Exhibi
Investment Agreement by and between
Digital Video Systems, Inc.
and Oregon Power Lending Institution
October 15, 1998
Mr. ▇▇▇▇▇▇ ▇▇▇▇▇
Secretary & Treasurer
Oregon Power Lending Institution
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▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Dear Don,
RE: Oregon Power Lending Institution and Digital Video Systems,
Inc. Investment Agreement
We are pleased to advise that Digital Video Systems, Inc.'s ("DVS")
Board of Directors has approved the following Investment Structure,
which is based upon your prior conversations and correspondence with
us. It is contemplated that in this transaction Oregon Power Lending
Institution ("OPLI") will have the right to acquire a total of
approximately 24,275,000 shares of DVS common stock. DVS currently
has outstanding approximately 25,337,000 shares of common stock, and
upon completion of this transaction (excluding exercise of the OPLI
option or any future issuances by DVS), the total outstanding shares
of DVS will be approximately 49,612,000 (the "Final Outstanding
Common Stock").
Because DVS is subject to Nasdaq rules, we are required to obtain
shareholder approval before we can sell 20% or more of our ownership
(or voting power) at a discount to the market price. Thus, we are
required to split the transaction into separate tranches, with the
tranches that follow the First Tranche being subject to shareholder
approval.
1) First Tranche. OPLI will make an initial investment of $1.5
million in cash by October 23rd and $500 thousand in cash on or
before November 5th (the "First Tranche"). In consideration of
and upon funding of the First Tranche, DVS will issue $2.0
million of convertible preferred shares ("Preferred Stock") to
OPLI. The shares of Preferred Stock issued in the First
Tranche will convert into 4,255,319 shares of DVS' common stock
("Common Stock"). This represents a conversion price of
approximately $0.47 per share of Common Stock.
2) Second Tranche. OPLI will make an investment of $1.0 to $2.0
million in cash during November 1998 (the "Second Tranche").
In consideration of and upon funding of the Second Tranche, DVS
will issue a minimum of $1.0 to a maximum of $2.0 million in
convertible preferred shares ("Preferred Stock") to OPLI. The
shares of Preferred Stock issued in the Second Tranche will
convert into a minimum of 2,127,660 to a maximum of 4,255,319
shares of DVS' common stock ("Common Stock"). This represents
a conversion price of approximately $0.47 per share of Common
Stock. The Second Tranche is subject to and conditioned upon
DVS obtaining the approval of its shareholders to the Second
Tranche, as well as subsequent Tranches. DVS anticipates that
it will obtain foregoing shareholder approval within
approximately 30 to 60 days from the date hereof.
3) Third Tranche. OPLI will have an option to make a third
investment of a maximum of $2.0 million in cash during December
1998 (the "Third Tranche"). In consideration of and upon
funding of the Third Tranche, DVS will issue up to a maximum of
$2.0 million of convertible preferred shares ("Preferred
Stock") to OPLI. The shares of Preferred Stock issued in the
Third Tranche will convert into a maximum of 4,255,319 shares
of DVS' common stock ("Common Stock"). This represents a
conversion price of approximately $0.47 per share of Common
Stock. Upon the full investment of $6.0 million and the
conversion of the $6.0 million into common shares issued in
association with the First, Second and Third Tranches, OPLI
will own approximately 33% of the Final Outstanding Common
Stock (including the shares of the common stock underlying the
Preferred Stock issued to OPLI in the First Tranche and Second
Tranche). The Third Tranche is subject to and conditioned upon
DVS obtaining the approval of its shareholders to the Second
Tranche, as well as subsequent Tranches.
4) Subsequent Tranche(s). OPLI will have the opportunity to
invest on or before April 30, 1999, an additional $4.0 million
in DVS (the "Subsequent Tranche(s)") for a total potential
investment (excluding exercise of OPLI's option) of $10.0
million. The subsequent Tranche(s) will be in increments of
$2.0 million. In consideration of and upon funding of the
Subsequent Tranche(s), DVS will issue up to an additional $4.0
million of Preferred Stock to OPLI. The maximum number of
preferred shares of DVS issued in the Subsequent Tranche(s)
will be convertible into 8,510,638 shares of DVS common stock.
This represents a conversion price of approximately $0.47 per
share of Common Stock. OPLI will fund the Subsequent
Tranche(s) with 50% in cash and 50% in Letter(s) of Credit
issued to DVS suppliers. The Subsequent Tranche(s) are subject
to and conditioned upon DVS obtaining the approval of its
shareholders to the Second Tranche, as well as subsequent
Tranches.
5) Option Grant. In connection with funding the First Tranche,
DVS will grant a stock option to purchase 2.0 million shares of
Common Stock at an exercise price of $0.75 per share. In
connection with the funding of the Second Tranche, DVS will
grant a stock option to purchase 1.0 million shares of Common
Stock at an exercise price of $0.75 per share. Both options
will expire twenty-four (24) months after the grant date. The
terms of the options will provide for OPLI to exercise this
option, in whole or in part, at any time prior to its
expiration by making a cash payment to DVS for the portion
exercised.
6) Terms of Preferred Stock. All of the Preferred Stock issued in
the First Tranche, Second Tranche, Third Tranche, and
Subsequent Tranche(s) will have identical terms. The Preferred
Stock will have a term of three (3) years from the date of
November 1, 1998 and will be convertible by OPLI into DVS
common stock, at any time. Any shares of Preferred Stock not
converted at the end of the three-year term will, at OPLI's
option, probably be converted into shares of DVS common stock
or with the mutual agreement of both OPLI and DVS; DVS will
repurchase all or a portion of such outstanding Preferred Stock
at a price equal to 125% of the original investment. DVS will
file a registration statement for all common stock contemplated
in this transaction within 60 days following the first
conversion of the Preferred Stock into common stock to register
the common stock for public resale by OPLI.
7) Right of First Refusal. OPLI understands that DVS may need to
raise additional capital in order to operate and grow its
business. In order to do this DVS may be required to issue
shares of Common Stock or other securities that may be
convertible into Common Stock. Because any such issuance could
result in OPLI converting the Preferred Stock from the First
Tranche, Second Tranche and Third Tranche into less than 33% of
the total outstanding Common Stock after the conversion, DVS
hereby grants OPLI a right of first refusal to make an
additional investment in DVS on the same terms as have been
offered to DVS by a third-party investor (the "Right of First
Refusal") upon DVS accepting such third-party offer. The Right
of First Refusal shall remain in effect up until such time as
the term of the Preferred Stock expires; provided OPLI has
converted into Common Stock at least half of all Preferred
Stock issued to OPLI from the First Tranche, Second Tranche and
Third Tranche within eighteen (18) months from the date of
issuance of the Preferred Stock associated with the First
Tranche.
8) Board Seats. DVS will provide OPLI with up to two (2) seats on
the DVS' Board of Directors upon the completion of the funding
associated with the First Tranche. OPLI may designate these
individuals and DVS agrees to appoint them to DVS' Board of
Directors, subject to a standard due diligence review that will
take no more than five (5) business days.
9) Restructuring of Capital Structure. DVS will commit to using
its best efforts to restructure its current capital structure,
by eliminating, to the extent reasonably possible, its Class A
Warrants and Class B Warrants (the "Warrants"). DVS proposes
to swap the Warrants for Common Stock. If, however, another
less dilutive or less costly method to eliminate the Warrants
is available, DVS may use such alternative method. DVS
estimates that it will require approximately four (4) months to
complete this restructuring.
10) Confidentiality. Each party shall safeguard the secrecy and
confidentiality of the letter and will not allow the existence
of or the contents of this letter to be published, disseminated
or disclosed to any person (other than officers, directors and
employees of such party and its accountants and lawyers, all of
whom shall agree to maintain the confidentiality of this
letter) without the prior written consent of the other party,
except as is required by law or regulation applicable to the
parties.
11) Binding Agreement. The undersigned, does hereby confirm and
acknowledge that this letter is a binding expression of the
terms of OPLI's investment in DVS and that such terms are
acceptable, subject to obtaining the approval of DVS's
shareholders for the Second Tranche, Third Tranche and
Subsequent Tranche(s).
If you agree to the points described above, please so indicate by
signing below and returning a signed copy of this letter to me by fax
at (▇▇▇) ▇▇▇-▇▇▇▇. Should you have any questions concerning the
information contained within this letter or the Subscription
Agreement, please feel free to contact me by telephone at (408) 874-
8224.
We look forward to working with you in the future.
Very truly yours,
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇.
President and Chief Executive Officer
ACKNOWLEDGED AND AGREED TO:
OREGON POWER LENDING INSTITUTION
_________________________
▇▇▇▇▇▇ ▇▇▇▇▇
Secretary and Treasurer
Letter to: Mr. ▇▇▇▇▇▇ ▇▇▇▇▇
October 15, 1998
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