less than the
fair market value of the Common Stock on the date the option is granted. No
person who owns, directly or indirectly, at the time of the granting of an
incentive stock option, more than 10% of the total combined voting power of all
classes of stock of the Company is eligible to receive incentive stock options
under the Plan unless the option price is at least 110% of the fair market value
of the Common Stock subject to the option on the date of grant.
No options may be transferred by an optionee other than by will or the laws
of descent and distribution, and during the lifetime of an optionee, the option
may only be exercisable by the optionee. Options may be exercised only if the
option holder remains continuously associated with the Company from the date of
grant to the date of exercise. Options under the Plan must be granted within
five years from the effective date of the Plan and the exercise date of an
option cannot be later than ten years from the date of grant. Any options that
expire unexercised or that terminate upon an optionee's ceasing to be employed
by the Company become available once again for issuance. Shares issued upon
exercise of an option will rank equally with other shares then outstanding.
As of the date of this Prospectus, no options have been granted under the
Plan.
28
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the holdings of
Common Stock (without giving effect to any shares issuable upon exercise of the
Public Warrants or the Prior Representative's Unit Warrants) by each person who,
as of the date of this Prospectus, holds of record or is known by the Company to
hold beneficially or of record, more than 5% of the Company's Common Stock, by
each director, and by all directors and executive officers as a group. All
shares are owned beneficially and of record and all share amounts include stock
options and common stock purchase warrants exercisable within 60 days from the
date hereof. The address of all persons is in care of the Company at 2300 Tulare
Street, Suite 210, Fresno, California 93721.
Amount of Percent of
Name Ownership Class
- ---- --------- -----
Raymond J. Meyers(1) 550,000 6.6%
Andrew Chu(2) 585,000 7.0%
Steven A. Kriegsman(3) 1,765,000 18.6%
Howard P. Silverman(4) 850,000 9.9%
Andrew, Alexander, Wise &
Company, Incorporated(5) 1,350,000 14.9%
Gloria Ippolito 600,000 7.8%
Anaka Parkash 700,000 9.1%
Isaac Paschaldis 900,000 11.6%
John Benedetto 700,000 9.1%
Matthew Mulhern 400,000 5.2%
All officers and directors as
a group (4 persons)(1)(2)(3)(4) 3,750,000 32.7%
- ----------
(1) Represents stock options to purchase 550,000 shares at $.25 per share at
any time until October 2001.
(2) Represents common stock purchase warrants to purchase 585,000 shares at
$.25 per share at any time until October 2001 including 535,000 Warrants
which are being registered hereby.
(3) Represents common stock purchase warrants to purchase 1,765,000 shares at
$.25 per share at any time until October 2001 including 1,665,000 Warrants
which are being registered hereby. All common stock purchase warrants are
held by the Kriegsman Group of which Mr. Kriegsman is the President and a
principal stockholder.
(4) Represents common stock purchase warrants to purchase 850,000 shares at
$.25 per share at any time until October 2001, all of which are being
registered hereby.
(5) Represents common stock purchase warrants to purchase 1,370,000 shares at
$.25 per share at any time until October 2001, all of which are being
registered hereby.
29
<PAGE>
SELLING STOCKHOLDERS
By this Prospectus, the Company is registering (at its expense) the
Registered Securities consisting of 6,400,000 shares of Common Stock, 4,400,000
Warrants and 4,400,000 shares of Common Stock underlying the Warrants. Each
Warrant is exercisable to purchase one share of Common Stock at $.25 per share
at any time until October 2001. The Registered Securities may be sold from time
to time in public or private open market transactions at prevailing market
prices less customary selling commissions by the Selling Stockholders whose
names are listed in the table below. The Selling Stockholders may use the
Prospectus to offer the Registered Securities for sale in transactions in which
the Selling Stockholders may be deemed to be "underwriters" within the meaning
of the 1933 Act. The Selling Stockholders acquired the Registered Securities in
private transactions with the Company between September 1996 and October 1996.
See "Certain Transactions." Certain information concerning the Selling
Stockholders and the Registered Securities is set forth below.
<TABLE>
<CAPTION>
Number of
Number of Warrants or
Warrants Shares
Number of Number of or Shares to be
Shares Warrants Offered Owned After
Name Owned Owned For Sale Offering
---- --------- --------- -------- -----------
<S> <C> <C> <C> <C>
Andrew Chu(1) -- 535,000 535,000 50,000
Steve A. Kriegsman(1) -- 1,665,000 1,665,000 100,000
Howard P. Silverman(1) -- 850,000 850,000 -0-
Andrew, Alexander, Wise &
Company, Incorporated(2) -- 1,350,000 1,350,000 -0-
John Benedetto(2) 700,000 -- 700,000 -0-
Brian A. Brewer 100,000 -- 100,000 -0-
James Ippolito 350,000 -- 350,000 -0-
Raymond King 100,000 -- 100,000 -0-
Jack Ko 200,000 -- 200,000 -0-
Anaka Parkash(2) 700,000 -- 700,000 -0-
Isaac Paschaldis(2) 900,000 -- 900,000 -0-
Larry Pensa 350,000 -- 350,000 -0-
Francis Sajeski 100,000 -- 100,000 -0-
Jerry Silberman 100,000 -- 100,000 -0-
Rao-Qi Zhang 100,000 -- 100,000 -0-
George P. Argerakis 200,000 -- 200,000 -0-
Robert Cavallaro 100,000 -- 100,000 -0-
Ding Chu Fuh Chen 100,000 -- 100,000 -0-
Murray Frank 100,000 -- 100,000 -0-
Donald Gross 200,000 -- 200,000 -0-
Gloria Ippolito(2) 600,000 -- 600,000 -0-
Chris Meshouris 100,000 -- 100,000 -0-
James Meshouris 100,000 -- 100,000 -0-
Matthew Mulhern(2) 400,000 -- 400,000 -0-
Michael Pizite 300,000 -- 300,000 -0-
Bernard Schwartz 100,000 -- 100,000 -0-
30
<PAGE>
George Stripas 100,000 -- 100,000 -0-
Kuei-Chi Tsai 100,000 -- 100,000 -0-
Saul Unter 100,000 -- 100,000 -0-
Osweld Valenti 100,000 -- 100,000 -0-
</TABLE>
- ----------
(1) Officer or director of the Company. Messrs. Chu and Kriegsman own 50,000
and 100,000 common stock purchase warrants, respectively, which are not
being registered hereby.
(2) Principal stockholder of the Company.
31
<PAGE>
CERTAIN TRANSACTIONS
Management of the Company believes that the transactions described below
were no more or less fair than the terms of transactions which the Company might
otherwise have entered into with third party nonaffiliated entities. Any related
party transactions have been and will continue to be approved by a majority of
the disinterested members of the Company's Board of Directors.
In February 1995, the Company loaned $35,000 to Charles T. Howard, the
Company's then President. Interest on the loan is payable monthly at the rate of
9% per annum and the promissory note evidencing the indebtedness is due in April
1997. The promissory note is secured by 50,000 shares of the Company's Common
Stock owned by Mr. Howard.
In November 1994, the Company issued 857,140 shares of its Convertible
Preferred Stock to five of the Company's then officers and directors, each share
of which was convertible for no additional consideration into one share of
Common Stock under certain circumstances. The Convertible Preferred Stock was
cancelled and returned to the Company by the five holders in connection with the
Divestiture Agreement described below.
In January 1997, the Company sold the remaining assets of the Classic Line
to SSC Technologies, Inc. ("SSC") for $770,850 evidenced by a promissory note
bearing interest at 10% per annum payable in January 2007 and the assumption by
SSC of all of the liabilities of the Classic Line, aggregating approximately
$500,000. Under the terms of the asset sales agreement (the "Divestiture
Agreement"), the Company purchased 25% of the outstanding common stock of SSC
for $500,000 in cash and the remaining 75% of the outstanding common stock was
issued to other stockholders including Charles T. Howard, David L. Green, Ding
Yang and Steven L. Wilson who were previously officers and directors of the
Company (the "SSC Principals"). As a part of the Divestiture Agreement, the SSC
Principals also (i) cancelled 900,000 shares of Convertible Preferred Stock held
by them which were previously exercisable into an equal number of shares of
Common Stock, (ii) agreed not to sell an aggregate of 454,494 shares of Common
Stock owned by them until October 1999 except with the prior written consent of
Andrew, Alexander, Wise & Company, Incorporated ("AAWC"), (iii) agreed to
sublease office space from the Company at a monthly rental of $12,000 through
February 28, 1998, (iv) granted to Steven A. Kriegsman, a director of the
Company, an option to purchase up to 150,000 shares of Common Stock held by the
SSC principals at any time until October 2001, and (v) personally guaranteed on
a joint and several basis the $770,850 promissory note and all other obligations
of SSC to the Company.
In October 1996, the Company issued 2,200,000 Warrants to the Kriegsman
Group ("KG") for consulting services. Steven A. Kriegsman who subsequently
became a director of the Company is the President and controlling stockholder of
KG. KG subsequently assigned 535,000 of such Warrants to Andy Chu, the Company's
President and a director. The Warrants and underlying shares are being
registered hereby. KG also assigned 50,000 of the 150,000 stock options it
received from the SSC Principals to Mr. Chu. See "Selling Stockholders."
32
<PAGE>
In October 1996, the Company issued 2,200,000 Warrants to AAWC as
additional compensation for AAWC assisting the Company in the private placement
of 6,000,000 shares of the Company's Common Stock to a group of investors for
$.25 per share. AAWC subsequently assigned 850,000 Warrants to Howard P.
Silverman, a director of the Company. The Warrants and underlying shares are
being registered hereby. See "Selling Stockholders." The Company also paid to
AAWC a cash commission of 10% of the gross proceeds raised ($150,000) and a
nonaccountable expense allowance of 3% of such gross proceeds ($45,000). In
September 1996, AAWC and KG entered into an agreement not to sell the 2,200,000
Warrants and underlying shares owned by each party for a period of three years
without the consent of the other party.
33
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 10,000,000 shares of common stock, no
par value (the "Common Stock"), of which 7,730,001 shares are currently
outstanding. Upon issuance, the shares of Common Stock are not subject to
further assessment or call. The holders of Common Stock are entitled to one vote
for each share held of record on each matter submitted to a vote of
stockholders. Cumulative voting for election of directors is permitted. Subject
to the prior rights of any series of Preferred Stock which may be issued by the
Company in the future, holders of Common Stock are entitled to receive ratably
such dividends that may be declared by the Board of Directors out of funds
legally available therefor, and, in the event of the liquidation, dissolution or
winding up of the Company, are entitled to share ratably in all assets remaining
after payment of liabilities. Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is, and the Common Stock to be outstanding upon
completion of the Offering will be, validly issued, fully paid and
nonassessable.
Public Warrants
In connection with the Prior Offering, the Company issued 690,000 Public
Warrants. Each Public Warrant represents the right to purchase one share of
Common Stock at an exercise price of $6.50 per share at any time until February
9, 1998. The exercise price and the number of shares issuable upon exercise of
the Public Warrants are subject to adjustment in certain events including the
issuance of Common Stock as a dividend on shares of Common Stock, subdivisions
or combinations of the Common Stock or similar events. The Public Warrants do
not contain provisions protecting against dilution resulting from the sale of
additional shares of Common Stock for less than the exercise price of the Public
Warrants or the current market price of the Company's securities.
Public Warrants may be redeemed in whole or in part, at the option of the
Company upon 30 days' notice, at a redemption price equal to $.01 per Public
Warrant if the closing price of the Company's Common Stock is at least $7.50 per
share for 30 consecutive trading days.
Holders of Public Warrants may exercise their Public Warrants for the
purchase of shares of Common Stock only if a current prospectus relating to such
shares is then in effect and only if such shares are qualified for sale, or
deemed to be exempt from qualification under applicable state securities laws.
The Company is required to use its best efforts to maintain a current prospectus
relating to such shares of Common Stock at all times when the market price of
the Common Stock exceeds the exercise price of the Public Warrants until the
expiration date of the Public Warrants, although there can be no assurance that
the Company will be able to do so.
34
<PAGE>
The shares of Common Stock issuable on exercise of the Public Warrants will
be, when issued in accordance with the Public Warrants, fully paid and
non-assessable. The holders of the Public Warrants have no rights as
stockholders until they exercise their Public Warrants.
For the life of the Public Warrants, the holders thereof are given the
opportunity to profit from a rise in the market for the Company's Common Stock,
with a resulting dilution in the interest of all other stockholders. So long as
the Public Warrants are outstanding, the terms on which the Company could obtain
additional capital may be adversely affected. The holders of the Public Warrants
might be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital by a new offering of securities
on terms more favorable than those provided by the Public Warrants.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, no
par value (the "Preferred Stock"), none of which is currently outstanding. In
December 1994, the Company issued 900,000 shares of Preferred Stock to five of
the Company's then executive officers. All such shares were subsequently
cancelled with the agreement of the holders. The Preferred Stock may, without
action by the stockholders of the Company, be issued by the Board of Directors
from time to time in one or more series for such consideration and with such
relative rights, privileges and preferences as the Board may determine.
Accordingly, the Board has the power to fix the dividend rate and to establish
the provisions, if any, relating to voting rights, redemption rates, sinking
fund provisions, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
The Warrants
The Company has issued an aggregate of 4,400,000 Warrants, which, along
with the underlying 4,400,000 shares of Common Stock, are being registered
hereby. See "Selling Stockholders." Each Warrant entitles the holder to purchase
one share of Common Stock for $.25 per share at any time until October 2001.
Use of Preferred Stock As Anti-Takeover Device
It is not possible to state the actual effect of any other authorization of
Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of any other series of Preferred
Stock. The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the future
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and therefore, may be used as an "anti-takeover" device adversely
affecting the holders of the Common Stock and depressing the value of the Common
Stock. The Company has no current plans to issue any other Preferred Stock.
35
<PAGE>
See "Risk Factors - Control by Management; Authorization and Issuance of
Preferred Stock; Prevention of Changes in Control."
Common Stock Eligible For Future Sale
There are currently 7,730,001 shares of Common Stock outstanding of which
690,000 shares were registered in the Company's IPO, 6,400,000 shares are being
registered hereby and the remaining 640,001 shares may be sold pursuant to Rule
144 commencing in February 1997 subject to the agreement of the holders of
454,494 shares not to sell such shares until October 1999 without the written
consent of AAWC. Any future sales may adversely affect prevailing market prices
for the Common Stock and could impair the Company's ability to raise capital
through the sale of its equity securities. The Company has also granted certain
demand and piggyback registration rights with respect to the Prior
Representative's Unit Warrants and the Common Stock underlying the Prior
Representative's Unit Warrants.
Transfer Agent and Warrant Agent
Corporate Stock Transfer, Inc., 370 Seventeenth Street, Suite 2350, Denver,
Colorado 80202, is the Company's transfer agent and warrant agent.
Dividends
The Company has not paid cash dividends on its Common Stock and does not
intend to pay any cash dividends on its Common Stock in the foreseeable future.
Earnings, if any, will be retained to finance growth. The Company has no
financing or other agreements which prohibit payment of dividends.
Limitation on Liability
The Company's Articles of Incorporation provides that liability of
directors to the Company for monetary damages is eliminated to the full extent
provided by Colorado law. Under Colorado law, a director is not personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability arising from (i) any breach of
the director's duty of loyalty to the Company or its shareholders; (ii) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) authorizing the unlawful payment of a dividend or other
distribution on the Company's capital stock or the unlawful purchases of its
capital stock, or (iv) any transaction from which the director derived any
improper personal benefit.
The effect of this provision in the Articles of Incorporation is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described above. This provision does not limit or eliminate the
rights of the
36
<PAGE>
Company or any stockholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care or any
liability for violation of the federal securities laws.
PLAN OF DISTRIBUTION
By this Prospectus, the company is registering (at its expense) the
Registered Securities consisting of 6,400,000 shares of Common Stock, 4,400,000
Warrants and 4,400,000 shares of Common Stock underlying the Warrants. Each
Warrant is exercisable to purchase one share of Common Stock at $.25 per share
at any time until October 2001. The Registered Securities may be sold from time
to time in public or private open market transactions at prevailing market
prices less customary selling commissions by the Selling Stockholders whose
names are listed in the table below. The Selling Stockholders may use the
Prospectus to offer the Registered Securities for sale in transactions in which
the Selling Stockholders may be deemed to be "underwriters" within the meaning
of the 1933 Act. The Selling Stockholders acquired the Registered Securities in
private transactions with the Company between September and October 1996. See
"Selling Stockholders" and "Certain Transactions."
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by the Law Office of Gary A. Agron, Englewood, Colorado.
EXPERTS
The financial statements of the Company for the years ended December 31,
1994 and 1995, appearing in this Prospeftus and Registration Statement, have
been audited by Angell & Deering, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
37
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Proforma Unaudited Condensed Balance Sheet as of
September 30, 1996 and Statements of Operations for
the nine months ended September 30, 1996 and 1995 F-2
Independent Auditors' Report F-9
Balance Sheets as of September 30, 1996 (Unaudited)
and December 31, 1995 F-10
Statements of Operations for the nine months ended
September 30, 1996 and 1995 (Unaudited) and for
the Years Ended December 31, 1995 and 1994 F-12
Statements Of Changes in Shareholders' Equity
for the Years Ended December 31, 1995 and 1994 and
for the nine months ended September 30, 1996
(Unaudited) F-13
Statements Of Cash Flows for the nine months ended
September 30, 1996 and 1995 (Unaudited) and for
the Years Ended December 31, 1995 and 1994 F-14
Notes To Financial Statements F-16
F-1
<PAGE>
PROTOSOURCE CORPORATION
PROFORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited proforma condensed financial statements gives effect to
the divestiture of ProtoSource Corporation's (the "Company's") software
development, MarketStreet and computer training center divisions (the
"divisions") to the former management of the Company. The proforma condensed
financial statements are based on the Company's historical financial statements
and estimates and assumptions set forth below.
The proforma condensed balance sheet as of September 30, 1996 gives effect to
the divestiture of the divisions to the former management of the Company as if
the sale took place on September 30, 1996.
The proforma condensed statement of operations for the nine months ended
September 30, 1996 includes the divestiture of the divisions as if the
transaction was completed at the beginning of the year. The proforma condensed
statement of operations for the nine months ended September 30, 1995 includes
the divestiture of the divisions as if the transaction was completed at the
beginning of the year.
Proforma adjustments are based upon preliminary estimates, available information
and certain assumptions that management deems appropriate. The unaudited
proforma financial information presented herein is not necessarily indicative of
the results of operations or financial position that the Company would have
obtained had such events occurred at the beginning of the period, as assumed, or
of the future results of the Company. The proforma financial statements should
be read in conjunction with the historical financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995 and the Company's Quarterly Report on Form 10-QSB for
the nine months ended September 30, 1996.
F-2
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
PROFORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
Proforma Proforma
ProtoSource Adjustments Combined
----------- ----------- --------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,370 $1,070,000 (1) $1,072,370
250,000 (2)
(250,000)(3)
Accounts receivable, net of allowance
for doubtful accounts of $199,848 and $-0-,
as adjusted 178,256 (129,438)(3) 48,818
Inventories 50,288 (50,288)(3) --
Deposits and other current assets 46,775 (20,000)(1) 14,275
(12,500)(3)
---------- ---------- ----------
Total Current Assets 277,689 857,774 1,135,463
---------- ---------- ----------
Property and Equipment, at cost:
Land 411,176 -- 411,176
Building and improvements 1,389,590 -- 1,389,590
Equipment 738,947 (67,806)(3) 671,141
Furniture 132,750 (38,375)(3) 94,375
Vehicles 10,090 -- 10,090
---------- ---------- ----------
2,682,553 (106,181) 2,576,372
Less accumulated depreciation and
amortization 423,789 (31,732)(3) 392,057
---------- ---------- ----------
Net Property and Equipment 2,258,764 (74,449) 2,184,315
---------- ---------- ----------
Other Assets:
Software development costs, net of (250,000)(2)
accumulated amortization of $895,868 710,215 (460,215)(3) --
Deferred tax assets 71,550 -- 71,550
Note receivable 35,000 (35,000)(3) 770,850
770,850 (3)
Deposits and other assets 74,141 -- 74,141
---------- ---------- ----------
Total Other Assets 890,906 25,635 916,541
---------- ---------- ----------
Total Assets $3,427,359 $ 808,960 $4,236,319
========== ========== ==========
The accompanying notes are an integral
part of these unaudited proforma condensed financial statements.
F-3
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
PROFORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Proforma Proforma
ProtoSource Adjustments Combined
----------- ----------- --------
<S> <C> <C> <C>
Current Liabilities:
Accounts payable $ 417,194 $(275,438)(3) $ 141,756
Accrued liabilities 294,710 (81,611)(3) 213,099
Customer deposits 44,415 -- 44,415
Notes payable 200,000 (200,000)(1) --
Current portion of long-term debt 116,008 -- 116,008
Unearned customer support revenue 25,099 (25,099)(3) --
----------- --------- ----------
Total Current Liabilities 1,097,426 (582,148) 515,278
----------- --------- ----------
Long-Term Debt, net of current portion above:
Bank 3,130 -- 3,130
Individuals 45,907 (45,907)(3) --
Obligations under capital leases 1,801,161 -- 1,801,161
Less current portion above (116,008) -- (116,008)
----------- --------- ----------
Total Long-Term Debt 1,734,190 (45,907) 1,688,283
----------- --------- ----------
Commitments and contingencies -- -- --
Shareholders' Equity:
Preferred stock, no par value;
5,000,000 shares authorized, 900,000
shares issued and outstanding, -0- adjusted -- -- (4) --
Common stock, no par value; 10,000,000
shares authorized, 1,330,001 shares
issued and outstanding, 7,730,001 as adjusted 3,464,286 1,350,000 (1) 4,814,286
Retained earnings (deficit) (2,868,543) 187,015 (3) (2,781,528)
(100,000)(1)
----------- --------- ----------
Total Shareholders' Equity 595,743 1,437,015 2,032,758
----------- --------- ----------
Total Liabilities and Shareholders'
Equity $ 3,427,359 $ 808,960 $4,236,319
=========== ========= ==========
The accompanying notes are an integral
part of these unaudited proforma condensed financial statements.
F-4
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
PROFORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Proforma Proforma
ProtoSource Adjustments Combined
----------- ----------- --------
<S> <C> <C> <C>
Net Revenues:
Product sales $ 19,120 $ (19,120) (5) $ --
Hardware equipment sales 244,366 (244,366) (5) --
Professional service fees 808,949 (265,993) (5) 542,956
Other -- -- --
---------- --------- ---------
Total Revenues 1,072,435 (529,479) 542,956
---------- --------- ---------
Operating Expenses:
Cost of product sales 132,339 (132,339) (5) --
Cost of hardware equipment sales 204,236 (204,236) (5) --
Cost of professional services 342,612 113,648 (5) 456,260
Sales and marketing 384,808 (384,808) (5) --
Research and development 213,126 (213,126) (5) --
General and administrative 419,624 (113,648) (5) 305,976
---------- --------- ---------
Total Operating Expenses 1,696,745 (934,509) 762,236
---------- --------- ---------
Operating Loss (624,310) 405,030 (219,280)
---------- --------- ---------
Other Income (Expense):
Interest income 1,140 -- 1,140
Interest expense (137,007) -- (137,007)
Financing costs -- -- --
Rent income -- 108,000 (6) 108,000
Other, net 78,189 -- 78,189
---------- --------- ---------
Total Other Income (Expense) (57,678) 108,000 50,322
---------- --------- ---------
Loss Before Provision
(Benefit) For Income Taxes (681,988) 513,030 (168,958)
Provision (benefit) for income taxes -- -- --
---------- --------- ---------
Net Loss $ (681,988) $ 513,030 $(168,958)
========== ========= =========
Net Loss Per Share of Common
Stock $ (.51) $ (.02)
========== =========
Weighted Average Number of
Common Shares Outstanding 1,330,001 7,730,001
========== =========
The accompanying notes are an integral
part of these unaudited proforma condensed financial statements.
F-5
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
PROFORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Proforma Proforma
ProtoSource Adjustments Combined
----------- ----------- --------
<S> <C> <C> <C>
Net Revenues:
Product sales $ 283,029 $ (283,029) (5) $ --
Hardware equipment sales 801,316 (801,316) (5) --
Professional service fees 426,963 (404,493) (5) 22,470
Other -- -- --
---------- ----------- ---------
Total Revenues 1,511,308 (1,488,838) 22,470
---------- ----------- ---------
Operating Expenses:
Cost of product sales 227,250 (227,250) (5) --
Cost of hardware equipment sales 632,904 (632,904) (5) --
Cost of professional services 209,493 (133,947) (5) 75,546
Sales and marketing 443,528 (443,528) (5) --
Research and development 315,684 (315,684) (5) --
General and administrative 401,424 -- 401,424
---------- ----------- ---------
Total Operating Expenses 2,230,283 (1,753,313) 476,970
---------- ----------- ---------
Operating Loss (718,975) 264,475 (454,500)
---------- ----------- ---------
Other Income (Expense):
Interest income 48,255 -- 48,255
Interest expense (122,266) -- (122,266)
Financing costs -- -- --
Rent income -- 108,000 (6) 108,000
Other, net 83,893 -- 83,893
---------- ----------- ---------
Total Other Income (Expense) 9,882 108,000 117,882
---------- ----------- ---------
Loss Before Provision
(Benefit) For Income Taxes (709,093) 372,475 (336,618)
Provision (benefit) for income taxes (170,183) -- (170,183)
---------- ----------- ---------
Net Loss $ (538,910) $ 372,475 $(166,435)
========== =========== =========
Net Loss Per Share of Common
Stock $ (.45) $ (.02)
========== =========
Weighted Average Number of
Common Shares Outstanding 1,205,441 7,605,441
========== =========
The accompanying notes are an integral
part of these unaudited proforma condensed financial statements.
F-6
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO PROFORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
---------------------
In 1996, the Company retained the Kriegsman Group ("Kriegsman"), a
financial consulting firm, to assist it with a financial restructuring of
its operations. Kriegsman was to use its best efforts to provide a minimum
of $1,500,000 of financing for the Company through bridge loans or equity
financing. In August 1996, a bridge loan of $200,000 was obtained by the
Company for which the Company issued 400,000 shares of common stock to the
bridge lenders as additional consideration for the $200,000 loan. In
October and November 1996 the Company sold 6,000,000 shares of its common
stock at $.25 per share through an Underwriter, which included the
conversion of the $200,000 bridge loan into common stock. The Company paid
the Underwriter a 10% sales commission and a 3% nonaccountable expense
allowance on the bridge loan and sale of common stock. The Company also
entered into a two year financial consulting agreement with the Underwriter
which provides for a monthly consulting fee of $5,000 for the two year
period.
As a part of the financing transaction, the Company granted both the
Underwriter and Kriegsman warrants to purchase common stock. The Company
granted 2,200,000 warrants to each which are exercisable at $.25 per share
for a four year period through October 31, 2001. The Company also agreed to
use its best efforts to file a Registration Statement within 90 days of the
closing of the Private Placement to register the shares issued in the
Private Placement and the shares underlying the warrants issued to the
Underwriter and Kriegsman.
In connection with the financial restructuring the Company agreed to divest
the software development, MarketStreet and the computer training center
divisions. The divisions were spun-off to a new Company owned by the former
management of the Company on December 31, 1996. All of the assets of the
three divisions and the related liabilities and facilities leases were
assumed by the former management. Also included in the assets of the
divested divisions will be $500,000 in cash less expenses of the divested
divisions paid prior to closing. The management of the divested divisions
will also assume all litigation and claims related to the divisions which
includes one law suit in the amount of approximately $70,000. The Kriegsman
Group will also nominate new members for the Board of Directors upon
completion of the divestiture of the three divisions. The Company will
receive a 25% ownership interest in the common stock of the new company
formed to acquire the divested divisions and the divested divisions will
lease the principal office from the Company for a period of eighteen months
at the current market rate.
F-7
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO PROFORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
2. Proforma Net Income (Loss) Per Share of Common Stock
------------------------------------------------------
The proforma net income (loss) per share of common stock is based on the
weighted average number of common shares outstanding during the period. The
shares issued in the Private Placement described above are given effect to
as if they were issued at the beginning of the period for each period
presented in the proforma combined calculations.
3. Proforma Adjustments
--------------------
Adjustments to present the proforma combined condensed financial statements
are as follows:
1. Adjustment to record the sale of 6,000,000 shares of common stock at
$.25 per share, which includes conversion of the $200,000 Bridge Loan
into common stock, net of offering expenses of approximately $250,000.
Also includes issuance of 400,000 shares of common stock as additional
consideration to the bridge lenders.
2. Adjustment to record the receipt of approximately $250,000 from the
sale of additional interest in the Software, net of expenses.
3. Adjustment to record the divestiture of the assets and liabilities of
the divested divisions.
4. Adjustment to record cancellation of all of the outstanding Preferred
Stock of the Company in accordance with the terms of the Divestiture
Agreement.
5. Adjustment to remove the operations of the divested divisions for the
period.
6. Adjustment to record rent income for the sublease of office space to
the divested divisions of $12,000 per month.
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ProtoSource Corporation
We have audited the accompanying balance sheet of ProtoSource Corporation
(formerly SHR Corporation dba Software Solutions Company) as of December 31,
1995 and the related statements of operations, changes in shareholders' equity
and cash flows for the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 ProtoSource Corporation as of
December 31, 1995 and the results of its operations and its cash flows for the
years ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,816,285 during the year ended December 31,
1995. As discussed in Note 1 to the financial statements, the Company's
significant operating losses raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 23, 1996
F-9
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,370 $ 138,646
Accounts receivable, net of allowance
for doubtful accounts of $199,848 178,256 214,109
Inventories 50,288 16,059
Deposits and other current assets 46,775 21,252
---------- ----------
Total Current Assets 277,689 390,066
---------- ----------
Property and Equipment, at cost:
Land 411,176 411,176
Building and improvements 1,389,590 1,389,590
Equipment 738,947 633,224
Furniture 132,750 131,895
Vehicles 10,090 18,628
---------- ----------
2,682,553 2,584,513
Less accumulated depreciation and
amortization 423,789 287,441
---------- ----------
Net Property and Equipment 2,258,764 2,297,072
---------- ----------
Other Assets:
Software development costs, net of
accumulated amortization of $895,868
and $763,614, respectively 710,215 400,368
Deferred tax assets 71,550 71,550
Note receivable 35,000 35,000
Deposits and other assets 74,141 75,355
---------- ----------
Total Other Assets 890,906 582,273
---------- ----------
Total Assets $3,427,359 $3,269,411
========== ==========
The accompanying notes are an integral
part of these financial statements.
F-10
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 417,194 $ 195,158
Accrued liabilities 294,710 77,736
Customer deposits 44,415 5,500
Notes payable 200,000 5,000
Current portion of long-term debt 116,008 101,551
Unearned customer support revenue 25,099 34,542
----------- -----------
Total Current Liabilities 1,097,426 419,487
----------- -----------
Long-Term Debt, net of current portion above:
Bank 3,130 5,723
Individuals 45,907 29,843
Obligations under capital leases 1,801,161 1,792,970
Less current portion above (116,008) (101,551)
----------- -----------
Total Long-Term Debt 1,734,190 1,726,985
----------- -----------
Commitments and contingencies -- --
Shareholders' Equity:
Preferred stock, no par value;
5,000,000 shares authorized, 900,000
shares issued and outstanding -- --
Common stock, no par value; 10,000,000
shares authorized, 1,330,001 shares
issued and outstanding 3,464,286 3,309,494
Retained earnings (deficit) (2,868,543) (2,186,555)
----------- -----------
Total Shareholders' Equity 595,743 1,122,939
----------- -----------
Total Liabilities and Shareholders'
Equity $ 3,427,359 $ 3,269,411
=========== ===========
The accompanying notes are an integral
part of these financial statements.
F-11
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net Revenues:
Product sales $ 19,120 $ 283,029 $ 283,029 $ 144,736
Hardware equipment sales 244,366 801,316 942,101 983,690
Professional service fees 808,949 426,963 609,836 680,528
Other -- -- -- 22,436
----------- ---------- ----------- ----------
Total Revenues 1,072,435 1,511,308 1,834,966 1,831,390
----------- ---------- ----------- ----------
Operating Expenses:
Cost of product sales 132,339 227,250 412,258 180,830
Cost of hardware equipment sales 204,236 632,904 719,698 743,528
Cost of professional services 342,612 209,493 307,743 350,454
Sales and marketing 384,808 443,528 640,819 275,267
Research and development 213,126 315,684 495,254 231,625
General and administrative 419,624 401,424 1,079,503 257,250
----------- ---------- ----------- ----------
Total Operating Expenses 1,696,745 2,230,283 3,655,275 2,038,954
----------- ---------- ----------- ----------
Operating Loss (624,310) (718,975) (1,820,309) (207,564)
----------- ---------- ----------- ----------
Other Income (Expense):
Interest income 1,140 48,255 50,891 742
Interest expense (137,007) (122,266) (160,192) (64,167)
Financing costs -- -- -- (260,000)
Rent income -- -- 124,356 62,645
Other, net 78,189 83,893 (10,231) 13,919
----------- ---------- ----------- ----------
Total Other Income (Expense) (57,678) 9,882 4,824 (246,861)
----------- ---------- ----------- ----------
Loss Before Provision
(Benefit) For Income Taxes (681,988) (709,093) (1,815,485) (454,425)
Provision (benefit) for income taxes -- (170,183) 800 (81,329)
---------- ---------- ----------- ----------
Net Loss $ (681,988) $ (538,910) $(1,816,285) $ (373,096)
========== ========== =========== ==========
Net Loss Per Share of Common
Stock $ (.51) $ (.45) $ (1.47) $ (.62)
========== ========== =========== ==========
Weighted Average Number of
Common Shares Outstanding 1,330,001 1,205,441 1,236,590 598,719
========== ========== =========== ==========
The accompanying notes are an integral
part of these financial statements.
F-12
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Retained
--------------- ------------ Earnings
Shares Amount Shares Amount (Deficit)
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 -- $ -- 571,430 $ 52,195 $ 2,826
Issuance of common stock -- -- 28,571 31,400 --
Issuance of common stock -- -- 40,000 220,000 --
Issuance of preferred stock 900,000 -- -- -- --
Net loss -- -- -- -- (373,096)
------- ---- --------- ---------- ---------
Balance at December 31, 1994 900,000 -- 640,001 303,595 (370,270)
Issuance of common stock and warrants
in public offering (net of offering
costs of $808,476) -- -- 690,000 2,986,524 --
Contribution of shares to the Company
by officers and directors for issuance
in connection with an acquisition -- -- -- 19,375 --
Net loss -- -- -- -- (1,816,285)
------- ---- --------- ----------- ---------
Balance at December 31, 1995 900,000 -- 1,330,001 3,309,494 (2,186,555)
Contribution of capital by officers
through forgiveness of previously
accrued salaries (unaudited) -- -- -- 154,792 --
Net loss (unaudited) -- -- -- -- (681,988)
------- ---- --------- ---------- -----------
Balance at September 30, 1996
(unaudited) 900,000 $ -- 1,330,001 $3,464,286 $(2,868,543)
======= ==== ========= ========== ===========
The accompanying notes are an integral
part of these financial statements.
F-13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(681,988) $ (538,910) $(1,816,285) $(373,096)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Depreciation and amortization 268,687 337,933 584,810 234,164
Provision for bad debts -- -- 508,187 67,354
Deferred income taxes -- (164,987) -- (83,971)
Compensation from issuance
of common stock -- -- -- 24,350
Issuance of common stock for
costs of financing -- -- -- 220,000
Changes in operating assets
and liabilities:
Accounts receivable 35,853 (537,852) (499,436) (223,467)
Inventories (34,229) (95,083) (4,625) (5,204)
Deposits and other assets (5,523) (55,585) (18,814) (42,852)
Accounts payable 222,036 (200,303) (150,623) 295,956
Accrued liabilities 371,766 23,760 (10,618) 53,772
Customer deposits 38,915 24,254 (12,213) (79,154)
Unearned customer support revenue (9,443) (3,867) (5,286) 100
--------- ----------- ----------- ---------
Net Cash Provided (Used) By
Operating Activities 206,074 (1,210,640) (1,424,903) 87,952
--------- ----------- ----------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment (7,238) (454,939) (403,591) (89,151)
Software development costs capitalized (442,186) (500,781) (592,754) (250,702)
Receivable from shareholders -- -- (35,000) 17,966
Other 1,214 (11,778) -- (4,000)
--------- ----------- ----------- ---------
Net Cash (Used) By Investing
Activities (448,210) (967,498) (1,031,345) (325,887)
--------- ----------- ----------- ---------
Cash Flows From Financing Activities:
Proceeds from line of credit, net -- -- -- 35,000
Payments on notes payable (106,140) (564,753) (625,998) (34,408)
Proceeds from borrowing 232,000 -- 20,000 400,010
Issuance of common stock -- 3,795,000 3,795,000 7,050
Deferred offering costs (20,000) (619,990) (619,990) (188,487)
---------- ----------- ----------- ---------
Net Cash Provided By Financing
Activities 105,860 2,610,257 2,569,012 219,165
--------- ----------- ----------- ---------
Net Increase (Decrease) in Cash
and Cash Equivalents (136,276) 432,119 112,764 (18,770)
Cash and Cash Equivalents at
Beginning of Period 138,646 25,882 25,882 44,652
--------- ----------- ----------- ----------
Cash and Cash Equivalents at
End of Period $ 2,370 $ 458,001 $ 138,646 $ 25,882
========= =========== =========== ==========
The accompanying notes are an integral
part of these financial statements.
F-14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period for:
Interest $ 137,007 $ 122,266 $ 174,251 $ 50,108
Income taxes -- -- 800 2,800
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Acquisition of equipment
under capital leases $ 90,802 $ -- $ 118,701 $ 32,064
Acquisition of land and building and
improvements under capital lease -- -- -- 1,760,000
Purchase of assets for notes payable -- -- -- 49,090
Common stock contributed by stockholders
for issuance in acquisition by the
Company -- -- 19,375 --
Capital contribution by officers through
forgiveness of previously accrued salaries 154,792 -- -- --
The accompanying notes arean integral
part of these financial statements.
F-15
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Description of Business
-----------------------
ProtoSource Corporation, formerly SHR Corporation, doing business as
Software Solutions Company (the "Company"), was incorporated on July 1,
1988, under the laws of the state of California. The Company is a software
developer and computer systems integrator in the agriculture and general
business application market and is an Internet services provider.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount and classification
of liabilities that might be necessary should the Company be unable to
continue as a going concern. The Company's continuation as a going concern
is dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may be
required, and to increase sales to a level where the Company becomes
profitable. Additionally, the Company has experienced significant cash
liquidity shortfalls from operations.
The Company's continued existence is dependent upon its ability to achieve
its operating plan. Management's plan consists of the following:
1. Sale of certain assets of the Company.
2. Reduction of cash shortfalls as a result of downsizing
in general and administrative and research and
development expenditures.
3. Potential exercise of outstanding common stock
purchase warrants.
4. Obtaining additional equity capital through the sale
of common stock.
If management cannot achieve its operating plan because of sales shortfalls
or other unfavorable events, the Company may find it necessary to dispose
of assets, or undertake other actions as may be appropriate.
Unaudited Interim Financial Statements
--------------------------------------
The financial statements as of September 30, 1996 and for the nine months
ended September 30, 1996 and 1995 are unaudited, however, in the opinion of
management of the Company, all adjustments (consisting solely of normal
recurring adjustments) necessary to a fair presentation of the financial
statements for the interim periods have been made.
F-16
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Amendment to Authorized Common and Preferred Shares and Stock Split
-------------------------------------------------------------------
On June 20, 1994, the Company's shareholders adopted a resolution approving
a 101.3171 for one stock split of the issued and outstanding common shares,
effective July 1, 1994. In October 1994, the company's Board of Directors
authorized and the shareholders approved, an amendment and restatement of
the Company's Articles of Incorporation, to increase the number of
authorized shares of common stock to 10,000,000 shares and to authorize the
issuance of up to 5,000,000 shares of preferred stock. All share
information and per share data have been restated for all periods presented
to reflect the stock split and increase in authorized shares.
Revenue Recognition
-------------------
Product sales represent sales of application software to end users.
Equipment sales represent sales of computer and peripheral equipment
bundled with the Company's software. Professional service fees represent
revenue from custom programming, post contract customer support (PCS)
agreements and training and installation related services. Fees associated
with insignificant vendor obligations related to installation of systems
are deferred and recognized upon completion of performance. Other income
represents primarily sales of promotional brochures, marketing materials
and sales of miscellaneous equipment and supplies.
Revenue from product sales is recognized upon delivery to the customer,
provided that no significant vendor or PCS obligations remain, and
collection of the related receivable is deemed probable. Revenue from PCS
agreements is recognized on a straight-line basis over the period of the
PCS agreement.
Net revenues consist of sales, less discounts. Through December 31, 1995,
the Company has not had significant sales returns or experienced
significant warranty costs.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less to be
cash equivalents.
Inventories
-----------
Inventories, consisting of computer equipment and supplies held for resale,
are stated at the lower of cost (determined on the first in, first out
method) or market.
F-17
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Property and Equipment
----------------------
Depreciation and amortization of equipment, furniture and vehicles are
computed using the straight-line method over estimated useful lives of
three to seven years. Assets held under capital lease obligations,
exclusive of land, are amortized using the straight-line method over the
shorter of the useful lives of the assets or the term of the lease.
Depreciation of property and equipment charged to operations was $171,695
and $50,845 for the years ended December 31, 1995 and 1994, respectively.
Software Development Costs
--------------------------
Software development costs are capitalized with respect to those products
for which technological feasibility (as defined in Statement of Financial
Accounting Standards No. 86) has been established. Capitalized amounts are
reported at the lower of unamortized cost or net realizable value. These
costs are amortized into cost of goods sold on a product-by-product basis.
The annual amortization expense is the greater of the amount computed using
the ratio of current revenue to the total anticipated revenue for the
product or the straight-line method over the estimated life of the product
starting when the product is available for general release to customers.
Generally, the Company amortizes these costs over three years. Software
development costs capitalized relate primarily to product enhancements.
Amortization expense for capitalized software was $412,258 and $183,163 for
the years ended December 31, 1995 and 1994, respectively.
Deferred Offering Costs
-----------------------
In connection with the Company's public offering (Note 6), costs incurred
to complete the offering have been deferred and were offset against the
proceeds of the offering.
Income Taxes
------------
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in 1992. Under the statement, deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities using enacted tax laws
and rates for the years when the differences are expected to reverse.
The Company had a fiscal year-end of June 30 for income tax reporting
purposes. The Company changed its fiscal year-end for income tax reporting
to December 31 to conform with its fiscal year for financial reporting
purposes.
F-18
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Net Income (Loss) Per Share of Common Stock
-------------------------------------------
Net income (loss) per share of common stock is based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding stock
options and warrants.
Estimates
---------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
2. Current Notes Payable
---------------------
Bank
----
Installment note due October 1996, monthly
principal payments of $500 plus interest at
the Bank's base rate plus 1.5% (10.0% at
December 31, 1995), collateralized by
substantially all assets of the Company. $ 5,000
========
3. Long-Term Debt
--------------
Long-term debt consists of the following:
Bank
----
10.5% installment note due in 1997 with monthly
principal and interest payments of $328,
collateralized by an automobile. $ 5,723
Individuals
-----------
10% unsecured installment note due in 1996 with
monthly principal and interest payments of $829
with a balloon payment due in 1996. 29,843
Obligations Under Capital Leases
--------------------------------
5.7% to 20.1% installment notes due in 1997 to
2000, collateralized by equipment. 156,392
9% capital lease for building and land with
a 20 year lease term, with monthly principal
and interest payments of $15,634 for the
first five years, $19,021 for the next five
years, $23,142 for the next five years and
$28,156 for the next five years with an
escalating purchase option (Note 7). 1,636,578
---------
F-19
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
3. Long-Term Debt (Continued)
--------------------------
Total Long-Term Debt $1,828,536
Less current portion of long-term debt (101,551)
----------
Long-Term Debt $1,726,985
==========
Installments due on debt principal, including the capital leases, at
December 31, 1995 are as follows:
Year Ending
December 31,
1996 $ 101,551
1997 98,600
1998 83,061
1999 75,827
2000 99,547
Later years 1,369,950
---------
Total $1,828,536
==========
4. Income Taxes
------------
The components of the provision (benefit) for income taxes are as follows:
1995 1994
---- ----
Current:
Federal $ -- $ 654
State 800 1,988
-------- ---------
Total 800 2,642
-------- ---------
Deferred:
Federal -- (64,109)
State -- (19,862)
-------- ---------
Total -- (83,971)
-------- ---------
Total Provision For Income Taxes $ 800 $ (81,329)
======== =========
The provision (benefit) for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the provision
(benefit) for income taxes as follows:
1995 1994
---- ----
Federal statutory rate (25)% (15)%
State franchise taxes,
net of federal benefits (4) (4)
Valuation allowance 29 --
Other -- 1
------ -----
Total -- % (18)%
====== =====
Significant components of deferred income taxes as of December 31, 1995 are
as follows:
F-20
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
4. Income Taxes (Continued)
------------------------
Net operating loss carryforward $ 682,110
Vacation accrual 2,070
Allowance for bad debts 61,560
---------
Total deferred tax asset 745,740
---------
Software development costs (115,340)
Accelerated depreciation (27,390)
State income taxes (1,520)
---------
Total deferred tax liability (144,250)
Less valuation allowance (529,940)
---------
Net Deferred Tax Asset $ 71,550
=========
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that $71,550 of deferred tax
assets will be realized. The remaining valuation allowance of $529,940 is
maintained on deferred tax assets which the Company has not determined to
be more likely than not realizable at this time. The Company will continue
to review this valuation on a quarterly basis and make adjustments as
appropriate.
At December 31, 1995, the Company had federal and California net operating
loss carryforwards of approximately $2,500,000 and $1,200,000,
respectively. Such carryforwards expire in the years 2007 through 2010 and
1997 through 2000 for federal and California purposes, respectively.
5. Acquisitions
------------
In June 1994, the Company purchased, from an unrelated individual, certain
assets of a computer education and training business, consisting primarily
of equipment and supplies, for $5,000 in cash and a note payable in the
amount of $39,000. The note bears interest at 10% and is payable in monthly
installments, including interest, of $829 through July 1996, when the
remaining balance becomes due and payable.
In July 1995, the Company purchased, from an unrelated individual certain
assets of ValleyNet Communications, an Internet services provider. The
purchase price was $50,000 in cash and 5,000 shares of the Company's common
stock. The common stock was issued by the Company's shareholders in
accordance with their agreement to use certain of their shares owned
individually in connection with future acquisitions of the Company (Note
8). The assets acquired consists of computer hardware and software, and
goodwill of $21,245 was recorded in connection with the acquisition. The
goodwill will be amortized over a fifteen year useful life.
F-21
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
6. Shareholders' Equity
--------------------
Incentive Stock Option Plan
---------------------------
In November 1994, the Company's Board of Directors authorized and the
shareholders approved, a stock option plan which provides for the grant of
incentive and nonqualified options to eligible officers and key employees
of the Company to purchase up to 150,000 shares of the Company's common
stock. The purchase price of such shares shall be at least equal to the
fair market value at the date of grant. Such options vest at the discretion
of the Board of Directors, generally over a four-year period. The stock
option plan expires in 2004. As of December 31, 1995, no options have been
granted under the Plan.
Preferred Stock
---------------
In December 1994, the Company issued to six individuals, including the
Company's five executive officers, for no consideration, a total of 900,000
shares of Series A Convertible Preferred Stock, no par value. Such shares
are automatically convertible, in varying amounts per year, into an
equivalent number of shares of common stock through 2003 if certain revenue
and net income milestones are met as follows:
(i) an aggregate of 9,375 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $9,600,000 and annual after tax earnings of at least
$1,550,000 for the calendar year ended December 31, 1996, an
additional 9,375 shares per year will convert to common stock from
1997 to 2002, and 121,875 shares in 2003 if the company reports gross
annual revenues of at least $9,600,000, and annual after tax earnings
of at least $1,550,000 for calendar years 1997 through 2003.
(ii) an aggregate of 9,375 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $15,500,000 and annual after tax earnings of at least
$3,000,000 for the calendar year ending December 31, 1997, an
additional 9,375 shares per year will convert to common stock from
1998 to 2002, and 131,250 shares in 2003 if the Company reports gross
annual revenues of at least $15,500,000, and annual after tax earnings
of at least $3,000,000 for calendar years 1998 through 2003.
(iii) An aggregate of 15,000 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $23,800,000 and annual after tax earnings of at least
$5,100,000 for the calendar year ending December 31, 1998, an
additional 5,000 shares per year will convert to common stock from
F-22
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
6. Shareholders' Equity (Continued)
--------------------------------
Preferred Stock (Continued)
---------------------------
1999 to 2002, and 225,000 shares in 2003 if the Company reports gross
annual revenues of at least $23,800,000, and annual after tax earnings
of at least $5,100,000 for calendar years 1999 through 2003.
The fair market value of the common stock issued upon conversion will be
charged to operations at that time. Any preferred shares not converted
during such period will be canceled. If, prior to January 1, 1999 (i) the
Company consolidates with or merges into another corporation or entity (and
the Company is not the survivor) or if the Company sells or leases
substantially all of its assets and the Company's common stock has
appreciated an average of 10% per annum for each 12 month period following
the date of the Company's Prospectus (February 9, 1995) or (ii) any person,
entity or affiliated group or entities acquires 40% or more of the
Company's common stock in any 12 month period, then all preferred stock
will be automatically converted into common stock. While outstanding, the
preferred stock does not carry voting rights or dividend rights and has a
liquidation preference of $.01 per share.
Common Stock and Warrants
-------------------------
The closing for the Company's IPO occurred on February 17, 1995. The
Company sold 690,000 units at $5.50 per unit and paid the Underwriter a 10%
commission and a 3% nonaccountable expense allowance which resulted in net
proceeds to the Company of $2,986,524. Each unit consists of one share of
the Company's common stock and one warrant to purchase an additional share
of common stock at $6.50 per share until February 9, 1998. The warrants may
be redeemed by the Company at any time, upon 30 days written notice to the
holders at a price of $.01 per warrant if the closing price of the common
stock is $7.50 or more for 30 consecutive days. The Company also entered
into a one year financial consulting contract with the Underwriter for
$36,000 which was paid in full in advance. In connection with the offering,
the Company issued the Underwriter, for $100, a warrant to purchase 10% of
the number of Units sold in the offering. The Warrant is exercisable for a
period of four years beginning February 9, 1996. The Underwriter's Warrant
is exercisable at a price of $6.60 per Unit. The Units subject to the
Underwriter's Warrant are identical to the Units sold to the public.
On May 15, 1994, the company issued 28,571 shares of common stock to an
employee in return for $7,050 cash and services rendered. In connection
with the issuance of common stock, the Company recognized $24,350 of
compensation expense.
F-23
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
6. Shareholders' Equity (Continued)
--------------------------------
Common Stock and Warrants (Continued)
-------------------------------------
In connection with the Company's bridge loan financing in 1994, the Company
agreed to issue 40,000 restricted shares of common stock to the individuals
on the basis of one share for each $10 loaned. The shares were issued upon
closing of the Company's IPO on February 17, 1995. The fair market value of
the common stock issued ($220,000) was charged to operations in 1994 as
additional financing costs.
7. Commitments and Contingencies
-----------------------------
In September 1994, the Company acquired, under a 20 year noncancellable
capital lease, an office building, including land and improvements. The
Company occupies approximately half of the space as its corporate office
facility and has sublet the remaining space to unrelated parties. The lease
requires initial annual minimum lease payments of $187,608, increasing
every five years to a maximum annual payment of $337,872 in 2009. Under the
lease, the Company has an option at any time through April 30, 1996, to
purchase the building and land for $1,700,000. Such amount increases to
$1,800,000 through April 30, 1997 and $1,900,000 through April 30, 1998.
After April 30, 1998, the option amount increases annually by the
percentage increase in the Consumer Price Index, as further described in
the lease. Upon exercise of the purchase option, all lease payments made by
the Company will be applied toward the down payment for the purchase price
based upon an amortized 20 year note with interest accrued at 9% per annum.
The Company also leases certain computer equipment and furniture and
fixtures under noncancellable capital leases.
The Company leases its education and training and other facilities, certain
vehicles and computer equipment under noncancellable operating leases. The
Company entered into subleases for its education and training facilities
subsequent to entering into the capital lease for the Company's office
building described above. The sublease rentals to be received in the future
are approximately $51,570 and have been deducted from the future minimum
operating lease payments in the table below.
The following is a schedule of future minimum lease payments at December
31, 1995 under the Company's capital leases (together with the present
value of minimum lease payments) and operating leases that have initial or
remaining noncancellable lease terms in excess of one year:
F-24
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
-----------------------------------------
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases Total
------------ ------ ------ -----
<S> <C> <C> <C>
1996 $ 248,964 $ 78,070 $ 327,034
1997 245,306 65,968 311,274
1998 228,310 55,569 283,879
1999 225,947 42,168 268,115
2000 248,462 21,468 269,930
Later years 3,933,825 -- 3,933,825
----------- -------- ----------
Total Minimum Lease
Payments 5,130,814 $263,243 $5,394,057
======== ==========
</TABLE>
Less amount representing
interest (3,337,844)
-----------
Present Value of Net
Minimum Lease Payments $ 1,792,970
===========
Rent expense amounted to approximately $133,555 and $82,589 for the years
ended December 31, 1995 and 1994, respectively.
Leased equipment under capital leases as of December 31, 1995 is as
follows:
Building $1,348,824
Land 411,176
Equipment 190,196
Less accumulated amortization (133,103)
----------
Net Property and Equipment Under
Capital Leases $1,817,093
==========
8. Related Party Transactions
--------------------------
The Company has entered into transactions with its officers and directors,
as follows.
The Company loaned $17,966 to two officers of the Company. The advances
were non-interest bearing and were repaid in 1994.
The Company has a note receivable from its President of $35,000 at December
31, 1995. Interest is payable monthly at 9% per annum and the note is due
in April 1997. The note is secured by 50,000 shares of the Company's common
stock which are owned by the Company's President.
F-25
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
8. Related Party Transactions (Continued)
--------------------------------------
On November 1, 1994, all of the Company's shareholders agreed in writing
with each other and with the Company to contribute pro rata from their
shareholdings up to a total of 200,000 shares of common stock to be used by
the Company (at any time until December 31, 1999) for acquisitions of other
companies or lines of business. The Company in its sole discretion may call
for such contributions at any time and from time to time for these
purposes. The Company will not issue any additional equity securities for
purposes of acquisition of other companies or product lines until all
200,000 shares have been contributed. The shareholders did not receive any
compensation or other form of remuneration for their agreement to
contribute the shares and will have no interest in any of the companies or
product lines which may be acquired. The shareholders agreed to provide the
200,000 shares at the request of the Underwriter of the Company's IPO, in
order to reduce any dilution to existing shareholders if the Company
elected to use common stock for acquisition purposes. In 1995, the
Company's shareholders contributed 5,000 shares in connection with the
acquisition of ValleyNet Communications (Note 5).
The Company incurred expenses in connection with desktop publishing
services provided by a Corporation controlled by the wife of the Company's
Chief Executive Officer of $7,800 and $7,725 for the years ended December
31, 1995 and 1994, respectively.
9. Concentration of Credit Risk and Major Customers
------------------------------------------------
The Company provides credit, in the normal course of business, to a large
number of companies in the agricultural industry. The Company's accounts
receivable are due from customers located primarily in central California.
The Company performs periodic credit evaluations of its customers'
financial condition and generally requires no collateral. The Company
maintains reserves for potential credit losses, and such losses have not
exceeded management's expectations.
Sales to major customers, as a percentage of total net revenues, for the
years ended December 31, 1995 and 1994 were as follows:
1995 1994
---- ----
Customer A --% 13%
Customer B -- 15
Customer C -- 11
Customer D 10 --
--- --
Total 10% 39%
=== ===
F-26
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
10. Sale of Software
- --- ----------------
In December 1995, the Company entered into an agreement to sell its
"Classic" Software to a Canadian Limited Partnership (the "Partnership")
for a promissory note in the amount of $8,080,000. The Partnership acquired
all of the Company's interest in the Classic Software defined as follows;
all existing and future updates, upgrades additions, improvements and
enhancements and any new versions of the software. The Partnership is
selling limited partnership units in Canada and the promissory note will be
replaced by cash and promissory notes as the units are sold. If all units
are sold, the Company would receive $1,333,200 cash at closing (less
expenses), $1,333,200 cash on March 21, 1996 (less expenses) and notes
receivable from the limited partners of $5,413,600. The notes bear interest
at 8.5% per annum and are due December 27, 2005 with interest payable
annually. The Partnership closed on December 28, 1995 selling units
representing 18.81% of the purchase price of the software and the Company
received $188,000, net of expenses, and received the second payment of
$188,000 in March 1996. A second partnership was formed in 1996 in Canada
to sell units to acquire the remaining 81.19% of the Software. The Company
also entered into a Distribution Agreement with the Partnership, whereby
the Company was appointed as the exclusive distributor of the Classic
Software throughout the world for a term of twenty years. Under the terms
of the Distribution Agreement the Company will purchase copies of the
Classic Software for resale to third parties. Until December 31, 2000, the
Company shall pay the following prices for each copy of the Software
purchased from the Partnership:
(a) until the Company has purchased $475,000 of copies in each year, 100%
of the price the Company invoices to its customers for each copy of the
Software; plus
Percentage of Sales
-------------------
Until Below Over
December 31, Sales Benchmark Benchmark Benchmark
------------ --------------- --------- ---------
1996 $ 3,670,000 2% .1%
1997 8,850,000 5 .1
1998 10,275,000 4 .1
1999 15,150,000 3 .1
2000 34,000,000 5 .1
Later Years -0- 6 6
Prior to the repayment of the Promissory Notes, payments to the Partnership
for Software will be applied by the Partnership as follows:
F-27
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
10. Sale of Software (Continued)
- --------------------------------
i) first, the Partnership shall pay to the Company on behalf of each
Limited Partner, an amount equal to the interest then payable in
respect of the Promissory Note issued by such Limited Partner;
ii) second, the balance remaining allocable to each Limited Partner
will be paid (A) 55% to the Limited Partner and (B) 45% to the Company
for repayment of the principal amount then outstanding on the Limited
Partner's Promissory Note.
The Partnership has also entered into an Option Agreement with the Company
whereby the Company may purchase the Software from the Partnership upon
certain triggering events. Upon the occurrence of such triggering events
the Company, at its sole option, may purchase the software from the
Partnership for a purchase price based upon the following.
The purchase price payable by the Company for the Software shall be equal
to the fair market value of the Software on the Exercise Date as determined
by a qualified arm's length appraiser agreed to by the parties, provided
that, if as a result of a Triggering Event, securities are issued by the
Company, or to the Company or its shareholders, the purchase price shall be
satisfied by the transfer by the Company to the Partnership of that number
of securities having a fair market value equal to the lesser of the
purchase price and 22.0% of the securities issued or received, as the case
may be, on a fully diluted basis. The Company agrees to jointly elect under
applicable taxing statutes, with the Partnership to complete the
transaction on a tax deferred basis, with respect to the issuance of
securities to the Partnership by allowing the Partnership to transfer the
Software to a Canadian subsidiary of the Company on a tax deferred basis.
In the event that sales revenue earned by the Partnership in any year under
the terms of the Distribution Agreement are less than $475,000 in any
calendar year prior to the Exercise Date, the percentage of the securities
to be transferred by the Company to the Partnership shall be increased by
1% for each 10% shortfall to a maximum of 5% in any calendar year, provided
that the option of the Partnership to acquire such additional shares shall
not be exercisable by the Partnership until the promissory notes issued by
limited partners to the Company have been paid in full and until such time,
such additional options may be repurchased by the Company for a price equal
to 150% of the cash shortfalls for which the options were issued.
F-28
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
10. Sale of Software (Continued)
---------------------------
Since the Company is responsible for maintaining, upgrading and developing
future revisions of the Software, the transaction has not been accounted
for as a sale by the Company. In addition, the notes receivable have not
been recorded by the Company as a result of their long-term nature and they
are primarily expected to be repaid as the Company sells software to third
parties and makes payments to the Partnership pursuant to terms of the
Distribution Agreement. Therefore, repayment prior to 2005 will only occur
out of revenue generated by the Company. This transaction has been
accounted for by the Company on a cost recovery basis and the cash received
from the Partnership will reduce the capitalized software costs and revenue
will be recognized when the capitalized software costs have been reduced to
zero since the Company has, in essence, retained substantially all rights
of ownership.
11. Subsequent Events (Unaudited)
-----------------------------
Corporate Restructuring and Private Placement of Common Stock
-------------------------------------------------------------
In 1996, the Company retained the Kriegsman Group ("Kriegsman"), a
financial consulting firm, to assist it with a financial restructuring of
its operations. Kriegsman was to use its best efforts to provide a minimum
of $1,500,000 of financing for the Company through bridge loans or equity
financing. In August 1996, a bridge loan of $200,000 was obtained by the
Company for which the Company issued 400,000 shares of common stock to the
bridge lenders as additional consideration for the $200,000 loan. In
October and November 1996 the Company sold 6,000,000 shares of its common
stock at $.25 per share through an Underwriter, which included the
conversion of the $200,000 bridge loan into common stock. The Company paid
the Underwriter a 10% sales commission and a 3% nonaccountable expense
allowance on the bridge loan and sale of common stock. The Company also
entered into a two year financial consulting agreement with the Underwriter
which provides for a monthly consulting fee of $5,000 for the two year
period.
As a part of the financing transaction, the Company granted both the
Underwriter and Kriegsman warrants to purchase common stock. The Company
granted 2,200,000 warrants to each which are exercisable at $.25 per share
for a four year period through October 31, 2001. The Company also agreed to
use its best efforts to file a Registration Statement within 90 days of the
closing of the Private Placement to register the shares issued in the
Private Placement and the shares underlying the warrants issued to the
Underwriter and Kriegsman.
In connection with the financial restructuring the Company agreed to divest
the software development, MarketStreet and the computer training center
divisions. The divisions were spun-off to a new Company owned by the former
management of
F-29
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
NOTES TO FINANCIAL STATEMENTS
11. Subsequent Events (Unaudited) (Continued)
-----------------------------------------
Corporate Restructuring and Private Placement of Common Stock (Continued)
-------------------------------------------------------------------------
the Company on December 31, 1996. All of the assets of the three divisions
and the related liabilities and facilities leases were assumed by the
former management. Also included in the assets of the divested divisions
will be $500,000 in cash. The management of the divested divisions will
also assume all litigation and claims related to the divisions which
includes one law suit in the amount of approximately $70,000. The Kriegsman
Group will also nominate new members for the Board of Directors upon
completion of the divestiture of the three divisions. The Company will
receive a 25% ownership interest in the common stock of the new company
formed to acquire the divested divisions and the divested divisions will
lease the principal office from the Company for a period of eighteen months
at the current market rate.
F-30
<PAGE>
<TABLE>
<CAPTION>
================================================== =================================================
No dealer, salesman or other person has been
authorized to give any information or to make any
representations other than contained in this
Prospectus in connection with the Offering
described herein, and if given or made, such
information or representations must not be relied 6,400,000 Shares of Common Stock
upon as having been authorized by the Company.
This Prospectus does not constitute an offer to 4,400,000 Common Stock
sell, or the solicitation of an offer to buy, the Purchase Warrants
securities offered hereby to any person in any
state or other jurisdiction in which such offer or
solicitation is unlawful. Neither the delivery of 4,400,000 Shares of Common Stock
this Prospectus nor any sale hereunder shall, underlying Common Stock
under any circumstances, create any implication Purchase Warrants
that there has been no change in the affairs of
the Company since the date hereof.
------------
TABLE OF CONTENTS PROTOSOURCE CORPORATION
Page
----
<S> <C>
Available Information.......................... 2
Prospectus Summary............................. 3
Risk Factors................................... 7
Capitalization................................. 13
Price Range of Common Stock.................... 14
Use of Proceeds................................ 14
Selected Financial Data........................ 15 -------------------------
Management's Discussion and
Analysis of Financial Condition PROSPECTUS
and Results of Operations.................... 16
Business....................................... 20 -------------------------
Management..................................... 26
Principal Stockholders......................... 29
Selling Stockholders........................... 30
Certain Transactions........................... 32
Description of Securities...................... 34
Plan of Distribution........................... 37
Legal Matters.................................. 37
Experts........................................ 37
Financial Statements...........................F-1
Until __________, 1997 (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 ---------------, 1997
addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with
respect to their unsold allotments or
subscriptions.
================================================== ======================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers.
Section 5 of the Registrant's Restated Articles of Incorporation provide
that liability of directors for monetary damage is eliminated to the fullest
extent possible with California law. Section 6 provides for indemnification of
all of the Registrant's agents (including officers and directors) subject only
to limits imposed by California law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to officers, directors or persons
controlling the Company, the Company has been advised that, in the opinion of
the Securities and Exchange Commission, Washington, D.C. 20549, such
indemnification is against public policy as expressed in such 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 an officer, director or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
officer, director 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 such Act and will be governed by the final adjudication
of such issue.
ITEM 25. Other Expenses of Issuance and Distribution.(1)
SEC Registration Fee........................ $ 1,016
NASD Filing Fee............................. 0
Blue Sky Legal and Filing Fees.............. 10,000
Printing Expenses........................... 5,000
Legal Fees and Expenses..................... 60,000
Accounting Fees............................. 40,000
Miscellaneous Expenses...................... 8,984
--------
TOTAL....................................... $125,000 (1)
(1) All expenses, except the SEC registration fee, are estimated.
ITEM 26. Recent Sales of Unregistered Securities
---------------------------------------
During the last three years, the Registrant sold the following shares of
its Common Stock which were not registered under the Securities Act of 1933, as
amended.
(i) In June 1994, the Registrant sold to Christopher Howard, 28,571 shares
of Common Stock for $7,050 in cash and services rendered valued at $24,350. Such
services consisted of assisting the Registrant in designing and developing two
of its proprietary products.
<PAGE>
(ii) Between July and November 1994, the Registrant issued an aggregate of
40,000 shares of its Common Stock to Alan T. Bates, Kwok Fu Chu, Liwen Tsai,
Alan Tsang, Capital Planning Specialists, Mitchell Levitts and Margaret Stevens,
who had loaned the Company a total of $400,000, as additional compensation for
the loans.
(iii) In September 1996, the Company issued 400,000 shares of its Common
Stock to the following individuals as additional consideration for a loan to the
Company in the amount of $200,000.
Name Number of Shares
---- ----------------
John Benedetto 100,000
James Ippolito 50,000
Anaka Parkash 100,000
Larry Pensa 50,000
Isaac Paschaldis 100,000
(iv) In October 1996, the Company sold an aggregate of 6,000,000 shares of
its Common Stock to the following individuals for $.25 per share.
Name Number of Share
---- ---------------
John Benedetto 600,000
Brian A. Brewer 100,000
James Ippolito 300,000
Raymond King 100,000
Jack Ko 200,000
Anaka Parkash 600,000
Isaac Paschaldis 800,000
Larry Pensa 300,000
Francis Sajeski 100,000
Jerry Silberman 100,000
Rao-Qi Zhang 100,000
George P. Argerakis 200,000
Robert Cavallaro 100,000
Ding Chu Fuh Chen 100,000
Murray Frank 100,000
Donald Gross 200,000
Gloria Ippolito 600,000
Chris Meshouris 100,000
James Meshouris 100,000
Matthew Mulhern 400,000
Michael Pizite 300,000
Bernard Schwartz 100,000
II-2
<PAGE>
George Stripas 100,000
Kuei-Chi Tsai 100,000
Saul Unter 100,000
Osweld Valenti 100,000
With respect to the sales made, the Registrant relied on Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"), and/or Regulation D,
Rule 506. No advertising or general solicitation was employed in offering the
securities. The securities were offered to a limited number of individuals and
the transfer thereof was appropriately restricted by the Registrant. All
shareholders were accredited investors as that term is defined under Regulation
D under the 1933 Act who were capable of analyzing the merits and risks of their
investment and who acknowledged in writing that they were acquiring the
securities for investment and not with a view toward distribution or resale and
that they understood the speculative nature of their investment.
ITEM 27. Exhibits.
---------
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<S> <C>
2.01 Restated Articles of Incorporation of the Registrant(1)
2.02 Bylaws of the Registrant(1)
5.04 Opinion of Gary A. Agron, regarding legality of the Common Stock and
Warrants (includes Consent)
10.01 1995 Incentive Stock Option Plan(1)
10.02 Capitalized Lease Agreement(1)
10.12 Divestiture Agreement
10.13 Selling Agreement with AAWC
10.14 Warrant Agreement with AAWC
10.15 Lock-up Agreement
10.16 Registration Rights Agreement
23.06 Consent of Angell & Deering
</TABLE>
II-3
<PAGE>
Exhibit No. Title
- ----------- -----
23.07 Consent of Gary A. Agron (See 5.04, above)
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on February 9, 1995, file
number 33-86242.
ITEM 28. Undertakings.
------------
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant 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 Registrant 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 of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-4
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
(g) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Fremont, California, on January 24, 1997.
PROTOSOURCE CORPORATION
By: /s/ Raymond J. Meyers
--------------------------------
Raymond J. Meyers
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Raymond J. Meyers Chief Executive Officer January 24, 1997
- ----------------------------- and Director
Raymond J. Meyers
/s/ Andrew Chu President, Chief Financial January 24, 1997
- ----------------------------- Officer, (Principal
Andrew Chu Accounting Officer)
and Director
/s/ Steven A. Kriegsman Director January 24, 1997
- -----------------------------
Steven A. Kriegsman
Director , 1997
- -----------------------------
Howard P. Silverman
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
----------- -----
5.04 Opinion of Gary A. Agron, regarding legality of the
Common Stock and Warrants (includes Consent)
10.12 Divestiture Agreement
10.13 Selling Agreement with AAWC
10.14 Warrant Agreement with AAWC
10.15 Lock-up Agreement
10.16 Registration Rights Agreement
23.06 Consent of Angell & Deering
23.07 Consent of Gary A. Agron (See 5.04, above)
January 24, 1997
ProtoSource Corporation
2300 Tulare Street, Suite 210
Fresno, CA 93721
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We are counsel for ProtoSource Corporation, a California corporation (the
"Company") in connection with its proposed public offering under the Securities
Act of 1933, as amended, of 6,400,000 shares of Common Stock ("Common Stock"),
4,400,000 common stock purchase warrants ("Warrants") and 4,400,000 shares of
Common Stock underlying the Warrants through a Registration Statement on Form
SB-2 ("Registration Statement") as to which this opinion is a part, to be filed
with the Securities and Exchange Commission (the "Commission").
In connection with rendering our opinion as set forth below, we have
reviewed and examined originals or copies identified to our satisfaction of the
following:
(1) Articles of Incorporation, and amendments thereto, of the Company as
filed with the Secretary of State of the State of California.
(2) Corporate minutes containing the written deliberations and resolutions
of the Board of Directors and shareholders of the Company.
(3) The Registration Statement and the Preliminary Prospectus contained
within the Registration Statement.
(4) The other exhibits to the Registration Statement.
We have examined such other documents and records, instruments and
certificates of public officials, officers and representatives of the Company,
and have made such other investigations as we have deemed necessary or
appropriate under the circumstances.
<PAGE>
ProtoSource Corporation
January 24, 1997
Page 2
Based on the foregoing and in reliance thereon, it is our opinion that the
Common Stock, Warrants and Common Stock issuable upon exercise of the Warrants
offered under the Registration Statement will, upon the purchase, receipt of
full payment, issuance and delivery in accordance with the terms of the offering
described in the Registration Statement, be duly and validly authorized, legally
issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus constituting a part thereof.
Very truly yours,
By: /S/ GARY A. AGRON
------------------------------------
Gary A. Agron
GAA/mdi
DIVESTITURE AGREEMENT
dated, December 31, 1996
by and between
PROTOSOURCE CORPORATION
a California corporation
(the "Seller"),
and
SSC TECHNOLOGIES, INC.
a California corporation
("Buyer")
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Section 1. Definitions .......................................... 2
Section 2. Divestiture Price; Closing; Transfer of Assets;
Payment of Purchase Price and Assumption of
Liabilities; Consistent Treatment .................... 6
2.1. Divestiture Price .................................... 6
2.2. Closing Date ......................................... 7
2.3. Transactions at Closing .............................. 7
2.3.1. Transfer of Assets ........................... 7
2.3.2. Payment of Divestiture Price and Assumption
of Liabilities ............................... 7
2.4. Consistent Treatment ................................. 7
Section 3. Representations, Warranties, Certain Agreements and
Covenants of Buyer ................................... 8
3.1. Organization ......................................... 8
3.2. Authority ............................................ 8
3.3. Consents ............................................. 8
3.4. Litigation ........................................... 8
Section 4. Representations, Warranties, Certain Agreements and
Covenants of the Seller .............................. 8
4.1. Organization ......................................... 8
4.2. Due Authorization .................................... 8
4.3. Ownership ............................................ 9
4.4. Title ................................................ 9
4.5. Balance Sheet ........................................ 9
4.6. Inventories .......................................... 10
4.7. Certain Contracts .................................... 10
4.8. Fixed Assets ......................................... 10
4.9. Intangible Rights .................................... 10
4.10. Litigation ........................................... 11
4.11. Employees ............................................ 11
4.12. Default .............................................. 12
4.13. Material Adverse Change .............................. 12
4.14. Consents ............................................. 13
4.15. Environmental ........................................ 13
4.16. Real Property ........................................ 13
4.17. Tax Matters .......................................... 14
4.18. Insurance ............................................ 14
4.19. Compliance; Governmental Authorizations; OSHA ........ 15
4.20. Accounts and Notes Receivable ........................ 15
4.21. Customers and Suppliers .............................. 16
4.22. Miscellaneous Assets ................................. 16
4.23. Disclosures .......................................... 16
i
<PAGE>
Section 5. Employee Pension and Other Benefit Plans
Programs ............................................. 16
Section 6. Pre-Closing Covenants of Buyer ....................... 16
6.1. Corporate and Other Action ........................... 16
6.2. Consents and Approvals ............................... 16
6.3. Confidentiality ...................................... 16
Section 7. Pre-Closing Covenants of the Seller .................. 17
7.1. Corporate and Other Actions .......................... 17
7.2. Consents and Approvals ............................... 17
7.3. Access to Information ................................ 17
7.4. Ordinary Course of Business .......................... 17
Section 8. Prorated Taxes, Brokerage Fees, Product Liability
Claims, Expenses and Sales Taxes and Other Taxes ..... 17
8.1. Proration of Taxes ................................... 18
8.2. Brokerage Fees ....................................... 18
8.3. Product Liability .................................... 18
8.4. Expenses ............................................. 18
8.5. Sales and Other Taxes ................................ 18
Section 9. Conditions ........................................... 19
9.1. Conditions to Obligations of the Seller .............. 19
9.1.1. Performance of Agreements and Covenants ...... 19
9.1.2. Truth of Representations and Warranties ...... 19
9.1.3. Opinions of Counsel .......................... 19
9.1.4. Payment of Purchase Price and Assumption
of Liabilities ............................... 20
9.1.5. No Actions or Proceedings .................... 20
9.1.6. Proceedings Satisfactory to the Seller ....... 20
9.2. Conditions to Obligations of Buyer ................... 20
9.2.1. Performance of Agreements and Covenants ...... 20
9.2.2. Truth of Representations and Warranties ...... 20
9.2.3. Updated Schedules ............................ 20
9.2.4. No Actions or Proceedings .................... 21
9.2.5. Consents Obtained ............................ 21
9.2.6. Deliveries by the Seller at Closing .......... 21
9.2.7. Proceedings Satisfactory to Buyer ............ 21
Section 10. Non-Competition ..................................... 22
Section 11. Post Closing Covenants of Buyer ..................... 22
11.1. Liabilities ......................................... 22
11.2. Availability of Records ............................. 22
11.3. Use of Trade or Service Marks ....................... 23
Section 12. Statement of Source and Use of Funds ................ 23
12.1. Statement of Source and Use of Funds ................ 23
12.2. Resolution .......................................... 23
12.3. Settlement of Accounts .............................. 24
ii
<PAGE>
Section 13. Indemnification, Survival and Termination .............. 24
13.1. Indemnification by the Seller .......................... 24
13.2. Indemnification by Buyer ............................... 25
13.3. Survival ............................................... 25
13.4. Termination ............................................ 26
3.4.1. With the mutual consent of Buyer and the
Seller ......................................... 26
13.4.2. By the Seller .................................. 26
13.4.3. By Buyer ....................................... 26
Section 14. Miscellaneous .......................................... 26
14.1. Assignment ............................................. 26
14.2. No Press Release Without Consent ....................... 26
14.3. Severability ........................................... 27
14.4. Entire Agreement ....................................... 27
14.5. No Third Party Beneficiaries ........................... 27
14.6. Waiver ................................................. 27
14.7. Governing Law .......................................... 27
14.8. Headings ............................................... 27
14.9 Counterparts ........................................... 27
14.10 Choice of Forum ........................................ 27
14.11 Further Documents ...................................... 27
14.12. Notices ................................................ 29
iii
<PAGE>
DIVESTITURE AGREEMENT
THIS AGREEMENT, dated, December 31, 1996, is entered into by and between
ProtoSource Corporation, a California corporation (the "Seller"), and SSC
Technologies, Inc., a California corporation (the "Buyer").
IT IS AGREED as follows:
Section 1. Definitions. The following terms have the following meanings
when used herein
"Agreement" means this Divestiture Agreement, including all Exhibits and
Schedules hereto, as it may be amended from time to time in accordance with its
terms.
"Assets" means the Software Division, Computer Training Center Division and
Market Street Division, including without limitation:
(a) all assets reflected on the Balance Sheets and supplies owned by the
Seller for use in the Software Division, Computer Training Center
Division and Market Street Division (except inventory and supplies
disposed of or used in the ordinary course of business as of August
31, 1996);
(b) all accounts and notes receivable of the Seller relating to the
Software Division, Computer Training Center Division and Market Street
Division listed on Schedule 4.20, which schedule will be updated on
the Closing Date to reflect all accounts and notes receivable of the
Seller relating to the Software Division, Computer Training Center
Division and Market Street Division existing on the Closing Date;
(c) inventory, stock in trade, work-in-progress, and raw materials
relating to the Software Division, Computer Training Center Division
and Market Street Division existing on the Closing Date;
(d) all sales order files, engineering order files, purchase order files,
manufacturing records, customer lists and business files of the Seller
relating exclusively to the Software Division, Computer Training
Center Division and Market Street Division;
2
<PAGE>
(e) all intellectual property rights including the Software Division,
Computer Training Center Division and Market Street Division, trade
secrets, know-how, trade names (with the exception of the tradename
"ProtoSource"), copyrights and copyright registrations, service marks
and trademarks (including applications and registrations therefor),
patents and patent applications, software and software documentation,
and all other licenses to or from third parties with respect to the
foregoing or rights related thereto used in the Software Division,
Computer Training Center Division and Market Street Division,
including such rights as the Seller may have to sue for past
infringement or misappropriation thereof;
(f) all right and interest of the Seller to or in all agreements, options,
contracts, distributor agreements, office equipment leases,
instruments, purchase orders, sales orders, bids, and product
liability insurance policies and contracts, if any relating
exclusively to the Software Division, Computer Training Center
Division and Market Street Division Businesses;
(g) all computer programs and like property, and all records thereof owned
by the Seller used exclusively in the Software Division, Computer
Training Center Division and Market Street Division;
(h) all machinery, equipment, tooling, dies and castings of the Seller
used exclusively in the Software Division, Computer Training Center
Division and Market Street Division;
(i) any claims, demands, causes of action, judgments and pending
litigation as to which the Seller is a claimant, plaintiff, judgment
creditor or beneficiary, relating to or arising out of the Software
Division, Computer Training Center Division and Market Street
Division;
(j) that certain five-year lease on the Pavilion West shopping center and
used exclusively in the Software Division, Computer Training Center
Division and Market Street Division, including all plants, buildings
and other improvements (leasehold or otherwise) thereon and including,
without limitation, that property listed on Schedule 4.16;
(k) goodwill and going concern value related to the Software Division,
Computer Training Center Division and Market Street Division
Businesses; and
3
<PAGE>
"Balance Sheet" means the consolidated balance sheets of the Software
Division, Computer Training Center Division and Market Street Division, as of
August 31, 1996 attached hereto as Exhibit A.
"Buyer" has the meaning specified above.
"Computer Training Center Business" means the business conducted by the
Computer Training Center Division of ProtoSource Corporation.
"Computer Training Center Division" means the Computer Training Center
Division of ProtoSource Corporation.
"Closing Balance Sheet" has the meaning assigned to it in Section 12.1.
"Closing Date" and "Closing" refer to the date, time, and place for
transactions described in Section 2.2 and the closing therein referred to.
"Code" means the Internal Revenue Code of 1986, as amended.
"Excluded Assets" means:
(a) all assets of the Seller related to all state, local and Federal taxes
including but not limited to income, sales or use, franchise, payroll
and property taxes, and prepaid insurance; and
(b) any cash in excess of the amount reflected on the Balance Sheet or any
insurance policy coverage and other services furnished to or for the
benefit of the Software Division, Computer Training Center Division,
and Market Street Division by the Seller or any of its subsidiaries.
(c) All assets related to the Internet division of Seller, the principal
building, improvements and certain computer equipment and furnishings
that the Divested Divisions will lease from the Seller, including all
bank accounts and all other assets.
"Excluded Liabilities" means:
(a) any intercompany or intracompany payable and receivable balances
between the Seller, or any of its subsidiaries and the Software
Division, Computer Training Center Division, and Market Street
Division;
4
<PAGE>
(b) any sales, use, transfer or other tax or recording cost imposed upon
the sale or transfer of the Assets pursuant to this Agreement;
(c) the employee pension and welfare benefit obligations of the Company
referred to in Section 5;
(d) all vacation and accrued sickness and other benefits for all employees
of the Software Division, Computer Training Center Division, and
Market Street Division who are employed by the Seller as part of the
Software Division, Computer Training Center Division, and Market
Street Division on the Closing Date (whether or not such employees are
employed by Buyer immediately thereafter);
(e) all product liability claims for which Seller is liable under Section
8.3;
(f) any claims, demands, causes of action, judgments, and litigation made
or brought after the Closing Date which relate to the actual or
alleged use, generation, storage, disposal, burial, dumping, spilling,
or release of wastes, chemicals, pollutants, contaminant hazardous or
toxic substances by the Software Division, Computer Training Center
Division, and/or Market Street Division, whether before or after the
Closing Date.
"GAAP" shall have the meaning assigned to it in Section 4.5.
"Intangible Rights" shall have the meaning assigned to it in Section 4.8.
"Liabilities" means:
(a) all the obligations of the Software Division, Computer Training Center
Division, and Market Street Division under the agreements, options,
contracts, distributor agreements, sales representative agreements,
leases, instruments, purchase orders, sales orders, and commitments
(including outstanding bids) of the Software Division, Computer
Training Center Division, and Market Street Division which are to be
assigned to Buyer by the Seller pursuant to this Agreement;
(b) any claims, demands, causes of action, judgments, and pending
litigation related to or arising out of the Software Division,
Computer Training Center Division, and Market Street Division,
including, but not limited to those listed in Schedule 4.10; and
5
<PAGE>
(c) other current liabilities (i) of the Software Division, Computer
Training Center Division, and Market Street Division reflected in the
Balance Sheet to the extent not paid on the Closing Date and (ii)
incurred by the Seller in respect to the Software Division, Computer
Training Center Division, and Market Street Division in the ordinary
course of the business after the date of the Balance Sheet and
existing at the Closing Date.
"Market Street Division" means the Market Street Division of ProtoSource
Corporation
"Market Street Division Business" means the business conducted by the
Market Street Division of ProtoSource Corporation.
"Promissory Note" means a note issued by the Buyer in favor of Seller in
the amount of $770,850, with a ten year maturation date and 10% rate of interest
payable in monthly installments.
"Seller" has the meaning specified above.
"Software Division" means the software division of ProtoSource Corporation.
"Software Division Business" means the business conducted by the Software
Division of ProtoSource Corporation.
"Statement of Source and Use of Funds" means a comprehensive list of all of
the Divestiture Divisionts expenses, losses, accrued liabilities and cash
receipts from September 1, 1996, through the Closing.
"Total Cash Investment" means the $500,000 that the Seller, pursuant to
this Divestiture Agreement, agrees to invest in the Buyer.
Section 2. Divestiture Price; Closing; Transfer of Assets; Payment of
Purchase Price and Assumption of Liabilities; Consistent Treatment.
2.1. Divestiture Price. The Buyer will receive a total of $500,000 less the
amount of cash used by the Seller 1n respect to the Software Division, Computer
Training Center Division, and Market Street Division in the ordinary course of
the business after August 31, 1996, plus the assumption of the Liabilities
pursuant to Section 2.3.2, subject to adjustment as provided in Section 12.
6
<PAGE>
2.1.1. Seller will receive 25% equity ownership of Buyer as part of
the Divestiture Price.
2.2. Closing Date. The Closing hereunder shall take place at the office of
Freshman, Marantz, Orlanski, Cooper & Klein, 9100 Wilshire Boulevard, East
Tower, Eighth Floor, Beverly Hills, CA 90212, at 10:00 a.m. Los Angeles time, on
October _, 1996, or at such other place, time or date as the Seller and Buyer
may agree.
2.3. Transactions at Closing. At the Closing, and on the basis of the
representations, warranties, covenants and agreements made herein and in the
exhibits hereto and in the certificates and other instruments delivered pursuant
hereto, and subject to the terms and conditions hereof:
2.3.1. Transfer of Assets. The Seller shall transfer, convey, sell,
assign and deliver to Buyer all of Seller's right, title and interest in the
Assets, delivering to Buyer bills of sale, assignments and documents of
conveyance (including assignments of leases), each duly executed and
acknowledged by the appropriate party, and such other good and sufficient
instruments of transfer and conveyance as shall be effective to vest in Buyer
all of Seller's right, title and interest in the Assets. In addition, the Seller
shall deliver the certificate required by Section 9.2.2 and the opinion required
by Section 9.2.3.
2.3.2.Payment of Divestiture Price and Assumption of Liabilities. In
consideration for the transfer of the Assets Buyer shall deliver to the Seller
that certain Promissory Note attached hereto as Exhibit C, and that certain
Assignment and Assumption Agreement attached hereto as Exhibit D, both executed
concurrently herewith. The Assignment and Assumption Agreement, together with
this Divestiture Agreement govern the Buyer's assumption of the Liabilities. In
addition, Buyer shall deliver the certificate required by Section 9.1.2 and the
opinion required by Section 9.1.3.
2.4. Consistent Treatment. The parties hereto agree to allocate the
Divestiture Price (which for purposes of this Section 2.4 shall include the
Liabilities assumed by Buyer) among the Assets and the covenant not to compete
set forth in Section 10 in accordance with Schedule 2.4 and Section 1060 of the
Code, (b) treat and report the transactions contemplated by this Agreement in
all respects consistently (including valuation of the Assets) for purposes of
any Federal, state, and local tax, and (c) not take any action inconsistent with
such allocation.
7
<PAGE>
Section 3. Representations, Warranties, Certain Agreements and Covenants of
Buyer. Buyer represents and warrants to, and agrees with the Seller as follows:
3.1. Organization. Buyer is, and at the Closing will be, a corporation duly
organized and validly existing in good standing under the laws of the State of
California, with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
3.2. Authority. Buyer has full corporate power and authority to enter into
and to perform this Agreement; the execution, delivery and performance of this
Agreement and of the instrument or instruments assuming the Liabilities have
been duly authorized by Buyer. The signing, delivery and performance of this
Agreement by Buyer is not prohibited or limited by, and will not result in the
breach of or a default under, any provision of the Articles of Incorporation or
By-Laws of Buyer, or of any agreement or instrument binding on Buyer, or of any
applicable order, writ, injunction or decree of any court or governmental
instrumentality. This Agreement has been duly executed and delivered by Buyer
and constitutes the legal, valid and binding obligation of Buyer, enforceable
against Buyer in accordance with its terms.
3.3. Consents. Except as set forth on Schedule 3.3, no notice to, filing
with, authorization of, exemption by, or consent of, any person, entity or
public or governmental authority is required for Buyer to consummate the
transactions contemplated hereby.
3.4. Litigation. Except as set forth on Schedule 3.4, there is no
litigation, proceeding or claim pending or threatened relating to the Buyer.
Section 4. Representations, Warranties, Certain Agreements and Covenants of
the Seller. The Seller represents and warrants to, and agrees with, Buyer as
follows:
4.1. Organization. The Seller is a corporation duly organized and validly
existing in good standing under the laws of the State of California. The Seller
has the full corporate power and authority to engage in the businesses in which
it is now engaged, and to deliver and perform this Agreement and all writings
relating hereto.
4.2. Due Authorization. The execution, delivery and performance of this
Agreement and all writings relating hereto by Seller have been duly and validly
authorized by the Board of Directors of Seller and no authorization by its
shareholders is required. This Agreement and all writings relating hereto to be
8
<PAGE>
signed by Seller constitute valid and binding obligations of Seller enforceable
in accordance with their respective terms. Neither the execution and delivery of
this Agreement or any writing relating hereto nor the consummation by Seller of
the transactions contemplated hereby or thereby, nor compliance with any of the
provisions hereof or thereof will: (i) conflict with or result in a breach of
the Certificate of Incorporation or ByLaws of Seller; (ii) violate any statute,
law, rule or regulation or any order, writ, injunction or decree of any court or
governmental authority) or (iii) violate or conflict with or constitute a
default under (or give rise to any right of termination, cancellation or
acceleration under) any agreement or writing of any nature to which Seller is a
party or by which it or its assets or properties may be bound. No consent or
approval of or notification to any governmental authority is required in
connection with the execution and delivery by Seller of this Agreement or any
writing relating hereto or the consummation of the transactions contemplated
hereby or thereby.
4.3. Ownership. Except as set forth on Schedule 4.3, the Seller has good
and marketable title to all Assets and none of such Assets is held by the Seller
under any lease or conditional sales contract, except those specifically listed
herein, or is subject to any security agreement, lien (except for tax liens for
taxes not yet due and payable), encumbrance, charge, equity or claim.
4.4. Title. Upon delivery to Buyer of the deeds, bills of sale and
assignments referred to in Section 2.3.1, Buyer will receive good and marketable
title to all of the Assets, free and clear of all liens (except for tax liens
for taxes not yet due and payable), encumbrances, charges, equities and claims
of every kind, except as set forth on Schedule 4.3 and subject to obtaining any
consents of persons listed on Schedule 4.14.
4.5. Balance Sheet. The Balance Sheet fairly presents the financial
position of the Software Division, Computer Training Center Division, and Market
Street Division at such date and the results of its operation for such year in
accordance with generally accepted accounting principles ("GAAP") consistently
applied except as otherwise set forth on Exhibit A. Except as reflected on the
Balance Sheet, the Software Division, Computer Training Center Division, and
Market Street Division has no contingent liabilities which would be required by
GAAP to be reflected therein. The Balance Sheet reflects the cancellation of all
obligations and liabilities of the Software Division, Computer Training Center
Division, and Market Street Division to the Seller or its affiliates so that
such liabilities and obligations are, and on the Closing Balance Sheet will be,
reflected as equity.
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4.6. Inventories. All inventories of Seller reflected on the Balance Sheet
were in existence on August 31, 1996. The amounts thereof so shown reflect
valuations not in excess of the values of such inventories computed in
accordance with GAAP applied on a consistent basis.
4.7. Certain Contracts. Schedule 4.7 is a list of all agreements, options,
contracts, leases, license agreements and instruments which are of material
importance to the conduct of the Software Division, Computer Training Center
Division, and Market Street Division including, without limitation, (i) each
sales order and purchase order for goods and services which involves more than
$5,000 and which will be performed and assumed by Buyer, (ii) each other written
or oral agreement of the Seller related to the Software Division, Computer
Training Center Division, and Market Street Division to be assumed by Buyer and
which extends beyond 30 days from the Closing Date or which involves payments by
or to the Seller after the Closing Date of more than $5,000, (iii) all
agreements with distributors or sales representatives for the Software Division,
Computer Training Center Division, and Market Street Division, and (iv) letters
of credit. Schedule 4.7 also lists each outstanding proposal by the Software
Division, Computer Training Center Division, and Market Street Division that
involves payments to the Software Division, Computer Training Center Division,
and Market Street Division in excess of $5,000 and is subject to acceptance by
third parties or could otherwise become a new sales contract. Schedule 4.7 will
be updated at the Closing to reflect all purchase orders, sales orders and other
agreements entered into by the Software Division, Computer Training Center
Division, and Market Street Division after the date of this Agreement and prior
to the Closing Date which would otherwise be required to be listed on Schedule
4.7. Copies of all written~agreements and written summaries of all oral
agreements described on Schedule 4.7 have been furnished to Buyer.
4.8. Fixed Assets. Schedule 4.8 is a list of the fixed assets of the Seller
reflected on the Balance Sheet owned by the Seller and relating to the Software
Division, Computer Training Center Division, and Market Street Division, showing
costs accumulated book depreciation, if any, and net book value, as of the date
of the Balance Sheet; and a list of all other tangible Assets (other than
inventory) reflected on the Balance Sheet at an amount exceeding $10,000.
4.9. Intangible Rights. Schedule 4.9 is a list of all trademarks, trade
names, service marks, know-how, patents and copyrights, patent applications and
all licenses and other rights related thereto which are owned or used by the
Seller in the Software Division, Computer Training Center Division, and Market
Street Division with the exception of the names "ProtoSource" or
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ProtoSource Corporation" (hereinafter referred to collectively as the
"Intangible Rights"). All such licenses are in full force and effect and
constitute legal, valid and binding obligations of the respective parties
thereto; there have not been and there currently are not any material defaults
thereunder by any party; and no event has occurred which (whether with or
without notice, lapse of time or the happening or occurrence of any other event)
would constitute a material default thereunder. The validity, continuation and
effectiveness of all such licenses under the current material terms thereof will
in no way be affected by the transfer of such licenses to Buyer under this
Agreement or, if any would be affected, Seller shall use all necessary and
reasonable means at its disposal to cause an appropriate consent to such
transfer to be delivered to Buyer prior to the Closing Date at no cost or other
adverse consequence to the Software Division, Computer Training Center Division,
and Market Street Division. Seller owns all the trademarks, trade names, service
marks, copyrights, knowhow, patents and applications for patents listed on
Schedule 4.9 and, except as set forth thereon, pays no royalty under any of them
and has the exclusive right to bring actions for the infringement thereof. No
product made or sold by the Software Division, Computer Training Center
Division, and Market Street Division violates any such license or infringes any
trademark, trade name, service mark, copyright, know-how or patent of another.
Except as listed on Schedule 4.9, there is no pending or, to the best of the
knowledge of Seller, threatened claim or litigation against Seller contesting
its right to use any of the trademarks, trade names and know-how or the validity
of any of the licenses, copyrights and patents listed on such Schedule or
asserting the misuse thereof.
On the Closing Date all the Intangible Rights shall have been duly
transferred to Buyer, so as to vest in Buyer all right, title and interest
therein, and the Seller shall make, execute and deliver recordable assignments
to effect and evidence such transfers as may be reasonably requested by Buyer.
Prior to the Closing no party other than the Seller shall acquire any interest
in any of the Intangible Rights.
4.10. Litigation. Schedule 4.10 is a list and brief description of all
material litigation, proceedings and claims by or against the Seller relating to
the Software Division, Computer Training Center Division, and Market Street
Division pending or, to the knowledge of the Seller, threatened against the
Seller relating to the Software Division, Computer Training Center Division, and
Market Street Division.
4.11. Employees. Schedule 4.11 is a list of all employee contracts, benefit
plans, and arrangements (including all collective bargaining, employment,
compensation, pension, retirement, separation, vacation, sickness, insurance,
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welfare, profit sharing and bonus plans and agreements) under which the Seller,
with respect to any employee of the Seller employed in the Software Division,
Computer Training Center Division, and Market Street Division, has any
obligation, together with an itemization of all accrued vacation and sickness
benefits owing to employees of the Seller employed in the Software Division,
Computer Training Center Division, and Market Street Division as of August 31,
1996. The Seller has furnished to Buyer copies of instruments evidencing all
such contracts, benefit plans and arrangements. Schedule 4.11 includes a true
and complete list of all employees of the Software Division, Computer Training
Center Division, and Market Street Division who are on an approved leave of
absence. The Software Division, Computer Training Center Division, and Market
Street Division has generally enjoyed a good employer/employee relationship with
its employees. Buyer will assume the accrued vacation and sick pay. With respect
to the Software Division, Computer Training Center Division, or Market Street
Division, Seller is in compliance with all federal, state and local laws and
regulations respecting employment and employment practices, terms and conditions
of employment and hours. Except as listed on Schedule 4.11, there is no material
unfair labor practice complaint against Seller relating to the Software
Division, Computer Training Center Division, or Market Street Division pending
before the National Labor Relations Board or strike, dispute, slowdown or
stoppage pending or threatened against or involving the Software Division,
Computer Training Center Division, or Market Street Division, and none has
occurred. No representation question exists respecting the employees of the
Software Division, Computer Training Center Division, or Market Street Division
and no collective bargaining agreement is currently being negotiated by Seller
relating to the Software Division, Computer Training Center Division, or Market
Street Division. Except as listed on Schedule 4.11, no grievance procedure or
arbitration proceeding is pending under any collective bargaining agreements.
4.12. Default. Neither the Seller nor, to the knowledge of the Seller, any
other party to any material contract, agreement, lease or instrument of the
Seller relating to the Software Division, Computer Training Center Division, or
Market Street Division including, without limiting the generality of the
foregoing-, relating to continuing warranty or service obligations, is in
material default in complying with any material provisions thereof, and no
condition or event or facts exists which, with notice, lapse of time or both
would constitute a default thereof on the part of the Seller or, to the
knowledge of the Seller, on the part of any other party thereto.
4.13. Material Adverse Change. Except as specifically disclosed and
identified as such on the Exhibits and Schedules to this Agreement, there has
not been since August 31, 1996 (i) any
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material adverse change in the business, condition (financial or otherwise),
assets, liabilities or obligations of the Software Division, Computer Training
Center Division, or the Market Street Division, or (ii) any damage, destruction
or loss (whether or not covered by insurance), materially and adversely
affecting the business, assets or properties of the Software Division, Computer
Training Center Division, or Market Street Division. Since August 31, 1996,
there have been no events, transactions or information which has come to the
attention of Seller which could be reasonably expected to have a material
adverse effect on the business and operations of the Software Division, Computer
Training Center Division, or Market Street Division.
4.14. Consents. Except as set forth on Schedule 4.14, no notice to, filing
with, authorization of, exemption by, or consent of, any person, entity, or
public or governmental authority is required for the Seller to consummate the
transactions contemplated hereby. Schedule 4.14 will be updated at the Closing
to reflect any consents required for the assignment of any agreements entered
into after the date of this Agreement.
4.15. Environmental. Except as set forth on Schedule 4.15, to the knowledge
of Seller, the real property included in the Assets and each portion thereof (a)
are not and have not been a site for the use, generation, manufacture, storage,
disposal or transportation of a material amount of any hazardous wastes,
carcinogenic, pathogenic or toxic substances or related materials, including,
without limitation, any substances defined as or included in the definition of
"hazardous substances" "hazardous wastes," "hazardous materials" or "toxic
substances" under any applicable Federal, state or local laws or regulations
(collectively, "Hazardous Materials") about which a government agency would,
under any and all Federal, state or local laws, ordinances, regulations, orders
and directives pertaining to Hazardous Materials (collectively, "Hazardous
Materials Laws"), require corrective action; and (b) are presently and at the
Closing will be in material compliance with all Hazardous Materials Laws. There
are no asbestos-containing materials incorporated into the buildings or interior
improvements that are part of that real property or into other of the Assets,
nor is there any electrical transformer, fluorescent light fixture with
ballasts, or other equipment containing PCBs on that real property. Disclosure
of any matter on Schedule 4.15 shall not constitute any admission by the Seller
that such matter is or was material or a violation of any Hazardous Materials
Laws.
4.16. Real Property. Schedule 4.16 is a complete and accurate legal
description of each parcel of real property owned by or leased by Seller in
connection with the operation of the Software Division, Computer Training Center
Division, and Market Street Division, together with a true and correct survey of
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each parcel. Schedule 4.16 contains a description of all buildings, fixtures and
other improvements located on the properties and list of the policies of title
insurance issued to Seller for these properties. Except as set forth on Schedule
4.16, to the knowledge of Seller, (a) all real property included in the Assets
has unqualified access to all utilities, including electricity, sanitary and
storm sewers, potable water, and natural gas, used in the operation of the
Software Division, Computer Training Center Division, and Market Street
Division; (b) all leases for real property included in the Assets, including,
without limitation, those listed on Exhibit A, are in full force and effect; (c)
all of the buildings, improvements and fixtures located on the real property
included in the Assets (whether owned or leased) are in all material respects in
good condition and repair (normal wear and tear excepted); (d) the zoning of
each parcel of property described on Schedule 4.16 permits the presently
existing improvements and the continuation of the business presently being
conducted on such parcel and Seller has not commenced, nor has it received
notice of, any proceeding that would affect the present zoning classification of
any such parcel; and (e) except as set forth on Schedule 4.16, Seller has not
received any notice of any violation of any law, ordinance, rule, statute,
order, writ, injunction, decree or regulation, or the existence of any
condemnation or eminent domain proceeding with respect to any real property
included in the Assets.
4.17. Tax Matters. All federal, state, local and foreign tax returns and
tax reports, if any, required to be filed with respect to the Software Division,
Computer Training Center Division, and Market Street Division and the properties
of the Software Division, Computer Training Center Division, and Market Street
Division have been filed with the appropriate governmental agencies in all
jurisdictions in which such returns and reports are required to be filed, all of
the foregoing are true, correct and complete.
4.18. Insurance. Seller maintains in effect insurance covering the Assets
and the Software Division, Computer Training Center Division, and Market Street
Division and any liabilities relating thereto in an amount believed adequate by
Seller, and such insurance coverage shall be maintained by Seller through the
Closing Date. Between now and the Closing Date, Seller shall furnish to Buyer
and its agents such information as Buyer shall reasonably request regarding the
Software Division, Computer Training Center Division, and Market Street
Division's insurance. Seller shall use its best efforts to assist Buyer to
transfer such insurance to Buyer, if possible, and if desired by Buyer. Schedule
4.18 is a summary of information pertaining to material property damage and
personal injury claims against the Software Division, Computer Training Center
Division, and Market Street Division during the past five years.
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4.19. Compliance; Governmental Authorizations; OSHA. Except as set forth on
Schedule 4.19, Seller is in compliance with all federal, state, local or foreign
laws, ordinances, regulations and orders applicable to the Software Division,
Computer Training Center Division, and Market Street Division or properties of
the Software Division, Computer Training Center Division, and Market Street
Division, including, for example, matters relating to the environment,
anti-competitive practices, false advertising, discrimination, employment,
health and safety. Seller has all federal, state, local and foreign governmental
licenses and permits necessary in the conduct of the Software Division, Computer
Training Center Division, and Market Street Division, and such licenses and
permits are in full force and effect, and no violations are or have been
recorded in respect of any thereof, and no proceeding is pending or threatened
to revoke or limit any thereof. Schedule 4.19 contains a list of: (1) all such
governmental licenses and permits and (2) all consents, orders, decrees and
other compliance agreements relating to the Software Division, Computer Training
Center Division, and Market Street Division under which Seller is operating or
bound, copies of all of which have been furnished to Buyer. Seller has furnished
to Buyer copies of all reports of inspections of the Software Division, Computer
Training Center Division, and Market Street Division's business and properties
from January 1, 1995 through the date hereof under OSHA and under all other
applicable federal, state and local health and safety laws and regulations.
The deficiencies, if any, noted on such reports or any deficiencies noted
by inspection through the Closing Date shall be corrected by the Closing Date.
Seller does not know or have reason to know of any other safety, health,
environmental, anti-competitive or discrimination problems relating to the
business, assets or employment practices of the Software Division, Computer
Training Center Division, and Market Street Division.
4.20. Accounts and Notes Receivable. Schedule 4.20 is an aged list of
unpaid accounts and notes receivable relating to the Software Division, Computer
Training Center Division, and Market Street Division from third parties
("Accounts Receivable Schedule") as of August 31, 1996. Seller shall furnish to
Buyer prior to the Closing Date such updated Accounts Receivable Schedule and
other information pertaining to the Software Division, Computer Training Center
Division, and Market Street Division's receivables as Buyer shall reasonably
request on reasonable advance notice. All of the accounts and notes receivable
reflected on the Balance Sheet (other than the intercompany and intracompany
accounts receivable) and the accounts and notes receivable which will be
reflected on the Closing Balance Sheet and listed on each Accounts Receivable
Schedule constituted, and will constitute, only valid claims against third
parties not affiliated with Seller arising in the
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ordinary course of the business of the Software Division, Computer Training
Center Division, and Market Street Division.
4.21. Customers and Suppliers. Upon prior written consent as provided for
in Section 14.12 herein, Buyer may obtain access to client files of the
Divestiture Divisions for a period of one year following the Closing Date.
4.22. Miscellaneous Assets. The assets shown on the Balance Sheet do not
include, and the assets as shown on the Closing Balance Sheet will not include:
(i) any contracts for future services or prepaid items or deferred charges, the
full value or benefit of which will not be usable by or transferable to the
Buyer; or (ii) any goodwill or organization expense.
4.23. Disclosures. All copies of all writings furnished to the Buyer
hereunder or in connection with the transactions contemplated hereby are true
and complete. All Schedules to this Agreement are true and complete.
Section 5. Employee Pension and Other Benefit Plans and Programs. As of the
Closing Date, the Software Division, Computer Training Center Division, and
Market Street Division shall cease to be a participating employer under all
employee benefit plans and programs of the Seller and the Seller shall take all
such action as may be necessary to effect such cessation of participation. As of
the Closing Date, Seller shall assume or retain all liabilities with respect to
all benefits accrued by employees of the Software Division, Computer Training
Center Division, and Market Street Division under any employee benefit plan or
program applicable to such employees.
Section 6. Pre-Closing Covenants of Buyer.
6.1. Corporate and Other Action. Buyer shall take all necessary action
required to fulfill its obligations under this Agreement and the transactions
contemplated hereby.
6.2. Consents and Approvals. Buyer shall use its best efforts to obtain all
necessary consents and approvals to the performance of its obligations under
this Agreement and the transactions contemplated hereby. Buyer shall make all
filings, applications, statements and reports to all Federal or state government
agencies or entities which are required to be made prior to the Closing Date by
or on behalf of Buyer pursuant to any applicable statute, rule or regulation in
connection with this Agreement and the transactions contemplated hereby.
6.3. Confidentiality. Except as required by applicable law, all information
related to the Software Division, Computer Training Center Division, and Market
Street Division supplied to Buyer by the Seller shall be maintained in strict
confidence by Buyer.
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6.4. Impact on the Equity of the Seller. Buyer shall take all necessary
action required to insure that the Divestiture will not have any negative impact
on the equity of ProtoSource.
6.4.1. Value of Divested Assets. The total value of the Assets acquired by
Buyer shall not exceed the amount of the Promissory Note and the assumed
Liabilities.
Section 7. Pre-Closing Covenants of the Seller.
7.1. Corporate and Other Actions. The Seller shall take all necessary
action required to fulfill its obligations under this Agreement and the
transactions contemplated hereby.
7.2. Consents and Approvals. The Seller shall use its best efforts to
obtain all necessary consents and approvals to the performance of its
obligations under this Agreement and the transactions contemplated hereby. The
Seller shall make all filings, applications, statements and reports to all
Federal or state government agencies or entities which are required to be made
prior to the Closing Date by or on behalf of the Seller pursuant to any
applicable statute, rule or regulation in connection with this Agreement and the
transactions contemplated hereby.
7.3.Access to Information. The Seller will permit representatives of Buyer,
from and after the date hereof up to the Closing Date, to have full access at
all reasonable times to the books, accounts, records, properties, operations and
facilities of every kind pertaining to the Software Division, Computer Training
Center Division, and Market Street Division, and will furnish Buyer with such
financial and operating data concerning the Software Division, Computer Training
Center Division, and Market Street Division as Buyer shall from time to time
reasonably request.
7.4. Ordinary Course of Business. Except as shown on Schedule 7.4,
subsequent to the date hereof and prior to the Closing Date, the Seller will, to
the extent it is within the Seller's control, continue to conduct the Software
Division, Computer Training Center Division, and Market Street Division and
maintain the Assets in substantially the same manner as heretofore and engage
only in business in the usual and normal course consistent with past practice.
Section 8. Prorated Taxes, Brokerage Fees, Product Liability Claims,
Expenses and Sales Taxes and Other Taxes.
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8.1. Proration of Taxes. All real estate, personal property and ad valorem
taxes relating to the Assets which shall have accrued and become payable prior
to the Closing Date shall be paid by the Seller. All such taxes which shall be
accrued but unpaid or which have been paid in advance shall be properly
reflected on the Closing Balance Sheet. In connection with such proration of
taxes, in the event that actual tax figures are not available at the Closing
Date, the taxes reflected on the Closing Balance Sheet shall be based upon the
actual taxes for the preceding year for which actual tax amounts are available
and such taxes shall be reprobated upon request of either party made within
sixty days of the date that the actual amounts become available, provided that
the actual amount is at least 5% more or 5% less than the amount on which the
original proration was based.
8.2. Brokerage Fees. The Seller and Buyer each represent, covenant, warrant
and agree with the other that it has not engaged any broker or any other person
who would be entitled to any brokerage fee or commission in respect of the
execution of this Agreement or the consummation of the transactions contemplated
hereby.
8.3. Product Liability. The Seller agrees with Buyer that the Seller is
solely responsible for any and all claims for injury (including death) or claims
for damage (other than warranty claims which Buyer has assumed pursuant to
Section 2.3.2), direct or consequential, resulting from or connected with
finished products or services manufactured or sold by it prior to the Closing
Date, Provided such claims are not fully covered by the product liability
insurance policies, if any, assigned to Buyer by the Seller under this
Agreement, and Buyer shall have no liability for such claims. Buyer agrees with
the Seller that Buyer is solely responsible for any and all claims for injury
(including death) or claims for damage including warranty claims, direct or
consequential, resulting from or connected with finished products or services of
the Seller, or connected with products or services of the Software Division,
Computer Training Center Division, and Market Street Division, provided such
claims are made on or after the Closing Date and relate to finished products or
service manufactured or sold after the Closing Date.
8.4. Expenses. Each party shall bear its own expenses with respect to this
transaction. Any sales, transfer, use or other tax (other than income tax) or
recording cost incurred upon the sale or transfer of the Assets shall be the
liability of Seller.
8.5. Sales and Other Taxes. Seller shall pay all sales and use taxes
arising out of the transfer of the Assets. Buyer shall not be responsible for
any business, occupation, withholding, or similar tax, or any taxes of any kind
related to any period before the Closing Date.
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Section 9. Conditions.
9.1. Conditions to Obligations of the Seller. The obligations of the Seller
to consummate the transactions contemplated by this Agreement shall be subject
to fulfillment at or prior to Closing of the following conditions (any one or
more of which may be waived in whole or in part by the Seller):
9.1.1. Performance of Agreements and Covenants. All agreements and
conditions to be performed and satisfied by Buyer hereunder on or prior to the
Closing Date shall have been duly performed and satisfied in all material
respects.
9.1.2. Truth of Representations and Warranties. The representations
and warranties of Buyer contained in this Agreement shall be true in all
material respects on and as of the Closing Date, with the same effect as though
made on and as of the Closing Date, and there shall be delivered to the Seller
on the Closing Date a certificate, in form and substance reasonably satisfactory
to the Seller and its counsel duly signed by the President or Vice President of
Buyer to that effect.
9.1.3. Opinions of Counsel. The Seller shall have received from
counsel to Buyer, an opinion dated the Closing Date and in form and substance
satisfactory to the Seller to the effect that:
(a) Buyer is a corporation duly organized, validly existing and
in good standing under the laws of the State of California;
(b) Buyer has full corporate power and authority to execute,
deliver and perform this Agreement;
(c) this Agreement and the instrument or instruments of
assumption provided for in Section 2.3.2 hereof, have been duly authorized,
executed and delivered by Buyer and constitute valid and legally binding
obligations of Buyer enforceable in accordance with their respective terms
except as enforcement thereof may be limited by bankruptcy, insolvency and other
laws affecting the enforcement of creditors' rights generally; and
(d) neither the execution and delivery nor the performance by Buyer of
this Agreement or such instruments will violate of Buyer of any material
instrument known to such which it is bound.
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9.1.4. Payment of Purchase Price and Assumption of Liabilities. Buyer
shall have paid the Purchase Price and assumed the Liabilities as provided in
Section 2.3.
9.1.5. No Actions or Proceedings. No action or proceeding by any
governmental agency shall have been instituted or threatened which would enjoin,
restrain or prohibit, or might result in substantial damages in respect of, this
Agreement or the complete consummation of the transactions as contemplated by
this Agreement, and which would in the reasonable judgment of the Seller make it
inadvisable to consummate such transactions, and no court order shall have been
entered in any action or proceeding instituted by any party which enjoins,
restrains, or prohibits this Agreement or the complete consummation of the
transactions as contemplated by this Agreement.
9.1.6. Proceedings Satisfactory to the Seller. All proceedings to be
taken by Buyer in connection with the consummation of the Closing on the Closing
Date and the other transactions contemplated hereby and all certificates,
opinions, instruments and other documents required to effect the transaction
contemplated hereby reasonably requested by the Seller will be reasonably
satisfactory in form and substance to the Seller.
9.2. Conditions to Obligations of Buyer. The obligations of Buyer to
consummate the transactions contemplated by this Agreement shall be subject to
fulfillment at or prior to the Closing of the following conditions (any one or
more of which may be waived in whole or in part by Buyer):
9.2.1. Performance of Agreements and Covenants. All agreements and
conditions to be performed and satisfied by the Seller hereunder on or prior to
the Closing Date shall have been duly performed and satisfied in all material
respects.
9.2.2. Truth of Representations and Warranties The representations and
warranties of the Seller contained in this Agreement, as updated by Schedules
delivered pursuant to Section 9.2.4, shall be true in all material respects on
and as of the Closing Date with the same effect as though made in and as of the
Closing Date and there shall be delivered by the Seller on the Closing Date a
certificate, in form and substance reasonably satisfactory to Buyer and its
counsel, duly signed by an officer of the Seller to that effect.
9.2.3. Updated Schedules. The Seller shall have delivered new
Schedules to reflect changes in Schedules hereto from the date of this Agreement
to the Closing Date.
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9.2.4. No Actions or Proceedings. No action or proceeding by any
governmental agency shall have been instituted or threatened which would enjoin,
restrain or prohibit, or might result in substantial damages in respect of, this
Agreement or the complete consummation of the transactions as contemplated by
this Agreement, and which would in the reasonable judgment of Buyer make it
inadvisable to consummate such transactions, and no court order shall have been
entered in any action or proceeding instituted by any party which enjoins,
restrains, or prohibits this Agreement or the complete consummation of the
transactions as contemplated by this Agreement.
9.2.5. Consents Obtained. All consents by third parties that are
required for the transfer of the Assets to Buyer or that are required for the
consummation of the transactions contemplated hereby, or that are required in
order to prevent a breach of or a default under or a termination of any
agreement material to the Software Division, Computer Training Center Division,
and Market Street Division to which the Seller is a party or to which any
material portion of property of the Software Division, Computer Training Center
Division, and Market Street Division is subject, will have been obtained, and
releases of all security interests held by third parties on the Assets will have
been obtained.
9.2.6. Deliveries by the Seller at Closing. On the Closing Date, the
Seller will have delivered to Buyer all of the following:
(a) Copies of all necessary third party and governmental consents
that Buyer is required to obtain in order to effect the transactions
contemplated by this Agreement;
(b) Such instruments of sale, transfer, assignment, conveyance
and delivery, in form and substance reasonably satisfactory to counsel for
Buyer, as are required in order to transfer to Buyer good and marketable title
to the Assets;
(c) Such other documents or instruments as Buyer reasonably
requests which are reasonably necessary to effect the transactions contemplated
hereby.
9.2.7. Proceedings Satisfactory to Buyer. All proceedings to be taken
by the Seller in connection with the consummation of the Closing on the Closing
Date and the other transactions contemplated hereby and all certificates,
opinions, instruments and other documents required to effect the transaction
contemplated hereby reasonably requested by Buyer will be reasonably
satisfactory in form and substance to Buyer.
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Section l0. Non-CompetitiOn. The Seller, in order to induce Buyer to enter
into this Agreement, expressly covenants and agrees that for a period of five
years from and after the Closing Date, neither the Seller nor any of its
subsidiaries will directly or indirectly, own, manage, operate, join, control,
or participate in or be connected with any business, individual, partnership,
firm or corporation, which is at the time engaged, wholly or partly, in any of
the businesses engaged in by the Software Division, Computer Training Center
Division, and Market Street Division on the Closing Date.
The Seller may own an aggregate of not more than five percent of the
outstanding stock of any class of any corporation engaged in any such business,
if such stock is listed on a national securities exchange or regularly traded in
the over-the-counter market by a member of a national securities exchange,
without violating the provisions of this Section 10, provided that the Seller
does not have the power to control or direct the management or affairs of such
corporation and is not otherwise associated with it. The Seller expressly
covenants and agrees that the remedy at law for any breach of this Section 10
will be inadequate and that, in addition to any other remedies Buyer may have,
Buyer shall be entitled to temporary and permanent injunctive relief without the
necessity of proving actual damage. To the extent that any part of this
provision may be invalid, illegal or unenforceable for any reason, it is
intended that such part shall be enforceable to the extent that a court of
competent jurisdiction shall determine that such part if more limited in scope
would have been enforceable and such part shall be deemed to have been so
written and the remaining parts shall as written be effective and enforceable in
all events. The Seller and Buyer agree that the total consideration for the
covenant contained in this Section 10 is $50,000.
Section 11. Post Closing Covenants of Buyer.
11.1. Liabilities. Buyer agrees to keep a list describing in detail the
Liabilities paid by Buyer and to retain all documentation supporting actual
payment of each Liability. Buyer will submit such list and such documentation to
the Seller within thirty days after the end of each calendar month until all
such Liabilities have been paid, satisfied or discharged by Buyer.
11.2. Availability of Records. After the Closing, Buyer shall make
available to the Seller as reasonably requested by either the Seller or any
taxing authority all information, records or documents relating to the Assets,
the personnel records referred to in Section 5.4 or the Software Division,
Computer Training Center Division, and Market Street Division for all periods
prior to Closing and shall preserve all such information, records and documents
until the later of six years
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<PAGE>
after the Closing or the expiration of all statutes of limitations or extensions
thereof applicable to the Seller. Buyer shall also make available to the Seller,
as reasonably requested by the Seller, personnel responsible for preparing or
maintaining information, records and documents, both in connection with tax
matters as well as litigation. Prior to destroying any records related to the
Software Division, Computer Training Center Division, and Market Street Division
prior to the Closing Date, Buyer shall notify the Seller of its intent to
destroy such records, and Buyer will permit the Seller to retain any such
records. With respect to any claims which are the Seller's responsibility under
Section 8.3, Buyer shall render all reasonable assistance which the Seller may
request in defending such claim and shall make available to the Seller technical
personnel most knowledgeable about the product in question.
11.3. Use of Trade or Service Marks. Buyer shall not use or permit its
distributors to use the name "ProtoSource." Any other corporate trade or service
marks owned or used by the Seller or any of its subsidiaries may not be used by
the Buyer unless (i) such marks or names are included in the Assets, (ii) such
use is permitted in writing by the Seller or (iii) such marks or names are
located on the Assets, in which case Buyer may use, and permit its distributors
to use, such marks or names for a period of six months following the Closing
Date.
Section 12. Statement of Source and Use of Funds.
12.1.Statement of Source and Use of Funds. On the Closing Date, Seller will
present to Buyer a Statement of Source and Use of Funds of the Software
Division, Computer Training Center Division, and Market Street Division as of
the Closing Date (the "Statement of Source and Use of Funds"). The Statement of
Source and Use of Funds shall be prepared by Seller with the assistance of Buyer
if necessary, from the Seller's books and records of the Software Division,
Computer Training Center Division, and Market Street Division. The Statement of
Source and Use of Funds shall be prepared on a basis consistent with those
practices applied in preparation of the Cash Flow Statement. All normal year-end
closing adjustments, including accruals of expenses through the Closing Date,
will be made in the Statement of Source and Use of Funds as if the Closing Date
were at fiscal year end.
12.2. Resolution. In the event the Buyer in good faith disputes any amounts
in the Statement of Source and Use of Funds, determined as provided in Section
12.1 above, the party disputing such amount shall give written notice thereof to
the other party within 30 days of the date Buyer had proposed adjustments as
provided in Section 12.1. The parties shall then attempt to resolve such dispute
amicably within 30 days after the date of such notice, or within any extension
of such period agreed to in
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writing by the Seller and Buyer. If the matter is not resolved, then as their
exclusive method of resolving the dispute, the Seller and Buyer shall select
within 14 days after said 30-day period a nationally recognized independent
public accounting firm other than the Seller's independent public accountants,
to resolve such dispute or, if the Seller and Buyer are unable to agree upon
such accounting firm within said 14-day period, then shall thereupon be deemed
selected by both parties such accounting firm as designated by the Seller, which
shall render their determination within 30 days of receiving the work papers and
preliminary opinion other than the Seller's independent public accountants and
any written challenges thereto by Buyer or the Seller. The fees and charges of
any such accounting firm so selected shall be born equally by the Buyer and
Seller. Such accounting firm's decision as to the Statement of Source and Use of
Funds shall be final and binding on both parties.
12.3. Settlement of Accounts. The net change in cash of the Software
Division, Computer Training Center Division, and Market Street Division as shown
on the Statement of Source and Use of Funds will be adjusted against the Total
Cash Investment (attached hereto as Exhibit B) The Seller shall pay Buyer the
adjusted amount.
Section 13. Indemnification, Survival and Termination.
13.1. Indemnification by the Seller. The Seller agrees to indemnify and
hold harmless the Buyer and its affiliates at all times, and against and in
respect of all losses, liabilities, costs and expenses (including reasonable
attorneys' fees) which arise out of or are based on any breach of the
representations, warranties, covenants and agreements of Seller set forth in
this Agreement, the operation of the business of the Software Division, Computer
Training Center Division, and Market Street Division prior to the Closing Date
or the noncompliance with any applicable bulk sales or similar laws, insofar as
such losses, liabilities, costs and expenses (including reasonable attorney's
fees) exceed in the aggregate $50,000.
Buyer shall promptly notify the Seller in writing of all matters which may
give rise to the right to indemnification hereunder, but the failure to notify
Seller shall not relieve Buyer from any liability it may have to Seller to the
extent Seller is not prejudiced as a result of such failure. The Seller shall
have the right, with the consent of Buyer which shall not be unreasonably
withheld, to settle all indemnifiable matters related to claims by third parties
which are susceptible to being settled, and to defend (without the consent of
Buyer) through counsel of its own choosing, at its own expense, any action which
may be brought by a third party in connection therewith, provided, however, that
Buyer shall have the right to have its
24
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counsel participate fully in such defense at its own expense. Buyer and the
Seller shall keep each other informed of all settlement negotiatiOns with third
parties and of the progress of any litigation with third parties, Buyer and the
Seller shall permit each other reasonable access to books and records and
otherwise cooperate with all reasonable requests of each other in connection
with any matter or claim for indemnification by a third party.
13.2. Indemnification by Buyer. The Buyer agrees to indemnify and hold
harmless the Seller and its affiliates at all times, and against and in respect
of all losses, liabilities,costs and expenses (including reasonable attorneys"
fees) which arise out of or are based on any breach of the representations,
warranties, covenants and agreements of Buyer set forth in this Agreement or the
operation of the business of the Software Division, Computer Training Center
Division, and Market Street Division after the Closing Date insofar as such
losses, liabilities, costs and expenses (including reasonable attorney's fees)
exceed in the aggregate $10,000.
Seller shall promptly notify the Buyer in writing of all matters which may
give rise to the right to indemnification hereunder, but the failure to notify
Buyer shall not relieve Seller from any liability it may have to Buyer to the
extent Buyer is not prejudiced as a result of such failure. The Buyer shall have
the right, with the consent of Seller which shall not be unreasonably withheld,
to settle all indemnifiable matters related to claims by third parties which are
susceptible to being settled, and to defend (without the consent of Seller)
through counsel of its own choosing, at its own expense, any action which may be
brought by a third party in connection therewith, provided, however, that Seller
shall have the right to have its counsel participate fully in such defense at
its own expense. Buyer and the Seller shall keep each other informed of all
settlement negotiations with third parties and of the progress of any litigation
with third parties, and Buyer and the Seller shall permit each other reasonable
access to books and records and otherwise cooperate with all reasonable requests
of each other in connection with any matter or claim for indemnification by a
third party.
13.3. Survival. The representations and warranties contained in this
Agreement shall survive the Closing for a period of five years at which the time
they shall expire. No claim may be made based upon an alleged breach of any of
such representations or warranties whether for indemnification in respect
thereof or otherwise, unless written notice of such claim, in reasonable detail,
is given to Buyer, or to the Seller, as the case may be, within said five year
period.
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13.4. Termination. This Agreement may be terminated any time prior to the
Closing Date:
13.4.1. With the mutual consent of Buyer and the Seller; or
13.4.2. By the Seller, if by the Closing Date any of the conditions
provided in Section 9.1 shall not have been satisfied, complied with or
performed in any material respect, and the Seller shall not have waived such
failure of satisfaction, noncompliance or nonperformance; or
13.4.3. By Buyer, if by the Closing Date any of the conditions
provided in Section 9.2 shall not have been satisfied, complied with or
performed in any material respect, and Buyer shall not have waived such failure
of satisfaction, noncompliance or nonperformance.
In the event of any termination pursuant to this Section 13.4 (other than
pursuant to Section 13.4.1), written notice setting forth the reasons thereof
shall forthwith be given the terminating party to the other. This Agreement
shall terminate automatically if the Closing Date shall not have occurred on or
before December 31, 1996, or such later date as shall have been agreed to by the
parties hereto.
If this Agreement shall be terminated as herein set forth, Buyer agrees
that it will remain obligated under, and will comply with, the provisions of
Section 6.3.
Section 14. Miscellaneous.
14.1. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns. If
however, an assignment shall be made on or prior to the Closing Date, Buyer
shall remain responsible for its obligations under this Agreement.
14.2. No Press Release Without Consent. No press release related to this
Agreement or the transactions contemplated herein, or other announcement to the
employees, customers or suppliers of the Software Division, Computer Training
Center Division, and Market Street Division will be issued without the joint
approval of the Seller and Buyer, except any public disclosure which the Seller
or Buyer in its good faith judgment believes is required by law or, in the case
of the Seller, by any stock exchange on which its securities are listed (in
which case the party making the disclosure will consult with the other party
prior to making such disclosure). Buyer and the Seller will cooperate to prepare
a joint press release to be issued on the
26
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Closing Date or upon the request of the Seller, at the time o the signing of
this Agreement.
14.3. Severability. Each of the provisions contained in this Agreement
shall be severable and the unenforceability of one shall not affect the
enforceability of any others or of the remainder of this Agreement.
14.4. Entire Agreement. This Agreement may not be amended, supplemented or
otherwise modified except by an instrument in writing signed by all of the
parties hereto. This Agreement contains the entire agreement of the parties
hereto with respect to the transactions covered hereby, superseding all
negotiations, prior discussions and preliminary agreements made prior to the
date hereof.
14.5. No Third Party Beneficiaries. This Agreement is solely for the
benefit of the parties hereto and their respective affiliates and no provision
of this Agreement shall be deemed to confer upon third parties any remedy,
claim, liability, reimbursement, claim of action or other right in excess of
those existing without reference to this Agreement.
14.6. Waiver. The failure of any party to enforce any condition or part of
this Agreement at any time shall not be construed as a waiver of that condition
or part, nor shall it forfeit any rights to future enforcement thereof.
14.7. Governing Law. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of California without
regard to the conflicts of laws provisions thereof.
14.8. Headings. The headings of the sections and subsections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part hereof.
14.9. CounterParts. More than one counterpart of this Agreement may be
executed by the parties hereto, and each full~, executed counterpart shall be
deemed an original.
14.10. Choice of Forum. Buyer and the Seller agree that any suit or action
or proceeding brought by either party against the other party to this Agreement
in connection with or arising out of this Agreement shall be brought solely
before Courts of the Central District of California or, if such court lacks
jurisdiction, in the Superior Court for the State of California for the County
of Fresno.
14.11. Further Documents. Buyer and the Seller will, at the request of
another party, execute and deliver to such other party
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<PAGE>
all such further instruments, assignments, assurances and other documents as
such other party may reasonably request in connection with the carrying out of
this Agreement.
14.12. Notices. All communications, notices and consents provided for
herein shall be in writing and be given in person or by means of telex,
facsimile or other means of wire transmission (with request for assurance of
receipt in a manner typical with respect to communications of that type) or by
mail, and shall become effective (x) on delivery if given in person, (y) on the
date of transmission if sent by telex, facsimile or other means of wire
transmission, or (z) four business days after being deposited in the United
States mails, with proper postage, for first-class registered or certified mail,
prepaid.
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Notices shall be addressed as follows:
If to Buyer, to:
SSC Technologies, Inc.
2580 W. Shaw Lane, #102
Fresno, California 93711
Attn: Charles Howard
If to the Seller, to:
ProtoSource Corporation
2580 West Shaw Lane, Suite 102,
Fresno, California 93711-2765
Attn: Andy Chu
provided, however, that if any party shall have designated a different address
by notice to the others, then to the last address so designated.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers as of the date first above written.
PROTOSOURCE CORPORATION
By: /S/ ANDY CHU
-------------------------------------
Andy Chu
President and Chief Executive Officer
SSC TECHNOLOGIES, INC.
By: /S/ CHARLES HOWARD
------------------------------------
Charles Howard
President
29
ProtoSource Corp.
2580 West Shaw
Fresno, California 93711-2765
September 27, 1996
Andrew, Alexander, Wise & Company, Incorporated
17 State Street
New York, New York 10004
Gentlemen;
ProtoSource Corp., a California corporation (the "Company"), proposes to
offer (the "Offering") a minimum of 2,000,000 and a maximum of 6,000,000 shares
of the Company's Common Stock (the "Shares"), at an offering price of 5.25 per
Share. The Offering of the minimum number of Shares is referred to as the
"Minimum Offering" and the Offering of the maximum number of Shares is referred
to as the "Maximum Offering."
The Offering will be made on terms and conditions acceptable to you and as
set forth in the confidential subscription agreement (the "Subscription
Agreement") and the exhibits thereto, which are collectively referred to herein
as the "Offering Documents." The Shares will be offered on a "best efforts"
basis through you, as the Company's placement agent in an Offering that is
exempt from registration under the Securities Act of 1933 (the Securities Act")
in accordance with Section 4(6) of the Securities Act. Andrew, Alexander, Wise &
Company, Incorporated is sometimes referred to herein as the "Placement Agent."
The Company will prepare and deliver to the Placement Agent a reasonable number
of copies of the Offering Documents.
Each prospective investor subscribing for Shares (each, a "Subscriber")
will be required to be an "accredited investor" as defined in Rule 501 of
Regulation D and to deliver, among other things, a Subscription Agreement and a
questionnaire ("Questionnaire") in the forms to be provided by the Company.
Capitalized terms used herein, unless otherwise defined or unless the context
otherwise indicates, shall have the same meanings as in the Offering Documents.
The Placement Agent has consummated a bridge financing (the "Bridge
Financing") on behalf of the Company. In connection with the Bridge Financing,
the Company is issued an aggregate of $200,000 of its 10%, 1 year promissory
notes (the "Notes") and an aggregate of 400,000 shares of its Common Stock (the
"Bridge Shares"). In connection with its services rendered in completion of the
Bridge Financing, the Company agrees to pay commissions and non-accountable
expenses to the Placement Agent as more fully described in Section (3)(c) below.
<PAGE>
1. Appointment of Placement Agent.
(a) You are hereby appointed Placement Agent of the Company during the
Offering Period specified below for the purposes of assisting the Company in
finding qualified Subscribers for Shares. As Placement Agent, you may engage the
services of other placement agents in order to assist you in finding qualified
Subscribers for the Shares, provided that such other placement agents possess
all requisite federal, state and NASD registrations and memberships to act as
placement agents. Any compensation to which you may become entitled in
accordance with Section (3) of this Agreement shall be allocated between you as
Placement Agent and any other placement agents which you engage to assist you in
this Offering, The Offering Period shall commence on the day the Offering
Documents are first made available to you by the Company for delivery to
prospective Subscribers and shall continue until the earlier of (1) the sale of
all of the Shares or (2) the close of business on October 31, 1996, except that
the Company and the Placement Agent may agree to extend the Offering from time
to time for up to an additional 60 days, if the Minimum Offering is sold prior
to the close of business on September 27, 1996. However, if the Minimum Offering
is not sold prior to the close of business on September 27, 1996, the Offering
will be terminated and all funds received from Subscribers will be returned,
without interest and without any deduction. The day that the Offering Period
terminates is referred to as the "Termination Date."
(b) Subject to the performance by the Company of all of its
obligations under this Agreement and to the completeness and accuracy of all
representations and warranties of the Company contained in this Agreement, you
hereby accept your appointment as exclusive Placement Agent and agree to assist
the Company in finding qualified Subscribers for Shares. Your agency hereunder
is not terminable by the Company except upon termination of the Offering.
(c) Subscriptions for Shares shall be evidenced by the execution by
Subscribers of a Subscription Agreement including a Questionnaire. No
Subscription Agreement shall be regarded as effective unless and until it is
accepted by the Company. Until the Closing (as defined below), all subscription
funds received shall be held in escrow as described in the Subscription
Agreement.
2. Representations and Warranties of the Company. The Company represents
and warrants (which representations and warranties will be true on the date of
each Closing) as follows:
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(a) Offering Documents. The Offering Documents conform in all respects
with the requirements of Section 4(6) of the Securities Act and Regulation D and
with the requirements of all other published rules and regulations of the
Securities and Exchange Commission (the "SEC") currently in effect relating to
"private offerings" to "accredited investors" of the type contemplated by the
Company. The Offering Documents have not been amended or supplemented and no
amendment or supplement thereto will be made without your prior consent.
(b) Organization. The Company and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation and has all requisite corporate power and
authority to own and lease its properties, to carry on its business as currently
conducted, to enter into this Agreement and to consummate all of the
transactions contemplated by this Agreement and the Offering Documents. The
Company and each of its subsidiaries is duly qualified as a foreign corporation
for the transaction of business and is in good standing as a foreign corporation
in each jurisdiction in which the conduct of its business or ownership or
leasing of its properties requires it to be so qualified, except where the
failure to be so qualified would not have a material adverse effect on the
business, financial condition or prospects of the Company or its subsidiaries.
(c) Capitalization. The authorized capital stock of the Company
consists of 10,000,000 shares of Common Stock, no par value and 9,000,000 shares
of Preferred Stock. As of the date hereof, the issued and outstanding capital
stock of the Company consists of 1,330,001 shares of Common Stock and 900,000
shares of Preferred Stock. All such issued and outstanding shares of the Company
are duly authorized, validly issued, fully paid and nonassessable.
(d) Warrants. Preemptive Rights Etc. Except for the Company's
outstanding, publicly traded warrants, options and warrants to purchase 690,000
shares by employees and others and Preferred Stock, there are not as of the date
hereof any outstanding warrants, options, agreements, convertible securities,
preemptive rights to subscribe for or other commitments pursuant to which the
Company is, or may become, obligated to issue any shares of its capital stock or
other securities of the Company.
(e) Title. The Company and each of its subsidiaries have good and
marketable title to all properties and assets, owned by them, free and clear of
all liens, charges, encumbrances or restrictions, except as described in the
Subscription Agreement or the exhibits thereto; all of the material leases and
subleases under which the Company or its subsidiaries is the lessor or sublessor
of properties or assets or under which the Company or its subsidiaries holds
properties or assets as lessee or sublessee are in full force and effect; and
the Company and its subsidiaries own or lease all such properties as are
necessary to its operations as now conducted.
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<PAGE>
(f) Litigation. Except as set forth in the Subscription Agreement or
the exhibits thereto, there is no action, suit, investigation, claim or
proceeding at law or ln equity by or before any arbitrator, governmental
instrumentality or agency now pending or, to the knowledge of the Company,
threatened against the Company or its subsidiaries. Except as set forth in the
Subscription Agreement or the exhibits thereto, neither the Company nor its
subsidiaries is subject to any judgment, order, writ, injunction or decree of
any Federal state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign which would
materially adversely affect the business, financial condition or prospects of
the Company or its subsidiaries.
(g) Non-Defaults; Non-Contravention. Neither the Company nor its
subsidiaries is in violation of, or in default under, (1) its Certificate of
Incorporation, or its By-laws, or any indenture, mortgage or other agreement or
instrument to which it is a party or by which it or its property is bound or
affected or (2) to the Company's knowledge, any order, writ, injunction or
decree of any court of any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign; and, to the Company's knowledge, there exists no condition, event or
act which constitutes, nor which after notice, the lapse of time or both, could
constitute a default Under any of the foregoing, which in any case would have a
material adverse effect on the business, financial condition or prospects of the
Company or its subsidiaries.
(h) Taxes. The Company and each of its subsidiaries has filed all tax
returns which are required to be filed by it and all such returns are true and
correct in all material respects, The Company has paid all taxes pursuant to
such returns or pursuant to any assessments received by it or which it is
obligated to withhold from amounts owing to any employee, creditor or third
party.
(i) Compliance With Laws; Environmental Matters Licenses, Etc. Neither
the Company nor its subsidiaries has received any notice of any violation of, or
noncompliance with, any Federal, state, local or foreign, laws, ordinances,
regulations and orders applicable to its business, the violation of which, or
noncompliance with which, would have a material adverse effect on the business,
financial condition or prospects of the Company or its subsidiaries. The Company
and each of its subsidiaries has all licenses and permits and other governmental
certificates, authorizations and permits and approvals (collectively,
"Licenses") required by every Federal, state and local government or regulatory
body for the operation of its business as currently conducted and for the use of
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<PAGE>
its properties, except where the failure to be licensed would not have a
material adverse effect on the business, financial condition or prospects of the
Company or its subsidiaries, The Licenses are in full force and effect and no
violations have been recorded in respect of any License and no proceeding is
pending or threatened to revoke or limit any thereof, except where such
violations, revocations or limitations would not have a material adverse effect
on the business, financial condition or prospects of the Company or its
subsidiaries.
(j) Authorization of Agreement, Etc. This Agreement has been duly
executed and delivered by the Company. The execution, delivery and performance
by the Company of this Agreement has been duly authorized by all requisite
corporate action by the Company and this Agreement constitutes the legal, valid
and binding obligation of the Company, enforceable in accordance with its terms.
The execution, delivery and performance of this Agreement, the issuance, sale
and delivery of the Notes, the Bridge Shares, the Shares, the Placement Agent's
Warrants and the Common Stock issuable upon exercise of the Placement Agent's
Warrants will not (l) violate any provision of law or statute or, to the
Company's knowledge, any order of any court or other agency of government or (2)
conflict with or result in any breach of any of the terms, conditions or
provisions of, or constitute (with due notice or lapse of time or both) a
default under, or result in the creation of any lien' security interest, charge
or encumbrance upon any of the properties or assets of the Company under its
Certificate of Incorporation or By-Laws or any material indenture, mortgage,
lease agreement or other material agreement or instrument to which the Company
is a party or by which it or any of its property is bound or affected, except as
to which requisite waivers or consents shall have been obtained by the Company.
(k) Issuance of Shares, Etc. When issued, sold and delivered, the
Common Stock purchasable upon exercise of the Placement Agent's Warrants (as
hereinafter defined) (l) will have been validly issued and will be fully paid
and nonassessable and will constitute valid and legal obligations of the Company
enforceable in accordance with their respective terms, and (2) will not be
subject to preemptive or any other similar rights of the stockholders of the
Company or others. When issued and delivered, the Placement Agent's Warrants
will be a valid and legal obligation of the Company enforceable in accordance
with its terms.
(1) Authorization of Reserved Shares. The Company has reserved for
issuance --------- shares of its Common Stock for issuance upon exercise of the
Placement Agents's Warrants. Such reserved shares are collectively referred to
as the "Reserved Shares." When paid for, issued and delivered, the Reserved
Shares will have been duly authorized and validly issued, will be fully paid and
nonassessable, and will not be subject to preemptive or any other similar rights
of the stockholders of the Company or others.
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<PAGE>
(m) Exempt Offering. Assuming (1) the accuracy of the representations
and warranties of each Subscriber in the Subscription Agreement executed and
delivered by such Subscriber and (2) that the Placement Agent has complied in
all material respects with the requirements of Sections 4(6), 12(2) and 17(a) of
the Securities Act, the offer and sale of the Shares in accordance with the
terms of the Offering Documents and this Agreement are exempt from the
registration requirements of the Securities Act by reason of the exemption
afforded by Section 4(6) of the Securities Act.
(n) Disclosure. The Offering Documents do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made in the Offering Documents, in light of the
circumstances under which they were made, not misleading.
(o) Registration Rights, Except as contemplated by the Subscription
Agreement and the Placement Agent's Warrants with respect to the rights of
holders of the Placement Agent's Warrants and the Reserved Shares, and except as
set forth in Subscription Agreement or the exhibits thereto, no person has any
right to cause the Company to effect the registration under the Securities Act
of any securities of the Company.
(p) Brokers. Neither the Company nor any of its officers, directors,
employees, agents or stockholders has employed any broker or finder in
connection with the transactions contemplated by this Agreement, other than the
Placement Agent.
(q) Title to Securities. When certificates representing the Placement
Agent's warrants and the Reserved Shares have been duly issued and delivered to
the purchasers thereof and payment has been made therefor, such purchasers,
respectively, will have good and marketable title to such securities, free and
clear of all liens, encumbrances and claims whatsoever (with the exception of
claims arising or through the acts of such purchasers) and the Company will have
paid all taxes, if any, in respect of the original issuance thereof
(r) Right of First Refusal. No person, firm or other business entity
is a party to any agreement, contract or understanding, written or oral,
entitling such party to a right of first refusal with respect to financing made
by the Company.
(s) Listing. The Company's securities are currently traded in the
Nasdaq Smallcap Market and except to the extent disclosed in the Offering
Documents by the Company, the Company has not received any notice of, nor does
it have any reason to believe, that its securities are subject to delisting from
or suspension of trading in such system.
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(t) Exchange Act Compliance. The Company has filed with the Securities
and Exchange Commission on a timely basis all filings required of a company
whose securities have been registered under the Securities Exchange Act of 1934
(the "Exchange Act"). All information contained in such filings was true
accurate and complete in all material respects as of the date of such filings.
(u) Changes. since January 1, 1995, and except as disclosed in the
Offering Documents, (i) neither the Company nor its subsidiaries has entered
into any transaction that was not in the ordinary course of its business, and
(ii) there has been no material adverse change in the condition (financial or
otherwise), business, properties, assets or liabilities of the Company or any of
its subsidiaries.
(v) Trademarks Etc. Each of the Company and its subsidiaries has, or
has the right to use, all trademarks and copyrights required to conduct its
business as now conducted; and the Company has not received any notice of any
claims, nor does it have any knowledge of any threatened claims, and knows of no
facts that would form the basis of any claim, asserted by any person to the
effect that the sale or use of any product or process now used or offered by the
Company or its subsidiaries or proposed to be used by the Company or its
subsidiaries infringes upon any trademarks, technology, know-how, processes or
other intellectual property of another person.
3. Closing: Blue Sky; Fees and Expenses, Etc.
(a) Closing. Provided the minimum number of Shares have been
subscribed for and funds representing the sale thereof have cleared, a closing
(the "Closing") shall take place at the offices of Snow Becker Krauss P.C., 605
Third Avenue, New York, N.Y. within seven days following the Termination Date
(which date may be accelerated or adjourned by agreement between the Company and
the Placement Agent). The Closing can be a staged closing ("Stage Closing") with
an initial closing of at least five hundred thousand dollars ($500,000), to
occur no later than Monday, September 30, 1996. The Final Closing must occur no
later than Thursday, October 31, 1996. At the Closing, payment for the Shares
then being issued and sold by the Company shall be made against delivery of
certificates representing the Common Stock included in the Shares. As used
herein, references to "Closing" shall include the initial and each Stage
Closing, unless the context requires otherwise. The Kriegsman Group and all
other holders of the Company's restricted Common Stock will enter into lock-up
agreements with the Placement Agent upon the Closing of the Maximum Offering to
refrain from the sale or disposition of the securities of the Company owned by
them for a two (2) year period following the later of the completion of the
Maximum Offering or the Termination Date, unless pursuant to the written consent
of the Placement Agent.
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<PAGE>
(b) Warrants.
(i) At each Closing, the Company shall issue to both the Placement
Agent or its designees or their assignees (the "Holders") and to the Kriegsman
Group, warrants (the "Placement Agent's Warrants" and the Kriegsman Group's
Warrants respectively). The Placement Agent's Warrants and the Kriegsman Group's
Warrants will permit each of those parties to purchase a number of Shares of the
Company's Common Stock in an amount equal to 2,200,000 multiplied by a fraction,
the numerator of which is the gross proceeds raised in connection with the
particular Stage Closing and the denominator of which is $l,500,000 (to a
maximum grant of Placement Agent's Warrants for 2,200,000 Shares and a maximum
grant of Kriegsman Group's Warrants for 2,200,000 Shares). The Placement Agent's
Warrants and the Kriegsman Group warrants shall be exercisable for five years
from their date of issuance (unless extended) at a price equal to $.25 per
share.
(ii) The Company covenants and agrees with the Placement Agent that,
if at any time within the five-year period commencing on the date of the first
Closing, the Company proposes to file a registration statement with respect to
any class of security (other than pursuant to a registration statement on Forms
S-4 or S-8 or any successor form or a post-effective amendment to the
registration statement relating to the Company's publicly traded warrants) under
the Securities Act in a primary registration on behalf of the Company and/or in
a secondary registration on behalf of holders of the Company's securities, the
Company will give prompt written notice (which, in the case of a registration
statement pursuant to the exercise of registration rights shall be within ten
(1O) business days after the Company's receipt of notice of such exercise and,
in any event, shall be at least twenty (20) days prior to such filing) to the
Holders, at the address appearing on the records of the Company, of its
intention to file a registration statement, and will offer to include in such
registration statement all or any portion of the shares underlying the Holder's
Warrants (the "Registrable Securities"). Unless otherwise indicated, all
registrations requested pursuant to this Section 3(b)(ii) are referred to herein
as "Piggyback Registrations." The offer to include the Registrable Securities in
any Piggyback Registration Statement is limited by subparagraphs (A) and (B) of
this Section 3(b)(ii).
The Company will use its best efforts, through its officers,
directors, auditors and counsel in all matters necessary or advisable, to cause
to become effective any registration statement filed pursuant to this Section 3
(b) (ii) as promptly as practicable, In that regard, the Company makes no
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<PAGE>
representations or warranties as to its ability to have the registration
statement declared effective, All registrations pursuant to this Section 3 (b)
(11) will be made solely at the Company's expense, exclusive of any sales
commissions incurred from the sale of the Registrable Securities and any
attorneys' fees incurred by the Holders resulting from the hiring of the Holders
own attorneys, if any Registrable Securities are sold.
(A) Priority on Primary Registrations. If a Piggyback Registration
includes an underwritten primary registration on behalf of the Company, and if
the underwriter for the offering being registered by the Company determines in
good faith and advises the Company in writing that in its opinion the number of
Registrable Securities requested to be included in such registration statement
exceeds the number that can be sold in such offering without materially
adversely affecting the distribution of such securities by the Company, then the
Company will promptly furnish the Holders with a copy of such letter, and the
Company will include in such registration statement first, the securities that
the Company proposes to sell and second, the securities requested to be included
in such registration statement, any sales of which shall be apportioned pro rata
among the Holders and the holders of any other securities requesting
registration according to the number of Registrable Securities, and other
securities to be registered.
(B) Priority on Secondary Registrations. If a Piggyback Registration
consists only of an underwritten secondary registration on behalf of
stockholders of securities of the Company, and the underwriter for the offering
being registered by the Company advises the Company in writing that in its
opinion the number of Registrable Securities requested to be included in such
registration statement exceeds the number which can be sold in such offering
without materially adversely affecting the distribution of such securities, then
the Company will promptly furnish the Placement Agent with a copy of such
letter, and the Company will include in such registration statement the
securities requested to be included in such registration statement, any sales of
which shall be apportioned pro rata among the Placement Agent and the holders of
any other securities requesting registration according to the number of
Registrable Securities and other securities requested to be registered.
Notwithstanding Subparagraph (a) above, if any such underwriter shall
determine in good faith and advise the Company in writing that the distribution
of the Registrable Securities requested to be included in the registration
statement concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by the Company,
then the Company may delay the Holders' offering and sale for such period ending
on the earliest of (i) 9O days following the effective date of the Company's
registration statement of (ii) such date as the Company, managing underwriter
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and Holders shall otherwise agree. In the event of such delay, the Company shall
file such supplements, post-effective amendments and take any such other steps
as may be necessary to permit the Holders to make a proposed offering and sale
for a period of ninety (90) days immediately following the end of such period of
delay. If any party disapproves of the terms of any such underwriting, it may
elect to withdraw therefrom by written notice to the Company, the underwriter,
and the Holders. Notwithstanding the foregoing, the Company shall not be
required to file a registration statement to include the Registrable Securities
pursuant to this Section 3(b) (ii) if, in the opinion of counsel for the
Company, all of the Registrable Securities proposed to be disposed of may be
transferred pursuant to the provisions of Rule 144 under the Securities Act.
(C) Demand Registration Rights. The Company covenants and agrees that
upon written request of no less than fifty percent (50%) of the Holders, on one
occasion, made at any time during the term, the Company will file with the SEC
as promptly as practicable and, in any event, within ninety (9O) days after
receipt of such written request, at its sole expense, a registration statement
or a post-effective amendment to an existing registration statement, under the
Securities Act (collectively a "Demand Registration Statement") registering or
qualifying the Registrable Securities requested to be so registered for sale.
The expenses of such Demand Registration Statement shall be paid solely by the
Company, exclusive of any sales commissions incurred from the sale of the
Registrable Securities and any attorneys' fees incurred by the Holders resulting
from the employment of their own attorneys which shall be the obligations solely
of such Holders. The registration right requested pursuant to this Section
3(b)(ii) is referred to herein as the "Demand Registration." Within fifteen (15)
days after receiving any such notice or the Company shall give notice to the
remaining holders of the Registrable Securities, if any, advising that the
Company had received a request for registration and is proceeding with such
Demand Registration Statement and offering to include therein the Registrable
Securities of such remaining Holders. The Company shall not be obligated to
include the Registrable Securities of any such remaining Holders in a Demand
Registration Statement unless the Company shall have received an acceptance from
such holder by notice in writing to the Company within ten (lO) days thereafter.
The Company will file and use its best efforts, through its officers, directors,
auditors and counsel in all matters necessary or advisable, to cause such Demand
Registration Statement to become effective as promptly as practicable. For a
period of nine months after the Registration Statement becomes effective, the
Company will reflect in an amendment to the registration Statement, financial
statements which are prepared in accordance with Section lO(a)(3) of the
Securities Act and any facts or events arising that, individually, or in the
aggregate, represent a fundamental and/or material change in the information set
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<PAGE>
forth in the Demand Registration Statement to enable the holders to sell such
Registrable Securities during said nine month period. The Company shall not be
obligated to file another Demand Registration Statement pursuant to this
paragraph for any holder who does not accept the offer herein.
Notwithstanding anything else herein, no Demand Registration shall be
utilized or be deemed to have been utilized under this Section 3(b)(ii)(C)
unless and until the Demand Registration Statement relating to the Registrable
Securities which are the subject of the Demand Registration Statement is
declared effective by the SEC and the Registerable Securities are qualified for
sale with the appropriate State Securities Commissions, and no stop order
suspending the effectiveness of such Demand Registration Statement shall have
been issued and the registration Statement has remained in effect and current
for a minimum period of nine months.
If requested by the underwriter for any underwritten offering of the
Company's or its stockholder's securities in which the Registerable Securities
are or may be included, and the underwriter of such offering by the Company
and/or its stockholder requests that the Registerable Securities also be
underwritten, then the Company and the Holder of Registrable Securities will
enter into an underwriting agreement with such underwriter for such offering,
which shall be reasonably satisfactory in substance and form to the Company and
the Company's counsel, the Holder of Registrable Securities and the underwriter,
and such agreement shall contain such representations and warranties by the
Company and the Holders of Registrable Securities and such other terms and
provisions as are customarily contained in an underwriting agreements with
respect to secondary distributions including, without limitation indemnities.
(d) Bridge Financing Fees. Upon the earlier of September 27, 1996 or
the Closing of the Minimum Offering, the Company hereby agrees to pay to the
Placement Agent commissions equal to ten percent (10%) of the gross proceeds of
the Bridge Financing as well as a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds of the Bridge Financing.
(e) Commissions. Upon the Closing the Minimum Offering and any
subsequent Closings, the Company hereby covenants and agrees to pay to the
Placement Agent a sales commission consisting of ten percent (10.0%) of the
gross proceeds of the Offering received by the Company at such Closing.
(f) Non-Accountable Expense Allowance. Upon the Closing the Minimum
Offering and any subsequent Closings, the Company hereby covenants and agrees to
pay to the Placement Agent a non-accountable expense allowance equal to three
percent (3.0%) of the gross proceeds of the Offering received by the Company at
such Closing.
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<PAGE>
(g) Consulting Agreement. Upon Closing of the Maximum Offering, the
Company and the Placement Agent shall execute a financial consulting agreement
for a term of two (2) years which provides for the Company to pay a monthly
consulting fee of $5,000 to the Placement Agent commencing with the Closing of
the Maximum Offering, in a form satisfactory to counsel for the Placement Agent.
(h) Termination. A Closing may be postponed or this Agreement may be
terminated by the Placement Agent by giving notice to the Company ln the event
that: (i) the Company shall have failed, refused or been unable, at or prior to
a Closing, to perform any agreement on its part to be performed, or (ii) there
shall have occurred, at any time prior to a Closing, (A) any domestic or
international event, act or occurrence that has materially disrupted, or in the
Placement Agent's opinion, will in the immediate future materially disrupt, the
securities markets; (B) a general suspension of, or a general limitation on
prices for, trading in securities on the New York Stock Exchange, the American
Stock Exchange or in the over-the-counter market; (C) any outbreak of major
hostilities or other national or international calamity; (D) any banking
moratorium declared by a state or federal authority; (E) any moratorium declared
in foreign exchange trading by major international banks or other persons: (F)
any material interruption in the mail service or other means of communication
within the Shared States; (G) any material adverse change in the business,
properties, assets, results of operations, or financial condition of the
Company; or (H) any change in the market for securities in general or in
political, financial, or economic conditions that, in the Placement Agent's
reasonable judgement, makes it inadvisable to proceed with the Offering.
4. Covenants of the Company.
(a) Use of Proceeds. The net proceeds of the Offering will be used by
the Company substantially as set forth in the Offering Documents.
(b) Reservation of Common Stock. The Company will, at all times while
the Placement Agent's Warrants and the Kriegsman Group's Warrants are
outstanding, have a sufficient number of shares of its Common Stock available
for issuance upon exercise thereof.
(c) Warrants. The Company shall not issue any Warrants to purchase
Common Stock of the Company other than the Placement Agent's warrants and the
Kriegsman Group's Warrants pursuant to Section three of this agreement. The
company shall not issue any warrants to the Kriegsman Group in excess of those
permitted by Section 3 of this Agreement.
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<PAGE>
(d) Expenses of Offering. The Company shall be responsible for, and
shall bear all reasonable expenses directly and necessarily incurred in
connection with, the Offering including, but not limited to, legal fees relating
to tho costs of preparing the Offering Documents and all exhibits and amendments
thereto; preparing and delivering all placement agent and selling documents,
including, but not limited to, the Common Stock, Blue Sky fees, filing fees and
the fees and reimbursement of counsel in connection with Blue Sky matters.
(e) Notification. The Company shall notify the Placement Agent
immediately, and in writing, (A) when any event shall have occurred during the
period commencing on the date hereof and ending the last Closing Date as a
result of which the Offering Documents would include 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 not misleading, and (B) of the
receipt of any notification with respect to the modification, rescission,
withdrawal or suspension of the qualification or registration of the Shares, or
of any exemption from such registration or qualification, in any jurisdiction.
The Company shall use its best efforts to prevent the issuance of any such
modification, rescission, withdrawal or suspension and, if issued and the
Placement Agent so requests, to obtain the lifting thereof as promptly as
possible.
(f) Blue Sky. The Company shall use its best efforts to qualify or
register the Shares for offering and sale under, or establish an exemption from
such qualification or registration under, the Blue Sky laws of such jurisdiction
as you may reasonably request. The Company will not consummate any sale of
Shares in any jurisdiction or in any manner in which such sale may not be
lawfully made.
(g) Form D Filing. The Company shall file five copies of a Notice of
Sales of Securities on Form D with the SEC no later than 15 days after the first
sale of the Shares. The Company shall file promptly such amendments to such
notices on Form D as shall become necessary and shall also comply with any
filing requirement imposed by the laws of any state or jurisdiction in which
offers are made. The Company shall furnish the Placement Agent with copies of
all such filings.
(h) Press Releases, Etc. The Company shall not, during the period
commencing on the date hereof and ending the last Closing Date, issue any press
release or other communication, or hold any press conference with respect to the
Company, its financial condition, results of operations, business, properties,
assets or liabilities, or the Offering, without the prior consent of the
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<PAGE>
Placement Agent, which consent shall not be unreasonably withheld. The foregoing
notwithstanding, the Company may issue releases or other communications if such
releases are made in the ordinary course of the Company's business or are
otherwise required by law.
5. Conditions of the Placement Agent's Obligations
(a) As of the date of the first Stage Closing, the Company will
deliver to the Placement Agent, at the Placement Agent's option, either (i) an
opinion letter from Angell & Deering, the Company's auditors, that based upon
June 30, 1996 financial statements, upon the Closing of this Offering the
Company will be eligible for listing on the Nasdaq SmallCap market; or (ii) a
predetermination from Nasdaq that upon the Closing of this Offering the Company
will be eligible for listing on the Nasdaq SmallCap market.
(b) On the Closing Dates the Placement Agent shall have received the
favorable opinion of counsel for the Company, dated the Closing Date, addressed
to the Placement Agent and in form, scope and substance satisfactory to counsel
for the Placement Agent, to the effect that:
(i) Each of the Company and its subsidiaries (the "Subsidiaries")
is a corporation validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority under
such laws to own its properties and to conduct its business as described in the
Offering Documents and is duly qualified to do business as a foreign corporation
and is in good standing in such jurisdictions as the Representative may request.
(ii) the Company has an authorized and outstanding capitalization
as set forth under the caption "Capitalization" in the Offering Documents; and
the Common Stock and preferred stock conform in all material respects as to
legal matters to the description thereof contained in the Offering Documents.
The Company has all requisite corporate power and authority to issue, sell and
deliver the Company Shares and option Shares in accordance with and upon the
terms and conditions set forth in this Agreement and in the Offering Documents,
and all corporate action required to be taken by the Company for the due and
proper authorization, issuance, sale and delivery of the Company Shares has been
validly and sufficiently taken. The Company Shares, upon issuance and delivery
and payment therefor in the manner herein described, will be, duly authorized,
validly issued, fully paid and nonassessable. The terms and provisions of the
capital stock of the Company conform in all material respects to the description
thereof contained under the caption "Description of Capital Stock" in the
Offering Documents; and except as set forth in the Offering Documents and except
as previously disclosed to the Placement Agent in writing, there are no
preemptive or other rights to subscribe for or to purchase, or any restriction
upon the voting or transfer of, any shares of Stock pursuant to the company's
certificate of incorporation, or by-laws;
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<PAGE>
(iii) this Agreement and the execution and performance by the
Company has been duly and validly authorized, executed and delivered by the
Company;
(iv) no consent, approval, authorization or order of any court or
governmental agency or body is required in connection with the consummation of
the transactions contemplated by this Agreement, except such as may be required
under the Act or state or foreign securities or Blue Sky laws;
(v) the Offering Documents and any amendments or supplements
thereto (other than the financial statements and other financial and statistical
data included therein, as to which no opinion need be rendered) as of their
respective dates comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations thereunder;
(vi) except as set forth in the Offering Documents and except as
previously disclosed to the Placement Agent in writing, there are no preemptive
or other rights to subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any shares of Stock pursuant to any agreement or other
instrument known to such counsel to which the Company or any subsidiary is a
party: and to the best of such counsel's knowledge, the offering or sale of the
Stock as contemplated by this Agreement does not give rise to any registration
rights or other rights, other than those which have been waived or satisfied for
or relating to the registration of any shares of Common Stock;
(vii) to the best of such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened before or by any court or
governmental agency or body against the Company of a character required to be
disclosed in the Prospectus which have not been so disclosed;
(viii) Such counsel have participated in conferences with
representatives of the Placement Agent and with representatives of the Company
and it accountants concerning the Registration Statement and the Offering
Documents and have considered the matters required to be stated therein and the
statements contained therein, although they have not independently verified the
accuracy, completeness or fairness of such statements. Such counsel shall also
state that based upon and subject to the foregoing, nothing has come to their
attention to cause them to believe that the Offering Documents, at their issue
date, or at the date of the Closing, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
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<PAGE>
therein or necessary to make the statements, in light of the circumstances under
which they were made, not misleading (it being understood that they have not
been requested to and do not make any comment with respect to the financial
statements, schedules and other financial and statistical in formation contained
in the offering Documents).
(c) Prior to either Closing Date (i) there shall have been no material
adverse change in the condition of the Company or its business or business
activities, financial or otherwise, from the date as of which such condition is
set forth in the Offering Documents, except as referred to therein; (ii) there
shall have been no material transaction, not in the ordinary course of business,
entered into by the Company from the date as of which the financial condition of
the Company in set forth in the Offering Documents, other than transactions
referred to or contemplated therein or to which the Placement Agent has given
its written consent; (iii) the Company shall not be in default under any
provisions of any instruments relating to any outstanding indebtedness; (iv) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Offering Documents; (v) no action, suit or
proceeding, at law or in equity, shall have been pending or to the Company's
knowledge threatened against the Company or affecting its properties or business
before or by any court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding would
materially adversely affect the business, operations, income or financial
condition of the Company, except as set forth in the Offering Documents; and
(vi) no stop order shall have been issued under the Act and no proceedings
therefor shall have been initiated or threatened by the Commission, (vii) the
Offering Documents do not contain 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, in light of the circumstances under which they were made,
not misleading and (viii) The Offering Documents conform in all respects with
the requirements of Section 4(6) of the Securities Act and Regulation D and with
the requirements of all other published rules regulations of the Securities and
Exchange Commission (the "SEC") currently in effect relating to "private
offerings" to "accredited investors".
(d) On the Closing Dates the Placement Agent shall have received a
certificate of the President or Chairman of the Board and Secretary or the
Treasurer of the Company, dated the Closing Date, to the effect that the
conditions set forth in subsection (c) above have been satisfied, and that as of
the Closing Date, the representations and warranties set forth in Section 2
hereof, and that the Company has performed all its obligations and satisfied all
conditions on its part to be performed or satisfied at or prior to the Closing
Date.
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<PAGE>
(e) At the time this Agreement is executed, and on the Closing Dates,
the Placement Agent shall have received a certificate from the Treasurer or
Chief Financial Officer of the Company in form, scope and substance satisfactory
to the Placement Agent in all respects (including the non-material nature of the
changes or decreases, if any, referred to below, that as of the date of this
Agreement and as of the Closing Dates the Interim Results of Operations included
in the Offering Documents for the period ended June 30, 1996 and the latest
available unaudited interim financial statements of the Company (with an
indication of the date of the latest available unaudited interim financial
statements), the unaudited Interim Results of Operations of the Company included
in the Disclosure Documents comply as to form in all material respects with the
applicable accounting requirements of the Act and the regulations thereunder and
are 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 Offering Documents and that at a
specified date not more than five business days prior to the date of such
letter, there was no material change in the Common Stock, preferred stock or
long term debt of the Company, in each case as compared with amounts shown on
the June 30, 1996 consolidated balance sheets other than as set forth in or
contemplated by the Offering Documents, or, if there was any change or decrease,
setting forth the amount of such change or decrease, or during the period from
June 30, 1996 to a specified date not more than five business days prior to the
date of such letter, there was any decrease in revenues, or in earnings before
income taxes, and extraordinary items or in the total or per share amounts of
net earnings or loss of the Company, in each case as compared with the
corresponding period beginning other than as set forth in or contemplated by the
Disclosure Documents, or, if there was any decrease, setting forth the amount of
such decrease;
(f) The certificates for the Stock comprising the Shares shall have
been duly tendered to the Placement Agent for the accounts of the Subscribers.
(g) No order suspending the sale of the Shares prior to the Closing in
any jurisdiction designated by the Placement Agents shall have been issued on or
before the Closing and no proceedings for that purpose shall have been
instituted or, to the Representative's knowledge or that of the Company, shall
be contemplated.
Any certificate signed by an officer of the Company and delivered to the
Placement Agent or to counsel for the Placement Agent shall be deemed a
representation and warranty by the Company to the Placement Agent as to the
statements made therein. If any condition to the Placement Agent's obligations
hereunder to be fulfilled prior to or at the Closing Date is not so fulfilled,
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<PAGE>
the Placement Agent may terminate this Agreement or, if it so elects, waive any
such conditions which have not been fulfilled or extend the time for their
fulfillment.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Placement
Agent and its officers, directors, employees, agents and counsel, and each
person, if any, who controls the Placement Agent within the meaning of Section
15 of the Securities Act (each, an "Indemnified Party") as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Offering Documents or the omission
or alleged omission therefrom of a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in settlement of
any litigation, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission or any such alleged untrue statement or
omission;
(iii) against any and all expense whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the extent that
any such expense is not paid under clause (i) or (ii) above; and
(iv) notwithstanding the foregoing, the Company shall have no
obligation to indemnify an Indemnified Party for any loss, liability, claim,
damage or expense found in the final judgement of a court to have resulted from
such Indemnified Party's gross negligence or intentional misconduct.
(b) The Company agrees to indemnify and hold harmless each Indemnified
Party, to the same extent as the foregoing indemnity, against any and all loss,
liability, claim, damage and expense whatsoever directly arising out of the
exercise by any person of any right under the Securities Act or the Exchange Act
or the securities or Blue Sky laws of any state on account of violations by the
Company of its representations, warranties or agreements set forth in Section 2
hereof or by the Company and any subscriber for Shares ln the Subscription
Agreement.
(c) Promptly after receipt by an Indemnified Party under this Section
of notice of the commencement of any action, the Indemnified Party will, if a
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claim for indemnification in respect thereof is to be made against the Company
under this section, notify in writing the Company of the commencement thereof;
but the omission so to notify the Company will not relieve it from any liability
which it may have to the Indemnified Party otherwise than under this Section. In
case any such action is brought against the Indemnified Party, and it notifies
the Company of the commencement thereof, the Company will be entitled to
participate in, and, to the extent that it may wish, to assume the defense
thereof, subject to the provisions herein stated, with counsel reasonably
satisfactory to the Indemnified Party, and after notice from the Company to the
Indemnified Party of its election so to assume the defense thereof, the Company
will not be liable to the Indemnified Party under this Section for any legal or
other expenses subsequently incurred by the Indemnified Party in connection with
the defense thereof other than reasonable costs of investigation and other than
as set forth below. The Indemnified Party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
Company if the Company has assumed the defense of the action with counsel
reasonably satisfactory to the Indemnified Party; provided that the fees and
expenses of such counsel shall be at the expense of the Company if (i) the
employment of such counsel has been specifically authorized in writing by the
Company or (ii) the named parties to any such action (including any impleaded
parties) include both the Placement Agent and one or more other Indemnified
Parties and/or the Company and, in the judgment of the Placement Agent, it is
advisable for the Placement Agent or any other Indemnified Party to be
represented by separate counsel (in which case the Company shall not have the
right to assume the defence of such action on behalf of the Placement Agent or
any other Indemnified Parties, it being understood, however, that the Company
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for the Indemnified
Parties, which firm shall be designated in writing by you). No settlement of any
action against the Indemnified Party shall be made without the consent of the
Indemnified Party, which shall not be unreasonably withheld in light of all
factors of importance to the Indemnified Party.
7. Contribution. To provide for just and equitable contribution, if (a) an
Indemnified Party makes a claim for indemnification under Section 5 but it is
found in a final judicial determination, not subject to further appeal, that
such indemnification may not be enforced in such case, even though this
Agreement provides for indemnification in such case, or (b) any Indemnified
Party or the Company seeks contribution under the Securities Act, or otherwise,
then the Company (including for this purpose any contribution made by or on
behalf of any officer, director, employee, agent, or counsel of the Company, or
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any controlling person within the nearing of Section 15 of the Securities Act
(each a "controlling person") of the Company), on the one hand, and the
Placement Agent (including for this purpose any contribution made by or on
behalf of any officer, director, employee, agent or counsel of the Placement
Agent or any controlling person of the Placement Agent), on the other hand,
shall contribute to the losses, liabilities, claims, damages, and expenses
whatsoever to which any of them may be subject, in such proportions as are
appropriate to reflect the relative benefits received by the Company, on the one
hand, and the Placement Agent, on the other hand; provided, however, that if
applicable law does not permit such allocation, then their contributions shall
be in such proportions as are appropriate to reflect not only the relevant
benefits received by each of them but also other relevant equitable
considerations such as the relative fault of the company and the Placement Agent
in the cause of such losses, liabilities, claims, damages, and expenses. No
person guilty of a fraudulent representation shall be entitled to contribution
from any person who is not guilty of such fraudulent representation. For
purposes of this Section 6, each officer, director, employee, agent, counsel and
controlling person of the Placement Agent shall have the same rights to
contribution as the Placement Agent, and each officer, director, employee,
agent, counsel and controlling person of the Company shall have the same rights
to contribution as the Company subject, in each case, to the provisions of this
Section 6. Anything in this Section 6 to the contrary notwithstanding, no party
shall be liable for contribution with respect to the settlement of any claim or
action effected without his, her or its written consent. This Section 6 is
intended to supersede any right to contribution under the Securities Act, or
otherwise.
8. Miscellaneous.
(a) Representations and Warranties. Certain Covenants and Indemnities
to Survive. All representations and warranties contained in this Agreement, or
contained in any certificate of any officer of the Company delivered pursuant to
this Agreement, and the indemnification and contribution provisions of Sections
5 and 6 hereof, shall remain operative, in full force and effect, regardless of
any termination or cancellation of this Agreement or any investigation made by
or on behalf of the Placement Agent or the Company and shall survive the sale
and delivery of the shares.
(b) No Other Beneficiaries. This Agreement is solely for the benefit
of the parties specified herein and their respective successors and assigns.
[c) Governing Law. This Agreement shall be governed by and construed
in accordance with the law of the State of New York without regard to principles
of conflict of laws.
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(d) Counterparts. This Agreement may be signed in counterparts with
the same effect as if both parties had signed one and the same instrument.
(e) Notices. All notices or other communications given or made
hereunder shall be in writing and shall be delivered by hand, against written
receipt, sent by facsimile transmission, receipt confirmed, or mailed by
registered or certified mail, return receipt requested, postage prepaid, if to
the Placement Agent at Noble Investment Co. of Palm Beach, 1801 Clint Moore,
Boca Raton, Florida 33487, Attention: Nick Pronk, and if to the Company at 790
East Market Street, Suite 270, West Chester, Pennsylvania 19382, Attention:
Joyce A. Rizzo. Notices shall be deemed given on the date of receipt or, if
mailed, three business days after mailing, except notices of change of address,
which will be deemed given when received.
(f) Entire Agreement. This Agreement constitutes the entire agreement
of the parties with respect to the matters herein referred and supersedes all
prior agreements and understandings, written and oral, between the parties with
respect to the subject matter hereof. Neither this Agreement nor any term hereof
may be changed, waived or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver or
termination is sought.
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It you find the foregoing is in accordance with our understanding,
kindly sign and return to us a counterpart hereof, whereupon this instrument
along with all counterparts will become a binding agreement between us.
Very truly yours,
PROTOSOURCE CORPORATION
By: /S/ CHARLES T. HOWARD
------------------------------------
Chief Executive Officer
agreed:
ANDREW, ALEXANDER, WISE &
COMPANY, INCORPORATED
By:
------------------------------
Andreas Zigouras
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WARRANT AGREEMENT dated as of October _, 1996 between PROTOSOURCE CORP., a
California corporation (the "Company"), and ANDREW, ALEXANDER, WISE & COMPANY,
INCORPORATED or its designees (hereinafter referred to variously as the "Holder"
or the "Underwriter" or the "Placement Agent").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter or its designees
110,000 warrants ("Warrant") to purchase up to ________ shares of Common Stock
of the Company (as hereinafter defined in Article 1 hereof); and
WHEREAS, the underwriter has agreed, pursuant to the Placement Agent
Agreement (the "Placement Agent Agreement") dated October _, 1996 between the
Placement Agent and the Company, to act as the underwriter in connection with
the Company's proposed initial private offering of Common Stock at an offering
price of $.25 per Share; and
WHEREAS, the Warrants issued pursuant to this Agreement are being issued by
the Company to the Placement Agent or its designees in consideration for, and as
part of the Placement Agent's compensation in connection with the services
rendered by the Placement Agent;
NOW THEREFORE, in consideration of the premises, the payment by the
Placement Agent or its designees to the Company of________DOLLARS ($________ ),
the agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Placement Agent is granted the right to purchase, at any time
from October _, 1996 until 5:00 P.M., New York time, on October _, 200l (the
"Warrant Exercise Term") up to fully-paid and non assessable shares of the
Company's Common Stock, ("Common Stock") at an initial exercise price of $.25
per share ("Share").
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant. The Warrants initially are exercisable at a price
of $.25 per Share, payable ln cash or by check to the order of the Company, or
any combination or cash or check, subject to adjustment as provided in Article 8
hereof. Upon surrender of the Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Purchase Price
(as hereinafter defined) for the Shares purchased, at the Company's principal
offices (currently located at 2580 West Shaw Lane, Suite 102, Fresno California
93711-2765) the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for shares
of Common Stock so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder hereof, in whole or in
part (but not as to fractional shares of the Common Stock subject to the
Warrants). In the case of the purchase of less than all the Shares purchasable
under any Warrant Certificate, the Company shall cancel said Warrant Certificate
upon the surrender thereof and shall execute and deliver a new Warrant
Certificate of like tenor for the balance of the Shares purchasable thereunder.
<PAGE>
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock underlying the Warrants
shall be made forthwith (and in any event within three business days
thereafter)without charge to the Holder thereof including, without limitation,
any tax which may be payable in respect of the issuance thereof, and such
certificates shall (subject to the provisions of Article 5 hereof) be issued in
the name of, or in such names as may be directed by, the Holder thereof;
provided, however, that the Company shall not be required to pay any tax which
may be payable In respect of any transfer involved in the issuance and delivery
of any such certificates in a name other than that of the Holder and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
The Warrant Certificate and the certificates representing the shares of
Common Stock underlying each Warrant shall be executed on behalf of the Company
by the manual or facsimile signature of the present or any future Chairman or
Vice Chairman of the Board of Directors or President or Vice President of the
Company under its corporate seal reproduced thereon, attested to by the manual
or facsimile signature of the present or any future Senior Assistant Secretary
of the Company. Warrant Certificates and certificates representing the Shares
shall be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants, certificates
representing the shares of Common Stock underlying the Warrants (collectively,
the "Warrant Securities"), shall bear a legend substantially similar to the
following:
"The securities represented by this certificate have not
been registered under the Securities Act of 1933, as amended
("Act"), and may not be offered or sold except (i) pursuant
to an effective registration statement under the Act, (ii)
to the extent applicable, pursuant to Rule 144 under the Act
(or any similar rule under such Act relating to the
disposition of securities), or (iii) upon the delivery by
the holder to the Company of an opinion of counsel,
reasonably satisfactory to counsel to the issuer, stating
that an exemption from registration under such Act is
available."
5. Restriction on Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof.
6. Price.
6.1. Initial and Adjusted Purchase Price. The initial purchase price
of each Warrant shall be $.25 per Share. The adjusted purchase price shall be
the price which shall result from time to time from any and all adjustments of
the initial purchase price in accordance with the provisions of Article 8
hereof.
6.2. Purchase Price. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon the
context.
7. Registration Rights.
7.1. Registration Under the Securities Act of 1933. The Warrants and
the shares of Common Stock have not been registered for purposes of public
distribution under the Securities Act of 1933, as amended (the "Act").
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7.2. Piggyback Registration. If, at any time during the seven years
following the date of this Agreement, the Company proposes to register any of
its securities under the Act (other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form), it will give written
notice by registered mail, at least thirty (30) business days prior to the
filing of each such registration statement, to the Holder or Holders of the
Warrants and/or the Warrant Securities of its intention to do so. If the Holder
or Holders of the Warrants and/or Warrant Securities notify the Company within
twenty (20) business days after receipt of any such notice of its or their
desire to include any such securities in such proposed registration statement,
the Company shall afford the Holder or Holders of the Warrants and/or Warrant
Securities the opportunity to have any such securities registered under such
registration statement at the Company's sole cost and expense and at no cost or
expense to the Holder or Holders; provided, however, that if, in the written
opinion of the Company's managing underwriter, if any, for such offering, the
inclusion of all or a portion of the Warrants and/or Warrant Securities
requested to be registered, when added to the securities being registered by the
Company or the selling shareholder(s), will exceed the maximum amount of the
Company's securities which can be marketed (i) at a price reasonably related to
their then current market value, or (ii) without otherwise materially adversely
affecting the entire offering, then the Company may exclude from such offering
all or a portion of the Warrants and/or Warrant Securities requested to be
registered.
If securities are proposed to be offered for sale pursuant to such
registration statement by other security holders of the Company and the total
number of securities to be offered by the holders of the Warrants and/or Warrant
Securities and such other selling security holders is required to be reduced
pursuant to a request from he managing underwriter (which request shall be made
only for the reasons and in the manner set forth above) the aggregate number of
Warrants and/or Warrant Securities to be offered by the Holders pursuant to such
registration statement shall equal the number which bears the same ratio to the
maximum number of securities that the underwriter believes may be included for
all of the selling security holders (including the Holders) as the original
number of Warrants and/or Warrant Securities proposed to be sold by the Holders
bears to the total original number of securities proposed to be offered by the
Holders and the other selling security holders.
If, subsequent to exercise of the demand registration right referred to in
Section 7.3 below, any Warrants and/or Warrant Securities requested to be
included in such an offering are not so included because of the operation of the
provision of the first paragraph of this Section 7.2, then the holders of
Warrants and/or Warrant Securities shall have the right to require the Company,
at its expense, to prepare and file a Registration Statement under the Act
covering such Warrants and/or Warrant Securities, provided that if the
underwriter so requests, such Warrants and/or Warrant Securities shall not be
sold until the expiration of 90 days from the effective date of the offering
that gives rise to the piggyback registration rights that are the subject of the
Section 7.2. Nothing contained in the foregoing sentence shall require the
Company to undergo an audit, either than in the ordinary course of business.
Notwithstanding the provisions of this Section 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3. Demand Registration.
(a) At any time during the Warrant Exercise Term, the Holder or
Holders of the Warrants or the Warrant Securities representing a majority of
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<PAGE>
such securities shall have the right (which right is in addition to the
registration rights under Section 7.2 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Commission, on one
occasion, at the sole expense of the Company, a registration statement and such
other documents, including a prospectus, as may be necessary in the opinion of
both counsel for the Company and counsel for the Holder or Holders, in order to
comply with the provisions of the Act, so as to permit a public offering and
sale for nine (9) consecutive months by such Holder or Holders of the Warrants
and/or the Warrant Securities.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrant and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request. After
receiving notice from (the Company as provided in this section 7.3(b), any
Holder of the Warrant and/or Warrant Securities may request the Company to
include their respective Warrants and or Warrant Securities in the registration
statement to be filed pursuant to Section 7.3(a) hereof by notifying the Company
of their decision to include such securities within ten (10) days of their
receipt of the Company notice.
(c) In addition tv the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time during the Warrant Exercise
Term, any Holder or Holders of Warrants and/or Warrant Securities representing a
majority of such securities shall have the right, exercisable by written request
to the Company, to have the Company prepare and file, on one additional occasion
in respect of all Holders of Warrants or Warrant Securities, with the Commission
a registration statement so as to permit a public offering and sale for nine (9)
consecutive months by any such holder of its Warrants and/or Warrant Securities,
provided, however, that all costs incident thereto shall be at the expense of
the Holder or Holders making such request and the other Holders which desire to
include their Warrants and/or Warrant Securities in such registration statement.
If a Holder shall give notice to the Company at any time of its desire to
exercise the registration right granted pursuant to this Section 7.3(c), then
within ten (10) days after receipt of such notice, the Company shall give notice
to the other Holders of Warrants and Warrant Securities, advising the Company is
proceeding with such registration and offering to include therein the Warrants
and/or Warrant Securities of such other Holders, provided they furnish the
Company with such appropriate information in connection therewith as the Company
shall reasonably request in writing.
7.4 Covenants of the Company With Respect to Registration. The Company
covenants and agrees as follows:
(a) In connection with any registration under Section 7.3 hereof, the
Company shall file a registration statement within thirty (30) days of receipt
any demand therefor, shall use its best efforts to have any registration
statements declared effective at the earliest possible time, and shall furnish
each Holder such number of prospectuses as shall reasonably be requested.
(h) The Company shall pay all costs, fees and expenses in connection
with all registration statements filed pursuant to Sections 7.2 and 7.3(a)
hereof including, without limitation, the Company's legal and accounting fees,
printing expenses, blue sky fees and expenses. The Holder or holders will pay
all costs, fees and expenses in connection with any registration statement filed
pursuant to Section 7.3(c).
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
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<PAGE>
states as are requested by the Holder or Holders, provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify any Holder of the Warrant Securities
to be sold pursuant to any registration statement and each person, if any, who
controls such Holder with in the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the, Act the Exchange
Act or otherwise, arising from such registration statement to the same extent
and with the same effect as the provisions pursuant to which the Company has
agreed to indemnify the Underwriter and to provide for just and equitable
contribution as set forth in Section 7 of the Purchase Contract.
(e) Any Holder of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify, the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holder, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions pursuant to which the Underwriter has agreed
to indemnify the Company and to provide for just and equitable contribution as
set forth in Section 7 of the Purchase Contract.
(f) Nothing contained in this Agreement shall be construed as requiring
any Holder to exercise their Warrant prior to the initial filing of any
registration statement or the effectiveness thereof; however, in the event of
the sale of a Warrant to the public pursuant to a registration statement and
prospectus, the person who purchases such Warrant from a Holder shall be
required to exercise such Warrant within 24 hours of the sale of such Warrant to
the purchaser thereof.
8. Adjustments of Purchase Price and Number of Shares.
8.1 Computation of Adjusted Price. Except as hereinafter provided, in
case the Company shall at any time after the date hereof issue or sell any
shares of Common Stock (other than the issuances or sales referred to in Section
8.6 hereof), including shares held in the Company's treasury and shares of
Common Stock issued upon the exercise of any options, rights or warrants to
subscribe for shares of Common Stock (other than the issuances or sales of
Common Stock pursuant to rights to subscribe for such Common Stock distributed
to all the shareholders of the Company and Holders of Warrants pursuant to
Section 8.8 hereof) and shares of Common Stock issued upon the direct or
indirect conversion or exchange of security for shares of Common Stock, for a
consideration per share less than the Purchase Price in effect immediately prior
to the issuance or sale of such shares or less than the "Market Price" (as
defined in Section 8.l (vi) hereof) per share of Common Stock, or without
consideration, then forthwith upon such issuance or sale, the Purchase Price
shall (until another such issuance or sale) be reduced to the price (calculated
to the nearest full cent) equal to the quotient derived by dividing (A) an
amount equal to the sum of (X) the product of (a) the total number of shares of
Common Stock outstanding immediately prior to such issuance or sale, multiplied
by (b) the lower of (i) the Purchase Price in effect immediately prior to such
issuance or sale or (ii) the Market Price per share of Common Stock on the date
immediately prior to the issuance of such shares, plus, (Y) the aggregate of the
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amount of all consideration, if any, received by the Company upon such issuance
or sale, by (B) the total number of shares of Common Stock outstanding
immediately after such issuance or sale; provided, however, that in no event
shall the Purchase Price be adjusted pursuant to this computation to an amount
in excess of the Purchase Price in effect immediately prior to such computation,
except in the case of a combination of outstanding shares of Common Stock, as
provided by Section 8.3 hereof.
For the purposes of any computation to be made in accordance with this
Section 8.1, the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of Common Stock for
a consideration part or all of which shall be cash, the amount of the cash
consideration there for shall be deemed to be the amount of cash received by the
Company for such shares (or, if shares of Common Stock are offered by the
Company for subscription, the subscription price, or, if such securities shall
be sold to underwriters or dealers for public offering without a subscription
offering, the initial public offering price) before deducting there from any
compensation paid or discount allowed in the sale, underwriting or purchase
thereof by underwriters or dealers or others performing similar services, or any
expenses incurred in connection therewith.
(ii) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company) of shares of Common
Stock for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash shall be deemed to be the
value of such consideration as determined in good faith by the Board of
Directors of the Company.
(iii) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(iv) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (ii) of this Section 8.1.
(v) The number of shares of Common Stock at any one time
outstanding shall include the aggregate number of shares issued or issuable upon
the exercise of options, right, warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(vi) As used herein, the phrase "Market Price" at any date shall
be deemed to be the average of the last reported sale price, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the last three trading days, in either case as officially reported by
the principal securities exchange on which the Common Stock is listed or
admitted to trading or as reported in the NASDAQ National Market System, or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted on the NASDAQ National Market System, the closing bid price
as furnished by the National Association of Securities Dealers, Inc. through
NASDAQ or similar organization if NASDAQ is no longer reporting such information
or if the Common Stock is not quoted on NASDAQ, as determined in good faith by
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resolution of the Board of Directors of the Company, based on the best
information available to it for the day immediately preceding such issuance or
sale, the day of such issuance or sale and the day immediately after such
issuance or sale.
8.2 Options, Rights, Warrant and Convertible and Exchangeable
Securities. Except in the case of the Company issuing rights to subscribe for
shares of Common Stock distributed to all the shareholders of the Company and
Holders of Warrants pursuant to Section 8.8 hereof, if the Company shall at any
time after the date hereof issue options, rights or warrants to subscribe for
shares of Common Stock, or issue any securities convertible into or exchangeable
for shares of Common Stock, (i) for a consideration per share less than (a) the
Purchase Price in effect immediately prior to the issuance of such options,
rights or warrants or such convertible or exchangeable securities, or (b) the
Market Price, or (ii) without consideration, the Purchase Price in effect
immediately prior to the issuance of such options, rights or warrants or such
convertible or exchangeable securities, as the case may be, shall be reduced to
a price determined by making a computation in accordance with the provisions of
Section 8.1 hereof, provided that:
(a) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable under all the outstanding options, rights or warrants
shall be deemed to be issued and outstanding at the time all the outstanding
options, rights or warrants were issued, and for a consideration equal to the
minimum purchase price per share provided for in the options, rights or warrants
at the time of issuance, plus the consideration (determined in the same manner
as consideration received on the issue or sale of shares in accordance with the
terms of the Warrants), if any, received by the Company for the options, rights
or warrants, and if no minimum price is provided in the options, rights or
warrants, then the consideration shall be equal to zero; provided, however, that
upon the expiration or other termination of the options, rights or warrants, if
any thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (a) (and for the
purposes of subsection (v) of Section 8.1 hereof) shall be reduced by such
number of shares as to which options, warrants and/or rights shall have expired
or terminated unexercised, and such number of shares shall no longer he deemed
to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price which it would have been had
adjustment been made on the basis of the issuance only of shares actually issued
or issuable upon the exercise of those options, rights or warrants as to which
the exercise rights shall not have expired or terminated unexercised.
(b) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities, and for a consideration equal to the consideration
(determined in the same manner as consideration received on the issue or sale of
shares of Common Stock in accordance with the terms of the Warrants) received by
the Company for such securities, plus the minimum consideration, if any,
receivable by the Company upon the conversion or exchange thereof; provided,
however, that upon the termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares deemed to be issued and outstanding pursuant to
this subsection (b) (and for the purpose of subsection (v) of Section 8.1
hereof) shall be reduced by such number of shares as to which the conversion or
exchange rights shall have expired or terminated unexercised, and such number of
shares shall no longer be deemed to be issued and outstanding and the Purchase
Price then in effect shall forthwith be readjusted and thereafter be the price
which it would have been had adjustment been made on the basis of the issuance
only of the shares actually issued or issuable upon the conversion or exchange
of those convertible or exchangeable securities as to which the conversion or
exchange rights shall not have expired or terminated unexercised.
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(c) If any change shall occur in the price per share provided for
in any of the options, rights or warrants referred to in subsection (a) of this
Section 8.2, or in the price per share at which the securities referred to in
subsection (b) of this Section 8.2 are convertible or exchangeable, the options,
rights or warrants or conversion or exchange rights, as the case may be, shall
be deemed to have expired or terminated on the date when such price change
became effective in respect of shares not theretofore issued pursuant to the
exercise or conversion or exchange thereof, and the Company shall be deemed to
have issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of then number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
8.3 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock the Purchase Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
8.4 Adjustment in Number of Shares. Upon each adjustment of the
Purchase Price pursuant to the provisions of this Article 8, the number of
Shares issuable upon the exercise of each Warrant shall be adjusted to the
nearest full Share by multiplying a number equal to the Purchase Price in effect
immediately prior to such adjustment by the number of Shares issuable upon
exercise of the Warrants immediately prior to such adjustment and dividing the
product so obtained by the adjusted Purchase Price.
8.5 Reclassification, Consolidation, Merger, etc, In case of any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), or in the case of any consolidation
of the Company with or merger of the Company into, another corporation (other
than a consolidation or merger in which the Company is the surviving corporation
and which does not result in any reclassification or change of the outstanding
shares of Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as aforesaid), or in the
case of a sale or conveyance to another corporation of the property of the
Company as an entirety, the Holder shall thereafter have the right to purchase
the kind and number of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holder were the owner of the shares of Common Stock
underlying the Warrants immediately prior to any such event at a price equal to
the product of (x) the number of shares issuable upon exercise of the Warrants
and (y) the Purchase Price in effect immediately prior to the record date for
such reclassification, change, consolidation, merger, sale or conveyance as if
such Holder had exercised the Warrants.
8.6 No Adjustment of Purchase Price in Certain Cases. Notwithstanding
anything herein to the contrary, no adjustment of the Purchase Price shall be
made:
(a) Upon the issuance or sale of the Warrant, the Share Warrants
or the shares of Common Stock issuable upon the exercise of the Warrants;
(b) Upon the issuance or sale of shares of Common Stock issued by
the Company in the public offering of its Shares being purchased concurrently
herewith;
(c) Upon (i) the issuance of options pursuant to the Company's
employee stock option plan in effect on the date hereof or the sale by the
-8-
<PAGE>
Company of any shares of Common Stock pursuant to the exercise of any such
options, or (ii) the sale by the Company of any shares of Common Stock pursuant
to the exercise of any options or warrants previously issued and outstanding on
the date hereof.
(d) If the amount of said adjustment shall be less than two cents
(2 cents) per Share, provided, however, that in such case any adjustment that
would otherwise be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount to at least two
cents (2 cents) per Share.
8.8 Dividends and Other Distributions with Respect to Outstanding
Securities. In the event that the Company shall at any time prior to the
exercise of all Warrants declare a dividend (other than a dividend consisting
solely of shares of Common Stock or a cash dividend or distribution payable out
of current or retained earnings) or otherwise distribute to its shareholders any
monies, assets, property, rights, evidences of indebtedness, securities (other
than shares of Common Stock), whether issued by the Company or by another person
or entity, or any other thing of value, the Holders of the unexercised Warrants
shall thereafter be entitled, in addition to the shares of Common Stock or other
securities receivable upon the exercise thereof, to receive, upon the exercise
of such Warrants, the same monies, property, assets, rights, evidences of
indebtedness, securities or any other thing of value that they would have been
entitled to receive at the time of such dividend or distribution. At the time of
any such dividend or distribution, the Company shall make appropriate reserves
to ensure the timely performance of the provisions of this Subsection 8.7.
8.7 Subscription Rights for Shares of Common Stock or Other
Securities. In the case that the Company or an affiliate of the Company shall at
any time after the date hereof and prior to the exercise of all the Warrants
issue any rights to subscribe for shares of Common Stock or any other securities
of the Company or of such affiliate to all the shareholders of the Company, the
Holders of the unexercised Warrants shall be entitled, in addition to the shares
of Common Stock or other securities receivable upon the exercise of the
Warrants, to receive such rights at the time such rights are distributed to the
other shareholders of the Company.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender hereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Shares in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interest. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of Factional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock.
-9-
<PAGE>
11. Reservation and Listing of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Common Stock as shall be issuable upon the exercise thereof. The
Company covenants and agrees that, upon exercise of the Warrants and payment of
the Purchase Price therefor, all shares of Common Stock issuable upon such
exercise shall be duly and validly issued, fully paid, nonassessable and not
subject to the preemptive rights of any shareholder. As long as the Warrants
shall be outstanding, the Company shall use its best efforts to cause all shares
of Common Stock issuable upon the exercise of the Warrants to be listed on or
quoted by NASDAQ or listed on such national securities exchanges as the Common
Stock held by public shareholders is so listed.
12. Notices to Warrant Holders. Nothing contained in this Agreement shall
be construed as conferring upon the Holder or Holders the right to vote or to
consent or to receive notice as a shareholder in respect of any meetings of
shareholders for the election of directors or any other matter, or as having any
rights whatsoever as a shareholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on
the books of the Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any
option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validly of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options, or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 of this
Agreement or to such other address as the Company may designate by notice
to the Holders.
-10-
<PAGE>
14. Supplements and Amendments. The Company and ANDREW, ALEXANDER, WISE &
COMPANY, INCORPORATED may from time to time supplement or amend this Agreement
in writing without the approval of any Holders of the Warrants and/or Warrant
Securities in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and ANDREW, ALEXANDER, WISE &
COMPANY, INCORPORATED may deem necessary or desirable and which the Company and
ANDREW, ALEXANDER, WISE & COMPANY, INCORPORATED deem not to adversely affect
the interests of the Holders of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
16. Termination, This Agreement shall terminate at the close of business on
October _, 2004. Notwithstanding the foregoing, this Agreement will terminate on
any earlier date when all Warrants have been exercised and all Warrant
Securities have been resold to the public; provided, however, that the
provisions of Section 7 shall survive such termination until the close of
business on October_, 2007
17. Governing Law. This Agreement and each Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
said State.
18. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Underwriter and any other registered Holder or Holders of the Warrant
Certificates or Warrant Securities any legal or equitable right, remedy or claim
under this Agreement: and this Agreement shall be for the sole and exclusive
benefit of the Company and the Underwriter and any other Holder or Holders of
the Warrant Certificates or Warrant Securities.
19. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
[SEAL] PROTOSOURCE CORPORATED
By:
-----------------------------------
Name: Charles Howard
Title: President
Attest:
- ----------------------------------
ANDREW, ALEXANDER, WISE & COMPANY, INC.
By:
-----------------------------------
Name: Andreas Zigouras
Title: Vice President
-12-
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
ISSUER, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, OCTOBER_, 2001
No. W - Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that-------- or registered assigns is
the registered holder of ------- ( ) Warrants to purchase, at any time from
October _, 1997 until 5:00 P.M. New York City time on October _, 2001
("Expiration Date"), up to ------- ( ) fully-paid and non-assessable shares of
common stock ("Common Stock") of PROTOSOURCE CORP., a California corporation
(the "Company") at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $.25 per Share upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of October _, 1996 between the Company and the Placement
Agent (the "Warrant Agreement"). Payment of the Exercise Price may be made in
cash, or by certified or official bank check in New York Clearing House funds
payable to the order of the Company, or any combination of cash or check.
No Warrant may be exercised after 5:00 P.M, New York City time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to in a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events,
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
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<PAGE>
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company 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, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated: October , 1996 PROTOSOURCE CORP.
--
[Seal By:
Name: Charles Howard
Title: President
Attest:
- -----------------------------------
-14-
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase______ Shares and herewith
tenders in payment for such Shares cash or a certified or official bank check
payable in New York Clearing House Funds to the order of__________ in the amount
of $________all in accordance with the terms hereof. The undersigned requests
that a certificate for such Shares be registered in the name of______________ ,
whose address is _________________________, that such Certificate be delivered
to____________________________ whose address is __________________________.
Dated: Signature:
------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
-----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
-15-
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED
-------------------------------------------------------
hereby sells, assigns and transfers unto
---------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ------------------------,
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: Signature:
---------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of
the Warrant Certificate)
- --------------------------------
- --------------------------------
(Insert Social Security or other
Identifying Number of Assignee)
-16-
LOCK-UP AGREEMENT
-----------------
LOCK-UP AGREEMENT (the "Agreement" or "Lock-Up Agreement") dated September
30, 1996 by and between _______________ , an officer of ProtoSource Corporation
with a place of business at 2580 West Shaw Road, Fresno California 93711
("Holder"), and Andrew, Alexander, Wise & Co. with a place of business at 17
State Street, New York, NY 10004 ("AAWC").
W I T N E S S E T H:
WHEREAS, Holder is the holder of______ shares of the restricted Common
Stock (the "Shares") of ProtoSource Corporation ( the "Company");
WHEREAS, AAWC is the holder warrants to purchase up to 2,200,000 Shares;
WHEREAS, Holder, AAWC and the Kriegsman Group have agreed not to sell,
transfer or otherwise dispose of the Shares except during the time periods set
forth in accordance with the terms of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the terms, conditions
and mutual covenants appearing in this Agreement and the Release, the parties
hereto hereby agree as follows:
Section 1.
(A) Holder hereby agrees that it will not offer, sell, transfer or
otherwise dispose of the Shares without the prior written consent of AAWC for a
period of three (3) years following the date hereof (the "Term").
(B) Holder hereby agrees that for a period of two (2) years following the
Term of this three (3) year Lock-Up Agreement, any and all sales or other
disposition of the Shares subject to this Lock-Up Agreement will be effectuated
by or at the direction of AAWC as the selling broker unless another broker is
designated in writing by AAWC.
(C) Holder acknowledges that its breach or impending violation of any of
the provisions of this Agreement may cause irreparable damage to AAWC for which
remedies at law would be inadequate. Holder further acknowledge that the
provisions set forth herein are essential terms and conditions of the Release.
Holder therefore agrees that AAWC shall be entitled to a decree or order by any
court of competent jurisdiction enjoining such impending or actual violation of
any of such provisions. Such decree or order, to the extent appropriate, shall
<PAGE>
specifically enforce the full performance of any such provision by Holder, and
Holder and AAWC hereby consent to the jurisdiction of any such court of
competent jurisdiction, state or federal, sitting in the State of New York, and
authorizes the entry on its behalf of any required appearance for such purpose.
This remedy shall be in addition to all other remedies available to AAWC at law
or equity. If any portion of this Section 1 is adjudicated to be invalid or
unenforceable, this Section 1 shall be deemed amended to delete therefrom the
portion so adjudicated, such deletion to apply only with respect to the
operation of this Section 1 in the jurisdiction in which such adjudication is
made.
Section 2. Subject to Section 5 hereunder, this Agreement shall inure to
the benefit of and be binding upon AAWC and Holder, their successors and
assigns.
Section 3. Should any part of this Agreement, for any reason whatsoever, be
declared invalid, illegal, or incapable of being enforced in whole or in part,
such decision shall not affect the validity of any remaining portion, which
remaining portion shall remain in full force and effect as if this Agreement had
been executed with the invalid portion thereof eliminated, and it is hereby
declared the intention of the parties hereto that they would have executed the
remaining portion of this Agreement without including therein any portion which
may for any reason be declared invalid.
Section 4. This Agreement shall be construed and enforced in accordance
with the laws of the State of New York applicable to agreements made and to be
performed in such State without application of the principles of conflicts of
laws of such States.
Section 5. This Agreement and all rights hereunder are personal to the
parties and shall not be assignable and any purported assignment in violation
thereof shall be null and void.
Section 6. Any notice, statement, report, request or demand required or
permitted to be given by this Agreement shall be in writing, and shall be
sufficient if delivered in person or if addressed and sent by certified mail,
return receipt requested, postage prepaid; or by overnight courier services or
by facsimile transmission, followed promptly by first class mail, to the parties
at the addresses set forth above, or at such other place that either party may
designate by notice in the foregoing manner to the other. Any such notice shall
be deemed given five (5) days after being mailed by certified mail, three (3)
days after being sent by facsimile transmission followed by being mailed by
first class mail, one (1) day after being sent by overnight courier service with
morning delivery and immediately when personally delivered.
Section 7. The failure of either party to insist upon the strict
performance of any of the terms, conditions and provisions of this Agreement
shall not be construed as a waiver or relinquishment of future compliance
-2-
<PAGE>
therewith, and said terms, conditions and provisions shall remain in full force
and effect. No waiver of any term or any condition of this Agreement on the part
of either party shall be effective for any purpose whatsoever unless such waiver
is in writing and signed by such party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
ANDREW, ALEXANDER, WISE & CO.
By:
-----------------------------------
Andreas Zigouras
By:
-----------------------------------
-3-
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of September ,
1996 by and among ProtoSource Corporation, a California corporation (the
"Company"), and each of the signatures to this Agreement (collectively, the
"Stockholders").
W I T N E S S E T H:
WHEREAS, the Stockholders are the purchasers of an aggregate of a minimum
of 2,000,000 shares of Common Stock and a maximum of 6,000,000 shares of Common
Stock of the Company (the "Shares") issued in connection with this private
placement of the Company, in the aggregate amount of up to $1.5 million (the
"Private Placement"); and
WHEREAS, the Company and the Stockholders desire that certain terms and
provisions be applicable to these Shares and to 400,000 shares of Common Stock
issued in connection with a bridge loan completed on August 23, 1996 (together
referred to as "Registrable Securities") held by the Stockholders;
NOW, THEREFORE, in consideration of the covenants and agreements set forth
herein, and for other good and valuable consideration, the adequacy and receipt
of which are hereby acknowledged, the parties hereby agree as follows:
Section 1. Registration Rights. The Company covenants and agrees with the
Stockholders that the Company will file with the Securities and Exchange
Commission ("SEC") a Registration Statement (the "Registration Statement"), a
post-effective amendment to an existing Registration Statement (the
"Amendment"), or a Regulation A Offering Statement (an "Offering Statement")
under the Securities Act of 1933, as amended (the "Act"), registering or
qualifying the Registrable Securities for sale within 60 days of completion of
this Private Placement, to be placed by Andrew, Alexander, Wise & Company,
Incorporated (the "Placement Agent"). The Company will use its best efforts,
through its officers, directors, auditors and counsel in all matters necessary
or advisable, to cause to become effective such Registration Statement as
promptly as practicable, and, for a period of one year thereafter, to reflect in
the Amendment, Registration Statement or Offering Statement, financial
statements which are prepared in accordance with Section 10(a)(3) of the Act and
any facts or events arising that, individually, or in the aggregate, represent a
fundamental and/or material change in the information set forth in the
Amendment, Registration Statement or Offering Statement to enable any
Stockholders of the Registrable Securities to sell such Registrable Securities
during said two-year period.
<PAGE>
Section 2. Piggyback Registration Rights. The Company covenants and agrees
with the Stockholders and any other holders of the Registrable Securities that
if, at any time within the period commencing from the date hereof, and ending
five (5) years thereafter, it proposes to file a Registration Statement,
Amendment or Offering Statement, as the case may be (collectively, a
"Registration Statement") with respect to any class of security (other than
pursuant to a Registration Statement on Forms S-4 or S-8 or any successor form)
under the Act in a primary registration on behalf of the Company and/or in a
secondary registration on behalf of holders of securities, and the Registration
Statement to be used may be used for registration of the Registrable Securities,
the Company will give written notice to the holders of the Registrable
Securities at least thirty (30) days prior to the filing of such Registration
Statement at the addresses appearing on the records of the Company of its
intention to file a Registration Statement, and will offer to include in such
Registration Statement, all or any portion of the Shares, and limited, in the
case of a Regulation A offering, to the amount of the available exemption. The
offer to include the Shares is limited by subparagraphs (a) and (b) of this
Section 2. In any event, the maximum number of Registrable Securities which
shall be registered shall not exceed that number for which the Company has
received written requests for inclusion therein within fifteen (15) days after
the giving of notice by the Company. The Company will use its best efforts,
through its officers, directors, auditors and counsel in all matters necessary
or advisable, to cause to become effective such Registration Statement as
promptly as practicable. All registrations requested pursuant to this section 2
are referred to herein as "Piggyback Registrations." All Piggyback Registrations
pursuant to this Section 2 will be made solely at the Company's expense, except
for the Stockholders' counsel fees and sales commissions incurred if the
Registrable Securities are sold.
(a) Priority on Primary Registrations. If a Piggyback
Registration includes an underwritten primary registration on behalf
of the Company and the underwriter so requests, the Company and such
holder of Registrable Securities will enter into an underwriting
agreement with such underwriter for such offering, which shall be
reasonably satisfactory in substance and form to the Company, such
holder of Registrable Securities and the underwriter, and such
agreement shall contain such representations and warranties by the
Company and such holder of Registrable Securities and such other terms
and provisions as are customarily contained in underwriting agreements
with respect to secondary distributions, including, without
limitation, indemnities substantially to the effect and to the extent
provided in Section 8. Furthermore, if the underwriter(s) for the
offering being registered by
-2-
<PAGE>
the Company shall determine in good faith and advise the Company in
writing that in its/their opinion the number of Registrable Securities
requested to be included in such registration exceeds the number that
can be sold in such offering without materially adversely affecting
the distribution of such securities by the Company (such opinion to
state the reasons therefor), then the Company will promptly furnish
the holders of the Registrable Securities with a copy of such opinion
and the Company will include in such registration (1) first, the
securities that the Company proposes to sell and (ii) second, the
Registrable Securities requested to be included in such registration,
apportioned pro rata among the holders of the Registrable Securities,
but in any event not less than 50% of the Shares, and (iii) third,
securities of the holders of other securities requesting registration.
(b) Priority on Secondary Registrations. If a Piggyback
Registration consists only of an underwritten secondary registration
on behalf of holders of securities of the Company and the
underwriter(s) for the offering being registered by the Company advise
the Company in writing that in its/their opinion the number of
Registrable Securities requested to be included in such registration
exceeds the number which can be sold in such offering without
materially adversely affecting the distribution of such securities by
the Company (such opinion to state the reasons therefor) then the
Company will promptly furnish the holders of the Registrable
Securities with a copy of such opinion and, the Company will include
in such registration (i) first, the securities requested to be
included therein by the holders requesting such registration and the
Registrable Securities requested to be included in such registration
above, pro rata, among all such holders on the basis of the number of
shares requested to be included by each such holder, but in any event
not less than 50% of the Registrable Securities and (ii) second, other
securities requested to be included in such registration.
Notwithstanding the foregoing, if any such underwriter shall determine in
good faith and advise the Company in writing that the distribution of the
Registrable Securities requested to be included in the registration concurrently
with the securities being registered by the Company would materially adversely
affect the distribution of such securities by the Company, then the holders of
such Registrable Securities shall delay their offering and sale for such period
ending on the earliest of (i) 90 days following the effective date of the
-3-
<PAGE>
Company's registration statement, (ii) the day upon which the underwriting
syndicate, if any, for such offering shall have been disbanded or, (iii) such
date as the Company, managing underwriter and holders of Registrable Securities
shall otherwise agree. In the event of such delay, the Company shall file such
supplements, post-effective amendments and take any such other steps as may be
necessary to permit such holders to make their proposed offering and sale for a
period of 120 days immediately following the end of such period of delay. If any
party disapproves of the terms of any such underwriting, it may elect to
withdraw therefrom by written notice to the Company, the underwriter, and the
Stockholders. Notwithstanding the foregoing, the Company shall not be required
to file a registration statement to include Shares pursuant to this Section 2 if
an opinion of independent counsel, reasonably satisfactory to counsel for the
Company and counsel for the Stockholders, that all of the Registrable Securities
proposed to be disposed of may be transferred pursuant to the provisions of Rule
144 under the Act shall have been delivered to counsel for the Company.
Section 3. Other Registration Rights. In addition to the rights above
provided, the Company will cooperate with the then Stockholders in preparing and
signing any Registration Statement, in addition to the Registration Statements
and Offering Statements discussed above, required in order to sell or transfer
the Registrable Securities and will supply all information required therefor,
but such additional Registration Statement shall be at the then Holders' cost
and expense; provided, however, that if the Company elects to register and
qualify additional shares of Common Shares, the cost and expenses of such
Registration Statement will be pro rated, between the Company and the Holders of
the Registrable Securities according to the aggregate sales price of the
securities being registered.
Section 4. Certain Understandings. The Stockholders understand that the
Company makes no representations of any kind concerning its intent or ability to
offer or sell any of the Registrable Securities in a public offering or
otherwise and that its sole rights to have the Registrable Securities registered
under the Act are contained in this Agreement. So long as there are Registrable
Securities outstanding and the Company is subject to the reporting requirements
of the Act and the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company will file the reports required to be filed by it under the Act and the
Exchange Act and the rules and regulations adopted by the SEC thereunder, and
will take such further action as the holders of Registrable Securities may
reasonably request, all to the extent required from time to time to enable the
holders of Registrable Securities to sell Registrable Securities without
registration under the Act within the limitation of the exemptions provided by
(i) Rule 144 under the Act, as such Rule may be amended from time to time, or
(ii) any similar rule or regulation hereafter adopted by the SEC. Upon the
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request of the holders of Registrable Securities, the Company will deliver to
the holders of Registrable Securities a written statement as to whether it has
compiled with such information requirements.
Section 5. Company Obligations. In connection with the registration of the
Registrable Securities pursuant to this Agreement, the Company shall:
(a) furnish to the holders of the Registrable Securities and to the
underwriter(s), if any, thereof such reasonable number of copies of the
Registration Statement, preliminary prospectus, final prospectus and such other
documents as such holders and underwriters may request in order to facilitate
the public offering of such securities;
(b) use its best efforts to register or qualify the Registrable Securities
under state securities laws of the jurisdictions which the holders thereof may
reasonably request in writing within 20 days following the original filing of
such Registration Statement, and do any and all other acts and things which may
be necessary or advisable to enable the holders of Registrable Securities to
consummate the disposition of Registrable Securities in such jurisdictions,
except that the Company shall not be required to execute a general consent to
service of process or to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified;
(c) notify the holders of the Registrable Securities promptly when such
Registration Statement has become effective or a supplement to any prospectus
forming a part of such Registration Statement has been filed; and
(d) advise the holders of the Registrable Securities, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the SEC suspending the effectiveness of such Registration Statement, or
the initiation or threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued.
(e) prepare and file with the SEC such amendments and supplements to such
Registration Statement, and the prospectus used in connection therewith as may
be necessary to keep such Registration Statement effective and to comply with
the provisions of the Act with respect to the disposition of all Registrable
Securities and other securities covered by such Registration Statement, until
the earlier of (a) such time as all of such Registrable Securities and
securities have been disposed of in accordance with the intended methods of
disposition by seller or sellers thereof set forth in such Registration
Statement, or (b) the expiration of 90 days after such Registration Statement
becomes effective;
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<PAGE>
(f) furnish to the holders of the Registrable Securities a signed
counterpart, addressed to the holders of the Registrable Securities, of (A) an
opinion of counsel for the Company dated the effective date of such registration
statement (and, if such registration includes an underwritten public offering,
dated the date of the closing of such underwritten public offering), and (B) a
"cold comfort" letter signed by the independent public accountants who have
certified the Company's financial statements included in such Registration
Statement, covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case of
such accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities and, in the case of the accountants' letter, such other
financial matters, as the holders of the Registrable Securities may reasonably
request;
(g) promptly notify the holders of the Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the Act, of
the happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, would include an 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 not misleading in the light of the
circumstances then existing, and at the reasonable request of the holders of the
Registrable Securities prepare and furnish to the holders of the Registrable
Securities such number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities or securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made;
(h) in connection with the preparation and filing of the Registration
Statement registering Registrable Securities under the Act, the Company will
give the holders of Registrable Securities and their counsel and accountants,
the opportunity to participate in the preparation of such registration
statement, each prospectus included therein or filed with the SEC, and each
amendment thereof or supplement thereto, and will give each of them such access
to its books and records and such opportunities to discuss the business of the
Company with its officers and the independent public accountants who have
certified its financial statements as shall be reasonably necessary, in the
opinion of the holders of Registrable Securities, or their counsel, to conduct a
reasonable investigation within the meaning of the Act.
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<PAGE>
(i) otherwise use of all of its or their reasonable efforts to comply with
all applicable rules and regulations of the SEC and make available to its
securities holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning after the effective date
of such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Act; and
(j) provide and cause to be maintained a transfer agent and registrant for
such Registrable Securities from and after a date not later than the effective
date of such registration statement.
Section 6. Expenses. The Company will bear all expenses attendant to
registering the Registrable Securities, including, without limitation, all
registration and filing fees, all listing fees, all fees and expenses of
complying with securities or blue sky laws, all word processing, duplicating and
printing expenses, messenger and delivery expenses and the fees and
disbursements of counsel for the Company and its independent public accountants,
including the expenses of "cold comfort" letters and expenses of any special
audits required by or incident to such performance and compliance, premiums and
other costs of policies of insurance against liabilities arising out of the
public offering of the Registrable Securities being registered and any fees and
disbursements of underwriters customarily paid by issuers and sellers of
securities, but excluding underwriting discounts and commissions, if any,
applicable to the sale of such securities. Furthermore, the Company shall not be
required to pay the fees and disbursements of counsel and accountants for any
holder of Registrable Securities or other expenses incurred by any holder
thereof that are not customarily paid by an issuer in response to the exercise
of registration rights.
Section 7. Indemnification and Contribution. The Stockholders understand
that indemnification and contribution provisions such as the following are
customarily included in an underwriting agreement and agree that they will enter
into an agreement containing such provisions or provisions substantially similar
thereto as a condition precedent to the registration by the Company of any of
their Registrable Securities:
(a) The Company will indemnify and hold harmless each holder of Registrable
Securities which are included in a Registration Statement pursuant to the
provisions of this Agreement and any underwriter (as defined in the Act) for
such holder, each officer, director, employee, agent and counsel, if any, of
each such holder and underwriter, and each pe,son, if any, who controls such
holder or such underwriter within the meaning of Section 15 of the Act or
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<PAGE>
Section 20(a) of the Exchange Act (each, a "person who controls" or a
"controlling person"), from and against, any and all loss, claim, damage,
liability, cost and expense (including, without limitation, reasonable legal
expenses) to which such holder or any such underwriter, officer, director,
employee, agent, counsel or controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages, liabilities, costs or
expenses (or actions or proceedings in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in such Registration Statement, any prospectus contained therein or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage, liability, cost or expense arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
so made in reliance upon and in strict conformity with information furnished by
or on behalf of such holder, underwriter, officer, director, employee, agent,
counsel or controlling person in writing specifically for use in the preparation
thereof.
(b) Each holder of Registrable Securities included in a registration
pursuant to the provisions of this Agreement will indemnify and hold harmless
the Company, any underwriter, each officer, director, employee, agent, counsel
of and each person who controls the Company or such underwriter from and
against, any and all losses, damages, liabilities, costs or expenses to which
the Company or such officer, director, employee, agent, counsel or controlling
person may become subject under the Act or otherwise, insofar as such losses,
damages, liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in such Registration
Statement, any prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
so made in reliance upon and in strict conformity with written information
furnished by or on behalf of such holder specifically for use in the preparation
thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of Sections 7(a) or (b) of notice of the commencement of any action
involving the subject matter of the foregoing indemnity provisions, such
indemnified party will, if a claim thereof is to be made against the
indemnifying party pursuant to the provisions of said subparagraph (a) or (b),
promptly notify the indemnifying party of the commencement thereof; but the
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<PAGE>
omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than hereunder.
In case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or in addition to those available
to the indemnifying party, or if there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing the
indemnified party, the indemnified party or parties shall have the right to
select separate counsel to participate in the defense of such action on behalf
of such indemnified party or parties. After notice from the indemnifying party
to such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party pursuant to the
provisions of Sections 7(a) or (b) for any legal or other expense subsequently
incurred by such indemnified party in connection with the defense thereof, other
than reasonable costs of investigation, unless (i) the indemnified party shall
have employed counsel in accordance with the provisions of the immediately
preceding sentence, (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the commencement of the action,
or (iii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 7 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages or liabilities referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect the relative fault of such indemnifying party and
indemnified parties in connection with the actions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and indemnified
parties shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact, has been
made by, or relates to information supplied by, such indemnifying party or
indemnified parties and the parties' relative intent, knowledge, access to
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<PAGE>
information and opportunity to correct or prevent such action; provided,
however, that any holder of Registrable Securities shall not be required to
contribute in an amount greater than the dollar amount of the proceeds received
by such holder of Registrable Securities with respect to the sale of any
securities. The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities referred to above shall be deemed to include,
subject to the limitations set forth in this Section 7(d), any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of a 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.
Section 8. No Inconsistent Agreements. The Company shall not on or after
the date of this Agreement enter into any agreement with respect to its
securities which is inconsistent with the rights granted to the holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof. The Company has not previously entered into or become a party
to nor is it bound by any agreement with respect to its securities granting any
registration rights to any person, except as set forth in or as contemplated by
the Merger Agreement. The rights granted to the holders of Registrable
Securities hereunder do not in any way conflict with and are not inconsistent
with the rights granted to the holders of the securities of the Company under
any other agreements.
Section 9. Miscellaneous.
(a) All notices or other communications given or made hereunder shall be in
writing and shall be delivered by hand, against written receipt, or mailed by
registered or certified mail, return receipt requested, postage prepaid, to the
Stockholders at their respective address appearing on the records of the Company
and to the Company at its address set forth above. Notices shall be deemed given
on the date of receipt or, if mailed, three business days after mailing, except
notices of change of address, which shall be deemed given when received.
(b) Notwithstanding the place where this Agreement may be executed by the
Stockholders or the Company, they agree that all the terms and provisions hereof
shall be construed in accordance with and governed by the laws of the State of
Delaware without regard to principles of conflict of laws.
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<PAGE>
(c) This Agreement constitutes the entire agreement between the
Stockholders and the Company with respect to the subject matter hereof and may
be amended only by a writing executed by each of them.
(d) This Agreement shall be binding upon and inure to the benefit of each
of the Stockholders's and the Company and their respective heirs, legal
representatives, successors and assigns.
(e) The Stockholders and the Company each hereby submit to the
non-exclusive jurisdiction of the courts of the State of New York located in New
York, New York and of the federal courts located in the Southern District of New
York with respect to any action or legal proceeding commenced by either of them
with respect to this Agreement or to the Registrable Securities. Each of them
irrevocably waives any objection they now have or hereafter may have respecting
the venue of any such action or proceeding brought in such a court or respecting
the fact that such court is an inconvenient forum and consents to the service of
process in any such action or proceeding by means of registered or certified
mail, return receipt requested, in care of the address set forth above or below
or at such other address as either of them shall furnish in writing to the
other.
(f) The parties hereto acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement,
this being in addition to any other remedy to which they may be entitled by law
or equity.
(g) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(h) The waiver by either the Stockholders or the Company of a breach of any
provision of this Agreement shall not operate, or be construed, as a waiver of
any subsequent breach of any provision of this Agreement.
(i) The Stockholders and the Company agree to execute and deliver all
further documents, agreements and instruments and to take such other further
action as may be necessary or appropriate to carry out the purposes and intent
of this Agreement.
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<PAGE>
(j) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which shall together constitute
one and the same instrument.
(k) References in this Agreement to the pronouns "him," "he" and "his" are
not intended to convey the masculine gender alone and are employed in a generic
sense and apply equally to the feminine gender or to an entity.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
PROTOSOURCE CORPORATION
By:
-----------------------------------
President
- --------------------------------- -----------------------------------
- --------------------------------- -----------------------------------
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Investment Representation Letter and Agreement
Name:
Address:
August 12, 1996
ProtoSource Corporation
2580 W. Shaw Lane #102
Fresno,California 93711
I am receiving __________ shares (the "Shares") of the common stock of
ProtoSource Corporation, a California corporation (the "Company"), for no
additional consideration, in connection with a concurrent loan by me to the
Company. I understand and acknowledge that the Shares will be shares of the
common stock of the Company.
In connection therewith, I hereby represent and certify to you and agree
that:
1. I am receiving the Shares for investment only and not with a view to
their resale or distribution. I am not receiving the Shares as a result of any
advertisement, general solicitation, public meeting or other public offering.
2. I understand that the Shares are not registered under the Securities Act
of 1933, as amended (the "Act"), or qualified under the California Corporate
Securities Law of 1968, as amended (the "CSL"), and must be held by me
indefinitely unless they are subsequently registered under the Act, and
qualified under the CSL, or an exemption from such registration or qualification
is available. I understand that the resale of such Shares will be restricted so
that such sale may be made only in accordance with the appropriate exemptions
(including holding such Shares for periods of time specified in Rule 144
promulgated under the Act and compliance with the other provisions thereof, if
such exemption is available) under the Act and the CSL, or registration under
the Act and qualification under the CSL.
3. I am an accredited investor as that term is defined in Regulation D
under the Act. Based upon my experience in business and as an investor, I am
aware of the risks of an investment in restricted securities, and I have no need
for any income from my investment. I am aware that the Shares may have no value
now,and the Company has not made any representation as to their value now or in
the future. I have such knowledge and experience in financial and business
matters so that I am capable of assessing the merits and risks of acquiring the
Shares. I have reviewed the financial statements of the Company as of March 31,
1996, and I have had an opportunity to ask questions of and receive answers from
management of the Company and to obtain any additional information that the
Company possesses or can acquire without unreasonable effort or expense relating
to the Company's business, financial condition and results of operation,
although the Company has made no representation or warranty except as expressly
contained herein.
<PAGE>
4. I understand that all certification evidencing the Shares will bear
legend substantially in the following form:
"The securities represented by this certificate have not
been registered under the Securities Act of 1933, as amended
(the "Act"), or qualified under any state securities law.
These securities may not be sold, transferred, pledged or
hypothecated ln the absence of an effective registration
statement for the securities under the Act and qualified
under any applicable state securities law, or unless an
opinion of counsel acceptable to counsel to the Company, and
other assurances satisfactory to the Company, have been
delivered to the Company prior to the transaction to the
effect that registration and qualification is not required."
5. The undesigned has consulted with tax and legal counsel selected by the
undersigned and with such financial advisors, who have reviewed the merits of an
investment in the Shares. The undersigned, together with such persons, has
sufficient knowledge and experience in business and financial matters to
evaluate the merits of the risks of an investment u~ the Shares, and the
undesigned~ fully aware of the risks involved, has determined that an investment
in the Shares in consistent with the undersigned's investment objectives. The
undersigned is relying solely on the undersigned's own tax advisors with respect
to the tax factors relating to an investment in the Shares.
6. I hereby agree as follows:
(a) If the undersigned, or any subsequent holder, desires to transfer
any of the Shams, the undersigned m~ give to the Company prior written notice of
such proposed transfer including the name and address of the proposed
transferee. Unless registered and qualified as provided herein, such transfer
may be made only either (i) upon publication by Securities and Exchange
Commission (the "Commission") of a ruling, interpretation, opinion or "no action
letter" bawd upon facts presented to the Commission' or (ii) upon receipt by the
Company of an opinion of counsel acceptable to counsel to the Company, in either
case to the effect that the proposed transfer will not violate the provisions of
the Act, the Securities Exchange Act of 1934, as amended, any state securities
laws, or the rules and regulations promulgated under any such acts or laws.
<PAGE>
(b) Prior to any such proposed transfer, and as a condition thereto,
if such transfer is not made pursuant to our effective registration statement
under the Act, the undersigned, or any subsequent holder, will, if requested by
the Company, deliver to the Company (i) an investment letter setting forth
investment representations of the proposed transferee and such proposed
transferee transferee's covenant to comply with the transfer provisions set
forth in this Section 6 and elsewhere in this Agreement, signed by the proposed
transferee, and (ii) an agreement by the transferee to indemnify the Company to
the same extent as forth in Section 6 (c) hereof.
(c) The undersigned acknowledges that the undersigned understands the
meaning and legal consequences of the representations and warranties contained
herein, and the undersigned hereby agrees to indemnify and hold harmless the
Company and its agents and representatives and each of their heirs, legal
representatives, successors and assigns from and against any and all loss,
damage or liability (including all attorneys' fees and costs incurred in
enforcing this indemnity provision) due to or arising out of (i) the inaccuracy
of any representation or the breach of any warranty of the undersigned contained
in, or any other breach of, this letter agreement, (ii) any transfer of any of
the Shares in violation of the Act, the Securities Exchange Act of 1934, as
amended, as~y state securities laws, or the rules and regulations promulgated
under any of such acts or laws, (iii) any transfer of any of the Shares not in
accordance herewith or (iv) any untrue statement or omission to state any
material fact in connection with the investment representation or with respect
to the facts and representations supplied by the undersigned to counsel to the
Company upon which its opinion as to a proposed transfer shall have been based.
(d) The Company may place a stop order with its transfer agent and
registrar, if any, with respect to soy of the Shams or any certificates into
which such Shares are exchanged.
7. In conjunction with the investment referred to in this Investment
Representation Letter and Agreement, by its execution of the acceptance and
agreement below, Company agrees as follows:
Upon funding and proper documentation of the loan which serves as
consideration for the issuance of the Shares, the Company agrees to issue to the
undersigned investor for no additional consideration two (2) shares of its
common stock for each one dollars ($1.00) lent to the Company by the undersigned
investor.
<PAGE>
Very truly yours,
--------------------------------------
Investor
--------------------------------------
Name (Please Type or Print)
The terms and provisions of
Sections 7 are accepted
and agreed to.
Dated: , 1996.
---------------
ProtoSource Corporation, a California corporation
By:
--------------------------------------
Name: Charles T. Howard
Title: Chief Executive Officer
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use, in this Registration Statement on Form SB-2, of
our report dated February 23, 1996, relating to the financial statements of
ProtoSource Corporation for the years ended December 31, 1995 and 1994, and the
reference to our firm under the caption "Experts" in the Prospectus contained in
said Registration Statement.
/S/ ANGELL & DEERING
------------------------------------
Angell & Deering
Certified Public Accountants
Denver, Colorado
January 28, 1997
