Filed with the Securities and Exchange Commission on May 5, 1998.
Securities Act Registration No. 333-40743
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
PROTOSOURCE CORPORATION
(Name of small business issuer in its charter)
California 7373 77-0190772
---------- ---- ----------
(State or jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code No.) Identification No.)
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 490-8600
------------------------------------------------------------
(Address and telephone number of principal executive offices)
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 490-8600
--------------------------------------------------
(Address of principal place of business or intended
principal place of business)
Raymond J. Meyers, Chief Executive Officer
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 490-8600
--------------------------------------------------------
(Name, address, and telephone number of agent for service)
Copies of all communications to:
Gary A. Agron, Esq. Snow Becker Krauss P.C.
5445 DTC Parkway, Suite 520 Charles Snow, Esq.
Englewood, CO 80111 605 Third Avenue
(303) 770-7254 New York, New York 10158
(303) 770-7257 (Fax) (212) 687-3860
(212) 949-7052 (fax)
Approximate date of proposed sale to public: 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box:
CALCULATION OF REGISTRATION FEE
================================================================================
Title of each class Amount to Proposed Proposed Amount of
of securities be registered maximum price maximum registration
to be registered per unit aggregate fee
offering
price
================================================================================
Units, consisting of 1,207,500
one share of Common Units(1) $5.75(2) $6,943,125 $2,048
Stock, no par value
and one Warrant
Common Stock, no 1,207,500 $6.00(3) $7,245,000 $2,138
par value, underlying Shares
Warrants included in
the Units
Underwriter's 105,000 $.0001 $ 100 $ -0-
Warrants Warrants
Units underlying 105,000 $ 9.4875(5) $ 996,188 $ 294
Underwriter's Units(4)
Warrants consisting of
one share of Common
Stock and one
Warrant
Common Stock, no 105,000 $9.4875(5) $ 996,188 $ 294
par value, underlying Shares
Warrants included in
Underwriter's
Warrants
Totals...................................... $16,180,501 $4,774(6)
ii
<PAGE>
(1) Includes the Underwriter's over allotment option of 157,500 Units.
(2) Based upon the closing bid price of the Registrant's Common Stock on the
Electronic Bulletin Board (the "Bulletin Board") on April 6, 1998, which is
the price for which the Units are to be offered.
(3) Represents the closing bid price of the Registrant's Common Stock on the
Bulletin Board on November 18, 1997.
(4) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number
of shares issuable upon exercise of the Underwriter's Warrants is subject
to adjustment with anti-dilution provisions of such warrants.
(5) Based upon 165% of the Unit public offering price.
(6) The Registrant previously paid a filing fee of $4,124. Accordingly, $650 is
paid herewith.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
(EXHIBIT INDEX LOCATED ON PAGE OF THIS FILING)
iii
<PAGE>
Subject to Completion Dated May 5, 1998
PROTOSOURCE CORPORATION
1,050,000 Units
ProtoSource Corporation (the "Company") is offering (the "Offering")
through Andrew, Alexander, Wise & Company, Inc. as representative of the
underwriters (the "Underwriter"), 1,050,000 Units of the Company's securities
("Units"). Each Unit consists of one share of no par value common stock ("Common
Stock") and one redeemable common stock purchase warrant ("Warrant"), priced at
$5.75 per Unit representing the closing bid price of the Common Stock on the
Electronic Bulletin Board ("Bulletin Board") on the date of this Prospectus. The
Common Stock and Warrants are separately tradeable immediately upon issuance.
Each Warrant is exercisable to purchase one share of Common Stock at an exercise
price of $5.75 per share (100% of the closing bid price of the Common Stock one
day prior to the date hereof on the Bulletin Board) for a period of five years
from the date hereof and may be redeemed by the Company after one year from the
date hereof for $.10 per Warrant on 30 days' written notice to the
Warrantholders if the closing bid price of the Common Stock on the NASDAQ
SmallCap Market or the Bulletin Board (whichever is applicable) is at least
$____ per share (150% of the closing bid price of the Common Stock on the
Bulletin Board one day prior to the date hereof) for 20 consecutive trading
days, ending not earlier than 15 days before the Warrants are called for
redemption. See "Risk Factors" and "Underwriting."
The Company's Common Stock currently trades on the Bulletin Board under the
symbol "PSCO". On May 4, 1998, the closing bid price of the Common Stock on the
Bulletin Board was $5.75 per share. The Company has applied to list the Common
Stock and Warrants (but not the Units) on the NASDAQ SmallCap Market but cannot
assure, that it meets the NASDAQ SmallCap Market requirements for listing.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION ("COMMISSION") OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN
A TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 9 OF THIS PROSPECTUS.
--------------------------------------
The Units are offered by the Underwriter on a firm commitment basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to certain conditions, including the right of the
Underwriter to reject orders in whole or in part. It is anticipated that
delivery of certificates representing the securities will be made against
payment therefor in New York, New York on or about three business days from the
date of this Prospectus.
1
<PAGE>
================================================================================
Price to Public Underwriting Discounts Proceeds to Company
and Commissions(1) (2)(3)
- --------------------------------------------------------------------------------
Per Unit.............$ 5.75 $ .575 $ 5.175
- --------------------------------------------------------------------------------
Total................$ 6,037,500 $ 603,750 $ 5,433,750
================================================================================
(1) Excludes a nonaccountable expense allowance payable to the Underwriter of
$181,125, a $60,000 one year consulting fee, and the issuance of warrants
to the Underwriter (the "Underwriter's Warrants") to purchase up to 105,000
Units at a price of $9.4875 per Unit, (165% of the Offering price of the
Units). The Company has granted certain registration rights with respect to
the Units underlying the Underwriters' Warrants and has agreed to indemnify
the Underwriter against certain liabilities, including liabilities under
the Securities Act of 1933 (the "1933 Act"). See "Underwriting."
(2) Before deducting costs of the Offering estimated to be $381,125, including
the Underwriter's nonaccountable expense allowance. See "Underwriting."
(3) Does not include the exercise of the Underwriter's option (the
"Overallotment Option"), exercisable within 30 days from the date of this
Prospectus, to purchase from the Company up to 157,500 additional Units on
the same terms as the Units offered hereby solely to cover overallotments,
if any. If the Overallotment Option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $6,943,125, $694,312 and $6,248,813, respectively. See
"Underwriting."
Andrew, Alexander, Wise & Company, Inc.
17 State Street
New York, New York 10004
(800) 303-5424
The date of this Prospectus is __________, 1998.
2
<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 Commission maintains a Web
site that contains such reports, proxy and information statements and other
information regarding the Company at http://www.sec.gov.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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.
3
<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. Except for the historical
information contained herein, the matters set forth in this Prospectus include
forward-looking statements which 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
The Company provides Internet access and related services to individuals,
public agencies and businesses in six small Central California cities. As of
December 31, 1997, the Company had 2,800 subscribers for whom it provided
Internet access up from 250 subscribers in July 1995. See "History." The Company
intends to acquire other small Internet providers in markets with populations of
less than 500,000 that are located 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 are
unable 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 has addressed these kinds of financial and
administrative burdens by (i) expanding its operations throughout Central
California, (ii) developing diversified services similar to its larger
competitors, such as hourly-based access services, special access to packages
for business and high speed access, and (iii) investing in automated billing and
administrative systems. The Company believes these resources will not only allow
it to compete effectively with larger access firms entering the Company's
markets, but also will facilitate the Company's efforts to attract small
Internet providers. The Company's long-term plan is to target a select number of
such markets and increase revenues through acquisition in these markets. The
Company is not currently negotiating to acquire, nor has it entered into any
agreement to acquire, any other companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business -
Introduction," and "Risk Factors."
The Company's strategy is to provide low cost direct Internet access and
other Internet related products and services to subscribers or customers in
target markets. The Company will seek to effectuate this strategy by acquiring
small Internet providers, by expanding marketing operations in its existing
markets, by offering Internet related products and services and by acquiring
other computer oriented companies. The Company will also seek to generate
additional revenues by (i) increasing monthly Internet access fees while
offering additional Internet products and services, (ii) offering monthly
community access services, (iii) providing Internet consulting services, and
(iv) generating marketing service fees from businesses seeking a Web site on the
Internet.
4
<PAGE>
The Offering
Securities offered (1).................... 1,050,000 Units, each Unit consist-
ing of one share of Common Stock
and one Warrant
Offering price............................ $5.75 per Unit
Common Stock outstanding
prior to the Offering (1)................ 665,333 shares
Common Stock Outstanding
After the Offering (1)................... 1,715,333
Use of Proceeds........................... For repayment of debt, acquisition
of small Internet access providers
and other computer oriented
companies, for marketing expenses
and working capital.
See "Use of Proceeds"
Bulletin Board Symbol..................... PSCO - Common Stock
Proposed NASDAQ SmallCap Symbols.......... PSCO - Common Stock
PSCOW - Warrants
Transfer Agent............................ Corporate Stock Transfer, Inc.
- ----------
(1) Excludes (i) up to 1,050,000 shares issuable upon exercise of the Warrants,
(ii) up to 315,000 shares issuable upon exercise of the Overallotment
Option and the Warrants included therein, and (iii) up to 407,333 shares
issuable upon exercise of other outstanding warrants and options. See
"Dilution", "Capitalization", "Management-Executive Compensation", "Certain
Transactions", "Description of Securities" and "Underwriting."
5
<PAGE>
Summary Financial Information
The following financial information is derived from the financial
statements of the Company appearing elsewhere herein and should be read in
conjunction with such financial statements. See "Financial Statements."
Year Ended December 31,
--------------------------------
1997 1996
Income Statement Data:
Revenues $ 749,796 $ 697,581
(Loss) from continuing
operations (1,470,550) (672,791)
Net (loss) (1,470,550) (1,409,800)
Net (loss) per share (2.49) (7.74)
Weighted average number
of shares outstanding 589,702 182,037
December 31,
1997 As Adjusted(1)
Balance Sheet Data:
Working capital (deficit) $ (795,657) $ 4,355,491
Total assets 3,295,734 7,598,359
Long-term debt 1,788,889 1,788,889
Total liabilities 2,772,184 2,022,184
Stockholders' equity 523,550 5,576,175
----------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to exercise of the
Warrants, the Underwriter's Warrants or other outstanding warrants or stock
options. See "Use of Proceeds" and "Description of Securities."
6
<PAGE>
THE COMPANY
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 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 designed and sold customized computer system
configurations 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 46,000 Units to the public at
$82.50 per Unit. Each Unit consisted of one share of Common Stock and one common
stock purchase warrant (the "Prior Warrants") to purchase an additional share of
Common Stock at $97.50 per share until February 1998, when the Prior Warrants
expired unexercised. McClurg Capital Corporation, the Representative of the
Underwriters of the IPO (the "Prior Representative"), received warrants (the
"Prior Representative's Unit Warrants") to purchase 4,000 Units at $99.00 per
Unit until February 2000. In May 1997, the Company registered 186,666 Common
Stock Purchase Warrants and 186,666 shares of Common Stock underlying these
Warrants together with 426,667 shares of Common Stock (collectively the "May
1997 Securities").
In July 1995, the Company acquired ValleyNet Communications ("ValleyNet"),
a small Internet access provider for $50,000 in cash and the issuance of 334
shares of the Company's Common Stock. At the time of its acquisition, ValleyNet
operated out of one location in Fresno, California and had 250 subscribers.
Since that time, the Company has increased its Internet locations to six, and
increased its subscribers to 2800 at December 31, 1997.
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
carried as an asset on its financial statements, due to the high degree of
uncertainty as to the payment of the promissory note. As a part of the
transaction, the Company received an exclusive worldwide license through
December 2006, to market the Classic Line subject to the payment of a royalty of
16% of gross sales to the Canadian company. To date, the Company has not
incurred any liability to pay royalties.
7
<PAGE>
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 the liabilities of the Classic Line and certain other liabilities,
aggregating approximately $500,000. Under the terms of the asset sales agreement
(the "Divestiture Agreement"), the Company acquired 25% of the outstanding
common stock of SSC for $500,000 in cash (less $200,000 of liabilities which
were paid by the Company and deducted from the $500,000) 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 part
of the Divestiture Agreement, the SSC Principals also (i) canceled 900,000
shares of Convertible Preferred Stock held by them (and one other individual)
which were previously exercisable into shares of Common Stock on a fifteen for
one basis, (ii) agreed not to sell an aggregate of 30,300 shares of Common Stock
owned by them until October 1999, except with the prior written consent of the
Prior Representative, (iii) agreed to sublease office space from the Company at
a monthly rental of $12,000 until February 28, 1998, (iv) granted to Steven A.
Kriegsman, a former director of the Company, an option to purchase up to 10,000
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. The value of
the Classic Line assets were determined as a result of negotiations between the
Company and the SSC Principals. See "Certain Transactions."
In October 1996, the Company sold 400,000 shares of its Common Stock to a
group of investors for $3.75 per share or a total of $1,500,000 (the "Common
Stock Placement"). 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 26,667 shares of its Common Stock to the bridge lenders as
additional consideration for the $200,000 loan. The Company also issued 186,666
Warrants exercisable at $3.75 per share in connection with the bridge loan and
the private placement. The 426,667 shares, 186,666 Warrants and 186,666 shares
underlying the Warrants were registered with the Commission in May 1997.
Between June and September 1997, the Company issued 150,000 shares of its
Common Stock as additional consideration for a $750,000 bridge loan (the "Bridge
Loan") advanced to it by eight bridge lenders. The Company intends to repay the
Bridge Loan with proceeds of the Offering.
The Company was incorporated in the State of California as SHR Corporation
on July 1, 1988, and changed its name to "ProtoSource Corporation" in October
1994. The Company's principal executive offices are located at 2300 Tulare
Street, Suite 210, Fresno, California 93721, telephone (209) 490-8600.
8
<PAGE>
RISK FACTORS
In evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the factors included in the
"Prospectus Summary" on page 4 and 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 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 losses of $1,816,285, $1,409,800 and $1,470,550 for the years ended
December 31, 1995, 1996 and 1997, respectively. The Company had a working
capital deficit of $795,657 at December 31, 1997, which could significantly
limit its operations. The Company also had an accumulated deficit of $5,066,905
at that date. 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 may find it necessary to seek additional equity
capital if its cash flow continues to be insufficient to fund its desired
growth. There can be no assurance that the Company can obtain such additional
capital, and if it is unable to do so, it will be unable to expand its
operations, should it require such capital. (See also "Risk Factors - Need for
Additional Financing.") 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, 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 these and other
risks.
9
<PAGE>
Risks Associated With Defaults by SSC and the SSC Principals. The Company
is the payee of a promissory note from SSC guaranteed by the SSC principals
which bears interest at 10% per annum and is due January 2007. SSC and the SSC
principals have also agreed (i) to assume certain trade accounts payable
originally incurred by the Company in the approximate amount of $500,000 and
(ii) to sublease from the Company certain office space at a rental of $12,000
per month through February 1998. In the event SSC and the SSC principals default
on, or for any reason elect not to pay, any of these obligations, the Company's
operations would be materially adversely affected. The Company has not received
rental payments on the aforesaid sublease since April 1997 and has been advised
by certain of its trade account creditors that such creditors have not received
payments on the accounts from SSC or the SSC principals. Since these obligations
were originally incurred by the Company, the Company remains liable to the trade
account creditors. Some of these creditors have threatened to bring suit against
the Company and the Company has been required to return possession of the
subject office space to the Company's landlord. The total amount of trade
account debt assumed by SSC and the SSC Principals is approximately $100,000.
See "Business - Properties, "Business - Litigation", and "Certain Transactions."
Litigation. The Company has been threatened with legal action resulting
from defaults by SSC and the SSC Principals (in connection with trade account
obligations originally incurred by the Company and assumed by SSC and the SSC
Principals), and claims against the Company filed by the SSC Principals. Payment
of any judgments or settlements in connection with these litigation matters
together with the costs of defending such matters could materially and adversely
affect the Company's results of operations and financial condition. See
"Business - Litigation."
Risks Associated With Unspecified Acquisitions. Although the Company
intends to increase revenues in part through acquisition of small Internet
access providers and other computer oriented companies using proceeds of the
Offering, it has limited experience in this regard and may acquire companies
with limited operating or negative operating history. Shareholders will not
generally have the right to review or vote upon such acquisitions. 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 companies and there can be no assurance it will complete any such
acquisitions in the future. See "Business-Strategy."
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 predict 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,
but not limited to, 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 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."
10
<PAGE>
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."
Few Barriers to Entry. There are few significant barriers to entry in the
Internet access business. Accordingly, the Company expects ongoing 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. See
"Busines - Competition."
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
11
<PAGE>
influence and respond to emerging industry standards and other technological
changes on a timely and cost effective basis. See "Business - The Internet and
the World Wide Web."
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. See "Business - The Internet
and the World Wide Web."
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."
Potential Liability for Information Disseminated On-Line. Civil actions
have been brought for libel and negligence in connection with electronic
messages posted through on-line access systems. Such actions seek to impose
liability upon Internet access and service providers for information
disseminated through their systems. Any actions against the Company could
significantly and adversely effect its operations. The Company does not carry
insurance against such actions or liabilities arising thereunder. See "Business
- - The Internet and the World Wide Web."
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 insurance with a basic policy limitation of $250,000, 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. See "Business."
12
<PAGE>
Need for Additional Financing. The Company may be required to seek debt or
equity financing in the future to fund expansion activities and acquisitions of
small access providers. 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."
Dependance Upon Management. The Company's success is dependent in part upon
the continued employment of Raymond J. Meyers, its Chief Executive Officer. The
Company has an employment agreement with Mr. Meyers, and intends to apply for
key man life insurance upon his life in the face amount of $1,000,000, but has
not as yet obtained such insurance. The loss of the services of Mr. Meyers for
whatever reason would have a material adverse effect upon the Company's
operations. See "Management."
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 future market price of the
Company's securities 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 and 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 securities
offered hereby coupled with the exercise of the Warrants could further increase
the volatility of the Common Stock by increasing the number of shares of the
Company's publicly traded Common Stock outstanding. See "Description of
Securities."
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 665,333 shares of the Company's Common Stock outstanding, of which (i)
46,000 shares were registered for sale in the Company's IPO, (ii) 426,667 shares
and 186,666 shares underlying 186,666 Common Stock Purchase Warrants were
registered in May 1997, (iii) 42,666 shares may currently be sold under Rule
144, and (iv) 150,000 shares may be sold under Rule 144 commencing in July 1998.
The holders of 30,300 shares have agreed to refrain from selling such shares
until October 1999 without the prior written consent of the Underwriter and the
holders of the 150,000 shares have agreed not to sell their shares under any
circumstances for a period of one year from the date hereof. The Underwriter's
Warrants (and the component securities) together with 150,000 shares of Common
Stock issued in connection with the Bridge Loan are subject to piggy-back and
demand registration rights. See "Description of Securities - Common Stock
Eligible for Future Sale" and "Underwriting."
Authorization and Issuance of Preferred Stock; Prevention of Changes in
Control. The Company's Articles of Incorporation authorize the issuance of up to
5,000,000 shares of Preferred Stock with such rights and preferences as may be
13
<PAGE>
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, if issued, may be
granted the right to receive dividends, certain preferences in liquidation, and
conversion rights at the discretion of the Board of Directors. 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
contain a provision eliminating directors' liability to the Company or to its
stockholders for monetary damages for breach of fiduciary duty, except in
circumstances involving a financial benefit to a director, intentional
infliction of harm to the Company or other 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."
Underwriter's Influence on the Market. A significant amount of the Common
Stock and Warrants offered hereby may be sold to customers of the Underwriter.
Subsequently, such customers may engage in transactions for the sale or purchase
of such securities through or with the Underwriter. Although it has no
obligation to do so, the Underwriter intends to make a market in the Company's
Common Stock and Warrants and may otherwise effect transactions in the Common
Stock and Warrants. This market making activity may terminate at any time. If it
participates in the market, the Underwriter may exert a dominating influence on
the market, if one develops, for the Common Stock and Warrants. The price and
liquidity of the Common Stock and Warrants may be significantly affected by the
degree, if any, of the Underwriter's participation in such market. The
Underwriter may also engage in market making activities and soliciting brokerage
activities with respect to the purchase or sale of the Common Stock and Warrants
on the NASDAQ SmallCap Market where such securities are anticipated to trade.
However, no assurance can be given that the Underwriter will continue to
participate as market maker for the Common Stock and Warrants or that other
broker-dealers will make a market in such securities. See "Underwriting."
Representatives' Lack of Underwriting Experience. The Underwriter commenced
business as a broker-dealer in May 1996, and has not acted as an underwriter in
any prior public offerings, although it has participated as a dealer in
offerings underwritten by others and its Chief Executive Officer has more than
ten years experience in public offering financing. The Underwriter's lack of
underwriting experience may (i) adversely affect the development or continuation
14
<PAGE>
of a trading market for the Common Stock and Warrants, (ii) have limited the
effectiveness of the Underwriter in negotiating the offering price of the Units
and the exercise price of the Warrants, and (iii) negatively influence the
market price of the Common Stock and Warrants following the Offering. The
Underwriter assisted the Company in a previous private placement of its
securities and with the Bridge Loan, pursuant to which the Underwriter received
cash commissions and common stock purchase warrants. See "Underwriting."
Non-Registration in Certain Jurisdictions of Shares of Common Stock
Underlying the Warrants. The Warrants are not convertible or exercisable unless,
at the time of exercise, the Company has a current prospectus covering the
shares of Common Stock issuable upon exercise of the Warrants and such shares of
Common Stock have been registered, qualified or deemed to be exempt under the
securities laws of the states of residence of the holders of such Warrants.
There can be no assurance that the Company will have or maintain a current
prospectus or that the securities will be qualified or registered under any
state law. Although the Company has undertaken and intends to use its best
efforts to maintain a current prospectus covering the Common Stock issuable upon
exercise of the Warrants following completion of the Offering to the extent
required by federal securities laws, there can be no assurance that the Company
will be able to do so. The value of the Warrants may be greatly reduced if a
prospectus covering the Common Stock issuable upon exercise of the Warrants is
not kept current or if the Common Stock issuable upon exercise of the Warrants
is not qualified, or exempt from qualification, in the states in which the
holders of the Warrants reside. Persons holding Warrants who reside in
jurisdictions in which such securities are not qualified and in jurisdictions
where there is no exemption will be unable to exercise their Warrants and would
either have to sell their Warrants in the open market or allow them to expire
unexercised. If, and when, the Warrants become redeemable by the terms thereof,
the Company may exercise its redemption right even if it is unable to qualify
the Common Stock issuable upon exercise of the Warrants for sale under
applicable state securities laws. See "Description of Securities Warrants."
Redemption of the Warrants. The Warrants may be redeemed by the Company
under certain circumstances (if there is a current prospectus covering exercise
of the Warrants) upon 30 days' written notice to the Warrantholders at $.10 per
Warrant. In such event, the Warrants will be exercisable until the close of
business on the date fixed for redemption in such notice. Any Warrants not
exercised by such time will cease to be exercisable, and the holders will be
entitled only to the redemption price, which is likely to be substantially less
than the market value of the Warrants. Accordingly, such redemption could force
the Warrantholders to exercise the Warrants and pay the exercise price at a time
when it might be disadvantageous for them to do so or to sell the Warrants at
the then market price when they might otherwise prefer to hold the Warrants. See
"Description of Securities - Warrants."
The Common Stock and the Warrants, which comprise the Units offered hereby,
are detachable and separately transferable immediately upon issuance. Purchasers
may buy Warrants in the aftermarket or may move to jurisdictions in which the
shares of the Common Stock underlying the Warrants are not registered or
15
<PAGE>
qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue Common Stock to those persons desiring to
exercise their Warrants unless and until such shares could be qualified for sale
in jurisdictions in which the purchasers reside, or an exemption from
qualification exists in such jurisdiction. In this event, Warrantholders would
have no choice but to attempt to sell the Warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised. See "Description of
Securities - Warrants."
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 could in the future include the securities of the Company if its
securities are not listed on the NASDAQ SmallCap Market, if the Offering is not
completed or if its Common Stock trades at less than $5.00 per share. In such
event, broker-dealers dealing in the Company's securities will be subject to
specific disclosure rules for transactions involving penny stocks such as the
Company's 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-dealers might discourage them from affecting transactions in
the Company's securities, which would reduce the liquidity of the Company's
securities making it more difficult for stockholders to sell the securities
should they desire to do so. See "Price Range of Common Stock."
Maintenance Criteria for the NASDAQ SmallCap Market Securities. The Company
has applied to have the Common Stock and Warrants listed on the NASDAQ SmallCap
Market. The NASD, which administers the NASDAQ SmallCap Market, sets the
criteria for continued eligibility on the NASDAQ SmallCap Market. In order to
continue to be included on the NASDAQ SmallCap Market, a company must maintain
$2 million in net tangible assets, a $1 million market value of its public
float, at least 300 holders of its Common Stock and a minimum bid price of $1
per share. The Company's failure to meet maintenance criteria imposed by the
NASDAQ SmallCap Market resulted in the discontinuance of the inclusion of the
Company's securities in the NASDAQ SmallCap Market in the past. Any future
failure to meet maintenance criteria may result in such a discontinuance in the
future. In such event, trading, if any, in the securities may then continue to
be conducted in the over-the-counter market on the Bulletin Board.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to give effect to the sale of the 1,050,000
Units offered hereby and application of the estimated net proceeds without
giving effect to the exercise of the Warrants, the Overallotment Option, the
Underwriter's Warrants, or other outstanding warrants or options. See "Use of
Proceeds" and "Description of Securities."
December 31,
1997 As Adjusted
----------- -----------
Short term debt $ 811,926 $ 61,926
----------- -----------
Long term debt $ 1,788,889 1,788,889
----------- -----------
Stockholders' equity:
Preferred Stock, 5,000,000 no par value
shares authorized, none
issued and outstanding -- --
Common Stock, 10,000,000 no par value
shares authorized, 665,333 shares
issued and outstanding, 1,715,333 as
adjusted 5,590,455 10,643,080
Accumulated deficit (5,066,905) (5,066,905)
----------- -----------
Total stockholders' equity 523,550 5,576,175
----------- -----------
Total capitalization $ 3,124,365 $ 7,426,990
=========== ===========
17
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock traded on the NASDAQ SmallCap Market under the
symbol "PSCO" from February 9, 1995, until July 10, 1996, when it was delisted
from the NASDAQ SmallCap Market and commenced trading on the Bulletin Board. The
Company currently trades on the 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 Bulletin Board but does not include retail markup, markdown or
commissions.
Price
----------------
By Quarter Ended: High Low
- ----------------- ----- -----
June 30, 1998 (through May 4, 1998) ......................... $5.75 $5.50
March 31, 1998 .............................................. 5.75 5.25
December 31, 1997 ........................................... 6.50 5.00
September 30, 1997........................................... 6.30 5.25
June 30, 1997................................................ 5.50 3.15
March 31, 1997 .............................................. 4.65 3.15
December 31, 1996............................................ 11.25 3.15
September 30, 1996........................................... 15.00 8.40
June 30, 1996................................................ 26.25 8.40
March 31, 1996............................................... 31.95 14.10
December 31, 1995............................................ 37.50 26.25
September 30, 1995........................................... 60.00 15.00
June 30, 1995................................................ 73.20 50.10
March 31, 1995............................................... 75.00 63.75
As of May 4, 1998, the Company had approximately 365 record and beneficial
stockholders.
USE OF PROCEEDS
The net proceeds of the Offering, estimated to be $5,052,625, will be
applied as follows over the next 12 months:
Percent of
Purpose Amount Net Proceeds
- ------- ------ ------------
Repayment of Bridge Loan (1) ..................... $ 825,000 16.3
Acquisition of Internet Access Providers (2) ..... 2,000,000 39.6
Marketing Expenses ............................... 600,000 11.9
Working Capital (3) .............................. 1,627,625 32.2
---------- ----
Totals ........................................... $5,052,625 100.0%
(1) Includes principal and interest on the Bridge Loan debt which was incurred
by the Company for working capital, bears interest at 12% per annum and is
due the earlier of the closing of the Offering or September 15, 1998.
(2) See "Business - Acquisiton Strategy."
(3) Any funds received by the Company upon exercise of the Overallotment Option
or the Warrants will be added to working capital.
The Company believes that the net proceeds of the Offering together with
its projected cash flow from operations, will be sufficient to finance its
working capital and other requirements for a period of approximately 12 months
from the date of this Prospectus. Pending application, the net proceeds from the
Offering will be invested in interest-bearing government securities. The
management of the Company will have broad discretion as to the application of
the proceeds of the Offering, including using a portion of the proceeds to make
acquisitions as described herein.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December
31, 1997 and 1996 is derived from the Company's financial statements which have
been audited by Angell & Deering. The selected financial data is qualified in
its entirety by, and should be read in conjunction with, the financial
statements and the notes thereto included elsewhere herein. See "Financial
Statements."
Year Ended December 31,
--------------------------------
1997 1996
----------- -----------
Income Statement Data:
Revenues $ 749,796 $ 697,581
(Loss) from continuing
operations (1,470,550) (672,791)
Net (loss) (1,470,550) (1,409,800)
Net (loss) per share (2.49) (7.74)
Weighted average number
of shares outstanding 589,702 182,037
December 31,
1997 As Adjusted (1)
----------- ---------------
Balance Sheet Data: (Unaudited)
Working capital (deficit) $ (795,657) 4,355,491
Total assets 3,295,734 7,598,359
Long-term debt 1,788,889 1,788,889
Total liabilities 2,772,184 2,022,184
Stockholders' equity 523,550 5,576,175
- ---------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to exercise of the
Warrants, the Underwriter's Warrants or other outstanding warrants or stock
options. See "Use of Proceeds" and "Description of Securities."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
The Company provides Internet access and related services to individuals,
public agencies and businesses in six small Central California Cities. As of
December 31, 1997, the Company had 2800 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 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 are unable 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 has addressed
these kinds of financial and administrative burdens by (i) expanding its
operations throughout Central California, (ii) developing diversified services
similar to its larger competitors, such as hourly-based access services, special
access packages for business and high speed access, and (iii) investing in
automated billing and administrative systems. The Company believes these
resources will not only allow it to compete effectively with larger access firms
entering the Company's markets, but will also facilitate the Company's efforts
to attract small Internet providers. The Company's long-term plan is to increase
revenues through acquisitions in such markets together with the acquisition of
small companies which provide related Internet products and services. The
Company is not currently negotiating to acquire, nor has it entered into any
agreement to acquire, any other companies.
Results of Operations
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
Net Sales. For calendar 1997, Internet services revenues were $749,796
versus $697,581 in calendar 1996, an increase of 7.5%. The increase in revenue
is primarily due to an increase in the subscriber base. Management believes
revenues will continue to increase as the Company implements marketing programs
focusing on increasing name brand recognition and differentiation of service
offerings (i.e., Internet access, web site development and electronic commerce).
Operating Expenses. 1997 operating expenses totaled $1,818,698 versus
$1,121,773 in 1996. This increase of $696,925 was primarily attributed to costs
associated with the Company's May 1997 Registration Statement covering the May
1997 Securities including $102,971 of legal and accounting fees, increased rent
expense, higher salary expense, and increased bad debt expense. Bad debt expense
was approximately $132,000 and is comprised of write-offs of accounts receivable
of approximately $25,000, establishment of a reserve for uncollectible accounts
receivable of $7,500 and for the uncollectability of a note receivable of
$100,000. Management has implemented several cost reduction or containment steps
but believes that operating expenses will increase as revenues increase. The
Company will also seek to reduce operating expenses by renegotiating or
canceling its Shaw Avenue Capital lease and its Visalia, California lease.
20
<PAGE>
Operating Loss. The Company's 1997 operating loss totaled $1,068,902 versus
$424,192 in 1996. This increase in operating loss of $644,710 is attributed to a
significant rise in 1997 operating expenses coupled with less than anticipated
Internet service revenue growth. Management believes that operating results will
improve as revenues increase.
Interest Expense (Net). Net interest expense for 1997 totaled $546,607
versus $268,721 in 1996. The increase of $277,886 is attributable to obtaining
bridge loan financing in the amount of $750,000. This net interest expense
includes the amortization of debt issuance costs of $320,167 in connection with
the issuance of 150,000 shares of Common Stock in the Bridge Loan and
commissions of $97,500 and Bridge Loan interest expense of $45,049. The interest
expense was somewhat offset by the interest earned on cash and short term
investments of $77,399.
Other Income. 1997 net other income increased to $218,959 from $146,122 in
1996. This increase of $72,837 is a result of the rental income generated by the
Company's Shaw Avenue office building and miscellaneous sales. Net other income
for 1997 is comprised entirely of rental income on the sublease of the Company's
office building. Rental income recognized from SSC totals $144,000, all of which
was collected in 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. For fiscal 1996, Internet services revenues were $697,581 versus
$100,901 in fiscal 1995, which represents a 591% increase in revenue. The
increases are attributed to increases in the number of Internet users worldwide
and the Company's increased market penetration in the Central California area.
Management believes that the Company's revenues will continue to increase as it
increases the number of points of presence ("POPS") through which it markets its
Internet services. The number of POPS to be developed in any given geographic
area depends upon the Company's estimate of "demand" in such geographic area. In
turn, demand is based upon the population and rate of population growth, the
number of existing access providers, the number of access subscribers and the
growth rate of such access subscribers in the particular area.
Operating Expenses. Operating expenses were $1,121,773 in 1996 versus
$1,079,503 in 1995. The increased operating expense is the result of increased
depreciation expense, additional personnel expenses and legal and accounting
expenses related to the Company's restructuring and the divestiture of the
Classic Line. Management believes that the operating expenses will remain at the
same level or decrease due to reduced personnel and facilities expenses as a
result of the Classic Line sale. The decreases may be somewhat offset by the
increases in operating expenses as the Company's Internet business grows.
21
<PAGE>
Operating Loss. For fiscal 1996, the operating loss was $424,192 compared
to an operating loss of $978,602 in 1995 which represents a 56% decrease. The
decrease in the operating loss in 1996 is attributed to the significant
increases in Internet services revenues by $596,680. Management believes that
operating results will improve as revenues increase and operating expenses
decrease.
Interest Expenses. Net interest expense for 1996 was $268,721 compared to
$109,301 in 1995. The increase in interest expense is primarily attributed to
additional interest expense related to the building which the Company acquired
under a 20-year capital lease. The net interest expense increased as a result of
a decrease in interest income in 1996.
Financing Costs. Financing costs were $126,000 in 1996, which represented
commissions and expenses related to the issuance of 26,667 shares of the
Company's Common Stock to investors. The Common Stock issued was valued at $3.75
per share and resulted in a financing expense of $100,000 to the Company.
Liquidity and Capital Resources
As shown in the Financial Statements, the Company incurred a net loss of
$1,470,550 during the year ended December 31, 1997, and, as of that date had a
working capital deficiency of $795,657. As discussed in Note 1 to the Financial
Statements, the Company's significant operating losses and working capital
deficiency raise substantial doubt about its ability to continue as a going
concern. Management's plans to overcome these difficulties involve consolidating
its operations to reduce general and administrative expenses, reducing operating
expenses and using proceeds of the Offering to acquire other Internet access
providers and small computer oriented companies. These acquisitions are expected
(although there can be no such assurance) to increase revenues without
significantly increasing general and administrative expenses, thereby generating
positive cash flows and earnings. The Financial Statements do not include any
adjustments that might result from the outcome of the uncertainty described
herein.
For the year ended December 31, 1997, the Company used cash of $995,736 for
operating activities. The Company had a working capital deficiency of $795,657
at December 31, 1997 which is primarily attributed to the short term liability
treatment of the Bridge Loan. The Company intends to reduce the working capital
deficit by (i) increasing sales, (ii) reducing certain low margin operations and
(iii) obtaining long-term financing. There can be no assurance that the Company
will be successful in these actions and if unsuccessful, the Company may be
required to substantially reduce its operations.
Capital expenditures relating primarily to the purchase of computer
equipment, furniture and fixtures, and other assets amounted to $77,552 and
$38,421 for the years ended December 31, 1997 and 1996, respectively. In
addition, the Company acquired through lease $69,959 of computer equipment for
its Internet operations during the year ended December 31, 1997.
Between June and September 1997, the Company received $750,000 from
proceeds of the Bridge Loan, which was used for working capital, marketing
expenses and the purchase of capital equipment. In connection with the Bridge
Loan, the Company agreed to issue 150,000 restricted shares of its Common Stock,
subject to certain piggy-back and demand registration rights at the Company's
expense. The fair market value of the Common Stock ($750,000) issued and
commission paid on the Bridge Loan ($97,500) were capitalized as debt issuance
costs and are being amortized over the 15 month loan as interest expense.
In June 1996 the Company's Common Stock was delisted from the NASDAQ
SmallCap Market as a result of the Company's shareholders' equity falling below
the NASDAQ SmallCap Market maintenance requirements.
22
<PAGE>
BUSINESS
Introduction
The Company provides Internet access and related services to individuals,
public agencies and businesses in six small Central California cities. As of
December 31, 1997, the Company had 2,700 subscribers for whom it provided
Internet access up from 250 subscribers in July 1995. The Company intends to
acquire other small Internet providers in markets with populations of less than
500,000 that are located 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 are unable 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 has addressed these kinds of financial and administrative
burdens by (i) expanding its operations throughout Central California, (ii)
developing diversified services similar to its larger competitors, such as
hourly-based access services, special access to packages for business and high
speed access, and (iii) investing in automated billing and administrative
systems. The Company believes these resources will not only allow it to compete
effectively with larger access firms entering the Company's markets, but also
will facilitate the Company's efforts to attract small Internet providers. The
Company's long-term plan is to target a select number of such markets and
increase revenues through acquisition in these markets. The Company is not
currently negotiating to acquire, nor has it entered into any agreement to
acquire, any other companies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The Company's strategy is to provide low cost direct Internet access and
other Internet related products and services to subscribers or customers in
target markets. The Company will seek to effectuate this strategy by acquiring
small Internet providers, by expanding marketing operations in its existing
markets, by offering Internet related products and services and by acquiring
other computer oriented companies. The Company will also seek to generate
additional revenues by (i) increasing monthly Internet access fees while
offering additional Internet products and services, (ii) offering monthly
community access services, (iii) providing Internet consulting services, and
(iv) generating marketing service fees from 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.
23
<PAGE>
Initially, use of the Internet was limited to governmental, educational and
commercial organizations with a working knowledge of certain computer operating
systems 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
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 to access information (to "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. However, 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
24
<PAGE>
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.
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.
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.
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.
Strategy
The Company's strategy is to provide low cost direct Internet access and
other Internet related products and services to subscribers or customers in
target markets. The Company will seek to effectuate this strategy by acquiring
small Internet providers, by expanding marketing operations in its existing
markets, by offering Internet related products and services and by acquiring
other computer oriented companies. The Company will also seek to generate
additional revenues by (i) increasing monthly Internet access fees while
offering additional Internet products and services, (ii) offering monthly
community access services, (iii) providing Internet consulting services, and
(iv) generating marketing service fees from businesses seeking a Web site on the
Internet. The Company believes that it can increase the profitability of its
monthly access fees by developing economies of scale as a result of increasing
total access subscribers and earning additional revenues from such subscribers
by providing additional access services.
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 to engage in 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
25
<PAGE>
Company plans to add additional high-speed dedicated data lines, enhance
system-wide access software in order to offer additional Internet products and
services, and expand the number of 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 to more
geographic areas which in turn may promote 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.
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 1998.
Providing Internet Consulting Services. The Company provides its customers
with a number of Internet services such as consulting services for network
setup, Internet application implementation, Intranet design, and Web site
implementation.
Generating Marketing Service Fees. The Company designs and develops 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 to assure subscriber access.
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 with a population
under 500,000; (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 computer oriented companies. The Company is not negotiating to
acquire, nor has it entered into any agreement to acquire, any such companies.
Marketing
The Company primarily markets its products and services 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 through advertisements in
26
<PAGE>
computer, professional and business publications. The Company also attracts
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.
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, MCI, Sprint and some of 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 Internet access
consolidators such as Verio, Inc. and from on-line service firms such as America
Online (AOL), CompuServe, 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 service businesses will further consolidate in the future, which
could result in increased price and other competition in the industry and
consequently adversely impact the Company. In the last year, a number of on-line
services have 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
27
<PAGE>
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 December 31, 1997, the Company employed 12 full-time and two
part-time individuals of which three employees are engaged in managerial,
accounting and administrative positions, two are engaged in sales and nine are
engaged in operations and customer support. 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.
Properties
In September 1994, the Company acquired, under a 20-year non-cancelable
capital lease, an office building, including land and improvements located at
2580 West Shaw, Fresno, California 93711. The lease requires initial annual
minimum 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
to purchase the building and land for $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 accruing at 9% per annum. The
Company does not occupy any space in the building, although it leased a portion
of it to SSC and the SSC Principals based upon monthly payments to the Company
of $12,000 through February 1998. See "Certain Transactions". In May 1997, as a
result of the Company's default on the lease, the Company agreed to return
possession of the office building to the landlord. Accordingly, the landlord
collects rents directly from the tenants of the office building and the Company
is responsible for the difference between such aggregate rents and the Company's
lease payment to the landlord. As of the date hereof, the landlord is collecting
monthly rents aggregating approximately $9,200 and the Company's monthly
leasehold obligation is approximately $15,600 leaving a monthly balance due from
the Company to the landlord of approximately $6,400.
The Company leases 4,000 square feet of space for its offices and operating
facilities at 2300 Tulare Street, Suite 210, Fresno, California 93721. The lease
term is five years, ending May 2002 and requires minimum annual payments of
$40,250 increasing every year to a maximum of $55,375 in 2002. The Company also
leases approximately 250 square feet for its corporate office space in Santa
Monica, California on a month-to-month lease for $600 per month.
28
<PAGE>
Litigation
As a result of the failure of SSC and the SSC Principals to pay certain
trade account payables and certain office rent under a sublease from the
Company, the Company has been threatened with litigation from such trade
creditors (currently aggregating approximately $25,000) and has been required to
return possession of the SSC subleased office space to the Company's landlord.
The Company believes that the total contingent liability to trade account
creditors arising from defaults by SSC and the SSC Principals does not exceed
$100,000. Additionally, the total amount due from SSC and the SSC Principals
under the Company's office sublease aggregates approximately $100,000.
On May 14, 1997, the SSC Principals brought an administrative labor claim
against the Company before the California office of the State Labor Commission
seeking unpaid wages in the amount of approximately $160,000. The case was
dismissed by the Labor Commission in December 1997 but may be refiled as a civil
action if the claimants elect to do so. As of this date the case has not been
refiled. This Company believes the claim to be without merit.
The Company is a defendant in a civil action entitled "P/K Associates, Inc.
et al. v. Fresno Business Journal, Inc., et al" civil action number 97-5546
filed in the United State District Court for the Eastern District of California
on May 5, 1997. The suit alleges certain copyright violations against the Fresno
Business Journal and the Company. The Company settled the case in December 1997
for a payment of $5,000 to the plaintiffs.
On February 21, 1997, three of the Company's former employees brought a
civil action against the Company in the California Municipal Court entitled
"David J. Dague, et al. v. ProtoSource Corporation" for back wages aggregating
approximately $45,000. In March 1998 the Company paid $23,000 to settle the
matter.
Payment of any judgments or settlements in connection with these litigation
matters, together with the costs of defending such matters, could adversely
affect the Company's results of operations and financial condition.
29
<PAGE>
MANAGEMENT
Officers and Directors
The name, age and position of each of the Company's executive officers and
directors are set forth below:
Officer/Director
Name Age Position Since
---- --- -------- -----
Raymond J. Meyers (1) 41 Chief Executive Officer 1996
Chief Financial Officer
and Director
David A. Appell (1) 35 Director 1997
Dickon Pownall-Gray (2) 43 Director 1998
Andrew N. Stathopoulos (1) 48 Director 1998
- ----------
(1) Member of the Audit Committee.
(2) Mr. Pownall-Gray will become a director of the Company at the closing of
the Offering.
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 Raymond J. Meyers, Andrew Chu, Steven A. Kriegsman and Howard P. Silverman
were elected as officers and directors. In May 1997 Mr. Kriegsman resigned and
in August 1997 Messrs. Chu and Silverman resigned. The Company established an
audit committee in January 1998 composed of all three members of its Board of
Directors.
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 December
1996. 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.
David A. Appell became a Director of the Company in September 1997. Since
January 1997, he has served as an investment banker for the Underwriter, and
since February 1992, he has been engaged in the private practice of law. Mr.
Appell also serves as a director of Allied Capital Services, LLC, a consulting
firm which provides financing and real estate development services. From April
1996 to January 1997 he served as Managing Director of Investment Banking for
R.D. White & Co., Inc. Mr. Appell is the General Partner of HPH Capital Growth
30
<PAGE>
L.P., a New York Limited Partnership created to raise and manage funds for
equity investments. From December 1993 through April 1996 he served as house
counsel for Comart, Inc., an introducing broker registered with the commodities
futures trading commission. Mr. Appell received a Judicial Doctorate degree from
Cardozo Law School and holds a BBA in Accounting from Pace University. He is a
Member of the New York State Bar and New Jersey State Bar. He is a registered
options principal, general securities representative, uniform securities agent
and general securities principal. He is also registered as a commodity trading
advisor and commodity pool operator.
Dickon Pownall-Gray will become a director of the Company at the closing of
the Offering. Since 1994 he has acted as an independent consultant and an
investment manager for his own account. Since 1995 he has also been a
stockholder and a director of Infosis, Inc. From 1992 to 1993 he served as
Senior Vice President in charge of acquisitions for Preferred Health Care, Inc.
From 1988 to 1991 he was Chief Executive Officer and a founder of CareSys, Inc.,
a medical monitoring and database cost containment company. In 1991 he sold
CareSys, Inc. to Preferred Health Care, Inc. From 1985 to 1987 he served as
Chief Executive Officer of Health Care Systems. From 1982 to 1984 he was a
senior consultant for Bain & Co. in its London office. Mr. Pownall-Gray holds an
MBA from the London Business School, an MA in Sports Science from the University
of California Berkeley, a BA (Honors History and Sports Science) degree from the
University of Birmingham.
Andrew N. Stathopoulos has over 25 years experience in finance, operations,
marketing, mergers and acquisitions, engineering, manufacturing, and consulting.
In March 1998 he joined the Bank of New York as a Vice President to launch a
software and hardware vendor management program. He is also currently involved
in the Bank's efforts to meet Year 2000 compliance. From 1996 to 1997, he was
Vice President of Finance for New Alliance Corp., an emerging markets investment
bank specializing in Eastern Europe. He was responsible for financial reporting;
internal audit and controls; mid-office and back-office operations; information
systems; and management reporting. From 1994 to 1996, he was Vice President of
Business Development for Nautical Technology Corp., an independent software
developer for the maritime industry. He was responsible for developing and
implementing a new marketing and sales program, seeking strategic partners and
providing general business advice. Also, from 1994 to 1996, he was Vice
President of Business Development for Interbank of New York, a Greek commercial
bank where he was responsible for identifying and marketing new products and
pursuing new business opportunities. From 1992 to 1994, he was the Vice
President of Finance and Administration for Societe Generale Energie, an oil
trading products firm. He was responsible for establishing financial controls,
accounting and reporting procedures; monitoring cash flow and working capital
requirements; managing human resources administration; and dealing with
auditors, insurers and vendors. From 1989 to 1991, he was a principal of Forest
Development, a privately held investment and consulting group. From 1985 to
1989, he was the Director of Business Development and Planning for Empire Blue
Cross and Blue Shield, a leading health insurer. From 1977 to 1985, he was
Director of Assets Management for Ogden Corporation, a diversified conglomerate.
From 1973 to 1977, he held positions in finance, planning and engineering for
International Paper, a leading manufacturer of paper and wood products. Mr.
Stathopoulos holds a BS degree in Industrial Engineering and an MBA degree in
Finance and International Business, both from Columbia University.
Executive Compensation
None of the Company's executive officers or directors currently receive
compensation in excess of $100,000 per year except Mr. Meyers, the Company's
Chief Executive Officer, who receives a salary of $130,000 per year pursuant to
an Employment Agreement which expires in January 1999. The Employment Agreement
also provides for cash bonuses ranging from $25,000 (if the Company earns at
least $500,000 before taxes in any year) to $75,000 (if the Company earns at
least $1,250,000 before taxes in any year). In connection with his employment,
Mr. Meyers was also granted options to purchase 36,667 shares of Common Stock
vesting over a three year period at $3.75 per share exercisable at any time
until October 2001. Compensation for all officers and directors as a group for
the calendar year ended December 31, 1997, aggregated $130,000.
31
<PAGE>
<TABLE>
<CAPTION>
The following table discloses certain compensation paid to the Company's
executive officers for the calendar years ended December 31, 1997, 1996, and
1995.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Prin- Other All
cipal Annual Restricted Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts ($) sation($)
- ------------ ---- --------- -------- --------- ----------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Raymond J.
Meyers,
Chief Execu-
tive Officer 1997 $130,008 $ 0 0 0 36,667 0 0
James C.
Robinson
Chief Execu- 1996 61,925 0 0 0 0 0 0
tive Officer 1995 61,425 5,941 0 0 0 0 0
Option Grants in Last Year and Stock Option Grant
The following table provides information on option grants during the year
ended December 31, 1997 to the named executive officer:
Individual Grants
%of Total Options
Granted to
Options Employees
Name Granted In Year Exercise Price Expiration Date
- ---- ------- ------- -------------- ---------------
Raymond J. Meyers 36,667 100.0% $3.75 October 2001
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.
The Plan is administered by the Board of Directors and terminates in
November 2004. As of December 31, 1997, 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
32
</TABLE>
<PAGE>
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 for reissuance. 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.
33
<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
Warrants, the Overallotment Option, or the Underwriter's 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 warrants and options exercisable within 60 days from the date hereof.
The address of all persons listed below is in care of the Company at 2300 Tulare
Street, Suite 210, Fresno, California 93721.
Percent of Percent of
Amount of Class Prior to Class After
Name Ownership Offering Offering
- --------------- --------- ------------- -----------
Raymond J. Meyers (1) 26,667 3.9% 1.5%
Andrew Chu(2) 38,999 5.5% 2.2%
David A. Appell 0 0% 0%
Dickon Pownall-Gray 0 0% 0%
Andrew N. Stathopoulos 0 0% 0%
Steven A. Kriegsman(3) 117,667 15.0% 6.4%
World Spirit, Inc. 50,000 7.5% 2.9%
All officers and directors as
a group (4 persons)(1) 26,667 3.9% 1.5%
- ----------
(1) Represents stock options to purchase 26,667 shares at $3.75 per share at
any time until October 2001. Mr. Meyers holds an additional 10,000 stock
options which vest in 1999.
(2) Represents common stock purchase warrants to purchase 38,999 shares at
$3.75 per share at any time until October 2001.
(3) Represents common stock purchase warrants to purchase 117,667 shares at
$3.75 per share at any time until October 2001. All common stock purchase
warrants are held by the Kriegsman Group ("KG") of which Mr. Kriegsman is
the President and a principal stockholder. KG originally received 146,666
Warrants, but assigned 38,999 of such Warrants to Mr. Chu. See "Certain
Transactions."
34
<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. All 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 November 1994, the Company issued 857,140 shares of its Convertible
Preferred Stock to five of the Company's then officers and directors, (and
42,860 to another individual not otherwise affiliated with the Company) each
share of which was convertible for no additional consideration into one share of
Common Stock for each fifteen shares of Preferred Stock. All 900,000 shares of
Convertible Preferred Stock were canceled and returned to the Company by the
five holders in connection with the Divestiture Agreement described below.
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 was due in
April 1997 and remains unpaid. The promissory note is secured by 3,333 shares of
the Company's Common Stock owned by Mr. Howard and was transferred to SSC as a
part of the Divestiture Agreement described below.
In October 1996, the Company issued 146,666 common stock purchase warrants
to the Kriegsman Group ("KG") for consulting services. The Company also paid KG
an aggregate of $90,000 for consulting services in connection with the Company's
sale of the Classic Line to a non-affiliated Canadian company. See "Prospectus
Summary - The Company". Steven A. Kriegsman who subsequently became a director
of the Company is the President and controlling stockholder of KG. KG
subsequently assigned 35,666 of such warrants to Andy Chu, the Company's
President and a director. KG also assigned 3,333 of the 10,000 stock options it
received from the SSC Principals to Mr. Chu to provide him with an equity stake
in the Company for a total assignment to Mr. Chu of 38,999 warrants and stock
options. KG believed that the Company's success and therefore the economic
success of its investment in the Company depended in part upon the participation
of Mr. Chu as the Company's then President.
In October 1996, the Company issued 146,667 common stock purchase warrants
to the Underwriter as compensation for it assisting the Company in the private
placement of 400,000 shares of the Company's Common Stock to a group of
investors for $3.75 per share. The Underwriter subsequently assigned 56,667 of
such warrants to Howard P. Silverman, a former director of the Company, for his
assistance to the Underwriter in connection with the private placement. At the
time the subject Warrants were assigned, Mr. Silverman was not a director of the
Company. The Company also paid to the Underwriter 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 June 1997, the Underwriter and Mr.
Silverman returned 106,667 warrants to the Company without consideration.
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 the liabilities of the Classic Line and certain other liabilities,
35
<PAGE>
aggregating approximately $500,000. Under the terms of the asset sales agreement
(the "Divestiture Agreement"), the Company acquired 25% of the outstanding
common stock of SSC for $500,000 in cash (less $200,000 of liabilities which
were paid by the Company and deducted from the $500,000) 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 part
of the Divestiture Agreement, the SSC Principals also (i) canceled 900,000
shares of Convertible Preferred Stock held by them which were previously
exercisable into shares of Common Stock on a fifteen for one basis, (ii) agreed
to refrain from the sale of an aggregate of 30,300 shares of Common Stock owned
by them until October 1999, except with the prior written consent of the
Underwriter, (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, then a director of the Company, an option to purchase up to 10,000
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. The Classic
Line assets were valued as a result of negotiations between the Company and the
SSC Principals.
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 665,333 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
non-assessable.
Warrants
Each Warrant represents the right to purchase one share of Common stock at
an initial exercise price of $5.75 per share (100% of the closing bid price of
the Common Stock on the Bulletin Board one day prior to the date hereof) for a
period of five years from the date hereof. The exercise price and the number of
shares issuable upon exercise of the Warrants will be adjusted upon the
occurrence of certain events, including the issuance of Common Stock as a
dividend on shares of Common Stock, subdivisions, reclassifications or
combinations of the Common Stock or similar events. The 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 Warrants or the
36
<PAGE>
current market price of the Company's securities and do not entitle Warrant
holders to any voting or other rights as a shareholder until such Warrants are
exercised and Common Stock is issued.
Warrants may be redeemed in whole or in part at the option of the Company
after one year from the date hereof, upon 30 days' notice and with the consent
of the Underwriter, at a redemption price equal to $.10 per Warrant if the
closing price of the Company's Common Stock on the NASDAQ SmallCap Market (or
the Bulletin Board) is at least $5.75 per share (150% of the closing price of
the Common Stock on the Bulletin Board one day prior to the date hereof) for 20
consecutive trading days, ending not earlier than 15 days before the Warrants
are called for redemption.
Holders of Warrants may exercise their 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 Warrants until the expiration date of
the Warrants, although there can be no assurance that the Company will be able
to do so.
The shares of Common Stock issuable on exercise of the Warrants will be,
when issued in accordance with the Warrants, duly and validly issued, fully paid
and non-assessable. At all times that the Warrants are outstanding, the Company
will authorize and reserve at least that number of shares of Common Stock equal
to the number of shares of Common Stock issuable upon exercise of all
outstanding Warrants.
For the term of the Warrants, the holders thereof are given the opportunity
to profit from an increase in the per share market price of the Company's Common
Stock, with a resulting dilution in the interest of all other stockholders. So
long as the Warrants are outstanding, the terms on which the Company could
obtain additional capital may be adversely affected. The holders of the Warrants
might be expected to exercise the Warrants at a time when the Company would, in
all likelihood, be able to obtain additional capital by a new offering of
securities on terms more favorable than those provided by the Warrants.
37
<PAGE>
Warrants
In October 1996, the Company issued 146,667 Warrants to the Underwriter,
(of which 56,667 Warrants were assigned to Howard P. Silverman) and 146,667
Warrants to KG. The Underwriter and Howard P. Silverman returned 106,667
Warrants and the remaining 186,667 Warrants, along with the underlying 186,667
shares of Common Stock, were registered for public sale by the Company in May
1997. Each Warrant entitles the holder to purchase one share of Common Stock for
$3.75 per share at any time until October 2001. See "Certain Transactions."
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
canceled 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.
Use of Preferred Stock As Anti-Takeover Device
It is not possible to state the actual effect of any 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
38
<PAGE>
Stock. The Company has no current plans to issue any other Preferred Stock. See
"Risk Factors - Control by Management; Authorization and Issuance of Preferred
Stock; Prevention of Changes in Control."
Common Stock 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. The Company is registering for public sale 1,050,000 Units,
consisting of 1,050,000 shares of Common Stock, 1,050,000 Warrants and 1,050,000
shares of Common Stock underlying the warrants. As of the date hereof, there are
665,333 shares of the Company's Common Stock outstanding, of which (i) 426,667
shares and 186,666 shares underlying 186,666 Common Stock Purchase Warrants were
registered in May 1997, subject to an agreement with the holders not to sell the
186,666 shares underlying the 186,666 Common Stock Purchase Warrants until
September 1999, (ii) 42,666 shares may currently be sold under Rule 144, and
(iii) 150,000 shares may be sold under Rule 144 commencing in July 1998. The
holders of 30,300 shares (of the 42,666 shares) have agreed to refrain from
selling such shares until October 1999, without the prior written consent of the
Underwriter and the holders of the 150,000 shares have agreed not to sell their
shares under any circumstances for a period of one year from the date hereof.
See "Underwriting."
The Company has granted certain demand and piggy-back registration rights
in connection with (i) the Underwriter's Warrants and the component securities,
and (ii) the issuance of 150,000 shares of Common Stock as a part of the Bridge
Loan. See "Underwriting."
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 provide that liability of directors
to the Company for monetary damages is eliminated to the full extent provided by
California law. Under California 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.
39
<PAGE>
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 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.
UNDERWRITING
The underwriters named below acting through Andrew, Alexander, Wise &
Company, Inc. (the "Underwriter") have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company the
number of Units set forth opposite their names below. The Underwriter commenced
business in May 1996 and has not acted as an Underwriter in any prior public
offerings. The Underwriter's principal business function is to act as a retail
brokerage firm purchasing and selling the securities of publicly traded
companies on behalf of its clients. There are no material relationships between
the promoters of the Company and the Underwriter. David A. Appell, a director of
the Company, has provided investment banking consulting services to the
Underwriter since January 1997.
Number
Underwriters Of Units
- ------------ --------
Andrew Alexander Wise & Company, Inc, ............................
Total............................................................. 1,050,000
The Company has been advised by the Underwriter that it proposes to offer
the Units purchased by it directly to the public at the public offering set
forth on the cover page of this Prospectus and to certain dealers at a price
that represents a concession of $.___ per Unit. The Underwriter is committed to
purchase and pay for all of the Units if any Units are taken. After the initial
public offering of the Units, the offering price and the selling terms may be
changed in the sole discretion of the Underwriter. The Underwriter does not
intend to sell any of the Company's securities to accounts for which it
exercises discretionary authority.
The Company has also granted the Underwriter an Overallotment Option,
exercisable within 30 days from the date of this Prospectus, to purchase from
the Company up to 157,500 Units solely to cover overallotments. The Underwriter
is under no obligation to exercise its Overallotment Option or purchase any
Units subject to the Overallotment Option.
The Underwriter will purchase the Units (including Units subject to the
Overallotment Option) from the Company at a price of $5.75 per Unit. In
40
<PAGE>
addition, the Company has agreed to pay the Underwriter a 3% nonaccountable
expense allowance on the aggregate initial public offering price of the Units,
including Units subject to the Overallotment Option.
The Company has agreed to issue the Underwriter's Warrants to the
Underwriter for a consideration of $10. The Underwriter's Warrants are
exercisable at any time in the four-year period commencing one year from the
date of this Prospectus to purchase up to an aggregate of 105,000 Units for
$9.4875 per Unit in cash (165% of the Offering price of the Units)or on a
cashless basis by exchanging the "value" of the existing Underwriter's Warrants
(such "value" based upon the difference between the exercise price and the
market price of the Underwriter's Warrants on the date of exercise). The Units
which may by purchased upon exercise of the Underwriters' Warrants (the
"Underwriters' Units") will be identical to the Units offered to the public,
except that the redeemable common stock purchase warrants included in the
Underwriters' Units will be exercisable to purchase shares of Common Stock at a
purchase price equal to 165% of the initial public offering price for the Units
offered to the public. The Underwriter's Warrants are not transferable for one
year from the date of this Prospectus except (i) to an Underwriter or a partner
or officer of an Underwriter or (ii) by will or operation of law. During the
term of the Underwriter's Warrants, the holder thereof is given the opportunity
to profit from an increase in the per share market price of the Company's
securities. As long as the Underwriter's Warrants are outstanding, the Company
may find it more difficult to raise additional equity capital. At any time at
which the Underwriter's Warrants are likely to be exercised, the Company would
probably be able to obtain additional equity capital on more favorable terms. If
the Company files a registration statement relating to an equity offering under
the provisions of the 1933 Act at any time during the seven-year period
following the date of this Prospectus, the holders of the Underwriter's Warrants
or underlying Units will have the right, subject to certain conditions, to
include in such registration statement, at the Company's expense, all or part of
the underlying Units at the request of the holders. Additionally, the Company
has agreed, for a period of five years commencing on the date of this
Prospectus, on demand of the holders of a majority of the Underwriter's Warrants
or the Units issued or issuable thereunder, to register the Units underlying the
Underwriter's Warrants one time at the Company's expense. The registration of
securities pursuant to the Underwriter's Warrants may result in substantial
expense to the Company at a time when it may not be able to afford such expense
and may impede future financing. The number of Units covered by the
Underwriter's Warrants and the exercise price are subject to adjustment under
certain events to prevent dilution.
In connection with the Offering, the Underwriter and selling group members
(if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
or purchase Common Stock or Warrants for the purpose of stabilizing their market
prices. The Underwriter may also create a short position for the account of the
Underwriter by selling more securities in connection with the Offering than it
is committed to purchase from the Company and in such case may purchase
securities in the open market following completion of the Offering to cover all
or a portion of such short Overallotment Option. Any of the transactions
described in this paragraph may result in the maintenance of the securities at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
41
<PAGE>
In connection with the Offering, the Underwriters may also purchase and
sell the Common Stock and Warrants in the open market. These transactions may
include overallotment and stabilizing transactions as described above, and
purchases to cover syndicate short positions created in connection with the
Offering. Stabilizing transactions consist of certain bids or purchases for the
purposes of preventing or retarding a decline in the market price of the Common
Stock and Warrants; and syndicate short positions involve the sale by the
Underwriters of a greater number of shares of Common Stock or of Warrants than
they are required to purchase from the Company in the Offering. The Underwriter
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock and Warrants sold
in the Offering for their account may be reclaimed by the Underwriter if such
securities are repurchased by the Underwriter in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock and Warrants, which may be higher than the
price that might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the Bulletin Board in the over-the-counter market.
Certain of the Company's shareholders (holding an aggregate of 30,300
shares) have entered into lock-up agreements with the Underwriter pursuant to
which they have agreed not to sell or otherwise dispose of any of their shares
of Common Stock (including shares issuable upon exercise of stock options) for a
period of three years from the date of this Prospectus without the prior written
consent of the Underwriter.
The Company has agreed upon completion of the Offering to retain the
Underwriter as a financial consultant for a period of one year at a monthly fee
of $5,000 (a total of $60,000), payable in full upon the closing of the
Offering. The consulting agreement will not require the Underwriter to devote a
specific amount of time to the performance of its duties thereunder.
The Company has agreed (i) to allow the Underwriter to designate one
director or advisor to the Company's Board of Directors for a period of five
years from the date hereof (ii) not to offer any equity securities or grant
options or warrants to purchase Common Stock without the prior written consent
of the Underwriter for a period of three years from the date hereof, (iii) to
grant the Underwriter a right of first refusal for three years from the date
hereof with respect to any private placement or public offering of the Company's
securities, or its subsidiaries and for sales by 5% or greater stockholders of
the Company's securities under Rule 144 (subject to the Company's right to
terminate the right of first refusal for a $10,000 payment to the Underwriter).
The Company has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act and to contribute in
certain events to liabilities incurred by the Underwriter in connection with the
sale of the Units. In the opinion of the Commission, indemnification against
liabilities under the Securities Act is against public policy and is therefore
unenforceable.
42
<PAGE>
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. Snow
Becker Krauss P.C., New York, New York, has acted as counsel for the Underwriter
in connection with the Offering.
EXPERTS
The financial statements of the Company for the years ended December 31,
1996 and 1997, appearing in the Registration Statement have been audited by
Angell & Deering, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
43
<PAGE>
PROTOSOURCE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditors' Report F-2
Balance Sheet as of December 31, 1997 F-3
Statements of Operations for the years ended
December 31, 1997 and 1996 F-5
Statements of Changes in Shareholders' Equity for the
years ended December 31, 1997 and 1996 F-6
Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-7
Notes To Financial Statements F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ProtoSource Corporation
We have audited the accompanying balance sheet of ProtoSource Corporation as of
December 31, 1997 and the related statements of operations, changes in
shareholders' equity and cash flows for the years ended December 31, 1997 and
1996. 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, 1997 and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1996 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 $1,470,550 during the year ended December 31,
1997, and, as of that date had a working capital deficiency of $795,657. As
discussed in Note 1 to the financial statements, the Company's significant
operating losses and working capital deficiency raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also discussed in Note 1. 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 13, 1998, except for
Note 6 as to which the date
is April 7, 1998
F-2
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
------
Current Assets:
Cash and cash equivalents $ 98,148
Accounts receivable - trade net of allowance
for doubtful accounts of $7,500 22,490
Current portion of note receivable 67,000
-----------
Total Current Assets 187,638
-----------
Property and Equipment, at cost:
Land 411,176
Building and improvements 1,381,816
Equipment 821,876
Furniture 110,387
-----------
2,725,255
Less accumulated depreciation and amortization (701,455)
-----------
Net Property and Equipment 2,023,800
-----------
Other Assets:
Goodwill, net of accumulated amortization
of $3,423 17,822
Debt issuance costs, net of accumulated amortization
of $320,167 527,333
Note receivable, net of allowance for uncollectibility
of $100,000 and net of current portion above 396,271
Deposits and other assets 44,347
Deferred offering costs 98,523
-----------
Total Other Assets 1,084,296
-----------
Total Assets $ 3,295,734
===========
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEET
DECEMBER 31, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 96,107
Accrued expenses:
Payroll taxes, wages and other 30,213
Interest 45,049
Current portion of bridge loans 750,000
Current portion of long-term debt 61,926
-----------
Total Current Liabilities 983,295
-----------
Long-Term Debt, net of current portion above:
Individuals and other 750,000
Obligations under capital leases 1,850,815
Less current portion above (811,926)
-----------
Total Long-Term Debt 1,788,889
-----------
Commitments and contingencies --
Shareholders' Equity:
Preferred stock, no par value; 5,000,000 shares
authorized, none issued and outstanding --
Common stock, no par value; 10,000,000 shares
authorized, 665,333 shares issued and outstanding 5,590,455
Accumulated deficit (5,066,905)
-----------
Total Shareholders' Equity 523,550
-----------
Total Liabilities and Shareholders' Equity $ 3,295,734
===========
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
PROTOSOURCE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
Net Revenues:
Internet service fees $ 749,796 $ 697,581
----------- -----------
Total Revenues 749,796 697,581
Operating expenses 1,818,698 1,121,773
----------- -----------
Operating Loss (1,068,902) (424,192)
----------- -----------
Other Income (Expense):
Interest income 77,399 3,507
Interest expense (624,006) (398,228)
Rent and other income 218,959 146,122
Loss on disposal of assets (2,018) --
Other, net 368 --
----------- -----------
Total Other Income (Expense) (329,298) (248,599)
----------- -----------
Loss From Continuing Operations Before
Provision For Income Taxes (1,398,200) (672,791)
Provision for income taxes 72,350 --
----------- -----------
Loss From Continuing Operations (1,470,550) (672,791)
----------- -----------
Discontinued Operations:
Loss from discontinued operations (Note 2) -- (532,663)
Loss on disposal (Note 2) -- (204,346)
----------- -----------
Loss From Discontinued Operations -- (737,009)
----------- -----------
Net Loss $(1,470,550) $(1,409,800)
=========== ===========
Net Loss Per Share of Common Stock:
Basic:
Loss from continuing operations $ (2.49) $ (3.69)
Discontinued operations -- (4.05)
----------- -----------
Net Loss $ (2.49) $ (7.74)
=========== ===========
Diluted:
Loss from continuing operations $ (2.49) $ (3.69)
Discontinued operations -- (4.05)
----------- -----------
Net Loss $ (2.49) $ (7.74)
=========== ===========
Weighted Average Number of
Common Shares Outstanding:
Basic 589,702 182,037
Diluted 589,702 182,037
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Series A
Preferred Stock Common Stock
------------------- --------------------- Accumulated
Shares Amount Shares Amount Deficit
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 900,000 $-- 88,666 $ 3,309,494 $(2,186,555)
Contribution of capital by officers
through forgiveness of previously
accrued salaries -- -- -- 154,792 --
Issuance of common stock in
connection with bridge loans -- -- 26,667 100,000 --
Issuance of common stock in private
offering (net of offering costs of
$224,801) -- -- 400,000 1,275,199 --
Cancellation of Preferred Stock in
connection with divestiture of assets (900,000) -- -- -- --
Net loss -- -- -- -- (1,409,800)
----------- ----- ----------- ----------- -----------
Balance at December 31, 1996 -- -- 515,333 4,839,485 (3,596,355)
Issuance of common stock -- -- -- 970 --
Issuance of common stock in connection
with bridge loans -- -- 150,000 750,000 --
Net loss -- -- -- -- (1,470,550)
----------- ----- ----------- ----------- -----------
Balance at December 31, 1997 -- $-- 665,333 $ 5,590,455 $(5,066,905)
=========== ===== =========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
F-6
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
Cash Flows From Operating Activities:
Net loss $(1,470,550) $(1,409,800)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 544,670 367,049
Provision for bad debts 107,500 --
Deferred income taxes 71,550 --
Assets and liabilities disposed of in
divestiture and note receivable received -- 17,176
(Gain) loss on disposal of equipment 2,018 (4,607)
Issuance of common stock for costs of financing -- 100,000
Changes in operating assets and liabilities:
Accounts receivable 20,563 163,556
Inventories 8,980 7,079
Deposits and other assets 12,586 15,441
Accounts payable (99,587) 32,536
Accrued liabilities (191,966) 344,284
Customer deposits (1,500) (4,000)
Unearned customer support revenue -- (34,542)
----------- -----------
Net Cash (Used) By Operating Activities (995,736) (405,828)
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (77,552) (38,421)
Proceeds from disposal of equipment -- 10,536
Software development costs capitalized -- (442,100)
Receipt of principal on notes receivable 207,579 --
----------- -----------
Net Cash Provided (Used) By Investing Activities 130,027 (469,985)
----------- -----------
Cash Flows From Financing Activities:
Payments on notes payable (73,447) (55,675)
Proceeds from borrowing 750,000 200,000
Issuance of common stock 970 1,300,000
Offering costs incurred (98,523) (224,801)
Debt issuance costs incurred (97,500) --
----------- -----------
Net Cash Provided By Financing Activities 481,500 1,219,524
----------- -----------
The accompanying notes are an integral
part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
<S> <C> <C>
Net Increase (Decrease) in Cash and Cash Equivalents $(384,209) $ 343,711
Cash and Cash Equivalents at Beginning of Year 482,357 138,646
--------- ---------
Cash and Cash Equivalents at End of Year $ 98,148 $ 482,357
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 258,790 $ 272,228
Income taxes 800 --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Acquisition of equipment under capital leases $ 69,959 $ 90,349
Conversion of account payable to a note payable -- 32,000
Capital contribution by officers through forgiveness
of previously accrued salaries -- 154,792
Conversion of note payable into common stock -- 200,000
Issuance of common stock in connection with financing 750,000 --
The accompanying notes are an integral
part of these financial statements.
F-8
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
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 an
Internet service 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 extreme cash liquidity
shortfalls from operations.
The Company's continued existence is dependent upon its ability to
achieve its operating plan. Management's plan consist of the
following:
1. In 1996, the Company restructured its operations and divested
three divisions (Note 2). The Company currently operates solely
as an Internet service provider. The Company has reduced its
general and administrative expenses and continues to consolidate
its operations and reduce its operating costs.
2. Obtaining additional equity through the sale of securities in a
secondary stock offering (the "Offering") (Note 6). The Company
has a letter of intent with an Underwriter for the offering on a
firm commitment basis. The Company has filed a Registration
Statement with the Securities and Exchange Commission for the
Offering. The Offering is expected to raise gross proceeds of
approximately $6,000,000, which would result in net proceeds to
the Company of approximately $5,100,000. There can be no
assurance that the Offering will be successfully completed.
3. Sale of certain assets of the Company.
If management cannot achieve its operating plan because of sales
shortfalls, lack of ability to complete the Offering, or other
unfavorable events, the Company may find it necessary to dispose of
assets, or undertake other actions as may be appropriate.
Stock Split
-----------
On February 28, 1997, the Company's shareholders adopted a resolution
approving a one for ten reverse stock split of the issued and
outstanding common shares, effective April 2, 1997.
On April 25, 1997, the Company's shareholders adopted a resolution
approving a three for two reverse stock split of the issued and
outstanding common shares, effective April 25, 1997. All share
information and per share data have been retroactively restated for
all periods presented to reflect the reverse stock splits.
F-9
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Revenue Recognition
-------------------
Revenue from the Internet operations is recognized over the period the
services are provided. Deferred revenue consists primarily of monthly
subscription fees billed in advance.
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
at the date of purchase to be cash equivalents.
Inventories
-----------
Inventories, consisting of computer supplies held for resale, are
stated at the lower of cost (determined on the first in, first out
method) or market.
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 $223,086 and $233,201 for the years ended December 31, 1997 and
1996, respectively.
Amortization
------------
Goodwill is being amortized using the straight-line method over an
estimated useful life of 15 years.
Debt issuance costs are being amortized using the straight-line method
over the fifteen month term of the loans.
Investment
----------
The Company has a 25% ownership interest in SSC Technologies, Inc.
("SSC"). The Company received the equity interest in connection with
the divestiture of three operating divisions of the Company (Note 2).
The cost of its investment is $-0-, and since the Company does not
have the ability to exercise influence over operating and financial
policies of SSC, the Company is accounting for its investment in SSC
utilizing the cost method of accounting. Under the cost method, net
accumulated earnings of an investee subsequent to the date of
investment are recognized by the investor only to the extent
distributed by the investee as dividends. Dividends received in excess
of earnings subsequent to the date of investment are considered a
return of investment and are recorded as reductions of the cost of the
investment.
Deferred Offering Costs
-----------------------
In connection with the Company's proposed public offering (Note 6),
costs incurred to complete the offering have been deferred and will be
offset against the proceeds of the offering if completed, or charged
to expense if the offering is not completed.
Stock-Based Compensation
------------------------
During the year ended December 31, 1996, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation". The Company will continue to measure
compensation expense for its stock-based employee compensation plans
F-10
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Stock-Based Compensation (Continued)
------------------------------------
using the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". See Note 8 for pro forma
disclosures of net income and earnings per share as if the fair
value-based method prescribed by SFAS No. 123 had been applied in
measuring compensation expense.
Long-Lived Assets
-----------------
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company reviews for the
impairment of long-lived assets, certain identifiable intangibles, and
associated goodwill, whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
An impairment loss would be recognized when the estimated future cash
flows is less than the carrying amount of the asset. No impairment
losses have been identified by the Company.
Income Taxes
------------
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.
Net Income (Loss) Per Share of Common Stock
-------------------------------------------
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share", which
specifies the method of computation, presentation and disclosure for
earnings per share. SFAS No. 128 requires the presentation of two
earnings per share amounts, basic and diluted.
Basic earnings per share is calculated using the average number of
common shares outstanding. Diluted earnings per share is computed on
the basis of the average number of common shares outstanding plus the
dilutive effect of outstanding stock options using the "treasury
stock" method.
The basic and diluted earnings per share are the same since the
Company had a net loss for 1997 and 1996 and the inclusion of stock
options and other incremental shares would be antidilutive. Options
and warrants to purchase 277,334 and 384,001 shares of common stock at
December 31, 1997 and 1996, respectively were not included in the
computation of diluted earnings per share because the Company had a
net loss and their effect would be antidilutive.
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. Discontinued Operations
-----------------------
In 1996, the Company retained the Kriegsman Group ("Kriegsman"), a
financial consulting firm, to assist it with a financial restructuring
of its operations. In connection with the financial restructuring the
Company divested the software development, MarketStreet (advertising
division) and the computer training center divisions. The divisions
were to be spun-off to a new Company owned by the former management of
the Company effective August 31, 1996. The closing for the divestiture
occurred 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 and a note payable was issued by the
former management to the Company in the amount of $770,850 (Notes 9
and 12).
F-11
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. Discontinued Operations (Continued)
-----------------------------------
Also included in the assets of the divested divisions was $500,000 in
cash less approximately $200,000 in liabilities which were paid by the
Company which resulted in approximately $300,000 in cash paid to the
divested divisions. The management of the divested divisions also
assumed all litigation and claims related to the divisions which
included one law suit in the amount of approximately $70,000. The
Kriegsman Group also nominated new members for the Board of Directors
upon completion of the divestiture of the three divisions which were
approved in January 1997. The Company received 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 office
space from the Company for a period of fourteen months at the rate of
$12,000 per month through February 1998.
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 26,667 shares of common stock
to the bridge lenders as additional consideration for the $200,000
loan. In October and November 1996 the Company sold 400,000 shares of
its common stock at $3.75 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 146,667 warrants to each which are exercisable at
$3.75 per share for a four year period through October 31, 2001. In
June 1997, the Underwriter returned 106,667 warrants to the Company
without consideration. 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. The Registration Statement was filed and
declared effective in May 1997.
Revenues applicable to the Company's discontinued operations were
$540,112 for the year ended December 31, 1996.
3. Long-Term Debt
--------------
Long-term debt consists of the following:
Individuals and Other
---------------------
12% unsecured Bridge Loans from a group of eight
lenders due on the earlier of the closing of a public
or private offering of securities by the Company for at
least $1,000,000 or fifteen months from the date of the
Bridge Loans. As additional compensation for the Bridge
Loans, the Company issued an aggregate of 150,000
shares of common stock to the lenders, one share for
each $5 loaned to the Company. $750,000
Obligations Under Capital Leases
--------------------------------
11.1% to 25.1% installment notes due in 1998 to 2001,
collateralized by equipment. 172,882
F-12
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. Long-Term Debt (Continued)
--------------------------
Obligations Under Capital Leases (Continued)
--------------------------------------------
13% 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). 1,677,933
----------
Total Long-Term Debt 2,600,815
Less current portion of long-term debt (811,926)
----------
Long-Term Debt $1,788,889
==========
Installments due on debt principal, including the capital leases, at
December 31, 1997 are as follows:
Year Ending
December 31,
------------
1998 $ 811,926
1999 19,902
2000 42,023
2001 10,504
2002 9,382
Later years 1,707,078
----------
Total $2,600,815
==========
4. Income Taxes
------------
The components of the provision for income taxes are as follows:
1997 1996
---- ----
Current:
Federal $ -- $ --
State 800 --
------- -------
Total 800 --
------- -------
Deferred:
Federal 60,635 --
State 10,915 --
------- -------
Total 71,550 --
------- -------
Total Provision For Income Taxes $72,350 $ --
======= =======
The provision for income taxes reconciles to the amount computed by
applying the federal statutory rate to income before the provision for
income taxes as follows:
F-13
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. Income Taxes (Continued)
------------------------
1997 1996
---- ----
Federal statutory rate (25)% (25)%
State franchise taxes,
net of federal benefits (4) (4)
Valuation allowance 29 29
------ ------
Total -- % -- %
====== ======
Significant components of deferred income taxes as of December 31,
1997 are as follows:
Net operating loss carryforward $ 1,413,700
Vacation accrual 2,070
Allowance for bad debts 36,870
-----------
Total deferred tax asset 1,452,640
-----------
Accelerated depreciation (21,760)
-----------
Total deferred tax liability (21,760)
Less valuation allowance (1,430,880)
-----------
Net Deferred Tax Asset $ --
===========
The Company has assessed its past earnings history and trends,
budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that no deferred tax assets
will be realized. The valuation allowance of $1,430,880 is maintained
on deferred tax assets which the Company has not determined to be more
likely than not realizable at this time. The net change in the
valuation allowance for deferred tax assets was an increase of
$494,180. The Company will continue to review this valuation on a
quarterly basis and make adjustments as appropriate.
At December 31, 1997, the Company had federal and California net
operating loss carryforwards of approximately $5,000,000 and
$2,500,000, respectively. Such carryforwards expire in the years 2007
through 2012 and 1998 through 2002 for federal and California
purposes, respectively.
5. 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, 1997, no options have been granted under the Plan.
F-14
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. Shareholders' Equity (Continued)
--------------------------------
Preferred Stock
---------------
In December 1994, the Company issued to six individuals, including the
Company's five former executive officers, for no consideration, a
total of 900,000 shares of Series A Convertible Preferred Stock, no
par value. Such shares were automatically convertible, in varying
amounts per year, into shares of common stock on a fifteen for one
basis through 2003 if certain revenue and net income milestones were
met.
In connection with the divestiture of three operating divisions (Note
2) all of the outstanding shares of Series A Preferred Stock were
cancelled on December 31, 1996.
Common Stock and Warrants
-------------------------
The closing for the Company's IPO occurred on February 17, 1995. The
Company sold 46,000 units at $82.50 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
consisted of one share of the Company's common stock and one warrant
to purchase an additional share of common stock at $97.50 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 $112.50
or more for 30 consecutive days. The warrants were not exercised and
all 46,000 warrants expired on February 9, 1998. 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 $99.00 per Unit. The Units subject to the Underwriter's
Warrant are identical to the Units sold to the public.
6. Proposed Public Stock Offering
------------------------------
The Company has executed a letter of intent with an Underwriter to
offer 1,050,000 units of the Company's securities at $5.75 per unit.
Each unit consists of one share of the Company's common stock and one
redeemable common stock purchase warrant. Each warrant is exercisable
to purchase one share of common stock at the closing bid price of the
common stock on the day prior to the effective date of the
Registration Statement for a period of five years from the effective
date of the Company's Registration Statement and may be redeemed by
the Company. The Company will also grant the Underwriter an option to
purchase an additional 157,500 units from the Company to cover
over-allotments for a period of thirty days from the effective date of
the Registration Statement.
The Company will pay the Underwriter a commission equal to ten percent
of the gross proceeds of the offering and a non-accountable expense
allowance equal to three percent of the gross proceeds of the
offering. In connection with the offering, the Company has agreed to
issue the Underwriter a warrant, for $10, to purchase up to 105,000
units which shall be exercisable at 9.4875 per unit (165% of the
public offering price of the Units). The Underwriter's warrant is
exercisable for a period of four years beginning one year from the
effective date of the Registration Statement. The units subject to the
Underwriter's warrant will be identical to the units sold to the
public except that the redeemable warrants included in the
Underwriter's Units will be exercisable to purchase shares of common
stock at $9.4875 (165% of the initial public offering price of the
Units offered to the public). The Company has also agreed upon
completion of the Offering to retain the Underwriter as a financial
consultant for a period of one year at a monthly fee of $5,000 (a
total of $60,000) payable in full upon completion of the Offering.
There can be no assurance that the Offering will be successfully
completed.
F-15
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 previously occupied approximately half of
the space as its corporate office facility and 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, 1998, to purchase the building
and land for $1,900,000. 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 other
facilities and computer equipment under noncancellable operating
leases. The Company entered into a sublease for its office building
described above in connection with the divestiture of three operating
divisions. The sublease rentals to be received in the future are
approximately $24,000 and have been deducted from the future minimum
lease payments in the table below.
The following is a schedule of future minimum lease payments at
December 31, 1997 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:
Year Ending Capital Operating
December 31, Leases Leases Total
------------ ------ ------ -----
1998 $ 273,922 $ 52,785 $ 326,707
1999 252,176 53,841 306,017
2000 265,984 54,918 320,902
2001 230,047 56,016 286,063
2002 228,252 23,340 251,592
Later years 3,477,321 -- 3,477,321
----------- --------- ----------
Total Minimum Lease
Payments 4,727,702 $ 240,900 $4,968,602
========= ==========
Less amount representing
interest (2,876,887)
-----------
Present Value of Net Minimum
Lease Payments $ 1,850,815
===========
Rent expense amounted to approximately $69,806 and $120,100 for the
years ended December 31, 1997 and 1996, respectively.
Leased equipment under capital leases as of December 31, 1997 is as
follows:
F-16
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
-----------------------------------------
Building $1,348,824
Land 411,176
Equipment 346,398
Less accumulated amortization (386,417)
----------
Net Property and Equipment Under Capital Leases $1,719,981
==========
In May 1997, as a result of the Company's default on its capital
lease, the Company agreed to return legal possession of the office
building to the landlord. The Company does not occupy any space in the
building, although it leased a portion of it to SSC and the SSC
Principals based upon monthly payments to the Company of $12,000
through February 1998. Accordingly, the landlord collects rents
directly from the tenants of the office building and the Company is
responsible for the difference between such aggregate rents and the
Company's lease payment to the landlord. The landlord is currently
collecting monthly rents aggregating approximately $9,200 and the
Company's monthly leasehold obligation is approximately $15,600
leaving a monthly balance due from the Company to the landlord of
approximately $6,400.
8. Stock Based Compensation Plans
------------------------------
The Company adopted SFAS No. 123 during the year ended December 31,
1996. In accordance with the provisions of SFAS No. 123, the Company
applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its plans
and does not recognize compensation expense for its stock-based
compensation plans other than for options granted to non-employees. If
the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS No. 123, the
Company's net income and earnings per share would be reduced to the
following pro forma amounts:
1997 1996
---- ----
Net Loss:
As reported $(1,470,550) $(1,409,800)
Pro forma (1,507,063) (1,412,843)
Net Loss Per Share of Common Stock:
As reported $ (2.49) $ (7.74)
Pro forma $ (2.56) $ (7.76)
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is
amortized to expense over the vesting period and additional options
may be granted in future years. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing
model with the following assumptions for the year ended December 31,
1996:
1996
----
Risk free interest rate 5.97%
Expected life 3.5 years
Expected volatility 129.3%
Expected dividend yield 0%
The Company did not grant any stock options in 1997.
F-17
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. Stock Based Compensation Plans (Continued)
------------------------------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in subjective input assumptions
can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock based
compensation plans.
9. Related Party Transactions
--------------------------
The Company has entered into transactions with its officers and
directors, as follows.
On November 1, 1994, all of the Company's former shareholders agreed
in writing with each other and with the Company to contribute pro rata
from their shareholdings up to a total of 13,334 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 13,334 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
13,334 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 334 shares in connection with
the acquisition of ValleyNet Communications.
In connection with the divestiture of three divisions (Note 2) the
Company received a note receivable of $770,850 from SSC which is
controlled by the former management of the Company. The note bears
interest at 10% per annum and is payable in monthly principal and
interest installments of $10,187 through 2006. The note is
collateralized by substantially all assets of SSC and is guaranteed by
the former management of the Company. SSC was behind on the payments
under the terms of the note and the Company has withheld certain
payments it received from the sale of software (Note 11) which were
owed to SSC and reduced the note receivable by such amounts (Note 12).
The Company received payments from the Canadian Limited Partnership
("Partnership") as a result of the sale of the software. The Company
entered into an agreement with SSC at the time of the divestiture
whereby all amounts received from the Partnership would be paid to
SSC. When SSC defaulted on the payments of the note receivable to the
Company, the Company notified SSC that the payments received from the
Partnership would be offset against the note receivable which was in
default for nonpayment.
The Company issued 36,667 warrants to its Chief Executive Officer in
connection with his employment agreement in November 1996. The
warrants vest as to 13,333 warrants on January 1, 1997, 13,334 on
January 1, 1998 and 10,000 on January 1, 1999. The warrants are
exercisable at $3.75 per share at anytime through October 2001.
10. Concentration of Credit Risk
----------------------------
The Company provides credit, in the normal course of business, to a
large number of companies in the Internet services 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.
F-18
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11. 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, 1996 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 received approximately $150,000, net of expenses, on December
31, 1996 for the sale of software to the second partnership. The
$150,000 was paid to the Company that acquired the software
development division pursuant to the terms of the Divestiture
Agreement.
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 various
percentage of sales for each copy of the Software purchased from the
Partnership.
Since the Company was responsible for maintaining, upgrading and
developing future revisions of the Software, the transaction was not
been accounted for as a sale by the Company. In addition, the notes
receivable were not 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 was accounted for by the
Company on a cost recovery basis and the cash received from the
Partnership reduced 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.
The software and all rights to the above agreements were sold by the
Company in connection with the divestiture of the software development
division (Note 2).
12. Litigation
----------
As a result of the failure of SSC and the SSC Principals to pay
certain trade account payables and certain office rent under a
sublease from the Company, the Company has been threatened with
litigation from such trade creditors and has been required to return
possession of the SSC subleased office space to the Company's landlord
(Note 7). The Company believes that the total contingent liability to
trade account creditors arising from defaults by SSC and the SSC
Principals does not exceed $100,000.
F-19
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
12. Litigation (Continued)
----------------------
The Company has paid certain amounts to trade creditors of SSC which
arose prior to the divestiture of three of the Company's divisions to
SSC in 1996. The Company filed suit against SSC and the SSC Principals
in December 1997 to recover the amounts it paid and to accelerate
payment of the Company's note receivable from SSC.
In February 1997, three of the Company's former employees brought a
civil action against the Company for back wages aggregating
approximately $45,000 which was incurred prior to the divestiture of
the three divisions. The Company alleges that these amounts, if due,
are the responsibility of SSC and the SSC Principals under the
Divestiture Agreement. The Company is unable to predict the outcome to
the litigation.
Payment of any judgements or settlements in connection with these
litigation matters, together with the costs of defending such matters,
could adversely affect the Company's results of operations and
financial condition.
13. Employee Benefit Plan
---------------------
Effective May 29, 1997, the Company adopted a 401(K) savings plan for
employees who are not covered by any collective bargaining agreement,
have attained age 21 and have completed one year of service. Employee
and Company matching contributions are discretionary. The Company made
matching contributions of $1,799 for the year ended December 31, 1997.
Company contributions vest as follows:
Years of Service Percent Vested
---------------- --------------
1 33%
2 66%
3 100%
14. Fair Value of Financial Instruments
-----------------------------------
Disclosures about Fair Value of Financial Instruments for the
Company's financial instruments are presented in the table below.
These calculations are subjective in nature and involve uncertainties
and significant matters of judgment and do not include income tax
considerations. Therefore, the results cannot be determined with
precision and cannot be substantiated by comparison to independent
market values and may not be realized in actual sale or settlement of
the instruments. There may be inherent weaknesses in any calculation
technique, and changes in the underlying assumptions used could
significantly affect the results. The following table presents a
summary of the Company's financial instruments as of December 31,
1997:
1997
-----------------------------
Carrying Estimated
Amount Fair Value
----------- ----------
Financial Assets:
Cash and cash equivalents $ 98,148 $ 98,148
Note receivable 463,271 463,271
Financial Liabilities:
Long-term debt 2,600,815 2,600,815
F-20
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
14. Fair Value of Financial Instruments (Continued)
-----------------------------------------------
The carrying amounts for cash and cash equivalents, receivables,
accounts payable and accrued expenses approximate fair value because
of the short maturities of these instruments. The fair value of
long-term debt, including the current portion, approximates fair value
because of the market rate of interest on the long-term debt and the
interest rate implicit in the obligations under capital leases.
15. Subsequent Events (Unaudited)
-----------------------------
In March 1998, the Company settled the civil action brought by former
employees for back wages aggregating approximately $45,000. The
Company paid $23,000 to settle this matter. The Company seeks to
recover the $23,000 from SSC and the SSC principals as the matter
arose prior to the divestiture of the three divisions and the Company
believes it is the responsibility of SSC.
F-21
<PAGE>
- --------------------------------------------------------------------------------
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 upon
as having been authorized by the
Company. This Prospectus does not
constitute an offer to sell, or the
solicitation of an offer to buy, the
securities offered hereby to any person
in any state or other jurisdiction in 1,050,000 Units
which such offer or solicitation is
unlawful. Neither the delivery of this
Prospectus nor any sale hereunder shall,
under any circumstances, create any
implication that there has been no
change in the affairs of the Company
since the date hereof.
PROTOSOURCE CORPORATION
------------
TABLE OF CONTENTS
Page
---- ---------------
Available Information................ 3
Prospectus Summary................... 4 PROSPECTUS
The Company ......................... 7
Risk Factors......................... 9 ---------------
Capitalization....................... 17
Price Range of Common Stock.......... 18
Use of Proceeds...................... 18
Selected Financial Data.............. 19 Andrew, Alexander, Wise &
Management's Discussion and Company, Inc.
Analysis of Financial Condition
and Results of Operations.......... 20
Business............................. 23 __________, 1998
Management........................... 30
Principal Stockholders............... 34
Certain Transactions................. 35
Description of Securities............ 36
Underwriting......................... 40
Legal Matters........................ 43
Experts.............................. 43
Financial Statements.................F-1
Until __________, 1998 (25 days
after the date of this Prospectus), all
dealers effecting transactions in the
registered securities, whether or not
participating in this distribution, may
be required to deliver a Prospectus.
This is in addition to the obligation of
dealers to deliver a Prospectus when
acting as underwriters and with respect
to their unsold allotments or
subscriptions.
<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 Registrant of expenses incurred
or paid by an officer, director or controlling person of the Registrant 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 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 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............................... $ 4,774
NASD Filing Fee.................................... 1,861
Blue Sky Legal and Filing Fees..................... 15,000
Printing Expenses.................................. 30,000
Legal Fees and Expenses............................ 70,000
Accounting Fees.................................... 45,000
NASDAQ Application Fee............................. 10,000
Transfer Agent Fees................................ 3,000
Miscellaneous Expenses............................. 20,365
------
TOTAL.............................................. $200,000 (1)
(1) All expenses, except the SEC and NASD registration fees, are estimated.
Does not include the Underwriter's commission of $603,750, nonaccountable
expense allowance of $181,125, and consulting fee of $60,000.
II-1
<PAGE>
ITEM 26. Recent Sales of Unregistered Securities
- ------------------------------------------------
During the last three years, the Registrant sold the following shares of
its securities which were not registered under the Securities Act of 1933, as
amended.
(i) In September 1996, the Registrant issued 26,667 shares of its Common
Stock to the following individuals as additional consideration for a loan to the
Registrant in the amount of $200,000.
Name Number of Shares
---- ----------------
John Benedetto 6,667
James Ippolito 3,333
Anaka Prakash 6,667
Larry Pensa 3,333
Isaac Paschalidis 6,667
(ii) In October 1996, the Registrant sold an aggregate of 400,000 shares of
its Common Stock to the following individuals for $3.75 per share.
Name Number of Shares
---- ----------------
John Benedetto 40,000
Brian A. Brewer 6,667
James Ippolito 20,000
Raymond King 6,667
Jack Ko and Wendy Ko 13,333
Anaka Prakash 40,000
Isaac Paschalidis 53,333
Larry Pensa 20,000
Francis Sajeski and Barbara Sajeski 6,667
Jerry Silberman 6,667
Rao-Qi Zhang 6,667
George P. Argerakis 13,333
Robert Cavallaro 6,667
Ding Chu Fuh Chen 6,667
Murray Frank 6,667
Donald Gross 13,333
Gloria Ippolito 40,000
Chris Meshouris 6,667
James Meshouris 6,667
Matthew Mulhern and Mary Mulhern 26,667
Michael Pizite 20,000
Bernard Schwartz and Barbara Schwartz 6,667
George Stripas and Matthew Ianello 6,666
II-2
<PAGE>
Kuei-Chi Tsai 6,666
Saul Unter 6,666
Osweld Valenti, Jack Valenti and Barbara Davis 6,666
(iii) Between June and September 1997, the Registrant issued an aggregate
of 150,000 shares of Common Stock in connection with a bridge loan financing of
$750,000 at the rate of one share of Common Stock for each $5.00 of bridge loan.
The following individuals received the number of shares set forth opposite their
names:
Names Number of Shares
----- ----------------
World Spirit, Inc. 50,000
Francis E. Sajeski 5,000
Anaka Prakash 30,000
James Ippolito 20,000
Saul Unter 5,000
Bernard Schwartz and Barbara Schwartz 5,000
Isaac Paschalidis 20,000
John Benedetto 15,000
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
stockholders 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.
- ------------------
Exhibit No. Title
----------- -----
1.05 Form of Underwriting Agreement
1.06 Form of Underwriter's Warrant Agreement
1.07 Form of Warrant Agreement
1.08 Financial Advisory and Investment Banking Agreement
1.09 Form of Amended Underwriting Agreement
1.10 Form of Amended Financial Advisory and Investment Banking
Agreement
1.11 Form of Amended Underwriting Agreement
1.12 Form of Amended Underwriter's Warrant Agreement
2.01 Restated Articles of Incorporation of the Registrant
II-3
<PAGE>
2.02 Bylaws of the Registrant
5.05 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 (2)
10.13 Selling Agreement with AAWC (2)
10.14 Warrant Agreement with AAWC (2)
10.15 Lock-up Agreement (2)
10.16 Registration Rights Agreement (2)
10.17 Employment Agreement with Mr. Meyers
10.18 Bridge Loan Agreement
10.19 Refiled Exhibit 10.17: Employment Agreement with Mr. Meyers
10.20 Refiled Exhibit 10.18 which consists of (i) Bridge Loan
Agreement, (ii) Investment Representation Agreement, (iii)
Promissory Note and (iv) Registration Rights Agreement
23.10 Consent of Angell & Deering
23.11 Consent of Gary A. Agron (See 5.05, above)
23.12 Consent of Angell & Derring
23.13 Consent of Angell & Deering
23.14 Consent of Angell & Deering
27.01 Financial Data Schedule
- ---------
(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.
(2) Incorporated by reference by the Registrant's Registration Statement on Form
SB-2 declared effective by the Commission on May 14, 1997, file Number
333-20543.
(3) Previously filed.
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
II-4
<PAGE>
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) 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.
(h) For determining any liability under the Securities Act, it will treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by it under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(i) For determining any liability under the Securities Act, it will treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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 Fresno, California, on May 4, 1998
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 May 4, 1998
- --------------------------
Raymond J. Meyers Chief Financial Officer,
(Principal Accounting Officer),
and Director
/s/ David A. Appell Director May 4, 1998
- --------------------------
David A. Appell
Director May 4, 1998
- --------------------------
Dickon Pownall-Gray
/s/ Andrew N. Stathopoulos Director May 4, 1998
- --------------------------
Andrew N. Stathopoulos
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
----------- -----
1.05 Form of Underwriting Agreement
1.06 Form of Underwriter's Warrant Agreement
1.07 Form of Warrant Agreement
1.08 Financial Advisory and Investment Banking Agreement
1.09 Form of Amended Underwriting Agreement
1.10 Form of Amended Financial Advisory and Investment Banking
Agreement
1.11 Form of Amended Underwriting Agreement
1.12 Form of Amended Underwriter's Warrant Agreement
2.01 Restated Articles of Incorporation of the Registrant
2.02 Bylaws of the Registrant
5.05 Opinion of Gary A. Agron, regarding legality of the Common
Stock and Warrants (includes Consent)
10.17 Employment Agreement with Mr. Meyers
10.18 Bridge Loan Agreement
10.19 Refiled Exhibit 10.17: Employment Agreement with Mr. Meyers
10.20 Refiled Exhibit 10.18 which consists of (i) Bridge Loan
Agreement, (ii) Investment Representation Agreement, (iii)
Promissory Note and (iv) Registration Rights Agreement
23.10 Consent of Angell & Deering
23.11 Consent of Gary A. Agron (See 5.05, above)
23.12 Consent of Angell & Derring
23.13 Consent of Angell & Deering
23.14 Consent of Angell & Deering
27.01 Financial Data Schedule
II-7
Exhibit 1.05
PROTOSOURCE CORPORATION
900,000 Shares of Common Stock
and
900,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
----------------------
, 1998
-----------
Andrew Alexander Wise & Company, Inc.
as Representative of the Underwriters
17 State Street
New York, New York 10004
Gentlemen:
ProtoSource Corporation, a California corporation (the "Company"), hereby
confirms its agreement with Andrew, Alexander, Wise & Company, Inc., as
representative (the "Representative") of the several Underwriters listed on
Schedule 1 annexed hereto (the "Underwriters"), as set forth below.
The Company proposes to issue and sell to the Underwriters an aggregate of
(i) 900,000 shares (the "Firm Shares") of the Company's common stock, par value
$.001 per share (the "Common Stock"), and (ii) 900,000 redeemable warrants to
purchase Common Stock (the "Firm Warrants") in units consisting of one Firm
Share and one Firm Warrant. The Company also proposes to grant to the
Underwriters an option to purchase (i) an additional 135,000 shares of Common
Stock and (ii) an additional 135,000 redeemable warrants to purchase Common
Stock in units consisting of one share of Common Stock and one Warrant, as
provided in section 2(c) of this agreement (the "Agreement"). Any and all shares
of Common Stock to be purchased pursuant to such option are referred to herein
as the "Option Shares," and the Firm Shares and any Option Shares are
collectively referred to herein as the "Shares." Any and all redeemable warrants
to purchase Common Stock to be purchased pursuant to such option are referred to
herein as the "Option Warrants," and the Firm Warrants and any Option Warrants
are collectively referred to herein as the "Warrants." Any shares of Common
Stock issuable upon the exercise of any Warrants are referred to herein as
<PAGE>
"Warrant Shares." The Firm Shares and the Firm Warrants are collectively
referred to herein as the "Firm Securities;" the Option Shares and the Option
Warrants are collectively referred to herein as the "Option Securities;" and the
Firm Securities, the Option Securities and the Warrant Shares are collectively
referred to herein as the "Securities."
Pursuant to an agreement to be entered into among the Company, the
Representative and Corporate Stock Transfer, Inc. (the "Warrant Agreement"),
each Warrant will be exercisable during the period commencing on the first
anniversary of the effective date of the Registration Statement (as hereinafter
defined) (the "Effective Date") and expiring on the fifth anniversary thereof,
subject to redemption by the Company (as described below), at an initial
exercise price of $____ per share, subject to adjustment as set forth in the
Warrant Agreement. The Warrants will be redeemable at a price of $.10 per
Warrant, commencing on the first anniversary of the Effective Date and prior to
their expiration, upon not less than 30 days prior written notice to the holders
of the Warrants, provided the closing bid price of the Common Stock as reported
on The Nasdaq Smallcap Market if traded thereon, or if not traded thereon, the
closing sale price if listed on a national or regional securities exchange (or
the Nasdaq National Market other reporting system that provides last sales
prices), shall have been at least ____% of the then current Warrant exercise
price (initially $____ per share, subject to adjustment), for 20 trading days
during the 30 trading day period ending 15 days prior to the date on which the
Company gives notice of redemption, subject to the right of the holder to
exercise such Warrants prior to redemption.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriters that:
(a) A registration statement on Form SB-2 (File No. 333-[ ]), with
respect to the Securities and the Underwriters' Warrant Securities (as
hereinafter defined), including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act "), and one
or more amendments to that registration statement may have been so filed. Copies
of such registration statement and of each amendment heretofore filed by the
Company with the Commission have been delivered to the Underwriter. After the
execution of this Agreement, the Company will file with the Commission either
(i) if the registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in that registration statement (or, if an amendment
thereto shall have been filed, in such amendment), with such changes or
insertions as are required by Rule 430A under the Act or permitted by Rule
424(b) under the Act and as have been provided to and approved by the
Underwriters prior to the execution of this Agreement, or (ii) if that
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to that registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Underwriters prior to the execution of this
Agreement. The Company also may file a related registration statement with the
Commission pursuant to Rule 462(b) under the Act for purposes of registering
certain additional Securities, which registration statement shall become
effective upon filing with the Commission (the "Rule 462(b) Registration
2
<PAGE>
Statement). As used in this Agreement, the term "Registration Statement" means
that registration statement, as amended at the time it was or is declared
effective, and any amendment thereto that was or is thereafter declared
effective, including all financial schedules and exhibits thereto and any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined), together with any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with that registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement at the time it was or is declared effective); and the
term "Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act or, if no prospectus is so filed pursuant to Rule
424(b), the prospectus included in the Registration Statement. The Company has
caused to be delivered to the Underwriters copies of each Preliminary Prospectus
and has consented to the use of those copies for the purposes permitted by the
Act. If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration Statement has not been declared effective, then (i) the Company has
filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. When each Preliminary Prospectus and each
amendment and each supplement thereto was filed with the Commission it (i)
contained all statements required to be stated therein, in accordance with, and
complied with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement was or is declared
effective, it (i) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply with the requirements
of, the Act and the rules and regulations of the Commission thereunder and (ii)
did not or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
When the Prospectus and each amendment or supplement thereto is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or
supplement is not required so to be filed, when the Registration Statement
containing such Prospectus or amendment or supplement thereto was or is declared
effective) and on the Firm Closing Date and any Option Closing Date (as each
such term is hereinafter defined), the Prospectus, as amended or supplemented at
any such time, (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
3
<PAGE>
in reliance upon and in conformity with written information furnished to the
Company by the Underwriter specifically for use therein.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of California and is
duly qualified or authorized to transact business as a foreign corporation and
is in good standing in each jurisdiction where the ownership or leasing of its
property or the conduct of its business requires such qualification or
authorization, except where the failure to be so qualified would not have a
material adverse effect upon the condition (financial or otherwise), business,
prospects, net worth or results of operations of the Company and its
Subsidiaries, taken as a whole.
(d) The Company has full corporate power and authority, and all
necessary material authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental regulatory authorities, to own or lease its
property and conduct its business as now being conducted and as proposed to be
conducted as described in the Registration Statement and the Prospectus (and, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(e) Except for the subsidiaries listed on Schedule 2 to this Agreement
(the "Subsidiaries"), the Company does not own, directly or indirectly, an
interest in any corporation, partnership, limited liability company, joint
venture, trust or other business entity. Each Subsidiary is duly incorporated
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and is duly qualified or authorized to transact
business as a foreign corporation and is in good standing in each jurisdiction
where the ownership or leasing of its property or the conduct of its business
requires such qualification or licensing, except where the failure to be so
qualified would not have a material adverse effect upon the condition (financial
or otherwise), business, prospects, net worth or results of operations of the
Company and its Subsidiaries, taken as a whole. Each Subsidiary has full
corporate power and authority, and all necessary material authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory authorities, to own or lease its properties and conduct
its business as now being conducted and as proposed to be conducted as described
in the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights. There are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock or other securities, other than as described in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The Shares and the Warrant Shares have been duly
authorized, and the Warrant Shares have been duly reserved for issuance, by all
necessary corporate action on the part of the Company and, when the Shares are
issued and delivered to and paid for by the Underwriters, pursuant to this
Agreement and the Warrant Shares are issued and delivered to and paid for by the
holders of Warrants upon exercise of the Warrants in accordance with the terms
4
<PAGE>
thereof, the Shares and the Warrant Shares will be validly issued, fully paid,
nonassessable and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence, the most
recent Preliminary Prospectus). No holder of outstanding securities of the
Company is entitled as such to any preemptive or other right to subscribe for
any of the Securities, and no person is entitled to have securities registered
by the Company under the Registration Statement or otherwise under the Act other
than as described in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(g) The capital stock of the Company conforms to the description
thereof contained in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(h) All issuances of securities of the Company have been effected
pursuant to an exemption from the registration requirements of the Act. Except
as previously disclosed in writing to the Representative, no compensation was
paid to or on behalf of any member of the National Association of Securities
Dealers, Inc. ("NASD"), or any affiliate or employee thereof, in connection with
any such issuance.
(i) The consolidated financial statements of the Company included in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its subsidiaries as of the dates indicated and the
results of operations of the Company and its subsidiaries for the periods
specified. Such consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
except to the extent that (A) certain footnote disclosures regarding unaudited
interim periods may have been omitted in accordance with the applicable rules of
the Commission under the Securities Exchange Act of 1934, as amended (the "1934
Act") and (B) the interim consolidated financial statements are subject to year
end adjustments. The consolidated financial data set forth under the caption
"Summary Financial Information" in the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) fairly present, on the
basis stated in the Prospectus (or such Preliminary Prospectus), the information
included therein.
(j) Angell & Deering, who have audited certain financial statements of
the Company and delivered their report with respect to the consolidated
financial statements included in the Registration Statement and the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants with respect to the Company as
required by the Act and the applicable rules and regulations thereunder.
(k) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), (i) except as otherwise
contemplated therein, there has been no material adverse change in the business,
operations, condition (financial or otherwise), earnings or prospects of the
Company and the Subsidiaries, taken as a whole, whether or not arising in the
ordinary course of business, (ii) except as otherwise stated therein, there have
5
<PAGE>
been no transactions entered into by the Company or the Subsidiaries and no
commitments made by the Company or the Subsidiaries that, individually or in the
aggregate, are material with respect to the Company and the Subsidiaries, taken
as a whole, (iii) there has not been any change in the capital stock or
indebtedness of the Company and the Subsidiaries, and (iv) there has been no
dividend or distribution of any kind declared, paid or made by the Company in
respect of any class of its capital stock.
(l) The Company has full corporate power and authority to enter into
and perform its obligations under this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement (as hereinafter defined). The execution and
delivery of this Agreement, the Warrant Agreement, and the Underwriters' Warrant
Agreement have been duly authorized by all necessary corporate action on the
part of the Company and this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement have each been duly executed and delivered by
the Company and each is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other similar laws affecting creditors'
rights generally and by general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law), and except as
rights to indemnity and contribution under this Agreement may be limited by
applicable law. The issuance, offering and sale by the Company to the
Underwriters of the Securities pursuant to this Agreement or the Underwriters'
Securities pursuant to the Underwriters' Warrant Agreement, the compliance by
the Company with the provisions of this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement, and the consummation of the other transactions
contemplated by this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement do not (i) require the consent, approval, authorization,
registration or qualification of or with any court or governmental or regulatory
authority, except such as have been obtained or may be required under state
securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (ii) conflict with or result in a
breach or violation of, or constitute a default under, any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which the Company or any Subsidiary is a
party or by which the Company or any Subsidiary or any of its property is bound
or subject, or the certificate of incorporation or by-laws of the Company or any
Subsidiary, or any statute or any rule, regulation, judgment, decree or order of
any court or other governmental or regulatory authority or any arbitrator
applicable to the Company or any Subsidiary.
(m) No legal or governmental proceedings are pending to which the
Company or any Subsidiary is a party or to which the property of the Company or
any Subsidiary is subject, and no such proceedings have been threatened against
the Company or any Subsidiary or with respect to any of its property, except
such as are described in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). No contract or other
document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein (and, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) or filed as required.
6
<PAGE>
(n) Neither the Company nor any Subsidiary is in (i) violation of its
certificate of incorporation or by-laws, (ii) violation in any material respect
of any law, statute, regulation, ordinance, rule, order, judgment or decree of
any court or any governmental or regulatory authority applicable to it, or (iii)
default in any material respect in the performance or observance of any
obligation, agreement, covenant or condition contained in any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which it is a party or by which it or any of
its property may be bound or subject, and no event has occurred which with
notice or lapse of time or both would constitute such a default.
(o) The Company and the Subsidiaries currently own or possess adequate
rights to use all intellectual property, including all trademarks, service
marks, trade names, copyrights, inventions, know-how, trade secrets, proprietary
technologies, processes and substances, or applications or licenses therefor,
that are described in the Prospectus (and if the Prospectus is not in existence,
the most recent Preliminary Prospectus), and any other rights or interests in
items of intellectual property as are necessary for the conduct of the business
now conducted or proposed to be conducted by them as described in the Prospectus
(or, such Preliminary Prospectus), and, except as disclosed in the Prospectus
(and such Preliminary Prospectus), the Company is not aware of the granting of
any patent rights to, or the filing of applications therefor by, others, nor is
the Company aware of, nor has the Company received notice of, infringement of or
conflict with asserted rights of others with respect to any of the foregoing.
All such intellectual property rights and interests are (i) valid and
enforceable and (ii) to the best knowledge of the Company, not being infringed
by any third parties.
(p) The Company and each Subsidiary possesses adequate licenses,
orders, authorizations, approvals, certificates or permits issued by the
appropriate federal, state or foreign regulatory agencies or bodies necessary to
conduct its business as described in the Registration Statement and the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), and, except as disclosed in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no pending or, to the best knowledge of the Company, threatened, proceedings
relating to the revocation or modification of any such license, order,
authorization, approval, certificate or permit.
(q) The Company and each Subsidiary has good and marketable title to
all of the properties and assets reflected in the Company's consolidated
financial statements or as described in the Registration Statement and the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), as being owned by any of them subject to no lien,
mortgage, pledge, charge or encumbrance of any kind, except those reflected in
such consolidated financial statements or as described in the Registration
Statement and the Prospectus (and such Preliminary Prospectus). Except as
disclosed in the Prospectus, the Company and each Subsidiary occupies its leased
7
<PAGE>
properties under valid and enforceable leases conforming to the description
thereof set forth in the Registration Statement and the Prospectus (and such
Preliminary Prospectus).
(r) The Company is not conducting and does not intend to conduct, its
business in a manner in which it would be an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940 (the "Investment Company
Act").
(s) Except as listed on Schedule 3 hereto, the Company has obtained
and delivered to the Representative the agreements (the "Lock-up Agreements")
with the officers, directors and other security holders owning or having rights
to acquire shares of Common Stock or preferred stock to the effect that, among
other things, each such person (i) will not, commencing on the Effective Date
and continuing for the period thereafter set forth opposite their names on
Schedule 3, directly or indirectly, sell, offer or contract to sell or grant any
option to purchase, transfer, assign or pledge, or otherwise encumber, or
dispose of any shares of Common Stock or preferred stock or any securities
convertible into or exercisable for Common Stock or preferred stock now or
hereafter owned by such person without the prior written consent of the
Underwriter, and (ii) will comply with any additional restriction or condition
on the disposition of such Common Stock or preferred stock which may be required
to qualify the offering of the Securities in any state in accordance with the
blue sky or securities laws of such state.
(t) No labor dispute with the employees of the Company or any
Subsidiary exists, or, to the best of the Company's knowledge, is threatened or
is imminent that could result in a material adverse change in the condition
(financial or otherwise), business, prospects, net worth or results of
operations of the Company and the Subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(u) The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any Subsidiary has been refused any insurance
coverage sought or applied for; and neither the Company nor any Subsidiary has
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), business, prospects, net worth or results of operations of the
Company and the Subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (and, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(v) The Underwriters' Warrants (as hereinafter defined) will conform
to the description thereof in the Registration Statement and in the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and, when sold to and paid for by the Underwriter in accordance with
the Underwriters' Warrant Agreement, will have been duly authorized and validly
issued and will constitute valid and binding obligations of the Company entitled
8
<PAGE>
to the benefits of the Underwriters' Warrant Agreement. The shares of Common
Stock issuable upon exercise of the Underwriters' Warrants and the Warrants
issuable upon exercise thereof (the "Underwriters' Warrant Shares") have been
duly authorized and reserved for issuance upon exercise of the Underwriters'
Warrants and the Warrants issuable upon exercise thereof by all necessary
corporate action on the part of the Company and, when issued and delivered and
paid for upon such exercise in accordance with the terms of the Underwriters'
Warrant Agreement, the Underwriters' Warrants, and the Warrants issuable upon
exercise thereof, respectively, will be validly issued, fully paid,
nonassessable and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence, the most
recent Preliminary Prospectus).
(w) No person has acted as a finder in connection with, or is entitled
to any commission, fee or other compensation or payment for services as a finder
for or for originating, or introducing the parties to, the transactions
contemplated herein and the Company will indemnify the Underwriter with respect
to any claim for finder's fees in connection herewith. Except as set forth in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has no
management or financial consulting agreement with anyone. To the best knowledge
of the Company, no promoter, officer, director or stockholder of the Company is,
directly or indirectly, affiliated or associated with an NASD member and no
securities of the Company have been acquired by an NASD member, except as
previously disclosed in writing to the Representative.
(x) The Company and each Subsidiary has filed all federal, state,
local and foreign tax returns which are required to be filed through the date
hereof, or has received extensions thereof, and has paid all taxes shown on such
returns and all assessments received by it to the extent that the same are
material and have become due.
(y) Neither the Company nor any director, officer, agent, employee or
other person associated with or acting on behalf of the Company has, directly or
indirectly: used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political activity; made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended;
or made any bribe, rebate, payoff, influence payment, kickback, or other
unlawful payment. No transaction has occurred between or among the Company and
any of its officers or directors or any affiliates of any such officer or
director, that is required to be described in and is not described in the
Registration Statement and the Prospectus.
(z) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations), has taken or will take, directly or
indirectly, prior to the completion of the Offering, any action designed to
stabilize or manipulate the price of any security of the Company, or which has
caused or resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any security
of the Company, to facilitate the sale or resale of any of the Securities or the
Option Securities.
9
<PAGE>
2. Purchase, Sale and Delivery of the Securities and the Warrant
Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to each Underwriter, and each
Underwriter agrees to purchase from the Company, severally and not jointly, the
number of Firm Shares set opposite its name on Schedule 1 at a purchase price of
$[ ] per share and the number of Firm Warrants set opposite its name on Schedule
1 at a purchase price of $[____] per Warrant, in units consisting of one Firm
Share and one Firm Warrant.
(b) Certificates in definitive form for the Firm Securities that the
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Underwriters request
upon notice to the Company at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company to the Underwriters, against
payment by or on behalf of the Underwriters of the purchase prices therefor by
certified or official bank check or checks drawn upon or by a New York Clearing
House bank or wire transfer and payable in next-day funds to the order of the
Company. Such delivery of and payment for the Firm Securities shall be made at
the offices of Counsel for the Representative, 605 Third Avenue, New York, New
York 10158 at 9:30 A.M., New York City time on _____________, 1998, or at such
other place, time or date as the Underwriters and the Company may agree upon,
such time and date of delivery against payment being herein referred to as the
"Firm Closing Date. The Company will make such certificates for the Firm
Securities available for checking and packaging by the Underwriters, at such
offices as may be designated by the Representative, at least 24 hours prior to
the Firm Closing Date. In lieu of physical delivery, the closing may occur by
"DTC" delivery.
(c) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the Underwriters an option to purchase
any or all of the Option Securities in units consisting of one Option Share and
one Option Warrant, exercisable by the Representative on behalf of and for the
account of the Underwriters. The purchase price to be paid for any of the Option
Securities shall be the same price per share or warrant as the price per share
or warrant for the Firm Securities set forth above in paragraph (a) of this
section 2. The option granted hereby may be exercised as to all or any part of
the Option Securities from time to time within 45 calendar days after the Firm
Closing Date. The Underwriters shall not be under any obligation to purchase any
of the Option Securities prior to the exercise of such option. The
Representative may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the Company
setting forth the aggregate number of Option Securities as to which the
Underwriters are then exercising the option and the date and time for delivery
of and payment for such Option Securities. Any such date of delivery shall be
determined by the Representative but shall not be earlier than two business days
or later than three business days after such exercise of the option and, in any
event, shall not be earlier than the Firm Closing Date. The time and date set
forth in such notice, or such other time on such other date as the
Representative and the Company may agree upon, is herein called the "Option
Closing Date" with respect to such Option Securities. Upon exercise of the
option as provided herein, the Company shall become obligated to sell to the
Underwriters, and, subject to the terms and conditions herein set forth, each
10
<PAGE>
Underwriter shall become obligated to purchase from the Company, the Option
Securities as to which the Underwriter is then exercising its option. If the
option is exercised as to all or any portion of the Option Securities,
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (b) of this section 2,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (c), to refer to such Option
Securities and Option Closing Date, respectively.
(d) On the Firm Closing Date, the Company will further issue and sell
to the Underwriters or, at the direction of the Underwriters, to bona fide
officers of the Underwriters, for an aggregate purchase price of $10, warrants
to purchase Common Stock and redeemable warrants to purchase Common Stock (the
"Underwriters' Warrants") entitling the holders thereof to purchase an aggregate
of 90,000 shares of Common Stock and 90,000 redeemable warrants to purchase
Common Stock for a period of four years, such period to commence on the first
anniversary of the Effective Date. The Underwriters' Warrants shall be
exercisable at a price equal to 120% of the initial public offering price of the
Common Stock and Warrants, respectively, and shall contain terms and provisions
more fully described herein below and as set forth more particularly in the
warrant agreement relating to the Underwriters' Warrants to be executed by the
Company on the Effective Date (the "Underwriters' Warrant Agreement"),
including, but not limited to, (i) customary anti-dilution provisions in the
event of stock dividends, stock splits, mergers, sales of all or substantially
all of the Company's assets, sales of stock below then prevailing market or
exercise prices and other events, and (ii) prohibitions of mergers,
consolidations or other reorganizations of or by the Company or the taking by
the Company of other action during the five-year period following the Effective
Date unless adequate provision is made to preserve, in substance, the rights and
powers incidental to the Underwriters' Warrants. As provided in the
Underwriters' Warrant Agreement, the Underwriters may designate that the
Underwriters' Warrants be issued in varying amounts directly to bona fide
officers of the Underwriters. As further provided, no sale, transfer,
assignment, pledge or hypothecation of the Underwriters' Warrants shall be made
for a period of 12 months from the Effective Date, except (i) by operation of
law or reorganization of the Company, or (ii) to the Underwriters and bona fide
partners or officers of the Underwriters and selling group members. The shares
of Common Stock issuable upon exercise of the Underwriters' Warrants and the
Warrants issuable upon exercise thereof are referred to herein as the
"Underwriters' Warrant Shares"; and the Underwriters' Warrants, the Warrants
issuable upon exercise thereof, and the Underwriters' Warrant Shares are
collectively referred to herein as the "Underwriters' Securities."
3. Offering by the Underwriters. The Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus
(the "Offering").
4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible.
11
<PAGE>
If required, the Company will file the Prospectus and any amendment or
supplement thereto with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. During any time when a prospectus
relating to the Securities is required to be delivered under the Act, the
Company (i) will comply with all requirements imposed upon it by the Act and the
rules and regulations of the Commission thereunder to the extent necessary to
permit the continuance of sales of or dealings in the Securities in accordance
with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission any prospectus or
amendment referred to in the first sentence of section (a) (i) hereof, any
amendment or supplement to such prospectus or any amendment to the Registration
Statement as to which the Underwriters shall not previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Underwriters shall not have given its consent.
The Company will prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, promptly upon request by the
Underwriters or counsel to the Underwriters, any amendments to the Registration
Statement or amendments or supplements to the Prospectus that may be necessary
or advisable in connection with the distribution of the Securities by the
Underwriters, and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective by the Commission as promptly as
possible. The Company will advise the Underwriters, promptly after receiving
notice thereof, of the time when the Registration Statement or any amendment
thereto has been filed or declared effective or the Prospectus or any amendment
or supplement thereto has been filed and will provide evidence satisfactory to
the Underwriters of each such filing or effectiveness.
(b) The Company will advise the Underwriters, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of any Securities for offering or sale in any jurisdiction, (iii)
the institution, threat or contemplation of any proceeding for any such purpose
or (iv) any request made by the Commission for amending the Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will, in cooperation with counsel to the Underwriters,
arrange for the qualification of the Securities for offering and sale under the
blue sky or securities laws of such jurisdictions as the Underwriters may
designate and will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Securities.
(d) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectus to comply with the Act or the
12
<PAGE>
rules or regulations of the Commission thereunder, the Company will promptly
notify the Underwriters thereof and, subject to section 4(a) hereof, will
prepare and file with the Commission, at the Company's expense, an amendment to
the Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) So long as any Warrants are outstanding, the Company shall use its
best efforts to cause post-effective amendments to the Registration Statement to
become effective in compliance with the Act and without any lapse of time
between the effectiveness of any such post-effective amendments and cause a copy
of each Prospectus, as then amended, to be delivered to each holder of record of
a Warrant and to furnish to the Underwriters and any dealer as many copies of
each such Prospectus as the Underwriters or dealer may reasonably request. The
Company shall not call for redemption of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify the Representative of any material change in the
business, financial condition or prospects of the Company. So long as any of the
Warrants remain outstanding, the Company will timely deliver and supply to its
Warrant Agent sufficient copies of the Company's current Prospectus, as will
enable such Warrant agent to deliver a copy of such Prospectus to any Warrant or
other holder where such Prospectus delivery is by law required to be made.
(f) The Company will, without charge, provide to the Underwriters and
to counsel for the Underwriters (i) as many signed copies of the registration
statement originally filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) as the Underwriters may
reasonably request, (ii) as many conformed copies of such registration statement
and each amendment thereto (in each case without exhibits thereto) as the
Underwriters may reasonably request and (iii) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many copies of
each Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto as the Underwriters may reasonably request.
(g) The Company, as soon as practicable, will make generally available
to its security holders and to the Underwriters an earnings statement of the
Company that satisfies the provisions of section 11 (a) of the Act and Rule 158
thereunder.
(h) The Company will reserve and keep available for issuance that
maximum number of authorized but unissued shares of Common Stock which are
issuable upon exercise of the Warrants and the Underwriters' Warrants (including
the underlying securities) outstanding from time to time.
(i) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus. The Company
will timely file, and will provide or cause to be provided to the Underwriters
and counsel to the Underwriters a copy of the report on Form 10Q required to be
filed by the Company pursuant to Rule 463 under the Act.
13
<PAGE>
(j) The Company will not, without the prior written consent of the
Representative, directly or indirectly offer, agree to sell, sell, grant any
option to purchase or otherwise dispose (or announce any offer, agreement to
sell, sales grant of any option to purchase or other disposition) of any shares
of Common Stock, preferred stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or preferred stock for a
period of 36 months after the Effective Date, except (i) the Shares and Warrants
issued pursuant to this Agreement, (ii) the Warrant Shares issuable upon
exercise of the Warrants, (iii) the Warrants, (iv) the Underwriters' Warrant
Shares and Warrants issuable upon the exercise of the Underwriters' Warrants,
(v) shares of Common Stock issuable upon the exercise of options granted and to
be granted under the Company's Stock Option Plan as in effect as of the date
hereof, and (vi) in connection with any merger or acquisition of another entity
or the business thereof. The Company also will not for a period of 36 months
following the Effective Date, without the prior written consent of the
Representative, (i) issue or sell any of its securities pursuant to Regulation S
promulgated under the Act or (ii) file a registration on Form S-8 for the sale
of securities by a person other than an employee of the Company or a Subsidiary.
(k) Prior to the Closing Date or the Option Closing Date (if any), the
Company will not, directly or indirectly, without prior written consent of the
Representative, issue any press release or other public announcement or hold any
press conference with respect to the Company or its activities with respect to
the Offering (other than trade releases issued in the ordinary course of the
Company's business consistent with past practices with respect to the Company's
operations).
(l) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule 430A
under the Act, then immediately following the execution of this Agreement, the
Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A and Rule 424(b) under the Act, copies of the
Prospectus including the information omitted in reliance on Rule 430A, or, if
required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(m) The Company will cause the Securities to be included in The Nasdaq
Small Cap Market on the Effective Date and to use its best efforts to maintain
such listing thereafter. The Company will file with The Nasdaq SmallCap Market
and all documents and notices that are required by companies with securities
that are traded on The Nasdaq SmallCap Market.
(n) During the period of five years from the Firm Closing Date, the
Company will, as promptly as possible, not to exceed 135 days, after each annual
fiscal period render and distribute reports to its stockholders which will
include audited statements of its operations and changes of financial position
during such period and its audited balance sheet as of the end of such period,
as to which statements the Company's independent certified public accountants
shall have rendered an opinion.
14
<PAGE>
(o) During a period of three years commencing with the Firm Closing
Date, the Company will furnish to the Representative, at the Company's expense,
copies of all periodic and special reports furnished to stockholders of the
Company and of all information, documents and reports filed with the Commission.
(p) The Company has appointed Corporate Stock Transfer, Inc. as
transfer agent for the Common Stock and warrant agent for the Warrants, subject
to the Closing. The Company will not change or terminate such appointment for a
period of three years from the Firm Closing Date without first obtaining the
written consent of the Representative, which such consent will not be
unreasonably denied or unduly delayed. For a period of three years after the
Effective Date, the Company shall cause the transfer agent and warrant agent to
deliver promptly to the Underwriters a duplicate copy of the weekly transfer
sheets relating to trading of the Securities. The Company shall also provide to
the Representative, promptly upon their request, up to four times in any
calendar year, copies of DTC or equivalent transfer sheets.
(q) During the period of 180 days after the date of this Agreement,
the Company will not at any time, directly or indirectly, take any action
designed to or that will constitute, or that might reasonably be expected to
cause or result in, the stabilization of the price of the Common Stock or the
Warrants to facilitate the sale or resale of any of the Securities.
(r) The Company will not take any action to facilitate the sale of any
shares of Common Stock pursuant to Rule 144 under the Act if any such sale would
violate any of the terms of the Lock-up Agreements.
(s) Prior to the 120th day after the Firm Closing Date, the Company
will provide the Representative and its designees with three bound volumes of
the transaction documents relating to the Registration Statement and the
closing(s) hereunder.
(t) The Company shall consult with the Representative prior to the
distribution to third parties of any financial information news releases or
other publicity regarding the Company, its business, or any terms of this
offering and the Underwriters will consult with the Company prior to the
issuance of any research report or recommendation concerning the Company's
securities. Copies of all documents that the Company or its public relations
firm intend to distribute will be provided to the Representative for review
prior to such distribution.
(u) The Company and the Underwriters will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent this Offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriters will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
15
<PAGE>
(v) The Company will, for a period of no less than three years
commencing immediately after the Effective Date, engage a designee of the
Representative as an advisor (the "Advisor") to the Company's Board of
Directors, who shall attend meetings of the Board, receive all notices and other
correspondence and communications sent by the Company to its Board of Directors
and receive cash compensation equal to that of the cash compensation paid to
other non-employee directors; provided, that in lieu of the Representative's
right to designate an Advisor, the Representative shall have the right during
such three-year period, in its sole discretion, to designate one person for
election as a director of the Company and the Company will utilize its best
efforts to obtain the election of such person who shall be entitled to receive
the same cash compensation, expense reimbursements and other benefits as set
forth above. In addition, such Advisor shall be entitled to receive
reimbursement for all costs incurred in attending such meetings including, but
not limited to, food, lodging and transportation consistent with reimbursement
made to other non-employee directors. The Company, during said three-year
period, shall schedule no less than four formal meetings (at least one of which
shall be "in person" and the others may be held telephonically) of its Board of
Directors in each such year at which meetings such Advisor shall be permitted to
attend (in person, for each meeting held "in person") as set forth herein; said
meetings shall be held quarterly each year and advance notice of such meetings
identical to the notice given to directors shall be given to the Advisor. The
Company and its principal stockholders shall, during such three year period,
give the Representative timely prior written notice of any proposed
acquisitions, mergers, reorganizations or other similar transactions. The
Company shall indemnify and hold the Representative and such Advisor or director
harmless against any and all claims, actions, damages, costs and expenses, and
judgments arising solely out of the attendance and participation of such Advisor
or director at any such meeting described herein, and, if the Company maintains
a liability insurance policy affording coverage for the acts of its officers and
directors, it shall, if possible, include such Advisor or director as an insured
under such policy.
(w) The Company shall first submit to the Representative certificates
representing the Securities for approval prior to printing, and shall, as
promptly as possible, after filing the Registration Statement with the
Commission, obtain CUSIP numbers for the Securities.
(x) The Company shall engage the Underwriters' counsel to provide the
Underwriters, at the closing of any sale of Securities hereunder and quarterly
thereafter, with an opinion, setting forth those states in which the Common
Stock and Warrants may be traded in non-issuer transactions under the blue sky
or securities laws of the 50 states. The Company shall pay such counsel a
one-time fee of $10,000 for such opinions at the closing of the sale of the Firm
Securities.
(y) The Company will prepare and file a registration statement with
the Commission pursuant to section 12 of the 1934 Act, and will use its best
efforts to have such registration statement declared effective by the Commission
on an accelerated basis on the day after the Effective Date. For this purpose
the Company shall prepare and file with the Commission a General Form of
Registration of Securities (Form 8-A or Form 10).
16
<PAGE>
(z) For so long as the Securities are registered under the 1934 Act,
the Company will hold an annual meeting of stockholders for the election of
directors within 180 days after the end of each of the Company's fiscal years
and within 135 days after the end of each of the Company's fiscal years will
provide the Company's stockholders with the audited consolidated financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such consolidated financial statements shall be those required by Rule
14a-3 under the 1934 Act and shall be included in an annual report pursuant to
the requirements of such Rule.
(aa) The Company shall retain the Representative as a financial
advisor at an annual fee of $60,000 for a 36-month period commencing on the
Closing Date. The entire fee of $180,000 shall be payable on the Closing Date.
(bb) The Company will engage a financial public relations firm
reasonably satisfactory to the Representative on or before the Firm Closing
Date, and continuously engage such firm, or a substitute firm reasonably
acceptable to the Representative, for a period of twelve (12) months following
the Firm Closing Date.
(cc) The Company will take all necessary and appropriate actions to be
included in Standard and Poor's Corporation Descriptions or other equivalent
manual and to maintain its listing therein for a period of five (5) years from
the Effective Date.
(dd) On or prior to the Effective Date, the Company will give written
instructions to the transfer agent for the Common Stock directing said transfer
agent to place stop-order restrictions against, and appropriate legends advising
of the Lock-up Agreements on, the certificates representing the securities of
the Company owned by the persons who have entered into the Lock-up Agreements.
(ee) The Company will obtain and keep in effect for the shorter of
five (5) years or the period during which Raymond J. Meyers is employed as its
Chief Executive Officer, a policy on his life in the amount of $1 million
payable to the Company.
5. Expenses
(a) The Company shall pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to section 10 hereof, including all costs and expenses incident to (i)
the preparation, printing and filing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Preliminary Prospectus and the Prospectus and any amendment or
supplement thereto, this Agreement, the Agreement Among Underwriters, the
selected dealer agreement and the other agreements and documents governing the
underwriting arrangements and any blue sky memoranda, (ii) all reasonable and
necessary arrangements relating to the delivery to the Underwriters of copies of
the foregoing documents, (iii) the fees and disbursements of the counsel, the
17
<PAGE>
accountants and any other experts or advisors retained by the Company, (iv) the
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's, warrant agent's and
registrar's fees or any transfer or other taxes payable thereon, (v) the
qualification of the Securities under state blue sky or securities laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto (such counsel fees not to exceed $________, of which $7,500
shall be due and payable upon the commencement of blue sky filing, together with
the related filing fees) and any fees and disbursements of local counsel, if
any, retained for such purpose, (vi) the filing fees of the Commission and the
NASD relating to the Securities, (vii) the inclusion of the Securities on The
Nasdaq SmallCap Market and in the Standard and Poor's Corporation Descriptions
Manual, (viii) any "road shows" or other meetings with prospective investors in
the Securities, including transportation, accommodation, meal, conference room,
audio-visual presentation and similar expenses of the Underwriters or its
representatives or designees (other than as shall have been specifically
approved by the Representative to be paid for by the Underwriters) and (ix) the
publication of "tombstone advertisements" in newspapers or other publications
selected by the Representative and the manufacture of prospectus memorabilia. In
addition to the foregoing, the Company shall reimburse the Representative for
its expenses on the basis of a non-accountable expense allowance in the amount
of 3.00% of the gross offering proceeds to be received by the Company. The
unpaid portion of the expense allowance, based on the gross proceeds from the
sale of the Firm Securities, shall be deducted from the funds to be paid by the
Representative in payment for the Firm Securities, pursuant to section 2 of this
Agreement, on the Firm Closing Date. To the extent any Option Securities are
sold, any remaining non-accountable expense allowance based on the gross
proceeds from the sale of the Option Securities shall be deducted from the funds
to be paid by the Representative in payment for the Option Securities, pursuant
to section 2 of this Agreement, on the Option Closing Date. The Company
warrants, represents and agrees that all such payments and reimbursements will
be promptly and fully made.
(b) Notwithstanding any other provision of this Agreement, if the
offering of the Securities contemplated hereby is terminated for any reason, the
Company agrees that, in addition to the Company paying its own expenses as
described in subparagraph (a) above, (i) the Company shall reimburse the
Underwriters only for their actual accountable out-of-pocket expenses (in
addition to blue sky legal fees and expenses referred to in subparagraph (a)
above), and (ii) the Representative shall be entitled to retain amounts advanced
by the Company (if any) against the non-accountable expense allowance referred
to in subparagraph (a) above; provided, however, that the amount retained
pursuant to this clause (ii) shall not exceed the Representative's expenses on
an accountable basis to the date of such cancellation and that all unaccounted
for amounts shall be refunded to the Company. Such expenses shall include, but
are not to be limited to, fees for the services and time of counsel for the
Underwriters to the extent not covered by clause (i) above, plus any additional
expenses and fees, including, but not limited to, travel expenses, postage
expenses, duplication expenses, long-distance telephone expenses, and other
expenses incurred by the Representative in connection with the proposed
offering.
18
<PAGE>
6. Warrant Solicitation Fee. The Company agrees to pay the Representative a
fee of five percent (5%) of the aggregate exercise price of the Warrants if (i)
the market price of the Common stock is not less than the exercise price of the
Warrants on the date of exercise; (ii) the exercise of the Warrants is solicited
by the Representative at such as it is a member of the NASD and the
Representative is designated in writing by the holder of the Warrants as the
NASD member soliciting the exercise; (iii) the Warrants are not held in a
discretionary account; (iv) the disclosure of compensation arrangements is made
both at the time of the Offering and at the time of the exercise; and (v) the
solicitation of the Warrant exercise is not in violation of Rule 101 of
Regulation M promulgated under the 1934 Act; and (vi) such payment is not
otherwise in violation of then applicable NASD rules. The Company agrees not to
solicit the exercise of any Warrant other than through the Representative and
will not authorize any other dealer to engage in such solicitation without the
prior written consent of the Representative, which will not be unreasonably
withheld. The Warrant solicitation fee will not be paid in a non-solicited
transaction. Any request for exercise will be presumed to be unsolicited unless
the customer states in writing that the transaction was solicited and designates
in writing that the Representative solicited the exercise. No Warrant
solicitation by the Representative will occur for a period of 12 months after
the Effective Date.
7. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares shall be subject, in the
Underwriters' sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy
of the statements of the Company's officers made pursuant to the provisions
hereof, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the registration statement, as heretofore amended, has not been
declared effective as of the time of execution hereof, the registration
statement, as heretofore amended or as amended by an amendment thereto to be
filed prior to the Firm Closing Date, shall have been declared effective not
later than 5:30 P.M., New York City time, on the date on which the amendment to
such registration statement containing information regarding the initial public
offering price of the Securities has been filed with the Commission, or such
later time and date as shall have been consented to by the Underwriters; if
required, the Prospectus and any amendment or supplement thereto shall have been
filed with the Commission in the manner and within the time period required by
Rule 424(b) under the Act, no stop order suspending the effectiveness of the
Registration Statement shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Underwriters, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Underwriters shall have received an opinion, dated the Firm
Closing Date, of Gary Agron, Esq., counsel to the Company, to the effect that:
(1) the Company and each Subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
state of its incorporation and is duly qualified to transact business as a
19
<PAGE>
foreign corporation and is in good standing under the laws of each other
jurisdiction in which its ownership or leasing of any properties or the conduct
of its business requires such qualification, except where the failure to so
qualify would not have a materially adverse effect upon the Company and its
subsidiaries, taken as a whole.
(2) the Company and each Subsidiary has full corporate power and
authority to own or lease its property and conduct its business as now being
conducted and as proposed to be conducted, as described in the Registration
Statement and the Prospectus, and the Company has full corporate power and
authority to enter into this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement and to carry out all the terms and provisions
hereof and thereof to be carried out by it;
(3) to the knowledge of such counsel, there are no outstanding
options, warrants or other rights granted by the Company to purchase shares of
its Common Stock, preferred stock or other securities other than as described in
the Prospectus; the Shares have been duly authorized and the Warrant Shares and
the Underwriters' Warrant Shares have been duly reserved for issuance by all
necessary corporate action on the part of the Company and, the Shares when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, the Warrant Shares when issued upon payment of the exercise price
specified in the Warrants, Underwriters' Warrants when issued and delivered and
paid for in accordance with this Agreement and the Underwriters' Warrant
Agreement by the Underwriters and the Warrant Shares when issued upon payment of
the exercise price specified in the Underwriters' Warrants, will be validly
issued, fully paid, nonassessable and free of preemptive rights and will conform
to the description thereof in the Prospectus; to the knowledge of such counsel,
no holder of outstanding securities of the Company is entitled as such to any
preemptive or other right to subscribe for any of the Shares, the Warrant
Shares, or the Underwriters' Warrant Shares; and to the knowledge of such
counsel, no person is entitled to have securities registered by the Company
under the Registration Statement or otherwise under the Act other than as
described in the Prospectus;
(4) the Shares have been approved for inclusion on The Nasdaq
SmallCap Market;
(5) the execution and delivery of this Agreement, the Warrant
Agreement, the Underwriters' Warrant Agreement and the Financial Advisory and
Investment Banking Agreement have been duly authorized by all necessary
corporate action on the part of the Company and this Agreement, the Warrant
Agreement, the Underwriters' Warrant Agreement and the Financial Advisory and
Investment Banking Agreement have been duly executed and delivered by the
Company, and each is a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other similar laws affecting creditors' rights generally and to
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law) and except as rights to indemnity and
contribution under this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement may be limited by applicable law;
20
<PAGE>
(6) the Underwriters' Warrants conform to the description thereof
in the Registration Statement and in the Prospectus and are duly authorized and
upon payment of the purchase price therefore specified in section 2(d) of this
Agreement are validly issued and constitute valid and binding obligations of the
Company entitled to the benefits of the Underwriters' Warrant Agreement;
(7) the statements set forth in the Prospectus under the caption
"Description of Securities" in the Prospectus, insofar as those statements
purport to summarize the terms of the capital stock and warrants of the Company,
provide a fair summary of such terms; the statements in the Prospectus, insofar
as those statements constitute matters of law or legal conclusions, or summaries
of the contracts, agreement instruments, leases or licenses referred to therein,
constitute a fair summary of those matters, legal conclusions, contracts,
agreement instruments, leases or licenses and include all material terms
thereof, as applicable;
(8) none of (A) the execution and delivery of this Agreement, the
Warrant Agreement and the Underwriters' Warrant Agreement, (B) the issuance,
offering and sale by the Company to the Underwriters of the Securities pursuant
to this Agreement and the Underwriters' Warrant Securities pursuant to the
Underwriters' Warrant Agreement, nor (C) the compliance by the Company with the
other provisions of this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement and the consummation of the transactions contemplated hereby
and thereby, (1) requires the consent, approval, authorization, registration or
qualification of or with any court or governmental authority known to us, except
such as have been obtained and such as may be required under state blue sky or
securities laws, or (2) conflicts with or results in a breach or violation of,
or constitutes a default under, any material contract, indenture, mortgage, deed
of trust, loan agreement, note, lease or other material agreement or instrument
known to such counsel to which the Company is a party or by which the Company or
any of its property is bound or subject, or the certificate of incorporation or
by-laws of the Company, or any material statute or any judgment, decree, order,
rule or regulation of any court or other governmental or regulatory authority
known to such counsel applicable to the Company;
(9) to the knowledge of such counsel, (A) no legal or
governmental proceedings are pending to which the Company or a Subsidiary is a
party or to which the property of the Company or a Subsidiary is subject and (B)
no contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required;
(10) the Company and each of the Subsidiaries possesses adequate
licenses, orders, authorizations, approvals, certificates or permits issued by
the appropriate federal or state regulatory agencies or bodies necessary to
conduct its business as described in the Registration Statement and the
Prospectus, and, to the knowledge of such counsel, there are no pending or
21
<PAGE>
threatened proceedings relating to the revocation or modification of any such
license, order, authorization, approval, certificate or permit, except as
disclosed in the Registration Statement and the Prospectus;
(11) neither the Company nor the Subsidiary is in violation or
breach of, or in default with respect to, any term of its certificate of
incorporation or by-laws, and to the knowledge of such counsel, neither the
Company nor any Subsidiary is in (i) violation in any material respect of any
law, statute, regulation, ordinance, rule, order, judgment or decree of any
court or any governmental or regulatory authority applicable to it, or (ii)
default in any material respect in the performance or observance of any
obligation, agreement, covenant or condition contained in any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which it is a party or by which it or any of
its property may be bound or subject, and no event has occurred which with
notice, lapse of time or both would constitute such a default.
(12) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to such
counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the best
knowledge of such counsel, are contemplated by the Commission;
(13) the registration statement originally filed with respect to
the Securities and each amendment thereto and the Prospectus (in each case,
other than the financial statements and schedules and other financial and
statistical information contained therein, as to which such counsel need express
no opinion) comply as to form in all material respects with the applicable
requirements of the Act and the rules and regulations of the Commission
thereunder; and
(14) the Company is not an "investment company" as defined in
section 3(a) of the Investment Company Act and, if the Company conducts its
business as set forth in the Prospectus, it will not become an "investment
company" and will not be required to register under the Investment Company Act.
Counsel also shall state in its opinion that it has participated in the
preparation of the Registration Statement and the Prospectus and that nothing
has come to its attention that has caused them to believe that the Registration
Statement, at the time it became effective (including the information deemed to
be a part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b), if applicable), contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, as of its
date or as of the Firm Closing Date, contained an untrue statement of material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
22
<PAGE>
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials, copies of which certificates will
be provided to the Underwriters, and, as to matters of the laws of certain
jurisdictions, on the opinions of other counsel to the Company, which opinions
shall also be delivered to the Underwriters, in form and substance acceptable to
the Underwriters, if such other counsel expressly authorize such reliance and
counsel to the Company expressly states in their opinion that such counsel's and
the Underwriters' reliance upon such opinion is justified.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Underwriters shall have received from Angell & Deering, a
letter dated the Firm Closing Date and dated each Option Closing Date (as
defined below), if applicable, in form and substance satisfactory to the
Underwriters, to the effect that (i) they are independent public accountants
with respect to the Company within the meaning of the Act and the applicable
rules and regulations thereunder; (ii) in their opinion, the consolidated
financial statements audited by them and included in the Registration Statement
and the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published rules
and regulations thereunder; (iii) based upon procedures set forth in detail in
such letter, nothing has come to their attention which causes them to believe
that (A) the unaudited financial statements as of ___________, 1997 included in
the Registration Statement was not determined on a basis substantially
consistent with that used in determining the corresponding amounts in the
audited financial statements as of [ ] included in the Registration Statement or
(B) at a specified date not more than five days prior to the date of this
Agreement, there has been any change in the capital stock of the Company, any
increase in the long-term debt or decrease in net sales of the Company and its
Subsidiaries, as compared with the amounts shown in the [ ] balance sheet
included in the Registration Statement or as of the date of the most recent
financial statements made available by the Company there has been any change in
the capital stock of the Company, any increase in the long-term debt or any
decrease in net sales, working capital or net assets of the Company and its
Subsidiaries as compared with the amounts shown in the [ ] balance sheet
included in the Registration Statement or, during the period from [ ] through
date of the most recent financial statement made available by the Company and
its Subsidiaries, there were any decreases, as compared with the corresponding
period in the preceding year, in revenues, or any increase in net loss of the
Company, except in all instances for changes, increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur;
and (iv) in addition to the audit referred to in their opinion and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information (including the summary of
consolidated financial information and secured financial information) which are
included in the Registration Statement and Prospectus and which are specified by
the Underwriters, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting, financial and other
records of the Company identified in such letter. References to the Registration
23
<PAGE>
Statement and the Prospectus in this paragraph (c) with respect to the letter
referred to above shall include any amendment or supplement thereto at the date
of such letter.
(d) The representations and warranties of the Company contained in
this Agreement shall be true and correct as if made on and as of the Firm
Closing Date; the Registration Statement shall not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, shall not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company shall
have performed all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date.
(e) No stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or contemplated by the
Commission.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a prospective
material adverse change, in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company and the Subsidiaries, taken as
a whole, except in each case as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto).
(g) The Underwriters shall have received a certificate, dated the Firm
Closing Date, of the Chief Executive Officer and the Secretary of the Company to
the effect set forth in subparagraphs (d) through (f) above.
(h) The Common Stock and Warrants shall be qualified in such
jurisdictions as the Underwriters may reasonably request pursuant to section
4(c), and each such qualification shall be in effect and not subject to any stop
order or other proceeding on the Firm Closing Date.
(i) The Company shall have executed and delivered to the Underwriters
the Underwriters' Warrant Agreement and a certificate or certificates evidencing
the Underwriters' Warrants, in each case in a form acceptable to the
Underwriters.
(j) The Representative shall have received Lock-up Agreements executed
by the persons listed on Schedule 3 annexed hereto, or the same has been waived
in writing.
(j) On or before the Firm Closing Date, the Underwriters and counsel
for the Underwriters shall have received such further certificates, documents,
letters or other information as they may have reasonably requested from the
Company.
24
<PAGE>
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and counsel
for the Underwriters. The Company shall furnish to the Underwriters such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriters and counsel for the Underwriters shall reasonably
request.
The obligation of the Underwriters to purchase and pay for any Option
Securities shall be subject, in its discretion, to each of the foregoing
conditions to purchase the Firm Securities, except that all references to the
Firm Securities and the Firm Closing Date shall be deemed to refer to such
Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Underwriters
and each person, if any, who controls any Underwriter within the meaning of
section 15 of the Act or section 20 of the 1934 Act against any losses, claims,
damages, amounts paid in settlement or liabilities, joint or several, to which
the Underwriters or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof arise out of or are based upon:
(1) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Securities under the Blue Sky or securities laws thereof or filed
with the Commission or any securities association or securities exchange (each
an "Application"), or
(2) the omission or alleged omission to state in such
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse, as incurred, the Underwriters and
such controlling person for any legal or other expenses reasonably incurred by
the Underwriters or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
loss, claim, damage, liability, action, investigation, litigation or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or any Application in reliance upon and in conformity with written information
furnished to the Company by the Underwriters specifically for use therein. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have. The Company will not, without the prior written consent of the
Underwriters, settle or compromise or consent to the entry of any judgment in
25
<PAGE>
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not the Underwriters or any
person who controls any Underwriter within the meaning of section 15 of the Act
or section 20 of the 1934 Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Underwriters and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(b) The Underwriters, severally but not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of section 15 of the Act or section 20 of the
Exchange Act against, any losses, claims, damages or liabilities to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, but only insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application, or necessary to make the statements
therein 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 made in reliance upon and in conformity with written information
furnished to the Company by any Underwriters specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in collection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
26
<PAGE>
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence or (ii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this section 8 is unavailable or insufficient to
hold harmless an indemnified party in respect of any losses, claims, damages or
liabilities (or actions in respect thereof), each indemnifying party, in order
to provide for just and equitable contribution, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party on the other from the
offering of the Securities or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the indemnified party on the other in connection with the statements or
omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof). The relative
benefits received by the Company on the one hand and the Underwriter on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriter. The relative fault of the parties shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriter, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and the other
equitable considerations appropriate in the circumstances. The Company and the
Underwriter agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d).
Notwithstanding any other provision of this paragraph (d), the Underwriter shall
not be obligated to make contributions hereunder that in the aggregate exceed
the total public offering price of the Securities purchased by the Underwriter
under this Agreement, less the aggregate amount of any damages that the
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of section 11 (f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), each person, if any, who
controls an Underwriter within the meaning of section 15 of the Act or section
20 of the 1934 Act shall have the same rights to contribution as the
27
<PAGE>
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of section 15 of the Act or section 20 of the 1934
Act, shall have the same rights to contribution as the Company.
9. Substitution of Underwriters.
If any Underwriter shall for any reason not permitted hereunder cancel its
obligations to purchase the Firm Securities hereunder, or shall fail to take up
and pay for the number of Firm Securities set forth opposite its name on
Schedule 1 hereto upon tender of such Firm Securities in accordance with the
terms hereof, then:
(a) If the aggregate number of Firm Securities which such Underwriter
or Underwriters agreed but failed to purchase does not exceed 10% of the total
number of Firm Securities, the other Underwriter shall be obligated to purchase
the Firm Securities which such defaulting Underwriter agreed but failed to
purchase.
(b) If any Underwriter so defaults and the agreed number of Firm
Securities with respect to which such default or defaults occurs is more than
10% of the total number of Firm Securities, the remaining Underwriters shall
have the right to take up and pay for the Firm Securities which the defaulting
Underwriter agreed but failed to purchase. If such remaining Underwriters do
not, at the Firm Closing Date, take up and pay for the Firm Securities which the
defaulting Underwriter agreed but failed to purchase, the time for delivery of
the Firm Securities shall be extended to the next business day to allow the
remaining Underwriters the privilege of substituting within twenty-four hours
(including nonbusiness hours) another underwriter or underwriters satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid, within such twenty-four hour period, the time of
delivery of the Firm Securities may, at the option of the Company, be again
extended to the next following business day, if necessary, to allow the Company
the privilege of finding within twenty-four hours (including nonbusiness hours)
another underwriter or underwriters to purchase the Firm Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted Underwriters to
take up the Firm Securities of the defaulting Underwriter as provided in this
section, (i) the Company or the underwriter shall have the right to postpone the
time of delivery for a period of not more than seven business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other document or arrangements, and the
Company agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective numbers of Firm Securities to be purchased by the remaining
Underwriters or substituted Underwriters shall be taken as the basis of the
underwriting obligation for all purposes of this agreement.
If in the event of a default by any Underwriter and the remaining
Underwriters shall not take up and pay for all the Firm Securities agreed to be
purchased by the defaulting Underwriter or substitute another underwriter or
underwriters as aforesaid, the Company shall not find or shall not elect to seek
another underwriter or underwriters for such Firm Securities as aforesaid, then
this Agreement shall terminate.
28
<PAGE>
If, following exercise of the option provided in section 2(c) hereof, any
Underwriter or Underwriters shall for any reason not permitted hereunder cancel
their obligations to purchase Option Securities at the Option Closing Date, or
shall fail to take up and pay for the number of Option Securities, which it
became obligated to purchase at the Option Closing Date upon tender of such
Option Securities in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Units of the defaulting Underwriters in the manner provided in section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not take
up and pay for all such Option Securities, the Underwriters shall be entitled to
purchase the number of Option Securities for which there is no default or, at
their election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, any of its officers
or directors and the Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, the Underwriters or any
controlling person referred to in section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in sections 5 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the Underwriters
by notice to the Company given prior to the Firm Closing Date or the related
Option Closing Date, respectively, in the event that the Company shall have
failed, refused or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied under section 7 hereunder at
or prior thereto or if at or prior to the Firm Closing Date or such Option
Closing Date, respectively.
(1) the Company sustains a loss by reason of explosion, fire,
flood, accident or other calamity, which, in the opinion of the Underwriters,
substantially affects the value of the properties of the Company or which
materially interferes with the operation of the business of the Company
regardless of whether such loss shall have been insured; there shall have been
29
<PAGE>
any material adverse change, or any development involving a prospective material
adverse change (including, without limitation, a change in management or control
of the Company), in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(2) any action, suit or proceeding shall be threatened,
instituted or pending, at law or in equity, against the Company, by any person
or by any federal, state, foreign or other governmental or regulatory
commission, board or agency wherein any unfavorable result or decision could
materially adversely affect the business, operations, condition (financial or
otherwise), earnings or prospects of the Company;
(3) trading in the Common Stock or Warrants shall have been
suspended by the Commission or the NASD, or trading in securities generally on
the New York Stock Exchange shall have been suspended or minimum or maximum
prices shall have been established on either such exchange or quotation system;
(4) a banking moratorium shall have been declared by New York or
United States authorities;
(5) there shall have been (A) an outbreak of hostilities between
the United States and any foreign power (or, in the case of any ongoing
hostilities, a material escalation thereof), (B) an outbreak of any other
insurrection or armed conflict involving the United States or (C) any other
calamity or crisis or material change in financial, political or economic
conditions, having an effect on the financial markets that, in any case referred
to in this clause (5), in the sole judgment of the Underwriters makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement;
(6) termination of this Agreement pursuant to this section 11
shall be without liability of any party to any other party, except as provided
in section 5(b) and section 8 hereof.
12. Information Supplied by the Underwriters. The statements set forth in
the first paragraph on page 3, in the second, third, eighth (first and third
sentences only) and sixteenth paragraphs under the heading "Underwriting" in the
Preliminary Prospectus dated ____________ or the Prospectus (to the extent such
statements relate to the Underwriters) constitute the only information furnished
by the Underwriters to the Company for the purposes of sections 1 (b) and 8(b)
hereof. The Underwriters confirm that such statements (to such extent) are
correct.
13. Notices. All notices hereunder to or upon either party hereto shall be
deemed to have been duly given for all purposes if in writing and (i) delivered
in person or by messenger or an overnight courier service against receipt, or
(ii) send by certified or registered mail, postage paid, return receipt
requested, or (iii) sent by telegram, facsimile, telex or similar means,
30
<PAGE>
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
To the Company: ProtoSource Corporation
2300 Tulare Street
Suite 210
Fresno, CA 93721
(209) 486-8638
Fax: (209) 490-8630
To the Underwriters: Andrew Alexander Wise & Company
17 State Street
4th Floor
New York, New York 10004
Attn: Andreas Zigouras
(212) 809-7300
Fax: (212) 809-7383
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice shall be, in the case of clause (i), the
date of the receipt; in the case of clause (ii), five business days after such
notice or demand is sent; and, in the case of clause (iii), the business day
next following the date such notice is sent.
14. Amendment. Except as otherwise provided herein, no amendment of this
Agreement shall be valid or effective, unless in writing and signed by or on
behalf of the parties hereto.
15. Waiver. No course of dealing or omission or delay on the part of either
party hereto in asserting or exercising any right hereunder shall constitute or
operate as a waiver of any such right. No waiver of any provision hereof shall
be effective, unless in writing and signed by or on behalf of the party to be
charged therewith. No waiver shall be deemed a continuing waiver or waiver in
respect of any other or subsequent breach or default, unless expressly so stated
in writing.
16. Applicable Law. This agreement shall be governed by, and interpreted
and enforced in accordance with, the laws of the State of New York without
regard to principles of choice of law or conflict of laws.
17. Jurisdiction. Each of the parties hereto hereby irrevocably consents
and submits to the exclusive jurisdiction of the Supreme Court of the State of
New York and the United States District Court for the Southern District of New
York in connection with any suit, action or other proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby, waives any
objection to venue in the County of New York, State of New York, or such
District and agrees that service of any summons, complaint, notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of section 13.
31
<PAGE>
18. Remedies. In the event of any actual or prospective breach or default
by either party hereto, the other party shall be entitled to equitable relief,
including remedies in the nature of rescission, injunction and specific
performance. All remedies hereunder are cumulative and not exclusive, and
nothing herein shall be deemed to prohibit or limit either party from pursuing
any other remedy or relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
19. Attorneys' Fees. The prevailing party in any suit, action or other
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby, shall be entitled to recover its costs and reasonable
attorneys' fees.
20. Severability. The provisions hereof are severable and in the event
that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
21. Counterparts. This agreement may be executed in counterparts, each of
which shall be deemed an original and which together shall constitute one and
the same agreement.
22. Successors. This agreement shall inure to the benefit of and be binding
upon the Underwriters, the Company and their respective successors and assigns.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company contained in
section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of section 15 of the Act
or section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in section 8 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company within
the meaning of section 15 of the Act or section 20 of the Exchange Act. No
purchaser of Securities from the Underwriters shall be deemed a successor
because of such purchase.
23. Titles and Captions. The titles and captions of the articles and
sections of this Agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
24. Grammatical Conventions. Whenever the context so requires, each pronoun
or verb used herein shall be construed in the singular or the plural sense and
each capitalized term defined herein and each pronoun used herein shall be
construed in the masculine, feminine or neuter sense.
25. References. The terms "herein," "hereto," "hereof," "hereby," and
"hereafter," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
32
<PAGE>
26. Entire Agreement. This Agreement embodies the entire agreement of the
parties hereto with respect to the subject matter hereof and supersedes any
prior agreement, commitment or arrangement relating thereto.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and the
Underwriters.
Very truly yours,
PROTOSOURCE
By:
--------------------------------
Name: Raymond J. Meyers
Title: Chief Executive Officer
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
ANDREW ALEXANDER WISE & COMPANY, INC.
As representative of the several Underwriters
listed in Schedule 1 annexed hereto.
By:
------------------------------------------
Name: Andreas Zigouras
Title: President
33
<PAGE>
Schedule 1
UNDERWRITERS
- - ------------------------------------------------------------------------------
Name Shares of Common Stock Warrants
- - ------------------------------------------------------------------------------
Andrew Alexander Wise &
Company, Inc.
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
900,000 900,000
======= =========
- --------------------------------------------------------------------------------
34
<PAGE>
Schedule 2
SUBSIDIARIES
35
<PAGE>
Schedule 3
STOCKHOLDERS LIST
36
Exhibit 1.06
PROTOSOURCE
AND
ANDREW ALEXANDER WISE & COMPANY, INC.
UNDERWRITER'S
WARRANT AGREEMENT
<PAGE>
Underwriter's WARRANT AGREEMENT dated as of _________________by and between
ProtoSource (the "Company") and Andrew Alexander Wise & Company, Inc. (the
"Underwriter").
Preliminary Statement
---------------------
The Underwriter has agreed, pursuant to an underwriting agreement (the
"Underwriting Agreement") dated ____________________, 1997, between the
Underwriter and the Company, to act as the Underwriter in connection with the
Company's proposed initial public offering of 900,000 shares of the Company's
common stock, par value $0.001 per share (the "Common Stock") and 900,000
Redeemable Common Stock Purchase Warrants (the "Warrants"), at an initial public
offering price of $_______ per share of Common Stock and $____ per Warrant (the
"Initial Public Offering"). The Company proposes to issue to the Underwriter at
the closing of the Initial Public Offering as part of the Underwriter's
compensation in connection therewith, warrants (the "Underwriter's Warrants") to
purchase an aggregate of 90,000 shares of Common Stock and/or 90,000 Warrants.
The Warrants being offered in the Initial Public Offering and the Warrants
purchasable upon exercise of the Underwriter's Warrants will be identical in all
respects and will be issued pursuant to, and governed by, the provisions of a
Warrant Agreement among the Company, the Underwriter and Corporate Stock
Transfer Co., as Warrant Agent (the "Warrant Agreement"). NOW, THEREFORE, in
consideration of the premises, the payment by the Underwriter to the Company of
Ten Dollars ($10.00), 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:
<PAGE>
1. Grant. The Holders (as defined in Section 3 below) are hereby granted
the right to purchase, at any time from ______________, 1998 until 5:00 p.m.,
New York City time, on _____________, 2003 an aggregate of 90,000 shares of
Common Stock and/or 90,000 Warrants, at an initial purchase price of $_______
per share of Common Stock (subject to adjustment as provided in Section 6
hereof) and $_____ per Warrant (120% of the Initial Public Offering price of the
Common Stock and Warrants, respectively), subject to the terms and conditions of
this Agreement.
2. Warrant Certificates. The warrant certificates (the "Underwriter's
Warrant Certificates") 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 Underwriter's Warrants. The Underwriter's Warrants are
exercisable during the term set forth in Section 1 hereof and the Purchase Price
(as hereinafter defined) is payable by certified or cashier's check or money
order payable in lawful money of the United States. Upon surrender of an
Underwriter's Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Purchase Price for the shares of
Common Stock or Warrants issuable upon exercise thereof (and such other amounts,
if any, arising pursuant to Section 4 hereof) at the Company's principal office
in New York (presently located at 2300 Tulare Street, Suite 210, Fresno,
California 93721), the registered holder of an Underwriter's Warrant Certificate
("Holders" or "Holders") shall be entitled to receive a certificate or
certificates for the shares of Common Stock or Warrants so purchased. The
purchase rights represented by each Underwriter's Warrant Certificate are
exercisable at the option of the Holders thereof, in whole or in part, as to the
2
<PAGE>
whole number of shares of Common Stock or Warrants purchasable therewith (but
not as to fractions thereof). In the case of the purchase of less than all the
shares of Common Stock or Warrants purchasable upon the exercise of the
Underwriter's Warrants represented by an Underwriter's Warrant Certificate, the
Company shall cancel the Underwriter's Warrant Certificate represented thereby
upon the surrender thereof and shall execute and deliver a new Underwriter's
Warrant Certificate of like tenor for the number of Underwriter's Warrants which
have not been exercised.
4. Issuance of Certificates. Upon the exercise of the Underwriter's
Warrants and payment of the Purchase Price therefor, the issuance of
certificates representing the shares of Common Stock or Warrants issuable upon
exercise thereof, shall be made forthwith (and in any event within five (5)
business days thereafter) without further charge to the Holder thereof, and such
certificates shall (subject to the provisions of Sections 5 and 7 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 Underwriter's
Warrant Certificates and the certificates representing the shares of Common
Stock or Warrants (and such other securities, property or rights as may be
represented by certificates) issuable upon exercise thereof shall be executed on
behalf of the Company by the manual or facsimile signature of the then Chairman
or Vice Chairman of the Board of Directors, Chief Executive Officer, President
3
<PAGE>
or Vice President of the Company under its corporate seal reproduced thereon,
attested to by the manual or facsimile signature of the then Secretary or
Assistant Secretary or Treasurer or Assistant Treasurer of the Company.
Underwriter's Warrant Certificates shall be dated the date of issuance thereof
by the Company upon initial issuance, transfer or exchange, or in lieu of
mutilated, lost, stolen or destroyed Underwriter's Warrant Certificates.
5. Restriction On Transfer of Underwriter's Warrants. The Holder of an
Underwriter's Warrant Certificate (and its Permitted Transferees, as defined
below), by its acceptance thereof, covenants and agrees that the Underwriter's
Warrants are being acquired as an investment and not with a view to the
distribution thereof; that the Underwriter's Warrants may be sold, transferred,
assigned, hypothecated or otherwise disposed of, in whole or in part, to any
person (a "Permitted Transferee"), provided such transfer, assignment,
hypothecation or other disposition is made in accordance with the provisions of
the Securities Act of 1933, as amended (the "Act"); and provided, further, that
until ____________, 1999 [one year following the effective date of the Initial
Public Offering] only officers and partners of the Underwriter, or any selling
group member in the Initial Public Offering and their respective officers and
partners, shall be Permitted Transferees.
6. Purchase Price. The initial purchase price of the Underwriter's Warrants
shall be $_____ per share of Common Stock (the "Common Stock Purchase Price")
and $_____ per Warrant. The Common Stock Purchase Price shall be subject to
adjustment in accordance with the provisions of Section 9 of the Warrant
Agreement, which provisions are hereby incorporated by reference herein and made
a part hereof.
4
<PAGE>
7. Registration Rights.
(a) Registration Under the Securities Act of 1933. The Underwriter's
Warrants have not been registered under the Act. The Underwriter's Warrant
Certificates shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act"), and
may not be offered for sale or sold except pursuant to (i)
an effective registration statement under the Act, or (ii)
an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption
from registration under such Act is available.
(b) Demand Registration. (i) At any time commencing one (1) year and
expiring seven (7) years after the effective date of the Company's Registration
Statement relating to the Initial Public Offering (the "Effective Date"), the
Holders of a majority (as hereinafter defined) of the shares of Common Stock
purchased and purchasable upon exercise of the Underwriter's Warrants and the
Warrants purchasable therewith shall have the right, exercisable by written
notice to the Company, to have the Company prepare and file with the Securities
and Exchange Commission (the "Commission"), solely on one (1) occasion, a
registration statement on Form SB-2 (or other appropriate form), and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Holders, in order to comply with the
provisions of the Securities Act, so as to permit a public offering and sale for
a period of nine (9) months of the shares of Common Stock and Warrants purchased
or purchasable by such Holders and any other Holders of the Underwriter's
Warrants upon exercise of the Underwriter's Warrants and the Warrants
purchasable therewith ( such shares of Common Stock and Warrants being
5
<PAGE>
hereinafter referred to as the "Registrable Securities"). The Holders of the
Underwriter's Warrants may demand registration without exercising the
Underwriter's Warrants, and are never required to exercise same. The Company
covenants and agrees to give written notice of any registration request under
this Section 7(b) to all other registered Holders of the Underwriter's Warrants
and the Registrable Securities within ten (10) days from the date of the receipt
of any such registration request and upon the written request of any Holder
within fifteen (15) days after receipt of such notice to include in such
registration statement, the Registrable Securities of such Holder. As used
herein, the term "Majority" in reference to the Holders of the Underwriter's
Warrants shall mean in excess of fifty percent (50%) of the shares of Common
Stock issued or issuable upon exercise of the Underwriter's Warrants and the
Warrants purchasable therewith that (i) are not held by the Company, an
affiliate, officer, creditor, employee or agent thereof or any of their
respective affiliates, members of their family, persons acting as nominees or in
conjunction therewith, or (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act.
(c) Piggyback Registration. If, at any time within the period commencing
one (1) year and expiring five (5) years after the Effective Date, the Company
should file a registration statement with the Commission under the Securities
Act (other than in connection with a merger or other business combination
transaction or pursuant to Form S-8) it will give written notice by registered
mail, at least thirty (30) calendar days prior to the filing of each such
registration statement, to the Underwriter and to all other Holders of the
Underwriter's Warrants and the shares of Common Stock and Warrants purchased or
purchasable upon exercise thereof of its intention to do so. If the Holders of
the Registrable Securities notify the Company within twenty (20) calendar days
after receipt of any such notice of its or their desire to include any
Registrable Securities in such proposed
6
<PAGE>
registration statement, the Company shall afford the Holders of the Registrable
Securities the opportunity to have such Registrable Securities included in such
registration statement, unless the Underwriter for each proposed objects to the
inclusion of the Registrable Securities in such registration statement. However,
in such event, the Company will, within six (6) months of completion of such
underwritten offering, file at the expense of the Company, a registration
statement so as to permit a public offering and sale of the Registrable
Securities so excluded for a period of nine (9) months, which shall be in
addition to any registration statement required to be filed pursuant to Section
7(b). Notwithstanding the provisions of this Section 7(c) and the provisions of
Section 7(d), the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7(c) (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.
(d) Covenants of the Company With Respect to Registration. In connection
with any registrations under Sections 7(b) and 7(c) hereof, the Company
covenants and agrees as follows:
(1) The Company shall use its best efforts to file a registration
statement within forty-five (45) calendar days of receipt of any demand therefor
pursuant to section 7(b); provided, however, that the Company shall not be
required to produce audited or unaudited financial statements for any period
prior to the date such financial statements are required to be filed in a report
on Form 10-KSB or Form 10-QSB, as the case may be. The Company shall use its
best efforts to have any registration statement declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell
Registrable Securities such number of prospectuses as shall reasonably be
requested.
7
<PAGE>
(2) The Company shall pay all costs (excluding fees and expenses of
Holders' counsel and any underwriting discounts or selling fees, expenses or
commissions), fees and expenses in connection with any registration statement
filed pursuant to Sections 7(b) and 7(c) hereof including, without limitation,
the Company's legal and accounting fees, printing expenses, blue sky fees and
expenses. If the Company shall fail to comply with the provisions of Section
7(d), the Company shall, in addition to any other equitable or other relief
available to the Holders, be liable for any or all incidental and special
damages and damages due to loss of profit sustained by the Holders requesting
registration of their Registrable Securities.
(3) The Company will take all necessary action which may be required
to qualify or register the Registrable Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the 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.
(4) The Company shall indemnify the Holders of the Registrable
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended (the "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 Securities Act, the Exchange Act or otherwise, arising
from such registration statement, but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify
the Underwriter contained in Section 8 of the Underwriting Agreement, and the
Holders shall indemnify the Company to the same extent and with the same effect
8
<PAGE>
as the provisions pursuant to which the Underwriter have agreed to indemnify the
Company contained in Section 8 of the Underwriting Agreement.
(5) The Holders of the Registrable Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall indemnify the
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, against all loss, claim, damage or expense or liability to
which they may become subject under the Securities Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 8 of the Underwriting Agreement pursuant to which the
Underwriter have agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall be construed as
requiring the Holders to exercise their Underwriter's Warrants (or the Warrants
purchasable upon exercise thereof) prior to the initial filing of any
registration statement or the effectiveness thereof.
(7) The Company shall not be entitled to include any securities other
than the Registrable Securities in any registration statement filed pursuant to
Section 7(b) hereof without the prior written consent of the Holders of a
Majority of the Registrable Securities.
(8) The Company shall furnish to a designated Underwriter of the
Holders participating in the offering and to each Underwriter, if any, a signed
counterpart, addressed to such Holder or Underwriter of (i) an opinion of
counsel to the Company, dated the effective date of such registration statement
(and if such registration relates to an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
9
<PAGE>
(and, if such registration relates to an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement (the
"Accountants"), in each case covering substantially the same matters with
respect to such registration statement (and the prospectus included therein)
and, in the case of the accountants' "cold comfort" 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 "cold comfort" letters, with
respect to events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in "cold comfort"
letters delivered to Underwriter in underwritten public offerings of securities.
(9) The Company shall as soon as practicable after the effective date
of the registration statement make "generally available to its security holders"
(within the meaning of Rule 158 under the Act) an earnings statement (which need
not be audited) complying with Section ll(a) of the Securities Act and covering
a period of at least 12 consecutive months beginning after the effective date of
the registration statement.
(10) The Company shall deliver promptly to each Holder participating
in the offering requesting the correspondence described below and any managing
Underwriter copies of all correspondence between the Commission and the Company,
its counsel or Accountants with respect to the registration statement and permit
each Holder and Underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
10
<PAGE>
records and properties and opportunities to discuss the business of the Company
with its officers and Underwriters of the Accountants, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.
(11) The Company shall enter into an underwriting agreement with the
managing Underwriter selected for such underwriting by Holders holding a
Majority of the Registrable Securities requested to be included in such
underwriting; provided, however, that (i) such managing Underwriter shall be
reasonably acceptable to the Company, except that in connection with an offering
for which the Holders have piggyback rights, the Company shall have the sole
right to select the managing Underwriter, and (ii) the Holders shall be
responsible for any selling fees or commissions in connection with such
underwriting. Such underwriting agreement shall be satisfactory in form and
substance to the Company, a Majority of such Holders and such managing
Underwriter, and shall contain such representations, warranties and covenants by
the Company and such other terms as are customarily contained in agreements of
that type used by the managing Underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of their Registrable
Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such Underwriter shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the Underwriter except as they may relate to
such Holders and their intended methods of distribution.
(e) Further Registrations. The Company will cooperate with the Holders of
the Registrable Securities in preparing and signing any registration statement,
in addition to the registration statements discussed above, required in order to
sell or transfer the Underwriter's Securities and will supply all information
11
<PAGE>
required therefor, but such additional registration statement expenses or
offering statement expenses will be prorated between the Company and the Holders
of the Registrable Securities according to the aggregate sales price of the
securities being issued. The provisions of Section 7(d) shall apply to any such
registration statement.
8. Exchange and Replacement of Warrant Certificates. Each
Underwriter's Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holders at the principal executive office of
the Company, for a new Underwriter's Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of shares of
Common Stock and/or Warrants in such denominations as shall be designated by the
Holders 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 Underwriter's 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 Underwriter's Warrant Certificates, if
mutilated, the Company will make and deliver a new Underwriter's Warrant
Certificate of like tenor, in lieu thereof.
9. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Underwriter's Warrants, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests; provided, however, that
if a Holder exercises all Underwriter's Warrants held of record by such Holder,
the fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock.
12
<PAGE>
10. 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 Underwriter's
Warrants, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. The Company covenants
and agrees that, upon exercise of Underwriter's Warrants and payment of the
Purchase Price therefor, all the shares of Common Stock and other securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any stockholder. The
Company further covenants and agrees that as long as the Underwriter's Warrants
shall be outstanding, the Company shall use its best efforts to cause the Common
Stock and Warrants to be listed (subject to official notice of issuance) on all
securities exchanges on which the Common Stock and the Warrants issued in the
Initial Public Offering may then be listed or quoted.
11. Notices to Underwriter's Warrant Holders. Nothing contained in
this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company. If, however, at
any time prior to the expiration of the Underwriter's 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
13
<PAGE>
(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 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 stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, 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 validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
12. 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 the registered Holders of the Underwriter's Warrants, to the
address of such Holders as shown on the books of the Company; or
(b) If to the Company to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the Holders.
14
<PAGE>
13. Supplements and Amendments. The Company and the Underwriter may from
time to time supplement or amend this Agreement without the approval of any
Holders of Underwriter's Warrant Certificates (other than the Underwriter) 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 the Underwriter may deem necessary or desirable and which
the Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Underwriter's Warrant Certificates.
14. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Underwriter, the
Holders and their respective successors and assigns hereunder.
15. Termination. This Agreement shall terminate at the close of business on
__________________, 2005. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on the expiration of any applicable statute of limitations.
16. Governing Law: Submission to Jurisdiction. This Agreement and each
Underwriter's 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 without giving effect to
the rules of said state governing the conflicts of laws. The Company, the
Underwriter and the Holders hereby agree that any action, proceeding or claim
against it arising out of, or relating in any way to, this Agreement shall be
brought and enforced in the courts of the State of New York or of the United
States of America for the Southern District of New York, and irrevocably submits
15
<PAGE>
to such jurisdiction, which jurisdiction shall be exclusive. The Company, the
Underwriter and the Holders hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum. Any such process or summons to be
served upon any of the Company, the Underwriter and the Holders (at the option
of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
12 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the party so served in any action, proceeding or claim.
17. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement, to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and thereof. Subject to Section 13, this Agreement may not
be modified or amended except by a writing duly signed by the Company and the
Holders of a Majority of the Registrable Securities.
18. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
19. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
20. 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 Holders of the Underwriter's Warrant
Certificates or Registrable Securities any legal or equitable right, remedy or
16
<PAGE>
claim under this Agreement, and this Agreement shall be for the sole and
exclusive benefit of the Company and the Underwriter and any other Holders of
the Underwriter's Warrant Certificates or Registrable Securities.
21. 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.
22. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company, the Underwriter and their respective successors and
assigns and the Holders from time to time of the Underwriters' Warrant
Certificates.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
PROTOSOURCE
By:
-------------------------------
Raymond J. Meyers,
Chief Executive Officer
ANDREW ALEXANDER WISE & CO.
By:
-------------------------------
Name: Andreas Zigouras
Title: President
17
<PAGE>
EXHIBIT A
---------
PROTOSOURCE
-----------
WARRANT CERTIFICATE
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE COMMENCING __________________, 1999 THROUGH
5:00 P.M., NEW YORK CITY TIME ON _____________, 2003
No. UW-1 90,000 Warrants
This Warrant Certificate certifies that Andrew Alexander Wise & Company,
Inc., or registered assigns, is the registered holder of 90,000 Warrants to
purchase initially, at any time from __________________, 1998 until 5:00 p.m.,
New York City time on __________________ (the "Expiration Date"), 90,000 fully
paid and non-assessable shares of Common Stock, $.001 par value (the "Common
Stock"), of ProtoSource, a California corporation (the "Company") at a purchase
price of $_____ per share (the "Common Stock Purchase Price"), and/or 90,000
Redeemable Common Stock Purchase Warrants ("Warrants") of the Company at the
purchase price of $_____ per Warrant (the "Warrant Purchase Price"), upon the
surrender of this Warrant Certificate and payment of the applicable Purchase
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 _____________, 1997 (the
"Warrant Agreement") between the Company and Andrew Alexander Wise & Company,
Inc. (the "Underwriter"). Payment of the applicable Purchase Price shall be made
by certified or cashier's check or money order payable to the order of the
Company.
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.
A-1
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement between
the Company and the Underwriter, which Warrant Agreement is hereby incorporated
by reference in and made a part of this instrument and is hereby referred to for
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 respective Purchase Prices and the type and/or number of the Company's
securities issuable upon the exercise of this Warrant, 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
Purchase 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.
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 as provided herein,
without any charge except for any tax or other governmental charge imposed in
connection with such transfer.
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 undersigned has executed this certificate this ____
day of __________________, 1997.
PROTOSOURCE
By:
----------------------------------
Raymond J. Meyers
Chief Executive Officer
ATTEST
By:
---------------------------
Secretary
A-2
<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 his or its attorney-in-fact
to transfer the within Warrant Certificate on the books of ProtoSource, with
full power of substitution.
Dated:
Signature
----------------------
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right represented by
this Warrant Certificate to purchase:
___________shares of Common Stock
___________Redeemable Common Stock Warrants
and herewith tenders in payment for such securities a certified or cashier's
check or money order payable to the order of ProtoSource in the amount of $ ,
all in accordance with the terms hereof. The undersigned requests that
certificates for such securities be registered in the name of whose address is
and that such certificates be delivered to
whose address is
- ---------------------------------------------------------.
Dated:
Signature
---------------------------------
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
Exhibit 1.07
WARRANT AGREEMENT
AMONG
PROTOSOURCE
a California corporation,
ANDREW ALEXANDER WISE & COMPANY, INC.
and
CORPORATE STOCK TRANSFER, INC.
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
1. APPOINTMENT OF WARRANT AGENT......................................1
2. FORM OF WARRANT...................................................2
3. COUNTERSIGNATURE AND REGISTRATION.................................3
4. TRANSFERS AND EXCHANGES...........................................3
5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT
SOLICITATION FEE..................................................4
6. PAYMENT OF TAXES..................................................8
7. MUTILATED OR MISSING WARRANTS.....................................8
8. RESERVATION OF COMMON STOCK.......................................9
9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SECURITIES............10
10. FRACTIONAL INTERESTS.............................................19
11. NOTICES TO WARRANTHOLDERS........................................19
12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS..................21
13. REDEMPTION OF WARRANTS...........................................21
14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF
WARRANT AGENT....................................................22
15. DUTIES OF WARRANT AGENT..........................................23
16. CHANGE OF WARRANT AGENT..........................................25
17. IDENTITY OF TRANSFER AGENT.......................................26
18. NOTICES..........................................................27
19. SUPPLEMENTS AND AMENDMENTS.......................................28
20. NEW YORK CONTRACT................................................28
21. BENEFITS OF THIS AGREEMENT.......................................28
22. SUCCESSORS.......................................................29
i
<PAGE>
WARRANT AGREEMENT, dated as of July 30, 1997, among ProtoSource, a
California corporation (the "Company"), (the "Representative") and Corporate
Stock Transfer, Inc., as warrant agent (the "Warrant Agent").
The Company proposes to issue and sell through a public offering (the
"PO") underwritten by a group of underwriters (the "Underwriters") for whom the
Representative is acting as the representative, an aggregate of 900,000 shares
of common stock, $.001 par value (the "Common Stock"), and 900,000 redeemable
Common Stock purchase warrants ("Warrants") and, pursuant to the Underwriters'
over-allotment option (the "Over-allotment Option"), an additional 135,000
shares of Common Stock and 135,000 Warrants.
In connection with the PO the Company proposes to sell to the Underwriters
warrants (the "Underwriters' Warrants") to purchase 90,000 shares of Common
Stock and 90,000 Warrants.
Each Warrant will entitle the holder to purchase one share of Common Stock.
The Company desires the Warrant Agent to act on behalf of the Company, and
the Warrant Agent is willing so to act, in connection with the issuance,
registration, transfer, exchange and exercise of the Warrants. THEREFORE, the
parties hereto agree as follows: Section 1. APPOINTMENT OF WARRANT AGENT. The
Company hereby appoints the Warrant Agent to act as Warrant Agent for the
Company in accordance with the instructions hereinafter set forth in this
Agreement, and the Warrant Agent hereby accepts such appointment. Upon the
execution of this Agreement, certificates representing 900,000 Warrants to
purchase an aggregate of 900,000 shares of Common Stock (subject to modification
and adjustment as provided in Section 9 hereof) shall be executed by the Company
and delivered to the Warrant Agent.
<PAGE>
Upon the exercise of the Over-allotment Option, certificates representing
up to 135,000 Warrants to purchase an aggregate of 135,000 shares of Common
Stock (subject to adjustment as provided in Section 9 hereof) shall be executed
by the Company and delivered to the Warrant Agent.
Upon exercise of the Underwriters' Warrant as provided therein,
certificates representing 90,000 Warrants to purchase an aggregate of 90,000
shares of Common Stock (subject to adjustment as provided in Section 9 hereof)
shall be executed by the Company and delivered to the Warrant Agent.
Section 2. FORM OF WARRANT. The text of the Warrants and the form of
election to purchase Common Stock to be printed on the reverse thereof shall be
substantially as set forth in Exhibit A attached hereto (the provisions of which
are hereby incorporated herein). All of the certificates for the Warrants may
have such letters, numbers or other marks of identification or designation and
such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Warrants may be listed, or to conform to
usage. Each Warrant shall initially entitle the registered holder thereof to
purchase one share of Common Stock at a purchase price of four dollars and fifty
cents ($[ ]) (as adjusted as hereinafter provided, the "Warrant Price"), at any
time during the period (the "Exercise Period") commencing on July 1, 1999 and
expiring at 5:00 p.m. New York City time, on July 29, 2003. The Warrant Price
and the number of shares of Common Stock issuable upon exercise of the Warrants
are subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The Warrants shall be executed on behalf of the Company by
the manual or facsimile signature of the present or any future Chairman of the
Board or Vice Chairman, Chief Executive Officer, President or Vice President of
2
<PAGE>
of the Company, and attested to by the manual or facsimile signature of the
present or any future Secretary, Treasurer, or Assistant Secretary or Assistant
Treasurer of the Company.
Warrants shall be dated as of the date of issuance by the Warrant Agent
either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration date of the Warrants falls on a day
that is not a business day, then the Warrants shall expire at 5:00 p.m. New York
City time on the next succeeding business day. For purposes hereof, the term
"business day" shall mean any day other than a Saturday, Sunday or a day on
which banking institutions in New York City, New York, are authorized or
obligated by law to be closed.
Section 3. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent shall
maintain books for the transfer and registration of the Warrants. Upon the
initial issuance of the Warrants, the Warrant Agent shall issue and register the
Warrants in the names of the respective holders thereof. The Warrants shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as warrant agent under this Agreement) and
shall not be valid for any purpose unless so countersigned. The Warrants may,
however, be so countersigned by the Warrant Agent (or by its successor as
Warrant Agent) and be delivered by the Warrant Agent, notwithstanding that the
persons whose manual or facsimile signatures appear thereon as proper officers
of the Company shall have ceased to be such officers at the time of such
countersignature or delivery.
Section 4. TRANSFERS AND EXCHANGES. The Warrant Agent shall transfer, from
time to time, any outstanding Warrants upon the books to be maintained by the
Warrant Agent for that purpose, upon surrender thereof for transfer properly
endorsed or accompanied by appropriate instructions for transfer. Upon any such
transfer, a new Warrant shall be issued to the transferee and the surrendered
3
<PAGE>
Warrant shall be canceled by the Warrant Agent. Warrants so canceled shall be
delivered by the Warrant Agent to the Company from time to time upon request.
Warrants may be exchanged at the option of the holder thereof, when surrendered
at the office of the Warrant Agent, for another Warrant, or other Warrants of
different denominations of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock. No certificates for
Warrants shall be issued except for (i) Warrants initially issued hereunder in
accordance with Section 1 hereof, (ii) Warrants issued upon any transfer or
exchange of Warrants, (iii) Warrants issued in replacement of lost, stolen,
destroyed or mutilated certificates for Warrants pursuant to Section 7 hereof,
and (iv) at the option of the Board of Directors of the Company, Warrants in
such form as may be approved by its Board of Directors, to reflect any
adjustment or change in the Warrant Price or the number of shares of Common
Stock purchasable upon exercise of the Warrants made pursuant to Section 9
hereof.
Section 5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT SOLICITATION FEE.
Subject to the provisions of this Agreement, each registered holder of Warrants
shall have the right, at any time during the Exercise Period, to exercise such
Warrants and purchase the number of fully paid and non-assessable shares of
Common Stock specified in such Warrants upon presentation and surrender of such
Warrants to the Company at the corporate office of the Warrant Agent, with the
exercise form on the reverse thereof duly executed, and upon payment to the
Company of the Warrant Price, determined in accordance with the provisions of
Sections 2, 9 and 10 of this Agreement, for the number of shares of Common Stock
in respect of which such Warrants are then exercised. Payment of such Warrant
Price shall be made in cash or by certified or bank check payable to the
Company. Subject to Section 6 hereof, upon such surrender of Warrants and
payment of the Warrant Price, the Warrant Agent on behalf of the Company shall
4
<PAGE>
cause to be issued and delivered with all reasonable dispatch to or upon the
written order of the registered holder of such Warrants and in such name or
names as such registered holder may designate, a certificate or certificates for
the number of full shares of Common Stock so purchased upon the exercise of such
Warrants. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such shares of Common Stock immediately prior to the close
of business on the date of the surrender of such Warrants and payment of the
Warrant Price as aforesaid. The rights of purchase represented by the Warrants
shall be exercisable during the Exercise Period, at the election of the
registered holders thereof, either as an entirety or from time to time for a
portion of the shares specified therein and, in the event that any Warrant is
exercised in respect of less than all of the shares of Common Stock specified
therein at any time prior to the date of expiration of the Warrants, a new
Warrant or Warrants will be issued to the registered holder for the remaining
number of shares of Common Stock specified in the Warrant so surrendered, and
the Warrant Agent is hereby irrevocably authorized to countersign and to deliver
the required new Warrants pursuant to the provisions of this Section and of
Section 3 of this Agreement and the Company, whenever requested by the Warrant
Agent, will supply the Warrant Agent with Warrants duly executed on behalf of
the Company for such purpose. Upon the exercise of any one or more Warrants, the
Warrant Agent shall promptly notify the Company in writing of such fact and of
the number of securities delivered upon such exercise and, subject to the
provisions below, shall cause all payments of an amount, in cash or by check
made payable to the order of the Company, equal to the aggregate Warrant Price
for such Warrants, less any amounts payable to the Representative, as provided
below, to be deposited promptly in the Company's bank account. The Company and
Warrant Agent shall determine, in their sole and absolute discretion, whether a
Warrant certificate has been properly completed for exercise by the registered
holder thereof.
5
<PAGE>
Anything in the foregoing to the contrary notwithstanding, no Warrant will
be exercisable and the Company shall not be obligated to deliver any securities
pursuant to the exercise of any warrant unless at the time of exercise the
Company has filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933, as amended (the "Act"), covering the
securities issuable upon exercise of such Warrant and such registration
statement shall have been declared and shall remain effective and shall be
current, and such shares have been registered or qualified or be exempt under
the securities laws of the state or other jurisdiction of residence of the
holder of such Warrant and the exercise of such Warrant in any such state or
other jurisdiction shall not otherwise be unlawful. During the Exercise Period,
the Company shall use its best efforts to have a current registration statement
on file with the Securities and Exchange Commission covering the issuance of
Common Stock underlying the Warrants so as to permit the Company to deliver to
each person exercising a Warrant a prospectus meeting the requirements of
Section 10(a) (3) of the Act and otherwise complying therewith, and will deliver
such prospectus to each such person. During the Exercise Period, the Company
shall also use its best efforts to effect appropriate qualifications of the
Common Stock underlying the Warrants under the laws and regulations of the
states and other jurisdictions in which the Common Stock and Warrants are sold
by the Underwriters in the PO in order to comply with applicable laws in
connection with the exercise of the Warrants.
(a) If at the time of exercise of any Warrant (i) the market price of
the Common Stock is not less than the then exercise price of the Warrant, (ii)
the exercise of the Warrant is solicited by the Representative at such time as
it is a member of the National Association of Securities Dealers, Inc. ("NASD")
and the Representative is designated in writing by the holder of the Warrants
6
<PAGE>
as the NASD member soliciting the exercise, (iii) the Warrant is not held in a
discretionary account, (iv) disclosure of the compensation arrangements is made
in documents provided to the holders of the Warrants both at the time of the PO
and at the time of the exercise of the Warrants, and (v) the solicitation of the
exercise of the Warrants is not in violation of Rule 101 of Regulation M (as
such rule or any successor rule may be in effect as of such time of exercise)
promulgated under the Securities Exchange Act of 1934, as amended, then the
Representative shall be entitled to receive from the Company following exercise
of each of the Warrants so exercised a fee of five percent (5%) of the aggregate
exercise price of the Warrants so exercised (the "Exercise Fee") The procedures
for payment of the Exercise Fee are set forth in Section 5(b) below.
(b) (i) Within five (5) days after the last day of each month
commencing with _______, 1998, the Warrant Agent will notify the Representative
of each Warrant certificate which has been properly completed for exercise by
holders of Warrants during the last month. The Warrant Agent will provide the
Representative with such information, in connection with the exercise of each
Warrant, as the Representative shall reasonably request.
(ii) The Company hereby authorizes and instructs the Warrant
Agent to deliver to the Representative the Exercise Fee, if payable, in respect
of each exercise of Warrants, promptly after receipt by the Warrant Agent from
the Company of a check payable to the order of the Representative in the amount
of such Exercise Fee. In the event that an Exercise Fee is paid to the
Representative with respect to a Warrant which the Company or the Warrant Agent
determines is not properly completed for exercise or in respect of which the
Representative is not entitled to an Exercise Fee, the Representative will
return such Exercise Fee to the Warrant Agent which shall forthwith return such
fee to the Company.
7
<PAGE>
The Representative and the Company may at any time during business hours
examine the records of the Warrant Agent, including its ledger of original
Warrant certificates returned to the Warrant Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of paragraph 5 (a)
and 5 (b) may not be modified, amended or deleted without the prior written
consent of the Representative.
Section 6. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance of Common Stock issuable upon the
exercise of Warrants; 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 or delivery of any certificates for shares of Common Stock in a name
other than that of the registered holder of Warrants in respect of which such
shares are issued, and in such case neither the Company nor the Warrant Agent
shall be required to issue or deliver any certificate for shares of Common Stock
or any Warrant until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid or that no such tax is required to be paid.
Section 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall
be mutilated, lost, stolen or destroyed, the Company may, in its discretion,
issue and the Warrant Agent shall countersign and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant, or in lieu of
and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and representing an equivalent right or interest, but only upon
receipt of evidence satisfactory to the Company and the Warrant Agent of such
loss, theft or destruction and, in case of a lost, stolen or destroyed Warrant,
indemnity or bond, if requested, also satisfactory to them. Applicants for such
substitute Warrants shall also comply with such other reasonable regulations and
pay such reasonable charges as the Company or the Warrant Agent may prescribe.
8
<PAGE>
Section 8. RESERVATION OF COMMON STOCK. There have been reserved, and the
Company shall at all times keep reserved, out of its authorized shares of Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the Warrants, and the transfer agent
for the shares of Common Stock and every subsequent transfer agent for any
shares of Common Stock issuable upon the exercise of any of the aforesaid rights
of purchase are irrevocably authorized and directed at all times to reserve such
number of authorized shares of Common Stock as shall be required for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the certificates for such
shares against payment of the Warrant Price therefor, validly issued, fully paid
and nonassessable and listed on any national securities exchange or included in
any interdealer automated quotation system upon or in which the other shares of
outstanding Common Stock are then listed or included. The Company will keep a
copy of this Agreement on file with the transfer agent for the shares of Common
Stock (which may be the Warrant Agent) and with every subsequent transfer agent
for any shares of Common Stock issuable upon the exercise of the rights of
purchase represented by the Warrants. The Warrant Agent is irrevocably
authorized to requisition from time to time from such transfer agent stock
certificates required to honor outstanding Warrants. The Company will supply
such transfer agent with duly executed stock certificates for that purpose. All
Warrants surrendered in the exercise of the rights thereby evidenced shall be
canceled by the Warrant Agent and shall thereafter be delivered to the Company,
and such canceled Warrants shall constitute sufficient evidence of the number of
shares of Common Stock which have been issued upon the exercise of such
Warrants. Promptly after the date of expiration of the Warrants, the Warrant
Agent shall certify to the Company the total aggregate amount of Warrants then
outstanding, and thereafter no shares of Common Stock shall be subject to
reservation in respect of such Warrants which shall have expired.
9
<PAGE>
Section 9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SECURITIES.
(a) Computation of Adjusted Price. Except as hereinafter provided, in
case the Company shall, at any time after the date of closing of the sale of
securities pursuant to the PO (the "Closing Date"), issue or sell any shares of
Common Stock (other than the issuances or sales referred to in Section 9 (f)
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 pursuant to
Section 9(h) hereof) and shares of Common Stock issued upon the direct or
indirect conversion or exchange of securities for shares of Common Stock, (i)
for a consideration per share less than the lesser of the (A) "Market Price" (as
defined in Section 9(a)(vi) hereof) per share of Common Stock on the trading day
immediately preceding such issuance or sale or (B) the Warrant Price in effect
immediately prior to such issuance or sale, or (ii) without consideration, then
forthwith upon such issuance or sale, the Warrant Price shall (until another
such issuance or sale) be reduced to the price (calculated to the nearest full
cent) determined by multiplying the Warrant Price in effect immediately prior to
such issuance or sale by a fraction, the numerator of which shall be the sum of
(1) the number of shares of Common Stock outstanding immediately prior to such
issuance or sale multiplied by the Warrant Price immediately prior to such
issuance or sale plus (2) the consideration received by the Company upon such
issuance or sale, and the denominator of which shall be the product of (x) the
total number of shares of Common Stock outstanding immediately after such
issuance or sale, multiplied by (y) the Warrant Price immediately prior to such
10
<PAGE>
issuance or sale; provided, however, that in no event shall the Warrant Price be
adjusted pursuant to this computation to an amount in excess of the Warrant
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 9(c)
hereof.
For the purposes of any computation to be made in accordance with this
Section 9(a), 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 therefor 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 public offering price) before deducting therefrom 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.
11
<PAGE>
(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 9(a).
(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, warrants or rights 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 by the Nasdaq Stock Market, Inc. ("Nasdaq")
or, if the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted on the Nasdaq National Market ("NMS"), but is
quoted on The Nasdaq SmallCap Market or the NASD's Electronic Bulletin Board,
the closing bid quotation as reported by Nasdaq the National Quotation Bureau
Incorporated or a similar organization, or if the Common Stock is not quoted on
Nasdaq or the Electronic Bulletin Board, as determined in good faith by
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
12
<PAGE>
issuance or sale. If the Common Stock is listed or admitted to trading on a
national securities exchange and also quoted on the Nasdaq National Market, the
Market Price shall be determined as herein above provided by reference to the
prices reported in the Nasdaq National Market; provided that if the Common Stock
is listed or admitted to trading on the New York Stock Exchange, the Market
Price shall be determined as herein above provided by reference to the prices
reported by such exchange.
(b) Options, Rights, Warrants and Convertible and Exchangeable
Securities. Except in the case of the Company issuing rights to subscribe for
shares of Common Stock distributed pursuant to Section 9(h) hereof, if the
Company shall at any time after the Closing Date 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, in each case other
than the issuances or sales referred to in section 9 (f) hereof, (i) for a
consideration per share less than the lesser of (a) the Warrant 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 on the trading
day immediately preceding such issuance, or (ii) without consideration, the
Warrant 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 9(a) hereof; provided that:
(i) 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 Section 9(a)), if any, received by the Company for the options, rights
13
<PAGE>
of warrants, and if no minimum purchase price is provided in the options, rights
or warrants, then the minimum purchase price 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 (b)
(and for the purposes of subsection (v) of Section 9(a) hereof) shall be reduced
by such number of shares as to which options, warrants or rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Warrant 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.
(ii) 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 Section 9 (a)) 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 expiration or other 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 (ii) (and for the purpose of subsection
(v) of Section 9(a) 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 Warrant Price then in effect shall forthwith be
14
<PAGE>
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. No adjustment will be made pursuant to this
subsection (ii) upon the issuance by the Company of any convertible or
exchangeable securities pursuant to the exercise of any option, right or warrant
exercisable therefor, to the extent that adjustments in respect of such options,
rights or warrants were previously made pursuant to the provisions of subsection
(i) of this subsection 9 (b).
(iii) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in subsection (i) of
this Section 9 (b), or in the price per share at which the securities referred
to in subsection (ii) of this Section 9(b) are convertible or exchangeable, or
if any such options, rights or warrants are exercised at a price greater than
the minimum purchase price provided for in such options, rights or warrants, or
any such securities are converted or exercised for more than the minimum
consideration receivable by the Company upon such conversion or exchange, 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 the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities; provided, however,
that no adjustment shall be made pursuant to this subsection (iii) with respect
to any change in the price per share provided for in any of the options, rights
or warrants referred to in subsection (b) (i) of this Section 9 (b), or in the
15
<PAGE>
price per share at which the securities referred to in subsection (b) (ii) of
this Section 9(b) are convertible or exchangeable, which change results from the
application of the anti-dilution provisions thereof in connection with an event
for which, subject to subsection (iv) of this Section 9(f), an adjustment to the
Warrant Price and the number of securities issuable upon exercise of the
Warrants will be required to be made pursuant to this Section 9.
(c) Subdivision and Combination. In case the Company shall at any time
after the Closing Date subdivide or combine the outstanding shares of Common
Stock, the Warrant Price shall forthwith be proportionately decreased in the
case of subdivision or increased in the case of combination.
(d) Adjustment in Number of Shares. Upon each adjustment of the
Warrant Price pursuant to the provisions of this Section 9, the number of shares
of Common Stock issuable upon the exercise of the Warrants shall be adjusted to
the nearest full whole number by multiplying a number equal to the Warrant Price
in effect immediately prior to such adjustment by the number of shares of Common
Stock issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Warrant Price.
(e) 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 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
16
<PAGE>
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 events at a
price equal to the product of (x) the number of shares issuable upon exercise of
the Warrants and (y) the Warrant 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 Warrant.
(f) No Adjustment of Warrant Price in Certain Cases. Notwithstanding
anything herein to the contrary, no adjustment of the Warrant Price shall be
made:
(i) Upon the issuance or sale of the Underwriters' Warrants, the
shares of Common Stock or Warrants issuable upon the exercise of the
Underwriters' Warrants or the shares of Common Stock issuable upon exercise of
the Warrants underlying the Underwriters' Warrants; or
(ii) Upon the issuance or sale of (A) the shares of Common Stock
or Warrants issued by the Company in the PO (including pursuant to the
Over-allotment Option) or other shares of Common Stock or warrants issued by the
Company upon consummation of the PO or, (B) the shares of Common Stock (or other
securities) issuable upon exercise of Warrants; or
(iii) Upon (i) the issuance of options pursuant to the Company's
stock option plan in effect on the date hereof or as hereafter amended in
accordance with the terms thereof or any other employee or executive stock
option plan approved by stockholders of the Company or the sale by the 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 issued and outstanding on the date of
17
<PAGE>
closing of the sale of Common Stock and Warrants pursuant to the PO; or (iii)
the issuance or sale by the Company of any shares of Common Stock in connection
with any merger, acquisition or other business combination; or
(iv) If the amount of said adjustment shall be less than five
cents (5(cent)) per share of Common Stock.
(g) Dividends and Other Distributions with Respect to Outstanding
Securities. In the event that the Company shall at any time after the Closing
Date and prior to the exercise or expiration 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 the holders of Common Stock any monies, assets,
property, rights, evidences of indebtedness, securities (other than such a cash
dividend or distribution or dividend consisting solely of 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 as if the Holders were the
owners of the shares of Common Stock underlying such Warrants. 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 Section 9(g).
(h) Subscription Rights for Shares of Common Stock or Other
Securities. In case the Company or an affiliate of the Company shall at anytime
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 holders of Common Stock, the Holders of
the unexercised Warrants shall be entitled, in addition to the shares of Common
18
<PAGE>
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
stockholders of the Company but only to the extent of the number of shares of
Common Stock, if any, for which the Warrants remain exercisable.
(i) Notice in Event of Dissolution. In case of the dissolution,
liquidation or winding-up of the Company, all rights under the Warrants shall
terminate on a date fixed by the Company, such date to be no earlier than ten
(10) days prior to the effectiveness of such dissolution, liquidation or
winding-up and not later than five (5) days prior to such effectiveness. Notice
of such termination of purchase rights shall be given to each registered holder
of the Warrants, as the same shall appear on the books of the Company maintained
by the Warrant Agent, by registered mail at least thirty (30) days prior to such
termination date.
(j) Computations. The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Section 9, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section 9.
Section 10. FRACTIONAL INTERESTS. The Warrants may only be exercised to
purchase full shares of Common Stock and the Company shall not be required to
issue fractions of shares of Common Stock on the exercise of Warrants. However,
if a Warrantholder exercises all Warrants then owned of record by him and such
exercise would result in the issuance of a fractional share, the Company will
pay to such Warrantholder, in lieu of the issuance of any fractional share
otherwise issuable, an amount of cash based on the Market Price on the last
trading day prior to the exercise date.
Section 11. NOTICES TO WARRANTHOLDERS.
19
<PAGE>
(a) Upon any adjustment of the Warrant Price and the number of shares
of Common Stock issuable upon exercise of a Warrant, then and in each such case,
the Company shall give written notice thereof to the Warrant Agent, which notice
shall state the Warrant Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of a Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based. The Company
shall also mail such notice to the holders of the Warrants at their respective
addresses appearing in the Warrant register. Failure to give or mail such
notice, or any defect therein, shall not affect the validity of the adjustments.
(b) In case at any time after the Closing Date:
(i) the Company shall pay dividends payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends) to the
holders of Common Stock; or
(ii) the Company shall offer for subscription pro rata to all of
the holders of Common Stock any additional shares of stock of any class or other
rights; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale of substantially all of its assets to another
corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; then in any one or more of such cases,
the Company shall give written notice to the Warrant Agent and the holders of
the Warrants in the manner set forth in Section 11(a) of the date on which (A) a
record shall be taken for such dividend, distribution or subscription rights, or
(B) such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up shall take place, as the case may be.
Such notice shall also specify the date as of which the holders of Common Stock
20
<PAGE>
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, as the case
may be. Such notice shall be given at least ten (10) days prior to the action in
question and not less than ten (10) days prior to the record date in respect
thereof. Failure to give such notice, or any defect therein, shall not affect
the legality or validity of any of the matters set forth in this Section 11(b).
(c) The Company shall cause copies of all financial statements and
reports, proxy statements and other documents that are sent to its stockholders
to be sent by an identical class of mail, postage prepaid, on the date of
mailing to such stockholders, to each registered holder of Warrants at his
address appearing in the Warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.
(a) The Warrant Agent shall promptly forward to the Company all monies
received by the Warrant Agent for the purchase of shares of Common Stock through
the exercise of these Warrants.
(b) The Warrant Agent shall keep copies of this Agreement available
for inspection by holders of Warrants during normal business hours.
Section 13. REDEMPTION OF WARRANTS. The Warrants are redeemable by the
Company commencing on the second anniversary of the date of the Prospectus (or
earlier with the consent of the Underwriter), in whole or in part, on not less
21
<PAGE>
than thirty (30) days' prior written notice at a redemption price of $.10 per
Warrant, provided the closing bid quotation of the Common Stock as reported on
The Nasdaq SmallCap Market, if traded thereon, or if not traded thereon, the
closing sale price if listed on a national securities exchange or the Nasdaq
National Market (or other reporting system that provides last sale prices), has
been in excess of ____% of the Exercise Price for a period of 20 consecutive
trading days in any 30 trading day period ending not more than 15 days prior to
the date on which the Company gives notice of redemption. Any redemption in part
shall be made pro rata to all Warrant holders. The redemption notice shall be
mailed to the holders of the Warrants at their respective addresses appearing in
the Warrant register. Any such notice mailed in the manner provided herein shall
be conclusively presumed to have been duly given in accordance with this
Agreement whether or not the registered holder receives such notice. No failure
to mail such notice nor any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to a
registered holder of a Warrant (i) to whom notice was not mailed or (ii) whose
notice was defective. An affidavit of the Warrant Agent or the Secretary or
Assistant Secretary of the Company that notice of redemption has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. Holders of the Warrants will have exercise rights until the close of
business on the day immediately preceding the date fixed for redemption.
Section 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT. Any
corporation or company which may succeed to the corporate trust business of the
Warrant Agent by any merger or consolidation or otherwise shall be the successor
to the Warrant Agent hereunder without the execution or filing of any paper or
any further act on the part of any of the parties hereto; provided, that such
corporation would be eligible for appointment as a successor Warrant Agent under
the provisions of Section 16 of this Agreement. In case at the time such
22
<PAGE>
successor to the Warrant Agent shall succeed to the agency created by this
Agreement any of the Warrants shall have been countersigned but not delivered,
any such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrants so countersigned.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrants shall have been countersigned but not delivered,
the Warrant Agent may adopt the countersignature under its prior name and
deliver Warrants so countersigned. In all such cases such Warrants shall have
the full force provided in the Warrants and in this Agreement.
Section 15. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained herein and in the
Warrants shall be taken as statements of the Company, and the Warrant Agent
assumes no responsibility for the correctness of any of the same except as such
describe the Warrant Agent or action taken or to be taken by it. The Warrant
Agent assumes no responsibility with respect to the distribution of the Warrants
except as herein expressly provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants in this Agreement or in the Warrants
to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
23
<PAGE>
(d) The Warrant Agent shall incur no liability or responsibility to
the Company or to any holder of any Warrant for any action taken in reliance on
any notice, resolution, waiver, consent, order, certificate or other instrument
believed by it to be genuine and to have been signed, sent or presented by the
proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges incurred by the Warrant Agent in the
execution of this Agreement and to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expenses unless the Company or one or more registered holders of Warrants shall
furnish the Warrant Agent with reasonable security and indemnity for any costs
and expenses which may be incurred, but this provision shall not affect the
power of the Warrant Agent to take such action as the Warrant Agent may consider
proper, whether with or without any such security or indemnity. All rights of
action under this Agreement or under any of the Warrants may be enforced by the
Warrant Agent without the possession of any of the Warrants or the production
thereof at any trial or other proceeding. Any such action, suit or proceeding
instituted by the Warrant Agent shall be brought in its name as Warrant Agent,
and any recovery of judgment shall be for the ratable benefit of the registered
holders of the Warrants, as their respective rights and interests may appear.
24
<PAGE>
(g) The Warrant Agent and any stockholder, director, officer, partner
or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent and its
duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys, agents or employees, and the Warrant Agent shall not be
answerable or accountable for any such attorneys, agents or employees or for any
loss to the Company resulting from such neglect or misconduct, provided
reasonable care had been exercised in the selection and continued employment
thereof.
(j) Any request, direction, election, order or demand of the Company
shall be sufficiently evidenced by an instrument signed in the name of the
Company by its President or a Vice President or its Secretary or an Assistant
Secretary or its Treasurer or an Assistant Treasurer (unless other evidence in
respect thereof be herein specifically prescribed); and any resolution of the
Board of Directors may be evidenced to the Warrant Agent by a copy thereof
certified by the Secretary or an Assistant Secretary of the Company. Section 16.
CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be discharged from its
duties under this Agreement by giving to the Company notice in writing, and to
the holders of the Warrants notice by mailing such notice to the holders at
their respective addresses appearing on the Warrant register, of such
resignation, specifying a date when such resignation shall take effect. The
25
<PAGE>
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and the like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
action, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after such removal or after it has been notified in writing of such resignation
or incapacity by the resigning or incapacitated Warrant Agent or after the
Company has received such notice from a registered holder of a Warrant (who
shall, with such notice, submit his Warrant for inspection by the Company), then
the registered holder of any Warrant may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Any
successor Warrant Agent, whether appointed by the Company or by such a court,
shall be a bank or trust company, in good standing, incorporated under New York
or federal law. After appointment, the successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibility as if it had been
originally named as Warrant Agent without further act or deed and the former
Warrant Agent shall deliver and transfer to the successor Warrant Agent all
canceled Warrants, records and property at the time held by it hereunder, and
execute and deliver any further assurance or conveyance necessary for this
purpose. Failure to file or mail any notice provided for in this Section,
however, or any defect therein, shall not affect the validity of the resignation
or removal of the Warrant Agent or the appointment of the successor Warrant
Agent, as the case may be.
Section 17. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of
any transfer agent (other than Continental Stock Transfer and Trust Company) for
the shares of Common Stock or of any subsequent transfer agent for the shares of
Common Stock, the Company will file with the Warrant Agent a statement setting
forth the name and address of such transfer agent.
26
<PAGE>
Section 18. NOTICES. Any notice pursuant to this Agreement to be given by
the Warrant Agent or the registered holder of any Warrant to the Company, shall
be sufficiently given if sent by first-class mail, postage prepaid, addressed
(until another is filed in writing by the Company with the Warrant Agent) as
follows:
PROTOSOURCE
2300 Tulare Street
Suite 210
Fresno, CA 93721
with a copy to: Gary Agron, Esq.
5445 DTC Parkway
Denver, Colorado 80111
Any notice pursuant to this Agreement to be given by the Company or the
registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing by the Warrant Agent with the Company) as follows:
Corporate Stock Transfer, Inc.
370 Seventeenth Street Suite 2350
Denver, CO 80202
Any notice pursuant to this Agreement to be given by the Warrant Agent or
the Company to the Representative shall be sufficiently given if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Warrant Agent) as follows:
27
<PAGE>
Andrew Alexander Wise & Company
17 State Street
4th Floor
New York, New York 10004
Attn: Andreas Zigouras
(212) 809-7300
Fax: (212) 809-7383
with a copy to: Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158
Attn: Charles Snow
(212) 687-3860
Fax: (212) 949-7052
Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Agent
may from time to time supplement or amend this Agreement in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
materially adversely affect the interest of the holders of Warrants; and in
addition the Company and the Warrant Agent may modify, supplement or alter this
Agreement with the consent in writing of the registered holders of the Warrants
representing not less than a majority of the Warrants then outstanding.
Section 20. NEW YORK CONTRACT. This Agreement and each Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and shall be construed in accordance with the laws of New York without
regard to the conflicts of law principles thereof.
Section 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
28
<PAGE>
Section 22. SUCCESSORS. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Warrant Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date first above written.
PROTOSOURCE
By:
-----------------------------------
Raymond J. Meyers
Chief Executive Officer
CORPORATE STOCK TRANSFER, INC.
By:
-----------------------------------
Name:
Title: Principal
ANDREW ALEXANDER WISE & CO.
By:
----------------------------------
Andreas Zigouras
President
29
<PAGE>
No. W_______________________ VOID AFTER __________, 2002
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
PROTOSOURCE
CUSIP
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number
of Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, (the "Common
Stock"), of ProtoSource, a California corporation (the "Company"), at any time
from _________, 1999 (the "Initial Warrant Exercise Date") , and prior to the
Expiration Date (as hereinafter defined) upon the presentation and surrender of
this Warrant Certificate with the Exercise Form on the reverse hereof duly
executed, at the corporate office of Corporate Stock Transfer, Inc., as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$[____], subject to adjustment (the "Exercise Price"), in lawful money of the
United States of America in cash or by certified or bank check made payable to
the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement, dated as of _____________, 1998 (the "Warrant
Agreement"), among the Company, Andrew Alexander Wise & Company (the
"Representative") and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares will be issued. In the case of the
exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York City time) on
July 29, 2003; provided, that if such date is not a business day, it shall mean
5:00 p.m., New York City time, on the next following business day. For purposes
hereof, the term "business day" shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in New York City, New York, are
authorized or obligated by law to be closed.
<PAGE>
The Company shall not be obligated to deliver any securities pursuant to
the exercise of the Warrants represented hereby unless at the time of exercise
the Company has filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933, as amended (the "Act"), covering the
securities issuable upon exercise of the Warrants represented hereby and such
registration statement has been declared and shall remain effective and shall be
current, and such securities have been registered or qualified or be exempt
under the securities laws of the state or other jurisdiction of residence of the
Registered Holder and the exercise of the Warrants represented hereby in any
such state or other jurisdiction shall not otherwise be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon the presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder, as such, shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $.10 per
Warrant, at any time commencing July 30, 1998, provided that the closing bid
quotation of the Common Stock as reported on The Nasdaq SmallCap Market, if
traded thereon, or if not traded thereon, the closing sale price if listed on a
national exchange or the Nasdaq National Market (or other reporting system that
provides last sale prices), shall have for a period of 20 consecutive trading
days in any 30 day period ending nor more than 15 days prior to the date on
which the Company gives the Notice of Redemption (as defined below) exceeded
150% of the then Exercise Price. Notice of redemption (the "Notice of
Redemption") shall be given by the Company no less than thirty days before the
date fixed for redemption, all as provided in the Warrant Agreement. On and
after the date fixed for redemption, the Registered Holder shall have no right
with respect to this Warrant except to receive the $0.10 per Warrant upon
surrender of this Certificate.
Under certain circumstances described in the Warrant Agreement, the
Representative shall be entitled to receive as a solicitation fee an aggregate
of five percent (5%) of the Exercise Price of the Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
2
<PAGE>
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without regard to the conflicts of law
principles thereof.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated _________, 1998
SEAL PROTOSOURCE
By:
-----------------------------
Raymond J. Meyers
Chief Executive Officer
By:
----------------------------
Secretary
COUNTERSIGNED:
CORPORATE STOCK TRANSFER, INC.
as Warrant Agent
By:
---------------------------
Authorized Officer
3
<PAGE>
EXERCISE FORM
-------------
To Be Executed by the Registered Holder
in order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
_________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
--------------------------
--------------------------
--------------------------
(please print or type name and address)
and be delivered to
--------------------------
--------------------------
--------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. If the exercise of this Warrant was solicited by Andrew Alexander
Wise & Company, please check the following box. |_|
2. The exercise of this Warrant was solicited by
---------------------------------------------------------------
3. If the exercise of this Warrant was not solicited, please check
the following box. |_|
4
<PAGE>
Dated: X
--------------------------- --------------------------------
- ----------------------------------
- ----------------------------------
Address
- -----------------------------------
Social Security or Taxpayer
Identification Number
- -----------------------------------
Signature Guaranteed
5
<PAGE>
ASSIGNMENT
----------
To be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ____________________________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
-------------------------
-------------------------
-------------------------
(please print or type name and address)
________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
______________________________________ as its/his/her attorney-in-fact to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: ______________________ x_______________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME
AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER
ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM.
6
Exhibit 1.08
FINANCIAL ADVISORY AND INVESTMENT BANKING AGREEMENT
---------------------------------------------------
This Agreement is made and entered into as of the day of , 1998 between
Andrew Alexander Wise & Company, Inc., a New York corporation ("Consultant"),
and ProtoSource, a corporation organized under the laws of the (the "Company").
In consideration of the mutual promises made herein and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Purpose: The Company hereby engages Consultant for the term specified in
Paragraph 2 hereof to render advice to the Company as an investment banker
relating to financial and similar matters upon the terms and conditions set
forth herein.
2. Term: Except as otherwise specified in Paragraph 4 hereof, this
Agreement shall be effective from _________, 1998 to _________________, 1999.
3. Duties of Consultant: During the term of this Agreement, Consultant
shall, upon the request of the Company, provide the Company with corporate
finance and related financial advisory services, advice with respect to
potential acquisitions and other business transactions and advice with respect
to stockholder relations matters. All obligations of the Consultant contained
herein shall be subject to the Consultant's availability to perform such
services and the amount of notice received from the Company. The Consultant
shall devote such time and effort to the performance of its duties hereunder as
the Consultant shall determine is reasonably necessary. The Consultant may look
to such others for such factual information, investment recommendations,
economic advice and/or research, upon which to base its advice to the Company
hereunder, as it shall deem appropriate. The Company recognizes that Consultant
<PAGE>
now renders and may continue to render financial and other advisory services to
other companies which may or may not have policies and conduct activities
similar to those of the Company, and acknowledges that Consultant shall be free
to render advice and to perform those services for such other companies.
4. Compensation: In consideration for the services rendered by Consultant
to the Company pursuant to this Agreement (and in addition to the expenses
provided for in Paragraph 5 hereof), the Company shall pay Consultant a
non-refundable fee of $60,000, payable in advance, upon the execution of this
Agreement. In addition, if any Transaction (as defined below) occurs during the
term of this Agreement or within twelve months thereafter, the Company shall pay
fees to Consultant as follows:
Consideration Fee
First $1,000,000 5% of First $1,000,000
Second $1,000,000 4% of Second $1,000,000
Third $1,000,000 3% of Third $1,000,000
Fourth $1,000,000 2% of Fourth $1,000,000
Consideration in excess of
the fourth $1,000,000 1% of Consideration in excess
of the fourth $1,000,000
For the purposes of this Agreement, a "Transaction" shall mean (i) any
transaction originated by Consultant, other than in the ordinary course of trade
or business of the Company, whereby, directly or indirectly, control of, or a
material interest in, the Company and its subsidiaries or the business or assets
of the Company and its subsidiaries, is transferred for Consideration, or (ii)
any transaction originated by Consultant whereby the Company acquires any other
company, or the assets of any other company or an interest in any other company;
2
<PAGE>
and "Consideration" shall mean the total market value on the day of the closing
of stock, cash, assets and all other property (real or personal) exchanged or
received, directly or indirectly by the Company or any of its security holders
in connection with any Transaction. Any co-broker retained by Consultant shall
be paid by Consultant. All Transaction fees to be paid pursuant to this
Agreement, except as otherwise specified, are due and payable to Consultant in
cash at the closing or closings of a Transaction. In the event that this
Agreement shall not be renewed or is terminated for any reason, notwithstanding
any such non-renewal or termination, Consultant shall be entitled to the entire
fee provided in this Paragraph 4, for any Transaction for which the discussions
were initiated during the term of this Agreement and which is consummated within
a period of twelve months after non-renewal or termination of this Agreement.
Nothing herein shall impose any obligation on the part of the Company to enter
into any Transaction.
5. Expenses of Consultant: In addition to the fees payable hereunder and
regardless of whether any Transaction is proposed or consummated, the Company
shall reimburse Consultant for the reasonable fees and disbursements of
Consultant's counsel and Consultant's reasonable travel and out-of-pocket
expenses incurred in connection with the services performed by Consultant
pursuant to this Agreement and at the request of the Company, including without
limitation, hotels, food and associated expenses and long-distance telephone
calls.
6. Liability of Consultant:
(a) In furnishing the Company with advice and other services as herein
provided, neither Consultant nor any officer, director or agent thereof shall be
liable to the Company or its creditors for errors of judgment or for anything,
except for the Consultant's intentional or willful misconduct in the performance
of its duties under this Agreement.
3
<PAGE>
(b) It is further understood and agreed that Consultant may rely upon
information furnished to it reasonably believed to be accurate and reliable and
that, except as herein provided, Consultant shall not be accountable for any
loss suffered by the Company by reason of the Company's action or inaction on
the basis of any advice, recommendation or approval of Consultant, its partners,
employees or agents.
(c) The Company acknowledges that all opinions and advice (written or
oral) given by Consultant to the Company in connection with Consultant's
engagement are intended solely for the benefit and use of the Company in
considering the transaction to which they relate, and the Company agrees that no
person or entity other than the Company shall be entitled to make use of or rely
upon the advice of Consultant to be given hereunder, and no such opinion or
advice shall be used for any other purpose or reproduced, disseminated, quoted
or referred to at any time, in any manner or for any purpose, nor may the
Company make any public references to Consultant, or use Consultant's name in
any annual reports or any other reports or releases of the Company without
Consultant's prior written consent.
(d) The Company acknowledges that Consultant makes no commitment
whatsoever as to making a market in the Company's securities or to recommending
or advising its clients to purchase the Company's securities. Research reports
or corporate finance reports that may be prepared by Consultant will, when and
if prepared, be done solely on the merits based upon an analysis performed by
Consultant and its corporate finance personnel.
7. Company Information:
4
<PAGE>
(a) The Company shall furnish to the Consultant all data, material and
other information relevant to the performance by the Consultant of its
obligations under this Agreement, or particular projects as to which the
Consultant is acting as advisor, which will permit the Consultant to know all
facts material to the advice to be rendered, and all material or information
reasonably requested by the Consultant. The Company acknowledges and agrees that
in performing its services under this engagement, Consultant may rely upon the
data, material and other information supplied by the Company without
independently verifying the accuracy, completeness or veracity of same. In the
event that the Company fails or refuses to furnish any such data, material or
information reasonably requested by the Consultant, and thus prevents or impedes
the Consultant's performance hereunder, any inability of the Consultant to
perform shall not be a breach of its obligations hereunder.
(b) Except as contemplated by the terms hereof or as required by applicable
law, Consultant shall keep confidential all non-public information provided to
it by the Company and shall not disclose such information to any third party
without the Company's prior written consent, other than to such of its employees
and advisors as Consultant determines in its sole judgment need to have access
thereto. Notwithstanding the foregoing, the Consultant shall not be required to
maintain confidentiality with respect to information (i) which is or becomes
part of the public domain; (ii) of which it had independent knowledge prior to
disclosure; (iii) which comes into the possession of the Consultant or its
employees or agents in the normal and routine course of its own business from
and through independent non-confidential sources; or (iv) which is required to
be disclosed by the Consultant pursuant to legal process or in accordance with
governmental or regulatory requirements. If the Consultant is requested or
required (by oral questions, interrogatories, requests for information or
5
<PAGE>
document subpoenas, civil investigative demands, or similar process) to disclose
any confidential information supplied to it by the Company, or the existence of
other negotiations in the course of its dealings with the Company or its
representatives, the Consultant shall, unless prohibited by law, promptly notify
the Company of such request(s) so that the Company may seek an appropriate
protective order.
8. Indemnification: The Company agrees to indemnify and hold harmless the
Consultant, its partners, employees, agents, representatives and controlling
persons (and the officers, directors, employees, agents, representatives and
controlling persons of each of them) from and against any and all losses,
claims, damages, liabilities, costs and expenses (and all actions, suits,
proceedings or claims in respect thereof) and any legal or other expenses in
giving testimony or furnishing documents in response to a subpoena or otherwise
(including, without limitation, the costs of investigating, preparing or
defending any such action, suit, proceeding or claim, whether or not in
connection with any action, suit, proceeding or claim in which the Consultant is
a party), as and when incurred, directly or indirectly, caused by, relating to,
based upon or arising out of the Consultant's service pursuant to this
Agreement. The Company further agrees that the Consultant shall incur no
liability to the Company or any other party on account of this Agreement or any
acts or omissions arising out of or related to the actions of the Consultant
relating to this Agreement or the performance or failure to perform any services
under this Agreement, except for the Consultant's intentional or willful
misconduct. The obligations of the Company under the Section shall survive the
termination of this Agreement.
9. Independent Contractor: Consultant shall perform its services hereunder
as an independent contractor and not as an employee of the Company or an
affiliate thereof. It is expressly
6
<PAGE>
understood and agreed to by the parties hereto that Consultant shall have no
authority to act for, represent or bind the Company or any affiliate thereof in
any manner, except as may be agreed to expressly by the Company in writing from
time to time.
10. Miscellaneous:
(a) This Agreement between the Company and Consultant constitutes the
entire agreement and understanding of the parties hereto and supersedes any and
all previous agreements and understandings, whether oral or written, between the
parties with respect to the matters set forth herein.
(b) Any notice or communication permitted or required hereunder shall
be in writing and shall be deemed sufficiently given if hand-delivered or sent
(i) postage prepaid by registered mail, return receipt requested, or (ii) by
facsimile, to the respective parties as set forth below, or to such other
address as either party may notify the other in writing:
If to the Company, to: ProtoSource Corporation
2300 Tulare Street
Suite 210
Fresno, CA 93721
(209) 486-8638
Fax: (209) 490-8630
with a copy to: Gary Agron, Esq.
5445 DTC Parkway
Denver, Colorado 80111
If to Consultant: Andrew Alexander Wise & Company
17 State Street
4th Floor
New York, New York 10004
Attn: Andreas Zigouras
(212) 809-7300
Fax: (212) 809-7383
7
<PAGE>
with a copy to: Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158
Attn: Charles Snow
(212) 687-3860
Fax: (212) 949-7052
(c) This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective successors, legal
representatives and assigns.
(d) This Agreement may be executed in any number of counterparts, each
of which together shall constitute one and the same original document.
(e) No provision of this Agreement may be amended, modified or waived,
except in a writing signed by all of the parties hereto.
(f) This Agreement shall be construed in accordance with and governed
by the laws of the State of New York, without giving effect to conflict of law
principles. The parties hereby agree that any dispute which may arise between
them arising out of or in connection with this Agreement shall be adjudicated
before a court located in New York City, and they hereby submit to the exclusive
jurisdiction of the courts of the State of New York located in New York, New
York and of the Federal District Court for the Southern District of New York
with respect to any action or legal proceeding commenced by any party, and they
irrevocably waive any objection they now 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, relating to or arising out of
this Agreement, and consent to the service of process in any such action or
legal proceeding by means of registered or certified mail, return receipt
requested, in care of the address set forth in Section 10(b) hereof.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
ANDREW ALEXANDER WISE & CO., INC.
By:
--------------------------------
Andreas Zigouras, President
PROTOSOURCE CORPORATION
By:
--------------------------------
Raymond J. Meyers, President
9
Exhibit 1.09
PROTOSOURCE CORPORATION
900,000 Shares of Common Stock
and
900,000 Redeemable Common Stock Purchase Warrants
AMENDED UNDERWRITING AGREEMENT
------------------------------
, 1998
-----------
Andrew Alexander Wise & Company, Inc.
as Representative of the Underwriters
17 State Street
New York, New York 10004
Gentlemen:
ProtoSource Corporation, a California corporation (the "Company"), hereby
confirms its agreement with Andrew, Alexander, Wise & Company, Inc., as
representative (the "Representative") of the several Underwriters listed on
Schedule 1 annexed hereto (the "Underwriters"), as set forth below.
The Company proposes to issue and sell to the Underwriters an aggregate of
(i) 900,000 shares (the "Firm Shares") of the Company's common stock, par value
$.001 per share (the "Common Stock"), and (ii) 900,000 redeemable warrants to
purchase Common Stock (the "Firm Warrants") in units consisting of one Firm
Share and one Firm Warrant. The Company also proposes to grant to the
Underwriters an option to purchase (i) an additional 135,000 shares of Common
Stock and (ii) an additional 135,000 redeemable warrants to purchase Common
Stock in units consisting of one share of Common Stock and one Warrant, as
provided in section 2(c) of this agreement (the "Agreement"). Any and all shares
of Common Stock to be purchased pursuant to such option are referred to herein
as the "Option Shares," and the Firm Shares and any Option Shares are
collectively referred to herein as the "Shares." Any and all redeemable warrants
to purchase Common Stock to be purchased pursuant to such option are referred to
herein as the "Option Warrants," and the Firm Warrants and any Option Warrants
are collectively referred to herein as the "Warrants." Any shares of Common
Stock issuable upon the exercise of any Warrants are referred to herein as
<PAGE>
"Warrant Shares." The Firm Shares and the Firm Warrants are collectively
referred to herein as the "Firm Securities;" the Option Shares and the Option
Warrants are collectively referred to herein as the "Option Securities;" and the
Firm Securities, the Option Securities and the Warrant Shares are collectively
referred to herein as the "Securities."
Pursuant to an agreement to be entered into among the Company, the
Representative and Corporate Stock Transfer, Inc. (the "Warrant Agreement"),
each Warrant will be exercisable during the period commencing on the first
anniversary of the effective date of the Registration Statement (as hereinafter
defined) (the "Effective Date") and expiring on the fifth anniversary thereof,
subject to redemption by the Company (as described below), at an initial
exercise price of $____ per share, subject to adjustment as set forth in the
Warrant Agreement. The Warrants will be redeemable at a price of $.10 per
Warrant, commencing on the first anniversary of the Effective Date and prior to
their expiration, upon not less than 30 days prior written notice to the holders
of the Warrants, provided the closing bid price of the Common Stock as reported
on The Nasdaq Smallcap Market if traded thereon, or if not traded thereon, the
closing sale price if listed on a national or regional securities exchange (or
the Nasdaq National Market other reporting system that provides last sales
prices), shall have been at least ____% of the then current Warrant exercise
price (initially $____ per share, subject to adjustment), for 20 trading days
during the 30 trading day period ending 15 days prior to the date on which the
Company gives notice of redemption, subject to the right of the holder to
exercise such Warrants prior to redemption.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriters that:
(a) A registration statement on Form SB-2 (File No. 333-40743), with
respect to the Securities and the Underwriters' Warrant Securities (as
hereinafter defined), including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act "), and one
or more amendments to that registration statement may have been so filed. Copies
of such registration statement and of each amendment heretofore filed by the
Company with the Commission have been delivered to the Underwriter. After the
execution of this Agreement, the Company will file with the Commission either
(i) if the registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in that registration statement (or, if an amendment
thereto shall have been filed, in such amendment), with such changes or
insertions as are required by Rule 430A under the Act or permitted by Rule
424(b) under the Act and as have been provided to and approved by the
Underwriters prior to the execution of this Agreement, or (ii) if that
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to that registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Underwriters prior to the execution of this
Agreement. The Company also may file a related registration statement with the
Commission pursuant to Rule 462(b) under the Act for purposes of registering
certain additional Securities, which registration statement shall become
effective upon filing with the Commission (the "Rule 462(b) Registration
2
<PAGE>
Statement). As used in this Agreement, the term "Registration Statement" means
that registration statement, as amended at the time it was or is declared
effective, and any amendment thereto that was or is thereafter declared
effective, including all financial schedules and exhibits thereto and any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined), together with any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with that registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement at the time it was or is declared effective); and the
term "Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act or, if no prospectus is so filed pursuant to Rule
424(b), the prospectus included in the Registration Statement. The Company has
caused to be delivered to the Underwriters copies of each Preliminary Prospectus
and has consented to the use of those copies for the purposes permitted by the
Act. If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration Statement has not been declared effective, then (i) the Company has
filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. When each Preliminary Prospectus and each
amendment and each supplement thereto was filed with the Commission it (i)
contained all statements required to be stated therein, in accordance with, and
complied with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement was or is declared
effective, it (i) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply with the requirements
of, the Act and the rules and regulations of the Commission thereunder and (ii)
did not or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
When the Prospectus and each amendment or supplement thereto is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or
supplement is not required so to be filed, when the Registration Statement
containing such Prospectus or amendment or supplement thereto was or is declared
effective) and on the Firm Closing Date and any Option Closing Date (as each
such term is hereinafter defined), the Prospectus, as amended or supplemented at
any such time, (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
3
<PAGE>
in reliance upon and in conformity with written information furnished to the
Company by the Underwriter specifically for use therein.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of California and is
duly qualified or authorized to transact business as a foreign corporation and
is in good standing in each jurisdiction where the ownership or leasing of its
property or the conduct of its business requires such qualification or
authorization, except where the failure to be so qualified would not have a
material adverse effect upon the condition (financial or otherwise), business,
prospects, net worth or results of operations of the Company and its
Subsidiaries, taken as a whole.
(d) The Company has full corporate power and authority, and all
necessary material authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental regulatory authorities, to own or lease its
property and conduct its business as now being conducted and as proposed to be
conducted as described in the Registration Statement and the Prospectus (and, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(e) Except for the subsidiaries listed on Schedule 2 to this Agreement
(the "Subsidiaries"), the Company does not own, directly or indirectly, an
interest in any corporation, partnership, limited liability company, joint
venture, trust or other business entity. Each Subsidiary is duly incorporated
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and is duly qualified or authorized to transact
business as a foreign corporation and is in good standing in each jurisdiction
where the ownership or leasing of its property or the conduct of its business
requires such qualification or licensing, except where the failure to be so
qualified would not have a material adverse effect upon the condition (financial
or otherwise), business, prospects, net worth or results of operations of the
Company and its Subsidiaries, taken as a whole. Each Subsidiary has full
corporate power and authority, and all necessary material authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory authorities, to own or lease its properties and conduct
its business as now being conducted and as proposed to be conducted as described
in the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights. There are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock or other securities, other than as described in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The Shares and the Warrant Shares have been duly
authorized, and the Warrant Shares have been duly reserved for issuance, by all
necessary corporate action on the part of the Company and, when the Shares are
issued and delivered to and paid for by the Underwriters, pursuant to this
Agreement and the Warrant Shares are issued and delivered to and paid for by the
holders of Warrants upon exercise of the Warrants in accordance with the terms
4
<PAGE>
thereof, the Shares and the Warrant Shares will be validly issued, fully paid,
nonassessable and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence, the most
recent Preliminary Prospectus). No holder of outstanding securities of the
Company is entitled as such to any preemptive or other right to subscribe for
any of the Securities, and no person is entitled to have securities registered
by the Company under the Registration Statement or otherwise under the Act other
than as described in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(g) The capital stock of the Company conforms to the description
thereof contained in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(h) All issuances of securities of the Company have been effected
pursuant to an exemption from the registration requirements of the Act. Except
as previously disclosed in writing to the Representative, no compensation was
paid to or on behalf of any member of the National Association of Securities
Dealers, Inc. ("NASD"), or any affiliate or employee thereof, in connection with
any such issuance.
(i) The consolidated financial statements of the Company included in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its subsidiaries as of the dates indicated and the
results of operations of the Company and its subsidiaries for the periods
specified. Such consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
except to the extent that (A) certain footnote disclosures regarding unaudited
interim periods may have been omitted in accordance with the applicable rules of
the Commission under the Securities Exchange Act of 1934, as amended (the "1934
Act") and (B) the interim consolidated financial statements are subject to year
end adjustments. The consolidated financial data set forth under the caption
"Summary Financial Information" in the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) fairly present, on the
basis stated in the Prospectus (or such Preliminary Prospectus), the information
included therein.
(j) Angell & Deering, who have audited certain financial statements of
the Company and delivered their report with respect to the consolidated
financial statements included in the Registration Statement and the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants with respect to the Company as
required by the Act and the applicable rules and regulations thereunder.
(k) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), (i) except as otherwise
contemplated therein, there has been no material adverse change in the business,
operations, condition (financial or otherwise), earnings or prospects of the
Company and the Subsidiaries, taken as a whole, whether or not arising in the
ordinary course of business, (ii) except as otherwise stated therein, there have
5
<PAGE>
been no transactions entered into by the Company or the Subsidiaries and no
commitments made by the Company or the Subsidiaries that, individually or in the
aggregate, are material with respect to the Company and the Subsidiaries, taken
as a whole, (iii) there has not been any change in the capital stock or
indebtedness of the Company and the Subsidiaries, and (iv) there has been no
dividend or distribution of any kind declared, paid or made by the Company in
respect of any class of its capital stock.
(l) The Company has full corporate power and authority to enter into
and perform its obligations under this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement (as hereinafter defined). The execution and
delivery of this Agreement, the Warrant Agreement, and the Underwriters' Warrant
Agreement have been duly authorized by all necessary corporate action on the
part of the Company and this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement have each been duly executed and delivered by
the Company and each is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other similar laws affecting creditors'
rights generally and by general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law), and except as
rights to indemnity and contribution under this Agreement may be limited by
applicable law. The issuance, offering and sale by the Company to the
Underwriters of the Securities pursuant to this Agreement or the Underwriters'
Securities pursuant to the Underwriters' Warrant Agreement, the compliance by
the Company with the provisions of this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement, and the consummation of the other transactions
contemplated by this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement do not (i) require the consent, approval, authorization,
registration or qualification of or with any court or governmental or regulatory
authority, except such as have been obtained or may be required under state
securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (ii) conflict with or result in a
breach or violation of, or constitute a default under, any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which the Company or any Subsidiary is a
party or by which the Company or any Subsidiary or any of its property is bound
or subject, or the certificate of incorporation or by-laws of the Company or any
Subsidiary, or any statute or any rule, regulation, judgment, decree or order of
any court or other governmental or regulatory authority or any arbitrator
applicable to the Company or any Subsidiary.
(m) No legal or governmental proceedings are pending to which the
Company or any Subsidiary is a party or to which the property of the Company or
any Subsidiary is subject, and no such proceedings have been threatened against
the Company or any Subsidiary or with respect to any of its property, except
such as are described in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). No contract or other
document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein (and, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) or filed as required.
6
<PAGE>
(n) Neither the Company nor any Subsidiary is in (i) violation of its
certificate of incorporation or by-laws, (ii) violation in any material respect
of any law, statute, regulation, ordinance, rule, order, judgment or decree of
any court or any governmental or regulatory authority applicable to it, or (iii)
default in any material respect in the performance or observance of any
obligation, agreement, covenant or condition contained in any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which it is a party or by which it or any of
its property may be bound or subject, and no event has occurred which with
notice or lapse of time or both would constitute such a default.
(o) The Company and the Subsidiaries currently own or possess adequate
rights to use all intellectual property, including all trademarks, service
marks, trade names, copyrights, inventions, know-how, trade secrets, proprietary
technologies, processes and substances, or applications or licenses therefor,
that are described in the Prospectus (and if the Prospectus is not in existence,
the most recent Preliminary Prospectus), and any other rights or interests in
items of intellectual property as are necessary for the conduct of the business
now conducted or proposed to be conducted by them as described in the Prospectus
(or, such Preliminary Prospectus), and, except as disclosed in the Prospectus
(and such Preliminary Prospectus), the Company is not aware of the granting of
any patent rights to, or the filing of applications therefor by, others, nor is
the Company aware of, nor has the Company received notice of, infringement of or
conflict with asserted rights of others with respect to any of the foregoing.
All such intellectual property rights and interests are (i) valid and
enforceable and (ii) to the best knowledge of the Company, not being infringed
by any third parties.
(p) The Company and each Subsidiary possesses adequate licenses,
orders, authorizations, approvals, certificates or permits issued by the
appropriate federal, state or foreign regulatory agencies or bodies necessary to
conduct its business as described in the Registration Statement and the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), and, except as disclosed in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no pending or, to the best knowledge of the Company, threatened, proceedings
relating to the revocation or modification of any such license, order,
authorization, approval, certificate or permit.
(q) The Company and each Subsidiary has good and marketable title to
all of the properties and assets reflected in the Company's consolidated
financial statements or as described in the Registration Statement and the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), as being owned by any of them subject to no lien,
mortgage, pledge, charge or encumbrance of any kind, except those reflected in
such consolidated financial statements or as described in the Registration
Statement and the Prospectus (and such Preliminary Prospectus). Except as
disclosed in the Prospectus, the Company and each Subsidiary occupies its leased
7
<PAGE>
properties under valid and enforceable leases conforming to the description
thereof set forth in the Registration Statement and the Prospectus (and such
Preliminary Prospectus).
(r) The Company is not conducting and does not intend to conduct, its
business in a manner in which it would be an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940 (the "Investment Company
Act").
(s) Except as listed on Schedule 3 hereto, the Company has obtained
and delivered to the Representative the agreements (the "Lock-up Agreements")
with the officers, directors and other security holders owning or having rights
to acquire shares of Common Stock or preferred stock to the effect that, among
other things, each such person (i) will not, commencing on the Effective Date
and continuing for the period thereafter set forth opposite their names on
Schedule 3, directly or indirectly, sell, offer or contract to sell or grant any
option to purchase, transfer, assign or pledge, or otherwise encumber, or
dispose of any shares of Common Stock or preferred stock or any securities
convertible into or exercisable for Common Stock or preferred stock now or
hereafter owned by such person without the prior written consent of the
Underwriter, and (ii) will comply with any additional restriction or condition
on the disposition of such Common Stock or preferred stock which may be required
to qualify the offering of the Securities in any state in accordance with the
blue sky or securities laws of such state.
(t) No labor dispute with the employees of the Company or any
Subsidiary exists, or, to the best of the Company's knowledge, is threatened or
is imminent that could result in a material adverse change in the condition
(financial or otherwise), business, prospects, net worth or results of
operations of the Company and the Subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(u) The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any Subsidiary has been refused any insurance
coverage sought or applied for; and neither the Company nor any Subsidiary has
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), business, prospects, net worth or results of operations of the
Company and the Subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (and, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(v) The Underwriters' Warrants (as hereinafter defined) will conform
to the description thereof in the Registration Statement and in the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and, when sold to and paid for by the Underwriter in accordance with
the Underwriters' Warrant Agreement, will have been duly authorized and validly
issued and will constitute valid and binding obligations of the Company entitled
8
<PAGE>
to the benefits of the Underwriters' Warrant Agreement. The shares of Common
Stock issuable upon exercise of the Underwriters' Warrants and the Warrants
issuable upon exercise thereof (the "Underwriters' Warrant Shares") have been
duly authorized and reserved for issuance upon exercise of the Underwriters'
Warrants and the Warrants issuable upon exercise thereof by all necessary
corporate action on the part of the Company and, when issued and delivered and
paid for upon such exercise in accordance with the terms of the Underwriters'
Warrant Agreement, the Underwriters' Warrants, and the Warrants issuable upon
exercise thereof, respectively, will be validly issued, fully paid,
nonassessable and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence, the most
recent Preliminary Prospectus).
(w) No person has acted as a finder in connection with, or is entitled
to any commission, fee or other compensation or payment for services as a finder
for or for originating, or introducing the parties to, the transactions
contemplated herein and the Company will indemnify the Underwriter with respect
to any claim for finder's fees in connection herewith. Except as set forth in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has no
management or financial consulting agreement with anyone. To the best knowledge
of the Company, no promoter, officer, director or stockholder of the Company is,
directly or indirectly, affiliated or associated with an NASD member and no
securities of the Company have been acquired by an NASD member, except as
previously disclosed in writing to the Representative.
(x) The Company and each Subsidiary has filed all federal, state,
local and foreign tax returns which are required to be filed through the date
hereof, or has received extensions thereof, and has paid all taxes shown on such
returns and all assessments received by it to the extent that the same are
material and have become due.
(y) Neither the Company nor any director, officer, agent, employee or
other person associated with or acting on behalf of the Company has, directly or
indirectly: used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political activity; made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended;
or made any bribe, rebate, payoff, influence payment, kickback, or other
unlawful payment. No transaction has occurred between or among the Company and
any of its officers or directors or any affiliates of any such officer or
director, that is required to be described in and is not described in the
Registration Statement and the Prospectus.
(z) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations), has taken or will take, directly or
indirectly, prior to the completion of the Offering, any action designed to
stabilize or manipulate the price of any security of the Company, or which has
caused or resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any security
of the Company, to facilitate the sale or resale of any of the Securities or the
Option Securities.
9
<PAGE>
2. Purchase, Sale and Delivery of the Securities and the Warrant
Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to each Underwriter, and each
Underwriter agrees to purchase from the Company, severally and not jointly, the
number of Firm Shares set opposite its name on Schedule 1 at a purchase price of
$[ ] per share and the number of Firm Warrants set opposite its name on Schedule
1 at a purchase price of $[____] per Warrant, in units consisting of one Firm
Share and one Firm Warrant.
(b) Certificates in definitive form for the Firm Securities that the
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Underwriters request
upon notice to the Company at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company to the Underwriters, against
payment by or on behalf of the Underwriters of the purchase prices therefor by
certified or official bank check or checks drawn upon or by a New York Clearing
House bank or wire transfer and payable in next-day funds to the order of the
Company. Such delivery of and payment for the Firm Securities shall be made at
the offices of Counsel for the Representative, 605 Third Avenue, New York, New
York 10158 at 9:30 A.M., New York City time on _____________, 1998, or at such
other place, time or date as the Underwriters and the Company may agree upon,
such time and date of delivery against payment being herein referred to as the
"Firm Closing Date. The Company will make such certificates for the Firm
Securities available for checking and packaging by the Underwriters, at such
offices as may be designated by the Representative, at least 24 hours prior to
the Firm Closing Date. In lieu of physical delivery, the closing may occur by
"DTC" delivery.
(c) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the Underwriters an option to purchase
any or all of the Option Securities in units consisting of one Option Share and
one Option Warrant, exercisable by the Representative on behalf of and for the
account of the Underwriters. The purchase price to be paid for any of the Option
Securities shall be the same price per share or warrant as the price per share
or warrant for the Firm Securities set forth above in paragraph (a) of this
section 2. The option granted hereby may be exercised as to all or any part of
the Option Securities from time to time within 30 calendar days after the Firm
Closing Date. The Underwriters shall not be under any obligation to purchase any
of the Option Securities prior to the exercise of such option. The
Representative may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the Company
setting forth the aggregate number of Option Securities as to which the
Underwriters are then exercising the option and the date and time for delivery
of and payment for such Option Securities. Any such date of delivery shall be
determined by the Representative but shall not be earlier than two business days
or later than three business days after such exercise of the option and, in any
event, shall not be earlier than the Firm Closing Date. The time and date set
forth in such notice, or such other time on such other date as the
Representative and the Company may agree upon, is herein called the "Option
Closing Date" with respect to such Option Securities. Upon exercise of the
option as provided herein, the Company shall become obligated to sell to the
Underwriters, and, subject to the terms and conditions herein set forth, each
10
<PAGE>
Underwriter shall become obligated to purchase from the Company, the Option
Securities as to which the Underwriter is then exercising its option. If the
option is exercised as to all or any portion of the Option Securities,
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (b) of this section 2,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (c), to refer to such Option
Securities and Option Closing Date, respectively.
(d) On the Firm Closing Date, the Company will further issue and sell to
the Underwriters or, at the direction of the Underwriters, to bona fide officers
of the Underwriters, for an aggregate purchase price of $10, warrants (the
"Underwriters' Warrants") entitling the holders thereof to purchase an aggregate
of 90,000 Units, each consisting of one share of Common Stock and one redeemable
warrant to purchase Common Stock for a period of four years, such period to
commence on the first anniversary of the Effective Date. The Underwriters'
Warrants shall be exercisable at a price equal to 165% of the initial public
offering price of the Units of Common Stock and Warrants offered to the public
and shall contain terms and provisions more fully described herein below and as
set forth more particularly in the warrant agreement relating to the
Underwriters' Warrants to be executed by the Company on the Effective Date (the
"Underwriters' Warrant Agreement"), including, but not limited to, (i) customary
anti-dilution provisions, and (ii) prohibitions of mergers, consolidations or
other reorganizations of or by the Company or the taking by the Company of other
action during the five-year period following the Effective Date unless adequate
provision is made to preserve, in substance, the rights and powers incidental to
the Underwriters' Warrants. As provided in the Underwriters' Warrant Agreement,
the Underwriters may designate that the Underwriters' Warrants be issued in
varying amounts directly to bona fide officers of the Underwriters. As further
provided, no sale, transfer, assignment, pledge or hypothecation of the
Underwriters' Warrants shall be made for a period of 12 months from the
Effective Date, except (i) by operation of law or reorganization of the Company,
or (ii) to the Underwriters and bona fide partners or officers of the
Underwriters and selling group members. The shares of Common Stock issuable upon
exercise of the Underwriters' Warrants and the Warrants issuable upon exercise
thereof are referred to herein as the "Underwriters' Warrant Shares"; and the
Underwriters' Warrants, the Warrants issuable upon exercise thereof, and the
Underwriters' Warrant Shares are collectively referred to herein as the
"Underwriters' Securities."
3. Offering by the Underwriters. The Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus
(the "Offering").
4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible.
11
<PAGE>
If required, the Company will file the Prospectus and any amendment or
supplement thereto with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. During any time when a prospectus
relating to the Securities is required to be delivered under the Act, the
Company (i) will comply with all requirements imposed upon it by the Act and the
rules and regulations of the Commission thereunder to the extent necessary to
permit the continuance of sales of or dealings in the Securities in accordance
with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission any prospectus or
amendment referred to in the first sentence of section (a) (i) hereof, any
amendment or supplement to such prospectus or any amendment to the Registration
Statement as to which the Underwriters shall not previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Underwriters shall not have given its consent.
The Company will prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, promptly upon request by the
Underwriters or counsel to the Underwriters, any amendments to the Registration
Statement or amendments or supplements to the Prospectus that may be necessary
or advisable in connection with the distribution of the Securities by the
Underwriters, and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective by the Commission as promptly as
possible. The Company will advise the Underwriters, promptly after receiving
notice thereof, of the time when the Registration Statement or any amendment
thereto has been filed or declared effective or the Prospectus or any amendment
or supplement thereto has been filed and will provide evidence satisfactory to
the Underwriters of each such filing or effectiveness.
(b) The Company will advise the Underwriters, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of any Securities for offering or sale in any jurisdiction, (iii)
the institution, threat or contemplation of any proceeding for any such purpose
or (iv) any request made by the Commission for amending the Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will, in cooperation with counsel to the Underwriters,
arrange for the qualification of the Securities for offering and sale under the
blue sky or securities laws of such jurisdictions as the Underwriters may
designate and will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Securities.
(d) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectus to comply with the Act or the
12
<PAGE>
rules or regulations of the Commission thereunder, the Company will promptly
notify the Underwriters thereof and, subject to section 4(a) hereof, will
prepare and file with the Commission, at the Company's expense, an amendment to
the Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) So long as any Warrants are outstanding, the Company shall use its
best efforts to cause post-effective amendments to the Registration Statement to
become effective in compliance with the Act and without any lapse of time
between the effectiveness of any such post-effective amendments and cause a copy
of each Prospectus, as then amended, to be delivered to each holder of record of
a Warrant and to furnish to the Underwriters and any dealer as many copies of
each such Prospectus as the Underwriters or dealer may reasonably request. The
Company shall not call for redemption of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify the Representative of any material change in the
business, financial condition or prospects of the Company. So long as any of the
Warrants remain outstanding, the Company will timely deliver and supply to its
Warrant Agent sufficient copies of the Company's current Prospectus, as will
enable such Warrant agent to deliver a copy of such Prospectus to any Warrant or
other holder where such Prospectus delivery is by law required to be made.
(f) The Company will, without charge, provide to the Underwriters and
to counsel for the Underwriters (i) as many signed copies of the registration
statement originally filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) as the Underwriters may
reasonably request, (ii) as many conformed copies of such registration statement
and each amendment thereto (in each case without exhibits thereto) as the
Underwriters may reasonably request and (iii) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many copies of
each Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto as the Underwriters may reasonably request.
(g) The Company, as soon as practicable, will make generally available
to its security holders and to the Underwriters an earnings statement of the
Company that satisfies the provisions of section 11 (a) of the Act and Rule 158
thereunder.
(h) The Company will reserve and keep available for issuance that
maximum number of authorized but unissued shares of Common Stock which are
issuable upon exercise of the Warrants and the Underwriters' Warrants (including
the underlying securities) outstanding from time to time.
(i) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus. The Company
will timely file, and will provide or cause to be provided to the Underwriters
and counsel to the Underwriters a copy of the report on Form 10Q required to be
filed by the Company pursuant to Rule 463 under the Act.
13
<PAGE>
(j) The Company will not, without the prior written consent of the
Representative, directly or indirectly offer, agree to sell, sell, grant any
option to purchase or otherwise dispose (or announce any offer, agreement to
sell, sales grant of any option to purchase or other disposition) of any shares
of Common Stock, preferred stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or preferred stock for a
period of 36 months after the Effective Date, except (i) the Shares and Warrants
issued pursuant to this Agreement, (ii) the Warrant Shares issuable upon
exercise of the Warrants, (iii) the Warrants, (iv) the Underwriters' Warrant
Shares and Warrants issuable upon the exercise of the Underwriters' Warrants,
(v) shares of Common Stock issuable upon the exercise of options granted and to
be granted under the Company's Stock Option Plan as in effect as of the date
hereof, and (vi) in connection with any merger or acquisition of another entity
or the business thereof. The Company also will not for a period of 36 months
following the Effective Date, without the prior written consent of the
Representative, (i) issue or sell any of its securities pursuant to Regulation S
promulgated under the Act or (ii) file a registration on Form S-8 for the sale
of securities by a person other than an employee of the Company or a Subsidiary.
(k) Prior to the Closing Date or the Option Closing Date (if any), the
Company will not, directly or indirectly, without prior written consent of the
Representative, issue any press release or other public announcement or hold any
press conference with respect to the Company or its activities with respect to
the Offering (other than trade releases issued in the ordinary course of the
Company's business consistent with past practices with respect to the Company's
operations).
(l) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule 430A
under the Act, then immediately following the execution of this Agreement, the
Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A and Rule 424(b) under the Act, copies of the
Prospectus including the information omitted in reliance on Rule 430A, or, if
required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(m) The Company will cause the Securities to be included in The Nasdaq
Small Cap Market on the Effective Date and to use its best efforts to maintain
such listing thereafter. The Company will file with The Nasdaq SmallCap Market
and all documents and notices that are required by companies with securities
that are traded on The Nasdaq SmallCap Market.
(n) During the period of five years from the Firm Closing Date, the
Company will, as promptly as possible, not to exceed 135 days, after each annual
fiscal period render and distribute reports to its stockholders which will
include audited statements of its operations and changes of financial position
during such period and its audited balance sheet as of the end of such period,
as to which statements the Company's independent certified public accountants
shall have rendered an opinion.
14
<PAGE>
(o) During a period of three years commencing with the Firm Closing
Date, the Company will furnish to the Representative, at the Company's expense,
copies of all periodic and special reports furnished to stockholders of the
Company and of all information, documents and reports filed with the Commission.
(p) The Company has appointed Corporate Stock Transfer, Inc. as
transfer agent for the Common Stock and warrant agent for the Warrants, subject
to the Closing. The Company will not change or terminate such appointment for a
period of three years from the Firm Closing Date without first obtaining the
written consent of the Representative, which such consent will not be
unreasonably denied or unduly delayed. For a period of three years after the
Effective Date, the Company shall cause the transfer agent and warrant agent to
deliver promptly to the Underwriters a duplicate copy of the weekly transfer
sheets relating to trading of the Securities. The Company shall also provide to
the Representative, promptly upon their request, up to four times in any
calendar year, copies of DTC or equivalent transfer sheets.
(q) During the period of 180 days after the date of this Agreement,
the Company will not at any time, directly or indirectly, take any action
designed to or that will constitute, or that might reasonably be expected to
cause or result in, the stabilization of the price of the Common Stock or the
Warrants to facilitate the sale or resale of any of the Securities.
(r) The Company will not take any action to facilitate the sale of any
shares of Common Stock pursuant to Rule 144 under the Act if any such sale would
violate any of the terms of the Lock-up Agreements.
(s) Prior to the 120th day after the Firm Closing Date, the Company
will provide the Representative and its designees with three bound volumes of
the transaction documents relating to the Registration Statement and the
closing(s) hereunder.
(t) The Company shall consult with the Representative prior to the
distribution to third parties of any financial information news releases or
other publicity regarding the Company, its business, or any terms of this
offering and the Underwriters will consult with the Company prior to the
issuance of any research report or recommendation concerning the Company's
securities. Copies of all documents that the Company or its public relations
firm intend to distribute will be provided to the Representative for review
prior to such distribution.
(u) The Company and the Underwriters will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent this Offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriters will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
15
<PAGE>
(v) The Company will, for a period of no less than three years
commencing immediately after the Effective Date, engage a designee of the
Representative as an advisor (the "Advisor") to the Company's Board of
Directors, who shall attend meetings of the Board, receive all notices and other
correspondence and communications sent by the Company to its Board of Directors
and receive cash compensation equal to that of the cash compensation paid to
other non-employee directors; provided, that in lieu of the Representative's
right to designate an Advisor, the Representative shall have the right during
such three-year period, in its sole discretion, to designate one person for
election as a director of the Company and the Company will utilize its best
efforts to obtain the election of such person who shall be entitled to receive
the same cash compensation, expense reimbursements and other benefits as set
forth above. In addition, such Advisor shall be entitled to receive
reimbursement for all costs incurred in attending such meetings including, but
not limited to, food, lodging and transportation consistent with reimbursement
made to other non-employee directors. The Company, during said three-year
period, shall schedule no less than four formal meetings (at least one of which
shall be "in person" and the others may be held telephonically) of its Board of
Directors in each such year at which meetings such Advisor shall be permitted to
attend (in person, for each meeting held "in person") as set forth herein; said
meetings shall be held quarterly each year and advance notice of such meetings
identical to the notice given to directors shall be given to the Advisor. The
Company and its principal stockholders shall, during such three year period,
give the Representative timely prior written notice of any proposed
acquisitions, mergers, reorganizations or other similar transactions. The
Company shall indemnify and hold the Representative and such Advisor or director
harmless against any and all claims, actions, damages, costs and expenses, and
judgments arising solely out of the attendance and participation of such Advisor
or director at any such meeting described herein, and, if the Company maintains
a liability insurance policy affording coverage for the acts of its officers and
directors, it shall, if possible, include such Advisor or director as an insured
under such policy.
(w) The Company shall first submit to the Representative certificates
representing the Securities for approval prior to printing, and shall, as
promptly as possible, after filing the Registration Statement with the
Commission, obtain CUSIP numbers for the Securities.
(x) The Company shall engage the Underwriters' counsel to provide the
Underwriters, at the closing of any sale of Securities hereunder and quarterly
thereafter, with an opinion, setting forth those states in which the Common
Stock and Warrants may be traded in non-issuer transactions under the blue sky
or securities laws of the 50 states. The Company shall pay such counsel a
one-time fee of $10,000 for such opinions at the closing of the sale of the Firm
Securities.
(y) The Company will prepare and file a registration statement with
the Commission pursuant to section 12 of the 1934 Act, and will use its best
efforts to have such registration statement declared effective by the Commission
on an accelerated basis on the day after the Effective Date. For this purpose
the Company shall prepare and file with the Commission a General Form of
Registration of Securities (Form 8-A or Form 10).
16
<PAGE>
(z) For so long as the Securities are registered under the 1934 Act,
the Company will hold an annual meeting of stockholders for the election of
directors within 180 days after the end of each of the Company's fiscal years
and within 135 days after the end of each of the Company's fiscal years will
provide the Company's stockholders with the audited consolidated financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such consolidated financial statements shall be those required by Rule
14a-3 under the 1934 Act and shall be included in an annual report pursuant to
the requirements of such Rule.
(aa) The Company shall retain the Representative as a financial
advisor at an annual fee of $60,000 for a 12-month period commencing on the
Closing Date. The entire fee of $60,000 shall be payable on the Closing Date.
(bb) The Company will engage a financial public relations firm
reasonably satisfactory to the Representative on or before the Firm Closing
Date, and continuously engage such firm, or a substitute firm reasonably
acceptable to the Representative, for a period of twelve (12) months following
the Firm Closing Date.
(cc) The Company will take all necessary and appropriate actions to be
included in Standard and Poor's Corporation Descriptions or other equivalent
manual and to maintain its listing therein for a period of five (5) years from
the Effective Date.
(dd) On or prior to the Effective Date, the Company will give written
instructions to the transfer agent for the Common Stock directing said transfer
agent to place stop-order restrictions against, and appropriate legends advising
of the Lock-up Agreements on, the certificates representing the securities of
the Company owned by the persons who have entered into the Lock-up Agreements.
(ee) The Company will obtain and keep in effect for the shorter of
five (5) years or the period during which Raymond J. Meyers is employed as its
Chief Executive Officer, a policy on his life in the amount of $1 million
payable to the Company.
5. Expenses
(a) The Company shall pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to section 10 hereof, including all costs and expenses incident to (i)
the preparation, printing and filing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Preliminary Prospectus and the Prospectus and any amendment or
supplement thereto, this Agreement, the Agreement Among Underwriters, the
selected dealer agreement and the other agreements and documents governing the
underwriting arrangements and any blue sky memoranda, (ii) all reasonable and
necessary arrangements relating to the delivery to the Underwriters of copies of
the foregoing documents, (iii) the fees and disbursements of the counsel, the
17
<PAGE>
accountants and any other experts or advisors retained by the Company, (iv) the
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's, warrant agent's and
registrar's fees or any transfer or other taxes payable thereon, (v) the
qualification of the Securities under state blue sky or securities laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto (such counsel fees not to exceed $________, of which $7,500
shall be due and payable upon the commencement of blue sky filing, together with
the related filing fees) and any fees and disbursements of local counsel, if
any, retained for such purpose, (vi) the filing fees of the Commission and the
NASD relating to the Securities, (vii) the inclusion of the Securities on The
Nasdaq SmallCap Market and in the Standard and Poor's Corporation Descriptions
Manual, (viii) any "road shows" or other meetings with prospective investors in
the Securities, including transportation, accommodation, meal, conference room,
audio-visual presentation and similar expenses of the Underwriters or its
representatives or designees (other than as shall have been specifically
approved by the Representative to be paid for by the Underwriters) and (ix) the
publication of "tombstone advertisements" in newspapers or other publications
selected by the Representative and the manufacture of prospectus memorabilia. In
addition to the foregoing, the Company shall reimburse the Representative for
its expenses on the basis of a non-accountable expense allowance in the amount
of 3.00% of the gross offering proceeds to be received by the Company. The
unpaid portion of the expense allowance, based on the gross proceeds from the
sale of the Firm Securities, shall be deducted from the funds to be paid by the
Representative in payment for the Firm Securities, pursuant to section 2 of this
Agreement, on the Firm Closing Date. To the extent any Option Securities are
sold, any remaining non-accountable expense allowance based on the gross
proceeds from the sale of the Option Securities shall be deducted from the funds
to be paid by the Representative in payment for the Option Securities, pursuant
to section 2 of this Agreement, on the Option Closing Date. The Company
warrants, represents and agrees that all such payments and reimbursements will
be promptly and fully made.
(b) Notwithstanding any other provision of this Agreement, if the
offering of the Securities contemplated hereby is terminated for any reason, the
Company agrees that, in addition to the Company paying its own expenses as
described in subparagraph (a) above, (i) the Company shall reimburse the
Underwriters only for their actual accountable out-of-pocket expenses (in
addition to blue sky legal fees and expenses referred to in subparagraph (a)
above), and (ii) the Representative shall be entitled to retain amounts advanced
by the Company (if any) against the non-accountable expense allowance referred
to in subparagraph (a) above; provided, however, that the amount retained
pursuant to this clause (ii) shall not exceed the Representative's expenses on
an accountable basis to the date of such cancellation and that all unaccounted
for amounts shall be refunded to the Company. Such expenses shall include, but
are not to be limited to, fees for the services and time of counsel for the
Underwriters to the extent not covered by clause (i) above, plus any additional
expenses and fees, including, but not limited to, travel expenses, postage
expenses, duplication expenses, long-distance telephone expenses, and other
expenses incurred by the Representative in connection with the proposed
offering.
18
<PAGE>
6. Warrant Solicitation Fee. The Company agrees to pay the Representative a
fee of five percent (5%) of the aggregate exercise price of the Warrants if (i)
the market price of the Common stock is not less than the exercise price of the
Warrants on the date of exercise; (ii) the exercise of the Warrants is solicited
by the Representative at such as it is a member of the NASD and the
Representative is designated in writing by the holder of the Warrants as the
NASD member soliciting the exercise; (iii) the Warrants are not held in a
discretionary account; (iv) the disclosure of compensation arrangements is made
both at the time of the Offering and at the time of the exercise; and (v) the
solicitation of the Warrant exercise is not in violation of Rule 101 of
Regulation M promulgated under the 1934 Act; and (vi) such payment is not
otherwise in violation of then applicable NASD rules. The Company agrees not to
solicit the exercise of any Warrant other than through the Representative and
will not authorize any other dealer to engage in such solicitation without the
prior written consent of the Representative, which will not be unreasonably
withheld. The Warrant solicitation fee will not be paid in a non-solicited
transaction. Any request for exercise will be presumed to be unsolicited unless
the customer states in writing that the transaction was solicited and designates
in writing that the Representative solicited the exercise. No Warrant
solicitation by the Representative will occur for a period of 12 months after
the Effective Date.
7. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares shall be subject, in the
Underwriters' sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy
of the statements of the Company's officers made pursuant to the provisions
hereof, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the registration statement, as heretofore amended, has not been
declared effective as of the time of execution hereof, the registration
statement, as heretofore amended or as amended by an amendment thereto to be
filed prior to the Firm Closing Date, shall have been declared effective not
later than 5:30 P.M., New York City time, on the date on which the amendment to
such registration statement containing information regarding the initial public
offering price of the Securities has been filed with the Commission, or such
later time and date as shall have been consented to by the Underwriters; if
required, the Prospectus and any amendment or supplement thereto shall have been
filed with the Commission in the manner and within the time period required by
Rule 424(b) under the Act, no stop order suspending the effectiveness of the
Registration Statement shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Underwriters, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Underwriters shall have received an opinion, dated the Firm
Closing Date, of Gary Agron, Esq., counsel to the Company, to the effect that:
(1) the Company and each Subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
state of its incorporation and is duly qualified to transact business as a
19
<PAGE>
foreign corporation and is in good standing under the laws of each other
jurisdiction in which its ownership or leasing of any properties or the conduct
of its business requires such qualification, except where the failure to so
qualify would not have a materially adverse effect upon the Company and its
subsidiaries, taken as a whole.
(2) the Company and each Subsidiary has full corporate power and
authority to own or lease its property and conduct its business as now being
conducted and as proposed to be conducted, as described in the Registration
Statement and the Prospectus, and the Company has full corporate power and
authority to enter into this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement and to carry out all the terms and provisions
hereof and thereof to be carried out by it;
(3) to the knowledge of such counsel, there are no outstanding
options, warrants or other rights granted by the Company to purchase shares of
its Common Stock, preferred stock or other securities other than as described in
the Prospectus; the Shares have been duly authorized and the Warrant Shares and
the Underwriters' Warrant Shares have been duly reserved for issuance by all
necessary corporate action on the part of the Company and, the Shares when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, the Warrant Shares when issued upon payment of the exercise price
specified in the Warrants, Underwriters' Warrants when issued and delivered and
paid for in accordance with this Agreement and the Underwriters' Warrant
Agreement by the Underwriters and the Warrant Shares when issued upon payment of
the exercise price specified in the Underwriters' Warrants, will be validly
issued, fully paid, nonassessable and free of preemptive rights and will conform
to the description thereof in the Prospectus; to the knowledge of such counsel,
no holder of outstanding securities of the Company is entitled as such to any
preemptive or other right to subscribe for any of the Shares, the Warrant
Shares, or the Underwriters' Warrant Shares; and to the knowledge of such
counsel, no person is entitled to have securities registered by the Company
under the Registration Statement or otherwise under the Act other than as
described in the Prospectus;
(4) the Shares have been approved for inclusion on The Nasdaq
SmallCap Market;
(5) the execution and delivery of this Agreement, the Warrant
Agreement, the Underwriters' Warrant Agreement and the Financial Advisory and
Investment Banking Agreement have been duly authorized by all necessary
corporate action on the part of the Company and this Agreement, the Warrant
Agreement, the Underwriters' Warrant Agreement and the Financial Advisory and
Investment Banking Agreement have been duly executed and delivered by the
Company, and each is a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other similar laws affecting creditors' rights generally and to
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law) and except as rights to indemnity and
contribution under this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement may be limited by applicable law;
20
<PAGE>
(6) the Underwriters' Warrants conform to the description thereof
in the Registration Statement and in the Prospectus and are duly authorized and
upon payment of the purchase price therefore specified in section 2(d) of this
Agreement are validly issued and constitute valid and binding obligations of the
Company entitled to the benefits of the Underwriters' Warrant Agreement;
(7) the statements set forth in the Prospectus under the caption
"Description of Securities" in the Prospectus, insofar as those statements
purport to summarize the terms of the capital stock and warrants of the Company,
provide a fair summary of such terms; the statements in the Prospectus, insofar
as those statements constitute matters of law or legal conclusions, or summaries
of the contracts, agreement instruments, leases or licenses referred to therein,
constitute a fair summary of those matters, legal conclusions, contracts,
agreement instruments, leases or licenses and include all material terms
thereof, as applicable;
(8) none of (A) the execution and delivery of this Agreement, the
Warrant Agreement and the Underwriters' Warrant Agreement, (B) the issuance,
offering and sale by the Company to the Underwriters of the Securities pursuant
to this Agreement and the Underwriters' Warrant Securities pursuant to the
Underwriters' Warrant Agreement, nor (C) the compliance by the Company with the
other provisions of this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement and the consummation of the transactions contemplated hereby
and thereby, (1) requires the consent, approval, authorization, registration or
qualification of or with any court or governmental authority known to us, except
such as have been obtained and such as may be required under state blue sky or
securities laws, or (2) conflicts with or results in a breach or violation of,
or constitutes a default under, any material contract, indenture, mortgage, deed
of trust, loan agreement, note, lease or other material agreement or instrument
known to such counsel to which the Company is a party or by which the Company or
any of its property is bound or subject, or the certificate of incorporation or
by-laws of the Company, or any material statute or any judgment, decree, order,
rule or regulation of any court or other governmental or regulatory authority
known to such counsel applicable to the Company;
(9) to the knowledge of such counsel, (A) no legal or
governmental proceedings are pending to which the Company or a Subsidiary is a
party or to which the property of the Company or a Subsidiary is subject and (B)
no contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required;
(10) the Company and each of the Subsidiaries possesses adequate
licenses, orders, authorizations, approvals, certificates or permits issued by
the appropriate federal or state regulatory agencies or bodies necessary to
conduct its business as described in the Registration Statement and the
Prospectus, and, to the knowledge of such counsel, there are no pending or
21
<PAGE>
threatened proceedings relating to the revocation or modification of any such
license, order, authorization, approval, certificate or permit, except as
disclosed in the Registration Statement and the Prospectus;
(11) neither the Company nor the Subsidiary is in violation or
breach of, or in default with respect to, any term of its certificate of
incorporation or by-laws, and to the knowledge of such counsel, neither the
Company nor any Subsidiary is in (i) violation in any material respect of any
law, statute, regulation, ordinance, rule, order, judgment or decree of any
court or any governmental or regulatory authority applicable to it, or (ii)
default in any material respect in the performance or observance of any
obligation, agreement, covenant or condition contained in any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which it is a party or by which it or any of
its property may be bound or subject, and no event has occurred which with
notice, lapse of time or both would constitute such a default.
(12) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to such
counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the best
knowledge of such counsel, are contemplated by the Commission;
(13) the registration statement originally filed with respect to
the Securities and each amendment thereto and the Prospectus (in each case,
other than the financial statements and schedules and other financial and
statistical information contained therein, as to which such counsel need express
no opinion) comply as to form in all material respects with the applicable
requirements of the Act and the rules and regulations of the Commission
thereunder; and
(14) the Company is not an "investment company" as defined in
section 3(a) of the Investment Company Act and, if the Company conducts its
business as set forth in the Prospectus, it will not become an "investment
company" and will not be required to register under the Investment Company Act.
Counsel also shall state in its opinion that it has participated in the
preparation of the Registration Statement and the Prospectus and that nothing
has come to its attention that has caused them to believe that the Registration
Statement, at the time it became effective (including the information deemed to
be a part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b), if applicable), contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, as of its
date or as of the Firm Closing Date, contained an untrue statement of material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
22
<PAGE>
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials, copies of which certificates will
be provided to the Underwriters, and, as to matters of the laws of certain
jurisdictions, on the opinions of other counsel to the Company, which opinions
shall also be delivered to the Underwriters, in form and substance acceptable to
the Underwriters, if such other counsel expressly authorize such reliance and
counsel to the Company expressly states in their opinion that such counsel's and
the Underwriters' reliance upon such opinion is justified.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Underwriters shall have received from Angell & Deering, a
letter dated the Firm Closing Date and dated each Option Closing Date (as
defined below), if applicable, in form and substance satisfactory to the
Underwriters, to the effect that (i) they are independent public accountants
with respect to the Company within the meaning of the Act and the applicable
rules and regulations thereunder; (ii) in their opinion, the consolidated
financial statements audited by them and included in the Registration Statement
and the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published rules
and regulations thereunder; (iii) based upon procedures set forth in detail in
such letter, nothing has come to their attention which causes them to believe
that (A) the unaudited financial statements as of ___________, 1997 included in
the Registration Statement was not determined on a basis substantially
consistent with that used in determining the corresponding amounts in the
audited financial statements as of [ ] included in the Registration Statement or
(B) at a specified date not more than five days prior to the date of this
Agreement, there has been any change in the capital stock of the Company, any
increase in the long-term debt or decrease in net sales of the Company and its
Subsidiaries, as compared with the amounts shown in the [ ] balance sheet
included in the Registration Statement or as of the date of the most recent
financial statements made available by the Company there has been any change in
the capital stock of the Company, any increase in the long-term debt or any
decrease in net sales, working capital or net assets of the Company and its
Subsidiaries as compared with the amounts shown in the [ ] balance sheet
included in the Registration Statement or, during the period from [ ] through
date of the most recent financial statement made available by the Company and
its Subsidiaries, there were any decreases, as compared with the corresponding
period in the preceding year, in revenues, or any increase in net loss of the
Company, except in all instances for changes, increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur;
and (iv) in addition to the audit referred to in their opinion and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information (including the summary of
consolidated financial information and secured financial information) which are
included in the Registration Statement and Prospectus and which are specified by
the Underwriters, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting, financial and other
records of the Company identified in such letter. References to the Registration
23
<PAGE>
Statement and the Prospectus in this paragraph (c) with respect to the letter
referred to above shall include any amendment or supplement thereto at the date
of such letter.
(d) The representations and warranties of the Company contained in
this Agreement shall be true and correct as if made on and as of the Firm
Closing Date; the Registration Statement shall not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, shall not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company shall
have performed all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date.
(e) No stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or contemplated by the
Commission.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a prospective
material adverse change, in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company and the Subsidiaries, taken as
a whole, except in each case as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto).
(g) The Underwriters shall have received a certificate, dated the Firm
Closing Date, of the Chief Executive Officer and the Secretary of the Company to
the effect set forth in subparagraphs (d) through (f) above.
(h) The Common Stock and Warrants shall be qualified in such
jurisdictions as the Underwriters may reasonably request pursuant to section
4(c), and each such qualification shall be in effect and not subject to any stop
order or other proceeding on the Firm Closing Date.
(i) The Company shall have executed and delivered to the Underwriters
the Underwriters' Warrant Agreement and a certificate or certificates evidencing
the Underwriters' Warrants, in each case in a form acceptable to the
Underwriters.
(j) The Representative shall have received Lock-up Agreements executed
by the persons listed on Schedule 3 annexed hereto, or the same has been waived
in writing.
(j) On or before the Firm Closing Date, the Underwriters and counsel
for the Underwriters shall have received such further certificates, documents,
letters or other information as they may have reasonably requested from the
Company.
24
<PAGE>
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and counsel
for the Underwriters. The Company shall furnish to the Underwriters such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriters and counsel for the Underwriters shall reasonably
request.
The obligation of the Underwriters to purchase and pay for any Option
Securities shall be subject, in its discretion, to each of the foregoing
conditions to purchase the Firm Securities, except that all references to the
Firm Securities and the Firm Closing Date shall be deemed to refer to such
Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Underwriters
and each person, if any, who controls any Underwriter within the meaning of
section 15 of the Act or section 20 of the 1934 Act against any losses, claims,
damages, amounts paid in settlement or liabilities, joint or several, to which
the Underwriters or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof arise out of or are based upon:
(1) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Securities under the Blue Sky or securities laws thereof or filed
with the Commission or any securities association or securities exchange (each
an "Application"), or
(2) the omission or alleged omission to state in such
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse, as incurred, the Underwriters and
such controlling person for any legal or other expenses reasonably incurred by
the Underwriters or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
loss, claim, damage, liability, action, investigation, litigation or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or any Application in reliance upon and in conformity with written information
furnished to the Company by the Underwriters specifically for use therein. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have. The Company will not, without the prior written consent of the
Underwriters, settle or compromise or consent to the entry of any judgment in
25
<PAGE>
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not the Underwriters or any
person who controls any Underwriter within the meaning of section 15 of the Act
or section 20 of the 1934 Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Underwriters and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(b) The Underwriters, severally but not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of section 15 of the Act or section 20 of the
Exchange Act against, any losses, claims, damages or liabilities to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, but only insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application, or necessary to make the statements
therein 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 made in reliance upon and in conformity with written information
furnished to the Company by any Underwriters specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in collection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
26
<PAGE>
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence or (ii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this section 8 is unavailable or insufficient to
hold harmless an indemnified party in respect of any losses, claims, damages or
liabilities (or actions in respect thereof), each indemnifying party, in order
to provide for just and equitable contribution, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party on the other from the
offering of the Securities or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the indemnified party on the other in connection with the statements or
omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof). The relative
benefits received by the Company on the one hand and the Underwriter on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriter. The relative fault of the parties shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriter, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and the other
equitable considerations appropriate in the circumstances. The Company and the
Underwriter agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d).
Notwithstanding any other provision of this paragraph (d), the Underwriter shall
not be obligated to make contributions hereunder that in the aggregate exceed
the total public offering price of the Securities purchased by the Underwriter
under this Agreement, less the aggregate amount of any damages that the
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of section 11 (f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), each person, if any, who
controls an Underwriter within the meaning of section 15 of the Act or section
20 of the 1934 Act shall have the same rights to contribution as the
27
<PAGE>
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of section 15 of the Act or section 20 of the 1934
Act, shall have the same rights to contribution as the Company.
9. Substitution of Underwriters.
If any Underwriter shall for any reason not permitted hereunder cancel its
obligations to purchase the Firm Securities hereunder, or shall fail to take up
and pay for the number of Firm Securities set forth opposite its name on
Schedule 1 hereto upon tender of such Firm Securities in accordance with the
terms hereof, then:
(a) If the aggregate number of Firm Securities which such Underwriter
or Underwriters agreed but failed to purchase does not exceed 10% of the total
number of Firm Securities, the other Underwriter shall be obligated to purchase
the Firm Securities which such defaulting Underwriter agreed but failed to
purchase.
(b) If any Underwriter so defaults and the agreed number of Firm
Securities with respect to which such default or defaults occurs is more than
10% of the total number of Firm Securities, the remaining Underwriters shall
have the right to take up and pay for the Firm Securities which the defaulting
Underwriter agreed but failed to purchase. If such remaining Underwriters do
not, at the Firm Closing Date, take up and pay for the Firm Securities which the
defaulting Underwriter agreed but failed to purchase, the time for delivery of
the Firm Securities shall be extended to the next business day to allow the
remaining Underwriters the privilege of substituting within twenty-four hours
(including nonbusiness hours) another underwriter or underwriters satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid, within such twenty-four hour period, the time of
delivery of the Firm Securities may, at the option of the Company, be again
extended to the next following business day, if necessary, to allow the Company
the privilege of finding within twenty-four hours (including nonbusiness hours)
another underwriter or underwriters to purchase the Firm Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted Underwriters to
take up the Firm Securities of the defaulting Underwriter as provided in this
section, (i) the Company or the underwriter shall have the right to postpone the
time of delivery for a period of not more than seven business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other document or arrangements, and the
Company agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective numbers of Firm Securities to be purchased by the remaining
Underwriters or substituted Underwriters shall be taken as the basis of the
underwriting obligation for all purposes of this agreement.
If in the event of a default by any Underwriter and the remaining
Underwriters shall not take up and pay for all the Firm Securities agreed to be
purchased by the defaulting Underwriter or substitute another underwriter or
underwriters as aforesaid, the Company shall not find or shall not elect to seek
another underwriter or underwriters for such Firm Securities as aforesaid, then
this Agreement shall terminate.
28
<PAGE>
If, following exercise of the option provided in section 2(c) hereof, any
Underwriter or Underwriters shall for any reason not permitted hereunder cancel
their obligations to purchase Option Securities at the Option Closing Date, or
shall fail to take up and pay for the number of Option Securities, which it
became obligated to purchase at the Option Closing Date upon tender of such
Option Securities in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Units of the defaulting Underwriters in the manner provided in section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not take
up and pay for all such Option Securities, the Underwriters shall be entitled to
purchase the number of Option Securities for which there is no default or, at
their election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, any of its officers
or directors and the Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, the Underwriters or any
controlling person referred to in section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in sections 5 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the Underwriters
by notice to the Company given prior to the Firm Closing Date or the related
Option Closing Date, respectively, in the event that the Company shall have
failed, refused or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied under section 7 hereunder at
or prior thereto or if at or prior to the Firm Closing Date or such Option
Closing Date, respectively.
(1) the Company sustains a loss by reason of explosion, fire,
flood, accident or other calamity, which, in the opinion of the Underwriters,
substantially affects the value of the properties of the Company or which
materially interferes with the operation of the business of the Company
regardless of whether such loss shall have been insured; there shall have been
29
<PAGE>
any material adverse change, or any development involving a prospective material
adverse change (including, without limitation, a change in management or control
of the Company), in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(2) any action, suit or proceeding shall be threatened,
instituted or pending, at law or in equity, against the Company, by any person
or by any federal, state, foreign or other governmental or regulatory
commission, board or agency wherein any unfavorable result or decision could
materially adversely affect the business, operations, condition (financial or
otherwise), earnings or prospects of the Company;
(3) trading in the Common Stock or Warrants shall have been
suspended by the Commission or the NASD, or trading in securities generally on
the New York Stock Exchange shall have been suspended or minimum or maximum
prices shall have been established on either such exchange or quotation system;
(4) a banking moratorium shall have been declared by New York or
United States authorities;
(5) there shall have been (A) an outbreak of hostilities between
the United States and any foreign power (or, in the case of any ongoing
hostilities, a material escalation thereof), (B) an outbreak of any other
insurrection or armed conflict involving the United States or (C) any other
calamity or crisis or material change in financial, political or economic
conditions, having an effect on the financial markets that, in any case referred
to in this clause (5), in the sole judgment of the Underwriters makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement;
(6) termination of this Agreement pursuant to this section 11
shall be without liability of any party to any other party, except as provided
in section 5(b) and section 8 hereof.
12. Information Supplied by the Underwriters. The statements set forth in
the first paragraph on page 3, in the second, third, eighth (first and third
sentences only) and sixteenth paragraphs under the heading "Underwriting" in the
Preliminary Prospectus dated ____________ or the Prospectus (to the extent such
statements relate to the Underwriters) constitute the only information furnished
by the Underwriters to the Company for the purposes of sections 1 (b) and 8(b)
hereof. The Underwriters confirm that such statements (to such extent) are
correct.
13. Notices. All notices hereunder to or upon either party hereto shall be
deemed to have been duly given for all purposes if in writing and (i) delivered
in person or by messenger or an overnight courier service against receipt, or
(ii) send by certified or registered mail, postage paid, return receipt
requested, or (iii) sent by telegram, facsimile, telex or similar means,
30
<PAGE>
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
To the Company: ProtoSource Corporation
2300 Tulare Street
Suite 210
Fresno, CA 93721
(209) 486-8638
Fax: (209) 490-8630
To the Underwriters: Andrew Alexander Wise & Company
17 State Street
4th Floor
New York, New York 10004
Attn: Andreas Zigouras
(212) 809-7300
Fax: (212) 809-7383
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice shall be, in the case of clause (i), the
date of the receipt; in the case of clause (ii), five business days after such
notice or demand is sent; and, in the case of clause (iii), the business day
next following the date such notice is sent.
14. Amendment. Except as otherwise provided herein, no amendment of this
Agreement shall be valid or effective, unless in writing and signed by or on
behalf of the parties hereto.
15. Waiver. No course of dealing or omission or delay on the part of either
party hereto in asserting or exercising any right hereunder shall constitute or
operate as a waiver of any such right. No waiver of any provision hereof shall
be effective, unless in writing and signed by or on behalf of the party to be
charged therewith. No waiver shall be deemed a continuing waiver or waiver in
respect of any other or subsequent breach or default, unless expressly so stated
in writing.
16. Applicable Law. This agreement shall be governed by, and interpreted
and enforced in accordance with, the laws of the State of New York without
regard to principles of choice of law or conflict of laws.
17. Jurisdiction. Each of the parties hereto hereby irrevocably consents
and submits to the exclusive jurisdiction of the Supreme Court of the State of
New York and the United States District Court for the Southern District of New
York in connection with any suit, action or other proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby, waives any
objection to venue in the County of New York, State of New York, or such
District and agrees that service of any summons, complaint, notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of section 13.
31
<PAGE>
18. Remedies. In the event of any actual or prospective breach or default
by either party hereto, the other party shall be entitled to equitable relief,
including remedies in the nature of rescission, injunction and specific
performance. All remedies hereunder are cumulative and not exclusive, and
nothing herein shall be deemed to prohibit or limit either party from pursuing
any other remedy or relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
19. Attorneys' Fees. The prevailing party in any suit, action or other
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby, shall be entitled to recover its costs and reasonable
attorneys' fees.
20. Severability. The provisions hereof are severable and in the event
that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
21. Counterparts. This agreement may be executed in counterparts, each of
which shall be deemed an original and which together shall constitute one and
the same agreement.
22. Successors. This agreement shall inure to the benefit of and be binding
upon the Underwriters, the Company and their respective successors and assigns.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company contained in
section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of section 15 of the Act
or section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in section 8 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company within
the meaning of section 15 of the Act or section 20 of the Exchange Act. No
purchaser of Securities from the Underwriters shall be deemed a successor
because of such purchase.
23. Titles and Captions. The titles and captions of the articles and
sections of this Agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
24. Grammatical Conventions. Whenever the context so requires, each pronoun
or verb used herein shall be construed in the singular or the plural sense and
each capitalized term defined herein and each pronoun used herein shall be
construed in the masculine, feminine or neuter sense.
25. References. The terms "herein," "hereto," "hereof," "hereby," and
"hereafter," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
32
<PAGE>
26. Entire Agreement. This Agreement embodies the entire agreement of the
parties hereto with respect to the subject matter hereof and supersedes any
prior agreement, commitment or arrangement relating thereto.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and the
Underwriters.
Very truly yours,
PROTOSOURCE
By:
--------------------------------
Name: Raymond J. Meyers
Title: Chief Executive Officer
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
ANDREW ALEXANDER WISE & COMPANY, INC.
As representative of the several Underwriters
listed in Schedule 1 annexed hereto.
By:
------------------------------------------
Name: Andreas Zigouras
Title: President
33
<PAGE>
Schedule 1
UNDERWRITERS
- --------------------------------------------------------------------------------
Name Shares of Common Stock Warrants
- --------------------------------------------------------------------------------
Andrew Alexander Wise &
Company, Inc.
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
900,000 900,000
======= =========
- --------------------------------------------------------------------------------
34
<PAGE>
Schedule 2
SUBSIDIARIES
35
<PAGE>
Schedule 3
STOCKHOLDERS LIST
36
Exhibit 1.10
AMENDED FINANCIAL ADVISORY AND INVESTMENT BANKING AGREEMENT
-----------------------------------------------------------
This Agreement is made and entered into as of the day of , 1998 between
Andrew Alexander Wise & Company, Inc., a New York corporation ("Consultant"),
and ProtoSource, a corporation organized under the laws of the (the "Company").
In consideration of the mutual promises made herein and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Purpose: The Company hereby engages Consultant for the term specified in
Paragraph 2 hereof to render advice to the Company as an investment banker
relating to financial and similar matters upon the terms and conditions set
forth herein.
2. Term: Except as otherwise specified in Paragraph 4 hereof, this
Agreement shall be effective from _________, 1998 to _________________, 1999.
3. Duties of Consultant: During the term of this Agreement, Consultant
shall, upon the request of the Company, provide the Company with corporate
finance and related financial advisory services, advice with respect to
potential acquisitions and other business transactions and advice with respect
to stockholder relations matters. All obligations of the Consultant contained
herein shall be subject to the Consultant's availability to perform such
services and the amount of notice received from the Company. The Consultant
shall devote such time and effort to the performance of its duties hereunder as
the Consultant shall determine is reasonably necessary. The Consultant may look
to such others for such factual information, investment recommendations,
economic advice and/or research, upon which to base its advice to the Company
hereunder, as it shall deem appropriate. The Company recognizes that Consultant
<PAGE>
now renders and may continue to render financial and other advisory services to
other companies which may or may not have policies and conduct activities
similar to those of the Company, and acknowledges that Consultant shall be free
to render advice and to perform those services for such other companies.
4. Compensation: In consideration for the services rendered by Consultant
to the Company pursuant to this Agreement (and in addition to the expenses
provided for in Paragraph 5 hereof), the Company shall pay Consultant a
non-refundable fee of $60,000, payable in advance, upon the execution of this
Agreement. In addition, if any Transaction (as defined below) occurs during the
term of this Agreement or within twelve months thereafter, the Company shall pay
fees to Consultant as follows:
Consideration Fee
First $1,000,000 5% of First $1,000,000
Second $1,000,000 4% of Second $1,000,000
Third $1,000,000 3% of Third $1,000,000
Fourth $1,000,000 2% of Fourth $1,000,000
Consideration in excess of
the fourth $1,000,000 1% of Consideration in excess
of the fourth $1,000,000
For the purposes of this Agreement, a "Transaction" shall mean (i) any
transaction originated by Consultant, other than in the ordinary course of trade
or business of the Company, whereby, directly or indirectly, control of, or a
material interest in, the Company and its subsidiaries or the business or assets
of the Company and its subsidiaries, is transferred for Consideration, or (ii)
any transaction originated by Consultant whereby the Company acquires any other
company, or the assets of any other company or an interest in any other company;
2
<PAGE>
and "Consideration" shall mean the total market value on the day of the closing
of stock, cash, assets and all other property (real or personal) exchanged or
received, directly or indirectly by the Company or any of its security holders
in connection with any Transaction. Any co-broker retained by Consultant shall
be paid by Consultant. All Transaction fees to be paid pursuant to this
Agreement, except as otherwise specified, are due and payable to Consultant in
cash at the closing or closings of a Transaction. In the event that this
Agreement shall not be renewed or is terminated for any reason, notwithstanding
any such non-renewal or termination, Consultant shall be entitled to the entire
fee provided in this Paragraph 4, for any Transaction for which the discussions
were initiated during the term of this Agreement and which is consummated within
a period of twelve months after non-renewal or termination of this Agreement.
Nothing herein shall impose any obligation on the part of the Company to enter
into any Transaction.
5. Expenses of Consultant: In addition to the fees payable hereunder and
regardless of whether any Transaction is proposed or consummated, the Company
shall reimburse Consultant for the reasonable fees and disbursements of
Consultant's counsel and Consultant's reasonable travel and out-of-pocket
expenses incurred in connection with the services performed by Consultant
pursuant to this Agreement and at the request of the Company, including without
limitation, hotels, food and associated expenses and long-distance telephone
calls.
6. Liability of Consultant:
(a) In furnishing the Company with advice and other services as herein
provided, neither Consultant nor any officer, director or agent thereof shall be
liable to the Company or its creditors for errors of judgment or for anything,
except for the Consultant's intentional or willful misconduct in the performance
of its duties under this Agreement.
3
<PAGE>
(b) It is further understood and agreed that Consultant may rely upon
information furnished to it reasonably believed to be accurate and reliable and
that, except as herein provided, Consultant shall not be accountable for any
loss suffered by the Company by reason of the Company's action or inaction on
the basis of any advice, recommendation or approval of Consultant, its partners,
employees or agents.
(c) The Company acknowledges that all opinions and advice (written or
oral) given by Consultant to the Company in connection with Consultant's
engagement are intended solely for the benefit and use of the Company in
considering the transaction to which they relate, and the Company agrees that no
person or entity other than the Company shall be entitled to make use of or rely
upon the advice of Consultant to be given hereunder, and no such opinion or
advice shall be used for any other purpose or reproduced, disseminated, quoted
or referred to at any time, in any manner or for any purpose, nor may the
Company make any public references to Consultant, or use Consultant's name in
any annual reports or any other reports or releases of the Company without
Consultant's prior written consent.
(d) The Company acknowledges that Consultant makes no commitment
whatsoever as to making a market in the Company's securities or to recommending
or advising its clients to purchase the Company's securities. Research reports
or corporate finance reports that may be prepared by Consultant will, when and
if prepared, be done solely on the merits based upon an analysis performed by
Consultant and its corporate finance personnel.
7. Company Information:
4
<PAGE>
(a) The Company shall furnish to the Consultant all data, material and
other information relevant to the performance by the Consultant of its
obligations under this Agreement, or particular projects as to which the
Consultant is acting as advisor, which will permit the Consultant to know all
facts material to the advice to be rendered, and all material or information
reasonably requested by the Consultant. The Company acknowledges and agrees that
in performing its services under this engagement, Consultant may rely upon the
data, material and other information supplied by the Company without
independently verifying the accuracy, completeness or veracity of same. In the
event that the Company fails or refuses to furnish any such data, material or
information reasonably requested by the Consultant, and thus prevents or impedes
the Consultant's performance hereunder, any inability of the Consultant to
perform shall not be a breach of its obligations hereunder.
(b) Except as contemplated by the terms hereof or as required by applicable
law, Consultant shall keep confidential all non-public information provided to
it by the Company and shall not disclose such information to any third party
without the Company's prior written consent, other than to such of its employees
and advisors as Consultant determines in its sole judgment need to have access
thereto. Notwithstanding the foregoing, the Consultant shall not be required to
maintain confidentiality with respect to information (i) which is or becomes
part of the public domain; (ii) of which it had independent knowledge prior to
disclosure; (iii) which comes into the possession of the Consultant or its
employees or agents in the normal and routine course of its own business from
and through independent non-confidential sources; or (iv) which is required to
be disclosed by the Consultant pursuant to legal process or in accordance with
governmental or regulatory requirements. If the Consultant is requested or
required (by oral questions, interrogatories, requests for information or
5
<PAGE>
document subpoenas, civil investigative demands, or similar process) to disclose
any confidential information supplied to it by the Company, or the existence of
other negotiations in the course of its dealings with the Company or its
representatives, the Consultant shall, unless prohibited by law, promptly notify
the Company of such request(s) so that the Company may seek an appropriate
protective order.
8. Indemnification: The Company agrees to indemnify and hold harmless the
Consultant, its partners, employees, agents, representatives and controlling
persons (and the officers, directors, employees, agents, representatives and
controlling persons of each of them) from and against any and all losses,
claims, damages, liabilities, costs and expenses (and all actions, suits,
proceedings or claims in respect thereof) and any legal or other expenses in
giving testimony or furnishing documents in response to a subpoena or otherwise
(including, without limitation, the costs of investigating, preparing or
defending any such action, suit, proceeding or claim, whether or not in
connection with any action, suit, proceeding or claim in which the Consultant is
a party), as and when incurred, directly or indirectly, caused by, relating to,
based upon or arising out of the Consultant's service pursuant to this
Agreement. The Company further agrees that the Consultant shall incur no
liability to the Company or any other party on account of this Agreement or any
acts or omissions arising out of or related to the actions of the Consultant
relating to this Agreement or the performance or failure to perform any services
under this Agreement, except for the Consultant's intentional or willful
misconduct. The obligations of the Company under the Section shall survive the
termination of this Agreement.
9. Independent Contractor: Consultant shall perform its services hereunder
as an independent contractor and not as an employee of the Company or an
affiliate thereof. It is expressly
6
<PAGE>
understood and agreed to by the parties hereto that Consultant shall have no
authority to act for, represent or bind the Company or any affiliate thereof in
any manner, except as may be agreed to expressly by the Company in writing from
time to time.
10. Miscellaneous:
(a) This Agreement between the Company and Consultant constitutes the
entire agreement and understanding of the parties hereto and supersedes any and
all previous agreements and understandings, whether oral or written, between the
parties with respect to the matters set forth herein.
(b) Any notice or communication permitted or required hereunder shall
be in writing and shall be deemed sufficiently given if hand-delivered or sent
(i) postage prepaid by registered mail, return receipt requested, or (ii) by
facsimile, to the respective parties as set forth below, or to such other
address as either party may notify the other in writing:
If to the Company, to: ProtoSource Corporation
2300 Tulare Street
Suite 210
Fresno, CA 93721
(209) 486-8638
Fax: (209) 490-8630
with a copy to: Gary Agron, Esq.
5445 DTC Parkway
Denver, Colorado 80111
If to Consultant: Andrew Alexander Wise & Company
17 State Street
4th Floor
New York, New York 10004
Attn: Andreas Zigouras
(212) 809-7300
Fax: (212) 809-7383
7
<PAGE>
with a copy to: Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158
Attn: Charles Snow
(212) 687-3860
Fax: (212) 949-7052
(c) This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective successors, legal
representatives and assigns.
(d) This Agreement may be executed in any number of counterparts, each
of which together shall constitute one and the same original document.
(e) No provision of this Agreement may be amended, modified or waived,
except in a writing signed by all of the parties hereto.
(f) This Agreement shall be construed in accordance with and governed
by the laws of the State of New York, without giving effect to conflict of law
principles. The parties hereby agree that any dispute which may arise between
them arising out of or in connection with this Agreement shall be adjudicated
before a court located in New York City, and they hereby submit to the exclusive
jurisdiction of the courts of the State of New York located in New York, New
York and of the Federal District Court for the Southern District of New York
with respect to any action or legal proceeding commenced by any party, and they
irrevocably waive any objection they now 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, relating to or arising out of
this Agreement, and consent to the service of process in any such action or
legal proceeding by means of registered or certified mail, return receipt
requested, in care of the address set forth in Section 10(b) hereof.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
ANDREW ALEXANDER WISE & CO., INC.
By:
--------------------------------
Andreas Zigouras, President
PROTOSOURCE CORPORATION
By:
--------------------------------
Raymond J. Meyers, President
9
Exhibit 1.11
PROTOSOURCE CORPORATION
1,050,000 Shares of Common Stock
and
1,050,000 Redeemable Common Stock Purchase Warrants
AMENDED UNDERWRITING AGREEMENT
------------------------------
, 1998
-----------
Andrew Alexander Wise & Company, Inc.
as Representative of the Underwriters
17 State Street
New York, New York 10004
Gentlemen:
ProtoSource Corporation, a California corporation (the "Company"), hereby
confirms its agreement with Andrew, Alexander, Wise & Company, Inc., as
representative (the "Representative") of the several Underwriters listed on
Schedule 1 annexed hereto (the "Underwriters"), as set forth below.
The Company proposes to issue and sell to the Underwriters an aggregate of
(i) 1,050,000 shares (the "Firm Shares") of the Company's common stock, par
value $.001 per share (the "Common Stock"), and (ii) 1,050,000 redeemable
warrants to purchase Common Stock (the "Firm Warrants") in units consisting of
one Firm Share and one Firm Warrant. The Company also proposes to grant to the
Underwriters an option to purchase (i) an additional 157,500 shares of Common
Stock and (ii) an additional 157,500 redeemable warrants to purchase Common
Stock in units consisting of one share of Common Stock and one Warrant, as
provided in section 2(c) of this agreement (the "Agreement"). Any and all shares
of Common Stock to be purchased pursuant to such option are referred to herein
as the "Option Shares," and the Firm Shares and any Option Shares are
collectively referred to herein as the "Shares." Any and all redeemable warrants
to purchase Common Stock to be purchased pursuant to such option are referred to
herein as the "Option Warrants," and the Firm Warrants and any Option Warrants
are collectively referred to herein as the "Warrants." Any shares of Common
Stock issuable upon the exercise of any Warrants are referred to herein as
<PAGE>
"Warrant Shares." The Firm Shares and the Firm Warrants are collectively
referred to herein as the "Firm Securities;" the Option Shares and the Option
Warrants are collectively referred to herein as the "Option Securities;" and the
Firm Securities, the Option Securities and the Warrant Shares are collectively
referred to herein as the "Securities."
Pursuant to an agreement to be entered into among the Company, the
Representative and Corporate Stock Transfer, Inc. (the "Warrant Agreement"),
each Warrant will be exercisable during the period commencing on the first
anniversary of the effective date of the Registration Statement (as hereinafter
defined) (the "Effective Date") and expiring on the fifth anniversary thereof,
subject to redemption by the Company (as described below), at an initial
exercise price of $____ per share, subject to adjustment as set forth in the
Warrant Agreement. The Warrants will be redeemable at a price of $.10 per
Warrant, commencing on the first anniversary of the Effective Date and prior to
their expiration, upon not less than 30 days prior written notice to the holders
of the Warrants, provided the closing bid price of the Common Stock as reported
on The Nasdaq Smallcap Market if traded thereon, or if not traded thereon, the
closing sale price if listed on a national or regional securities exchange (or
the Nasdaq National Market other reporting system that provides last sales
prices), shall have been at least ____% of the then current Warrant exercise
price (initially $____ per share, subject to adjustment), for 20 trading days
during the 30 trading day period ending 15 days prior to the date on which the
Company gives notice of redemption, subject to the right of the holder to
exercise such Warrants prior to redemption.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriters that:
(a) A registration statement on Form SB-2 (File No. 333-40743), with
respect to the Securities and the Underwriters' Warrant Securities (as
hereinafter defined), including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act "), and one
or more amendments to that registration statement may have been so filed. Copies
of such registration statement and of each amendment heretofore filed by the
Company with the Commission have been delivered to the Underwriter. After the
execution of this Agreement, the Company will file with the Commission either
(i) if the registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in that registration statement (or, if an amendment
thereto shall have been filed, in such amendment), with such changes or
insertions as are required by Rule 430A under the Act or permitted by Rule
424(b) under the Act and as have been provided to and approved by the
Underwriters prior to the execution of this Agreement, or (ii) if that
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to that registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Underwriters prior to the execution of this
Agreement. The Company also may file a related registration statement with the
Commission pursuant to Rule 462(b) under the Act for purposes of registering
certain additional Securities, which registration statement shall become
effective upon filing with the Commission (the "Rule 462(b) Registration
2
<PAGE>
Statement). As used in this Agreement, the term "Registration Statement" means
that registration statement, as amended at the time it was or is declared
effective, and any amendment thereto that was or is thereafter declared
effective, including all financial schedules and exhibits thereto and any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined), together with any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with that registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement at the time it was or is declared effective); and the
term "Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act or, if no prospectus is so filed pursuant to Rule
424(b), the prospectus included in the Registration Statement. The Company has
caused to be delivered to the Underwriters copies of each Preliminary Prospectus
and has consented to the use of those copies for the purposes permitted by the
Act. If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration Statement has not been declared effective, then (i) the Company has
filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. When each Preliminary Prospectus and each
amendment and each supplement thereto was filed with the Commission it (i)
contained all statements required to be stated therein, in accordance with, and
complied with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement was or is declared
effective, it (i) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply with the requirements
of, the Act and the rules and regulations of the Commission thereunder and (ii)
did not or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
When the Prospectus and each amendment or supplement thereto is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or
supplement is not required so to be filed, when the Registration Statement
containing such Prospectus or amendment or supplement thereto was or is declared
effective) and on the Firm Closing Date and any Option Closing Date (as each
such term is hereinafter defined), the Prospectus, as amended or supplemented at
any such time, (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
3
<PAGE>
in reliance upon and in conformity with written information furnished to the
Company by the Underwriter specifically for use therein.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of California and is
duly qualified or authorized to transact business as a foreign corporation and
is in good standing in each jurisdiction where the ownership or leasing of its
property or the conduct of its business requires such qualification or
authorization, except where the failure to be so qualified would not have a
material adverse effect upon the condition (financial or otherwise), business,
prospects, net worth or results of operations of the Company and its
Subsidiaries, taken as a whole.
(d) The Company has full corporate power and authority, and all
necessary material authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental regulatory authorities, to own or lease its
property and conduct its business as now being conducted and as proposed to be
conducted as described in the Registration Statement and the Prospectus (and, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(e) Except for the subsidiaries listed on Schedule 2 to this Agreement
(the "Subsidiaries"), the Company does not own, directly or indirectly, an
interest in any corporation, partnership, limited liability company, joint
venture, trust or other business entity. Each Subsidiary is duly incorporated
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and is duly qualified or authorized to transact
business as a foreign corporation and is in good standing in each jurisdiction
where the ownership or leasing of its property or the conduct of its business
requires such qualification or licensing, except where the failure to be so
qualified would not have a material adverse effect upon the condition (financial
or otherwise), business, prospects, net worth or results of operations of the
Company and its Subsidiaries, taken as a whole. Each Subsidiary has full
corporate power and authority, and all necessary material authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory authorities, to own or lease its properties and conduct
its business as now being conducted and as proposed to be conducted as described
in the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights. There are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock or other securities, other than as described in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The Shares and the Warrant Shares have been duly
authorized, and the Warrant Shares have been duly reserved for issuance, by all
necessary corporate action on the part of the Company and, when the Shares are
issued and delivered to and paid for by the Underwriters, pursuant to this
Agreement and the Warrant Shares are issued and delivered to and paid for by the
holders of Warrants upon exercise of the Warrants in accordance with the terms
4
<PAGE>
thereof, the Shares and the Warrant Shares will be validly issued, fully paid,
nonassessable and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence, the most
recent Preliminary Prospectus). No holder of outstanding securities of the
Company is entitled as such to any preemptive or other right to subscribe for
any of the Securities, and no person is entitled to have securities registered
by the Company under the Registration Statement or otherwise under the Act other
than as described in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(g) The capital stock of the Company conforms to the description
thereof contained in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(h) All issuances of securities of the Company have been effected
pursuant to an exemption from the registration requirements of the Act. Except
as previously disclosed in writing to the Representative, no compensation was
paid to or on behalf of any member of the National Association of Securities
Dealers, Inc. ("NASD"), or any affiliate or employee thereof, in connection with
any such issuance.
(i) The consolidated financial statements of the Company included in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its subsidiaries as of the dates indicated and the
results of operations of the Company and its subsidiaries for the periods
specified. Such consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
except to the extent that (A) certain footnote disclosures regarding unaudited
interim periods may have been omitted in accordance with the applicable rules of
the Commission under the Securities Exchange Act of 1934, as amended (the "1934
Act") and (B) the interim consolidated financial statements are subject to year
end adjustments. The consolidated financial data set forth under the caption
"Summary Financial Information" in the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) fairly present, on the
basis stated in the Prospectus (or such Preliminary Prospectus), the information
included therein.
(j) Angell & Deering, who have audited certain financial statements of
the Company and delivered their report with respect to the consolidated
financial statements included in the Registration Statement and the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants with respect to the Company as
required by the Act and the applicable rules and regulations thereunder.
(k) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), (i) except as otherwise
contemplated therein, there has been no material adverse change in the business,
operations, condition (financial or otherwise), earnings or prospects of the
Company and the Subsidiaries, taken as a whole, whether or not arising in the
ordinary course of business, (ii) except as otherwise stated therein, there have
5
<PAGE>
been no transactions entered into by the Company or the Subsidiaries and no
commitments made by the Company or the Subsidiaries that, individually or in the
aggregate, are material with respect to the Company and the Subsidiaries, taken
as a whole, (iii) there has not been any change in the capital stock or
indebtedness of the Company and the Subsidiaries, and (iv) there has been no
dividend or distribution of any kind declared, paid or made by the Company in
respect of any class of its capital stock.
(l) The Company has full corporate power and authority to enter into
and perform its obligations under this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement (as hereinafter defined). The execution and
delivery of this Agreement, the Warrant Agreement, and the Underwriters' Warrant
Agreement have been duly authorized by all necessary corporate action on the
part of the Company and this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement have each been duly executed and delivered by
the Company and each is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other similar laws affecting creditors'
rights generally and by general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law), and except as
rights to indemnity and contribution under this Agreement may be limited by
applicable law. The issuance, offering and sale by the Company to the
Underwriters of the Securities pursuant to this Agreement or the Underwriters'
Securities pursuant to the Underwriters' Warrant Agreement, the compliance by
the Company with the provisions of this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement, and the consummation of the other transactions
contemplated by this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement do not (i) require the consent, approval, authorization,
registration or qualification of or with any court or governmental or regulatory
authority, except such as have been obtained or may be required under state
securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (ii) conflict with or result in a
breach or violation of, or constitute a default under, any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which the Company or any Subsidiary is a
party or by which the Company or any Subsidiary or any of its property is bound
or subject, or the certificate of incorporation or by-laws of the Company or any
Subsidiary, or any statute or any rule, regulation, judgment, decree or order of
any court or other governmental or regulatory authority or any arbitrator
applicable to the Company or any Subsidiary.
(m) No legal or governmental proceedings are pending to which the
Company or any Subsidiary is a party or to which the property of the Company or
any Subsidiary is subject, and no such proceedings have been threatened against
the Company or any Subsidiary or with respect to any of its property, except
such as are described in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). No contract or other
document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein (and, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) or filed as required.
6
<PAGE>
(n) Neither the Company nor any Subsidiary is in (i) violation of its
certificate of incorporation or by-laws, (ii) violation in any material respect
of any law, statute, regulation, ordinance, rule, order, judgment or decree of
any court or any governmental or regulatory authority applicable to it, or (iii)
default in any material respect in the performance or observance of any
obligation, agreement, covenant or condition contained in any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which it is a party or by which it or any of
its property may be bound or subject, and no event has occurred which with
notice or lapse of time or both would constitute such a default.
(o) The Company and the Subsidiaries currently own or possess adequate
rights to use all intellectual property, including all trademarks, service
marks, trade names, copyrights, inventions, know-how, trade secrets, proprietary
technologies, processes and substances, or applications or licenses therefor,
that are described in the Prospectus (and if the Prospectus is not in existence,
the most recent Preliminary Prospectus), and any other rights or interests in
items of intellectual property as are necessary for the conduct of the business
now conducted or proposed to be conducted by them as described in the Prospectus
(or, such Preliminary Prospectus), and, except as disclosed in the Prospectus
(and such Preliminary Prospectus), the Company is not aware of the granting of
any patent rights to, or the filing of applications therefor by, others, nor is
the Company aware of, nor has the Company received notice of, infringement of or
conflict with asserted rights of others with respect to any of the foregoing.
All such intellectual property rights and interests are (i) valid and
enforceable and (ii) to the best knowledge of the Company, not being infringed
by any third parties.
(p) The Company and each Subsidiary possesses adequate licenses,
orders, authorizations, approvals, certificates or permits issued by the
appropriate federal, state or foreign regulatory agencies or bodies necessary to
conduct its business as described in the Registration Statement and the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), and, except as disclosed in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no pending or, to the best knowledge of the Company, threatened, proceedings
relating to the revocation or modification of any such license, order,
authorization, approval, certificate or permit.
(q) The Company and each Subsidiary has good and marketable title to
all of the properties and assets reflected in the Company's consolidated
financial statements or as described in the Registration Statement and the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), as being owned by any of them subject to no lien,
mortgage, pledge, charge or encumbrance of any kind, except those reflected in
such consolidated financial statements or as described in the Registration
Statement and the Prospectus (and such Preliminary Prospectus). Except as
disclosed in the Prospectus, the Company and each Subsidiary occupies its leased
7
<PAGE>
properties under valid and enforceable leases conforming to the description
thereof set forth in the Registration Statement and the Prospectus (and such
Preliminary Prospectus).
(r) The Company is not conducting and does not intend to conduct, its
business in a manner in which it would be an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940 (the "Investment Company
Act").
(s) Except as listed on Schedule 3 hereto, the Company has obtained
and delivered to the Representative the agreements (the "Lock-up Agreements")
with the officers, directors and other security holders owning or having rights
to acquire shares of Common Stock or preferred stock to the effect that, among
other things, each such person (i) will not, commencing on the Effective Date
and continuing for the period thereafter set forth opposite their names on
Schedule 3, directly or indirectly, sell, offer or contract to sell or grant any
option to purchase, transfer, assign or pledge, or otherwise encumber, or
dispose of any shares of Common Stock or preferred stock or any securities
convertible into or exercisable for Common Stock or preferred stock now or
hereafter owned by such person without the prior written consent of the
Underwriter, and (ii) will comply with any additional restriction or condition
on the disposition of such Common Stock or preferred stock which may be required
to qualify the offering of the Securities in any state in accordance with the
blue sky or securities laws of such state.
(t) No labor dispute with the employees of the Company or any
Subsidiary exists, or, to the best of the Company's knowledge, is threatened or
is imminent that could result in a material adverse change in the condition
(financial or otherwise), business, prospects, net worth or results of
operations of the Company and the Subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(u) The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any Subsidiary has been refused any insurance
coverage sought or applied for; and neither the Company nor any Subsidiary has
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), business, prospects, net worth or results of operations of the
Company and the Subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (and, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(v) The Underwriters' Warrants (as hereinafter defined) will conform
to the description thereof in the Registration Statement and in the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and, when sold to and paid for by the Underwriter in accordance with
the Underwriters' Warrant Agreement, will have been duly authorized and validly
issued and will constitute valid and binding obligations of the Company entitled
8
<PAGE>
to the benefits of the Underwriters' Warrant Agreement. The shares of Common
Stock issuable upon exercise of the Underwriters' Warrants and the Warrants
issuable upon exercise thereof (the "Underwriters' Warrant Shares") have been
duly authorized and reserved for issuance upon exercise of the Underwriters'
Warrants and the Warrants issuable upon exercise thereof by all necessary
corporate action on the part of the Company and, when issued and delivered and
paid for upon such exercise in accordance with the terms of the Underwriters'
Warrant Agreement, the Underwriters' Warrants, and the Warrants issuable upon
exercise thereof, respectively, will be validly issued, fully paid,
nonassessable and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence, the most
recent Preliminary Prospectus).
(w) No person has acted as a finder in connection with, or is entitled
to any commission, fee or other compensation or payment for services as a finder
for or for originating, or introducing the parties to, the transactions
contemplated herein and the Company will indemnify the Underwriter with respect
to any claim for finder's fees in connection herewith. Except as set forth in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has no
management or financial consulting agreement with anyone. To the best knowledge
of the Company, no promoter, officer, director or stockholder of the Company is,
directly or indirectly, affiliated or associated with an NASD member and no
securities of the Company have been acquired by an NASD member, except as
previously disclosed in writing to the Representative.
(x) The Company and each Subsidiary has filed all federal, state,
local and foreign tax returns which are required to be filed through the date
hereof, or has received extensions thereof, and has paid all taxes shown on such
returns and all assessments received by it to the extent that the same are
material and have become due.
(y) Neither the Company nor any director, officer, agent, employee or
other person associated with or acting on behalf of the Company has, directly or
indirectly: used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political activity; made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended;
or made any bribe, rebate, payoff, influence payment, kickback, or other
unlawful payment. No transaction has occurred between or among the Company and
any of its officers or directors or any affiliates of any such officer or
director, that is required to be described in and is not described in the
Registration Statement and the Prospectus.
(z) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations), has taken or will take, directly or
indirectly, prior to the completion of the Offering, any action designed to
stabilize or manipulate the price of any security of the Company, or which has
caused or resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any security
of the Company, to facilitate the sale or resale of any of the Securities or the
Option Securities.
9
<PAGE>
2. Purchase, Sale and Delivery of the Securities and the Warrant
Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to each Underwriter, and each
Underwriter agrees to purchase from the Company, severally and not jointly, the
number of Firm Shares set opposite its name on Schedule 1 at a purchase price of
$[ ] per share and the number of Firm Warrants set opposite its name on Schedule
1 at a purchase price of $[____] per Warrant, in units consisting of one Firm
Share and one Firm Warrant.
(b) Certificates in definitive form for the Firm Securities that the
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Underwriters request
upon notice to the Company at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company to the Underwriters, against
payment by or on behalf of the Underwriters of the purchase prices therefor by
certified or official bank check or checks drawn upon or by a New York Clearing
House bank or wire transfer and payable in next-day funds to the order of the
Company. Such delivery of and payment for the Firm Securities shall be made at
the offices of Counsel for the Representative, 605 Third Avenue, New York, New
York 10158 at 9:30 A.M., New York City time on _____________, 1998, or at such
other place, time or date as the Underwriters and the Company may agree upon,
such time and date of delivery against payment being herein referred to as the
"Firm Closing Date. The Company will make such certificates for the Firm
Securities available for checking and packaging by the Underwriters, at such
offices as may be designated by the Representative, at least 24 hours prior to
the Firm Closing Date. In lieu of physical delivery, the closing may occur by
"DTC" delivery.
(c) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the Underwriters an option to purchase
any or all of the Option Securities in units consisting of one Option Share and
one Option Warrant, exercisable by the Representative on behalf of and for the
account of the Underwriters. The purchase price to be paid for any of the Option
Securities shall be the same price per share or warrant as the price per share
or warrant for the Firm Securities set forth above in paragraph (a) of this
section 2. The option granted hereby may be exercised as to all or any part of
the Option Securities from time to time within 30 calendar days after the Firm
Closing Date. The Underwriters shall not be under any obligation to purchase any
of the Option Securities prior to the exercise of such option. The
Representative may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the Company
setting forth the aggregate number of Option Securities as to which the
Underwriters are then exercising the option and the date and time for delivery
of and payment for such Option Securities. Any such date of delivery shall be
determined by the Representative but shall not be earlier than two business days
or later than three business days after such exercise of the option and, in any
event, shall not be earlier than the Firm Closing Date. The time and date set
forth in such notice, or such other time on such other date as the
Representative and the Company may agree upon, is herein called the "Option
Closing Date" with respect to such Option Securities. Upon exercise of the
option as provided herein, the Company shall become obligated to sell to the
Underwriters, and, subject to the terms and conditions herein set forth, each
10
<PAGE>
Underwriter shall become obligated to purchase from the Company, the Option
Securities as to which the Underwriter is then exercising its option. If the
option is exercised as to all or any portion of the Option Securities,
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (b) of this section 2,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (c), to refer to such Option
Securities and Option Closing Date, respectively.
(d) On the Firm Closing Date, the Company will further issue and sell to
the Underwriters or, at the direction of the Underwriters, to bona fide officers
of the Underwriters, for an aggregate purchase price of $10, warrants (the
"Underwriters' Warrants") entitling the holders thereof to purchase an aggregate
of 105,000 Units, each consisting of one share of Common Stock and one
redeemable warrant to purchase Common Stock for a period of four years, such
period to commence on the first anniversary of the Effective Date. The
Underwriters' Warrants shall be exercisable at a price equal to 165% of the
initial public offering price of the Units of Common Stock and Warrants offered
to the public and shall contain terms and provisions more fully described herein
below and as set forth more particularly in the warrant agreement relating to
the Underwriters' Warrants to be executed by the Company on the Effective Date
(the "Underwriters' Warrant Agreement"), including, but not limited to, (i)
customary anti-dilution provisions, and (ii) prohibitions of mergers,
consolidations or other reorganizations of or by the Company or the taking by
the Company of other action during the five-year period following the Effective
Date unless adequate provision is made to preserve, in substance, the rights and
powers incidental to the Underwriters' Warrants. As provided in the
Underwriters' Warrant Agreement, the Underwriters may designate that the
Underwriters' Warrants be issued in varying amounts directly to bona fide
officers of the Underwriters. As further provided, no sale, transfer,
assignment, pledge or hypothecation of the Underwriters' Warrants shall be made
for a period of 12 months from the Effective Date, except (i) by operation of
law or reorganization of the Company, or (ii) to the Underwriters and bona fide
partners or officers of the Underwriters and selling group members. The shares
of Common Stock issuable upon exercise of the Underwriters' Warrants and the
Warrants issuable upon exercise thereof are referred to herein as the
"Underwriters' Warrant Shares"; and the Underwriters' Warrants, the Warrants
issuable upon exercise thereof, and the Underwriters' Warrant Shares are
collectively referred to herein as the "Underwriters' Securities." The
redeemable warrant included in each Unit subject to the Underwriters' Warrants
shall be identical to the redeemable warrants included in the Units offered to
the public, except that the exercise price therefor shall be 165% of the initial
public offering price of the Units offered to the public.
3. Offering by the Underwriters. The Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus
(the "Offering").
4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible.
11
<PAGE>
If required, the Company will file the Prospectus and any amendment or
supplement thereto with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. During any time when a prospectus
relating to the Securities is required to be delivered under the Act, the
Company (i) will comply with all requirements imposed upon it by the Act and the
rules and regulations of the Commission thereunder to the extent necessary to
permit the continuance of sales of or dealings in the Securities in accordance
with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission any prospectus or
amendment referred to in the first sentence of section (a) (i) hereof, any
amendment or supplement to such prospectus or any amendment to the Registration
Statement as to which the Underwriters shall not previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Underwriters shall not have given its consent.
The Company will prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, promptly upon request by the
Underwriters or counsel to the Underwriters, any amendments to the Registration
Statement or amendments or supplements to the Prospectus that may be necessary
or advisable in connection with the distribution of the Securities by the
Underwriters, and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective by the Commission as promptly as
possible. The Company will advise the Underwriters, promptly after receiving
notice thereof, of the time when the Registration Statement or any amendment
thereto has been filed or declared effective or the Prospectus or any amendment
or supplement thereto has been filed and will provide evidence satisfactory to
the Underwriters of each such filing or effectiveness.
(b) The Company will advise the Underwriters, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of any Securities for offering or sale in any jurisdiction, (iii)
the institution, threat or contemplation of any proceeding for any such purpose
or (iv) any request made by the Commission for amending the Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will, in cooperation with counsel to the Underwriters,
arrange for the qualification of the Securities for offering and sale under the
blue sky or securities laws of such jurisdictions as the Underwriters may
designate and will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Securities.
(d) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectus to comply with the Act or the
12
<PAGE>
rules or regulations of the Commission thereunder, the Company will promptly
notify the Underwriters thereof and, subject to section 4(a) hereof, will
prepare and file with the Commission, at the Company's expense, an amendment to
the Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) So long as any Warrants are outstanding, the Company shall use its
best efforts to cause post-effective amendments to the Registration Statement to
become effective in compliance with the Act and without any lapse of time
between the effectiveness of any such post-effective amendments and cause a copy
of each Prospectus, as then amended, to be delivered to each holder of record of
a Warrant and to furnish to the Underwriters and any dealer as many copies of
each such Prospectus as the Underwriters or dealer may reasonably request. The
Company shall not call for redemption of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify the Representative of any material change in the
business, financial condition or prospects of the Company. So long as any of the
Warrants remain outstanding, the Company will timely deliver and supply to its
Warrant Agent sufficient copies of the Company's current Prospectus, as will
enable such Warrant agent to deliver a copy of such Prospectus to any Warrant or
other holder where such Prospectus delivery is by law required to be made.
(f) The Company will, without charge, provide to the Underwriters and
to counsel for the Underwriters (i) as many signed copies of the registration
statement originally filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) as the Underwriters may
reasonably request, (ii) as many conformed copies of such registration statement
and each amendment thereto (in each case without exhibits thereto) as the
Underwriters may reasonably request and (iii) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many copies of
each Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto as the Underwriters may reasonably request.
(g) The Company, as soon as practicable, will make generally available
to its security holders and to the Underwriters an earnings statement of the
Company that satisfies the provisions of section 11 (a) of the Act and Rule 158
thereunder.
(h) The Company will reserve and keep available for issuance that
maximum number of authorized but unissued shares of Common Stock which are
issuable upon exercise of the Warrants and the Underwriters' Warrants (including
the underlying securities) outstanding from time to time.
(i) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus. The Company
will timely file, and will provide or cause to be provided to the Underwriters
and counsel to the Underwriters a copy of the report on Form 10Q required to be
filed by the Company pursuant to Rule 463 under the Act.
13
<PAGE>
(j) The Company will not, without the prior written consent of the
Representative, directly or indirectly offer, agree to sell, sell, grant any
option to purchase or otherwise dispose (or announce any offer, agreement to
sell, sales grant of any option to purchase or other disposition) of any shares
of Common Stock, preferred stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or preferred stock for a
period of 36 months after the Effective Date, except (i) the Shares and Warrants
issued pursuant to this Agreement, (ii) the Warrant Shares issuable upon
exercise of the Warrants, (iii) the Warrants, (iv) the Underwriters' Warrant
Shares and Warrants issuable upon the exercise of the Underwriters' Warrants,
(v) shares of Common Stock issuable upon the exercise of options granted and to
be granted under the Company's Stock Option Plan as in effect as of the date
hereof, and (vi) in connection with any merger or acquisition of another entity
or the business thereof. The Company also will not for a period of 36 months
following the Effective Date, without the prior written consent of the
Representative, (i) issue or sell any of its securities pursuant to Regulation S
promulgated under the Act or (ii) file a registration on Form S-8 for the sale
of securities by a person other than an employee of the Company or a Subsidiary.
(k) Prior to the Closing Date or the Option Closing Date (if any), the
Company will not, directly or indirectly, without prior written consent of the
Representative, issue any press release or other public announcement or hold any
press conference with respect to the Company or its activities with respect to
the Offering (other than trade releases issued in the ordinary course of the
Company's business consistent with past practices with respect to the Company's
operations).
(l) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule 430A
under the Act, then immediately following the execution of this Agreement, the
Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A and Rule 424(b) under the Act, copies of the
Prospectus including the information omitted in reliance on Rule 430A, or, if
required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(m) The Company will cause the Securities to be included in The Nasdaq
Small Cap Market on the Effective Date and to use its best efforts to maintain
such listing thereafter. The Company will file with The Nasdaq SmallCap Market
and all documents and notices that are required by companies with securities
that are traded on The Nasdaq SmallCap Market.
(n) During the period of five years from the Firm Closing Date, the
Company will, as promptly as possible, not to exceed 135 days, after each annual
fiscal period render and distribute reports to its stockholders which will
include audited statements of its operations and changes of financial position
during such period and its audited balance sheet as of the end of such period,
as to which statements the Company's independent certified public accountants
shall have rendered an opinion.
14
<PAGE>
(o) During a period of three years commencing with the Firm Closing
Date, the Company will furnish to the Representative, at the Company's expense,
copies of all periodic and special reports furnished to stockholders of the
Company and of all information, documents and reports filed with the Commission.
(p) The Company has appointed Corporate Stock Transfer, Inc. as
transfer agent for the Common Stock and warrant agent for the Warrants, subject
to the Closing. The Company will not change or terminate such appointment for a
period of three years from the Firm Closing Date without first obtaining the
written consent of the Representative, which such consent will not be
unreasonably denied or unduly delayed. For a period of three years after the
Effective Date, the Company shall cause the transfer agent and warrant agent to
deliver promptly to the Underwriters a duplicate copy of the weekly transfer
sheets relating to trading of the Securities. The Company shall also provide to
the Representative, promptly upon their request, up to four times in any
calendar year, copies of DTC or equivalent transfer sheets.
(q) During the period of 180 days after the date of this Agreement,
the Company will not at any time, directly or indirectly, take any action
designed to or that will constitute, or that might reasonably be expected to
cause or result in, the stabilization of the price of the Common Stock or the
Warrants to facilitate the sale or resale of any of the Securities.
(r) The Company will not take any action to facilitate the sale of any
shares of Common Stock pursuant to Rule 144 under the Act if any such sale would
violate any of the terms of the Lock-up Agreements.
(s) Prior to the 120th day after the Firm Closing Date, the Company
will provide the Representative and its designees with three bound volumes of
the transaction documents relating to the Registration Statement and the
closing(s) hereunder.
(t) The Company shall consult with the Representative prior to the
distribution to third parties of any financial information news releases or
other publicity regarding the Company, its business, or any terms of this
offering and the Underwriters will consult with the Company prior to the
issuance of any research report or recommendation concerning the Company's
securities. Copies of all documents that the Company or its public relations
firm intend to distribute will be provided to the Representative for review
prior to such distribution.
(u) The Company and the Underwriters will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent this Offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriters will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
15
<PAGE>
(v) The Company will, for a period of no less than three years
commencing immediately after the Effective Date, engage a designee of the
Representative as an advisor (the "Advisor") to the Company's Board of
Directors, who shall attend meetings of the Board, receive all notices and other
correspondence and communications sent by the Company to its Board of Directors
and receive cash compensation equal to that of the cash compensation paid to
other non-employee directors; provided, that in lieu of the Representative's
right to designate an Advisor, the Representative shall have the right during
such three-year period, in its sole discretion, to designate one person for
election as a director of the Company and the Company will utilize its best
efforts to obtain the election of such person who shall be entitled to receive
the same cash compensation, expense reimbursements and other benefits as set
forth above. In addition, such Advisor shall be entitled to receive
reimbursement for all costs incurred in attending such meetings including, but
not limited to, food, lodging and transportation consistent with reimbursement
made to other non-employee directors. The Company, during said three-year
period, shall schedule no less than four formal meetings (at least one of which
shall be "in person" and the others may be held telephonically) of its Board of
Directors in each such year at which meetings such Advisor shall be permitted to
attend (in person, for each meeting held "in person") as set forth herein; said
meetings shall be held quarterly each year and advance notice of such meetings
identical to the notice given to directors shall be given to the Advisor. The
Company and its principal stockholders shall, during such three year period,
give the Representative timely prior written notice of any proposed
acquisitions, mergers, reorganizations or other similar transactions. The
Company shall indemnify and hold the Representative and such Advisor or director
harmless against any and all claims, actions, damages, costs and expenses, and
judgments arising solely out of the attendance and participation of such Advisor
or director at any such meeting described herein, and, if the Company maintains
a liability insurance policy affording coverage for the acts of its officers and
directors, it shall, if possible, include such Advisor or director as an insured
under such policy.
(w) The Company shall first submit to the Representative certificates
representing the Securities for approval prior to printing, and shall, as
promptly as possible, after filing the Registration Statement with the
Commission, obtain CUSIP numbers for the Securities.
(x) The Company shall engage the Underwriters' counsel to provide the
Underwriters, at the closing of any sale of Securities hereunder and quarterly
thereafter, with an opinion, setting forth those states in which the Common
Stock and Warrants may be traded in non-issuer transactions under the blue sky
or securities laws of the 50 states. The Company shall pay such counsel a
one-time fee of $10,000 for such opinions at the closing of the sale of the Firm
Securities.
(y) The Company will prepare and file a registration statement with
the Commission pursuant to section 12 of the 1934 Act, and will use its best
efforts to have such registration statement declared effective by the Commission
on an accelerated basis on the day after the Effective Date. For this purpose
the Company shall prepare and file with the Commission a General Form of
Registration of Securities (Form 8-A or Form 10).
16
<PAGE>
(z) For so long as the Securities are registered under the 1934 Act,
the Company will hold an annual meeting of stockholders for the election of
directors within 180 days after the end of each of the Company's fiscal years
and within 135 days after the end of each of the Company's fiscal years will
provide the Company's stockholders with the audited consolidated financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such consolidated financial statements shall be those required by Rule
14a-3 under the 1934 Act and shall be included in an annual report pursuant to
the requirements of such Rule.
(aa) The Company shall retain the Representative as a financial
advisor at an annual fee of $60,000 for a 12-month period commencing on the
Closing Date. The entire fee of $60,000 shall be payable on the Closing Date.
(bb) The Company will engage a financial public relations firm
reasonably satisfactory to the Representative on or before the Firm Closing
Date, and continuously engage such firm, or a substitute firm reasonably
acceptable to the Representative, for a period of twelve (12) months following
the Firm Closing Date.
(cc) The Company will take all necessary and appropriate actions to be
included in Standard and Poor's Corporation Descriptions or other equivalent
manual and to maintain its listing therein for a period of five (5) years from
the Effective Date.
(dd) On or prior to the Effective Date, the Company will give written
instructions to the transfer agent for the Common Stock directing said transfer
agent to place stop-order restrictions against, and appropriate legends advising
of the Lock-up Agreements on, the certificates representing the securities of
the Company owned by the persons who have entered into the Lock-up Agreements.
(ee) The Company will obtain and keep in effect for the shorter of
five (5) years or the period during which Raymond J. Meyers is employed as its
Chief Executive Officer, a policy on his life in the amount of $1 million
payable to the Company.
5. Expenses
(a) The Company shall pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to section 10 hereof, including all costs and expenses incident to (i)
the preparation, printing and filing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Preliminary Prospectus and the Prospectus and any amendment or
supplement thereto, this Agreement, the Agreement Among Underwriters, the
selected dealer agreement and the other agreements and documents governing the
underwriting arrangements and any blue sky memoranda, (ii) all reasonable and
necessary arrangements relating to the delivery to the Underwriters of copies of
the foregoing documents, (iii) the fees and disbursements of the counsel, the
17
<PAGE>
accountants and any other experts or advisors retained by the Company, (iv) the
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's, warrant agent's and
registrar's fees or any transfer or other taxes payable thereon, (v) the
qualification of the Securities under state blue sky or securities laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto (such counsel fees not to exceed $________, of which $7,500
shall be due and payable upon the commencement of blue sky filing, together with
the related filing fees) and any fees and disbursements of local counsel, if
any, retained for such purpose, (vi) the filing fees of the Commission and the
NASD relating to the Securities, (vii) the inclusion of the Securities on The
Nasdaq SmallCap Market and in the Standard and Poor's Corporation Descriptions
Manual, (viii) any "road shows" or other meetings with prospective investors in
the Securities, including transportation, accommodation, meal, conference room,
audio-visual presentation and similar expenses of the Underwriters or its
representatives or designees (other than as shall have been specifically
approved by the Representative to be paid for by the Underwriters) and (ix) the
publication of "tombstone advertisements" in newspapers or other publications
selected by the Representative and the manufacture of prospectus memorabilia. In
addition to the foregoing, the Company shall reimburse the Representative for
its expenses on the basis of a non-accountable expense allowance in the amount
of 3.00% of the gross offering proceeds to be received by the Company. The
unpaid portion of the expense allowance, based on the gross proceeds from the
sale of the Firm Securities, shall be deducted from the funds to be paid by the
Representative in payment for the Firm Securities, pursuant to section 2 of this
Agreement, on the Firm Closing Date. To the extent any Option Securities are
sold, any remaining non-accountable expense allowance based on the gross
proceeds from the sale of the Option Securities shall be deducted from the funds
to be paid by the Representative in payment for the Option Securities, pursuant
to section 2 of this Agreement, on the Option Closing Date. The Company
warrants, represents and agrees that all such payments and reimbursements will
be promptly and fully made.
(b) Notwithstanding any other provision of this Agreement, if the
offering of the Securities contemplated hereby is terminated for any reason, the
Company agrees that, in addition to the Company paying its own expenses as
described in subparagraph (a) above, (i) the Company shall reimburse the
Underwriters only for their actual accountable out-of-pocket expenses (in
addition to blue sky legal fees and expenses referred to in subparagraph (a)
above), and (ii) the Representative shall be entitled to retain amounts advanced
by the Company (if any) against the non-accountable expense allowance referred
to in subparagraph (a) above; provided, however, that the amount retained
pursuant to this clause (ii) shall not exceed the Representative's expenses on
an accountable basis to the date of such cancellation and that all unaccounted
for amounts shall be refunded to the Company. Such expenses shall include, but
are not to be limited to, fees for the services and time of counsel for the
Underwriters to the extent not covered by clause (i) above, plus any additional
expenses and fees, including, but not limited to, travel expenses, postage
expenses, duplication expenses, long-distance telephone expenses, and other
expenses incurred by the Representative in connection with the proposed
offering.
18
<PAGE>
6. Warrant Solicitation Fee. The Company agrees to pay the Representative a
fee of five percent (5%) of the aggregate exercise price of the Warrants if (i)
the market price of the Common stock is not less than the exercise price of the
Warrants on the date of exercise; (ii) the exercise of the Warrants is solicited
by the Representative at such as it is a member of the NASD and the
Representative is designated in writing by the holder of the Warrants as the
NASD member soliciting the exercise; (iii) the Warrants are not held in a
discretionary account; (iv) the disclosure of compensation arrangements is made
both at the time of the Offering and at the time of the exercise; and (v) the
solicitation of the Warrant exercise is not in violation of Rule 101 of
Regulation M promulgated under the 1934 Act; and (vi) such payment is not
otherwise in violation of then applicable NASD rules. The Company agrees not to
solicit the exercise of any Warrant other than through the Representative and
will not authorize any other dealer to engage in such solicitation without the
prior written consent of the Representative, which will not be unreasonably
withheld. The Warrant solicitation fee will not be paid in a non-solicited
transaction. Any request for exercise will be presumed to be unsolicited unless
the customer states in writing that the transaction was solicited and designates
in writing that the Representative solicited the exercise. No Warrant
solicitation by the Representative will occur for a period of 12 months after
the Effective Date.
7. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares shall be subject, in the
Underwriters' sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy
of the statements of the Company's officers made pursuant to the provisions
hereof, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the registration statement, as heretofore amended, has not been
declared effective as of the time of execution hereof, the registration
statement, as heretofore amended or as amended by an amendment thereto to be
filed prior to the Firm Closing Date, shall have been declared effective not
later than 5:30 P.M., New York City time, on the date on which the amendment to
such registration statement containing information regarding the initial public
offering price of the Securities has been filed with the Commission, or such
later time and date as shall have been consented to by the Underwriters; if
required, the Prospectus and any amendment or supplement thereto shall have been
filed with the Commission in the manner and within the time period required by
Rule 424(b) under the Act, no stop order suspending the effectiveness of the
Registration Statement shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Underwriters, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Underwriters shall have received an opinion, dated the Firm
Closing Date, of Gary Agron, Esq., counsel to the Company, to the effect that:
(1) the Company and each Subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
state of its incorporation and is duly qualified to transact business as a
19
<PAGE>
foreign corporation and is in good standing under the laws of each other
jurisdiction in which its ownership or leasing of any properties or the conduct
of its business requires such qualification, except where the failure to so
qualify would not have a materially adverse effect upon the Company and its
subsidiaries, taken as a whole.
(2) the Company and each Subsidiary has full corporate power and
authority to own or lease its property and conduct its business as now being
conducted and as proposed to be conducted, as described in the Registration
Statement and the Prospectus, and the Company has full corporate power and
authority to enter into this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement and to carry out all the terms and provisions
hereof and thereof to be carried out by it;
(3) to the knowledge of such counsel, there are no outstanding
options, warrants or other rights granted by the Company to purchase shares of
its Common Stock, preferred stock or other securities other than as described in
the Prospectus; the Shares have been duly authorized and the Warrant Shares and
the Underwriters' Warrant Shares have been duly reserved for issuance by all
necessary corporate action on the part of the Company and, the Shares when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, the Warrant Shares when issued upon payment of the exercise price
specified in the Warrants, Underwriters' Warrants when issued and delivered and
paid for in accordance with this Agreement and the Underwriters' Warrant
Agreement by the Underwriters and the Warrant Shares when issued upon payment of
the exercise price specified in the Underwriters' Warrants, will be validly
issued, fully paid, nonassessable and free of preemptive rights and will conform
to the description thereof in the Prospectus; to the knowledge of such counsel,
no holder of outstanding securities of the Company is entitled as such to any
preemptive or other right to subscribe for any of the Shares, the Warrant
Shares, or the Underwriters' Warrant Shares; and to the knowledge of such
counsel, no person is entitled to have securities registered by the Company
under the Registration Statement or otherwise under the Act other than as
described in the Prospectus;
(4) the Shares have been approved for inclusion on The Nasdaq
SmallCap Market;
(5) the execution and delivery of this Agreement, the Warrant
Agreement, the Underwriters' Warrant Agreement and the Financial Advisory and
Investment Banking Agreement have been duly authorized by all necessary
corporate action on the part of the Company and this Agreement, the Warrant
Agreement, the Underwriters' Warrant Agreement and the Financial Advisory and
Investment Banking Agreement have been duly executed and delivered by the
Company, and each is a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other similar laws affecting creditors' rights generally and to
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law) and except as rights to indemnity and
contribution under this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement may be limited by applicable law;
20
<PAGE>
(6) the Underwriters' Warrants conform to the description thereof
in the Registration Statement and in the Prospectus and are duly authorized and
upon payment of the purchase price therefore specified in section 2(d) of this
Agreement are validly issued and constitute valid and binding obligations of the
Company entitled to the benefits of the Underwriters' Warrant Agreement;
(7) the statements set forth in the Prospectus under the caption
"Description of Securities" in the Prospectus, insofar as those statements
purport to summarize the terms of the capital stock and warrants of the Company,
provide a fair summary of such terms; the statements in the Prospectus, insofar
as those statements constitute matters of law or legal conclusions, or summaries
of the contracts, agreement instruments, leases or licenses referred to therein,
constitute a fair summary of those matters, legal conclusions, contracts,
agreement instruments, leases or licenses and include all material terms
thereof, as applicable;
(8) none of (A) the execution and delivery of this Agreement, the
Warrant Agreement and the Underwriters' Warrant Agreement, (B) the issuance,
offering and sale by the Company to the Underwriters of the Securities pursuant
to this Agreement and the Underwriters' Warrant Securities pursuant to the
Underwriters' Warrant Agreement, nor (C) the compliance by the Company with the
other provisions of this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement and the consummation of the transactions contemplated hereby
and thereby, (1) requires the consent, approval, authorization, registration or
qualification of or with any court or governmental authority known to us, except
such as have been obtained and such as may be required under state blue sky or
securities laws, or (2) conflicts with or results in a breach or violation of,
or constitutes a default under, any material contract, indenture, mortgage, deed
of trust, loan agreement, note, lease or other material agreement or instrument
known to such counsel to which the Company is a party or by which the Company or
any of its property is bound or subject, or the certificate of incorporation or
by-laws of the Company, or any material statute or any judgment, decree, order,
rule or regulation of any court or other governmental or regulatory authority
known to such counsel applicable to the Company;
(9) to the knowledge of such counsel, (A) no legal or
governmental proceedings are pending to which the Company or a Subsidiary is a
party or to which the property of the Company or a Subsidiary is subject and (B)
no contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required;
(10) the Company and each of the Subsidiaries possesses adequate
licenses, orders, authorizations, approvals, certificates or permits issued by
the appropriate federal or state regulatory agencies or bodies necessary to
conduct its business as described in the Registration Statement and the
Prospectus, and, to the knowledge of such counsel, there are no pending or
21
<PAGE>
threatened proceedings relating to the revocation or modification of any such
license, order, authorization, approval, certificate or permit, except as
disclosed in the Registration Statement and the Prospectus;
(11) neither the Company nor the Subsidiary is in violation or
breach of, or in default with respect to, any term of its certificate of
incorporation or by-laws, and to the knowledge of such counsel, neither the
Company nor any Subsidiary is in (i) violation in any material respect of any
law, statute, regulation, ordinance, rule, order, judgment or decree of any
court or any governmental or regulatory authority applicable to it, or (ii)
default in any material respect in the performance or observance of any
obligation, agreement, covenant or condition contained in any material contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
material agreement or instrument to which it is a party or by which it or any of
its property may be bound or subject, and no event has occurred which with
notice, lapse of time or both would constitute such a default.
(12) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to such
counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the best
knowledge of such counsel, are contemplated by the Commission;
(13) the registration statement originally filed with respect to
the Securities and each amendment thereto and the Prospectus (in each case,
other than the financial statements and schedules and other financial and
statistical information contained therein, as to which such counsel need express
no opinion) comply as to form in all material respects with the applicable
requirements of the Act and the rules and regulations of the Commission
thereunder; and
(14) the Company is not an "investment company" as defined in
section 3(a) of the Investment Company Act and, if the Company conducts its
business as set forth in the Prospectus, it will not become an "investment
company" and will not be required to register under the Investment Company Act.
Counsel also shall state in its opinion that it has participated in the
preparation of the Registration Statement and the Prospectus and that nothing
has come to its attention that has caused them to believe that the Registration
Statement, at the time it became effective (including the information deemed to
be a part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b), if applicable), contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, as of its
date or as of the Firm Closing Date, contained an untrue statement of material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
22
<PAGE>
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials, copies of which certificates will
be provided to the Underwriters, and, as to matters of the laws of certain
jurisdictions, on the opinions of other counsel to the Company, which opinions
shall also be delivered to the Underwriters, in form and substance acceptable to
the Underwriters, if such other counsel expressly authorize such reliance and
counsel to the Company expressly states in their opinion that such counsel's and
the Underwriters' reliance upon such opinion is justified.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Underwriters shall have received from Angell & Deering, a
letter dated the Firm Closing Date and dated each Option Closing Date (as
defined below), if applicable, in form and substance satisfactory to the
Underwriters, to the effect that (i) they are independent public accountants
with respect to the Company within the meaning of the Act and the applicable
rules and regulations thereunder; (ii) in their opinion, the consolidated
financial statements audited by them and included in the Registration Statement
and the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published rules
and regulations thereunder; (iii) based upon procedures set forth in detail in
such letter, nothing has come to their attention which causes them to believe
that (A) the unaudited financial statements as of ___________, 1997 included in
the Registration Statement was not determined on a basis substantially
consistent with that used in determining the corresponding amounts in the
audited financial statements as of [ ] included in the Registration Statement or
(B) at a specified date not more than five days prior to the date of this
Agreement, there has been any change in the capital stock of the Company, any
increase in the long-term debt or decrease in net sales of the Company and its
Subsidiaries, as compared with the amounts shown in the [ ] balance sheet
included in the Registration Statement or as of the date of the most recent
financial statements made available by the Company there has been any change in
the capital stock of the Company, any increase in the long-term debt or any
decrease in net sales, working capital or net assets of the Company and its
Subsidiaries as compared with the amounts shown in the [ ] balance sheet
included in the Registration Statement or, during the period from [ ] through
date of the most recent financial statement made available by the Company and
its Subsidiaries, there were any decreases, as compared with the corresponding
period in the preceding year, in revenues, or any increase in net loss of the
Company, except in all instances for changes, increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur;
and (iv) in addition to the audit referred to in their opinion and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information (including the summary of
consolidated financial information and secured financial information) which are
included in the Registration Statement and Prospectus and which are specified by
the Underwriters, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting, financial and other
records of the Company identified in such letter. References to the Registration
23
<PAGE>
Statement and the Prospectus in this paragraph (c) with respect to the letter
referred to above shall include any amendment or supplement thereto at the date
of such letter.
(d) The representations and warranties of the Company contained in
this Agreement shall be true and correct as if made on and as of the Firm
Closing Date; the Registration Statement shall not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, shall not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company shall
have performed all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date.
(e) No stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or contemplated by the
Commission.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a prospective
material adverse change, in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company and the Subsidiaries, taken as
a whole, except in each case as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto).
(g) The Underwriters shall have received a certificate, dated the Firm
Closing Date, of the Chief Executive Officer and the Secretary of the Company to
the effect set forth in subparagraphs (d) through (f) above.
(h) The Common Stock and Warrants shall be qualified in such
jurisdictions as the Underwriters may reasonably request pursuant to section
4(c), and each such qualification shall be in effect and not subject to any stop
order or other proceeding on the Firm Closing Date.
(i) The Company shall have executed and delivered to the Underwriters
the Underwriters' Warrant Agreement and a certificate or certificates evidencing
the Underwriters' Warrants, in each case in a form acceptable to the
Underwriters.
(j) The Representative shall have received Lock-up Agreements executed
by the persons listed on Schedule 3 annexed hereto, or the same has been waived
in writing.
(j) On or before the Firm Closing Date, the Underwriters and counsel
for the Underwriters shall have received such further certificates, documents,
letters or other information as they may have reasonably requested from the
Company.
24
<PAGE>
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and counsel
for the Underwriters. The Company shall furnish to the Underwriters such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriters and counsel for the Underwriters shall reasonably
request.
The obligation of the Underwriters to purchase and pay for any Option
Securities shall be subject, in its discretion, to each of the foregoing
conditions to purchase the Firm Securities, except that all references to the
Firm Securities and the Firm Closing Date shall be deemed to refer to such
Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Underwriters
and each person, if any, who controls any Underwriter within the meaning of
section 15 of the Act or section 20 of the 1934 Act against any losses, claims,
damages, amounts paid in settlement or liabilities, joint or several, to which
the Underwriters or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof arise out of or are based upon:
(1) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Securities under the Blue Sky or securities laws thereof or filed
with the Commission or any securities association or securities exchange (each
an "Application"), or
(2) the omission or alleged omission to state in such
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse, as incurred, the Underwriters and
such controlling person for any legal or other expenses reasonably incurred by
the Underwriters or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
loss, claim, damage, liability, action, investigation, litigation or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or any Application in reliance upon and in conformity with written information
furnished to the Company by the Underwriters specifically for use therein. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have. The Company will not, without the prior written consent of the
Underwriters, settle or compromise or consent to the entry of any judgment in
25
<PAGE>
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not the Underwriters or any
person who controls any Underwriter within the meaning of section 15 of the Act
or section 20 of the 1934 Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Underwriters and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(b) The Underwriters, severally but not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of section 15 of the Act or section 20 of the
Exchange Act against, any losses, claims, damages or liabilities to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, but only insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application, or necessary to make the statements
therein 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 made in reliance upon and in conformity with written information
furnished to the Company by any Underwriters specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in collection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
26
<PAGE>
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence or (ii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this section 8 is unavailable or insufficient to
hold harmless an indemnified party in respect of any losses, claims, damages or
liabilities (or actions in respect thereof), each indemnifying party, in order
to provide for just and equitable contribution, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party on the other from the
offering of the Securities or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the indemnified party on the other in connection with the statements or
omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof). The relative
benefits received by the Company on the one hand and the Underwriter on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriter. The relative fault of the parties shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriter, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and the other
equitable considerations appropriate in the circumstances. The Company and the
Underwriter agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d).
Notwithstanding any other provision of this paragraph (d), the Underwriter shall
not be obligated to make contributions hereunder that in the aggregate exceed
the total public offering price of the Securities purchased by the Underwriter
under this Agreement, less the aggregate amount of any damages that the
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of section 11 (f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), each person, if any, who
controls an Underwriter within the meaning of section 15 of the Act or section
20 of the 1934 Act shall have the same rights to contribution as the
27
<PAGE>
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of section 15 of the Act or section 20 of the 1934
Act, shall have the same rights to contribution as the Company.
9. Substitution of Underwriters.
If any Underwriter shall for any reason not permitted hereunder cancel its
obligations to purchase the Firm Securities hereunder, or shall fail to take up
and pay for the number of Firm Securities set forth opposite its name on
Schedule 1 hereto upon tender of such Firm Securities in accordance with the
terms hereof, then:
(a) If the aggregate number of Firm Securities which such Underwriter
or Underwriters agreed but failed to purchase does not exceed 10% of the total
number of Firm Securities, the other Underwriter shall be obligated to purchase
the Firm Securities which such defaulting Underwriter agreed but failed to
purchase.
(b) If any Underwriter so defaults and the agreed number of Firm
Securities with respect to which such default or defaults occurs is more than
10% of the total number of Firm Securities, the remaining Underwriters shall
have the right to take up and pay for the Firm Securities which the defaulting
Underwriter agreed but failed to purchase. If such remaining Underwriters do
not, at the Firm Closing Date, take up and pay for the Firm Securities which the
defaulting Underwriter agreed but failed to purchase, the time for delivery of
the Firm Securities shall be extended to the next business day to allow the
remaining Underwriters the privilege of substituting within twenty-four hours
(including nonbusiness hours) another underwriter or underwriters satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid, within such twenty-four hour period, the time of
delivery of the Firm Securities may, at the option of the Company, be again
extended to the next following business day, if necessary, to allow the Company
the privilege of finding within twenty-four hours (including nonbusiness hours)
another underwriter or underwriters to purchase the Firm Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted Underwriters to
take up the Firm Securities of the defaulting Underwriter as provided in this
section, (i) the Company or the underwriter shall have the right to postpone the
time of delivery for a period of not more than seven business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other document or arrangements, and the
Company agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective numbers of Firm Securities to be purchased by the remaining
Underwriters or substituted Underwriters shall be taken as the basis of the
underwriting obligation for all purposes of this agreement.
If in the event of a default by any Underwriter and the remaining
Underwriters shall not take up and pay for all the Firm Securities agreed to be
purchased by the defaulting Underwriter or substitute another underwriter or
underwriters as aforesaid, the Company shall not find or shall not elect to seek
another underwriter or underwriters for such Firm Securities as aforesaid, then
this Agreement shall terminate.
28
<PAGE>
If, following exercise of the option provided in section 2(c) hereof, any
Underwriter or Underwriters shall for any reason not permitted hereunder cancel
their obligations to purchase Option Securities at the Option Closing Date, or
shall fail to take up and pay for the number of Option Securities, which it
became obligated to purchase at the Option Closing Date upon tender of such
Option Securities in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Units of the defaulting Underwriters in the manner provided in section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not take
up and pay for all such Option Securities, the Underwriters shall be entitled to
purchase the number of Option Securities for which there is no default or, at
their election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, any of its officers
or directors and the Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, the Underwriters or any
controlling person referred to in section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in sections 5 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the Underwriters
by notice to the Company given prior to the Firm Closing Date or the related
Option Closing Date, respectively, in the event that the Company shall have
failed, refused or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied under section 7 hereunder at
or prior thereto or if at or prior to the Firm Closing Date or such Option
Closing Date, respectively.
(1) the Company sustains a loss by reason of explosion, fire,
flood, accident or other calamity, which, in the opinion of the Underwriters,
substantially affects the value of the properties of the Company or which
materially interferes with the operation of the business of the Company
regardless of whether such loss shall have been insured; there shall have been
29
<PAGE>
any material adverse change, or any development involving a prospective material
adverse change (including, without limitation, a change in management or control
of the Company), in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(2) any action, suit or proceeding shall be threatened,
instituted or pending, at law or in equity, against the Company, by any person
or by any federal, state, foreign or other governmental or regulatory
commission, board or agency wherein any unfavorable result or decision could
materially adversely affect the business, operations, condition (financial or
otherwise), earnings or prospects of the Company;
(3) trading in the Common Stock or Warrants shall have been
suspended by the Commission or the NASD, or trading in securities generally on
the New York Stock Exchange shall have been suspended or minimum or maximum
prices shall have been established on either such exchange or quotation system;
(4) a banking moratorium shall have been declared by New York or
United States authorities;
(5) there shall have been (A) an outbreak of hostilities between
the United States and any foreign power (or, in the case of any ongoing
hostilities, a material escalation thereof), (B) an outbreak of any other
insurrection or armed conflict involving the United States or (C) any other
calamity or crisis or material change in financial, political or economic
conditions, having an effect on the financial markets that, in any case referred
to in this clause (5), in the sole judgment of the Underwriters makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement;
(6) termination of this Agreement pursuant to this section 11
shall be without liability of any party to any other party, except as provided
in section 5(b) and section 8 hereof.
12. Information Supplied by the Underwriters. The statements set forth in
the first paragraph on page 3, in the second, third, eighth (first and third
sentences only) and sixteenth paragraphs under the heading "Underwriting" in the
Preliminary Prospectus dated ____________ or the Prospectus (to the extent such
statements relate to the Underwriters) constitute the only information furnished
by the Underwriters to the Company for the purposes of sections 1 (b) and 8(b)
hereof. The Underwriters confirm that such statements (to such extent) are
correct.
13. Notices. All notices hereunder to or upon either party hereto shall be
deemed to have been duly given for all purposes if in writing and (i) delivered
in person or by messenger or an overnight courier service against receipt, or
(ii) send by certified or registered mail, postage paid, return receipt
requested, or (iii) sent by telegram, facsimile, telex or similar means,
30
<PAGE>
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
To the Company: ProtoSource Corporation
2300 Tulare Street
Suite 210
Fresno, CA 93721
(209) 486-8638
Fax: (209) 490-8630
To the Underwriters: Andrew Alexander Wise & Company
17 State Street
4th Floor
New York, New York 10004
Attn: Andreas Zigouras
(212) 809-7300
Fax: (212) 809-7383
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice shall be, in the case of clause (i), the
date of the receipt; in the case of clause (ii), five business days after such
notice or demand is sent; and, in the case of clause (iii), the business day
next following the date such notice is sent.
14. Amendment. Except as otherwise provided herein, no amendment of this
Agreement shall be valid or effective, unless in writing and signed by or on
behalf of the parties hereto.
15. Waiver. No course of dealing or omission or delay on the part of either
party hereto in asserting or exercising any right hereunder shall constitute or
operate as a waiver of any such right. No waiver of any provision hereof shall
be effective, unless in writing and signed by or on behalf of the party to be
charged therewith. No waiver shall be deemed a continuing waiver or waiver in
respect of any other or subsequent breach or default, unless expressly so stated
in writing.
16. Applicable Law. This agreement shall be governed by, and interpreted
and enforced in accordance with, the laws of the State of New York without
regard to principles of choice of law or conflict of laws.
17. Jurisdiction. Each of the parties hereto hereby irrevocably consents
and submits to the exclusive jurisdiction of the Supreme Court of the State of
New York and the United States District Court for the Southern District of New
York in connection with any suit, action or other proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby, waives any
objection to venue in the County of New York, State of New York, or such
District and agrees that service of any summons, complaint, notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of section 13.
31
<PAGE>
18. Remedies. In the event of any actual or prospective breach or default
by either party hereto, the other party shall be entitled to equitable relief,
including remedies in the nature of rescission, injunction and specific
performance. All remedies hereunder are cumulative and not exclusive, and
nothing herein shall be deemed to prohibit or limit either party from pursuing
any other remedy or relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
19. Attorneys' Fees. The prevailing party in any suit, action or other
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby, shall be entitled to recover its costs and reasonable
attorneys' fees.
20. Severability. The provisions hereof are severable and in the event
that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
21. Counterparts. This agreement may be executed in counterparts, each of
which shall be deemed an original and which together shall constitute one and
the same agreement.
22. Successors. This agreement shall inure to the benefit of and be binding
upon the Underwriters, the Company and their respective successors and assigns.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company contained in
section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of section 15 of the Act
or section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in section 8 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company within
the meaning of section 15 of the Act or section 20 of the Exchange Act. No
purchaser of Securities from the Underwriters shall be deemed a successor
because of such purchase.
23. Titles and Captions. The titles and captions of the articles and
sections of this Agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
24. Grammatical Conventions. Whenever the context so requires, each pronoun
or verb used herein shall be construed in the singular or the plural sense and
each capitalized term defined herein and each pronoun used herein shall be
construed in the masculine, feminine or neuter sense.
25. References. The terms "herein," "hereto," "hereof," "hereby," and
"hereafter," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
32
<PAGE>
26. Entire Agreement. This Agreement embodies the entire agreement of the
parties hereto with respect to the subject matter hereof and supersedes any
prior agreement, commitment or arrangement relating thereto.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and the
Underwriters.
Very truly yours,
PROTOSOURCE
By:
--------------------------------
Name: Raymond J. Meyers
Title: Chief Executive Officer
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
ANDREW ALEXANDER WISE & COMPANY, INC.
As representative of the several Underwriters
listed in Schedule 1 annexed hereto.
By:
------------------------------------------
Name: Andreas Zigouras
Title: President
33
<PAGE>
Schedule 1
UNDERWRITERS
- --------------------------------------------------------------------------------
Name Shares of Common Stock Warrants
- --------------------------------------------------------------------------------
Andrew Alexander Wise &
Company, Inc.
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
[
]
- --------------------------------------------------------------------------------
1,050,000 1,050,000
========= =========
- --------------------------------------------------------------------------------
34
<PAGE>
Schedule 2
SUBSIDIARIES
35
<PAGE>
Schedule 3
STOCKHOLDERS LIST
36
Exhibit 1.12
PROTOSOURCE
AND
ANDREW ALEXANDER WISE & COMPANY, INC.
AMENDED UNDERWRITER'S
WARRANT AGREEMENT
<PAGE>
Underwriter's WARRANT AGREEMENT dated as of _________________by and between
ProtoSource (the "Company") and Andrew Alexander Wise & Company, Inc. (the
"Underwriter").
Preliminary Statement
---------------------
The Underwriter has agreed, pursuant to an underwriting agreement (the
"Underwriting Agreement") dated ____________________, 1998, between the
Underwriter and the Company, to act as the Underwriter in connection with the
Company's proposed public offering of 1,050,000 Units of the Company's
securities (the "Units"), each consisting of one share of the Company's common
stock, par value $0.001 per share (the "Common Stock") and a Redeemable Common
Stock Purchase Warrants (the "Warrants"), at a public offering price of $_______
per Unit (the "Public Offering"). The Company proposes to issue to the
Underwriter at the closing of the Public Offering as part of the Underwriter's
compensation in connection therewith, warrants (the "Underwriter's Warrants") to
purchase an aggregate of 105,000 Units. The Warrants being offered in the Public
Offering and the Warrants purchasable upon exercise of the Underwriter's
Warrants will be identical in all respects (except that the exercise price for
the Warrants included in the Units purchasable upon exercise of the
Underwriters' Warrants shall be 165% of the initial public offering price of the
Units offered to the public) and will be issued pursuant to, and governed by,
the provisions of a Warrant Agreement among the Company, the Underwriter and
Corporate Stock Transfer Co., as Warrant Agent (the "Warrant Agreement").
NOW, THEREFORE, in consideration of the premises, the payment by the
Underwriter to the Company of Ten Dollars ($10.00), 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:
<PAGE>
1. Grant. The Holders (as defined in Section 3 below) are hereby granted
the right to purchase, at any time from ______________, 1999 until 5:00 p.m.,
New York City time, on _____________, 2003 an aggregate of 105,000 Units at an
initial purchase price of $_______ per Unit (subject to adjustment as provided
in Section 6 hereof) (165% of the Public Offering price of the Units), subject
to the terms and conditions of this Agreement.
2. Warrant Certificates. The warrant certificates (the "Underwriter's
Warrant Certificates") 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 Underwriter's Warrants. The Underwriter's Warrants are
exercisable during the term set forth in Section 1 hereof and the Purchase Price
(as hereinafter defined) is payable by certified or cashier's check or money
order payable in lawful money of the United States. Upon surrender of an
Underwriter's Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Purchase Price for the Units
issuable upon exercise thereof (and such other amounts, if any, arising pursuant
to Section 4 hereof) at the Company's principal office in New York (presently
located at 2300 Tulare Street, Suite 210, Fresno, California 93721), the
registered holder of an Underwriter's Warrant Certificate ("Holders" or
"Holders") shall be entitled to receive a certificate or certificates for the
shares of Common Stock and Warrants underlying the Units so purchased. The
purchase rights represented by each Underwriter's Warrant Certificate are
exercisable at the option of the Holders thereof, in whole or in part, as to the
2
<PAGE>
whole number of Units purchasable therewith (but not as to fractions thereof).
In the case of the purchase of less than all the Units purchasable upon the
exercise of the Underwriter's Warrants represented by an Underwriter's Warrant
Certificate, the Company shall cancel the Underwriter's Warrant Certificate
represented thereby upon the surrender thereof and shall execute and deliver a
new Underwriter's Warrant Certificate of like tenor for the number of
Underwriter's Warrants which have not been exercised.
4. Issuance of Certificates. Upon the exercise of the Underwriter's
Warrants and payment of the Purchase Price therefor, the issuance of
certificates representing the shares of Common Stock and Warrants issuable upon
exercise thereof shall be made forthwith (and in any event within five (5)
business days thereafter) without further charge to the Holder thereof, and such
certificates shall (subject to the provisions of Sections 5 and 7 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 Underwriter's
Warrant Certificates and the certificates representing the shares of Common
Stock and Warrants (and such other securities, property or rights as may be
represented by certificates) issuable upon exercise thereof shall be executed on
behalf of the Company by the manual or facsimile signature of the then Chairman
or Vice Chairman of the Board of Directors, Chief Executive Officer, President
3
<PAGE>
or Vice President of the Company under its corporate seal reproduced thereon,
attested to by the manual or facsimile signature of the then Secretary or
Assistant Secretary or Treasurer or Assistant Treasurer of the Company.
Underwriter's Warrant Certificates shall be dated the date of issuance thereof
by the Company upon initial issuance, transfer or exchange, or in lieu of
mutilated, lost, stolen or destroyed Underwriter's Warrant Certificates.
5. Restriction On Transfer of Underwriter's Warrants. The Holder of an
Underwriter's Warrant Certificate (and its Permitted Transferees, as defined
below), by its acceptance thereof, covenants and agrees that the Underwriter's
Warrants are being acquired as an investment and not with a view to the
distribution thereof; that the Underwriter's Warrants may be sold, transferred,
assigned, hypothecated or otherwise disposed of, in whole or in part, to any
person (a "Permitted Transferee"), provided such transfer, assignment,
hypothecation or other disposition is made in accordance with the provisions of
the Securities Act of 1933, as amended (the "Act"); and provided, further, that
until ____________, 1999 [one year following the effective date of the Initial
Public Offering] only officers and partners of the Underwriter, or any selling
group member in the Initial Public Offering and their respective officers and
partners, shall be Permitted Transferees.
6. Purchase Price. The initial purchase price of the Underwriter's Warrants
shall be $_____ per Unit (the "Unit Purchase Price"). The Unit Purchase Price
shall be subject to adjustment in accordance with the provisions of Section 9 of
the Warrant Agreement, which provisions are hereby incorporated by reference
herein and made a part hereof.
4
<PAGE>
7. Registration Rights.
(a) Registration Under the Securities Act of 1933. The Underwriter's
Warrants have not been registered under the Act. The Underwriter's Warrant
Certificates shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act"), and
may not be offered for sale or sold except pursuant to (i)
an effective registration statement under the Act, or (ii)
an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption
from registration under such Act is available.
(b) Demand Registration. (i) At any time commencing one (1) year and
expiring five (5) years after the effective date of the Company's Registration
Statement relating to the Initial Public Offering (the "Effective Date"), the
Holders of a majority (as hereinafter defined) of the shares of Common Stock
purchased and purchasable upon exercise of the Underwriter's Warrants and the
Warrants purchasable therewith shall have the right, exercisable by written
notice to the Company, to have the Company prepare and file with the Securities
and Exchange Commission (the "Commission"), solely on one (1) occasion, a
registration statement on Form SB-2 (or other appropriate form), and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Holders, in order to comply with the
provisions of the Securities Act, so as to permit a public offering and sale for
a period of nine (9) months of the shares of Common Stock and Warrants purchased
or purchasable by such Holders and any other Holders of the Underwriter's
Warrants upon exercise of the Underwriter's Warrants and the Warrants
purchasable therewith ( such shares of Common Stock and Warrants being
5
<PAGE>
hereinafter referred to as the "Registrable Securities"). The Holders of the
Underwriter's Warrants may demand registration without exercising the
Underwriter's Warrants, and are never required to exercise same. The Company
covenants and agrees to give written notice of any registration request under
this Section 7(b) to all other registered Holders of the Underwriter's Warrants
and the Registrable Securities within ten (10) days from the date of the receipt
of any such registration request and upon the written request of any Holder
within fifteen (15) days after receipt of such notice to include in such
registration statement, the Registrable Securities of such Holder. As used
herein, the term "Majority" in reference to the Holders of the Underwriter's
Warrants shall mean in excess of fifty percent (50%) of the shares of Common
Stock issued or issuable upon exercise of the Underwriter's Warrants and the
Warrants purchasable therewith that (i) are not held by the Company, an
affiliate, officer, creditor, employee or agent thereof or any of their
respective affiliates, members of their family, persons acting as nominees or in
conjunction therewith, or (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act.
(c) Piggyback Registration. If, at any time within the period commencing
one (1) year and expiring seven (7) years after the Effective Date, the Company
should file a registration statement with the Commission under the Securities
Act (other than in connection with a merger or other business combination
transaction or pursuant to Form S-8) it will give written notice by registered
mail, at least thirty (30) calendar days prior to the filing of each such
registration statement, to the Underwriter and to all other Holders of the
Underwriter's Warrants and the shares of Common Stock and Warrants purchased or
purchasable upon exercise thereof of its intention to do so. If the Holders of
the Registrable Securities notify the Company within twenty (20) calendar days
after receipt of any such notice of its or their desire to include any
6
<PAGE>
Registrable Securities in such proposed registration statement, the Company
shall afford the Holders of the Registrable Securities the opportunity to have
such Registrable Securities included in such registration statement, unless the
Underwriter for each proposed objects to the inclusion of the Registrable
Securities in such registration statement. However, in such event, the Company
will, within six (6) months of completion of such underwritten offering, file at
the expense of the Company, a registration statement so as to permit a public
offering and sale of the Registrable Securities so excluded for a period of nine
(9) months, which shall be in addition to any registration statement required to
be filed pursuant to Section 7(b). Notwithstanding the provisions of this
Section 7(c) and the provisions of Section 7(d), the Company shall have the
right at any time after it shall have given written notice pursuant to this
Section 7(c) (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.
(d) Covenants of the Company With Respect to Registration. In connection
with any registrations under Sections 7(b) and 7(c) hereof, the Company
covenants and agrees as follows:
(1) The Company shall use its best efforts to file a registration
statement within forty-five (45) calendar days of receipt of any demand therefor
pursuant to section 7(b); provided, however, that the Company shall not be
required to produce audited or unaudited financial statements for any period
prior to the date such financial statements are required to be filed in a report
on Form 10-KSB or Form 10-QSB, as the case may be. The Company shall use its
best efforts to have any registration statement declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell
Registrable Securities such number of prospectuses as shall reasonably be
requested.
7
<PAGE>
(2) The Company shall pay all costs (excluding fees and expenses of
Holders' counsel and any underwriting discounts or selling fees, expenses or
commissions), fees and expenses in connection with any registration statement
filed pursuant to Sections 7(b) and 7(c) hereof including, without limitation,
the Company's legal and accounting fees, printing expenses, blue sky fees and
expenses. If the Company shall fail to comply with the provisions of Section
7(d), the Company shall, in addition to any other equitable or other relief
available to the Holders, be liable for any or all incidental and special
damages and damages due to loss of profit sustained by the Holders requesting
registration of their Registrable Securities.
(3) The Company will take all necessary action which may be required
to qualify or register the Registrable Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the 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.
(4) The Company shall indemnify the Holders of the Registrable
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended (the "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 Securities Act, the Exchange Act or otherwise, arising
from such registration statement, but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify
the Underwriter contained in Section 8 of the Underwriting Agreement, and the
Holders shall indemnify the Company to the same extent and with the same effect
8
<PAGE>
as the provisions pursuant to which the Underwriter have agreed to indemnify the
Company contained in Section 8 of the Underwriting Agreement.
(5) The Holders of the Registrable Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall indemnify the
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, against all loss, claim, damage or expense or liability to
which they may become subject under the Securities Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 8 of the Underwriting Agreement pursuant to which the
Underwriter have agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall be construed as
requiring the Holders to exercise their Underwriter's Warrants (or the Warrants
purchasable upon exercise thereof) prior to the initial filing of any
registration statement or the effectiveness thereof.
(7) The Company shall not be entitled to include any securities other
than the Registrable Securities in any registration statement filed pursuant to
Section 7(b) hereof without the prior written consent of the Holders of a
Majority of the Registrable Securities.
(8) The Company shall furnish to a designated Underwriter of the
Holders participating in the offering and to each Underwriter, if any, a signed
counterpart, addressed to such Holder or Underwriter of (i) an opinion of
counsel to the Company, dated the effective date of such registration statement
(and if such registration relates to an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
9
<PAGE>
(and, if such registration relates to an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement (the
"Accountants"), in each case covering substantially the same matters with
respect to such registration statement (and the prospectus included therein)
and, in the case of the accountants' "cold comfort" 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 "cold comfort" letters, with
respect to events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in "cold comfort"
letters delivered to Underwriter in underwritten public offerings of securities.
(9) The Company shall as soon as practicable after the effective date
of the registration statement make "generally available to its security holders"
(within the meaning of Rule 158 under the Act) an earnings statement (which need
not be audited) complying with Section ll(a) of the Securities Act and covering
a period of at least 12 consecutive months beginning after the effective date of
the registration statement.
(10) The Company shall deliver promptly to each Holder participating
in the offering requesting the correspondence described below and any managing
Underwriter copies of all correspondence between the Commission and the Company,
its counsel or Accountants with respect to the registration statement and permit
each Holder and Underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
10
<PAGE>
records and properties and opportunities to discuss the business of the Company
with its officers and Underwriters of the Accountants, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.
(11) The Company shall enter into an underwriting agreement with the
managing Underwriter selected for such underwriting by Holders holding a
Majority of the Registrable Securities requested to be included in such
underwriting; provided, however, that (i) such managing Underwriter shall be
reasonably acceptable to the Company, except that in connection with an offering
for which the Holders have piggyback rights, the Company shall have the sole
right to select the managing Underwriter, and (ii) the Holders shall be
responsible for any selling fees or commissions in connection with such
underwriting. Such underwriting agreement shall be satisfactory in form and
substance to the Company, a Majority of such Holders and such managing
Underwriter, and shall contain such representations, warranties and covenants by
the Company and such other terms as are customarily contained in agreements of
that type used by the managing Underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of their Registrable
Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such Underwriter shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the Underwriter except as they may relate to
such Holders and their intended methods of distribution.
(e) Further Registrations. The Company will cooperate with the Holders of
the Registrable Securities in preparing and signing any registration statement,
in addition to the registration statements discussed above, required in order to
sell or transfer the Underwriter's Securities and will supply all information
11
<PAGE>
required therefor, but such additional registration statement expenses or
offering statement expenses will be prorated between the Company and the Holders
of the Registrable Securities according to the aggregate sales price of the
securities being issued. The provisions of Section 7(d) shall apply to any such
registration statement.
8. Exchange and Replacement of Warrant Certificates. Each
Underwriter's Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holders at the principal executive office of
the Company, for a new Underwriter's Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of shares of
Common Stock and/or Warrants in such denominations as shall be designated by the
Holders 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 Underwriter's 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 Underwriter's Warrant Certificates, if
mutilated, the Company will make and deliver a new Underwriter's Warrant
Certificate of like tenor, in lieu thereof.
9. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Underwriter's Warrants, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests; provided, however, that
if a Holder exercises all Underwriter's Warrants held of record by such Holder,
the fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock.
12
<PAGE>
10. 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 Underwriter's
Warrants, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. The Company covenants
and agrees that, upon exercise of Underwriter's Warrants and payment of the
Purchase Price therefor, all the shares of Common Stock and other securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any stockholder. The
Company further covenants and agrees that as long as the Underwriter's Warrants
shall be outstanding, the Company shall use its best efforts to cause the Common
Stock and Warrants to be listed (subject to official notice of issuance) on all
securities exchanges on which the Common Stock and the Warrants issued in the
Initial Public Offering may then be listed or quoted.
11. Notices to Underwriter's Warrant Holders. Nothing contained in
this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company. If, however, at
any time prior to the expiration of the Underwriter's 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
13
<PAGE>
(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 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 stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, 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 validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
12. 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 the registered Holders of the Underwriter's Warrants, to the
address of such Holders as shown on the books of the Company; or
(b) If to the Company to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the Holders.
14
<PAGE>
13. Supplements and Amendments. The Company and the Underwriter may from
time to time supplement or amend this Agreement without the approval of any
Holders of Underwriter's Warrant Certificates (other than the Underwriter) 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 the Underwriter may deem necessary or desirable and which
the Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Underwriter's Warrant Certificates.
14. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Underwriter, the
Holders and their respective successors and assigns hereunder.
15. Termination. This Agreement shall terminate at the close of business on
__________________, 2005. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on the expiration of any applicable statute of limitations.
16. Governing Law: Submission to Jurisdiction. This Agreement and each
Underwriter's 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 without giving effect to
the rules of said state governing the conflicts of laws. The Company, the
Underwriter and the Holders hereby agree that any action, proceeding or claim
against it arising out of, or relating in any way to, this Agreement shall be
brought and enforced in the courts of the State of New York or of the United
States of America for the Southern District of New York, and irrevocably submits
15
<PAGE>
to such jurisdiction, which jurisdiction shall be exclusive. The Company, the
Underwriter and the Holders hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum. Any such process or summons to be
served upon any of the Company, the Underwriter and the Holders (at the option
of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
12 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the party so served in any action, proceeding or claim.
17. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement, to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and thereof. Subject to Section 13, this Agreement may not
be modified or amended except by a writing duly signed by the Company and the
Holders of a Majority of the Registrable Securities.
18. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
19. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
20. 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 Holders of the Underwriter's Warrant
Certificates or Registrable Securities any legal or equitable right, remedy or
16
<PAGE>
claim under this Agreement, and this Agreement shall be for the sole and
exclusive benefit of the Company and the Underwriter and any other Holders of
the Underwriter's Warrant Certificates or Registrable Securities.
21. 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.
22. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company, the Underwriter and their respective successors and
assigns and the Holders from time to time of the Underwriters' Warrant
Certificates.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
PROTOSOURCE
By:
-------------------------------
Raymond J. Meyers,
Chief Executive Officer
ANDREW ALEXANDER WISE & CO.
By:
-------------------------------
Name: Andreas Zigouras
Title: President
17
<PAGE>
EXHIBIT A
---------
PROTOSOURCE
-----------
WARRANT CERTIFICATE
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE COMMENCING __________________, 1999 THROUGH
5:00 P.M., NEW YORK CITY TIME ON _____________, 2003
No. UW-1 105,000 Warrants
This Warrant Certificate certifies that Andrew Alexander Wise & Company,
Inc., or registered assigns, is the registered holder of a Warrant to purchase
initially, at any time from __________________, 1999 until 5:00 p.m., New York
City time on __________________ (the "Expiration Date"), 105,000 Units of
securities of the Company (the "Units"), each consisting of one fully paid and
non-assessable share of Common Stock, $.001 par value (the "Common Stock"), of
ProtoSource, a California corporation (the "Company") and a Redeemable Common
Stock Purchase Warrant to purchase one share of Common Stock ("Warrants") of the
Company at the purchase price of $_____ per Unit (the "Unit Purchase Price"),
upon the surrender of this Warrant Certificate and payment of the applicable
Purchase 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
_____________, 1998 (the "Warrant Agreement") between the Company and Andrew
Alexander Wise & Company, Inc. (the "Underwriter"). Payment of the applicable
Purchase Price shall be made by certified or cashier's check or money order
payable to the order of the Company.
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.
A-1
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement between
the Company and the Underwriter, which Warrant Agreement is hereby incorporated
by reference in and made a part of this instrument and is hereby referred to for
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 respective Purchase Prices and the type and/or number of the Company's
securities issuable upon the exercise of this Warrant, 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
Purchase 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.
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 as provided herein,
without any charge except for any tax or other governmental charge imposed in
connection with such transfer.
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 undersigned has executed this certificate this ____
day of __________________, 1998.
PROTOSOURCE
By:
----------------------------------
Raymond J. Meyers
Chief Executive Officer
ATTEST
By:
---------------------------
Secretary
A-2
<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 his or its attorney-in-fact
to transfer the within Warrant Certificate on the books of ProtoSource, with
full power of substitution.
Dated:
Signature
----------------------
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right represented by
this Warrant Certificate to purchase:
___________ Units, each consisting of one share of Common
Stock and one Redeemable Common Stock Warrant
and herewith tenders in payment for such securities a certified or cashier's
check or money order payable to the order of ProtoSource in the amount of $ ,
all in accordance with the terms hereof. The undersigned requests that
certificates for such securities be registered in the name of whose address is
and that such certificates be delivered to
whose address is
- --------------------------------------------------------.
Dated:
Signature
---------------------------------
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
Exhibit 2.01
RESTATED ARTICLES OF INCORPORATION
OF
SHR CORPORATION
A CALIFORNIA CORPORATION
CHARLES HOWARD and STEVEN WILSON certify that:
A. They are the President and Secretary, respectively, of SHR CORPORATION,
a California corporation.
B. The Articles of Incorporation of this corporation are amended and
restated to read as follows:
"ARTICLES OF INCORPORATION
OF
PROTOSOURCE CORPORATION
1. Name. The name of the corporation is PROTOSOURCE CORPORATION.
2. Purpose. The purpose of the corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust company
business, or the practice of a profession permitted to be incorporated by the
California Corporations Code.
3. Stock. The corporation is authorized to issue two classes of shares to
be, designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"), respectively. The corporation is authorized to issue 10,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock. On the amendment of
this Article 3 to read as set forth above, each outstanding share of Common
Stock is split up and converted into 101.31712 shares of Common Stock.
4. Preferred Stock. Preferred Stock may be issued from time to time in one
or more series. The first such series shall be designated Series A Preferred
Stock ("Series A Preferred Stock") and shall consist of 900,000 shares. As used
herein, the terms "Preferred Stock" or "Preferred Shares" without designation
shall refer collectively to shares of Series A Preferred Stock and to shares of
any other series of Preferred Stock.
<PAGE>
Except as to Series A Preferred Stock, the Preferred Stock may be issued
from time to time in one or more series, as determined by the Board of Directors
("Board"). By resolution the Board may fix the designation and number of shares
of any such series, and within the limitations or restrictions stated in any
resolution or resolutions of the Board originally fixing the number of shares
constituting any series (except Series A) may increase or decrease (but not
below the number of shares of such series then outstanding) the number of shares
of any such series subsequent to the issue of shares of that series. As to
Series A Preferred Stock, the Board alone may amend these Articles of
Incorporation to increase or decrease (but not below the number of shares then
outstanding) the number of shares of Series A Preferred Stock.
Except as to Series A Preferred Stock, and except as to matters fixed
herein as to Preferred Stock, the Board may determine, alter or revoke the
rights, preferences, privileges and restrictions of any wholly unissued series
of Preferred Stock.
The rights, preferences, privileges and restrictions granted to or imposed
upon the respective classes or series of shares and on their holders are as
follows:
4.1 Dividends. The holders of record of Series A Preferred Stock shall
have no preference or priority in regard to the payment of any dividend and
shall be entitled to receive cash dividends only when and as declared by the
Board out of funds legally available therefor.
4.2 Preference on Liquidation.
4.2.1 In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the holders of record of Series A
Preferred Stock then outstanding shall be entitled to be paid an amount equal to
$. 01 per share of Series A Preferred Stock out of the assets of the corporation
available for distribution to its shareholders, whether from capital, surplus or
earnings, before any payment shall be made in respect of the Common Stock of the
corporation. If, upon liquidation, dissolution or winding up of the corporation,
the assets of the corporation available for distribution to its shareholders are
insufficient to pay the holders of Series A Preferred Stock the full amounts to
which they shall be entitled, the holders of Series A Preferred Stock shall
-2-
<PAGE>
share ratably in any distribution of assets according to the respective amounts
which would be payable in respect of the shares of Series A Preferred Stock held
by them upon such distribution as if all amounts payable on or with respect to
such shares were able to be paid in full.
4.2.2 After setting apart or paying in full the preferential
amounts due the holders of Series A Preferred Stock, the remaining assets of the
corporation available for distribution to shareholders, if any, shall be
distributed ratably to the holders of Preferred Stock and Common Stock, with the
holders of Preferred Stock being deemed to hold the number of shares of Common
Stock into which such shares of Preferred Stock would be convertible as of the
date fixed for such distribution.
4.2.3 The merger or consolidation of the corporation into or with
another corporation or the sale of all or substantially all of the assets of the
corporation shall not be deemed to be a liquidation, dissolution or winding up
of the corporation as those terms are used in this Section 4.2.
4.3 Voting Rights.
4.3.1 Except as provided below, or as otherwise required by law,
the shares of Series- A Preferred Stock shall have no votes with respect to any
matter presented to the shareholders of the corporation.
4.3.2 The corporation shall not, without first obtaining the
approval by vote or written consent, in the manner provided by law, of the
holders of at least two-thirds (2/3) of the total number of shares of Series A
Preferred Stock then outstanding, voting separately as a class:
4.3.2.1 Alter or change any of the rights, preferences,
privileges or powers of the Series A Preferred Stock;
4.3.2.2 Alter, amend, or modify the provisions of this
Section 4.3.2;
4.3.2.3 Sell, lease, convey, exchange, transfer or otherwise
dispose of all or substantially all of the assets of the corporation (other than
for the purposes of securing payment of any contract or obligation);
-3-
<PAGE>
4.3.2.4 Merge or consolidate with or into any other
corporation, except into or with a wholly owned subsidiary;
4.3.2.5 Increase the authorized number of shares of Series A
Preferred Stock;
4.3.2.6 Repurchase any outstanding securities except for the
purchase of Common Stock held by directors, employees or consultants pursuant to
agreements between the corporation and such directors, employees or consultants.
4.4 Conversion Rights. Series A Preferred Stock shall be automatically
convertible into fully paid and nonassessable Common Stock without additional
consideration upon the happening of the events set forth in Sections 4.4.2
through 4.4.7 below. The following provisions apply to these conversion rights:
4.4.1 Upon an automatic conversion, a holder of Series A
Preferred Stock shall be entitled to receive one share of Common Stock for each
share of Series A Preferred Stock being converted, subject to the adjustments
provided below in Section 4.5.
4.4.2 A total of two hundred twenty five thousand (225,000)
shares of the outstanding Series A Preferred Stock shall be automatically
converted if the corporation reports annual gross revenues of at least
$5,300,000.00 and annual net income after taxes of at least $650,000.00 for its
fiscal year ending December 31, 1995 (,,the fiscal year of the conversion"). The
conversion shall be on a pro rata basis among the holders of the outstanding
Series A Preferred Stock as allocated by the Board based on the amount of Series
A Preferred Stock held by each shareholder.
4.4.3 A total of one hundred eighty seven thousand five hundred
(187,500) shares of the outstanding Series A Preferred Stock shall be
automatically converted if the corporation reports annual gross revenues of at
least $9,600,000.00 and annual net income after taxes of at least $1,550,000.00
for its fiscal year ending December 31, 1996 ("the fiscal year of the
conversion"). The conversion shall be on a pro rata basis among the holders of
the outstanding Series A Preferred Stock as allocated by the Board based on the
amount of Series A Preferred Stock held by each shareholder.
-4-
<PAGE>
4.4.4 A total of one hundred eighty seven thousand five hundred
(187,500) shares of the outstanding Series A Preferred Stock shall be
automatically converted if the corporation reports annual gross revenues of at
least $15,500,000.00 and annual net income after taxes of at least $3,000,000.00
for its fiscal year ended December 31, 1997 ("the fiscal year of the
conversion"). The conversion shall be on a pro rata basis among the holders of
the outstanding Series A Preferred Stock as allocated by the Board based on the
amount of Series A Preferred Stock held by each shareholder.
4.4.5 A total of three hundred thousand (300,000) shares of the
outstanding Series A Preferred Stock shall be automatically converted if the
corporation reports annual gross revenues of at least $23,800,000.00 and annual
net income after taxes of at least $5,100,000.00 for its fiscal year ended
December 31, 1998 ("the fiscal year of the conversion"). The conversion shall be
on a pro rata basis among the holders of the outstanding Series A Preferred
Stock as allocated by the Board based on the amount of Series A Preferred Stock
held by each shareholder.
4.4.6 If, prior to January 1, 1999, the corporation consolidates
with, or merges into (as the disappearing entity), another corporation or
entity, or, if prior to such date, the corporation sells, leases or conveys to
another corporation or entity all or substantially all of the assets of the
corporation, then all of the Series A Preferred Stock then outstanding shall be
automatically converted but only if, as of the effective date of any
consolidation, merger, sale, lease or conveyance (i) the corporation previously
has offered and sold Common Stock for the account of the corporation through an
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, and either (ii) since the closing
date of any such offering the Common Stock sold in any such offering has
appreciated an average of ten percent (10%) for each twelve (12) month period
(prorated for any partial twelve (12) month period) from the closing to the
effective date of any such consolidation, merger, sale, lease or conveyance.
4.4.7 If, prior to January 1, 1999, any person, entity or
affiliated group of persons or entities acquires forty percent (40%) or more of
the Common Stock (calculated prior to any conversion under this Section 4.4.7)
in any transaction or group of transactions in any twelve (12) month period,
then all of the Series A Preferred Stock then outstanding shall be automatically
converted.
-5-
<PAGE>
4.4.8 Upon the occurrence of any events resulting in an automatic
conversion of Series A Preferred Stock into Common Stock, such Common Stock
shall thereupon be issued and outstanding. The Board may order any holders of
outstanding certificates for the Series A Preferred Stock to surrender the
certificate or certificates for the shares being converted, duly endorsed for
transfer to the corporation, if required by it. As promptly as practicable
thereafter, the corporation shall issue and deliver to such holder, at the
principal office of the corporation or such other place as may be designated by
the corporation, a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled and a check for cash with respect
to any fractional interest in a share of Common Stock. The holder shall be
deemed to have become a shareholder of record on the date of conversion unless
the transfer books of the corporation are closed on that date, in which event
the holder shall be deemed to have become a shareholder of record on the next
succeeding date on which the transfer books are open. Upon conversion of only a
portion of the number of shares of Series A Preferred Stock represented by a
certificate surrendered for conversion, the corporation shall issue and deliver
to the holder of the certificate so surrendered for conversion, at the expense
of the corporation, a new certificate covering the number of shares of Series A
Preferred Stock representing the unconverted portion of the certificate so
surrendered. If the conversion is in connection with an underwritten offering,
such conversion will not be deemed to have occurred until immediately prior to
the closing of such sale of securities.
4.4.9 The corporation shall pay any and all costs, expenses and
taxes that may be payable in respect of any conversion of Series A Preferred
Stock or the issue and delivery of shares of Common Stock on conversion.
4.4.10 The corporation shall at all times reserve and keep
available, out of its authorized but unissued Common Stock, solely for the
purpose of effecting the conversion of Series A Preferred Stock, the full number
of shares Common Stock deliverable upon the conversion of all Series A Preferred
Stock.
4.4.11 If any shares of Common Stock to be reserved for the
purpose of conversion of shares of Series A Preferred Stock require registration
-6-
<PAGE>
or a listing with, or approval of, any governmental authority, stock exchange or
other regulatory body under any federal or state law or regulation, or
otherwise, before such shares must be validly issued or delivered upon
conversion, the corporation shall in good faith, and at its own expense, as
expeditiously as possible endeavor to secure such registration, listing or
approval, as the case may be.
4.4.12 Any shares of Series A Preferred Stock not automatically
converted pursuant to Sections 4.4.2 through 4.4.5 shall be canceled by the
corporation as of the end of the applicable fiscal -year of conversion with the
cancellation being on a pro rata basis among the holders of the outstanding
Series A Preferred Stock as allocated by the Board based on the amount of Series
A Preferred Stock held by each shareholder.
4.5 Adjustment of Conversion Ratio.
4.5.1 If the number of outstanding shares of Common Stock has
been increased or reduced since the first issuance of the Series A Preferred
Stock because of a split, share dividend, consolidation, or other capital change
or reorganization affecting the number of outstanding Common Stock, this Article
shall be amended to adjust the number of Common Stock to be issued for each
share of Series A Preferred Stock being converted, to preserve fairly and
equitably as far as reasonably possible the original conversion rights of the
shares being converted.
4.5.2 In the event the corporation consolidates with, or merges
into (as the disappearing entity), another corporation or entity, or if the
corporation sells, leases or conveys to another corporation or entity all or
substantially all of the assets of the corporation, after the date of any such
consolidation, merger, sale, lease or conveyance, and upon an authorized
conversion, each share of Series A Preferred Stock shall be convertible into the
number of shares of stock or other securities or property (including cash) to
which the Common Stock issuable (at the time of any such consolidation, merger,
sale, lease or conveyance) upon conversion of such share of Series A Preferred
Stock would have been entitled upon any such consolidation, merger, sale, lease
or conveyance; and in any such case, if necessary, these provisions with respect
to the rights and interests of the holders of Series A Preferred Stock shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or property thereafter deliverable on
the conversion of the shares of Series A Preferred Stock.
-7-
<PAGE>
5. Limitation on Director Liability. The liability of the directors of
the corporation for monetary damages shall be eliminated to the fullest
extent permissible under California law.
6. Indemnification of Agents. The corporation is authorized to provide
indemnification of agents (as defined in Section 317 of the California
Corporations Code) through bylaw provisions, agreements with agents, vote
of shareholders or disinterested directors or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in
Section 204 of the California Corporations Code with respect to actions for
breach of duty to the corporation and its shareholders."
C. The foregoing amendment and restatement was approved by the required
vote of the shareholders of the corporation in accordance with Section 902 of
the California Corporations Code; the total number of outstanding shares of each
class entitled to vote with respect to the foregoing amendment and restatement
was five thousand nine hundred twenty-two (5,922) shares; and the number of
shares of each class voting in favor of the foregoing amendment and restatement
equalled or exceeded the vote required, such required vote being a majority of
the outstanding shares.
D. The foregoing amendment and restatement of Articles of Incorporation has
been duly approved by the board of directors.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Dated: November 2, 1994.
/s/ Charles Howard
-------------------------------------
CHARLES HOWARD, President
/s/ Steven Wilson
-------------------------------------
STEVEN WILSON, Secretary
Exhibit 2.02
BYLAWS OF
SHR CORPORATION
---------------
A California Corporation
ARTICLE I
OFFICES OF CORPORATION
Section 1. PRINCIPAL 1 OFFICES. The principal executive office for the
transaction of the business of the corporation is hereby fixed and located at
2210 San Joaquin, Fresno, California 93721. The Board of Directors is hereby
granted full power and authority to change the principal office from one
location to another within or without this state.
Section 2. OTHER OFFICES. The Board of Directors may at any time establish
branch or subordinate offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of Shareholders shall be held at any
place within or outside the State of California designated by the Board of
Directors. In the absence of any such designation, Shareholders' meetings shall
be held at the principal executive office of the Corporation.
Section 2. ANNUAL MEETING. The annual meeting of Shareholders shall be held
on the first Monday of August in each year at 10:00 o'clock, a.m. However, if
this day falls on a legal holiday, then the meeting shall be held at the same
time and place on the next succeeding full business day. At this meeting,
Directors shall be elected, and any other proper business within the power of
the Shareholders may be transacted.
Section 3. SPECIAL MEETING. A special meeting of the Shareholders may be
called at any time by the Board of Directors, or by the Chairman of the Board,
or by the President or Vice President, or by one or more Shareholders holding
shares in the aggregate entitled to cast not less than ten percent (10%) of the
votes at that meeting.
If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
<PAGE>
other facsimile transmission to the Chairman of the Board, the President, any
Vice President, or the Secretary of the Corporation. The officer receiving the
request shall cause notice to be promptly given to all the Shareholders entitled
to vote, in accordance with the provisions of Sections 4 and 5 of this Article
II, that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
3 shall be construed as limiting, fixing or affecting the time when a meeting of
Shareholders called by action of the Board of Directors may be held.
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
Shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) days nor more than sixty (60) days before
the date of the meeting. The notice shall specify the place, date and hour of
the meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, or (ii) in the case of the annual meeting, those
matters which the Board of Directors, at the time of giving the notice, intends
to present for action by the Shareholders. The notice of any meeting at which
Directors are to be elected shall include the name of any nominee or nominees
whom, at the time of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a Director has a direct or indirect financial
interest under Section 310 of the Corporations Code of California, (ii) an
amendment of the Articles of Incorporation under Section 902 of that Code, (iii)
a reorganization of the Corporation, under Section 1201 of that Code, (iv) a
voluntary dissolution of the Corporation under Section 1900 of that Code, or (v)
a distribution in dissolution other than in accordance with the rights of
outstanding preferred shares under Section 2007 of that Code, the notice shall
also state the general nature of that proposal.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
Shareholders' meeting shall be given to each and every Shareholder either
personally or by first-class mail or telegraphic or other written communication,
-2-
<PAGE>
charges prepaid, addressed to the Shareholder at the address of that Shareholder
appearing on the books of the Corporation or given by the Shareholder to the
Corporation for the purpose of notice. If no such address appears on the
Corporation's books or has been so given, notice shall be deemed to have been
given if sent to that Shareholder by first-class mail or telegraphic or other
written communication to the Corporation's principal executive office, or if
published at least once in a newspaper of general circulation in the county
where that office is located. Notice shall be deemed to have been given at the
time when delivered personally or deposited in the mail or sent by telegram or
other means of written communication.
If any notice addressed to a Shareholder at the address of that
Shareholder appearing on the books of the Corporation is returned to the
Corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the Shareholder
at that address, all future notices or reports shall be deemed to have been duly
given without further mailing if these shall be available to the Shareholder on
written demand of the Shareholder at the principal executive office of the
Corporation for a period of one year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
Shareholders' meeting may be executed by the Secretary, Assistant Secretary, or
any transfer agent of the Corporation giving the notice, and filed and
maintained in the minute book of the Corporation.
Section 6. QUORUM. The presence (in person or by proxy) of the holders of a
majority of the shares entitled to vote at any meeting of Shareholders shall
constitute a quorum for the transaction of business.
The Shareholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding
the withdrawal of enough Shareholders to leave less than a quorum, but no action
(other than adjournment) may be taken unless approved by a majority of the
shares necessary to constitute a quorum.
Section 7. ADJOURNED MEETING; NOTICE. Any Shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the shares represented at that meeting, either in
person or by proxy, but in the absence of a quorum, no other business may be
transacted at that meeting, except as provided in Section 6 of this Article II.
-3-
<PAGE>
When any meeting of Shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than forty-five (45) days from the
date set for the original meeting, in which case the Board of Directors shall
set a new record date. Notice of any such adjourned meeting, if required, shall
be given to each and every Shareholder of record entitled to vote at the
adjourned meeting in accordance with the provisions of Sections 4 and 5 of this
Article II. At any adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting.
Section 8. VOTING. The Shareholders entitled to vote at any meeting of
Shareholders shall be determined in accordance with the provisions of Section 11
of this Article II, subject to the provisions of Sections 702 and 704,
inclusive, of the Corporations Code of California (relating to voting shares
held by a fiduciary, in the name of a corporation, or in joint ownership). Said
Shareholders are entitled to cast one vote per share. The Shareholders' vote may
be by voice vote or by ballot; provided, however, that any election for
Directors must be by ballot if demanded by any Shareholder before the voting has
begun.
On any matter other than the election of Directors, any Shareholder
may vote part of to shares in favor of the proposal and refrain from voting the
remaining shares or vote them against the proposal, but, if the Shareholder
fails to specify the number of shares which the Shareholder is voting
affirmatively, it will be conclusively presumed that the Shareholder's approving
vote is with respect to all shares that the Shareholder is entitled to vote. If
a quorum is present (or if a quorum. had been present earlier at the meeting but
some Shareholders had, withdrawn) the affirmative vote of a majority of the
shares represented and voting, provided such shares voting affirmatively also
constitutes a majority of the number of shares required for a quorum, shall be
the act of the Shareholders, unless the vote of a greater number or voting by
classes is required by California General Corporation Law or by the Articles of
Incorporation.
At a Shareholders' meeting at which Directors are to be elected, no
Shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such Shareholder normally
-4-
<PAGE>
charges prepaid, addressed to the Shareholder at the address of that placed in
nomination before commencement of the voting and a Shareholder has given notice
before commencement of the voting of the Shareholder's intention to cumulate
votes. If any Shareholder has given such a notice, then every Shareholder
entitled to vote may cumulate votes for candidates in nomination and give one
candidate a number of votes equal to the number of Directors to be elected
multiplied by the number of votes to which that Shareholder's shares are
normally entitled, or distribute the Shareholder's votes on the same principle
among any or all of the candidates, as the Shareholder thinks fit. The
candidates receiving the highest number of votes, up to the number of Directors
to be elected, shall be elected.
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of Shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy, and if, either before or after the meeting, each person entitled to vote,
who was not present in person or by proxy, signs a written waiver of notice or a
consent to a holding of the meeting, or an approval of the minutes. The waiver
of notice or consent need not specify either -the business transacted or the
purpose of any annual or special meeting of Shareholders, except that, if action
is taken or proposed to be taken for approval of any of those matters specified
in the second paragraph of Section 4 of this Article II, the waiver of notice or
consent shall state the general nature of the proposal. All such waivers,
consents, or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law to be
included in the notice of the meeting, but not so included, if that objection is
expressly made at the meeting.
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any annual or special meeting of Shareholders may
be taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take that action at a meeting at which all shares entitled to
vote on that action were present and voted.
-5-
<PAGE>
In the case of election of Directors, such a written consent without a
meeting shall be effective only if signed by the holders of all outstanding
shares entitled to vote for the election of Directors; provided, however, that a
Director may be elected at any time to fill a vacancy on the Board of Directors
that has not been filled by the Directors, by the written consent of the holders
of a majority of the outstanding shares entitled to vote.
All such consents shall be filed with the Secretary of the Corporation
and shall be maintained in the corporate records. Any Shareholder giving a
written consent, or the Shareholder's proxy holder, or a transferee of the
shares or a personal representative of the Shareholder or their respective proxy
holders, may revoke the consent by a writing received by the Secretary of the
Corporation before written consents of the number of shares required to
authorize the proposed action have been filed with the Secretary.
If the consents of all Shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
Shareholders shall not have been received, the Secretary shall give prompt
notice of the corporate action approved by the Shareholders without a meeting.
This notice shall be given in the manner specified in Section 5 of this Article
II. In the case of approval of (i) contracts or transactions in which a Director
has a direct or indirect financial interest under Section 310 of the
Corporations Code of California, (ii) indemnification of agents of the
Corporation, under Section 317 of that Code, (iii) a reorganization of the
Corporation, under Section 1201 of that Code, or (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, under Section 2007 of that Code, notice of such approval shall be given
at least ten (10) days before the consummation of any action authorized by that
approval.
Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For the purposes of determining the Shareholders entitled to notice of
any meeting or to vote or entitled to give consent to corporate action without a
meeting, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) days or less than ten (10) days before the date of
any such meeting or more than sixty (60) days before any such action without a
meeting, and in this event only Shareholders of record at the close of business
on the date so fixed are entitled to notice and to vote or to give consents, as
the case may be, notwithstanding any transfer of any shares on the books of the
Corporation after the record date, except as otherwise provided in the
California General Corporation Law.
-6-
<PAGE>
If the Board of Directors does not so fix a record date:
(a) The record date for determining Shareholders entitled to notice of
or to vote at a meeting of Shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining Shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the Board has been taken, shall
be at the close of business on the day on which the Board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
Section 12. PROXIES.Every person entitled to vote for Directors or on any
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by, the person and filed with the
Secretary of the Corporation. A proxy shall be deemed signed if the
Shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the Shareholder or the
Shareholder's attorney in fact. I
A validly executed proxy that does not state that it is irrevocable
shall continue in full force and effect unless (i) revoked by the person
executing it, before the vote pursuant to that proxy, or by writing delivered to
the Corporation stating that the proxy is revoked, or by attendance at the
meeting and voting in person by the person executing the proxy or by a
subsequent proxy executed by the same person and presented at the meeting; or
(ii) revoked by written notice of the death or incapacity of the maker of that
proxy being received by the Corporation before the vote pursuant to that proxy
is counted; provided, however, that no proxy shall be valid after the expiration
of eleven (11) months from the date of the proxy, unless otherwise provided in
the proxy.
-7-
<PAGE>
The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of
the Corporations Code of California.
Section 13. INSPECTORS OF ELECTION. Before any meeting of Shareholders, the
Board of Directors may appoint any persons other than nominees for office to act
as inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the Chairman of the meeting may, and on the request
of any Shareholder or a Shareholder's proxy shall, appoint inspectors of
election at the meeting. The number of inspectors shall he either one (1) or
three (3). If inspectors are to be appointed at a meeting on the request of one
or more Shareholders or proxies, the holders of a majority of shares or their
proxies present at the meeting shall determine whether one (1) or three (3)
inspectors are to be appointed. if any person appointed as inspector fails to
appear or fails or refuses to act, the Chairman of the meeting may, and upon the
request of any Shareholder or a Shareholder's proxy shall, appoint a person to
fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all Shareholders.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the California General
Corporation Law and any limitations in the is mailed, it shall be deposited in
the United States mail at least four (4) days before the time of meeting. In
case the notice is delivered personally, or by telephone or telegram, it shall
-8-
<PAGE>
Shareholders. The number of Directors may be changed by a duly adopted amendment
to the Articles of Incorporation or by an amendment to this Bylaw duly adopted
by the unanimous vote or written consent of holders of all of the outstanding
shares entitled to vote. No amendment may change the stated maximum number of
authorized Directors to a number other than three (3) or five (5) .
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the Shareholders to hold office until the next
annual meeting. Each Director, including a Director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
No reduction of the authorized number of Directors shall have the
effect of removing any Director before that Director's term of office expires.
Section 4. VACANCIES. A vacancy or vacancies in the Board of Directors
shall be deemed to exist in the event of the death, resignation, or removal of
any Director,.or if the Board of Directors by resolution declares vacant
the-office of a Director who has been declared of unsound mind by an order of
court or convicted of a felony, or if the authorized number of Directors is
increased, or if the Shareholders fail at anv meeting of Shareholders at which
any Director or Directors are elected to elect the number of Directors to be
voted for at that meeting.
Any Director may resign effective on giving written notice to the
Chairman of the Board, the President, the Secretary, or the Board of Directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a Director is effective at a future time, the
Board of Directors may elect a successor to take office when the resignation
becomes effective.
Vacancies in the Board of Directors may be filled by a majority of the
remaining Directors, whether or not less than a quorum, or by a sole remaining
Director, except that a vacancy created by the removal of a Director by the vote
or written consent of the Shareholders or by court order may be filled only by
the vote of a majority of the shares entitled to vote represented at a duly held
meeting at which a quorum is present, or by the unanimous written consent of the
holders of the outstanding shares entitled to vote. The Shareholders may elect a
Director or Directors at any time to fill any vacancy or vacancies not filled by
the Directors, but any such election by written consent shall require the
-10-
<PAGE>
consent of a majority of the outstanding shares entitled to vote, except that
filling a vacancy created by removal of a Director shall require the written
consent of the holders of all outstanding shares entitled to vote.
Each Director so elected shall hold office until the next annual
meeting of the Shareholders and until a successor has been elected and
qualified.
Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings of
the Board of Directors may be held at any place within or outside the State of
California that has been designated from time to time by the Board. In the
absence of such a designation, regular meetings shall be held at the principal
executive office of the Corporation. Special meetings of the Board shall be held
at any place within or outside the State of California that has been designated
in the notice of the meeting or, if not stated in the notice or if there is no
notice, at the principal executive office of the Corporation. Any meeting,
regular or special, may be held by conference telephone or similar communication
equipment, as long as all Directors participating in the meeting can hear
one-another, and all such Directors shall be deemed to be present-in person at
the meetincr.
Section 6. ANNUAL MEETING. Immediately following each annual meeting of
Shareholders, the Board of Directors shall hold a regular meeting at the place
that the annual meeting of Shareholders was held or at any other place that
shall have been designated by the Board of Directors, for the purpose of
organization, any desired election of officers, and the transaction of other
business. Notice of this meeting shall not be required.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the Board of
Directors shall be held without call at such time as shall from time to time be
fixed by the Board of Directors. Such regular meetings may be held without
notice.
Section 8. SPECIAL MEETINGS. Special meetings of the Board of Directors for
any purpose or purposes may be called at any time by the Chairman of the Board,
the President, any Vice President, the Secretary, or any two Directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each Director or sent by first-class mail or
telegram, charges prepaid, addressed to each Director at the Director's address
-11-
<PAGE>
as it is shown on the records of the Corporation. In case the notice be
delivered personally or by telephone or to the telegraph company at least
forty-eight (48) hours before the time of the meeting. Any oral notice given
personally or by telephone may be communicated either to the Director or to a
person at the office of the Director whom the person giving the notice has
reason to believe will promptly communicate it to the Director. The notice need
not specify the purpose of the meeting, nor need it specify the place if the
meeting is to be held at the principal executive office of the Corporation.
Section 9. QUORUM. A majority of the authorized number of Directors shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 11 of this Article III. Every act or decision done or made
by a majority of the Directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Directors, subject to
the provisions of Section 310 of the Corporations Code of California (as to
approval of contracts or transactions in which a Director has a direct or.
indirect material financial interest) , Section 311 of that Code (as to
appointment of committees), and Section 317(e) of that Code (as to
indemnification of Directors) . A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of Directors,
if any action taken is approved by at least a majority of the required quorum
for that meeting.
Section 10. WAIVER OF - NOTICE. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if each Director (a) has received notice of the meeting,
(b) attends the meeting without protesting before or at the beginning of the
meeting, the lack of notice to such Director, or (c) before or after the meeting
signs a waiver of notice and consent to holding the meeting, or an approval of
the minutes of the meeting. Any such waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 11. ADJOURNMENT. A majority of the Directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
-12-
<PAGE>
Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given, unless the meeting is adjourned for more
than twenty-four hours, in which case notice of the time and place shall be
aiven before the time of the adjourned meeting, in the manner specified in
Section 8 of this Article III, to the Directors who were not present at the time
of the adjournment.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted to be
taken by the Board of Directors may be taken without a meeting, if all members
of the Board shall individually or collectively consent in writing to that
action. Such action bv written consent shall have the same force and effect as a
unanimous vote of the Board of Directors. Such written consent or consents shall
be filed with the minutes of the proceedings of the Board.
Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as mav be fixed or determined by resolution of the
Board of Directors. This Section 14 shall not be construed to preclude any
Director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES bF DIRECTORS. The Board of Directors may, by
resolution adopted by a majority of the authorized number of Directors,
designate one or more committees, each consisting of two or more Directors, to
serve at the pleasure of the Board. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. Any committee, to the extent provided in
the resolution of the Board, shall have all the authority of the Board, except
with respect to:
(a) The approval of any action which, under the General Corporation
Law of California, also requires shareholders' approval or approval of the
outstanding shares;
(b) The filling Of Vacancies on the Board of Directors or in any
committee;
-13-
<PAGE>
(c) The fixing of compensation of the Directors for serving on the
Board or on any committee;
(d) The amendment or repeal of Bylaws or the adoption of new Bylaws;
(e) The amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable;
(f) A distribution to the Shareholders of the Corporation, except at a
rate or in a periodic amount or within a price range determined by the Board of
Directors; or
(g) The appointment of any other committees of the Board of Directors
or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these Bylaws, Sections 5 (Place of Meetings), 7
(Regular Meetings), 8 (Special Meetings and Notice), 9 (Quorum), 10 (Waiver of
Notice), 11 (Adjournment), 12 (Notice of Adjournment), and 13 (Action Without
Meeting), with such changes in the context of those Bylaws as are necessary to
substitute the committee and its members for the Board of Directors and its
members, except that the time of regular meetings of committees may be
determined either by resolution of the Board of Directors or by resolution of
the committee; special meetings of committees may also be called by resolution
of the Board of Directors; and notice of special meetings of committees shall
also be given to all alternate members, who shall have the right to attend all
meetings of the committee. The Board of Directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
Bylaws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Corporation shall be a President,
a Secretary, and a Chief Financial Officer. The Corporation may also have, at
the discretion of the Board of Directors, a Chairman of the Board, one or more
Vice Presidents, one or more Assistant Secretaries, one or more Assistant
Treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 3 of this Article V. Any number of offices maybe held by
the same person.
-14-
<PAGE>
Section 2. OFFICERS. The officers of the Corporation, except officers as
may be appointed in accordance with the proved Is of Section 3 or Section 5 of
this Article V, shall be chosen by the Board of Directors, and each shall serve
at the pleasure of the Board, subject to the rights, if any, of an officer under
any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint, and
may empower the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in the Bylaws or as the
Board of Directors may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the Board of Directors, at any regular or
special meeting of the Board, or, except in case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause shall be filled in
the manner prescribed in these Bylaws for regular appointment to that office.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer is elected, shall, if present, preside at meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by these
Bylaws. If there is no President, the Chairman of the Board shall in addition be
the General Manager and Chief Executive Officer of the Corporation and shall
have the powers and duties prescribed in Section 7 of this Article V.
-15-
<PAGE>
Section 7. PRESIDENT. Subject to such powers, if any, as may be given by
the Bylaws or Board of Directors to the Chairman of the Board, if there is such
an officer, the President shall be the General Manager and Chief Executive
Officer of the Corporation and shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the Corporation. He shall preside at all meetings of the
Shareholders and, in the absence of the Chairman of the Board, or if there is
none, sy all meetings of the Board of Directors. He shall have the general
powers and duties of management usually vested in the office of president of a
Corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or the Bylaws.
Section 8. VICE PRESIDENTS. In the absence or disability of the President,
the Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of, Directors or the Bylaws, and the President, or the Chairman of, the
Board if there is no President.
Section 9. SECRETARY. The Secretary shall keep or cause to be kept, at the
principal executive office or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of Directors, committees
of Directors, and Shareholders, with the time and place of holding, whether
regular or special, -and, if special, how authorized, the notice given, the
names of those present at Directors' meetings or committee meetings, the number
of shares present or represented at Shareholders' meetings, and the proceedings.
The Secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the Corporation's transfer agent or
registrar, as determined by resolution of the Board of Directors, a record of
Shareholders, or a duplicate record of Shareholders, showing the names of all
Shareholders and their addresses, the number and classes of shares held by each,
the number and date of certificates issued for the same, and the number and date
of cancellation of every certificate surrendered for cancellation.
The Secretary or Assistant Secretary, or if they are absent or unable
to act or refuse to act, any other officer of the Corporation, shall give, or
cause to be given, notice of all meetings of the Shareholders, of the Board of
-16-
<PAGE>
Directors, and of committees of the Board of Directors, required by the Bylaws
or by law to be given. The Secretary shall keep the seal of the Corporation if
one is adopted, in safe custody, and shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or by the
Bylaws.
Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep
and maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
Corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any Director.
The Chief Financial Officer shall deposit all monies and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. The Chief Financial
Officer shall disburse the funds of the Corporation as may be ordered by the
Board of Directors, shall render to the President and Directors, whenever they
request it, an account of all of his transactions as Chief Financial Officer and
of the financial condition of the Corporation, and shall have other powers and
perform such other duties as may be prescribed by the Board of Directors or the
Bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS, AND EXPENSES. For the purposes of this
Article, "agent" means any person who is or was a Director, officer, employee,
or other agent of this Corporation, or is or was serving at the request of this
Corporation as a Director, officer, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
was a Director, officer, employee, or agent of a foreign or domestic corporation
that was a predecessor corporation of this Corporation or of another enterprise
at the request of such predecessor corporation; "proceeding" means any
threatened, pending, or completed action or proceeding, whether civil, criminal,
administrative, or investigative; and "expenses" includes, without limitation,
attorneys' fees and any expenses of establishing a right to indemnification
under Section 4 or Section 5(c) of this Article.
-17-
<PAGE>
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. This Corporation shall
have power to indemnify any person who was or is a party, or is threatened to be
made a party, to any proceeding (other than an action by or in the right of this
Corporation to procure a judgment in its favor) by reason of the fact that such
person is or was an agent of this Corporation, against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with such proceeding if that person acted in good faith and in a
manner that person reasonably believed to be in the best interests of this
Corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of that person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction, or upon a plea of note
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner that the person reasonably
believed to be in the best interests of this Corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
Section 3. ACTIONS BY THE CORPORATION. This Corporation shall have power to
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending, or completed action by or in the right of this
Corporation to procure a judgment in its favor by reason of the fact that such
person is or was an agent of this Corporation, against expenses actually and
reasonably incurred by that person in connection with the defense or settlement
of that action if that person acted in good faith, in a manner that person
believed to be in the best interests of this Corporation and with such care,
including reasonable inquiry, as an ordinarily prudent person in a like position
would use under similar circumstances. No indemnification shall be made under
this Section 3:
(a) With respect to any claim, issue, or matter as to which that
person shall have been adjudged to be liable to this Corporation in the
performance of that person's duty to this Corporation, unless and only to the
extent that the court in which that proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, that person
is fairly and reasonably entitled to indemnity for the expenses which the court
shall determine;
(b) Of amounts paid in settling or otherwise disposing of a threatened
or pending action, with or without court approval; or
(c) Of expenses incurred in defending a threatened or pending action
that is settled or otherwise disposed of without court approval.
-18-
<PAGE>
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this
Corporation has been successful on the merits in defense of any proceeding
referred to in Sections 2 and 3 of this Article, or in defense of any claim,
issue, or matter -'%'-,herein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
Section 5. REQUIRED APPROVAL. Except as provided in Section 4 of this
Article, any indemnification under this Article shall be made by this
Corporation only if authorized in the specific case on a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Sections 2 or 3 of this
Article by:
(a) A majority vote of a quorum consisting of Directors who are not
parties to the proceeding;
(b) Approval by the affirmative vote of a majority of the shares of
this Corporation entitled to vote represented at a duly held meeting at which a
quorum is present-or by the written consent of holders of a majority of the
outstanding shares entitled to vote. For this purpose, the shares owned by the
person to be indemnified shall not be considered outstanding or entitled to vote
thereon; or
(c) The court in which the proceeding is or was pending, on
application made by this Corporation or the agent or the attorney or other
person rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by this
Corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Corporation before the final disposition of
the proceeding on receipt of an undertaking by or on behalf of the agent to
repay the amount of the advance unless it shall be determined ultimately that
the agent is entitled to be indemnified as authorized in this Article.
Section 7. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Directors
and officers of this Corporation or any subsidiary hereof may be entitled by
contract or otherwise.
Section 8. LIMITATIONS. No indemnification or advance shall be made under
this Article, except as provided in Section 4 or Section 5(c), in any
circumstance where it appears:
-19-
<PAGE>
(a) That it would be inconsistent with a provision of the Articles, a
resolution of the Shareholders, or an agreement in effect at the time of the
accrual of the alleged cause of action asserted in the proceeding in which the
expenses were incurred or other amounts were paid, which prohibits or otherwise
limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
Section 9. INSURANCE. Upon and in the event of a determination by the Board
of Directors of this Corporation to purchase such insurance, this Corporation
shall purchase and maintain insurance on behalf of any agent of the corporation
against any liability asserted against or incurred by the agent in such capacity
or arising out of the agent's status as such whether or not this Corporation
would have the power to indemnify the agent against that liability under the
provisions of this Section.
Section 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN. This Article
does not apply to any proceeding against any trustee, investment manager, or
other fiduciary of an employee benefit plan in that person's capacity as such,
even though that person may also be an agent of the Corporation as defined in
Section 1 of this Article. This Corporation shall have the power to indemnify,
and to purchase and maintain insurance on behalf of, any such trustee,
investment manager, or other fiduciary of any pension, profit-sharing, share
bonus, share purchase, share option, savings, thrift, and other retirement,
incentive, and benefit plan, trust, and other provision for any or all of the
Directors, officers, and employees of the Corporation or any of its subsidiary
or affiliated Corporations, and to indemnify and purchase and maintain insurance
on behalf of any fiduciary of such plans, trusts, or provisions. Nothing
contained in this Article shall limit any right to indemnification to which such
a trustee, investment manager, or other fiduciary may be entitled by contract or
otherwise, which shall be enforceable to the extent permitted by applicable law
other than this Article.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF RECORD OF SHAREHOLDERS. The
Corporation shall keep at its principal executive office, or at the office of
its transfer agent or registrar, if either be appointed and as determined by
-20-
<PAGE>
resolution of the Board of Directors, a record of its Shareholders, giving the
names and addresses of all Shareholders and the number and class of shares held
by each Shareholder.
A Shareholder or Shareholders of the Corporation holding at least five
(5%) percent in the aggregate of the outstanding voting shares of the
Corporation may: (i) inspect and copy the records of Shareholders' names and
addresses and shareholdings during usual business hours on five days' prior
written demand on the Corporation, and (ii) obtain from the transfer agent of
the Corporation, on written demand and on the tender of such transfer agent's
usual charges for such list, a list of the Shareholders' names and addresses,
who are entitled to vote for the election of Directors, and their shareholdings,
as of the most recent record date for which that list has been compiled or as of
a date specified by the Shareholder after the date of demand. This list shall be
made available to any such Shareholder or Shareholder's transfer agent on or
before the later of five (5) days after the demand is received or the date
specified in the demand as the date as of which the list is to be compiled. The
record of Shareholders shall also be open to inspection on the written demand of
any Shareholder or holder of a voting trust certificate, at any time during
usual business hours, for a purpose reasonably related to the holder's interests
as a Shareholder or as the holder of a voting trust certificate. Any inspection
and copying under this Section 1 may be made in person or by an agent or
attorney of the Shareholder or holder of a voting trust certificate making the
demand.
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The Corporation shall keep
at its principal executive office, or if its principal executive office is not
in the State of California, at its principal business office in this state, the
original or a copy of the Bylaws as amended to date, which shall be open to
inspection by the Shareholders at all reasonable times during office hours. If
the principal executive office of the Corporation is outside the State of
California and the Corporation has no principal business office in this state,
the Secretary shall, upon the written request of any Shareholder, furnish to
that Shareholder a copy of the Bylaws as amended to date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the Shareholders and
the Board of Directors and any committee or committees of the Board of Directors
-21-
<PAGE>
shall be kept at such place or places designated by; the Board of Directors, or,
in the absence of such designation, at the principal executive office of the
Corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. The minutes and accounting books and records
shall be open to inspection upon the written demand of any Shareholder or holder
of a voting trust certificate, at any reasonable time during usual business
hours, for a purpose reasonably related to the holder's interests as a
Shareholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney, and shall include the right to
copy and make extracts. These rights of inspection shall extend to the records
of each subsidiary Corporation of the Corporation.
Section 4. INSPECTION BY DIRECTORS. Every Director shall have the absolute
right at any reasonable time to inspect all books, records, and documents of
every kind and the physical properties of the Corporation and each of its
subsidiary Corporations. This inspection by a Director may be made in person or
by an agent or attorney and the right of inspection includes the right to copy
and make extracts of documents.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to Shareholders
referred to in Section 1501 of the California General Corporation Law is
expressly dispensed with, but nothing herein shall be interpreted as prohibiting
the Board of Directors from issuing annual or other periodic reports to the
Shareholders of the Corporation as they consider appropriate.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement
and any income statement of the Corporation for each quarterly period of each
fiscal year, and any accompanying balance sheet of the Corporation as of the end
of each such period, that has been prepared by the Corporation shall be kept on
file in the principal executive office of the Corporation for twelve (12) months
and each such statement shall be exhibited at all reasonable times to any
Shareholder demanding an examination of any such statement or a copy shall be
mailed to any such Shareholder.
If a Shareholder or Shareholders of the Corporation holding at least
five (5%) percent of the outstanding shares of any class of stock makes a
written request to the Corporation for an income statement of the Corporation
for the three-month, six-month or nine-month period of the current fiscal year
ended more than thirty (30) days before the date of the request, and a balance
-22-
<PAGE>
sheet of the Corporation as of the end of that period, the Chief Financial
Officer shall cause that statement to be prepared, if not already prepared, and
shall deliver personally or mail that statement or statements to the person
making the request within thirty (30) days after the receipt of the request. If
the Corporation has not sent the Shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to the
Shareholder or Shareholders within thirty (30) days after the request.
The Corporation shall also, on the written request of any Shareholder,
mail to the Shareholder a copy of the last annual, semi-annual, or quarterly
income statement which it has prepared, and a balance sheet as of the end of
that period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the Corporation or the certificate of an authorized
officer of the Corporation that the financial statements were prepared without
audit from the books and records of the Corporation.
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The Corporation shall,
each year during the calendar month in which its Articles of Incorporation
originally were filed with the California Secretary of State, or during the
preceding five (5) calendar months, file with the Secretary of State, on the
prescribed form, a statement setting forth the authorized number of Directors,
the names and complete business or residence addresses of all incumbent
Directors, the names and complete business or residence addresses of the Chief
Executive Officer, secretary, and Chief Financial Officer, the street address of
its principal executive office or principal business office in this state, and
the general type of business constituting the principal business activity of the
Corporation, together with a designation of the agent of the Corporation for the
purpose of service of process, all in compliance with Section 1502 of the
Corporations Code of California.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the Shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
-23-
<PAGE>
Shareholders by written consent without a meeting), the Board of Directors may
fix, in advance, a record date, which shall not be more than sixty (60) nor less
than ten (10) days before any such action, and in that case only Shareholders of
record on the date so fixed are entitled to receive the dividend, distribution
or allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the Corporation after
the record date so fixed, except as otherwise provided in the California General
Corporation Law.
If the Board of Directors does not so fix a record date, the record
date for determining Shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts,
or other orders for payment of money, notes, or other evidences of indebtedness,
issued in the name of or payable to the Corporation, shall be signed or endorsed
by such person or persons and in such manner as, from time to time, shall be
determined by resolution of the Board of Directors.
Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of
Directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent, or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the capital stock of the Corporation shall be issued to each
Shareholder when any of these shares are fully paid, and the Board of Directors
may authorize the issuance of certificates or shares as partly paid provided
that these certificates shall state the amount of the consideration to be paid
for them and the amount paid. All certificates shall be signed in the name of
the corporation by the Chairman of the board or Vice Chairman of the Board or
the President or Vice President and by the Chief Financial Officer or an
Assistant Treasurer or the Secretary or any Assistant Secretary, certifying the
-24-
<PAGE>
number of shares and the class or series of shares owned by the Shareholder.
None of the signatures on the certificate may be facsimile. In case any officer,
transfer agent, or registrar who has signed a certificate shall have ceased to
be that officer, transfer agent, or registrar before that certificate is issued,
it may be issued by the Corporation with the same effect as if that person were
an officer, transfer agent, or registrar at the date of issue.
Section 5. LOST CERTIFICATES. Except as provided in this Section 5, no new
certificates for shares shall be issued to replace an old certificate unless the
latter is surrendered to the Corporation and cancelled at the same time. The
Board of Directors may, in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the Board may require,
including provision for indemnification of the Corporation secured by a bond or
other adequate security sufficient to protect the Corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft, or destruction of the certificate or the issuance of
the replacement certificate.
Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of
the Board, the President, or any Vice President, or any other person authorized
by resolution of the Board of Directors or by any of the foregoing designated
officers, is authorized to vote on behalf of the Corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the Corporation. The authority granted to these officers to vote or
represent on behalf of the Corporation any and all shares held by the
Corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
California General Corporation Law shall govern the construction of these
Bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
Section 8. REIMBURSEMENT. if all or part of the salary or any other
compensation paid to a Shareholder-employee or Shareholder-officer or
Shareholder-Director of the Corporation is finally determined not to, be
allowable as a federal or state income tax deduction to the Corporation then
-25-
<PAGE>
said Shareholder shall repay to the Corporation the amount disallowed. The Board
of Directors shall enforce repayment of each such amount disallowed.
Section 9. COVENANT NOT TO COMPETE. No Shareholder shall, directly or
indirectly, whether as a partner, employee, creditor, shareholder, or otherwise,
promote, participate, or engage in any activity or other business competitive
with this Corporation's business. In the event any Shareholder desires to engage
in any such activity, said Shareholder may sell, transfer or return such shares
to the Corporation or other Shareholders of the Corporation in accordance with
Article X of these Bylaws, at which time this Covenant Not to Compete will be
erased with regard to such Shareholder.
ARTICLE ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the Articles of Incorporation of the Corporation set forth the number of
authorized Directors of the Corporation, the authorized number of Directors may
be changed only by an amendment of the Articles of Incorporation.
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
Shareholders as provided in Section 1 of this Article IX, to adopt, amend, or
repeal Bylaws, Bylaws may be adopted, amended, or repealed by the Board of
Directors, provided, however, that the Board of Directors may adopt a Bylaw or
amendment of a Bylaw changing the authorized number of Directors only for the
purpose of fixing the exact number of Directors within the limits specified in
the Articles of Incorporation or in Section 2 of Article III of these Bylaws.
(a) The Board of Directors may adopt a Bylaw or amendment of a Bylaw
changing the authorized number of Directors only for the purpose of fixing the
exact number of Directors within the range of numbers authorized in the Articles
of Incorporation or in Section 2 of Article III of these Bylaws;
(b) The Board of Directors may not alter or repeal this Section 2 of
this Article IX.
-26-
<PAGE>
ARTICLE X
RESTRICTIONS ON TRANSFER OF SHARES
Before there can be a valid sale or transfer of any of the shares of
the Corporation by any holder thereof, he shall first offer the shares to the
other Shareholders and then to the Corporation in the following manner:
(1) Such offering Shareholder shall deliver to the Secretary of
the Corporation, a copy of the written agreement concerning the proposed sale,
whether the same is executed or not, and if not in writing, then a written
notice identifying the proposed purchaser(s) and stating the price, terms and
conditions of such proposed sale or transfer, the number of shares to be sold or
transferred, and his intention so to sell or transfer such shares. Within thirty
(30) days thereafter, the Secretary of the Corporation shall, mail or deliver to
each of the other Shareholders a notice setting forth the particulars concerning
such shares described in the notice received from the offering Shareholder. The
other Shareholders shall have the right to purchase all of the shares specified
in such Secretary's notice by delivering to the Secretary by mail or otherwise a
written offer or offers to purchase all or any specified number of such shares
upon the terms so described in the Secretary's notice if such offer or offers
are so delivered to the Secretary within thirty (30) days after mailing or
delivering such Secretary's notice to such other Shareholders. If the total
number of shares specified in such offers so received within such period by the
Secretary exceeds the number of shares referred to in such Secretary's notice,
each offering Shareholder shall be entitled to purchase such proportion of the
shares referred to in such notice to the Secretary, as the number of shares of
this Corporation which he holds bears to the total number of shares held by all
such Shareholders desiring to purchase the shares referred to in such notice to
the Secretary.
(2) If all of the shares referred to in such notice to the
Secretary are not disposed of under such apportionment, each Shareholder
desiring to purchase shares in a number in excess of this proportionate share,
as provided above, shall be entitled to purchase such proportion of those shares
which remain thus undisposed of, as the total number of shares which he holds
bears to the total number of shares held by all of the Shareholders desiring to
purchase shares in excess of those to which they are entitled under such
apportionment.
-27-
<PAGE>
(3) If all of the shares referred to in such notice to the
Secretary are not disposed of in accordance with the foregoing provisions, the
Corporation shall have the right to purchase all of such shares so offered at
the price and upon the terms and conditions stated in such notice. Should the
Corporation fail to purchase all of such shares at the expiration of said time
period, within thirty (30) days thereafter the restriction on transfer of shares
shall no longer be effective with respect to such transaction and the
Shareholder desiring to sell or transfer his shares may dispose of all shares of
stock referred to in such notice to the Secretary to the person or persons set
forth in the notice; provided, however, that he shall not sell or transfer such
shares at a lower price or on terms more favorable to the purchaser or
transferee than those specified in such notice to the Secretary.
(4) Any sale or transfer or purported sale or transfer of the
shares of the Corporation shall be null and void unless the terms, conditions,
and provisions of this Article X are followed. Following any sale or transfer as
provided in this Article, the shares held by the purchaser or transferee shall
be subject to the restrictions set forth in this Article X.
(5) The restrictions on transfer of shares as provided herein may
be waived as to a particular transaction by the filing of a written waiver of
such restriction signed by all the Shareholders of the Corporation with the
Secretary 0 f the Corporation. Such waiver shall designate the particular
transaction as to which such waiver shall be effective.
(6) Notwithstanding the provisions of Article IX of these Bylaws,
this Article X may be amended or repealed only by the vote or written assent of
Shareholders holding 66 2/3 percent of the outstanding shares entitled to vote.
(7) Regarding this Article X and all provisions, terms,
subdivisions, paragraphs and subparagraphs thereof, the terms "sale" and/or
"Transfer" shall mean any event, transaction or circumstances whatsoever, as a
result of which, or in connection with, any legal, equitable or security
interest in any stock in SHR CORPORATION is, or is claimed to be, acquired or
owned by a person who previously or otherwise did not acquire or own that
interest. A "sale" and/or "transfer" for the purposes of this entire Article X
and any provision or subpart hereof may occur either voluntarily or
involuntarily or by operation of law. The meaning of the terms "sale" and/or
"transfer" includes, by way of illustration, but is not limited to any of the
following: ... any sale or purchase; any assignment, however evidenced or done;
any change of possession or endorsement or assignment of certificate; any
-28-
<PAGE>
attachment, execution or other levy; any process or order of any court, judge,
referee, receiver, trustee, commissioner, marshal, or other officer or official;
and commencement by or against a Shareholder of any proceedings under any law
relating to bankruptcy or insolvency; the making of an assignment for the
benefit of creditors or appointment of a creditor's committee; appointment or a
receiver, trustee, guardian or conservator; death; creation or termination of a
joint tenancy or other co-ownership; as between spouses, conversion in any
manner to or from community property ownership if the result is the right to
vote upon any shares by any person who prior to such conversion did not have the
right to vote upon those shares; contribution to or distribution from any
partnership, corporation or other party; transfer to or out of any trust or
estate; distribution by any trust or estate; any order or judgment of specific
performance or other specific release; any gift; any bequest by death.
Notwithstanding anything within Article X or any part thereof to the
contrary, the terms "sale" and/or "transfer" shall NOT include the sale,
assignment, gift, conveyance, bequest (or any transfer resulting from death) of
any SHR CORPORATION stock from a Shareholder of SHR CORPORATION to another
person who previously and concurrently owned and acquired other stock in SHR
CORPORATION. Thus, by way of illustration, but not limited to this example, the
transfer or sale of shares by one Shareholder to another Shareholder shall be
exempt from all provisions and restrictions contained wihtin this Article X.
Further, notwithstanding anything within Article X or any part thereof
to the contrary, the terms "sale" and/or "transfer" shall also NOT include the
sale, assignment, gift, conveyance, bequest (or any transfer resulting from
death) of any SHR CORPORATION stock from a Shareholder of SHR CORPORATION to any
spouse or lineal descendant of any Shareholder of SHR CORPORATION.
----------------
-29-
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of SHR
CORPORATION, a California Corporation; and
(2) That the foregoing Bylaws, comprising twenty nine (29) pages,
constitute the Bylaws of such Corporation as duly adopted by action of the
incorporator of the Corporation duly taken on July 1, 1988.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of such Corporation this 1st day of July, 1988.
/s/ Scott M. Sakata
----------------------------------------
SCOTT M. SAKATA
Secretary
-30-
Exhibit 5.05
ProtoSource Corporation
Page 1
November 18, 1997
November 18, 1997
ProtoSource Corporation
2800 28th Street
Santa Monica, CA 90405
Re: Registration Statement for 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 up to 1,035,000 Units of its securities, each Unit
consisting of one share of no par value common stock ("Common Stock") and one
common stock purchase warrant ("Warrant") 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.
<PAGE>
ProtoSource Corporation
Page 2
November 18, 1997
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.
Based upon the foregoing and in reliance thereon, it is our opinion that
the Units, 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 fully 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,
Gary A. Agron
Exhibit 10.17
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made this 3rd day of April, 1997
between Protosource Corporation, a California corporation, ("Employer") and
Raymond Meyers, ("Employee").
This Agreement is made with respect to the following facts:
A) Employer is engaged in the business of providing internet access and
related services.
B) Employee has skills and experience which Employer can utilize in its
business.
C) Employer desires to employ Employee as chief executive officer and
Employee desires to accept such employment, and has been employed by
Employer since December 1, 1996.
D) This Agreement is intended to formally reduce to writing and
memorialize the agreement between Employer and Employee with respect
to Employee's employment by Employer.
Now, Therefore, in consideration of the mutual promises contained herein
Employer and Employee agree to the following terms and conditions of employment:
1. TERM
----
This Agreement shall commence on January 1, 1997 and terminate January 1,
1999 as unless earlier terminated as provided for in Section 9 hereof.
2. EMPLOYMENT
----------
Employee shall serve as chief executive officer of Employer throughout the
term of this Agreement. Employee shall have all authority customarily granted to
a chief executive officer including but not limited to hiring and firing of all
employees of Employer, fixing the compensation of such employees, unless board
of directors approval is required, and generally conducting the day to day
business operations of Employer. Employee shall report only to the board of
directors of Employer.
Employer may not change Employee's position without Employee's prior
written consent. Any attempt by Employer to make any material changes to
Employees authority without Employee's prior written consent shall be deemed, at
Employee's option, a breach of this Agreement.
Employee agrees to faithfully perform the duties of chief executive officer
to the best of Employee's ability and to devote such time as is reasonably
necessary to perform those duties.
<PAGE>
3. SALARY
------
Employee's salary for the first year of the term of this Agreement shall be
$110,000.00 and for the second year of the term $140,000.00. Employer shall
deduct and pay all applicable taxes and other deductions required by law from
Employee's salary.
Salary shall be paid periodically in accordance with Employer`s standard
practices, but no less than monthly.
4. EMPLOYEE BENEFITS
-----------------
Employee shall be entitled to all employee benefits provided to employees
of Employer as well as the following whether or not generally provided:
a) Term life insurance insuring the life Employee for $1,000,000.00.
b) Health insurance coverage provided to company employees insuring
Employee and his family. Such insurance shall be provided at no cost
to employee.
c) Automobile allowance of $700.00 per month.
d) Disability insurance coverage insuring payment of Employee's full base
salary for the term of this Agreement in the event Employee becomes
disabled.
5. ADDITIONAL COMPENSATION
-----------------------
Employee shall receive the following additional compensation based upon the
net income of Employer before taxes.
NET INCOME EMPLOYEE'S BONUS
---------- ----------------
$500,000.00 - $600,000.00 $25,000.00
$600,000.00 - $750,000.00 $35,000.00
$750,000.00 - $1,000,000.00 $50,000.00
$1,000,000.00 - $1,250,000.00 $60,000.00
Over $1,250,000.00 $75,000.00
Net income shall be determined in accordance with generally accepted
accounting practices and shall include extraordinary items.
2
<PAGE>
Payment shall be made to Employee of the full bonus amount, less applicable
taxes, within sixty (80) days from the end of Employer's fiscal year ending
December 31. Should this Agreement be terminated prior to expiration of its
term, Employee shall be entitled to a bonus based upon the Employer's
prorata results, (example, if this Agreement is terminated as of June 30,
Employee's bonus would be $12,500 if net income is between $250,000 -
$300,000). Payment shall be made to Employee within sixty (60) days of
termination.
6. STOCK OPTION
-------------
Employee is hereby granted the option to acquire shares of Employer's
capital stock at the price of $0.25 per share. This option is effective as of
the date of this Agreement and may be exercised by Employee in accordance with
the following scheduled:
a) 200,000 shares on or after January 1, 1997
b) 200,000 shares on or after January 1, 1998
c) 150,000 shares on or after January 1, 1999
Provided, however, that should substantially all of Employer's capital
stock or assets be subject to an agreement for acquisition or merger, or
Employer acquires another entity, Employee may prior to the closing of such
acquisition or merger immediately exercise the remaining balance of unexercised
options. All options shall expire if not exercised by October 31, 2001.
7. EXPENSE REIMBURSEMENT
---------------------
Employer shall reimburse Employee for all reasonable out of pocket expenses
that Employee shall incur in connection With promoting the business of Employer
and performing his duties under this Agreement. Upon request, Employee shall
support such request for reimbursement with appropriate receipts or other
evidence of incurring such expenses.
8. DISABILITY OF EMPLOYEE
----------------------
Should Employee be unable to perform his duties pursuant to this Agreement
due to disability, Employee shall continue to receive his base salary and
employee benefits during the period of disability, up to and including the
remaining term of this Agreement. Such payment shall make up for any amount not
covered by disability insurance.
9. TERMINATION
-----------
Employee's employment under this Agreement shall terminate:
3
<PAGE>
a) Upon expiration of the term of this Agreement as set forth in Section
1 hereof unless extended by the mutual agreement of Employer and
Employee.
b) Employer may terminate this Agreement only for cause upon ten (10)
days prior written notice, and upon a majority vote of Employer's
board of directors. Cause shall be defined as and be limited to:
(1) Employee's gross negligence or wilful misconduct which materially
adversely effects Employer's business.
(2) Employee's wilful failure to perform the duties prescribed in
this Agreement.
10. LIABILITY INSURANCE/INDEMNIFICATION
-----------------------------------
Throughout the term of this Agreement and any extension thereof, Employer
shall provide Employee with officers and directors liability insurance average
in an amount not less than $3,000,000. Failure of insurance to cover and act or
omission for which Employer would otherwise have a duty to indemnify Employee
under applicable law shall not relieve Employer of such duty to indemnify
Employee.
11. REPRESENTATION AND WARRANTIES OF EMPLOYER
Employer hereby represents and warrants that:
a) All appropriate corporate action has been taken to approve this
Agreement and the party signing on behalf of Employer has full
authority to bind Employer to its terms.
b) Employer has fully disclosed to Employee all material facts concerning
Employer and its financial condition upon which Employee would
reasonably rely in accepting employment with Employer.
12. NOTICE
------
All notices, requests, demands, instructions or other communications to be
given to any party hereunder shall be in writing and shall be deemed to have
been duly given (i) on the date of service if personally served on the party to
whom notice is to be given; (ii) within twenty-four (24) hours after mailing, if
mailed to the party to whom notice is to be given, by first class mail which is
registered or certified, return receipt requests, postage prepaid; (iii) within
twenty-four (24) hours after being
4
<PAGE>
deposited with a recognized private courier service (e.g., Federal Express), if
delivered by a private courier service to the party to whom notice is to be
given, all charges prepaid; or (iv) when sent, if given by telex or telecopy.
Any notice, request, demand, instructions or other communication sent by telex
or telecopy must be confirmed within twenty-four (24) hours by letter mailed or
delivered in accordance with this Section. All notices shall be properly
addressed to tho party receiving notice as follows:
If to Employer to:
2300 Tulare St., Suite 210
Fresno, CA 93721
If to Employee to:
851 Iliff Street
Pacific Palisades, CA 90272
The address for the purposes of this Section may be changed by giving written
notice of such change.
13. GENERAL PROVISIONS
------------------
a) Nothing contained in this Agreement shall be construed to require the
commission of any act contrary to law, and whenever there is any
conflict between any provision of this Agreement and any statute, law,
ordinance, or regulation, contrary to which the parties have no legal
right to contract, then the latter shall prevail; but in such an
event, the provisions of this Agreement so affected shall be curtailed
and limited only to the extent necessary to bring it within the legal
requirements.
b) Failure to insist upon strict compliance with any of the terms,
covenants, and conditions hereof shall not be deemed a waiver of such
term, covenant or condition. No waiver of any of the provisions of
this Agreement shall be deemed, or shall constitute a waiver of any
other provision, whether or not similar, not shall any waiver
constitute a continuing waiver and no waiver shall be binding unless
contained in a writing specifically referring to this Agreement and
executed by the party making the waiver.
c) The invalidity or unenforceability of any provision hereon shall in no
way affect the validity or enforceability of any other provision.
5
<PAGE>
d) This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter contained herein and supersedes all
prior and contemporaneous agreements, representations and
understandings, whether oral or written, of the parties and none shall
be available to interpret or construe this Agreement. No supplement,
modification or amendment of this Agreement shall be binding unless
contained in a writing specifically referring to this Agreement and
executed by Employee and Employer, approved by a majority vote of
Employer's Board of Directors.
e) The paragraph headings used in this Agreement are for reference and
convenience only, and shall not in any way limit or amplify the terms
and provisions hereof, nor enter into the interpretation of this
Agreement.
f) This Agreement shall inure to the benefit of and be binding upon the
parties and their respective heirs, executors, administrators,
successor and assigns, except that the duties and obligations of
Employee hereunder may not be delegate or assigned.
g) Employer and Employee agree that this Agreement and performance under
it, and all suits and special proceedings that may ensue from its
breach, be construed in accordance with and under the laws of the
State of California.
h) In the event an action is brought by either party related to this
Agreement the prevailing party shall be entitle to recover, in
addition to any other remedy, reasonable attorney's fees and costs.
EMPLOYER EMPLOYEE
PROTOSOURCE CORPORATION
BY: /s/ RAYMOND MEYERS
------------------------------------ ---------------------------------
TITLE:
---------------------------------
6
Exhibit 10.18
BRIDGE LOAN AGREEMENT
ProtoSource Corporation (the "Company")
2300 Tulare Street, Ste 210
Fresno, California 93721
To: Raymond Meyers, Chief Executive Officer
The undersigned (the "Lender") hereby promises to lend, as provided herein, the
amount specified in Item 2 below in the Company. ProtoSource Corporation (the
"Borrower") shall execute a series of notes in connection with the extension of
credit made by various Lenders in the aggregate principal amount up to $750,000
(the "Credit"). In consideration of the extension of the Credit, each Lender
shall receive shares of the Common stock in proportion to the amount of the
Credit which is extended by such Creditor; the aggregate number of shares of
Common Stock of the Borrower shall be up to 150,000 shares.
1. ACKNOWLEDGEMENT OF RECEIPT
Lender hereby acknowledges receipt of a copy of the Company's Prospectus
dated May 14, 1997, the Company's Form 10-QSB dated March 31, 1997, and the
Company's Proxy Statement dated April 10, 1997, and the other documents relating
to an investment in the Common Stock that were included therein or were received
by the Lender from the Company or from another party acting on behalf of the
Company prior to executing this Agreement (collectively, the "Offering
Documents"). Terms used herein without definition shall have the meanings
assigned thereto in the Offering Documents.
2. PAYMENT
Subject to the terms and conditions set forth in the Offering Documents,
the Lender is hereby required, together with other lenders, to lend the Company
an amount not to exceed Seven Hundred Fifty Thousand ($750,000) Dollars. Such
amount is to be raised on a Best Efforts basis and may be advanced immediately
for use by the Company upon receipt of same. These loans, together comprising
the Bridge Loan are to be made subject to the form or promissory Note attached
hereto as Exhibit A. Andrew, Alexander, Wise & Company Incorporated (the
"Placement Agent"), will transfer the loan amounts as received by the Lenders.
Subsequent to the execution of the Bridge Loan, and subject to the approval of
the National Association of Securities Dealers, Inc. ("NASD"), the Placement
Agent intends to raise a minimum of Four Million ($4,000,000) Dollars through a
secondary public offering of the Company's Shares, (the "Secondary Offering").
The Placement Agent will transfer the Subscription payment less ten percent
(10%) sales commission and three percent (3%) non-accountable expense allowance
earned in the placement of the Bridge Loan as such funds are received by said
Placement Agent. In the event that the Subscription payment amount is received
directly by the Company, the Company shall forward to Placement Agent any fees
due in connection with such Subscription.
Page 1
<PAGE>
3. ACCEPTANCE OF LOAN
The Company has the right to accept or reject the Loan in whole or in part. This
Agreement will be deemed to be accepted by the Company only when signed by the
Company. Once accepted by the Company, this loan is irrevocable except (a) as
required by applicable state securities laws, and (b) as otherwise provided in
the Offering Documents.
4. Lender UNDERSTANDS THAT:
(a) No federal or state agency has made any finding or determination as to
the fairness of the offering for investment, or any recommendation or
endorsement, of the Common Stock.
(b) Lender's right to transfer all or any part of the Common Stock will be
restricted for the reasons and in the manner set forth in the Offering
Documents, and such Common Stock may not be transferred unless registered under
the Securities Act of 1933, (the "Securities Act"), and any applicable state
securities laws, or an exemption from such registration is available. Lender
recognizes that the Company has not made any representations with respect to
registration of the Common Stock under the Securities Act or any applicable
state securities laws, other than set forth in Section 4(c) below, that the
exemption afforded by Rule 144 under the Securities Act will be available, that
there is an active current market for the Common Stock, and that a sale of the
Common Stock by the Lender will accordingly be restricted.
(c) The Company will use cause a registration statement under the
Securities Act covering the Common Stock (the "Registration Statement") to be
filed with the Commission upon the first to occur of (i) December 31, 1997; or
(ii) concurrently with the final closing date for the Secondary Offering, and
will use its Best Efforts to cause such Registration Statement to become
effective as soon as practicable. All expenses of the Registration Statement
including, but not limited to, legal, accounting, printing and other related
fees will be borne by the Company.
5. Lender HEREBY REPRESENTS, WARRANTS AND AGREES THAT:
(a) Lender is acquiring the Common Stock for Lender's own account for
investment and not for the account of others or with a view to distribution or
resale of such Common Stock or any interest therein. Lender shall not sell,
hypothecate or otherwise dispose of Common Stock except as permitted by the
Offering Documents and unless such Common Stock is registered under the
Securities Act and any applicable state securities laws or in the opinion of
counsel, an exemption from the registration requirements of the Securities Act
and any applicable state securities laws is available.
(b) Lender is aware that Common Stock may not be liquidated readily in
cases of emergency. Lender has adequate means of providing for Lender's current
needs and possible personal contingencies and has no need for liquidity of this
investment.
Page 2
<PAGE>
(c) Lender has carefully read and understands the terms of the Offering
Documents, and the Company has made available to Lender all other documents that
Lender has requested relating to an investment in the Common Stock and has
afforded Lender the opportunity to discuss the investment with and to ask
questions of the Company and has provided answers to all of Lender's questions
concerning the offering of Common Stock. The Company has also afforded Lender
the opportunity to obtain any additional nonproprietary information necessary to
verify the accuracy of any information in the Offering Documents. In evaluating
the suitability of an investment in the Common Stock, Lender has not received or
relied upon any representations or other information (whether oral or written)
made by the Company other than as set forth in the Offering Documents or as
contained in other documents supplied at the request of Lender as aforesaid.
(d) Lender recognizes that an investment in the Common Stock involves
certain risks and Lender has taken full cognizance of and understands all of the
risk factors related to a purchase of the Common Stock, including, without
limitation, those set forth in the "RISK FACTORS" attached hereto as Exhibit B.
(e) Lender has not relied upon the Company for any tax or legal advise in
connection with Lender's purchase of Common Stock, and Lender has consulted
Lender's own adviser with respect to the tax and other legal aspects of the
acquisition of Common Stock.
(f) Lender will not duplicate or furnish copies of the Offering Documents
to persons other than Lender's investment and tax advisors, accountants or legal
counsel assisting Lender in the evaluation of the Common Stock.
(g) Lender has such knowledge and experience in financial and business
matters generally that Lender is capable of evaluating the meets and risks of an
investment in the Common Stock. Lender, or Lender's professional advisor, has
the capacity to protect Lender's concerns in connection with the purchase of
Common Stock, and Lender is able to bear the economic risk of an investment in
Common Stock.
(h) Lender, if a corporation, partnership, trust or other entity, is duly
formed and is validly existing and in good standing under the laws of its
jurisdiction of organization and has all powers and is authorized, has taken all
required action, and otherwise has duly qualified to execute and perform this
Agreement and to purchase and hold the Common Stock, and this Agreement has been
duly executed and delivered by Lender and constitutes the legal, valid and
binding obligation of Lender enforceable against Lender in accordance with its
terms. The Individual signing this Agreement on behalf of Lender represents that
he or she has full power and authority to execute and deliver this Agreement in
such capacity and on behalf of Lender. Lender and/or the individual signing this
Agreement on Lender's behalf will provide to the Company such information as its
shall reasonable request to substantiate the foregoing. Lender has furnished to
the Corporation:
1. if the Lender is a corporation, the articles or certificate of
incorporation and by-laws
Page 3
<PAGE>
of the Lender and a copy (certified by the secretary or other authorized
officer of the Lender) of appropriate corporate resolutions authorizing
Lender's investment in the Common Stock;
2. if Lender is a trust, the trust agreement of Lender;
3. if Lender is a partnership, the partnership agreement (or other
evidence of due authorization to make Lender's investment in the
Common Stock.
(i) Lender, if executing this agreement in a representative or fiduciary
capacity, has full power and authority to execute and deliver this Agreement in
such capacity and on behalf of the subscribing individual for whom Lender is
executing this Agreement, and such individual has full right and power to
perform pursuant to this Agreement and become a shareholder of the Corporation.
(j) Lender, if a corporation, partnership, trust or other entity, was not
formed reformed or recapitalized for the specific purpose of investing in the
Company.
(k) Lender will make such additional representations and warranties and
furnish such information regarding Lender's investment experience and financial
position as the Company may reasonably require. All information that Lender has
provided to the Company is correct and complete as of the date set forth below
and if there should be any material change in the information set forth herein
or in any other information provided to the Company prior to Lender's admission
to the Company, Lender will immediately furnish such revised or corrected
information to the Company.
6. Lender understands the meaning and legal consequences of the
representations and warranties and the restrictions and limitations on transfer
contained in this Agreement and in the Offering Documents and hereby agrees to
indemnify and hold harmless the Company, the Board members, and their
affiliates, advisors, agents and employees, from and against any and all loss,
damage or liability due to or arising out of any inaccuracy in or breach or any
of those representations or warranties by Lender. Notwithstanding the provisions
of this Section 6, however, no representation, warranty, acknowledgement or
agreement made in this Agreement by Lender will in any manner be deemed to
constitute a waiver of any rights granted to Lender under federal or state
securities laws. Lender acknowledges specifically that the representations and
warranties and understandings and agreements set forth in this Agreement will
survive the date of this Agreement.
7. CERTIFICATION OF STATUS AS AN ACCREDITED INVESTOR
Lender certifies that Lender qualifies as an "accredited investor" within
the meaning of Rule 501 (a) of Regulation D promulgated under the Securities
Act, [for the reason set forth herein]. The Lender if an entity has checked the
appropriate box below indicating Lender's status as an accredited investor:
(check applicable box)
Page 4
<PAGE>
Certain Entities
[ ] (A) a bank, as defined in Section 3(a)(2) of the Act or a savings and
loan company or other institution as defined in Section 3(a) (5) (A) of the
Act;
[ ] (B) a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934, as amended;
[ ] (C) an insurance company as defined in Section 2(13) of the Act;
[ ] (D) an investment company registered under the Investment Company Act of
1940, as amended or a business development company as defined in Section
2(a)(48) thereunder;
[ ] (E) A small business investment company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958, as amended;
[ ] (F) a private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940, as amended;
[ ] (G) an organization described in Section 50l(c)(3) of the Internal
Revenue Code of 1986, as amended, or a corporation, Massachusetts or
similar business trust, or partnership not formed for the specific purpose
of acquiring the securities offered in the offering in the offering, with
total assets in excess of $5,000,000; or
[ ] (H) a trust with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered in the offering, whose
purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) promulgated under the Act; or
[ ] (I) a corporation or partnership in which each and every shareholder of
such corporation or each and every partner (including, in the case of a
limited partnership, each and every limited partner) of such partnership is
an "accredited investor" as such term is defined in Rule 501 (a)
promulgated under the Act.
OTHER
[ ] (J) Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase exceeds $1,000,000;
[ ] (K) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
Page 5
<PAGE>
[ ] (L) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person described as having such knowledge and
experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment, or the
issuer reasonably believes immediately prior to making the sale that such
purchaser comes within this description;
[X] (M) Any entity in which all of the equity owners are accredited investors.
8. CERTIFICATION OF STATUS AS A UNITED STATES PERSON
Lender hereby certifies under penalties of perjury that: (i) if Lender is a
natural person, he or she is a citizen or resident of the United States, or (ii)
if Lender is a partnership, corporation, trust or other entity, it was organized
under the laws of one of the 50 States of the United States (or the laws of the
District of Columbia).
9. MISCELLANEOUS
(a) Failure by the Company to exercise any right or remedy under this
Agreement or any other agreement between the Company and Lender, or delay by the
Company in exercising the same, shall not operate as a waiver. No waiver by the
Company shall be effective unless it is in writing and signed by the Company.
(b) In the event that any provision of this Agreement is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict with such statute
or rule of law and shall be deemed modified to conform therewith. Any provision
hereof which may prove invalid or unenforceable shall not affect the validity or
enforceability of any other provision hereof.
(c) Notices required or permitted to be given under this Agreement shall be
in writing and shall be deemed to be sufficiently given when sent by registered
or certified United States mail, postage prepaid, addressed to the party for
whom intended at the address of such party as set forth below.
(d) This Agreement is not transferable or assignable by Lender.
(e) This Agreement and all questions relating to its validity,
interpretation, performance, and enforcement shall be governed and construed in
accordance with the laws of the State of New York, without giving effect to
conflict of law principles (except insofar as affected by the state securities
or "Blue Sky" laws of the jurisdiction in which the offerings described herein
have been made). Lender understands that this Agreement (i) shall be binding
upon Lender and Lender's legal representatives, successors and assigns and shall
inure to the benefit of the Company, its successors and assigns, (ii) shall
survive Lender's admission as a shareholder of the Company; (iii) shall, if
Page 6
<PAGE>
Lender consists of more than one person, be the joint and several obligations of
all such persons; and (iv) may be executed by Lender and accepted by the Company
in one or more counterparts, each of which shall be an original and all of which
together shall constitute one instrument.
10. FOR NEW YORK RESIDENTS
Lender understands that the offering of Common Stock has not been reviewed
by the Attorney General of the State of New York because of the Company's
representations that this is intended to be a non-public offering pursuant to
Regulation D promulgated under the Securities Act, and that if all of the
conditions and limitations of Regulation D are not complied with, the offering
will be resubmitted to the Attorney General for amended exemption. Lender
understands that any offering literature used in connection with this offering
has not been pre-filed with the Attorney General and has not been reviewed by
the Attorney General. The Common Stock is being purchased for Lender's own
account for investment, and not for distribution or resale to others. Lender
agrees that Lender will not sell or otherwise transfer the Common Stock unless
an exemption from such registration is available. Lender represents that Lender
has adequate means of providing for Lender's current needs and possible personal
contingencies, and that Lender has no need for liquidity of this investment.
All documents, records, and books pertaining to this investment have been
made available for inspection by Lender's attorney and/or Lender's accountant
and Lender, and the books and records of the Company will be available upon
reasonable notice, for inspection by investors at reasonable hours at its
principal place of business.
11. FORM OF OWNERSHIP
Please indicate the form of ownership you desire for the Common Stock;
Individual (one signature required)
- ----
Joint Tenants with Right of Survivorship (all parties must sign)
- ----
Tenants in Common (all parties must sign)
- ----
Tenants by the Entirety (all parties must sign)
- ----
Community Property (one signature required if interest held in one name,
i.e. managing spouse; two signatures required if interest is held in both
names)
- ----
X Corporation (signature of authorized officer or officers required)
- ----
Partnership (signature of general partner and any additional signatures
required by partnership agreement required)
- ----
Page 7
<PAGE>
Trust (signature of trustee and any additional signatures required by trust
instrument required)
- ----
Other Entities (all signatures required by governing instrument required)
- ----
Please PRINT below the exact name (registration) you desire for the Common
Stock:
World Spirit Inc.
- ------------------------------
In WITNESS WHEREOF, Lender has executed this Agreement this 16th day of June
1997.
If Lender is a Natural Person:
- ------------------------------
(Signature of Lender)
- ------------------------------
(Name of Lender)
(Please Print of Type)
If Lender is not a Natural Person:
World Spirit Inc.
- --------------------------------
(Type or Print Name of Corporation, Partnership, Trust or Other Entity)
- --------------------------------
(Signature of Individual Signing)
(Capacity of Individual Signing on behalf of Corporation, Partnership, Trust
or Other Entity)
Page 8
<PAGE>
Investment Representation Letter and Agreement
Name: World Spirit Inc.
Address: 350 5th Ave., suite 6603
New York, New York 10018
June 16, 1997
ProtoSource Corporation
2300 Tulare Street, Suite 210
Fresno, California 93721
I am receiving 50,000 (50,000) 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 resale 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 Hares 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 Company's definitive prospectus dated May 14, 1997,
the Company's last Form 1O-QSB, and its proxy statement dated April 10, 1997,
and 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 19337 as amended (the "Act"), or qualified
under any state securities law. These securities may not be sold,
transferred, pledged or hypothecated in 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. I have consulted with the 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 meets
of the risks of an investment in the Shares, and the undersigned, fully aware of
the risks involved, has determined that an investment in the Shares is
consistent with the undersigned's investment objectives. The undesigned is
relying solely o~ e undersigned's own tax advisors with respect to the tax
factors relating to an investment in the Shares.
6. I understand that 10% of my loan proceeds to the (Company will be used
to pay sales commissions to Andrew, Alexander Wise and Company, Incorporated
(hereinafter "AAWC") ~ connection with this transaction. In addition, I
understand that AAWC shall be allocated an additional 3% of my loan proceeds as
and for a non-accountable expense allowance.
7. I hereby agree as follows:
(a) If the undersign, or any subsequent holder, desires to transfer any of
the Shares, the undersigned must 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" based 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 Exchanges Act of 1934, as amended any
state securities laws, or the rules and regulations promulgated under any such
acts or laws.
(b) Prior to any such proposed transfer, and as a condition thereto, if
such offer 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) and investment letter setting forth
investment representations of the proposed transferee and such proposed
transferee's covenant to comply with the transfer provisions set forth in this
Section 7 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 set forth in Section 7 (c) hereof.
(c) The undersigned acknowledges that the undersigned understands the
meaning and legal consequences of the representation and warranties contained
herein, and the undersigned hereby agrees to indemnify and hold harmless the
<PAGE>
Company and its agents and representatives and each of their heirs, legal
representative, successors and assigns from and against any and all loss, damage
or liability (including without limitation 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 and
Exchange Act of 1934, as amended, any state securities laws, or the rules and
regulation promulgated under any of such acts or laws, (iii) any transfer of any
to the Shares not in accordance herewith or (iv) any undue 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 any of the Shares or any certificates unto
which such Shares are exchanged.
(e) Notwithstanding the above, the Company will use cause a registration
statement under the Securities Act covering the Common Stock (the "Registration
Statement") to be filed with the Commission upon the first to occur of (i)
December 31, 1997; or (ii) concurrently with the final closing date for the
Secondary Offering and will use its Best Efforts to cause such Registration
Statement to become effective as soon as practicable. All expenses of the
Registration Statement including, but not limited to, legal, accounting,
printing and other related fees will be done by the Company.
8. 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:
(a) 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 one (1) share of its common
stock for each five dollars ($5.00) lent to the Company by the undersigned
investor.
(b) The Company will offer not more than $750,000 of aggregated loans on a
Best Efforts Basis only.
Very truly yours,
World Spirit Inc.
-----------------------------------------
Investor
----------------------------------------
Name (Please Type or Print)
By: President
Accepted and agreed to:
Dated: June , 1997
ProtoSource Corporation, a California corporation
<PAGE>
By:
Name: Raymond Meyers
Title: Chief Executive Officer
<PAGE>
PROMISSORY NOTE
$250,000 New York, New York
- ---------
June 16, 1997
-------------
Date
A. GENERAL; TERMS OF PAYMENT; USE OF PROCEEDS; PREPAYMENT
1. FOR VALUE RECEIVED, the undersigned, ProtoSource Corporation, a
corporation organized under the laws of the State of California (the"Borrower"),
hereby promises to pay to the order of WORLD SPIRIT INC.(the "Lender"), at the
offices of Andrew, Alexander, Wise & Company, Incorporated hereinafter "AAWC")
at 17 State Street, New York, New York 10004 the principal sum of $250,000 on
the first to occur of the following; (i) upon the closing of a public or private
offering of securities of the Borrower for at least $1,000,000 (the "Closing");
or (ii) fifteen months from the date hereof.
The Borrower will pay interest on the unpaid principal amount hereof at the
rate of 12 per cent per annum computed on the basis of a 360-day year, at
maturity (whether by acceleration or otherwise).
The loan proceeds shall be used as bridge financing until the occurrence of
the Closing.
2. PREPAYMENT. The Borrower shall have the right to prepay this Note in
whole or in part at any time without penalty or premium.
B. EVENTS OF DEFAULT; REMEDIES
1. If any of the following events shall occur and be continuing (each an
"Event of Default") (a) the Borrower fails to make any payment when due under
the Note; (b) the Borrower shall default in the performance or observance of any
covenant or agreement contained herein or any agreement between the Borrower and
the Lender; (c) the Borrower sells, agrees to sell, leases, agrees to lease to a
third party all or substantially all of its assets or stock; (d) the Borrower
terminates its business operations; (e) any representation or warranty made by
or on behalf of the Borrower in this Note or in any other certificate,
agreement, instrument or statement delivered to the Lender by or on behalf of
the borrower shall at any time prove to have been incorrect when made in any
material respect; (f) the Borrower shall default in the payment of principal or
interest on any indebtedness for borrowed money including without limitation,
any portion of the Credit (as such term is defined below) of which this loan
forms a part, or shall default in the performance or observance of the terms of
any instrument pursuant to which such indebtedness was created or is secured,
the effect of which default is to cause or permit any holder of any such
indebtedness to cause the same to become due prior to its stated maturity (and
whether or not such default is waived by the holder thereof; (g) any change in
the condition or affairs (financial or otherwise) of the Borrower shall occur
which, in the opinion of the Lender, increases its risk with respect to the loan
evidenced by this Note; (h) any judgement against the Borrower or any
<PAGE>
attachment, levy, or execution against any of there properties for any amount
shall remain unpaid or shall not be released, discharged dismissed, stayed or
fully bonded for a period of thirty (30) days or more after its entry, issue or
levy, as the case may be; (i) the Borrower shall become insolvent or be unable
or admit in writing its inability, to pay its debts as they mature; or (j) the
Borrower shell make an assignment for the benefit of creditors or a trustee,
receiver or liquidator shall be appointed for the Borrower or for any of their
property, or the commencement of any proceeding by the Borrower under any
bankruptcy, reorganization arrangement of debt insolvency, readjustment of debt,
receivership, liquidation or dissolution law or statute, or the commencement of
any such proceeding without the consent of the Borrower and such proceeding
shall continue undischarged for a period of 30 days. Then, the Lender may
declare the entire unpaid principal amount of this Note and all interest and
fees accrued and unpaid hereon to be forthwith due and payable, whereupon the
same shall become and be forthwith due and payable by the Borrower.
2. In case any one or more Event(s) of Default hereunder or under any
related document shall happen and be continuing, Lender may proceed to protect
and enforce Lender's rights either by suit in equity or by action at law, or
both, whether for the specific performance of any covenant, condition, or
agreement contained in this Note, or in aid of the exercise of any power granted
in this Note to enforce any other legal or equitable right of Lender. After an
Event of Default, Borrower shall pay to Lender immediately upon written demand
therefore any amounts reasonably expended or incurred by Lender in collecting
any amount due hereunder including, without limitation, attorneys fees and
costs, whether or not any legal action is instituted in connection therewith.
C. MISCELLANEOUS
1. Amendments. No amendment, modification or waiver of any provision of
this Note nor consent to any departure by the Borrower therefrom shall be
effective unless the same shall be in writing and signed by the Lender and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which it is given.
2. Constructions. This Note shall be deemed to be a contract made under the
laws of the State of New York and shall be construed in accordance with the laws
of said State.
3. Successors and Assigns. This Note shall be binding upon the Borrower and
its heirs, legal representatives, successors and assigns, and the terms hereof
shall inure to the benefit of the Lender and its successors and assigns,
including subsequent borders thereof.
4. Severability. The provisions of this Note are severable, and if any
provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or enforceability shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Note in any jurisdiction.
5. No Waiver: Remedies Cumulative. No failure on the part of the Lender to
exercise and no delay in exercising any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by the Lender of any
right hereunder preclude any other or further exercise thereof or the exercise
<PAGE>
of any other right Borrower hereby waives presentment, demand, protest, notice
of dishonor and all other notices and demands, except as expressly set forth
herein. Borrower also hereby waives the right to trial by jury in any litigation
related to this Note. written.
6. Costs and Expenses. The Borrower shall reimburse the Lender of all costs
and expenses incurred by it and shall pay the reasonable fees and disbursements
of counsel to the Lender connection with the enforcement of the Lenders rights
hereunder. The Borrower shall also pay any and all taxes (other than taxes on or
measured by net income of the holder of this Note) incurred in connection with
the execution and delivery of this Note.
7. Series of Notes. This, Note is one of a series of notes executed by the
Borrower in connection with the extension of credit made by various creditors
(together the "Creditor") in the aggregate principal amount up to $750,000 (the
"Credit~). In consideration of the extension of the Credit, each Creditor shall
receive shares of the Common stock in proportion to the amount of the Credit
which is extended by such Creditor; the aggregate number of shares of Common
Stock of the Borrower shall be up to 150,000 shares.
IN WITNESS WHEREOF, Borrower has executed this Note on the day and year
first above
ProtoSource Corporation
By:
---------------------------------------
Name: Raymond Meyers
Title: Chief Executive Officer
<PAGE>
REGISTRATION RIGHTS AGREEMENT
W I T N E S S E T H:
--------------------
WHEREAS, the Stockholders are the purchasers of am aggregate of 150,000
shares of Common Stock of the Company (the "Shares") issued in connection with
interim financing on this date of the Company in an aggregate amount not to
exceed $750,000 (the "Bridge Financing"), and
WHEREAS, the Company and the Stockholders desire that certain terms and
provisions be applicable to the Shares hereinafter 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 concurrently with the proposed Secondary Public
Offering of the Company's Securities (the "Secondary Offering) to be placed by
Andrew Alexander Wise & Company, Incorporated (the "Placement Agent") or if such
Secondary Offering is not completed by December 31, 1997. The Company will use
its best efforts, through its officers, directors, auditors md 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 hereafter,
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
Stockholder of the Registrable Securities to sell such Registrable Securities
during said two-year period.
Section 2. Piggyback Registration Rights. The Company covenants and agrees
with the Stockholders and any other holders of the Registrable securities that
if, at anytime 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 for 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
Page 1
<PAGE>
Registration Statement, all or any portion of the Shares, and limited, in the
case of a Regulation A offering, 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' co~el fees and sales commissions incurred if the
Registrable Securities be 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 md such holder of Registrable Securities and such
other terms and provisions as are customarily contained in underwriting
agreement with respect to secondary distributors, including, without
limitation, indemnities substantially to the effect and to the extent
provided Section 8. Furthermore, if the underwriter(s) for the offering
being registered by the Company shall determine ln 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 and 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 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 requested to be included therein by
the holders requesting such registration and the Registrable Securities
requested to be included in such
Page 2
<PAGE>
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 the
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
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
Stockholder's. 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 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 E;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 hereunder, 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 without registration under the Act within the
limitation of the exemptions provided by (i) Rule 144
Page 3
<PAGE>
under the Act, as such Rule may be amended from time to tune, or (ii) any
similar rule or regulation hereafter adopted by the SEC. Upon the 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 complied 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 my
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,
(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
Page 4
<PAGE>
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 my 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
re~red to be stated therein or necessary to malice 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 of 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.
(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 the Section ii(a) of the Act; and
Page 5
<PAGE>
(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 any special audits
required by or incident to such performance and compliance, premiums and other
costs of policies 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 an disbursements of counsel and accountants for any
holder of Registrable Securities or other expenses incurred by 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:
(s) 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 person, if any' who
controls such holder or such underwriter within the meaning of Section 15
of the Act or 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, costs and expense (including, without limitation,
reasonable legal expenses) to which such holder or any such underwriter,
officer, director, employee, agent, counsel of 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
Page 6
<PAGE>
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 of 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 thereon, 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 or such holder specifically for use
in the preparation thereof,
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of Section 7(a) or (b) of notice of the commencement of any
action involving the subject matter of the foregoing indemnity provisions,
shall indemnified part 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 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 Section 7(a) or (b)
for any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense
Page 7
<PAGE>
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 equable 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 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, dan~ages and liabilities referred to above shall be deemed
to include, subject to the limitations set for~ 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 1 l(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 amy agreement with respect to its
securities which is inconsistent with the rights granted to the holders of
Registrable Securities, 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 the securities of the
Company under any other agreements.
Page 8
<PAGE>
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, ret~n 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 ma~ling, 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 New York without regard to principles of conflict of laws.
(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 writing executed by each of them.
(d) This Agreement shall be binding upon and inure to the benefit of each
of the Stockholder' 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 ~e fact that such courts
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 provisions of this Agreement
shall not affect the validity or enforceability of any other provision of
this Agreement.
Page 9
<PAGE>
(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 or 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.
(j) This Agreement may be executed by 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
firrt written above.
ProtoSource Corporation
By:
-------------------------------------
Name: Raymond Meyers
Title: Chief Executive Officer
- ------------------------------- -------------------------------------
WORLD SPIRIT INC.
- ------------------------------- -------------------------------------
By Its President
Page 10
Exhibit 10.19
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made this 3rd day of April, 1997
between Protosource Corporation, a California corporation, ("Employer") and
Raymond Meyers, ("Employee").
This Agreement is made with respect to the following facts:
A) Employer is engaged in the business of providing internet access and
related services.
B) Employee has skills and experience which Employer can utilize in its
business.
C) Employer desires to employ Employee as chief executive officer and
Employee desires to accept such employment, and has been employed by
Employer since December 1, 1996.
D) This Agreement is intended to formally reduce to writing and
memorialize the agreement between Employer and Employee with respect
to Employee's employment by Employer.
Now, Therefore, in consideration of the mutual promises contained herein
Employer and Employee agree to the following terms and conditions of employment:
1. TERM
----
This Agreement shall commence on January 1, 1997 and terminate January 1,
1999 as unless earlier terminated as provided for in Section 9 hereof.
2. EMPLOYMENT
----------
Employee shall serve as chief executive officer of Employer throughout the
term of this Agreement. Employee shall have all authority customarily granted to
a chief executive officer including but not limited to hiring and firing of all
employees of Employer, fixing the compensation of such employees, unless board
of directors approval is required, and generally conducting the day to day
business operations of Employer. Employee shall report only to the board of
directors of Employer.
Employer may not change Employee's position without Employee's prior
written consent. Any attempt by Employer to make any material changes to
Employees authority without Employee's prior written consent shall be deemed, at
Employee's option, a breach of this Agreement.
Employee agrees to faithfully perform the duties of chief executive officer
to the best of Employee's ability and to devote such time as is reasonably
necessary to perform those duties.
<PAGE>
3. SALARY
------
Employee's salary for the first year of the term of this Agreement shall be
$130,000.00 and for the second year of the term $140,000.00. Employer shall
deduct and pay all applicable taxes and other deductions required by law from
Employee's salary.
Salary shall be paid periodically in accordance with Employer`s standard
practices, but no less than monthly.
4. EMPLOYEE BENEFITS
-----------------
Employee shall be entitled to all employee benefits provided to employees
of Employer as well as the following whether or not generally provided:
a) Term life insurance insuring the life Employee for $1,000,000.00.
b) Health insurance coverage provided to company employees insuring
Employee and his family. Such insurance shall be provided at no cost
to employee.
c) Automobile allowance of $700.00 per month.
d) Disability insurance coverage insuring payment of Employee's full base
salary for the term of this Agreement in the event Employee becomes
disabled.
5. ADDITIONAL COMPENSATION
-----------------------
Employee shall receive the following additional compensation based upon the
net income of Employer before taxes.
NET INCOME EMPLOYEE'S BONUS
---------- ----------------
$500,000.00 - $600,000.00 $25,000.00
$600,000.00 - $750,000.00 $35,000.00
$750,000.00 - $1,000,000.00 $50,000.00
$1,000,000.00 - $1,250,000.00 $60,000.00
Over $1,250,000.00 $75,000.00
Net income shall be determined in accordance with generally accepted
accounting practices and shall include extraordinary items.
2
<PAGE>
Payment shall be made to Employee of the full bonus amount, less applicable
taxes, within sixty (80) days from the end of Employer's fiscal year ending
December 31. Should this Agreement be terminated prior to expiration of its
term, Employee shall be entitled to a bonus based upon the Employer's
prorata results, (example, if this Agreement is terminated as of June 30,
Employee's bonus would be $12,500 if net income is between $250,000 -
$300,000). Payment shall be made to Employee within sixty (60) days of
termination.
6. STOCK OPTION
-------------
Employee is hereby granted the option to acquire shares of Employer's
capital stock at the price of $0.25 per share. This option is effective as of
the date of this Agreement and may be exercised by Employee in accordance with
the following scheduled:
a) 200,000 shares on or after January 1, 1997
b) 200,000 shares on or after January 1, 1998
c) 150,000 shares on or after January 1, 1999
Provided, however, that should substantially all of Employer's capital
stock or assets be subject to an agreement for acquisition or merger, or
Employer acquires another entity, Employee may prior to the closing of such
acquisition or merger immediately exercise the remaining balance of unexercised
options. All options shall expire if not exercised by October 31, 2001.
7. EXPENSE REIMBURSEMENT
---------------------
Employer shall reimburse Employee for all reasonable out of pocket expenses
that Employee shall incur in connection With promoting the business of Employer
and performing his duties under this Agreement. Upon request, Employee shall
support such request for reimbursement with appropriate receipts or other
evidence of incurring such expenses.
8. DISABILITY OF EMPLOYEE
----------------------
Should Employee be unable to perform his duties pursuant to this Agreement
due to disability, Employee shall continue to receive his base salary and
employee benefits during the period of disability, up to and including the
remaining term of this Agreement. Such payment shall make up for any amount not
covered by disability insurance.
9. TERMINATION
-----------
Employee's employment under this Agreement shall terminate:
3
<PAGE>
a) Upon expiration of the term of this Agreement as set forth in Section
1 hereof unless extended by the mutual agreement of Employer and
Employee.
b) Employer may terminate this Agreement only for cause upon ten (10)
days prior written notice, and upon a majority vote of Employer's
board of directors. Cause shall be defined as and be limited to:
(1) Employee's gross negligence or wilful misconduct which materially
adversely effects Employer's business.
(2) Employee's wilful failure to perform the duties prescribed in
this Agreement.
10. LIABILITY INSURANCE/INDEMNIFICATION
-----------------------------------
Throughout the term of this Agreement and any extension thereof, Employer
shall provide Employee with officers and directors liability insurance average
in an amount not less than $3,000,000. Failure of insurance to cover and act or
omission for which Employer would otherwise have a duty to indemnify Employee
under applicable law shall not relieve Employer of such duty to indemnify
Employee.
11. REPRESENTATION AND WARRANTIES OF EMPLOYER
Employer hereby represents and warrants that:
a) All appropriate corporate action has been taken to approve this
Agreement and the party signing on behalf of Employer has full
authority to bind Employer to its terms.
b) Employer has fully disclosed to Employee all material facts concerning
Employer and its financial condition upon which Employee would
reasonably rely in accepting employment with Employer.
12. NOTICE
------
All notices, requests, demands, instructions or other communications to be
given to any party hereunder shall be in writing and shall be deemed to have
been duly given (i) on the date of service if personally served on the party to
whom notice is to be given; (ii) within twenty-four (24) hours after mailing, if
mailed to the party to whom notice is to be given, by first class mail which is
registered or certified, return receipt requests, postage prepaid; (iii) within
twenty-four (24) hours after being
4
<PAGE>
deposited with a recognized private courier service (e.g., Federal Express), if
delivered by a private courier service to the party to whom notice is to be
given, all charges prepaid; or (iv) when sent, if given by telex or telecopy.
Any notice, request, demand, instructions or other communication sent by telex
or telecopy must be confirmed within twenty-four (24) hours by letter mailed or
delivered in accordance with this Section. All notices shall be properly
addressed to tho party receiving notice as follows:
If to Employer to:
2300 Tulare St., Suite 210
Fresno, CA 93721
If to Employee to:
851 Iliff Street
Pacific Palisades, CA 90272
The address for the purposes of this Section may be changed by giving written
notice of such change.
13. GENERAL PROVISIONS
------------------
a) Nothing contained in this Agreement shall be construed to require the
commission of any act contrary to law, and whenever there is any
conflict between any provision of this Agreement and any statute, law,
ordinance, or regulation, contrary to which the parties have no legal
right to contract, then the latter shall prevail; but in such an
event, the provisions of this Agreement so affected shall be curtailed
and limited only to the extent necessary to bring it within the legal
requirements.
b) Failure to insist upon strict compliance with any of the terms,
covenants, and conditions hereof shall not be deemed a waiver of such
term, covenant or condition. No waiver of any of the provisions of
this Agreement shall be deemed, or shall constitute a waiver of any
other provision, whether or not similar, not shall any waiver
constitute a continuing waiver and no waiver shall be binding unless
contained in a writing specifically referring to this Agreement and
executed by the party making the waiver.
c) The invalidity or unenforceability of any provision hereon shall in no
way affect the validity or enforceability of any other provision.
5
<PAGE>
d) This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter contained herein and supersedes all
prior and contemporaneous agreements, representations and
understandings, whether oral or written, of the parties and none shall
be available to interpret or construe this Agreement. No supplement,
modification or amendment of this Agreement shall be binding unless
contained in a writing specifically referring to this Agreement and
executed by Employee and Employer, approved by a majority vote of
Employer's Board of Directors.
e) The paragraph headings used in this Agreement are for reference and
convenience only, and shall not in any way limit or amplify the terms
and provisions hereof, nor enter into the interpretation of this
Agreement.
f) This Agreement shall inure to the benefit of and be binding upon the
parties and their respective heirs, executors, administrators,
successor and assigns, except that the duties and obligations of
Employee hereunder may not be delegate or assigned.
g) Employer and Employee agree that this Agreement and performance under
it, and all suits and special proceedings that may ensue from its
breach, be construed in accordance with and under the laws of the
State of California.
h) In the event an action is brought by either party related to this
Agreement the prevailing party shall be entitle to recover, in
addition to any other remedy, reasonable attorney's fees and costs.
EMPLOYER EMPLOYEE
PROTOSOURCE CORPORATION
BY: /s/ RAYMOND MEYERS
------------------------------------ ---------------------------------
TITLE:
---------------------------------
6
Exhibit 10.20
BRIDGE LOAN AGREEMENT
ProtoSource Corporation (the "Company")
2300 Tulare Street, Ste 210
Fresno, California 93721
To: Raymond Meyers, Chief Executive Officer
The undersigned (the "Lender") hereby promises to lend, as provided herein, the
amount specified in Item 2 below in the Company. ProtoSource Corporation (the
"Borrower") shall execute a series of notes in connection with the extension of
credit made by various Lenders in the aggregate principal amount up to $750,000
(the "Credit"). In consideration of the extension of the Credit, each Lender
shall receive shares of the Common stock in proportion to the amount of the
Credit which is extended by such Creditor; the aggregate number of shares of
Common Stock of the Borrower shall be up to 150,000 shares.
1. ACKNOWLEDGEMENT OF RECEIPT
Lender hereby acknowledges receipt of a copy of the Company's Prospectus
dated May 14, 1997, the Company's Form 10-QSB dated March 31, 1997, and the
Company's Proxy Statement dated April 10, 1997, and the other documents relating
to an investment in the Common Stock that were included therein or were received
by the Lender from the Company or from another party acting on behalf of the
Company prior to executing this Agreement (collectively, the "Offering
Documents"). Terms used herein without definition shall have the meanings
assigned thereto in the Offering Documents.
2. PAYMENT
Subject to the terms and conditions set forth in the Offering Documents,
the Lender is hereby required, together with other lenders, to lend the Company
an amount not to exceed Seven Hundred Fifty Thousand ($750,000) Dollars. Such
amount is to be raised on a Best Efforts basis and may be advanced immediately
for use by the Company upon receipt of same. These loans, together comprising
the Bridge Loan are to be made subject to the form or promissory Note attached
hereto as Exhibit A. Andrew, Alexander, Wise & Company Incorporated (the
"Placement Agent"), will transfer the loan amounts as received by the Lenders.
Subsequent to the execution of the Bridge Loan, and subject to the approval of
the National Association of Securities Dealers, Inc. ("NASD"), the Placement
Agent intends to raise a minimum of Four Million ($4,000,000) Dollars through a
secondary public offering of the Company's Shares, (the "Secondary Offering").
The Placement Agent will transfer the Subscription payment less ten percent
(10%) sales commission and three percent (3%) non-accountable expense allowance
earned in the placement of the Bridge Loan as such funds are received by said
Placement Agent. In the event that the Subscription payment amount is received
directly by the Company, the Company shall forward to Placement Agent any fees
due in connection with such Subscription.
Page 1
<PAGE>
3. ACCEPTANCE OF LOAN
The Company has the right to accept or reject the Loan in whole or in part. This
Agreement will be deemed to be accepted by the Company only when signed by the
Company. Once accepted by the Company, this loan is irrevocable except (a) as
required by applicable state securities laws, and (b) as otherwise provided in
the Offering Documents.
4. Lender UNDERSTANDS THAT:
(a) No federal or state agency has made any finding or determination as to
the fairness of the offering for investment, or any recommendation or
endorsement, of the Common Stock.
(b) Lender's right to transfer all or any part of the Common Stock will be
restricted for the reasons and in the manner set forth in the Offering
Documents, and such Common Stock may not be transferred unless registered under
the Securities Act of 1933, (the "Securities Act"), and any applicable state
securities laws, or an exemption from such registration is available. Lender
recognizes that the Company has not made any representations with respect to
registration of the Common Stock under the Securities Act or any applicable
state securities laws, other than set forth in Section 4(c) below, that the
exemption afforded by Rule 144 under the Securities Act will be available, that
there is an active current market for the Common Stock, and that a sale of the
Common Stock by the Lender will accordingly be restricted.
(c) The Company will use cause a registration statement under the
Securities Act covering the Common Stock (the "Registration Statement") to be
filed with the Commission upon the first to occur of (i) December 31, 1997; or
(ii) concurrently with the final closing date for the Secondary Offering, and
will use its Best Efforts to cause such Registration Statement to become
effective as soon as practicable. All expenses of the Registration Statement
including, but not limited to, legal, accounting, printing and other related
fees will be borne by the Company.
5. Lender HEREBY REPRESENTS, WARRANTS AND AGREES THAT:
(a) Lender is acquiring the Common Stock for Lender's own account for
investment and not for the account of others or with a view to distribution or
resale of such Common Stock or any interest therein. Lender shall not sell,
hypothecate or otherwise dispose of Common Stock except as permitted by the
Offering Documents and unless such Common Stock is registered under the
Securities Act and any applicable state securities laws or in the opinion of
counsel, an exemption from the registration requirements of the Securities Act
and any applicable state securities laws is available.
(b) Lender is aware that Common Stock may not be liquidated readily in
cases of emergency. Lender has adequate means of providing for Lender's current
needs and possible personal contingencies and has no need for liquidity of this
investment.
Page 2
<PAGE>
(c) Lender has carefully read and understands the terms of the Offering
Documents, and the Company has made available to Lender all other documents that
Lender has requested relating to an investment in the Common Stock and has
afforded Lender the opportunity to discuss the investment with and to ask
questions of the Company and has provided answers to all of Lender's questions
concerning the offering of Common Stock. The Company has also afforded Lender
the opportunity to obtain any additional nonproprietary information necessary to
verify the accuracy of any information in the Offering Documents. In evaluating
the suitability of an investment in the Common Stock, Lender has not received or
relied upon any representations or other information (whether oral or written)
made by the Company other than as set forth in the Offering Documents or as
contained in other documents supplied at the request of Lender as aforesaid.
(d) Lender recognizes that an investment in the Common Stock involves
certain risks and Lender has taken full cognizance of and understands all of the
risk factors related to a purchase of the Common Stock, including, without
limitation, those set forth in the "RISK FACTORS" attached hereto as Exhibit B.
(e) Lender has not relied upon the Company for any tax or legal advise in
connection with Lender's purchase of Common Stock, and Lender has consulted
Lender's own adviser with respect to the tax and other legal aspects of the
acquisition of Common Stock.
(f) Lender will not duplicate or furnish copies of the Offering Documents
to persons other than Lender's investment and tax advisors, accountants or legal
counsel assisting Lender in the evaluation of the Common Stock.
(g) Lender has such knowledge and experience in financial and business
matters generally that Lender is capable of evaluating the meets and risks of an
investment in the Common Stock. Lender, or Lender's professional advisor, has
the capacity to protect Lender's concerns in connection with the purchase of
Common Stock, and Lender is able to bear the economic risk of an investment in
Common Stock.
(h) Lender, if a corporation, partnership, trust or other entity, is duly
formed and is validly existing and in good standing under the laws of its
jurisdiction of organization and has all powers and is authorized, has taken all
required action, and otherwise has duly qualified to execute and perform this
Agreement and to purchase and hold the Common Stock, and this Agreement has been
duly executed and delivered by Lender and constitutes the legal, valid and
binding obligation of Lender enforceable against Lender in accordance with its
terms. The Individual signing this Agreement on behalf of Lender represents that
he or she has full power and authority to execute and deliver this Agreement in
such capacity and on behalf of Lender. Lender and/or the individual signing this
Agreement on Lender's behalf will provide to the Company such information as its
shall reasonable request to substantiate the foregoing. Lender has furnished to
the Corporation:
1. if the Lender is a corporation, the articles or certificate of
incorporation and by-laws
Page 3
<PAGE>
of the Lender and a copy (certified by the secretary or other authorized
officer of the Lender) of appropriate corporate resolutions authorizing
Lender's investment in the Common Stock;
2. if Lender is a trust, the trust agreement of Lender;
3. if Lender is a partnership, the partnership agreement (or other
evidence of due authorization to make Lender's investment in the
Common Stock.
(i) Lender, if executing this agreement in a representative or fiduciary
capacity, has full power and authority to execute and deliver this Agreement in
such capacity and on behalf of the subscribing individual for whom Lender is
executing this Agreement, and such individual has full right and power to
perform pursuant to this Agreement and become a shareholder of the Corporation.
(j) Lender, if a corporation, partnership, trust or other entity, was not
formed reformed or recapitalized for the specific purpose of investing in the
Company.
(k) Lender will make such additional representations and warranties and
furnish such information regarding Lender's investment experience and financial
position as the Company may reasonably require. All information that Lender has
provided to the Company is correct and complete as of the date set forth below
and if there should be any material change in the information set forth herein
or in any other information provided to the Company prior to Lender's admission
to the Company, Lender will immediately furnish such revised or corrected
information to the Company.
6. Lender understands the meaning and legal consequences of the
representations and warranties and the restrictions and limitations on transfer
contained in this Agreement and in the Offering Documents and hereby agrees to
indemnify and hold harmless the Company, the Board members, and their
affiliates, advisors, agents and employees, from and against any and all loss,
damage or liability due to or arising out of any inaccuracy in or breach or any
of those representations or warranties by Lender. Notwithstanding the provisions
of this Section 6, however, no representation, warranty, acknowledgement or
agreement made in this Agreement by Lender will in any manner be deemed to
constitute a waiver of any rights granted to Lender under federal or state
securities laws. Lender acknowledges specifically that the representations and
warranties and understandings and agreements set forth in this Agreement will
survive the date of this Agreement.
7. CERTIFICATION OF STATUS AS AN ACCREDITED INVESTOR
Lender certifies that Lender qualifies as an "accredited investor" within
the meaning of Rule 501 (a) of Regulation D promulgated under the Securities
Act, [for the reason set forth herein]. The Lender if an entity has checked the
appropriate box below indicating Lender's status as an accredited investor:
(check applicable box)
Page 4
<PAGE>
Certain Entities
[ ] (A) a bank, as defined in Section 3(a)(2) of the Act or a savings and
loan company or other institution as defined in Section 3(a) (5) (A) of the
Act;
[ ] (B) a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934, as amended;
[ ] (C) an insurance company as defined in Section 2(13) of the Act;
[ ] (D) an investment company registered under the Investment Company Act of
1940, as amended or a business development company as defined in Section
2(a)(48) thereunder;
[ ] (E) A small business investment company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958, as amended;
[ ] (F) a private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940, as amended;
[ ] (G) an organization described in Section 50l(c)(3) of the Internal
Revenue Code of 1986, as amended, or a corporation, Massachusetts or
similar business trust, or partnership not formed for the specific purpose
of acquiring the securities offered in the offering in the offering, with
total assets in excess of $5,000,000; or
[ ] (H) a trust with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered in the offering, whose
purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) promulgated under the Act; or
[ ] (I) a corporation or partnership in which each and every shareholder of
such corporation or each and every partner (including, in the case of a
limited partnership, each and every limited partner) of such partnership is
an "accredited investor" as such term is defined in Rule 501 (a)
promulgated under the Act.
OTHER
[ ] (J) Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase exceeds $1,000,000;
[ ] (K) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
Page 5
<PAGE>
[ ] (L) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person described as having such knowledge and
experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment, or the
issuer reasonably believes immediately prior to making the sale that such
purchaser comes within this description;
[X] (M) Any entity in which all of the equity owners are accredited investors.
8. CERTIFICATION OF STATUS AS A UNITED STATES PERSON
Lender hereby certifies under penalties of perjury that: (i) if Lender is a
natural person, he or she is a citizen or resident of the United States, or (ii)
if Lender is a partnership, corporation, trust or other entity, it was organized
under the laws of one of the 50 States of the United States (or the laws of the
District of Columbia).
9. MISCELLANEOUS
(a) Failure by the Company to exercise any right or remedy under this
Agreement or any other agreement between the Company and Lender, or delay by the
Company in exercising the same, shall not operate as a waiver. No waiver by the
Company shall be effective unless it is in writing and signed by the Company.
(b) In the event that any provision of this Agreement is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict with such statute
or rule of law and shall be deemed modified to conform therewith. Any provision
hereof which may prove invalid or unenforceable shall not affect the validity or
enforceability of any other provision hereof.
(c) Notices required or permitted to be given under this Agreement shall be
in writing and shall be deemed to be sufficiently given when sent by registered
or certified United States mail, postage prepaid, addressed to the party for
whom intended at the address of such party as set forth below.
(d) This Agreement is not transferable or assignable by Lender.
(e) This Agreement and all questions relating to its validity,
interpretation, performance, and enforcement shall be governed and construed in
accordance with the laws of the State of New York, without giving effect to
conflict of law principles (except insofar as affected by the state securities
or "Blue Sky" laws of the jurisdiction in which the offerings described herein
have been made). Lender understands that this Agreement (i) shall be binding
upon Lender and Lender's legal representatives, successors and assigns and shall
inure to the benefit of the Company, its successors and assigns, (ii) shall
survive Lender's admission as a shareholder of the Company; (iii) shall, if
Page 6
<PAGE>
Lender consists of more than one person, be the joint and several obligations of
all such persons; and (iv) may be executed by Lender and accepted by the Company
in one or more counterparts, each of which shall be an original and all of which
together shall constitute one instrument.
10. FOR NEW YORK RESIDENTS
Lender understands that the offering of Common Stock has not been reviewed
by the Attorney General of the State of New York because of the Company's
representations that this is intended to be a non-public offering pursuant to
Regulation D promulgated under the Securities Act, and that if all of the
conditions and limitations of Regulation D are not complied with, the offering
will be resubmitted to the Attorney General for amended exemption. Lender
understands that any offering literature used in connection with this offering
has not been pre-filed with the Attorney General and has not been reviewed by
the Attorney General. The Common Stock is being purchased for Lender's own
account for investment, and not for distribution or resale to others. Lender
agrees that Lender will not sell or otherwise transfer the Common Stock unless
an exemption from such registration is available. Lender represents that Lender
has adequate means of providing for Lender's current needs and possible personal
contingencies, and that Lender has no need for liquidity of this investment.
All documents, records, and books pertaining to this investment have been
made available for inspection by Lender's attorney and/or Lender's accountant
and Lender, and the books and records of the Company will be available upon
reasonable notice, for inspection by investors at reasonable hours at its
principal place of business.
11. FORM OF OWNERSHIP
Please indicate the form of ownership you desire for the Common Stock;
Individual (one signature required)
- ----
Joint Tenants with Right of Survivorship (all parties must sign)
- ----
Tenants in Common (all parties must sign)
- ----
Tenants by the Entirety (all parties must sign)
- ----
Community Property (one signature required if interest held in one name,
i.e. managing spouse; two signatures required if interest is held in both
names)
- ----
X Corporation (signature of authorized officer or officers required)
- ----
Partnership (signature of general partner and any additional signatures
required by partnership agreement required)
- ----
Page 7
<PAGE>
Trust (signature of trustee and any additional signatures required by trust
instrument required)
- ----
Other Entities (all signatures required by governing instrument required)
- ----
Please PRINT below the exact name (registration) you desire for the Common
Stock:
World Spirit Inc.
- ------------------------------
In WITNESS WHEREOF, Lender has executed this Agreement this 16th day of June
1997.
If Lender is a Natural Person:
- ------------------------------
(Signature of Lender)
- ------------------------------
(Name of Lender)
(Please Print of Type)
If Lender is not a Natural Person:
World Spirit Inc.
- --------------------------------
(Type or Print Name of Corporation, Partnership, Trust or Other Entity)
- --------------------------------
(Signature of Individual Signing)
(Capacity of Individual Signing on behalf of Corporation, Partnership, Trust
or Other Entity)
Page 8
<PAGE>
Investment Representation Letter and Agreement
Name: World Spirit Inc.
Address: 350 5th Ave., suite 6603
New York, New York 10018
June 16, 1997
ProtoSource Corporation
2300 Tulare Street, Suite 210
Fresno, California 93721
I am receiving 50,000 (50,000) 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 resale 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 Hares 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 Company's definitive prospectus dated May 14, 1997,
the Company's last Form 1O-QSB, and its proxy statement dated April 10, 1997,
and 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 19337 as amended (the "Act"), or qualified
under any state securities law. These securities may not be sold,
transferred, pledged or hypothecated in 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. I have consulted with the 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 meets
of the risks of an investment in the Shares, and the undersigned, fully aware of
the risks involved, has determined that an investment in the Shares is
consistent with the undersigned's investment objectives. The undesigned is
relying solely o~ e undersigned's own tax advisors with respect to the tax
factors relating to an investment in the Shares.
6. I understand that 10% of my loan proceeds to the (Company will be used
to pay sales commissions to Andrew, Alexander Wise and Company, Incorporated
(hereinafter "AAWC") ~ connection with this transaction. In addition, I
understand that AAWC shall be allocated an additional 3% of my loan proceeds as
and for a non-accountable expense allowance.
7. I hereby agree as follows:
(a) If the undersign, or any subsequent holder, desires to transfer any of
the Shares, the undersigned must 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" based 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 Exchanges Act of 1934, as amended any
state securities laws, or the rules and regulations promulgated under any such
acts or laws.
(b) Prior to any such proposed transfer, and as a condition thereto, if
such offer 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) and investment letter setting forth
investment representations of the proposed transferee and such proposed
transferee's covenant to comply with the transfer provisions set forth in this
Section 7 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 set forth in Section 7 (c) hereof.
(c) The undersigned acknowledges that the undersigned understands the
meaning and legal consequences of the representation and warranties contained
herein, and the undersigned hereby agrees to indemnify and hold harmless the
<PAGE>
Company and its agents and representatives and each of their heirs, legal
representative, successors and assigns from and against any and all loss, damage
or liability (including without limitation 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 and
Exchange Act of 1934, as amended, any state securities laws, or the rules and
regulation promulgated under any of such acts or laws, (iii) any transfer of any
to the Shares not in accordance herewith or (iv) any undue 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 any of the Shares or any certificates unto
which such Shares are exchanged.
(e) Notwithstanding the above, the Company will use cause a registration
statement under the Securities Act covering the Common Stock (the "Registration
Statement") to be filed with the Commission upon the first to occur of (i)
December 31, 1997; or (ii) concurrently with the final closing date for the
Secondary Offering and will use its Best Efforts to cause such Registration
Statement to become effective as soon as practicable. All expenses of the
Registration Statement including, but not limited to, legal, accounting,
printing and other related fees will be done by the Company.
8. 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:
(a) 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 one (1) share of its common
stock for each five dollars ($5.00) lent to the Company by the undersigned
investor.
(b) The Company will offer not more than $750,000 of aggregated loans on a
Best Efforts Basis only.
Very truly yours,
World Spirit Inc.
-----------------------------------------
Investor
----------------------------------------
Name (Please Type or Print)
By: President
Accepted and agreed to:
Dated: June , 1997
ProtoSource Corporation, a California corporation
<PAGE>
By:
Name: Raymond Meyers
Title: Chief Executive Officer
<PAGE>
Exhibit A to Exhibit 10.20
PROMISSORY NOTE
$250,000 New York, New York
- ---------
June 16, 1997
-------------
Date
A. GENERAL; TERMS OF PAYMENT; USE OF PROCEEDS; PREPAYMENT
1. FOR VALUE RECEIVED, the undersigned, ProtoSource Corporation, a
corporation organized under the laws of the State of California (the"Borrower"),
hereby promises to pay to the order of WORLD SPIRIT INC.(the "Lender"), at the
offices of Andrew, Alexander, Wise & Company, Incorporated hereinafter "AAWC")
at 17 State Street, New York, New York 10004 the principal sum of $250,000 on
the first to occur of the following; (i) upon the closing of a public or private
offering of securities of the Borrower for at least $1,000,000 (the "Closing");
or (ii) fifteen months from the date hereof.
The Borrower will pay interest on the unpaid principal amount hereof at the
rate of 12 per cent per annum computed on the basis of a 360-day year, at
maturity (whether by acceleration or otherwise).
The loan proceeds shall be used as bridge financing until the occurrence of
the Closing.
2. PREPAYMENT. The Borrower shall have the right to prepay this Note in
whole or in part at any time without penalty or premium.
B. EVENTS OF DEFAULT; REMEDIES
1. If any of the following events shall occur and be continuing (each an
"Event of Default") (a) the Borrower fails to make any payment when due under
the Note; (b) the Borrower shall default in the performance or observance of any
covenant or agreement contained herein or any agreement between the Borrower and
the Lender; (c) the Borrower sells, agrees to sell, leases, agrees to lease to a
third party all or substantially all of its assets or stock; (d) the Borrower
terminates its business operations; (e) any representation or warranty made by
or on behalf of the Borrower in this Note or in any other certificate,
agreement, instrument or statement delivered to the Lender by or on behalf of
the borrower shall at any time prove to have been incorrect when made in any
material respect; (f) the Borrower shall default in the payment of principal or
interest on any indebtedness for borrowed money including without limitation,
any portion of the Credit (as such term is defined below) of which this loan
forms a part, or shall default in the performance or observance of the terms of
any instrument pursuant to which such indebtedness was created or is secured,
the effect of which default is to cause or permit any holder of any such
indebtedness to cause the same to become due prior to its stated maturity (and
whether or not such default is waived by the holder thereof; (g) any change in
the condition or affairs (financial or otherwise) of the Borrower shall occur
which, in the opinion of the Lender, increases its risk with respect to the loan
evidenced by this Note; (h) any judgement against the Borrower or any
<PAGE>
attachment, levy, or execution against any of there properties for any amount
shall remain unpaid or shall not be released, discharged dismissed, stayed or
fully bonded for a period of thirty (30) days or more after its entry, issue or
levy, as the case may be; (i) the Borrower shall become insolvent or be unable
or admit in writing its inability, to pay its debts as they mature; or (j) the
Borrower shell make an assignment for the benefit of creditors or a trustee,
receiver or liquidator shall be appointed for the Borrower or for any of their
property, or the commencement of any proceeding by the Borrower under any
bankruptcy, reorganization arrangement of debt insolvency, readjustment of debt,
receivership, liquidation or dissolution law or statute, or the commencement of
any such proceeding without the consent of the Borrower and such proceeding
shall continue undischarged for a period of 30 days. Then, the Lender may
declare the entire unpaid principal amount of this Note and all interest and
fees accrued and unpaid hereon to be forthwith due and payable, whereupon the
same shall become and be forthwith due and payable by the Borrower.
2. In case any one or more Event(s) of Default hereunder or under any
related document shall happen and be continuing, Lender may proceed to protect
and enforce Lender's rights either by suit in equity or by action at law, or
both, whether for the specific performance of any covenant, condition, or
agreement contained in this Note, or in aid of the exercise of any power granted
in this Note to enforce any other legal or equitable right of Lender. After an
Event of Default, Borrower shall pay to Lender immediately upon written demand
therefore any amounts reasonably expended or incurred by Lender in collecting
any amount due hereunder including, without limitation, attorneys fees and
costs, whether or not any legal action is instituted in connection therewith.
C. MISCELLANEOUS
1. Amendments. No amendment, modification or waiver of any provision of
this Note nor consent to any departure by the Borrower therefrom shall be
effective unless the same shall be in writing and signed by the Lender and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which it is given.
2. Constructions. This Note shall be deemed to be a contract made under the
laws of the State of New York and shall be construed in accordance with the laws
of said State.
3. Successors and Assigns. This Note shall be binding upon the Borrower and
its heirs, legal representatives, successors and assigns, and the terms hereof
shall inure to the benefit of the Lender and its successors and assigns,
including subsequent borders thereof.
4. Severability. The provisions of this Note are severable, and if any
provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or enforceability shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Note in any jurisdiction.
5. No Waiver: Remedies Cumulative. No failure on the part of the Lender to
exercise and no delay in exercising any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by the Lender of any
right hereunder preclude any other or further exercise thereof or the exercise
<PAGE>
of any other right Borrower hereby waives presentment, demand, protest, notice
of dishonor and all other notices and demands, except as expressly set forth
herein. Borrower also hereby waives the right to trial by jury in any litigation
related to this Note. written.
6. Costs and Expenses. The Borrower shall reimburse the Lender of all costs
and expenses incurred by it and shall pay the reasonable fees and disbursements
of counsel to the Lender connection with the enforcement of the Lenders rights
hereunder. The Borrower shall also pay any and all taxes (other than taxes on or
measured by net income of the holder of this Note) incurred in connection with
the execution and delivery of this Note.
7. Series of Notes. This, Note is one of a series of notes executed by the
Borrower in connection with the extension of credit made by various creditors
(together the "Creditor") in the aggregate principal amount up to $750,000 (the
"Credit~). In consideration of the extension of the Credit, each Creditor shall
receive shares of the Common stock in proportion to the amount of the Credit
which is extended by such Creditor; the aggregate number of shares of Common
Stock of the Borrower shall be up to 150,000 shares.
IN WITNESS WHEREOF, Borrower has executed this Note on the day and year
first above
ProtoSource Corporation
By:
---------------------------------------
Name: Raymond Meyers
Title: Chief Executive Officer
<PAGE>
REGISTRATION RIGHTS AGREEMENT
W I T N E S S E T H:
--------------------
WHEREAS, the Stockholders are the purchasers of am aggregate of 150,000
shares of Common Stock of the Company (the "Shares") issued in connection with
interim financing on this date of the Company in an aggregate amount not to
exceed $750,000 (the "Bridge Financing"), and
WHEREAS, the Company and the Stockholders desire that certain terms and
provisions be applicable to the Shares hereinafter 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 concurrently with the proposed Secondary Public
Offering of the Company's Securities (the "Secondary Offering) to be placed by
Andrew Alexander Wise & Company, Incorporated (the "Placement Agent") or if such
Secondary Offering is not completed by December 31, 1997. The Company will use
its best efforts, through its officers, directors, auditors md 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 hereafter,
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
Stockholder of the Registrable Securities to sell such Registrable Securities
during said two-year period.
Section 2. Piggyback Registration Rights. The Company covenants and agrees
with the Stockholders and any other holders of the Registrable securities that
if, at anytime 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 for 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
Page 1
<PAGE>
Registration Statement, all or any portion of the Shares, and limited, in the
case of a Regulation A offering, 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' co~el fees and sales commissions incurred if the
Registrable Securities be 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 md such holder of Registrable Securities and such
other terms and provisions as are customarily contained in underwriting
agreement with respect to secondary distributors, including, without
limitation, indemnities substantially to the effect and to the extent
provided Section 8. Furthermore, if the underwriter(s) for the offering
being registered by the Company shall determine ln 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 and 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 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 requested to be included therein by
the holders requesting such registration and the Registrable Securities
requested to be included in such
Page 2
<PAGE>
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 the
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
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
Stockholder's. 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 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 E;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 hereunder, 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 without registration under the Act within the
limitation of the exemptions provided by (i) Rule 144
Page 3
<PAGE>
under the Act, as such Rule may be amended from time to tune, or (ii) any
similar rule or regulation hereafter adopted by the SEC. Upon the 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 complied 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 my
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,
(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
Page 4
<PAGE>
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 my 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
re~red to be stated therein or necessary to malice 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 of 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.
(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 the Section ii(a) of the Act; and
Page 5
<PAGE>
(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 any special audits
required by or incident to such performance and compliance, premiums and other
costs of policies 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 an disbursements of counsel and accountants for any
holder of Registrable Securities or other expenses incurred by 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:
(s) 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 person, if any' who
controls such holder or such underwriter within the meaning of Section 15
of the Act or 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, costs and expense (including, without limitation,
reasonable legal expenses) to which such holder or any such underwriter,
officer, director, employee, agent, counsel of 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
Page 6
<PAGE>
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 of 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 thereon, 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 or such holder specifically for use
in the preparation thereof,
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of Section 7(a) or (b) of notice of the commencement of any
action involving the subject matter of the foregoing indemnity provisions,
shall indemnified part 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 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 Section 7(a) or (b)
for any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense
Page 7
<PAGE>
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 equable 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 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, dan~ages and liabilities referred to above shall be deemed
to include, subject to the limitations set for~ 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 1 l(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 amy agreement with respect to its
securities which is inconsistent with the rights granted to the holders of
Registrable Securities, 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 the securities of the
Company under any other agreements.
Page 8
<PAGE>
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, ret~n 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 ma~ling, 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 New York without regard to principles of conflict of laws.
(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 writing executed by each of them.
(d) This Agreement shall be binding upon and inure to the benefit of each
of the Stockholder' 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 ~e fact that such courts
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 provisions of this Agreement
shall not affect the validity or enforceability of any other provision of
this Agreement.
Page 9
<PAGE>
(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 or 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.
(j) This Agreement may be executed by 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
firrt written above.
ProtoSource Corporation
By:
-------------------------------------
Name: Raymond Meyers
Title: Chief Executive Officer
- ------------------------------- -------------------------------------
WORLD SPIRIT INC.
- ------------------------------- -------------------------------------
By Its President
Page 10
Exhibit 23.10
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 28, 1997, except for Note 12 as to which the date is
April 25, 1997 relating to the financial statements of ProtoSource Corporation
for the years ended December 31, 1996 and 1995 and the reference to our firm
under the caption "Experts" in the Prospectus contained in said Registration
Statement.
Angell & Deering
Certified Public Accountants
Denver, Colorado
November 18, 1997
Exhibit 12.12
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use, in Amendment No. 1 to the Registration Statement
on Form SB-2, of our report dated February 28, 1997, except for Note 12 as to
which the date is April 25, 1997 relating to the financial statements of
ProtoSource Corporation for the years ended December 31, 1996 and 1995 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
February 6, 1998
Exhibit 23.13
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use, in Amendment No. 2 to the Registration Statement
on Form SB-2, of our report dated February 13, 1998, except for Note 6 as to
which the date is April 7, 1998, relating to the financial statements of
ProtoSource Corporation for the years ended December 31, 1997 and 1996 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
April 7, 1998
Exhibit 23.14
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use, in Amendment No. 3 to the Registration Statement
on Form SB-2, of our report dated February 13, 1998, except for Note 6 as to
which the date is April 7, 1998, relating to the financial statements of
ProtoSource Corporation for the years ended December 31, 1997 and 1996 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
May 4, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-QSB September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 61,471
<SECURITIES> 0
<RECEIVABLES> 183,220
<ALLOWANCES> 0
<INVENTORY> 8,980
<CURRENT-ASSETS> 319,888
<PP&E> 2,691,195
<DEPRECIATION> 659,141
<TOTAL-ASSETS> 3,255,812
<CURRENT-LIABILITIES> 904,503
<BONDS> 1,812,493
0
0
<COMMON> 5,590,455
<OTHER-SE> (5,051,639)
<TOTAL-LIABILITY-AND-EQUITY> 3,255,812
<SALES> 550,969
<TOTAL-REVENUES> 550,969
<CGS> 0
<TOTAL-COSTS> 1,415,019
<OTHER-EXPENSES> 591,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 898,678
<INCOME-PRETAX> (1,455,284)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,455,284)
<EPS-PRIMARY> (2.61)
<EPS-DILUTED> (2.61)
</TABLE>
