[Digital Video Systems, Inc. Logo]
October 15, 1998
Mr. Xxxxxx Xxxxx
Secretary & Treasurer
Oregon Power Lending Institution
000 Xxxxxx Xxxxxx
Xxxxx 0
Xxxxxxxx Xxxx, XX 00000
Dear Xxx,
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.
[Digital Video Systems, Inc. Letterhead]
LETTER TO: MR. XXXXXX XXXXX
OCTOBER 15, 1998
PAGE 2 OF 5
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
LETTER TO: MR. XXXXXX XXXXX
OCTOBER 15, 1998
PAGE 3 OF 5
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
LETTER TO: MR. XXXXXX XXXXX
OCTOBER 15, 1998
PAGE 4 OF 5
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 an
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).
LETTER TO: MR. XXXXXX XXXXX
OCTOBER 15, 1998
PAGE 5 OF 5
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 (000) 000-0000.
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 (000) 000-0000.
We look forward to working with you in the future.
Very truly yours,
/s/ Xxxxxx X. Xxxxxx, Xx.
--------------------------------------
Xxxxxx X. Xxxxxx, Xx.
President and Chief Executive Officer
ACKNOWLEDGED AND AGREED TO:
OREGON POWER LENDING INSTITUTION
/s/ Xxx Xxxxx
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Xxxxxx Xxxxx
Secretary and Treasurer
