Filed with the Securities and Exchange Commission on February 10, 1998.
Securities Act Registration No. 333-40743
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 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
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(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.
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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 1,035,000
one share of Common Units(1) $6.00(2) $6,210,000 $1882
Stock, no par value
and one Warrant
Common Stock, no 1,035,000 $6.00(3) $6,210,000 $1882
par value, underlying Shares
Warrants included in
the Units
Underwriter's 90,000 $.0011 $ -0-
Warrants Warrants
Units underlying 90,000 $7.20(5) $648,000 $ 196
Underwriter's Units(4)
Warrants consisting of
one share of Common
Stock and one
Warrant
Common Stock, no 90,000 $6.00(3) $540,000 $ 164
par value, underlying Shares
Warrants included in
Underwriter's
Warrants
Totals....................................... $13,608,000 $4124
ii
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(1) Includes the Underwriter's over allotment option of 135,000 Units.
(2) Based upon the closing bid price of the Registrant's Common Stock on the
Electronic Bulletin Board (the "Bulletin Board") on November 18, 1997,
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 120% of the Unit public offering price.
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 February 10, 1998
PROTOSOURCE CORPORATION
900,000 Units
ProtoSource Corporation (the "Company") is offering (the "Offering")
through Andrew, Alexander, Wise & Company, Inc. as representative of the
underwriters (the "Underwriter"), 900,000 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
$_____ 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 $_____ 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 November 18, 1997, the closing bid price of the Common Stock
on the Bulletin Board was $5.75 per share. The Company has applied to list the
Common Stock and Warrants (but not the Units) on the NASDAQ SmallCap Market but
cannot assure, that it meets the NASDAQ SmallCap Market requirements for
listing.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION")
NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN
A TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 9 OF THIS PROSPECTUS.
--------------------------------------
The Units are offered by the Underwriter on a firm commitment basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to certain conditions, including the right of the
Underwriter to reject orders in whole or in part. It is anticipated that
delivery of certificates representing the securities will be made against
payment therefor in New York, New York on or about three business days from the
date of this Prospectus.
1
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================================================================================
Price to Public Underwriting Discounts Proceeds to Company
and Commissions(1) (2)(3)
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Per Unit.............$__________ $_______________ $____________
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Total................$__________ $_______________ $____________
===============================================================================
(1) Excludes a nonaccountable expense allowance payable to the Underwriter of
$________, a $60,000 one year consulting fee, and the issuance of warrants
to the Underwriter (the "Underwriter's Warrants") to purchase up to 90,000
Units at a price of $______ 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 $________, 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 135,000 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 $__________, $__________ and $________, 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.
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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
September 30, 1997, the Company had 2,700 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" and "Business -
Introduction.".
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
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The Offering
Securities offered (1).................... 900,000 Units, each Unit consisting
of one share of Common Stock and
one Warrant
Offering price............................ $___________ per Unit
Common Stock outstanding
prior to the Offering (1)................ 665,333 shares
Common Stock Outstanding
After the Offering (1)................... 1,565,333
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 900,000 shares issuable upon exercise of the Warrants,
(ii) up to 270,000 shares issuable upon exercise of the Overallotment
Option and the Warrants included therein, and (iii) up to 453,333 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."
Nine Months Ended
Year Ended December 31, September 30,
-------------------------- --------------------------
1996 1995 1997 1996
(Unaudited) (Unaudited)
Income Statement Data:
Revenues $ 697,581 $ 100,901 $ 550,969 $ 544,590
(Loss) from continuing
operations (672,791) (974,578) (1,455,284) (417,782)
Net (loss) (1,409,800) (1,816,285) (1,455,284) (681,982)
Net (loss) per share (7.74) (22.04) (2.61) ( 7.69)
Weighted average number
of shares outstanding 182,037 82,439 557,897 86,667
September 30,
1997 As Adjusted(1)
Balance Sheet Data:
Working capital (deficit) $ (584,615) $__________
Total assets 3,255,812 __________
Long-term debt 1,812,493 __________
Total liabilities 2,716,996 __________
Stockholders' equity 538,816 __________
----------
(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. 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 2700 at September 30, 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 through 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 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 $373,096, $1,816,285 and $1,409,800 for the years ended
December 31, 1994, 1995 and 1996, respectively. For the nine months ended
September 30, 1997, the Company reported a loss of $1,455,284 and had a working
capital deficit of $584,615, which could significantly limit its operations. See
"Financial Statements." There can be no assurance that the Company will achieve
profitability or positive cash flow from operations. The Company expects to
focus in the near term on building and increasing its Internet subscriber base,
which will require it to significantly increase its expenses for personnel,
marketing, network infrastructure and the development of new services. As a
result, the Company believes that it may incur further losses in the near term.
The Company 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 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. 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.
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
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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.
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.
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to providing Internet access or other services
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that laws and regulations may be adopted with respect
to the Internet which may decrease the demand for Internet access, increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's operating results or financial condition.
Dependence on the Internet. The Company's business will depend in large
part upon a robust industry and infrastructure for providing Internet access and
carrying Internet traffic. Notwithstanding current interest and worldwide
subscriber growth, the Internet may not prove to be a viable marketplace because
of inadequate development of the necessary infrastructure or timely development
of complementary products, such as high speed modems. Because global commerce
and on-line exchange of information on the Internet, Web and other open area
networks are new and evolving, it is difficult to predict with any assurance
whether the Internet will prove to be economically viable in the long term. If
the necessary infrastructure or complementary products are not developed, or if
the Internet does not become an economically viable marketplace, the Company's
business, operating results and financial condition will be materially adversely
affected. See "Business - The Internet and the World Wide Web."
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.
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.
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<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. 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.
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. 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
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<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 affect 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.
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 these maintenance criteria or future
maintenance requirements imposed by the NASDAQ SmallCap Market may result in the
discontinuance of the inclusion of the Company's securities in the NASDAQ
SmallCap Market. 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.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to give effect to the sale of the 900,000
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."
September 30,
1997 As Adjusted
----------- -----------
Short term debt $ 789,358 $ 39,358
----------- -----------
Long term debt $ 1,812,493 1,812,493
----------- -----------
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, 1,565,333 as
adjusted 5,590,455 -----------
Accumulated deficit (5,051,639) (5,051,639)
----------- -----------
Total stockholders' equity 538,816
----------- -----------
Total capitalization $ 3,140,667 $
=========== ===========
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<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
- ----------------- ----- -----
March 31, 1998 (through February 6, 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 February 6, 1998, the Company had approximately 365 record and
beneficial stockholders.
USE OF PROCEEDS
The net proceeds of the Offering will be used (i) to repay $750,000 of
Bridge Loan debt incurred by the Company for working capital and bearing
interest at 12% per annum, due the earlier of the closing of the Offering or
September 15, 1998, (ii) to acquire small Internet access providers and other
small computer oriented companies ($2,000,000), (iii) for marketing expenses to
increase the Company's Internet access customer base ($450,000), and (iv) for
working capital ($______). See "Business - Strategy."
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<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December
31, 1996 and 1995 is derived from the Company's financial statements which have
been audited by Angell & Deering. The financial information for the nine months
ended September 30, 1997, and 1996, has been derived from the unaudited
financial statements of the Company. In the opinion of management, the unaudited
financial statements include all adjustments (consisting only of normal
recurring adjustments) that are necessary for a fair presentation of the
financial position and results of operations of such periods. Results of
operations for the nine months ended September 30, 1997, may not be indicative
of results for the year ending December 31, 1997. 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, Nine Months Ended September 30,
------------------------------ -------------------------------
1996 1995 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Income Statement Data:
<S> <C> <C> <C> <C>
Revenues $ 697,581 $ 100,901 $ 550,969 $ 544,590
(Loss) from continuing
operations (672,791) (974,578) (1,455,284) (417,782)
Net (loss) (1,409,800) (1,816,285) (1,455,284) (681,982)
Net (loss) per share (7.74) (22.04) (2.61) (7.69)
Weighted average number
of shares outstanding 182,037 82,439 557,897 88,667
September 30,
1997 As Adjusted (1)
---------- ---------------
Balance Sheet Data: (Unaudited) (Unaudited)
Working capital (deficit) $(584,615) _________
Total assets 3,255,812 _________
Long-term debt 1,812,493 _________
Total liabilities 2,716,996 _________
Stockholders' equity 538,816 _________
----------
(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."
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<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
September 30, 1997, the Company had 2700 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
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Net Sales. For the nine months ended September 30, 1997, net sales were
$550,969 versus $544,590 in the same period of the prior year, representing a
increase of $6,379. The slight increase in net sales is primarily attributed to
higher customer retention rates.
Gross Profit. For the nine months ended September 30, 1997, gross profit
was $343,668 versus $387,667 in 1996, representing a decrease of $44,009. The
decrease in gross profit is attributed to higher telecommunications costs.
Sales and Marketing. Sales and marketing expenses were $50,403 for the nine
months ended September 30, 1997 versus $47,528 in 1996. The increase in sales
and marketing expenses was caused by increased advertising and travel . The
Company believes that sales and marketing expenses will continue to increase if
funds are available to the Company to promote its products and services.
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General and Administrative. General and administrative expenses increased
from $693,014 in 1996 to $1,157,315 in 1997. The increase in general and
administrative costs is primarily attributed to costs associated with its May
1997 Registration Statement covering the May 1997 Securities including $77,971
of legal and accounting fees together with expenses associated with the Bridge
Loan, including commissions of $97,500 and legal expenses of $25,000.
Operating Loss. For the nine months ended September 30, 1997, the operating
loss was $864,050 compared to an operating loss of $352,875 in the same period
of 1996. The operating loss in 1997 is attributed to the significant increases
in general and administrative expenses described above. The Company will seek to
reduce general and administrative costs by renegotiating or cancelling its Shaw
Avenue Capital lease and its Visella, California lease.
Interest Expense. Net interest expense increased to $794,663 for the nine
months ended September 30, 1997 from $136,187 in the same period of 1996, as a
result of costs associated with the Bridge Loan. This interest expense includes
financing costs of $750,000 in connection with the issuance of 150,000 shares of
Common Stock in the Bridge Loan. The interest expense was somewhat offset by the
interest earned on cash and short term investments.
Other Income. Net other income increased to $203,429 for the nine months
ended September 30, 1997, as a result of rental income generated by the
Company's office building and miscellaneous sales. Total rental income
recognized was $108,000 and the total amount collected was $48,000. (The balance
of the outstanding rent was paid in December 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.
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<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
For the nine months ended September 30, 1997, the Company used cash of
$1,018,558 for operating activities. The Company had a working capital
deficiency of $584,615 at September 30, 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 $80,887 and
$448,210 for the nine months ended September 30, 1997 and 1996 respectively. In
addition, the Company acquired through lease $69,959 of computer equipment for
its Internet operations during the nine month period ended September 30, 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 issued was charged to
operations as an additional financing expense for the nine months ended
September 30, 1997.
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
September 30, 1997, the Company had 2,700 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".
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
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<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 compputer 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
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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
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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 consolidates
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
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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 September 30, 1997, the Company employed ten full-time and two
part-time individuals. The Company believes it maintains good relations with its
employees. None of the Company's employees are represented by a labor union or
covered by a collective bargaining agreement.
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 $1,800,000 until April 30, 1997. Such
amount increases to $1,900,000 through April 30, 1998. After April 30, 1998, the
option amount increases annually by the percentage increase in the Consumers
Price Index, as further described in the lease. Upon exercise of the purchase
option, the principal portion of the lease payments made by the Company will be
applied toward the down payment for the purchase price based upon an amortized
20-year note with interest 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.
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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.
In May 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
in May 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.
In February 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. 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 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.
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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 41 Chief Executive Officer 1996
Chief Financial Officer
and Director
David A. Appell 34 Director 1997
Dickon Pownall-Gray (1) 43 Director 1997
- ----------
(1) 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 all of 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
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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) from the
University of Birmingham.
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. No executive officer or director received compensation in
excess of $100,000 for the calendar years ended December 31, 1996, 1995 or 1994.
Compensation for all officers and directors as a group for the calendar year
ended December 31, 1996, aggregated $64,000.
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<TABLE>
<CAPTION>
The following table discloses certain compensation paid to the Company's
executive officers for the calendar years ended December 31, 1996, 1995 and
1994.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Prin- Other All
cipal Annual Restricted Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts ($) sation($)
- ------------ ---- --------- -------- --------- ----------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James C. 1996 $61,925 $ 0 0 0 0 0 0
Robinson 1995 61,425 5,941 0 0 0 0 0
Chief Execu- 1994 57,226 25,000 0 0 0 0 0
tive Officer
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 September 30, 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
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</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.
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<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) 13,333 2.0% .8%
Andrew Chu(2) 38,999 5.5% 2.4%
David A. Appell 0 0% 0%
Dickon Pownall-Gray 0 0% 0%
Steven A. Kriegsman(3) 117,667 15.0% 7.0%
Anaka Prakash 38,667 5.8% 2.5%
World Spirit, Inc. 50,000 7.5% 3.2%
All officers and directors as
a group (3 persons)(1) 13,333 2.0% .8%
- ----------
(1) Represents stock options to purchase 13,333 shares at $3.75 per share at
any time until October 2001. Mr. Meyers holds an additional 23,334 stock
options which vest in 1998 and 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 28,999 of such Warrants to Mr. Chu. See "Certain
Transactions."
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<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. 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. 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,
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<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 $______ 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
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<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 $_______ 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.
Prior Warrants
In connection with the IPO, the Company issued 46,000 Prior Warrants. Each
Prior Warrant represents the right to purchase one share of Common Stock at an
exercise price of $97.50 per share at any time until February 9, 1998. The
exercise price and the number of shares issuable upon exercise of the Prior
Warrants are subject to adjustment in certain events including the issuance of
Common Stock as a dividend on shares of Common Stock, subdivisions or
combinations of the Common Stock or similar events. The Prior 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 Prior
Warrants or the current market price of the Company's securities.
37
<PAGE>
Prior Warrants may be redeemed in whole or in part at the option of the
Company upon 30 days' notice, at a redemption price equal to $.01 per Prior
Warrant if the closing price of the Company's Common Stock is at least $112.50
per share for 30 consecutive trading days.
Holders of Prior Warrants may exercise their Prior 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 Prior Warrants until the
expiration date of the Prior Warrants, although there can be no assurance that
the Company will be able to do so.
Other 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 900,000 Units,
consisting of 900,000 shares of Common Stock, 900,000 Warrants and 900,000
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) 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 have agreed to refrain from selling such shares until October 1999,
without the prior written consent of the Underwriter. 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.................................................................900,000
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 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 135,000 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 $______ 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 90,000 Units for
$______ 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) for
additional Units at $___ per Unit. 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 five-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,
1995 and 1996, 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 Sheets as of September 30, 1997
(Unaudited) and December 31, 1996 F-3
Statements of Operations for the nine months
ended September 30, 1997 and 1996
(Unaudited) and for the years ended
December 31, 1996 and 1995 F-5
Statements Of Changes in Shareholders'
Equity for the nine months ended
September 30, 1997 (Unaudited)
and for the years ended December 31, 1996 and 1995 F-6
Statements Of Cash Flows for the nine months
ended September 30, 1997 and 1996
(Unaudited) and for the
years ended December 31, 1996 and 1995 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, 1996 and the related statements of operations, changes in
shareholders' equity and cash flows for the years ended December 31, 1996 and
1995. 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, 1996 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/ Angell & Deering
---------------------------------------
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 28, 1997, except for
Note 12 as to which the date
is April 25, 1997
F-2
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEETS
ASSETS
------
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 61,471 $ 482,357
Accounts receivable:
Trade 183,220 29,156
Employees and other -- 21,397
Inventories 8,980 8,980
Prepaid expenses and other 18,932 14,587
Current portion of note receivable 47,285 47,285
---------- ----------
Total Current Assets 319,888 603,762
---------- ----------
Property and Equipment, at cost:
Land 411,176 411,176
Building and improvements 1,381,816 1,381,816
Equipment 777,726 680,377
Furniture 110,387 104,375
Vehicles 10,090 10,090
---------- ----------
2,691,195 2,587,834
Less accumulated depreciation and amortization 659,141 486,441
---------- ----------
Net Property and Equipment 2,032,054 2,101,393
---------- ----------
Other Assets:
Goodwill, net of accumulated amortization
of $2,321 and $2,006, respectively 18,924 19,239
Deferred tax assets 71,550 71,550
Note receivable, net of current portion above 723,565 723,565
Deposits and other assets 89,831 42,346
---------- ----------
Total Other Assets 903,870 856,700
---------- ----------
Total Assets $3,255,812 $3,561,855
========== ==========
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Current Liabilities:
Accounts payable $ 99,716 $ 195,694
Accrued liabilities 13,929 267,228
Customer deposits 1,500 1,500
Notes payable 750,000 --
Current portion of long-term debt 39,358 39,358
----------- -----------
Total Current Liabilities 904,503 503,780
----------- -----------
Long-Term Debt, net of current portion above:
Bank -- 2,220
Obligations under capital leases 1,851,851 1,852,083
Less current portion above 39,358 39,358
----------- -----------
Total Long-Term Debt 1,812,493 1,814,945
----------- -----------
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 and 515,333 shares
issued and outstanding 5,590,455 4,839,485
Accumulated deficit (5,051,639) (3,596,355)
----------- -----------
Total Shareholders' Equity 538,816 1,243,130
----------- -----------
Total Liabilities and
Shareholders' Equity $ 3,255,812 $ 3,561,855
=========== ===========
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF OPERATIONS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited)
Net Revenues:
<S> <C> <C> <C> <C>
Internet service fees $ 550,969 $ 544,590 $ 697,581 $ 100,901
----------- ----------- ----------- -----------
Total Revenues 550,969 544,590 697,581 100,901
Operating expenses 1,415,019 897,465 1,121,773 1,079,503
----------- ----------- ----------- -----------
Operating Loss (864,050) (352,875) (424,192) (978,602)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 104,015 825 3,507 50,891
Interest expense (898,678) (137,012) (272,228) (160,192)
Financing costs -- -- (126,000) --
Rent and other income 203,429 71,280 146,122 124,356
Other, net -- -- -- (10,231)
----------- ----------- ----------- -----------
Total Other Income (Expense) (591,234) (64,907) (248,599) 4,824
----------- ----------- ----------- -----------
Loss From Continuing Operations
Before Provision For Income Taxes (1,455,284) (417,782) (672,791) (973,778)
Provision for income taxes -- -- -- 800
----------- ----------- ----------- -----------
Loss From Continuing Operations (1,455,284) (417,782) (672,791) (974,578)
----------- ----------- ----------- -----------
Discontinued Operations:
Loss from discontinued
operations (Note 2) -- (264,200) (532,663) (841,707)
Loss on disposal (Note 2) -- -- (204,346) --
----------- ----------- ----------- -----------
Loss From Discontinued Operations -- (264,200) (737,009) (841,707)
----------- ----------- ----------- -----------
Net Loss $(1,455,284) $ (681,982) $(1,409,800) $(1,816,285)
----------- ----------- =========== ===========
Net Loss Per Share of Common Stock:
Loss from continuing operations $ (2.61) $ (4.71) $ (3.69) $ (11.82)
Discontinued operations -- (2.98) (4.05) (10.22)
----------- ----------- ----------- -----------
Net Loss $ (2.61) $ (7.69) $ (7.74) $ (22.04)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 557,897 88,667 182,037 82,439
=========== =========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
Series A
Preferred Stock Common Stock
--------------- ------------ Accumulated
Shares Amount Shares Amount Deficit
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 900,000 $-- 42,666 $ 303,595 $ (370,270)
Issuance of common stock and warrants
in public offering (net of offering
costs of $808,476) -- -- 46,000 2,986,524 --
Contribution of shares to the Company
by officers and directors for issuance
in connection with an acquisition -- -- -- 19,375 --
Net loss -- -- -- -- (1,816,285)
----------- ----- ----------- ----------- -----------
Balance at December 31, 1995 900,000 -- 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
$24,801) -- -- 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 (unaudited) -- -- -- 970 --
Issuance of common stock in connection
with bridge loans (unaudited) -- -- 150,000 750,000 --
Net loss (unaudited) -- -- -- -- (1,455,284)
----------- ----- ----------- ----------- -----------
Balance at September 30, 1997
(unaudited) -- $-- 665,333 $ 5,590,455 $(5,051,639)
=========== ===== =========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited)
Cash Flows From Operating Activities:
<S> <C> <C> <C> <C>
Net loss $(1,455,284) $ (681,982) $(1,409,800) $(1,816,285)
Adjustments to reconcile net
loss to net cash provided (used) by
operating activities:
Depreciation and amortization 173,015 268,687 367,049 584,810
Provision for bad debts -- -- -- 508,187
Assets and liabilities disposed of in
divestiture and note receivable received -- -- 17,176 --
Gain on disposal of equipment -- -- (4,607) --
Issuance of common stock for
costs of financing 750,000 -- 100,000 --
Changes in operating assets
and liabilities:
Accounts receivable (132,667) 35,853 163,556 (499,436)
Inventories -- (34,229) 7,079 (4,625)
Deposits and other assets (51,830) (5,523) 15,441 (18,814)
Accounts payable (95,978) 222,036 32,536 (150,623)
Accrued liabilities (253,299) 371,766 344,284 (10,618)
Customer deposits -- 38,915 (4,000) (12,213)
Unearned customer support revenue -- (9,443) (34,542) (5,286)
----------- ----------- ----------- -----------
Net Cash Provided (Used) By
Operating Activities (1,066,043) 206,080 (405,828) (1,424,903)
----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (33,402) (7,238) (38,421) (403,591)
Proceeds from disposal of equipment -- -- 10,536 --
Software development costs capitalized -- (442,186) (442,100) (592,754)
Receivable from shareholders -- -- -- (35,000)
Other -- 1,214 -- --
----------- ----------- ----------- -----------
Net Cash (Used) By Investing Activities (33,402) (448,210) (469,985) (1,031,345)
----------- ----------- ----------- -----------
Cash Flows From Financing Activities:
Payments on notes payable (72,411) (106,146) (55,675) (625,998)
Proceeds from borrowing 750,000 232,000 200,000 20,000
Issuance of common stock 970 -- 1,300,000 3,795,000
Offering costs incurred -- (20,000) (224,801) (619,990)
----------- ----------- ----------- -----------
Net Cash Provided By Financing Activities 678,559 105,854 1,219,524 2,569,012
----------- ----------- ----------- -----------
The accompanying notes are an integral
part of these financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited)
Net Increase (Decrease) in Cash and
<S> <C> <C> <C> <C>
Cash Equivalents $(420,886) $(136,276) $ 343,711 $ 112,764
Cash and Cash Equivalents at
Beginning of Period 482,357 138,646 138,646 25,882
--------- --------- --------- ---------
Cash and Cash Equivalents at
End of Period $ 61,471 $ 2,370 $ 482,357 $ 138,646
========= ========= ========= =========
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period for:
Interest $ 148,678 $ 137,012 $ 272,228 $ 174,251
Income taxes -- -- -- 800
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Acquisition of equipment under
capital leases $ 69,959 $ 90,802 $ 90,349 $ 118,701
Common stock contributed by
stockholders for issuance in
acquisition by the Company -- -- -- 19,375
Conversion of account payable to a
note payable -- -- 32,000 --
Capital contribution by officers through
forgiveness of previously accrued salaries -- 154,792 154,792 --
Conversion of note payable into common stock -- -- 200,000 --
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
services provider.
Unaudited Interim Financial Statements
--------------------------------------
The financial statements as of September 30, 1997 and for the nine months
ended September 30, 1997 and 1996 are unaudited, however, in the opinion of
management of the Company, all adjustments (consisting solely of normal
recurring adjustments) necessary to a fair presentation of the financial
statements for the interim periods have been made.
Reclassifications
-----------------
The former software development, MarketStreet and computer training center
divisions are presented as discontinued operations in accordance with
Accounting Principles Board (APB) Opinion No. 30 (Note 2). The 1995
operations and per share information have been reclassified to present the
operations of the three divisions as discontinued operations also.
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. All share information and per share
data have been retroactively restated for all periods presented to reflect
the reverse stock split (Note 12).
Revenue Recognition
-------------------
Product sales represent sales of application software to end users.
Equipment sales represent sales of computer and peripheral equipment
bundled with the Company's software. Professional service fees represent
revenue from custom programming, post contract customer support (PCS)
agreements and training and installation related services. Fees associated
with insignificant vendor obligations related to installation of systems
are deferred and recognized upon completion of performance. Other income
represents primarily sales of promotional brochures, marketing materials
and sales of miscellaneous equipment and supplies.
Revenue from product sales is recognized upon delivery to the customer,
provided that no significant vendor or PCS obligations remain, and
collection of the related receivable is deemed probable. Revenue from PCS
agreements is recognized on a straight-line basis over the period of the
PCS agreement.
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 to be
cash equivalents.
Inventories
-----------
Inventories, consisting of computer equipment and supplies held for resale,
are stated at the lower of cost (determined on the first in, first out
method) or market.
F-9
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
Property and Equipment
----------------------
Depreciation and amortization of equipment, furniture and vehicles are
computed using the straight-line method over estimated useful lives of
three to seven years. Assets held under capital lease obligations,
exclusive of land, are amortized using the straight-line method over the
shorter of the useful lives of the assets or the term of the lease.
Depreciation of property and equipment charged to operations was $233,201
and $171,695 for the years ended December 31, 1996 and 1995, respectively.
Goodwill
--------
Goodwill is being amortized using the straight-line method over an
estimated useful life of 15 years.
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 $--, 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 cost of the investment.
Software Development Costs
--------------------------
Software development costs are capitalized with respect to those products
for which technological feasibility (as defined in Statement of Financial
Accounting Standards No. 86) has been established. Capitalized amounts are
reported at the lower of unamortized cost or net realizable value. These
costs are amortized into cost of goods sold on a product-by-product basis.
The annual amortization expense is the greater of the amount computed using
the ratio of current revenue to the total anticipated revenue for the
product or the straight-line method over the estimated life of the product
starting when the product is available for general release to customers.
Generally, the Company amortizes these costs over three years. Software
development costs capitalized relate primarily to product enhancements.
Amortization expense for capitalized software was $132,254 and $412,258 for
the years ended December 31, 1996 and 1995, respectively.
Deferred Offering Costs
-----------------------
In connection with the Company's public offering (Note 6), costs incurred
to complete the offering have been deferred and were offset against the
proceeds of the offering.
Stock-Based Compensation
------------------------
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation". The Company will continue to measure compensation expense
for its stock-based employee compensation plans 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 123 had been
applied in measuring compensation expense.
F-10
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
Income Taxes
------------
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in 1992. Under the statement, deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities using enacted tax laws
and rates for the years when the differences are expected to reverse.
Net Income (Loss) Per Share of Common Stock
-------------------------------------------
Net income (loss) per share of common stock is based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding stock
options and warrants.
Estimates
---------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
2. 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 (Note 9). 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 includes
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 principal office from the Company for a period of
eighteen months at the current market rate.
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
F-11
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. Discontinued Operations (Continued)
----------------------------------
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. 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.
Revenues applicable to the Company's discontinued operations were $540,112
and $1,734,605 for the years ended December 31, 1996 and 1995,
respectively.
3. Long-Term Debt
---------------
Long-term debt consists of the following:
Bank
----
10.5% installment note due in 1997 with monthly
principal and interest payments of $328, collateralized
by an automobile. $ 2,220
Obligations Under Capital Leases
--------------------------------
5.7% to 25.1% installment notes due in 1997 to 2001,
collateralized by equipment. 193,146
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). 1,658,937
----------
Total Long-Term Debt 1,854,303
Less current portion of long-term debt (39,358)
----------
Long-Term Debt $1,814,945
==========
Installments due on debt principal, including the capital leases, at
December 31, 1996 are as follows:
Year Ending
December 31,
1997 $ 39,358
1998 26,058
1999 16,325
2000 42,101
2001 10,591
Later years 1,719,870
----------
Total $1,854,303
==========
F-12
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. Income Taxes
------------
The components of the provision for income taxes are as follows:
1996 1995
---- ----
Current:
Federal $ -- $ --
State -- 800
-------- --------
Total -- 800
-------- --------
Deferred:
Federal -- --
State -- --
-------- ---------
Total -- --
-------- ---------
Total Provision For
Income Taxes $ -- $ 800
======== =========
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:
1996 1995
---- ----
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, 1996 are
as follows:
Net operating loss carryforward $1,051,240
Vacation accrual 2,070
----------
Total deferred tax asset 1,053,310
----------
Accelerated depreciation (43,540)
State income taxes (1,520)
----------
Total deferred tax liability (45,060)
Less valuation allowance (936,700)
----------
Net Deferred Tax Asset $ 71,550
==========
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that $71,550 of deferred tax
assets will be realized. The remaining valuation allowance of $936,700 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 $406,760.
The Company will continue to review this valuation on a quarterly basis and
make adjustments as appropriate.
F-13
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. Income Taxes (Continued)
-----------------------
At December 31, 1996, the Company had federal and California net operating
loss carryforwards of approximately $3,900,000 and $1,900,000,
respectively. Such carryforwards expire in the years 2007 through 2011 and
1997 through 2001 for federal and California purposes, respectively.
5. Acquisitions
------------
In July 1995, the Company purchased, from an unrelated individual certain
assets of ValleyNet Communications, an Internet services provider. The
purchase price was $50,000 in cash and 334 shares of the Company's common
stock. The common stock was issued by the Company's shareholders in
accordance with their agreement to use certain of their shares owned
individually in connection with future acquisitions of the Company (Note
9). The assets acquired consists of computer hardware and software, and
goodwill of $21,245 was recorded in connection with the acquisition. The
goodwill is being amortized over a fifteen year useful life.
6. Shareholders' Equity
--------------------
Incentive Stock Option Plan
---------------------------
In November 1994, the Company's Board of Directors authorized and the
shareholders approved, a stock option plan which provides for the grant of
incentive and nonqualified options to eligible officers and key employees
of the Company to purchase up to 150,000 shares of the Company's common
stock. The purchase price of such shares shall be at least equal to the
fair market value at the date of grant. Such options vest at the discretion
of the Board of Directors, generally over a four-year period. The stock
option plan expires in 2004. As of December 31, 1996, no options have been
granted under the Plan.
Preferred Stock
---------------
In December 1994, the Company issued to six individuals, including the
Company's five executive officers, for no consideration, a total of 900,000
shares of Series A Convertible Preferred Stock, no par value. Such shares
are automatically convertible, in varying amounts per year, into shares of
common stock on a fifteen for one basis through 2003 if certain revenue and
net income milestones are met as follows:
(i) an aggregate of 9,375 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $9,600,000 and annual after tax earnings of at least
$1,550,000 for the calendar year ended December 31, 1996, an
additional 9,375 shares per year will convert to common stock from
1997 to 2002, and 121,875 shares in 2003 if the company reports gross
annual revenues of at least $9,600,000, and annual after tax earnings
of at least $1,550,000 for calendar years 1997 through 2003.
(ii) an aggregate of 9,375 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $15,500,000 and annual after tax earnings of at least
$3,000,000 for the calendar year ending December 31, 1997, an
additional 9,375 shares per year will convert to common stock from
1998 to 2002, and 131,250 shares in 2003 if the Company reports gross
annual revenues of at least $15,500,000, and annual after tax earnings
of at least $3,000,000 for calendar years 1998 through 2003.
F-14
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. Shareholders' Equity (Continued)
--------------------------------
Preferred Stock (Continued)
---------------------------
(iii) An aggregate of 15,000 shares of Series A Preferred Stock
will convert to common stock if the Company reports gross annual
revenues of at least $23,800,000 and annual after tax earnings of
at least $5,100,000 for the calendar year ending December 31,
1998, an additional 5,000 shares per year will convert to common
stock from 1999 to 2002, and 225,000 shares in 2003 if the
Company reports gross annual revenues of at least $23,800,000,
and annual after tax earnings of at least $5,100,000 for calendar
years 1999 through 2003.
The fair market value of the common stock issued upon conversion will be
charged to operations at that time. Any preferred shares not converted
during such period will be cancelled. If, prior to January 1, 1999 (i) the
Company consolidates with or merges into another corporation or entity (and
the Company is not the survivor) or if the Company sells or leases
substantially all of its assets and the Company's common stock has
appreciated an average of 10% per annum for each 12 month period following
the date of the Company's Prospectus (February 9, 1995) or (ii) any person,
entity or affiliated group or entities acquires 40% or more of the
Company's common stock in any 12 month period, then all preferred stock
will be automatically converted into common stock. While outstanding, the
preferred stock does not carry voting rights or dividend rights and has a
liquidation preference of $.01 per share.
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 consists 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 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.
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 occupied approximately half of the space as its corporate office
facility and has sublet the remaining space to unrelated parties. The lease
requires initial annual minimum lease payments of $187,608, increasing
every five years to a maximum annual payment of $337,872 in 2009. Under the
lease, the Company has an option at any time through April 30, 1996, to
purchase the building and land for $1,700,000. Such amount increases to
$1,800,000 through April 30, 1997 and $1,900,000 through April 30, 1998.
After April 30, 1998, the option amount increases annually by the
F-15
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
----------------------------------------
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, certain vehicles 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 $168,000 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, 1996 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:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases Total
------------ ------ ------ -----
<S> <C> <C> <C> <C>
1997 $ 132,142 $ 57,074 $ 189,216
1998 235,146 53,242 288,388
1999 245,162 53,841 299,003
2000 266,169 54,918 321,087
2001 230,523 56,016 286,539
Later years 3,705,573 23,340 3,728,913
----------- --------- ----------
Total Minimum Lease
Payments 4,814,715 $298,431 $5,113,146
======== ==========
</TABLE>
Less amount representing interest (2,962,632)
-----------
Present Value of Net Minimum
Lease Payments $ 1,852,083
===========
Rent expense amounted to approximately $120,100 and $133,600 for the years
ended December 31, 1996 and 1995, respectively.
Leased equipment under capital leases as of December 31, 1996 is as
follows:
Building $1,348,824
Land 411,176
Equipment 276,441
Less accumulated amortization (252,939)
----------
Net Property and Equipment Under Capital Leases $1,783,502
==========
F-16
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. Stock Based Compensation Plans
------------------------------
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock- Based Compensation" (SFAS 123) during the year ended December 31,
1996. In accordance with the provision of SFAS 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 123,
the Company's net income and earnings per share would be reduced to the
following pro forma amounts:
1996 1995
---- ----
Net Loss:
As reported $(1,409,800) $(1,816,285)
Pro forma (1,412,843) (1,816,285)
Net Loss Per Share of Common Stock:
As reported $ (7.74) $ (22.04)
Pro forma $ (7.76) $ (22.04)
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 1995.
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.
The Company had a note receivable from its former President of $35,000 at
December 31, 1995. Interest is payable monthly at 9% per annum and the note
is due in April 1997. The note is secured by 3,333 shares of the Company's
common stock which are owned by the Company's former President. The note
receivable and accrued interest were sold in connection with the
divestiture of three operating divisions (Note 2).
F-17
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. Related Party Transactions (Continued)
--------------------------------------
On November 1, 1994, all of the Company's shareholders agreed in writing
with each other and with the Company to contribute pro rata from their
shareholdings up to a total of 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 (Note 5).
The Company incurred expenses in connection with desktop publishing
services provided by a Corporation controlled by the wife of the Company's
former Chief Executive Officer of $7,800 for the year ended December 31,
1995.
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.
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 in December 1997, 13,334 in December 1998 and
10,000 in December 1999. The warrants are exercisable at $3.75 per share at
anytime through December 2001.
10. Concentration of Credit Risk and Major Customers
------------------------------------------------
The Company provides credit, in the normal course of business, to a large
number of companies in the 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.
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
F-18
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11. Sale of Software (Continued)
---------------------------
at 8.5% per annum and are due December 27, 2005 with interest payable
annually. The Partnership closed on December 28, 1995 selling units
representing 18.81% of the purchase price of the software and the Company
received $188,000, net of expenses, and received the second payment of
$188,000 in March 1996. A second partnership was formed in 1996 in Canada
to sell units to acquire the remaining 81.19% of the Software. The Company
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 the following prices for each copy of the
Software purchased from the Partnership:
(a) until the Company has purchased $475,000 of copies in each year,
100% of the price the Company invoices to its customers for each copy
of the Software; plus
<TABLE>
<CAPTION>
Percentage of Sales
-------------------
Until Below Over
December 31, Sales Benchmark Benchmark Benchmark
------------ --------------- --------- ---------
<S> <C> <C> <C>
1997 $ 8,850,000 5% .1%
1998 10,275,000 4 .1
1999 15,150,000 3 .1
2000 34,000,000 5 .1
Later Years -0- 6 6
</TABLE>
Prior to the repayment of the Promissory Notes, payments to the Partnership
for Software will be applied by the Partnership as follows:
i) first, the Partnership shall pay to the Company on behalf of each
Limited Partner, an amount equal to the interest then payable in
respect of the Promissory Note issued by such Limited Partner;
ii) second, the balance remaining allocable to each Limited Partner
will be paid (A) 55% to the Limited Partner and (B) 45% to the
Company for repayment of the principal amount then outstanding on
the Limited Partner's Promissory Note.
The Partnership has also entered into an Option Agreement with the Company
whereby the Company may purchase the Software from the Partnership upon
certain triggering events. Upon the occurrence of such triggering events
the Company, at its sole option, may purchase the software from the
Partnership for a purchase price based upon the following.
The purchase price payable by the Company for the Software shall be equal
to the fair market value of the Software on the Exercise Date as determined
by a qualified arm's length appraiser agreed to by the parties, provided
that, if as a result of a Triggering Event, securities are issued by the
F-19
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11. Sale of Software (Continued)
---------------------------
Company, or to the Company or its shareholders, the purchase price shall be
satisfied by the transfer by the Company to the Partnership of that number
of securities having a fair market value equal to the lesser of the
purchase price and 22.0% of the securities issued or received, as the case
may be, on a fully diluted basis. The Company agrees to jointly elect under
applicable taxing statutes, with the Partnership to complete the
transaction on a tax deferred basis, with respect to the issuance of
securities to the Partnership by allowing the Partnership to transfer the
Software to a Canadian subsidiary of the Company on a tax deferred basis.
In the event that sales revenue earned by the Partnership in any year under
the terms of the Distribution Agreement are less than $475,000 in any
calendar year prior to the Exercise Date, the percentage of the securities
to be transferred by the Company to the Partnership shall be increased by
1% for each 10% shortfall to a maximum of 5% in any calendar year, provided
that the option of the Partnership to acquire such additional shares shall
not be exercisable by the Partnership until the promissory notes issued by
limited partners to the Company have been paid in full and until such time,
such additional options may be repurchased by the Company for a price equal
to 150% of the cash shortfalls for which the options were issued.
Since the Company is responsible for maintaining, upgrading and developing
future revisions of the Software, the transaction has not been accounted
for as a sale by the Company. In addition, the notes receivable have not
been recorded by the Company as a result of their long-term nature and they
are primarily expected to be repaid as the Company sells software to third
parties and makes payments to the Partnership pursuant to terms of the
Distribution Agreement. Therefore, repayment prior to 2005 will only occur
out of revenue generated by the Company. This transaction has been
accounted for by the Company on a cost recovery basis and the cash received
from the Partnership will reduce the capitalized software costs and revenue
will be recognized when the capitalized software costs have been reduced to
zero since the Company has, in essence, retained substantially all rights
of ownership.
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. Subsequent Events
------------------
Reverse Stock Split
-------------------
On March 26, 1997, the Company filed a Proxy Statement for a special
meeting of stockholders to be held April 25, 1997 to vote on a proposed
reverse stock split of the Company's common stock on the basis of two
shares for each three shares outstanding. The Company's stockholders
approved the reverse stock split on April 25, 1997 and accordingly, all
share amounts and earnings per share amounts have been retroactively
restated to give effect to the reverse stock split.
13. Subsequent Events (Unaudited)
----------------------------
Warrants (Unaudited)
--------------------
In June 1997, the Underwriter returned 106,667 warrants to the Company
without consideration.
F-20
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
13. Subsequent Events (Unaudited) (Continued)
----------------------------------------
Bridge Loans (Unaudited)
------------------------
In June through August 1997, the Company borrowed $750,000 from a group of
nine lenders (the "1997 Bridge Loan"). As additional compensation for the
1997 Bridge Loan, the Company issued an aggregate of 150,000 shares of
common stock to the lenders, one share for each $5 loaned to the Company.
The Bridge Loan bears interest at 12% per annum and is payable 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 Loan.
The Company paid the Private Placement Agent a sales commission of 10% of
the proceeds of the Bridge Loans and a 3% nonaccountable expense allowance.
Proposed Public Stock Offering (Unaudited)
------------------------------------------
The Company has executed a letter of intent with an Underwriter to offer
900,000 units of the Company's securities, each unit consisting of one
share of the Company's common stock and one redeemable common stock
purchase warrant. The offering price per unit will be the average bid price
of the common stock in the over-the-counter market for the common stock on
the day prior to the Offering. Each warrant is exercisable to purchase one
share of common stock at the public offering price of the Units 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 135,000 units from the
Company to cover over-allotments for a period of 30 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 $100, to purchase up to 90,000 units which shall be
exercisable at a price per unit equal to 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. 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-21
<PAGE>
Default on Facilities Lease
- ---------------------------
In May 1997, as a result of the Company's default on its capital lease, the
Company agreed to return 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 form 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.
<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 900,000 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............................... $ 4,124
NASD Filing Fee.................................... 1,861
Blue Sky Legal and Filing Fees..................... 15,000
Printing Expenses.................................. 30,000
Legal Fees and Expenses............................ 60,000
Accounting Fees.................................... 45,000
NASDAQ Application Fee............................. 10,000
Transfer Agent Fees................................ 3,000
Miscellaneous Expenses............................. 31,015
------
TOTAL.............................................. $200,000 (1)
(1) All expenses, except the SEC and NASD registration fees, are estimated.
Does not include the Underwriter's commission of $_______, nonaccountable
expense allowance of $_______, 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(3)
1.06 Form of Underwriter's Warrant Agreement(3)
1.07 Form of Warrant Agreement(3)
1.08 Financial Advisory and Investment Banking Agreement(3)
1.09 Form of Amended Underwriting Agreement
1.10 Form of Amended Financial Advisory and Investment Banking
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) (3)
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 (3)
10.18 Bridge Loan Agreement (3)
23.10 Consent of Angell & Deering (3)
23.11 Consent of Gary A. Agron (See 5.05, above) (3)
23.12 Consent of Angell & Derring
27.01 Financial Data Schedule (3)
- ---------
(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 February 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 February 4, 1998
- --------------------------
Raymond J. Meyers Chief Financial Officer,
(Principal Accounting Officer),
and Director
/s/ David A. Appell Director February 4, 1998
- --------------------------
David A. Appell
/s/ Dickon Pownall-Gray Director February 4, 1998
- --------------------------
Dickon Pownall-Gray
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
----------- -----
1.09 Form of Amended Underwriting Agreement
1.10 Form of Amended Financial Advisory and Investment Banking
Agreement
1.11 Form of Amended Underwriter's Warrant Agreement
2.01 Restated Articles of Incorporation of the Registrant
2.02 Bylaws of the Registrant
23.12 Consent of Angell & Deering
II-7
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
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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
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<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.
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(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
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<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.
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<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
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<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.
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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
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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.
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(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.
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(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.
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(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).
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(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
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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.
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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
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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;
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(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
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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.
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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
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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
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:
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<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
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<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
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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.
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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
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 900,000 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 90,000 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 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 90,000 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
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<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
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<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.
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<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
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<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
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<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.
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<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
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<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,
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<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
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<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.
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<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
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<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 a Warrant to purchase
initially, at any time from __________________, 1999 until 5:00 p.m., New York
City time on __________________ (the "Expiration Date"), 90,000 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)
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
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,
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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.
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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
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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.
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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.
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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.
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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
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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
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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
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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.
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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;
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(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.
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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.
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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
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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.
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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.
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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:
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(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
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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
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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
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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
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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
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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
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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.
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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.
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(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
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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.
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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
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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
