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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): November 12, 1998
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PROVIDENT AMERICAN CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 0-13591 23-2214195
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2500 DeKalb Pike, Norristown, Pennsylvania 19404
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(Address of principal executive offices/Zip Code)
Former name, former address, and former fiscal year,
if changed since last report: N/A
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Item 5. Other Events
This Current Report on Form 8-K is being filed by Provident American
Corporation ("Provident" or the "Company") to supplement and update the
information contained in the periodic reports filed during 1998 and to disclose
additional information or transactions occurring subsequent to September 30,
1998. Such information relates primarily to the operations of its majority owned
subsidiary, HealthAxis.com Inc., formerly known as Insurion Inc. ("HealthAxis"),
as well as certain financing transactions engaged in by the Company in order to
fund the continuing operations of HealthAxis.
The following information is qualified in its entirety by, and should
be read in conjunction with, the more detailed information and financial data,
including the Consolidated Financial Statements of the Company and its
subsidiaries, and the notes thereto, appearing in the Company's reports filed
with the Securities and Exchange Commission ("SEC"). Except for the historical
information contained herein, this Current Report on Form 8-K, contains certain
forward-looking statements regarding the Company's business and prospects that
are based upon numerous assumptions about future conditions which may ultimately
prove to be inaccurate and actual events and results may materially differ from
anticipated results described in such statements. Such forward-looking
statements involve risks and uncertainties, such as historical and anticipated
losses; uncertainty of future results, new business challenges, risks associated
with brand development, competition, need for additional capital, management of
potential growth; new management team of HealthAxis, dependence on key
personnel, dependence on the Internet, commercial viability of the Internet,
risk of changes in the Internet, dependence on strategic alliances with Internet
partners, liability for information retrieved from the Internet, uncertain
acceptance of the Internet as a medium for health insurance sales, risk capacity
constraints; reliance on internally developed systems; system development risks,
dependence on third party systems, rapid technological change, risk of system
failure or inadequacy, A.M. Best's insurance ratings, dependence on key
suppliers of insurance products, dependence upon third party claims
administration services, changes in the insurance industry, insurance industry
factors, health care reform legislation, government regulation and legal
uncertainties, potential conflicts of interest, intercompany agreements not
subject to arm's length negotiations and risk associated with the Year 2000 and
absence of dividends. Any one or a combination of these factors could have a
material adverse effect on the Company's business, financial condition and
results of operations. These forward-looking statements represent the Company's
judgment as of the date of this report. The Company disclaims, however, any
intent or obligation to update these forward-looking statements.
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Amendments to HealthAxis' Agreements with Internet Partners
During 1998 the Company entered into various agreements in order to
sell and service insurance policies via the Internet along with agreements
related to financing and management. Effective February 1, 1998 the Company
entered into the first of these agreements: an Amended and Restated Interactive
Marketing Agreement with America Online, Inc. ("AOL") which provided that the
Company will be AOL's exclusive third-party direct marketer for managed-care
products for individuals and groups of less than fifty individuals in the United
States along with vision insurance, prescription coverage, dental, critical care
insurance and long-term care insurance coverage. In June 1998 the Company
entered into two similar promotional agreements with CNET, Inc. ("CNET"), which
also includes Snap.com, and LYCOS, Inc. ("LYCOS") whereby CNET and LYCOS each
would exclusively promote the Company's health insurance and other related
products on CNET's and LYCOs' web sites. The primary terms of these agreements
were previously described in the Company's reports filed with the SEC pursuant
to the Securities Exchange Act of 1934, as amended.
In November 1998, HealthAxis renegotiated its agreements with AOL, CNET
and LYCOS in order to obtain additional time needed to develop and test its web
site and to secure additional funds necessary to enable HealthAxis to make
payments that were coming due and/or past due under these agreements. AOL, CNET
and LYCOS each agreed to extend the launch date for HealthAxis' web site and the
due dates for HealthAxis' payment of fees. The material terms of the amendments
to these three agreements are described below.
The AOL Amendment. In February 1998, the Company's wholly owned
subsidiary, Provident Health Services, Inc. ("PHS"), entered into an Amended and
Restated Interactive Marketing Agreement (the "IM Agreement") with AOL. PHS
subsequently assigned all of its rights in the IM Agreement to HealthAxis. Due
to the delays in the implementation of its web site during the preliminary phase
of the web site development, management of HealthAxis determined to utilize a
two-step launch of its web site consisting of a "soft launch" whereby HealthAxis
would be able to perform live system tests and upon the completion of these
tests an "official launch." In addition, HealthAxis found it necessary to
reschedule payment obligations which were past due under the IM Agreement. As a
result, PHS and HealthAxis entered into the First Amendment to the Amended and
Restated Interactive Marketing Agreement (the "IM Amendment") with AOL effective
November 13, 1998. The IM Amendment provides that HealthAxis will be the
exclusive third-party direct marketer of certain health insurance and other
related policies (the "Products") for individuals and groups of less than fifty
individuals in the United States and HealthAxis will advertise the Products to
AOL subscribers on AOL's online network under the HealthAxis.com brand name to
be used exclusively for the Products. The IM Amendment extended the official
launch of the www.healthaxis.com web site from October 1, 1998 to no later than
March 31, 1999. The initial term commencing on February 1, 1998, was extended
and now expires on January 31, 2000, instead of October 1, 1999, with a renewal
period of two additional years at HealthAxis' election. The IM Amendment
provides that PHS is required to pay $10.0 million to AOL during 1998 and 1999,
an increase of $2.0 million from the IM Agreement. HealthAxis paid AOL $8.5
million during 1998 and is required to pay AOL $1.5 million during 1999.
HealthAxis obligations under the IM Amendment are guaranteed by the Company.
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Under the IM Amendment, the Company issued to AOL immediately
exercisable warrants to purchase 300,000 shares of the Company's common stock,
par value $0.10 per share (the "Provident Common Stock"), at an exercise price
of $4.48 per share, for a period of seven years (rather than five years as set
forth in the IM Agreement) commencing February 1, 1998. Under the IM Amendment,
the Company also agreed to issue to AOL additional warrants in the fourth
quarter of 1998 to purchase shares of Provident Common Stock and shares of
HealthAxis common stock, no par value per share (the "HealthAxis Common Stock").
The warrant agreements executed in connection with the IM Amendment provide that
AOL shall receive warrants to purchase 300,000 shares of Company's or
HealthAxis' or any combination thereof for an aggregate of 300,000 shares. The
exercise price of the warrants to purchase shares of the Provident Common Stock
is $3.38 per share for a period of nine years commencing November 13, 1998. Such
warrants are immediately exercisable. The warrants to purchase shares of
HealthAxis Common Stock have an exercise price of $1.77 per share and are
exercisable for a period of nine years commencing November 13, 1998. Such
warrants are immediately exercisable. See "Recent Sales of Unregistered
Securities by Provident."
Under the IM Amendment, if HealthAxis elects the two year renewal, then
HealthAxis shall make an additional payment to AOL of $33.5 million (rather than
$32.5 million as set forth in the IM Agreement) on or before January 31, 2000.
Under certain circumstances, the IM Amendment can be extended by AOL. If
HealthAxis exercises its right to renew the IM Amendment then the IM Amendment
also provides for the issuance of warrants to purchase 300,000 shares of
Provident subject to the terms and conditions of the IM Amendment. In addition,
the IM Amendment has provided that upon its expiration or termination,
HealthAxis must release and discharge its underwriters, third party insurance
carriers and other providers from any obligations which would preclude such
third parties from entering into a similar arrangement with AOL or its
affiliates. Finally, under the IM Amendment, HealthAxis will pay additional
administrative fees to AOL if accepted applications exceed certain levels for
the initial and renewal terms of the IM Amendment.
The CNET Amendment. On June 14, 1998, CNET and HealthAxis entered into
the Promotion Agreement, which was renegotiated in November 1998. Effective
November 13, 1998, CNET and HealthAxis entered into the First Amendment to
Promotion Agreement (the "CNET Amendment"). Under the CNET Amendment, the
promotions that had been scheduled for delivery during the fourth quarter of
1998 and January 1999 will, subject to CNET's discretion and reasonable efforts,
be delivered from February 1, 1999 until December 31, 1999. The parties also
agreed to reschedule future payments and defer payments due under the Promotion
Agreement until April 1, 1999.
The LYCOS Amendment. Effective November 13, 1998, HealthAxis and LYCOS
entered into the Amended and Restated Agreement (the "LYCOS Amendment") to amend
the initial agreement (the "LYCOS Agreement") between the parties dated June 26,
1998 as amended October 30, 1998. Under the LYCOS Amendment, LYCOS agreed to
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reduce the fees payable by HealthAxis by approximately $4.08 million during the
first term of the LYCOS Agreement and HealthAxis agreed to a 28% reduction in
guaranteed impressions during the same period. In addition, the parties agreed
to omit a provision under which LYCOS would sell advertising on the co-branded
site. The parties reduced the rate of compensation payable to LYCOS for
over-delivery of impressions under the LYCOS Agreement and reduced the minimum
number of policies that must be sold in order to trigger additional payments to
LYCOS. Finally, the launch date of the HealthAxis web site was extended from
between September 1, 1998 and November 1, 1998 to between March 1, 1999 and May
1, 1999, and the term of the LYCOS Agreement was reduced from twenty-seven
months to twenty-four months commencing with the launch date of the co-branded
web site under the LYCOS Amendment.
Sale of PALHIC to Central Reserve Life Insurance Company/Reinsurance of Group
Medical and Life Insurance Business
On November 12, 1998, the Company and Provident Indemnity Life
Insurance Company ("PILIC"), a subsidiary of Provident, signed a binding letter
agreement to reinsure 100% of its group medical and group life inforce business
and sell the Company's group medical marketing, sales distribution rights and
all of the outstanding capital stock of Provident American Life and Health
Insurance Company ("PALHIC") to Central Reserve Life Insurance Company ("CRLC")
(the "CRLC Agreement"). The following description of the CRLC Agreement is
qualified by reference to the full text of such agreement which was filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
Under the CRLC Agreement, PALHIC will reinsure 100% of its business to
PILIC, which in turn will reinsure through a 100% quota share reinsurance
agreement all of the Company's group medical and group life business to
Reassurance Company of Hanover ("RCH") for a $10.0 million ceding commission. In
addition, PILIC will sell all of the outstanding shares of PALHIC to CRLC for an
amount equal to PALHIC's capital and surplus. The Company will also transfer all
rights and control regarding the Company's licensed insurance agents and enter
into non-compete and non-solicitation agreements with CRLC regarding the
Company's licensed insurance agents with respect to the future sale of health
insurance products for a three year period. The Company anticipates that these
transactions will be effective by December 31, 1998. The completion of the
transactions described in the CRLC Agreement are subject to regulatory approval.
The Company can provide no assurance that this transaction can be consummated
within the time frame contemplated by the CRLC Agreement.
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The CRLC Agreement provides for a $10.0 million ceding commission to be
paid to PILIC by RCH and will consist of a $5.0 million non-refundable payment
plus a $5.0 million contingent payment, whereby the Company will guarantee that
RCH will earn at least $10.0 million in future profits from the purchased
inforce business, plus 12% interest (the "guaranteed amount"). If RCH fails to
earn the guaranteed amount within five years of the date of the closing of the
CRLC transaction, the Company must repay RCH the lesser of the guaranteed amount
less RCH's actual profits on the inforce business, or $5.0 million, plus 12%
interest on $5.0 million. As security for the Company's guarantee, the Company
will execute a security agreement in favor of RCH secured by the stock of PILIC.
Such agreement will provide that RCH will take ownership of PILIC if the Company
defaults on its guarantee to RCH. If RCH's future profits exceed the guaranteed
amount then PILIC is entitled to receive an additional payment from RCH equal to
two-thirds of the policy fees collected during 1999 and one-third of the policy
fees collected during 2000.
The Company is evaluating the accounting and financial impact on the
Company's 1998 consolidated GAAP earnings of the transactions with CRLC and RCH.
Such transactions may be material to the 1998 and subsequent financial
statements.
Under the CRLC Agreement, PILIC has the right to assume new business
written by PILIC's agents for five years after the effective date of the CRLC
Agreement. PILIC may assume up to 20% of the new business written by PILIC's
agents during 1999 and up to 50% for the remaining four years via a new quota
share reinsurance agreement with PALHIC. For the purpose of computing profit and
loss of the reinsured business, CRLC, through PALHIC, will charge not more than
43% of first year premium and 28% of renewal premium, plus an administrative fee
of 3%, which will be reduced to 2% if total policies under administration exceed
$100 million of premium inforce.
Pursuant to the terms of the CRLC Agreement, PILIC may also assume 50%
of the new business sold through HealthAxis and directly underwritten by PALHIC
commencing January 1, 1999 via a new quota share reinsurance agreement with
PALHIC for a period of 3 years. For the purpose of computing profit and loss of
the reinsured business, CRLC, through PALHIC, will charge not more than 28% of
first year premium and 21% of renewal premium, plus an administrative fee of 3%.
PALHIC will pay HealthAxis commissions of 15% of first year premium and 8% of
renewal premium, plus all administrative fees until HealthAxis has recovered all
payments made to initiate its Internet program. After such time the fees will be
subject to the quota share agreement between PALHIC and PILIC. CRLC will work to
develop additional health insurance products for sale by HealthAxis and enter
into comparable reinsurance agreements with PILIC. Such transactions are subject
to regulatory approval.
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Issuance of HealthAxis Common Stock upon Conversion of $5.0 Million Convertible
Note
On September 30, 1998, Health Plan Services, Inc. ("HPS"), the holder
of HealthAxis' $5.0 million convertible note (the "Convertible Note"), exercised
an option to convert the Convertible Note into 2,316,177 shares of HealthAxis
Common Stock, representing approximately 15% of outstanding HealthAxis Common
Stock. In addition, HealthAxis issued 49,188 shares of HealthAxis Common Stock
to HPS in consideration for approximately $106,000 of outstanding accrued but
unpaid interest on the Convertible Note. The conversion agreement with HPS
includes an anti-dilution provision which requires HealthAxis to issue
additional shares of HealthAxis Common Stock to such holder in certain
circumstances. Under such agreement, if HealthAxis issues additional shares of
Common Stock (or any stock convertible into HealthAxis Common Stock) for
consideration less than $2.16 per share prior to having a registration statement
declared effective by the SEC, HealthAxis would be required to issue additional
shares to its minority shareholder. In connection with the conversion of the
Convertible Note, the number of shares issuable upon the conversion of the
Convertible Note was increased from 12.5% to 15% of the outstanding shares of
HealthAxis.
Provident Future Capital Needs
The Company estimates that its anticipated funding needs for the fourth
quarter of 1998 and 1999 will approximate $30.0 million and $63.0 million,
respectively, of which $4.0 million and $16.0 million relate to the funding
needs of HealthAxis for the fourth quarter of 1998 and 1999, respectively, which
are described below. The Company intends to fund its capital needs through
premiums generated from insurance sales, commission and fee income of
HealthAxis, the sale of its insurance business, including PAHLIC, to CRLC, the
sale of short and long term investments and the issuance of $5.75 million of
HealthAxis Common Stock, described herein. The Company is currently exploring
the possible issuance of approximately $15.0 million of HealthAxis debt or
equity during 1999.
No assurances can be given that such sources will be available or
sufficient to fund the Company's operations particularly in light of the funds
required by HealthAxis to implement its business plan. As a result of these
funding needs, the Company will need to seek external debt or equity financing.
No assurance can be given as to the Company's ability to successfully access the
debt or equity markets in light of its current financial condition as well as
market conditions for private or public debt or equity offerings generally.
HealthAxis' Capital Raising Efforts and Future Capital Needs
HealthAxis' operational efforts to date have been formation and
development orientated. The HealthAxis "soft launch" of its web site commenced
on December 4, 1998, and included a limited number of impressions from AOL. As
part of the "soft launch", Provident products are currently available for sale
on such web site in 19 states. HealthAxis is currently negotiating to add the
products of additional carriers to its web site. It is currently anticipated
that the "official launch" will occur in the first quarter of 1999. Since its
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inception, HealthAxis has incurred significant costs to develop and enhance its
technology, to create its web site and to establish Internet marketing,
insurance carrier, and claims administration relationships. As a result, on
September 30, 1998, HealthAxis had a retained earnings deficit of $3.2 million.
During 1998, HealthAxis funded its operations through the $750,000 fee
received from HPS in return for the exclusive right to administer the HealthAxis
insurance business and a $5.0 million private placement of convertible debt
which was converted into 2,365,365 shares of HealthAxis Common Stock on
September 30, 1998. On November 13, 1998, the Company purchased an additional
682,395 shares of HealthAxis Common Stock at a price of approximately $4.40 per
share. In addition, effective September 15, 1998, HealthAxis issued 405,886
shares of its Series A Convertible Preferred Stock to PILIC for aggregate
consideration of $2.4 million, or $5.91 per share. Effective November 16, 1998,
HealthAxis issued an additional 140,030 shares of its Series A Convertible
Preferred Stock to PILIC pursuant to the price adjustment provisions of the
agreement between HealthAxis and PILIC. The Series A Convertible Preferred Stock
is convertible into HealthAxis Common Stock on a one for one basis, subject to
adjustment, as described in the Certificate of Designation related to the Series
A Convertible Preferred Stock of HealthAxis. Each share of Series A Convertible
Preferred Stock has the same voting rights as a share of HealthAxis Common Stock
into which it is convertible and has certain preferences with respect to the
payment of dividends and upon liquidation over the HealthAxis Common Stock.
The Certificate of Designation related to the Series A Convertible
Preferred Stock contains a mandatory redemption provision effective September
15, 1999 which would permit HealthAxis to redeem any or all of the Series A
Convertible Preferred Stock outstanding at a redemption price of approximately
$4.40 per share (subject to adjustments for stock dividends, stock splits, stock
combinations, recapitalizations and similar occurrences) plus an amount that
would yield a total annualized return of 10% calculated daily and compounded
annually from the issue date through the redemption date. In addition, the
holders of at least 51% of the outstanding shares of the Series A Preferred
Stock have the right to require HealthAxis to redeem up to 100,000 shares on
February 1, 2002 and on the first day of each calendar quarter thereafter
provided the Series B Preferred Stock has been redeemed in full. Reference is
made to the Certificate of Designation attached hereto as Exhibit 10.6 for
additional information on the Series A Convertible Preferred Stock of
HealthAxis.
On November 13, 1998, HealthAxis issued 625,529 shares of Series B
Convertible Preferred Stock to AOL at a price of approximately $4.40 per share
for an aggregate purchase price of $2.75 million, of which a portion was used to
pay amounts due to AOL under the IM Agreement. The Series B Convertible
Preferred Stock is convertible into a number of shares of HealthAxis Common
Stock on a one for one basis, subject to adjustment, as described in the
Certificate of Designation related to the Series B Convertible Preferred Stock
of HealthAxis. The outstanding shares of Series B Convertible Preferred Stock
shall automatically convert into shares of HealthAxis Common Stock based upon a
conversion ratio set forth in the Certificate of Designation of HealthAxis upon
the consummation of the first public offering of HealthAxis Common Stock at a
pre-offering market capitalization of not less than $200.0 million and aggregate
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proceeds of the offering are not less than $25.0 million. Holders of 51% of the
outstanding shares of Series B Preferred Stock have the right to require
HealthAxis to redeem any or all of the outstanding Series B Preferred Stock
within six months of the occurrence of certain triggering events described in
the Certificate of Designation.
Each share of Series B Convertible Preferred Stock has the same voting
rights as a share of HealthAxis Common Stock into which it is convertible and
has certain preferences with respect to the payment of dividends and upon
liquidation over the Series A Convertible Preferred Stock and the HealthAxis
Common Stock. Reference is made to the Certificate of Designation attached
hereto as Exhibit 10.7 for additional information on the Series B Convertible
Preferred Stock of HealthAxis.
HealthAxis estimates that its anticipated funding needs for the fourth
quarter of 1998 and 1999 will be approximately $4.0 million and $16.0 million,
respectively. In 1999, HealthAxis' obligations to AOL, CNET and LYCOS total
approximately $4.4 million, of which approximately $800,000 is payable during
the first quarter of 1999. In order to implement its business plan in 1999,
HealthAxis anticipates incurring expenses of $16.0 million of which
approximately $6.0 million is necessary to promote its web site launch, $4.4
million represents payments to AOL, CNET and LYCOS and the balance relates to
salary and other expenses.
HealthAxis is seeking other external sources of funds in order to fund
payments to AOL, CNET and LYCOS and working capital expenses. No assurance can
be given with respect to the success or timing of HealthAxis' efforts in
obtaining such additional funding. In the event that HealthAxis is unable to
obtain the additional funds or launch its web site in accordance with the AOL,
CNET and LYCOS Agreements, HealthAxis will be in breach of one or more of those
agreements. A breach on the part of HealthAxis could result in the forfeiture of
all amounts paid to AOL, CNET or LYCOS under such agreements. The inability of
HealthAxis to timely obtain additional sources of financing in a sufficient
amount in order to make payments due under the AOL, LYCOS and CNET Agreements in
the first quarter of 1999 and to continue the implementation of its business
plan would have a material adverse effect on HealthAxis and the Company. No
assurance can be given with respect to HealthAxis' ability to successfully
implement its business plan without additional capital.
In June 1998, HealthAxis adopted and Provident, as the sole shareholder
of HealthAxis, approved the 1998 Stock Plan which provides for the award of
options and stock purchase rights. Awards for an aggregate of 2,900,000 shares
of HealthAxis Common Stock may be awarded pursuant to such plan. Of this amount,
options to purchase 1,961,000 shares of HealthAxis Common Stock have been
awarded to directors, officers, employees and consultants of HealthAxis,
including options to purchase 991,000 and 309,000 shares of HealthAxis Common
Stock which were awarded to Messrs. Ashker and Clemens, respectively. The option
awards granted to Messrs. Ashker and Clemens are immediately exercisable at an
exercise price of $1.77 and have a term of ten years. Substantially all of the
remaining shares subject to options, other than the options to purchase 55,000
shares which are immediately exercisable, were granted at an exercise price of
$1.77 per share and vest at a rate of 25% of the initial award on the date of
grant, 25% of the initial award on February 1, 1999 and the balance in quarterly
installments thereafter. Such options have
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a term of five years. HealthAxis issued options to purchase shares of HealthAxis
Common Stock at an exercise price of $4.00 per share in November 1998. Such
options have a term of five years and vest at a rate of 25% of the initial award
on the grant date, 25% of the initial award on November 20, 1999 and the balance
in quarterly installments thereafter.
Recent Sales of Unregistered Securities by Provident
During 1998, Provident issued 961,543 shares of Provident Common Stock,
in private offerings which were not registered with the Securities and Exchange
Commission. The following provides information regarding such transactions which
were engaged in by Provident as part of its capital raising efforts, in
connection with the conversion of its preferred stock, for compensatory reasons
and as payments to consultants.
The following Provident Common Stock transactions were engaged in with
the individuals identified below as part of compensatory arrangements with
employees, payment for consulting services and in connection with the conversion
of preferred stock:
<TABLE>
<CAPTION>
Name of Person Aggregate
Purchasing Number Purchase Nature of
Date of Transaction Securities of Shares Price Transaction
------------------- ---------- --------- ----- -----------
<S> <C> <C> <C> <C>
April 3, 1998 Paul Klimczak 75,000 N/A Stock issued pursuant to
consulting arrangement
July 27, 1998 Edward Bolton 25,000 N/A Stock issued pursuant to
employment agreement
October 28, 1998 Butera, Beausang, Cohen 4,400 N/A Conversion of Preferred
& Brennan Pension Plan Shares into Common Stock
</TABLE>
The remaining 857,143 shares of Provident Common Stock were issued on
November 13, 1998 to the following individuals in a private offering:
<TABLE>
<CAPTION>
Name of Person Number of Aggregate
Purchasing Securities Shares Purchase Price
--------------------- ------ --------------
<S> <C> <C>
Lynx Private Equity Partners I, LLC(1) 250,000 $ 875,000
James Burke 207,143 $ 725,000
Craig Gitlitz(2) 42,857 $ 150,000
Interhotel Company, Ltd. 357,143 $ 1,250,000
</TABLE>
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(1) Lynx Private Equity Partners I, LLC ("LPEP") is a limited liability
corporation of which Lynx Capital Group, LLC ("LCG") is the investment
advisor and general partner. Michael Ashker, the President and Chief
Executive Officer of HealthAxis, is the sole manager of LCG and an investor
in LPEP.
(2) Mr. Gitlitz is an employee of HealthAxis.
The proceeds of such offering were used to fund the Company's purchase
of HealthAxis Common Stock.
In addition, on March 23, 1998, the Company issued currently
exercisable warrants to purchase 300,000 shares of Provident Common Stock to AOL
at an exercise price of $4.48 per share. Such warrants had an exercise period of
five years from the date of issue. Such warrant agreement was subsequently
amended on November 13, 1998 in connection with the amendment of the IM
Agreement to, among other things, extend the exercise period from five to seven
years from November 13, 1998. On November 13, 1998, the Company also issued to
AOL a warrant to purchase 300,000 shares of Provident Common Stock at an
exercise price of $3.38 per share and HealthAxis issued AOL a warrant to
purchase 300,000 shares of HealthAxis Common Stock at a price of $1.77 per
share. Both warrants are immediately exercisable for a term of nine years from
the date of issuance. Pursuant to the terms of such warrants, AOL may only
exercise such warrants for a total of 300,000 shares of either HealthAxis Common
Stock or Provident Common Stock or a combination of both. See "Amendments to the
HealthAxis' Agreements with Internet Partners."
The issuances of securities described above were made pursuant to
exemptions from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended, in reliance upon the fact that such sales did not involve a
public offering. As a result, such securities are subject to restrictions on
transfer. No commissions were paid in connection with the above transactions.
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Item 7. Financial Statements and Exhibits
(a) Financial Statements.
None
(b) Exhibits.
The following exhibits are filed herewith:
S-K Item
Number Description
10.1 Share Purchase Agreement dated November 13, 1998 between
Provident American Corporation, Lynx Private Equity Partners
I, LLC, James Burke, Craig Gitlitz and Interhotel Company
Ltd.
10.2* First Amendment to the Amended and Restated Interactive
Marketing Agreement between America Online, Inc., Provident
Health Services, Inc. and HealthAxis.com Inc.
10.3* Promotion Agreement dated June 27, 1998 between Insurion,
Inc. and CNET, Inc. and the First Amendment thereto dated
November 13, 1998.
10.4* Amended and Restated Agreement dated November 13, 1998
between LYCOS, Inc. and Insurion, Inc.
10.5 Agreement dated September 15, 1998 between PILIC and
HealthAxis related to the Series A Convertible Preferred
Shares.
10.6 Certificate of Designation related to the Series A
Convertible Preferred Stock of HealthAxis.com Inc.
10.7 Certificate of Designation related to the Series B
Convertible Preferred Stock of HealthAxis.com Inc.
* To be filed by amendment.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PROVIDENT AMERICAN CORPORATION
Date: December 21, 1998 By: /s/ ALVIN H. CLEMENS
---------------------
Alvin H. Clemens
Chairman of the Board and
Chief Executive Officer
Date: December 21, 1998 By: /s/ FRANCIS L. GILLAN III
--------------------------
Francis L. Gillan III
Chief Accounting Officer and
Treasurer
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S-K Item
Number Description
- ------ -----------
10.1 Share Purchase Agreement dated November 13, 1998 between
Provident American Corporation, Lynx Private Equity
Partners I, LLC, James Burke, Craig Gitlitz and Interhotel
Company Ltd.
10.2* First Amendment to the Amended and Restated Interactive
Marketing Agreement between America Online, Inc., Provident
Health Services, Inc. and HealthAxis.com Inc.
10.3* Promotion Agreement dated June 27, 1998 between Insurion, Inc.
and CNET, Inc. and the First Amendment thereto dated November
13, 1998.
10.4* Amended and Restated Agreement dated November 13, 1998 between
LYCOS, Inc. and Insurion, Inc.
10.5 Agreement dated September 15, 1998 between PILIC and
HealthAxis related to the Series A Convertible Preferred
Shares.
10.6 Certificate of Designation related to the Series A
Convertible Preferred Stock of HealthAxis.com Inc.
10.7 Certificate of Designation related to the Series B
Convertible Preferred Stock of HealthAxis.com Inc.
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* To be filed by amendment.
<PAGE>
EXECUTION COPY
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT ("Agreement") is made as of the 13th day
of November, 1998, by and among Provident American Corporation, a Pennsylvania
corporation (the "Company"), and the individuals and entities named in Schedule
I hereto (each, a "Purchaser," and, collectively, the "Purchasers"). The parties
hereby agree as follows:
1. Sale and Purchase of Shares.
1.1 Sale and Purchase. Subject to the terms and conditions of this
Agreement, the Company will issue and sell to the Purchasers, and the Purchasers
will purchase from the Company an aggregate of eight hundred fifty-seven
thousand one hundred forty-three (857,143) shares of the Company's Common Stock,
par value $.10 per share (the "Shares"). The number of such Shares to be
purchased by each Purchaser hereunder is set forth opposite such Purchaser's
name on Schedule I.
1.2 Certain Terms.
(a) The term "to the Company's knowledge" or "to the knowledge of
the Company," or words of similar import, shall mean the actual knowledge of an
officer of the Company, and the term "to the Company's best knowledge" "to the
best knowledge of the Company," or words of similar import, shall mean the
actual knowledge of an officer of the Company after conducting such due
diligence as may be reasonable under the circumstances, but which reasonable due
diligence shall not require any investigation beyond a review of the books and
records of the Company and discussions with officers, directors and employees of
the Company.
(b) The terms "combined" and "combining", when used with respect to
the Company's financial statements, mean the inclusion in the financial
statements of those companies which are wholly owned or controlled by the
Company.
(c) The term "Subsidiary" shall mean any corporation or company
listed as a Subsidiary of the Company in Exhibit 22 to the Company's Annual
Reports on Form 10-K filed with the Securities and Exchange Commission for the
fiscal year ended December 31, 1997.
2. Closing Date; Delivery; Use of Proceeds.
2.1 Closing Date. Subject to the satisfaction of the terms and
conditions hereof, the purchase and sale of the Shares to be purchased and sold
pursuant to Section 1.1 shall be held immediately following the execution and
delivery of this agreement by the parties hereto. Such time is hereinafter
referred to as the "Closing" and the date of the Closing is hereinafter referred
to as the "Closing Date."
<PAGE>
2.2 Deliveries by the Company and the Purchasers.
(a) Delivery by the Company. At the Closing the Company shall
deliver to each Purchaser, each of the following:
(i) A duly executed certificate or certificates evidencing the
Shares to be purchased hereunder by such Purchaser; and
(ii) All documents required by Section 5.1 not previously
delivered to such Purchaser.
(b) Delivery by the Purchasers. At the Closing, the Purchasers
shall (i) pay to the Company, by means of wire transfer, representing
immediately available funds, an amount equal to $3,000,000, representing the
aggregate purchase price payable by the Purchasers for the Shares to be
purchased hereunder by the Purchasers and (ii) deliver to the Company the
opinion of Shartsis, Friese & Ginsburg, LLP, One Maritime Plaza, 18th Floor, San
Francisco, CA 94111, counsel to Lynx Private Equity Partners I, LLC, a limited
liability company formed and existing under the laws of the State of California,
one of the Purchasers ("Lynx"), substantially in the form attached hereto as
Schedule 2.2(b). The portion of such aggregate purchase price for the Shares to
be paid by each Purchaser is set forth opposite such Purchaser's name on
Schedule I.
2.3 Use of Proceeds. The Company shall use the proceeds from the sale
of the Shares to be purchased hereunder by the Purchasers to purchase, directly
or indirectly through an investment vehicle of the Company's choosing,
$3,000,000 worth of the capital stock of HealthAxis.Com, Inc. ("HealthAxis")
directly or through a wholly-owned subsidiary of the Company as part of the
American Online ("AOL") funding round. Each Purchaser understands and agrees
that HealthAxis may apply an amount, not to exceed $531,000, of the proceeds of
the issuance and sale of its capital stock to repay advances heretofore made to
it by Provident Indemnity Life Insurance Company ("PILIC"), one of the
Subsidiaries of the Company, and that the balance of such proceeds will be used
by HealthAxis for its general corporate business.
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Purchaser as follows:
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<PAGE>
3.1 Organization and Good Standing.
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania and is
duly qualified or authorized to do business in each jurisdiction in which it
conducts business, or owns property, except where the failure so to qualify
would not in the aggregate have a material adverse effect on the Company and the
Subsidiaries, taken as a whole.
(b) Each of PILIC and Provident American Life and Health Insurance
Company ("PALHIC") is an insurance company duly organized and existing under the
laws of the Commonwealth of Pennsylvania.
3.2 Capitalization.
(a) Immediately prior to the Closing, the Company's authorized
capital stock will consist of 50,000,000 shares of Common Stock, par value $.10
per share ("Voting Common Stock"), of which 10,200,735 shares will be issued and
outstanding, 20,000,000 shares of Class A Common Stock, par value $.10 per
share, of which no shares will be outstanding, and 20,000,000 shares of
Preferred Stock, par value $1.00 per share. The Company's Preferred Stock may be
issued by the Company's Board from time to time in series, and such Board is
authorized to fix the number of shares in each series of Preferred Stock and to
establish all designations, the relative rights (including any conversion
rights), preferences and limitations of the shares in each such series,
including the number of shares in such series, the dividend rate, redemption
provisions, the terms and conditions applicable to any conversion privilege,
amount payable on liquidation, provisions concerning the voting of the shares of
such series, and generally the other rights and privileges, and any
qualifications, limitations or restrictions of such rights and privileges of
such series. The Company's Board of Directors has authorized the issuance of two
series of Preferred Stock, the Series A Preferred Shares and Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Shares"), the relative
rights (including any conversion rights), preferences and limitations of the
shares in each such series of Preferred Stock are set forth in Schedule 3.2(a).
The Company's Board of Directors has authorized the issuance of up to 4,500,000
Series A Preferred Shares, 580,250 of which will be issued and outstanding prior
to the Closing and 426,250 Series B Preferred Shares, none of which will be
issued and outstanding prior to the Closing. At the Closing, 857,143 Shares to
be purchased hereunder by the Purchasers will be issued and there will be
outstanding 11,057,878 shares of Voting Common Stock. At the time of the
Closing, all such issued and outstanding shares of Voting Common Stock and
Series A Preferred Shares will have been duly and validly authorized and issued,
will be fully paid and nonassessable, and will have been issued in full
compliance with all applicable laws, rules, regulations and ordinances.
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<PAGE>
(b) The numbers of authorized, issued and outstanding shares of
capital stock of each Subsidiary are set forth on Schedule 3.2(b). All such
issued and outstanding shares are duly and validly authorized and issued, fully
paid and nonassessable, and were issued in full compliance with all applicable
laws, rules, regulations and ordinances. The Company is the owner, beneficially
and of record, of all of the issued and outstanding stock of each of the
Subsidiaries, free and clear of any liens, encumbrances, pledges, security
interests, restrictions, prior assignments or claims of any nature whatsoever.
(c) Except for rights created by this Agreement or as listed on
Schedule 3.2(c), there exist no (A) outstanding options, warrants or rights to
purchase or subscribe for any equity securities or other ownership interests of
the Company or any of the Subsidiaries, (B) obligations of the Company or any of
the Subsidiaries, whether absolute or contingent, to issue any shares of equity
securities or other ownership interests, or (C) indebtedness or securities
directly or indirectly convertible into any equity securities of the Company or
any of the Subsidiaries. No person is entitled to any preemptive or similar
right with respect to the issuance of any equity securities of the Company
except for rights of the Purchasers created by this Agreement and as set forth
in Schedule 3.2(c).
3.3 Authorization. The Company has full corporate power and authority
to enter into this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby. This Agreement is a valid and
binding agreement of the Company, enforceable in accordance with its terms
except (a) as the same may be limited by applicable bankruptcy, insolvency,
moratorium or similar laws of general application relating to or affecting
creditors' rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances and preferential transfers, and (b)
for the limitations imposed by general principles of equity. The foregoing
exceptions set forth in subsections (a) and (b) of this Section 3.3 are
hereinafter referred to as the "Enforceability Exceptions."
3.4 Consents and Approvals. Except as disclosed on Schedule 3.4, all
prior consents, approvals and authorizations of any governmental or regulatory
authority (domestic or foreign) or any other person (either governmental or
private) required in connection with the execution and delivery by the Company
of this Agreement or the consummation of the transactions contemplated hereby
have been obtained, made and satisfied.
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<PAGE>
3.5 Financial Information.
(a) The Company has furnished to the Purchasers an unaudited
combined and combining balance sheet as of June 30, 1998, and the related
unaudited statements of operations, changes in shareholders' equity and cash
flows for the period ended June 30, 1998 of the Company and the Subsidiaries
(the "Financials"). The Financials have been prepared from the books and records
of the Company and the Subsidiaries and, to the knowledge of the Company,
present fairly the combined financial condition and the combined statement of
operations and retained earnings of the Company and the Subsidiaries at and as
of June 30, 1998 in accordance with generally accepted accounting principles
consistently applied ("GAAP") except that required footnote disclosures may be
omitted.
(b) The Company has heretofore furnished to the Purchasers audited
combined and combining balance sheets of the Company as of December 31, 1995,
1996 and 1997 and the related audited statements of operations, changes in
shareholders' equity and cash flows prepared in accordance with GAAP for the
years ended December 31, 1995, 1996 and 1997.
(c) The Company has heretofore furnished to the Purchasers a draft
of the financial statements for the Company, PILIC and PALHIC for the period
ended September 30, 1998.
3.6 Company Reports. The Company has previously furnished to the
Purchasers true and complete copies of its Annual Reports on Form 10-K filed
with the Securities and Exchange Commission (the "SEC") for each of its five
fiscal years ended December 31, 1993 through 1997, as the same may have been
amended, and a true and complete copy of its Quarterly Report on Form 10-Q filed
with the SEC for the six months ended June 30, 1998 (the "Company Reports").
3.7 Labor and Employment Agreements. Schedule 3.7 sets forth a complete
and correct list of each employment, profit sharing, deferred compensation,
bonus, pension, retainer, consulting, retirement, health, welfare, or incentive
plan or contract between the Company or any Subsidiary and any senior management
employee or independent consultant.
3.8 Brokerage Fees. No person or entity is entitled to any brokerage or
finder's fee or other commission from the Company or any Subsidiary in respect
of this Agreement or the transactions contemplated hereby.
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<PAGE>
3.9 Disclosure. To the best knowledge of the Company, the information
provided by the Company in this Agreement, including, without limitation, the
Schedules hereto, and in any other writing pursuant hereto does not and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated herein or therein or necessary to make the statements and
facts contained herein or therein, in light of the circumstances under which
they are made, not false or misleading. Copies of all documents heretofore
delivered or made available by the Company to the Purchasers pursuant hereto
were complete and accurate records of such documents.
3.10 Corporate Books. The corporate minute books of the Company and
each Subsidiary are complete in all material respects, each of the minutes
contained therein accurately reflect the transactions that occurred at the
meeting for which the minutes were taken, the meetings of directors or
stockholders referred to in the minutes were duly called and held or held by
telephone means or unanimous written consent, and, to the Company's best
knowledge, the signatures contained on all documents in the minute books are the
true signatures of the persons purporting to have signed the same.
3.11 HealthAxis Common Shares Held By Company. The Company is the
record holder and beneficial owner of 13,125,000 shares of the Common Stock, par
value $.10 per share, of HealthAxis.Com, Inc. (the "HealthAxis Common Shares"),
all of which have been duly authorized and issued, are fully paid and
non-assessable, and are held by the Company free from any liens and
encumbrances. The Purchasers are aware that HealthAxis.Com. Inc. and America
Online are on the date hereof in close negotiations on an agreement pursuant to
which HealthAxis.Com, Inc. will issue and sell certain shares of its capital
stock to America Online. The Company has advised the Purchasers that
HealthAxis.Com, Inc. is in default of the Interactive Marketing Agreement
between HealthAxis.Com, Inc. and America Online dated February 1, 1998, as
amended, and certain other material agreement relative to the business of
HealthAxis.Com, Inc.
4. Representations and Warranties of the Purchasers. Each Purchaser
represents and warrants to the Company as follows:
4.1 Acquisition of Securities. This Agreement is made with such
Purchaser in reliance upon such Purchaser's representation to the Company, which
by such Purchaser's execution of this Agreement such Purchaser hereby confirms,
that the Shares to be received by such Purchaser will be acquired for investment
for such Purchaser's own account, not as a nominee or agent, and not with a view
to the resale or distribution of any part thereof, and that such Purchaser has
no present intention of selling, granting any participation in, or otherwise
distributing the same, and such Purchaser has no present or contemplated
agreement, undertaking, arrangement, obligation, indebtedness or commitment
providing for the disposition thereof.
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<PAGE>
4.2 No Registration. Such Purchaser understands and acknowledges that
the offering of the Shares pursuant to this Agreement will not be registered
under the Securities Act of 1933, as amended (the "Securities Act"), or under
any other applicable blue sky or state securities law on the grounds that the
offering and sale of Shares to such Purchaser contemplated by this Agreement are
exempt from registration pursuant to Section 4(2) of the Act and exempt from
qualification pursuant to comparable available exceptions in various states, and
that the Company's reliance upon such exemptions is predicated upon such
Purchaser's representations set forth in this Agreement. Such Purchaser is
purchasing the Shares to be received by such Purchaser hereunder without being
furnished any offering literature, prospectus or business plan other than as
specifically mentioned herein. Such Purchaser acknowledges and understands that
the Shares to be received by such Purchaser hereunder must be held indefinitely
unless such Shares are subsequently registered under the Act and other
applicable blue sky and state securities laws or an exemption from such
registration is available.
4.3 Investment. Such Purchaser is acquiring the Shares to be received
by such Purchaser hereunder for investment for its own account and not with a
view to, or for resale in connection with, any distribution of such Shares. Such
Purchaser understands that the Shares to be received by such Purchaser hereunder
have not been registered under the Securities Act, or under any state securities
or "Blue Sky" laws, and, as a result, are subject to substantial restrictions on
transfer. Such Purchaser acknowledges that the Shares to be received by such
Purchaser hereunder must be held indefinitely unless subsequently registered
under the Securities Act and any applicable state securities or "Blue Sky" laws,
or exemptions from registration under the Securities Act and such laws are
available; provided, however, that by making the representation herein, such
Purchaser does not agree to hold any of the Shares to be received by such
Purchaser hereunder for any minimum or other specific term and reserve the right
to dispose of such Shares at any time in accordance with or pursuant to a
registration statement or an exemption from registration under the Securities
Act and any applicable state securities or "Blue Sky" laws. Such Purchaser
confirms that in making the decision to purchase Shares to be received by such
Purchaser hereunder it has relied on the Terms Sheet attached hereto as Exhibit
4.3 and has been given the opportunity to ask questions of and to receive
answers from the Company concerning the information set forth in the Terms Sheet
and to review financial statements of the Company, and to obtain any additional
information which the Company possesses or can acquire without unreasonable
effort or expense as is necessary to verify the accuracy of the information
furnished in the Terms Sheet.
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<PAGE>
4.4 Understanding. Such Purchaser understands that if the Company does
not register the Shares to be received by such Purchaser hereunder with the
Securities and Exchange Commission ("SEC") pursuant to Section 12 or become
subject to Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act") or supply information pursuant to Rule 15c2-11 thereunder or if a
registration statement covering such Shares (or a filing pursuant to the
exemption from registration under Regulation A of the Act covering such Shares)
under the Act is not in effect when it desires to sell such Shares, such
Purchaser may be required to hold such Shares for an indeterminate period during
which time such Shares would be subject to substantial transfer restrictions.
4.5 High Degree of Risk. Such Purchaser understands that the Shares to
be received by such Purchaser hereunder are highly speculative in nature and
their purchase involves a high degree of risk. Such Purchaser confirms that it
is (i) able to bear the economic risk of the investment in the Company, (ii)
able to hold the Shares to be received by such Purchaser hereunder for an
indefinite period of time, and (iii) can afford a complete loss of the
investment.
4.6 Authorization. Such Purchaser has full power and authority to enter
into this Agreement and to perform its obligations hereunder and to consummate
the transactions contemplated hereby. This Agreement is a valid and binding
agreement of such Purchaser, enforceable in accordance with its terms, subject
to the Enforceability Exceptions.
4.7 Brokerage Fees. No person or entity is entitled to any brokerage or
finder's fee or other commission from such Purchaser in respect of this
Agreement or the transactions contemplated hereby.
4.8 Accredited Investor. Such Purchaser and each member of Lynx is an
"accredited investor" within the meaning of Section 2(a)(15) of the Securities
Act.
4.9 Consents and Approvals. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
violate, result in a breach of any of the terms or provisions of, constitute a
default (or an event which, with the giving of notice or the passage of time or
both, would constitute a default) under, result in the acceleration of any
indebtedness under or performance required by, result in any right of
termination of, increase any amounts payable under, decrease any amounts
receivable under, change any other rights pursuant to, or conflict with, any
material agreement, indenture or other instrument to which such Purchaser is a
party or by which any of its properties are bound, or any judgment, decree,
order or award of any court, governmental body or arbitrator (domestic or
foreign) applicable to such Purchaser. No consent, approval or authorization of,
or declaration, filing or registration with, or payment of any material tax,
fee, fine or penalty to, any governmental or regulatory authority (domestic or
foreign) including the Pennsylvania Department of Insurance, or any other person
(either governmental or private), is required in connection with the execution,
delivery and performance of this Agreement by such Purchaser.
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<PAGE>
5. Conditions.
5.1 Conditions to Closing.
(a) Conditions to Purchaser Obligations. The obligation of each
Purchaser to purchase the Shares at the Closing is subject to the fulfillment on
or prior to the Closing Date of the following conditions, any of which may be
waived in accordance with the provisions of Section 11.1 hereof:
(i) Representations and Warranties Correct: Performance of
Obligations. The representations and warranties made by the Company in
Section 3 hereof shall be true and correct when made, and shall be true
and correct on the Closing Date with the same force and effect as if
they had been made on and as of said date; and the Company shall have
performed all obligations and conditions herein required to be
performed or observed by it on or prior to the Closing Date.
(ii) Opinion of Company's Counsel. Butera Beausang Cohen &
Brennan, counsel to the Company, shall have delivered an opinion
addressed to the Purchasers, dated the Closing Date, substantially in
the form attached hereto as Schedule 5.1(a)(ii).
(iii) Consents and Waivers. The Company shall have obtained any
and all consents, permits, orders, approvals and waivers necessary or
appropriate for consummation of the transactions contemplated by this
Agreement, including all authorizations, approvals or permits, if any,
of any governmental authority or regulatory body of the United States
or of any state that are required in connection with the lawful
issuance and sale of the Shares pursuant to the terms of this
Agreement.
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<PAGE>
(iv) Legal Investment. At the time of the Closing, the sale and
purchase of the Shares hereunder shall be legally permitted by all laws
and regulations to which the Company and the Purchasers are subject.
(v) Compliance Certificate. The Company shall have delivered a
Certificate, executed by the Chairman and Chief Executive Officer and
the Secretary of the Company, dated the Closing Date, certifying to the
fulfillment of the conditions specified in subsections (i) , (iii) and
(iv) of this Section 5.1(a).
(vi) Documents. All documents and instruments incident to the
transactions contemplated hereby shall be reasonably satisfactory in
substance and form to the Purchasers and Purchasers' counsel.
(b) Conditions to Company Obligations. The Company's obligation to
sell and issue the Shares at the Closing is subject to the fulfillment on or
prior to the Closing Date of the following conditions, any of which may be
waived by the Company in accordance with the provisions of Section 11.1 hereof:
(i) Representations and Warranties Correct. The representations
and warranties made by each of the Purchasers in Section 4 hereof shall
be true and correct when made, and shall be true and correct on the
Closing Date with the same force and effect as if they had been made on
and as of said date.
(ii) Payments by Purchasers. The payment by the Purchasers
required by Section 2.2 (b) shall have been made.
(iii) Opinion of Lynx's Counsel. Shartsis, Friese & Ginsburg,
LLP, One Maritime Plaza, 18th Floor, San Francisco, CA 94111, counsel
to Lynx, shall have delivered an opinion addressed to the Company,
dated the Closing Date, substantially in the form attached hereto as
Schedule 2.2(b).
(iv) Legal Investment. At the time of the closing the sale and
purchase of the Shares hereunder shall be legally permitted by all laws
and regulations to which the Company and the Purchasers are subject,
including, without limitation, the Securities Act of 1933 and the
Pennsylvania Securities Act (collectively, the "Securities Laws").
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<PAGE>
(v) Information. The Purchasers will supply to the Company any
and all information necessary to complete a Form D under the Securities
Act of 1933 and any equivalent forms under other Securities Laws.
(vi) Compliance certificate. The Purchasers shall have
delivered a Certificate, dated the Closing Date, certifying to the
fulfillment of the conditions specified in subsections (i) and (iv) of
this Section 5.1(b).
(vi) Documents. All documents and instruments incident to the
transactions contemplated hereby shall be reasonably satisfactory in
substance and form to the Company and the Company's counsel.
6. Affirmative Covenants of the Company. The Company hereby covenants
and agrees as follows until the date at which no Purchaser is a holder of any of
the Shares to be received by the Purchasers hereunder:
6.1 Financial Information and Inspection Right. The Company will
furnish the following reports to each Purchaser who is a holder of any of the
Shares to be received by the Purchasers hereunder until the date at which such
Purchaser is no longer a holder of any of the Shares:
(a) within thirty (30) days after the Corporation has filed its
Annual Report on Form 10-K with the Securities and Exchange Commission for a
calendar year which does not end before such date, a combined balance sheet as
of the end of such fiscal year and the related audited statements of operations,
changes in shareholders equity and cash flows for the year then ended, of the
Company and the Subsidiaries (the "Annual Financial Statements") and the
auditor's management letter to the Company's Board of Directors, which financial
statements shall be prepared in accordance with GAAP;
(b) as soon as practicable after the end of each of the first three
fiscal quarters, and in any event within sixty (60) days thereafter, an
unaudited combined and combining balance sheet as at the end of the fiscal
quarter then ended, and a related unaudited combined and combining statement of
operations, changes in shareholders' equity and cash flows for the quarter then
ended and for the portion of the fiscal year through such date, for the Company
and the Subsidiaries including a comparison thereof to the Company's annual
budget and operating plan with management's discussion and analysis of variances
therefrom; and
(c) within thirty (30) days of their filing with state insurance
regulatory authorities, all Annual and Quarterly Convention Statements of the
Subsidiaries which are insurance companies, prepared in accordance with
statutory accounting principles consistently applied in accordance with past
practices.
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<PAGE>
6.2 Access.
(a) Upon reasonable notice the Company shall permit authorized
representatives of any Purchaser, during normal business hours, to have
reasonable access to all properties, books, records, contracts and documents of
the Company and the Subsidiaries (other than such information as may be subject
to attorney-client or other recognized privilege) and to discuss the business
and finances of the Company or the Subsidiaries with the directors, officers and
senior employees of the Company and the Subsidiaries.
(b) Each Purchaser understands and agrees that the information,
documents and instruments delivered to such Purchaser hereunder or to which such
Purchaser has access are of a confidential and proprietary nature. Each
Purchaser agrees that it will maintain, and Lynx agrees to take commercially
reasonable efforts to cause its members to maintain, the confidentiality of all
such confidential information, documents or instruments delivered to it by the
Company or to which it has access, and that it will not, and Lynx will make
commercially reasonable efforts to cause its members to not, disclose any of
such information, documents or instruments to third parties, and Lynx will
disclose such information, documents and instruments to its members so long as
such parties maintain the confidentiality of such information. Each Purchaser
recognizes that any breach of this Section 6.2(c) would result in irreparable
harm to the Company and its Subsidiaries and that therefore the Company shall be
entitled to an injunction to prohibit any such breach or anticipated breach,
without the necessity of posting a bond, cash or otherwise, in addition to all
other legal or equitable remedies available to the Company.
6.3 Accounts and Records. The Company will keep true records and books
of account in which full, true and correct entries will be made of all dealings
or transactions in relation to its business and affairs in accordance with
reasonable business practices consistent with prior periods.
6.4 Maintenance of Corporate Existence, etc. The Company shall use
commercially reasonable efforts to maintain in full force and effect its
corporate existence, rights and franchises.
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<PAGE>
6.5 Board Representation. At the Annual Meeting of the stockholders of
the Company to be held following the Closing and continuing until December 31,
1999, the Company shall cause the nomination of, and support for election, as a
director of the Company, Michael Ashker, and one other qualified individual to
be designated by the Purchasers holding a majority of the Shares to be received
by the Purchasers hereunder prior to the mailing of the Notice to Stockholders
of such Annual Meeting. By acknowledging and accepting this Agreement, until
December 31, 1999, Mr. Alvin Clemens agrees to vote all shares of the Company's
stock entitled to vote held by him from time to time in favor of the election to
membership on the Company's Board of Directors of Michael Ashker and the other
person designated by the Purchasers as aforesaid.
7. Negative Covenants of the Company.
7.1 Negative Covenants.
(a) Without the prior written consent of the Purchasers who are
holders of any of the Shares to be received by the Purchasers hereunder, until
the date at which no Purchaser is a holder of any of such Shares, the Company
shall not:
(i) amend its Articles of Incorporation or By-Laws in any way
which would affect the rights and preferences of parties then owning
the Shares;
(ii) engage in any material transaction with any Insider which
is other than on an arms length basis and/or may have a material
adverse effect on the Company and the Subsidiaries, taken as a whole
("Insider" shall mean any person who is (A) an officer of the Company,
(B) a director of the Company, (C) a stockholder of the Company owning
5% or more of the total number of shares of the Common Stock of the
Company, or (D) or any person who bears a familial or common control
relationship with a person described in (A), (B) or (C) above); or
(iii) authorize or issue any new or existing class of equity
securities or rights to acquire such securities which would adversely
affect the relative voting rights and authority of the Shares.
(b) In the event the Company or any of its Subsidiaries shall
engage in violation of the provisions of Section 7.1(a)(ii), the Company shall
not thereby be deemed to be in default of its obligations hereunder unless it
shall fail to take all corrective actions necessary to bring itself or the
relevant Subsidiary, as the case may be, into full compliance with such
provisions prior to the expiration of thirty (30) days after any Purchaser gives
of written notice to the Company of the violation, such notice to contain a
brief description of the violation and a reference to the 30-day cure period
provided for by this paragraph (b).
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7.2 RESERVED
8. Legends: Restrictions on Transfer.
8.1 Legend on Securities. All certificates representing the Shares
shall bear a legend to the following effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN
WITHOUT A VIEW TO THE DISTRIBUTION THEREOF WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH SUCH ACT
AND THE RULES AND REGULATIONS THEREUNDER AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS. THE CORPORATION WILL NOT TRANSFER
SUCH SHARES EXCEPT UPON RECEIPT OF EVIDENCE SATISFACTORY TO THE
CORPORATION THAT THE REGISTRATION PROVISIONS OF SUCH ACT HAVE BEEN
COMPLIED WITH OR THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH
TRANSFER WILL NOT VIOLATE ANY APPLICABLE STATE SECURITIES LAWS. IN
ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN PROVISIONS OF A SHARE PURCHASE AGREEMENT DATED NOVEMBER 12,
1998 WHICH RESTRICTS THE ABILITY OF THE HOLDER HEREOF TO TRANSFER SUCH
SECURITIES."
and any other legends required by applicable state blue sky or
other laws.
9. Registration Rights. Each Purchaser shall have the right to register
its Registrable Securities (as hereinafter defined) in accordance with the
following provisions.
9.1 Definitions. As used in this Section 9, the following terms shall
have the following meanings:
"Business Day" shall mean any day except a Saturday, Sunday or other
day on which commercial banks in the City of Norristown, Pennsylvania are
authorized by law or executive order to close.
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"Commission" shall mean the Securities and Exchange Commission and any
successor commission or agency having similar powers.
"Exchange Act" shall mean the Securities and Exchange Act of 1934, as
amended, and the rules and regulations promulgated pursuant thereto.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotations System.
"Registrable Securities" shall mean the Shares purchased hereunder by
such Purchaser; provided, however, that such securities shall cease to be
Registrable Securities if and when (A) a registration statement with respect to
the disposition of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of pursuant to such
effective registration statement, (B) such securities shall have been otherwise
transferred, if new certificates or other evidences of ownership for such
securities not bearing a legend restricting further transfer and not subject to
any stop transfer order or other restrictions on transfer shall have been
delivered by the Company, and subsequent disposition of such securities shall
not require registration or qualification of such securities under the
Securities Act, or (C) such securities shall have ceased to be outstanding.
"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with its obligations under this Section
9, including, without limitation, all Commission and stock exchange or NASD
registration and filing fees and expenses, fees and expenses of compliance with
applicable state securities or "blue sky" laws (including, without limitation,
reasonable fees and disbursements of counsel for the underwriters in connection
with "blue sky" qualifications of the Registrable Securities), printing
expenses, messenger and delivery expenses, the fees and expenses incurred in
connection with the listing of the securities to be registered in a public
offering on each securities exchange or national market system on which such
securities are to be so listed and, following such initial public offering, the
fees and expenses incurred in connection with the listing of such securities to
be registered on each securities exchange or national market system on which
such securities are listed, fees and disbursements of counsel for the Company
and all independent certified public accountants (including the expenses of any
annual audit and "cold comfort" letters required by or incident to such
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performance and compliance), the fees and disbursements of underwriters
customarily paid by issuers or sellers of securities (including the fees and
expenses of any "qualified independent underwriter" required by the NASD), the
reasonable fees of one counsel retained in connection with each such
registration by the holders of a majority of the Registrable Securities being
registered, the reasonable fees and expenses of any special experts retained by
the Company in connection with such registration, and fees and expenses of other
persons retained by the Company (but not including any underwriting discounts or
commissions or transfer taxes, if any, attributable to the sale of Registrable
Securities by holders of such Registrable Securities).
"Rule 144 Securities" are Registrable Securities which are of a class
which is registered under Section 12 of the Exchange Act and which may be
publicly sold pursuant to the provisions of Rule 144 under the Securities Act.
9.2 Immediate Registration.
(a) Registration Statement. Within forty-five (45) days after
Company's receipt of the report of the Company's independent public accountants
on the review of the Company's financial statements for the Company's fiscal
year ending December 31, 1998, the Company will prepare and file with the
Commission a registration statement on an appropriate form under the Securities
Act with respect to the Registrable Securities. The Company will use
commercially reasonable efforts to cause such registration statement to become
effective no later than 120 days after the Company's receipt of the report of
the Company's independent public accountants on the review of the Company's
financial statements for the Company's fiscal year ending December 31, 1998.
(b) Registration Expenses. The Company shall pay all Registration
Expenses in connection with the registration to which each Purchaser is entitled
pursuant to this Section 9.2. However, each Purchaser shall pay, or its proceeds
shall be subject to reduction for, all underwriting discounts and commissions
and transfer taxes, if any, relating to the sale or disposition of such
Purchaser's Registrable Securities pursuant to this Section 9.2.
(c) Effective Registration Statement. A registration pursuant to
this Section 9.2 shall not be deemed to have been effected unless the
registration statement relating thereto (i) has become effective under the
Securities Act and any of the Registrable Securities of the Purchaser included
in such registration have actually been sold thereunder, and (ii) has remained
effective for a period of at least 180 days (or shorter period in which all
Registrable Securities of the Purchaser included in such registration have
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actually been sold thereunder); provided, however, that if after any
registration statement pursuant to this Section 9.2 becomes effective (i) such
registration statement is subject to any stop order, injunction or other order
or requirement of the Commission or other governmental agency or court solely
due to the actions or omissions to act of the Company and (ii) less than 70% of
the Registrable Securities of the Purchaser included in such registration have
been sold thereunder, such registration statement shall not be included as the
registration to which such Purchaser is entitled pursuant to Section 9.2(a).
(d) Selection of Underwriters. If the registration pursuant to this
Section 9.2 is in the form of an underwritten offering, the Company shall have
the right to select the investment banker and manager or co-managers that will
administer the offering, subject to the consent of the Purchasers, which consent
shall not be unreasonably withheld. The Company will review and consider
recommendations concerning selection of underwriters and method of distribution
prepared and offered by any Purchaser.
(e) Pro Rata Participation in Registrations. If a registration
pursuant to Section 9.2 involves an underwritten offering and the managing
underwriter shall advise the Company that, in its view, the number of equity
securities requested to be included in such registration exceeds the largest
number of securities which can be sold without having an adverse effect on such
offering, including the price at which such securities can be sold, the number
of Registrable Securities held by the Purchasers included by the Company in such
registration shall be reduced to the largest number of securities which, in the
opinion of the managing underwriter, can be sold without having an adverse
effect on such offering, including the price at which such securities can be
sold.
9.3 Registration Procedures. In connection with any offering
of Registrable Securities registered pursuant to this Section 9, the Company
shall:
(a) Prepare, file and effect such registration with the Commission
in accordance with Section 9.2 hereof; provided that before filing with the
Commission a registration statement or prospectus or any amendments or
supplements thereto, the Company will (i) furnish to counsel for each Purchaser
copies of all such documents proposed to be filed for said counsel's review and
comment and (ii) notify the Purchasers of any stop order issued or threatened by
the Commission and take all reasonable actions required to prevent the entry of
such stop order or to remove it if entered.
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(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than 180 days or such shorter period which will terminate
when all Registrable Securities covered by such registration statement have been
sold (but not before the expiration of the 90 day period referred to in Section
4(3) of the Securities Act and Rule 174, or any successor thereto, if
applicable), and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement.
(c) Furnish to each Purchaser and each underwriter, if any, of
Registrable securities covered by such registration statement such number of
copies of such registration statement, each amendment and supplement thereto (in
each case including all exhibits thereto), and the prospectus included in such
registration statement (including each preliminary prospectus), in conformity
with the requirements of the Securities Act, and such other documents as a
Purchaser may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such Purchaser.
(d) Use commercially reasonable efforts to register or qualify such
Registrable Securities under such other state securities or "blue sky" laws of
such jurisdictions as any Purchaser, and underwriter, if any, of Registrable
Securities covered by such registration statement reasonably requests and do any
and all other acts and things which may be reasonably necessary or advisable to
enable such Purchaser and each underwriter, if any, to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
Purchaser; provided that the Company will not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 9.4(d), (ii) subject itself to taxation
in any such jurisdiction or (iii) consent to general service of process in any
jurisdiction.
(e) Use commercially reasonable efforts to cause the Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
by virtue of the business and operations of the Company to enable the Purchaser
to consummate the disposition of such Registrable Securities.
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<PAGE>
(f) As soon as practicable notify each Purchaser owning Registrable
Securities covered by a registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act of the
happening of any event which comes to the Company's attention if as a result of
such event the prospectus included in such registration statement contains an
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which made, and the Company will promptly
prepare and furnish to such Purchaser a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchaser of such Registrable
Securities, such prospectus will not contain an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which made.
(g) Cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
be listed.
(h) Enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other actions as any Purchaser or
the underwriters retained by such Purchaser, if any, reasonably request in order
to expedite or facilitate the disposition of such Registrable Securities.
(i) Make available for inspection by any Purchaser owning
Registrable Securities covered by such registration statement, any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney, accountant or other agent retained by such Purchaser or
underwriter (collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company and its Subsidiaries
(collectively, "Records"), if any, as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause the Company's and
its Subsidiaries' officers, directors and employees to supply all information
and respond to all inquiries reasonably requested by any such Inspector in
connection with such registration statement.
(j) Use commercially reasonable efforts to obtain a "cold comfort"
letter from the Company's independent public accountants in customary form and
covering such matters of the type customarily covered by "cold comfort" letters
as any Purchaser owning Registrable Securities covered by such registration
statement may reasonably request.
(k) Otherwise use its commercially reasonable efforts to comply
with all applicable rules and regulations of the Commission.
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<PAGE>
It shall be a condition precedent to the obligation of the Company to
take any action with respect to Registrable Securities held by any Purchaser
that such Purchaser shall furnish to the Company such information regarding such
Registrable Securities and the intended method of disposition thereof as the
Company shall reasonably request and as shall be required in connection with the
action taken by the Company.
Each Purchaser, as holder of Registrable Securities, agrees that, upon
receipt of any notice from the Company of the happening of any event of the kind
described in Section 9.4(f) hereof, such Purchaser will forthwith discontinue
disposition of Registrable Securities until such Purchaser's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 9.4(f)
hereof, and, if so directed by the Company, such Purchaser will deliver to the
Company (at the Company's expense) all copies (including, without limitation,
any and all drafts), other than permanent file copies, then in such Purchaser's
possession, of the prospectus covering such Registrable Securities current at
the time of receipt of such notice. In the event that the Company shall give any
such notice, the period mentioned in Section 9.4(b) hereof shall be extended by
the greater of (i) three months or (ii) the number of days during the period
from and including the date of the giving of such notice pursuant to Section 9.4
(f) hereof to and including the date when each holder of Registrable Securities
covered by such registration statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 9.4(f) hereof.
Each Purchaser agrees, if reasonably requested by the Company's
underwriter with regard to an underwritten public sale of Registrable
Securities, not to sell or otherwise transfer or dispose of any Registrable
Securities held by such Purchaser during the period (not to exceed one hundred
eighty (180) days) following the effective date of a registration statement,
provided that (i) such agreement shall only apply to the first such registration
statement of the Company including Voting Common Stock (or other securities) to
be sold on its behalf to the public in an underwritten offering, and (ii) all
officers and directors of the Company enter into similar agreements. Such
agreements shall be in writing and in a form satisfactory to the Company and
such underwriter. The Company may impose stop-transfer instructions with respect
to the Registrable Securities subject to the foregoing restriction until the end
of said period.
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9.5 Indemnification.
(a) Indemnification by the Company. In the event of any
registration of any securities of the Company under the Securities Act pursuant
to this Agreement, the Company will indemnify and hold harmless, to the full
extent permitted by law, each Purchaser, its respective directors and officers,
members, general partners, limited partners and managing directors, each other
person who participates as an underwriter in the offering or sale of such
securities and each other person, if any, who controls, is controlled by or is
under common control with the Purchaser or any such underwriter within the
meaning of the Securities Act (and directors, officers, controlling persons,
members, partners and managing directors of any of the foregoing), against any
and all losses, claims, damages or liabilities, joint or several, and expenses
(including any amounts paid in any settlement effected with the Company's
consent, which consent will not be unreasonably withheld) to which such
Purchaser, any such director or officer or member or general or limited partner
or managing director or any such underwriter or controlling, controlled or
commonly controlled person may become subject under the Securities Act, state
securities or "blue sky" laws, common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof) or
expenses arise out of or are based upon (i) any untrue statement of any material
fact contained, on the effective date thereof, in any registration statement
under which such securities were registered under the Securities Act, any
preliminary, final or summary prospectus contained therein, or any amendment or
supplement thereof, (ii) any omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which made, or (iii) any violation by the
Company of any federal, state or common law rule or regulation applicable to the
Company and relating to action required of or inaction by the Company in
connection with any such registration. To the extent permitted by law, the
Company shall reimburse each such Purchaser, and each such director, officer,
member, general partner, limited partner, managing director or underwriter and
each such controlling, controlled or commonly controlled person for any legal or
any other expenses reasonably incurred by them in connection with investigating
or defending such loss, claim, liability, action or proceeding, provided, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon any untrue statement or alleged untrue
statement or omission made in such registration statement or amendment or
supplement thereto or in any such preliminary, final or summary prospectus in
reliance upon and in conformity with written information furnished to the
Company for use in the preparation thereof; and, provided further, that the
Company shall not be liable to any Purchaser, any person who participates
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as an underwriter in the offering or sale of Registrable Securities, if any, or
any other person, if any, who controls such underwriter within the meaning of
the Securities Act, pursuant to this Section with respect to any preliminary
prospectus or the final prospectus or the final prospectus as amended or
supplemented as the case may be, to the extent that any such loss, claim, damage
or liability of such underwriter or controlling person results from the fact
that such underwriter sold Registrable Securities to a person to whom there was
not sent or given, at or prior to the written confirmation of such sale, a copy
of the final prospectus or of the final prospectus as then amended or
supplemented, whichever is most recent, if the Company has previously furnished
copies thereof to such underwriter and such final prospectus, as then amended or
supplemented, had corrected any such misstatement or omission. The indemnity
provided for herein shall remain in full force and effect regardless of any
investigation made by or on behalf of a Purchaser or any such director, officer,
member, general partner, limited partner, managing director, underwriter or any
such underwriter or controlling, controlled or commonly controlled person and
shall survive the transfer of such securities by such Purchaser.
(b) Indemnification by Purchaser and Underwriters. The Company will
require, as a condition to including any Registrable Securities in any
registration statement filed in accordance with the provisions hereof, that the
Company shall have received an undertaking reasonably satisfactory to it from
the Purchaser owning Registrable Securities covered by such registration
statement or any underwriter, to indemnify and hold harmless (in the same manner
and to the same extent as set forth in paragraph (a) above) the Company and its
directors, officers, controlling persons, underwriters and all other prospective
sellers and their respective directors, officers, members, general and limited
partners, managing directors, and their respective controlling persons with
respect to any statement in or omission from such registration statement, any
preliminary, final or summary prospectus contained therein, or any amendment or
supplement, if such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company or its
representatives by such Purchaser or underwriter for use in the preparation of
such registration statement, preliminary, final or summary prospectus or
amendment or supplement, or a document incorporated by reference into any of the
foregoing. To the extent permitted by law, such Purchaser and underwriter shall
reimburse (in the same manner and to the same extent and subject to the same
limitations as set forth in paragraph (a) above) the Company and its directors,
officers and controlling persons for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending such loss, claim,
liability, action or proceeding (as referred to in paragraph (a) above). Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any of such holders, underwriters or any
of their respective directors, officers, members, general or limited partners,
managing directors or controlling persons and shall survive the transfer of such
securities by such holder, provided, however, that such Purchaser shall not be
liable in the aggregate for any amounts exceeding the product of the sale price
per Registrable Security and the number of Registrable Securities being sold
pursuant to such registration statement or prospectus by such Purchaser.
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(c) Notice of Claims, Etc. Promptly after receipt by an indemnified
party hereunder of written notice of the commencement of any action or
proceeding with respect to which a claim for indemnification may be made
pursuant to this Section, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, promptly give written
notice to the indemnifying party of the commencement of such action, provided
that the failure of any indemnified party to give notice as provided herein
shall not relieve the indemnifying party of its obligations under the preceding
subsections of this Section, except to the extent that the indemnifying party is
actually prejudiced by such failure to give notice. In case any such action is
brought against an indemnified party, unless in the opinion of counsel, a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim, the indemnifying party will be entitled to participate
in and, jointly with any other indemnifying party similarly notified, to assume
the defense thereof to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by the latter in connection
with the defense thereof, unless in the opinion of counsel, a conflict of
interest between such indemnified and indemnifying parties arises in respect of
such claim after the assumption of the defense thereof, and the indemnifying
party will not be subject to any liability for any settlement made without its
consent (which consent shall not be unreasonably withheld). No indemnifying
party will consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation. An indemnifying party who is not entitled to, or
elects to, assume the defense of a claim will not be obligated to pay the fees
and expenses of more than one counsel in any single jurisdiction for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
opinion of counsel, a conflict of interest may exist between such indemnified
party and any other of such indemnified parties with respect to such claim, in
which event the indemnifying party shall be obligated to pay the fees and
expenses of such additional counsel or counsels as may be reasonably necessary.
Notwithstanding anything to the contrary set forth herein, and without limiting
any of the rights set forth above, in any event any party will have the right to
retain, at its own expense, counsel with respect to the defense of a claim.
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(d) Other Indemnification. Indemnification similar to that
specified in the preceding subsections of this Section (with appropriate
modifications) shall be given by the Company and to each Purchaser with respect
to any required registration or other qualification of securities under any
federal or state law or regulation or governmental authority other than the
Securities Act.
(e) Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
this Section is for any reason held to be unenforceable although applicable in
accordance with its terms, the Company, each Purchaser owning Registrable
Securities covered by a registration statement and the underwriters shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by such indemnity agreement incurred by the Company,
such Purchaser and the underwriters, in such proportions that the underwriters
are responsible for that portion represented by the percentage that the
underwriting discount appearing on the cover page of the prospectus bears to the
initial public offering price appearing thereon and the Company and such
Purchasers are responsible for the balance; provided, however, that no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. As between the Company and the
Purchasers owning Registrable Securities covered by a registration statement,
such parties shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity agreement in
such proportion as shall be appropriate to reflect (i) the relative benefits
received by the Company, on the one hand, and such Purchasers on the other hand,
from the offering of the Registrable Securities and any other securities
included in such offering, and (ii) the relative fault of the Company, on the
one hand, and such Purchasers, on the other, with respect to the statements or
omissions which resulted in such loss, liability, claim, damage or expense, or
action in respect thereof, as well as any other relevant equitable
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considerations. The relative benefits received by the Company, on the one hand,
and each of such Purchasers on the other hand, with respect to such offering
shall be deemed to be in the same proportion as the sum of the total purchase
price paid to the Company in respect of the Registrable Securities plus the
total net proceeds from the offering of any securities included in such offering
(before deducting expenses) received by the Company bears to the amount by which
the total net proceeds from the offering of Registrable Securities (before
deducting expenses) received by such Purchaser exceeds the purchase price paid
to the Company in respect of the Registrable Securities, and in each case the
net proceeds received from such offering shall be determined as set forth on the
table to the cover page of the prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or such Purchaser,
the intent of the parties and their relative knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and each Purchaser agree that it would not be just and equitable if contribution
pursuant to this Section were to be determined by pro rata allocation or by any
other method of allocation which does not take into account the equitable
considerations referred to herein. Notwithstanding anything to the contrary
contained herein, the Company and each Purchaser agree, that any contribution
required to be made by such Purchaser pursuant to this Section 9.5(e) shall not
exceed the net proceeds from the offering of Registrable Securities (before
deducting expenses) received by such Purchaser with respect to such offering.
For purposes of this Section, each person, if any, who controls such Purchaser
or an underwriter within the meaning of Section 15 of the Securities Act shall
have the same rights to contribution as such Purchaser or 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 Securities Act shall have the same rights to contribution
as the Company.
10. Additional Agreements.
10.1 HealthAxis Common Shares. Prior to the earliest to occur of (a)
the sale by PILIC of all of the outstanding shares of the capital stock of
PALHIC to Central Reserve Life Insurance Company ("Central Reserve") following
the consummation of the other related transactions described in a letter
agreement dated November 11, 1998, by and among the Company, PILIC and Central
Life (such sale and other transactions being referred to hereinafter in this
Section 10 as the "Central Reserve Transactions") on or before March 31, 1999,
(b) the lapse of the "Exchange Right" described in Section 10.2 at the close of
business on April 30, 1999, or if such April 30th is not a business day in
Norristown, Pennsylvania, on the next day thereafter which is a business day in
Norristown, Pennsylvania, or (c) the close of business on the date that there
shall be no Shares outstanding, the Company shall not transfer or assign any of
the HealthAxis Common Shares held by it on the Closing Date, and the Company
shall keep and maintain such HealthAxis Common Shares free of any liens and
encumbrances of any nature whatsoever other than the rights of the Purchasers
hereunder.
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10.2 Exchange Right. In the event Central Reserve, PILIC and the
Company shall fail to consummate the Central Reserve Transactions on or before
March 31, 1999, or in the event the Company and/or Central Reserve shall make
public announcement of the termination of the Central Reserve Transactions at
any time prior to March 31, 1999, each Purchaser then owning any of the Shares
received hereunder shall have the right (the "Exchange Right") to exchange all
or part of such Shares, for that number of HealthAxis Common Shares as shall be
determined by multiplying two and one-quarter (23) times the number of the
Shares to be exchanged. A Purchaser may exercise its Exchange Right by (a)
giving written notice to the Company on or prior to April 15, 1999, of such
Purchaser's intention to exercise the Exchange Right, specifying the number of
Shares to be exchanged and (b) surrendering to the Company at its principal
office the certificate or certificates for the Shares to be exchanged endorsed
to the Company or accompanied by duly executed instruments of transfer to the
Company of the Shares to be exchanged prior to the close of business on April
30, 1999, or if such April 30th is not a business day in Norristown,
Pennsylvania, on the next day thereafter which is a business day in Norristown,
Pennsylvania. If and to the extent that a Purchaser shall fail or refuse to
exercise the Exchange Right in respect of all or part of the Shares in the
manner provided aforesaid, such Exchange Right shall lapse and be of no further
force or effect after the close of business on April 30, 1999, or if such April
30th is not a business day in Norristown, Pennsylvania, on the next day
thereafter which is a business day in Norristown, Pennsylvania.
10.3 Delivery of HealthAxis Common Shares. Upon surrender to
it by a Purchaser of the certificate or certificates for the Shares to be
exchanged endorsed to the Company or accompanied by duly executed instruments of
transfer to the Company in connection with such Purchaser's exercise of its
Exchange Right pursuant to Section 10.2, the Company shall deliver a certificate
or certificates for the number of HealthAxis Common Shares to which such
Purchaser is entitled, duly endorsed to the Purchaser, or order, or accompanied
by duly executed instruments of transfer to such Purchaser, or order.
- 26 -
<PAGE>
11. Miscellaneous.
11.1 Modifications, Amendments and Waivers. The Company and the
Purchasers may by written agreement:
(a) Extend the time for the performance of any of the obligations
or other acts of the parties hereto;
(b) Waive any inaccuracies in the representations and warranties
contained in this Agreement or in any document delivered pursuant to this
Agreement;
(c) Waive compliance with any of the covenants and agreements
contained in this Agreement; or
(d) Amend or supplement any of the provisions of this Agreement.
11.2 Governing Law; Jurisdiction. This Agreement shall be governed by,
and construed and enforced in accordance with, the internal law, and not the law
pertaining to conflicts or choice of law, of the State of Pennsylvania. Each of
the Company and each Purchaser hereby agrees that all actions or proceedings
initiated by it and arising directly or indirectly out of this Agreement shall
be litigated in the United States District Court for the Eastern District of
Pennsylvania. In any such action, the Company and each Purchaser agrees that
service of such Summons and Complaint or other process or papers may be made by
registered or certified mail addressed to the Company and any such Purchaser, as
applicable, at the address to which notices are to be sent pursuant to this
Agreement. Each of the Company and each Purchaser waives, to the extent
permitted by applicable law, any claim that Pennsylvania is an inconvenient
forum or an improper forum based on lack of venue. Should the Company or any
Purchaser, as applicable, after being so served, fail to appear or answer to any
summons, complaint, process or papers so served within the number of days
prescribed by law after the mailing thereof, the Company or the Purchaser, as
applicable, shall be deemed in default and an order and/or judgment may be
entered against the Company or such Purchaser, as applicable, as demanded or
prayed for in such summons, complaint, process or papers.
11.3 Survival and Remedies. The representations and warranties made by
the Company herein shall survive the Closing, notwithstanding any investigation
made by any Purchaser, until the earlier of the date on which no Shares are
owned by any Purchaser. The covenants and agreements made herein shall survive
the Closing. All statements as to factual matters contained in any certificate
or other instrument delivered by or on behalf of the Company pursuant hereto or
in connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder as of the date of such
certificate or instrument.
- 27 -
<PAGE>
11.4 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
11.5 Entire Agreement. This Agreement and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement among
the parties with regard to the subject matter hereof and thereof.
11.6 Notices. All notices and other communication required or permitted
hereunder shall be effective upon receipt and shall be in writing and delivered
personally, by facsimile transmission, by overnight delivery service or by
certified or registered mail, postage prepaid, addressed (a) if to a Purchaser,
at such Purchaser's address set forth below its name on Schedule I hereto, or at
such other address as such Purchaser shall have furnished to the Company in
writing, (b) if to the Company, at 2500 DeKalb Pike, Norristown, Pennsylvania
19404, attention: Alvin H. Clemens or at such other address as the Company shall
have furnished to each Purchaser in writing.
11.7 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
11.8 Expenses. At the Closing, the Company will pay all fees, expenses
and disbursements incurred by the Purchasers in connection with the preparation,
negotiation and execution of this Agreement, including, but not limited to, the
fees, expenses and disbursements of Dunnington, Bartholow & Miller LLP, special
counsel for the Purchasers. Otherwise, all parties hereto shall pay their own
expenses in connection with the preparation, negotiation and execution of this
Agreement.
11.9 Titles and Subtitles. The titles of the Sections of this Agreement
are for convenience of reference only and are not to be considered in construing
this Agreement.
11.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
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<PAGE>
11.11 Construction of Agreement. None of the parties hereto or their
respective counsel shall be deemed to have drafted this Agreement for purposes
of construing the terms hereof. The language in all parts of this Agreement
shall in all cases be construed according to its fair meaning, and not strictly
for or against any party hereto.
11.12 Termination of Agreement. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Closing either
(i) by unanimous written consent of the parties hereto or (ii) by any party
hereto if the Closing shall not have occurred prior to the close of business on
December 1, 1998.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
THE COMPANY:
PROVIDENT AMERICAN CORPORATION
By:__________________________
Name:
Title:
THE PURCHASERS:
LYNX PRIVATE EQUITY PARTNERS I, LLC __________________
James Burke
By:______________________
Name:
Title:
___________________
Craig Gitlitz
Delaware Charter Guarantee Trust,
as Trustee for Craig Gitlitz IRA INTERHOTEL COMPANY, LTD.
By: _______________________ By:____________________
Craig Gitlitz Name: Brad Raulston
Title:
Acknowledged and agreed to
this 13th day of November, 1998
_______________________________
Alvin H. Clemens
- 29 -
<PAGE>
STATE OF CALIFORNIA)
s.s.:
COUNTY OF )
On this the ____ day of November, 1998, before me, the undersigned, a
Notary Public in and of the State of California, personally appeared James
Burke, to me known to be the person described in and who executed the foregoing
Share Purchase Agreement and duly acknowledged that he executed the same.
-------------------------
NOTARY PUBLIC
STATE OF NEW YORK )
s.s.:
COUNTY OF NASSAU )
On this the ____ day of November, 1998, before me, the undersigned, a
Notary Public in and of the State of New York, personally appeared Craig
Gitlitz, to me known to be the person described in and who executed the
foregoing Share Purchase Agreement and duly acknowledged that he executed the
same.
-------------------------
NOTARY PUBLIC
- 30 -
<PAGE>
Schedule I
to
Share Purchase Agreement
Name and Address
of
Purchaser Number of Shares
---------------- ----------------
Lynx Private Equity Partners I, LLC
2601 Fair Oaks Blvd., Suite 150
Sacramento, CA 95864 250,000
James Burke
7297 Chevron Way
Dixon, CA 95620 207,143
Craig Gitlitz
141 Firestone Circle
Roslyn, NY 11576 34,571
Delaware Charter Guarantee Trust,
as Trustee for Craig Gitlitz IRA
c/o Spencer Clark
505 Park Ave.. Rm.404
New York, NY 10022 8,286
Interhotel Company, Ltd. 357,143
- 31 -
<PAGE>
PILIC - HEALTHAXIS.COM, INC.
STOCK PURCHASE AGREEMENT
THIS AGREEMENT, made and entered into as of the 15th day of September,
1998 by and between PROVIDENT INDEMNITY LIFE INSURANCE COMPANY (the
"Purchaser"), and HEALTHAXIS.COM, INC., a Pennsylvania corporation (the
"Corporation").
BACKGROUND
A. As of November 13, 1998, the authorized capital of Corporation is
40,000,000 shares of common voting stock, no par value (the "Common Stock") and
5,000,000 shares of preferred stock, par value $1.00 per share, of which Nine
Hundred Forty-Three Thousand Nine Hundred Eighty (943,980) shares have been duly
designated as Series A convertible preferred stock (the "Series A Convertible
Preferred Stock") and Six Hundred Twenty-Five Thousand Five Hundred Twenty-Nine
(625,529) shares have been duly designated as Series B convertible preferred
stock (the "Series B Convertible Preferred Stock").
B. The parties are desirous of reflecting the purchase of Series A
Convertible Preferred Stock of the Corporation by the Purchaser effective as of
September 15, 1998, upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of One ($1.00) Dollar and other good
and valuable consideration, the receipt of which is hereby acknowledged, as well
as the mutual covenants and agreements contained herein, and intending to be
legally bound, the parties agree as follows:
1. Sale and Purchase.
(a) Number of Shares. On the date of the execution of this
Agreement, the Purchaser agrees to and does purchase Four Hundred Five Thousand
Eight Hundred Eighty-Six (405,886) shares of the Series A Convertible Preferred
Stock, par value $1.00 per share, of the Corporation (the "Shares").
(b) Purchase Price. The purchase price for the Shares
shall be $5.913 per share or an aggregate purchase price of Two Million Four
Hundred Thousand ($2,400,000) Dollars, payable by wire transfer or immediately
available funds upon the execution of the Agreement.
(c) Issuance of Stock. As of the date of the issuance of
the certificate
<PAGE>
representing the Shares, Corporation is authorized to issue and
deliver to the Purchaser a certificate representing the number of Shares
purchased by the Purchaser hereunder.
3. Representations, Warranties, and Covenants of the Purchaser.
The Purchaser represents, covenants, and warrants to Corporation
that:
(a) Authority to Execute and Perform Agreements. The Purchaser
has the full legal right, power, authority and approvals to enter into and
perform under this Agreement, and it constitutes a valid and binding Agreement
of the Purchaser.
(b) Full Disclosure. The Purchaser is familiar with the business
and financial affairs of Corporation, is aware that Corporation may not pay any
dividends, that there is no market for its Shares, and it is unlikely that there
will be a market in the near future. The Purchaser has had the right to inquire
and investigate the business and financial affairs of the Corporation and
acknowledges that it has received such information as it shall have requested
with respect thereto prior to the purchase of the Shares.
(c) Investment Representation. The Purchaser is purchasing the
Shares hereunder for its own account for the purpose of investment and not with
a view towards or for sale in connection with any distribution thereof.
(d) THE PURCHASER HAS BEEN ADVISED BY THE CORPORATION AND
UNDERSTANDS THAT PURSUANT TO SECTION 207(m) OF THE PENNSYLVANIA ACT (i) THE
PURCHASER HAS THE RIGHT TO CANCEL AND WITHDRAW THE PURCHASE OF THE SHARES UPON
WRITTEN NOTICE TO THE CORPORATION GIVEN TWO BUSINESS DAYS FOLLOWING EXECUTION OF
THIS AGREEMENT, (ii) UPON SUCH CANCELLATION OR WITHDRAWAL, THE PURCHASER WILL
HAVE NO OBLIGATION OR DUTY UNDER THIS AGREEMENT TO THE CORPORATION OR ANY OTHER
PERSON AND WILL BE ENTITLED TO FULL REFUND WITHOUT INTEREST OF ANY AMOUNTS PAID
BY THE PURCHASER PURSUANT TO THIS AGREEMENT, AND (iii) ANY NOTICE OF
CANCELLATION OR WITHDRAWAL SHOULD BE MADE BY TELEGRAPH OR CERTIFIED OR
REGISTERED MAIL AND WILL BE EFFECTIVE WHEN DELIVERED TO WESTERN UNION OR
DEPOSITED IN THE UNITED STATES MAILS AS AFORESAID, WITH POSTAGE OR OTHER
TRANSMITTAL FEES PREPAID.
4. Representations, Warranties, and Covenants of Corporation.
Corporation represents, covenants, and warrants to the Purchaser
that:
(a) Authority to Execute and Perform Agreements. Corporation has
the full legal right and power and all authority and approvals required to enter
into, execute, deliver and perform this Agreement and the obligations hereunder.
The execution, delivery and performance of this Agreement (and all other
documents required to effect the transaction contemplated) and the consummation
of the transactions contemplated herein have been duly authorized by
Corporation, and each document or instrument contemplated by this Agreement, is
and will be the valid and legally binding obligation of Corporation enforceable
in accordance with its terms.
-2-
<PAGE>
(b) Good Standing. Corporation is a corporation duly organized,
validly existing, and in good standing under the laws of the Commonwealth of
Pennsylvania, and has full power and authority to own, lease and operate its
respective assets, properties and business, and to carry on its respective
business as and where such business is now conducted.
(c) Foreign Qualifications. There is no jurisdiction in which the
nature of Corporation's business or location of its properties requires it to be
licensed or qualified as a foreign corporation.
(d) Outstanding Capital Stock.
(1) Corporation is authorized to issue Nine Hundred
Forty-Three Thousand Nine Hundred Eighty (943,980) shares of Series A
Convertible Preferred Stock, $1.00 par value, none of which are issued and
outstanding prior to the date hereof.
(e) Compliance with Laws. Corporation has complied with all
federal, state, county, local and foreign laws, statutes, ordinances, rules,
regulations and orders (collectively "Laws") relating to the business and/or
operations of Corporation, including, but not limited to, federal and state
securities laws.
5. Legend. The certificates of stock subject to this Agreement shall be
endorsed as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY JURISDICTION. THE SALE OR OTHER
DISPOSITION OF THESE SHARES IS PROHIBITED UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL SATISFACTORY TO IT AND ITS COUNSEL THAT SUCH SALE OR
OTHER DISPOSITION CAN BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT
OF 1933 AND OTHER APPLICABLE STATUTES. BY ACQUIRING THE SHARES REPRESENTED
BY THIS CERTIFICATE, THE HOLDER OF THIS CERTIFICATE REPRESENTS THAT HOLDER
WILL NOT SELL OR OTHERWISE DISPOSE OF THESE SHARES WITHOUT REGISTRATION OR
OTHER COMPLIANCE WITH THE AFORESAID ACTS AND THE RULES AND REGULATIONS
THEREUNDER AND, IN ANY EVENT, THE HOLDER OF THIS CERTIFICATE, IF HOLDER IS
A RESIDENT OF PENNSYLVANIA, AGREES THAT HOLDER WILL NOT SELL THE SHARES
REPRESENTED HEREBY WITHIN TWELVE MONTHS AFTER THE DATE OF PURCHASE."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RIGHTS,
PRIVILEGES, AND RESTRICTIONS SET FORTH IN AN AMENDED SUBSCRIPTION
AGREEMENT BETWEEN PURCHASER AND CORPORATION DATED AS OF SEPTEMBER 15,
1998."
-3-
<PAGE>
7. Miscellaneous.
(a) Effective Date. The Purchaser is the owner of the Shares as
of September 15, 1998, notwithstanding that the certificate representing the
Shares may be issued as of a later date.
(b) Entire Agreement. This Agreement contains the entire
agreement between the parties and supersedes all prior agreements, written, oral
or otherwise relative to the subject matter hereof.
(c) Severability. If any term, provision, covenant, or
restriction contained in this Agreement is held by a court of competent
jurisdiction to be invalid, void, and unenforceable, the remainder of the terms,
provisions, covenants, and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired, or invalidated.
(d) Survival of Representations, Warranties and Agreements. All
representations, warranties, covenants, and agreements made herein shall survive
the execution and delivery of this Agreement, the issuance of the stock pursuant
hereto, and the Purchaser's payment therefor.
(e) Modification and Amendment. This Agreement may not be
modified, amended, altered or supplemented, except upon the execution and
delivery of a written agreement executed by all of the parties hereto.
(f) Binding Agreement. All of the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of each of the parties
hereto and their respective successors and assigns. No provision of this
Agreement shall be effective until this Agreement has been executed by all
parties hereto.
(g) Notices. All notices, requests, claims, demands, and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given, if given) by delivery via cable, telegram,
telex, or by mail (registered or certified, postage prepaid, return receipt
requested) to the respective parties as follows:
If to the Purchaser: Provident Indemnity Life Insurance Company
2500 DeKalb Pike
P. O. Box 511
Norristown, PA 19404-0511
Attention: James O. Bowles
President
-4-
<PAGE>
If to Corporation: HealthAxis.com, Inc.
2500 DeKalb Pike
P. O. Box 511
Norristown, PA 19404-0511
Attention: Michael Ashker
President
(h) Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
(i) Counterparts. This Agreement may be executed in separate
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year above first written.
PROVIDENT INDEMNITY LIFE
INSURANCE COMPANY
By:_______________________________
James O. Bowles
President
HEALTHAXIS.COM, INC.
By:_______________________________
Michael Ashker
President
-5-
<PAGE>
CERTIFICATE OF DESIGNATION
OF
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
HEALTHAXIS.COM, INC.
HEALTHAXIS.COM, INC., a Pennsylvania corporation (the "Corporation"),
acting pursuant to Section 1522 of the Pennsylvania Business Corporation Law,
does hereby submit the following Certificate of Designation of Series and
Determination of Rights and Preferences of its Series A Preferred Stock.
FIRST: The name of the Corporation is HealthAxis.com, Inc.
SECOND: By unanimous consent of the Board of Directors of the
Corporation dated November 11, 1998, the following resolutions were duly
adopted:
WHEREAS the Amended and Restated Articles of Incorporation of the
Corporation authorizes Preferred Stock consisting of 5,000,000 shares, par value
$1.00 per share, issuable from time to time in one or more series; and
WHEREAS the Board of Directors of the Corporation is authorized,
subject to limitations prescribed by law and by the provisions of Article 5 of
the Corporation's Amended and Restated Articles of Incorporation to establish
and fix the number of shares to be included in any series of Preferred Stock and
the designation, rights, preferences and limitations of the shares of such
series; and
WHEREAS it is the desire of the Board of Directors to establish and fix
the number of shares to be included in a new series of Preferred Stock and the
designation, rights, preferences and limitations of the shares of such new
series.
NOW, THEREFORE, BE IT RESOLVED that pursuant to Article 5 of the
Corporation's Amended and Restated Articles of Incorporation, there is hereby
established a new series of 953,980 shares of Preferred Stock of the Corporation
(the "Series A Preferred Stock") to have the designation, rights, preferences,
powers, restrictions and limitations set forth in a supplement of Article 5 as
follows:
1. Dividends.
(a) The holder of each share of Series A Preferred Stock shall be
entitled to receive, before dividends shall be declared or paid upon or set
aside for the Common Stock $.10 par value of the Corporation (the "Common
Stock") but after dividends shall be declared and paid upon or set aside for the
Series B Preferred Stock, dividends in cash at the per annum rate of $.13 per
share of such Series A Preferred Stock (subject to equitable adjustment to
reflect stock splits, stock dividends, stock combinations, recapitalizations,
and like occurrences), and no more, when and as declared by the Board of
Directors of the Corporation, out of funds legally available
<PAGE>
for that purpose. Dividends on each share of Series A Preferred Stock shall
accrue and be cumulative from the applicable Original Issuance Date (whether or
not there shall be surplus or net profits of the Corporation legally available
for the payment of such dividends and whether or not declared by the Board of
Directors of the Corporation) so that if at any time Accrued Dividends (as
hereinafter defined) upon the Series A Preferred Stock shall not have been paid
or declared and a sum sufficient for payment thereof set apart, the amount and
deficiency in such dividends shall be fully paid (but without interest) or
dividends in such amount shall have been declared on the shares of the Series A
Preferred Stock and a sum sufficient for the payment thereof shall have been set
apart for such payment, before any dividend shall be declared or paid or any
other distribution ordered or made upon shares of Common Stock and before any
sum or sums shall be set aside for or applied to the purchase or redemption of
any shares of Common Stock other than the repurchase by the Corporation of
shares of Common Stock from any employee thereof upon cessation of their
employment, which shall under all circumstances be permitted notwithstanding the
foregoing. Dividends payable on the Series A Preferred Stock for any period less
than a full year shall be computed on the basis of the actual number of days
elapsed and the actual number of days in the relevant year.
(b) "Accrued Dividends" shall mean (whether or not there shall have
been net profits or net assets of the Corporation legally available for the
payment of dividends) that amount that shall be equal to dividends at the full
rate fixed for the Series A Preferred Stock as provided herein (plus any other
dividends declared but unpaid) for the period of time elapsed from the Original
Issuance Date to the date as of which Accrued Dividends are to be computed less
an amount equal to all dividends paid on the Series A Preferred Stock through
the date of calculation thereof.
2. Liquidation.
(a) Upon a Liquidation (as defined below), after payment or provision
for payment of the debts and other liabilities of the Corporation and all
amounts which the holders of shares of Series B Preferred Stock and any other
class of capital stock ranking senior to the Series A Preferred Stock shall be
entitled to receive upon such Liquidation:
(i) the holders of Series A Preferred Stock shall be entitled to
receive, prior and in preference to the holders of Common Stock, out of the
remaining assets of the Corporation available for distribution to its
stockholders with respect to each share of Series A Preferred Stock, an amount
(the "Series A Preference Amount") per share of Series A Preferred Stock equal
to the sum of (A) $4.396279 (the "Original Issuance Price" of the Series A
Preferred Stock) and (B) all Accrued Dividends payable with respect to such
share under Section 1. If upon any Liquidation the assets of the Corporation
available for distribution to its stockholders shall be insufficient to pay the
holders of Series A Preferred Stock the full respective Series A Preference
Amounts to which they shall be entitled, the holders of Series A Preferred Stock
shall share ratably in any distribution of assets based on the amounts which
would be payable to them on or with respect to the shares of Series A Preferred
Stock held by them upon such distribution pursuant to this Section 2 as if all
amounts payable on or with respect to such shares were paid in full.
2
<PAGE>
(ii) After distribution to the holders of Series B Preferred Stock
of the full Series B Preference Amount (as such term is defined in Section
2(a)(i) of the Certificate of Designation of Series and Determination of Rights
and Preferences of the Series B Preferred Stock) and distribution to the holders
of Series A Preferred Stock of the full Series A Preference Amount set forth in
Section 2(a)(ii), the holders of Series B Preferred Stock, Series A Preferred
Stock and Common Stock shall be entitled to receive, on a pro rata basis
(determined, in the case of Series A Preferred and Series B Preferred, on an "as
converted" basis), the remaining assets of the Corporation available for
distribution to its stockholders.
(b) For purposes of this Section 2, a Corporate Transaction (as defined
below) shall be treated as a Liquidation and shall entitle the holders of
Preferred Stock to receive, upon the consummation of such Corporate Transaction,
consideration in the same form as is to be provided in such Corporate
Transaction (whether cash, securities, other property or any combination
thereof), having a value (as determined in accordance with the next sentence)
equivalent to the amounts to which such holders of Series A Preferred Stock and
Series B Preferred Stock would otherwise have been entitled pursuant to Section
2(a) assuming such Corporate Transaction had constituted a Liquidation within
the meaning of said Section 2(a).
(c) As used herein, the following terms shall have the following
respective meanings:
(i) "Corporate Transaction" means (A) any consolidation or merger
of the Corporation, other than any merger or consolidation resulting in the
holders of the capital stock of the Corporation entitled to vote for the
election of directors holding a majority of the capital stock of the surviving
or resulting entity entitled to vote for the election of directors, (B) any
person or entity (including any affiliates thereof) becoming the holder of a
majority of the capital stock of the Corporation entitled to vote for the
election of directors, or (C) any sale or other disposition by the Corporation
of all or substantially all of its assets.
(ii) "Liquidation" means any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, other than any
dissolution, liquidation or winding up in connection with any reincorporation of
the Corporation in another jurisdiction.
(iii) "Original Issuance Date" means November 12, 1998.
3. Redemption.
(a) Optional Redemption
(i) Each holder of Series A Preferred Stock shall have the option,
exercisable on February 1, 2002 and on the first day of each calendar quarter
thereafter (unless all shares of Series B Preferred Stock have theretofore been
redeemed by the Corporation in full, in which event the holders of Series A
Preferred Stock shall not entitled to exercise such option unless and until all
such Series B Preferred Stock have been so redeemed) upon request by the holders
of 51% of the outstanding shares of Series A Preferred Stock (the "Optional
Redemption Period") to cause the Corporation to redeem up to 100,000 shares of
Series A Preferred Stock, and the Corporation shall (unless prohibited by law or
failure to obtain the required corporate consent in the Corporation's Articles
of Incorporation) so redeem (the "Optional Redemption"),
3
<PAGE>
such number of shares of Series A Preferred Stock requested by such holder to be
redeemed, at a redemption price per share (the "Optional Redemption Price")
equal to the Original Issuance Price (subject to equitable adjustment to reflect
stock splits, stock dividends, stock combinations, recapitalizations and like
occurrences), plus an amount that would yield a total annualized return of 10%
calculated daily and compounded annually from the later to occur of (i) the
Original Issuance Date and (ii) the date on which a holder acquires shares of
Series A Preferred Stock, through the date of Redemption.
(ii) Notice of the exercise of the Optional Redemption (the
"Optional Notice of Exercise") pursuant to Section 3(a)(i) shall be sent by
first-class certified mail, postage prepaid and return receipt requested, or by
overnight courier to the Corporation. The Corporation shall, within fifteen (15)
days of receipt of the Optional Notice of Exercise, send notice to those holders
of Series A Preferred Stock who sent the Optional Notice of Exercise informing
them of whether the Corporation is legally permitted to effectuate the Optional
Redemption. If the Corporation is legally permitted to effectuate the Optional
Redemption, then at any time during the Optional Redemption Period, the holders
of record of shares of Series A Preferred Stock shall, as to the shares of
Series A Preferred Stock to be redeemed on such date, be entitled to receive
payment in cash of the Optional Redemption Price with respect to such Series A
Preferred Stock upon actual delivery to the Corporation or its agent of the
certificate or certificates representing the shares of Series A Preferred Stock
to be redeemed.
(iii) Anything contained herein to the contrary notwithstanding,
the holders of shares of Series A Preferred Stock exercising their optional
redemption rights under this Section 3 shall have the right, exercisable at any
time during the Optional Redemption Period, to convert all or any part of such
shares into shares of Common Stock pursuant to Section 5 hereof.
(b) Mandatory Redemption.
(i) The Corporation shall have the option, exercisable on or after
September 15, 1999 (the "Mandatory Redemption Period") to redeem any or all of
the shares of Series A Preferred Stock (the "Mandatory Redemption"), and the
holders of Series A Preferred Stock shall so sell to the Corporation, such
number of shares of Series A Preferred Stock requested by the Corporation to be
redeemed, at a redemption price per share equal to the Original Issuance Price
(subject to equitable adjustment to reflect stock splits, stock dividends, stock
combinations, recapitalizations and like occurrences), plus an amount that would
yield a total annualized return of 10% calculated daily and compounded annually
from the closing date through the date of Mandatory Redemption.
(ii) Notice of the exercise of the Mandatory Redemption (the
"Mandatory Notice of Exercise") pursuant to Section 3(b)(i) shall be sent by
first-class certified mail, postage prepaid and return receipt requested, or by
overnight courier to the Corporation. The Corporation shall, within fifteen (15)
days of receipt of the Mandatory Notice of Exercise, send notice to those
holders of Series A Preferred Stock who sent the Mandatory Notice of Exercise
informing them of whether the Corporation is legally permitted to effectuate the
Mandatory Redemption. If the Corporation is legally permitted to effectuate the
Mandatory Redemption, then at any time during the Mandatory Redemption Period,
the holders of record of
4
<PAGE>
shares of Series A Preferred Stock shall, as to the shares of Series A Preferred
Stock to be redeemed on such date, be entitled to receive payment in cash of the
Mandatory Redemption Price with respect to such Series A Preferred Stock upon
actual delivery to the Corporation or its agent of the certificate or
certificates representing the shares of Series A Preferred Stock to be redeemed.
(iii) Anything contained herein to the contrary notwithstanding,
the holders of shares of Series A Preferred Stock shall have the right,
exercisable at any time during the Mandatory Redemption Period, to convert all
or any part of such shares into shares of Common Stock pursuant to Section 5
hereof.
4. Voting Rights.
(a) In addition to the rights provided by law or in the Corporation's
By-laws, each share of Series A Preferred Stock shall entitle the holder thereof
to such number of votes as shall equal the nearest whole number of shares of
Common Stock into which such share of Series A Preferred Stock is then
convertible pursuant to Section 5. Except as provided in paragraph (b) below or
as otherwise provided by law, the holders of Series A Preferred Stock, shall be
entitled to vote on all matters as to which holders of Common Stock shall be
entitled to vote, in the same manner and with the same effect as such holders of
Common Stock, voting together with the holders of Common Stock as one class.
(b) The Corporation shall not, without the affirmative consent or
approval of the holders of at least a majority of the shares of Series A
Preferred Stock then outstanding, voting as a separate class:
(1) authorize, create, designate or establish any class or
series of capital stock or other security or other instrument convertible into
or exchangeable for any security ranking senior to the Series A Preferred Stock
(other than the Series B Preferred Stock) or reclassify any shares of Common
Stock into shares having any preference or priority as to dividends or assets
superior to any such preference or priority of the Series A Preferred Stock
(other than the Series B Preferred Stock);
(2) in any other manner amend or modify the powers,
privileges, preferences, or rights, or qualifications, limitations or
restrictions of the Series A Preferred Stock as to materially adversely affect
the holders thereof;
(3) amend the Amended and Restated Articles of Incorporation
of the Corporation so as to materially adversely affect the powers, preferences
or rights, or qualification, limitations or restrictions, of the shares of
Series A Preferred Stock (other than the creation of the Series B Preferred
Stock);
(4) amend the By-laws of the Corporation in any manner that
would materially adversely affect the powers, preferences or rights, or
qualifications, limitations or restrictions of the Series A Preferred Stock;
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5. Optional Conversion.
(a) Upon the terms set forth in this Section 5, the holder of shares of
Series A Preferred Stock shall have the right, at the holder's option, at any
time and from time to time, to convert any of such shares into the number of
fully paid and nonassessable shares of Common Stock equal to the quotient
obtained by dividing (i) the Original Issuance Price by (ii) the Conversion
Price (as defined below) therefor, as last adjusted and then in effect, by
surrender of the certificates representing the shares of Series A Preferred
Stock to be converted. The conversion price per share at which shares of Common
Stock shall be issuable upon conversion of shares of Series A Preferred Stock
shall initially be the Original Issuance Price (the "Conversion Price"), subject
to adjustment as set forth in paragraph (d) below.
(b) The holder of the shares of Series A Preferred Stock may exercise
the conversion right pursuant to paragraph (a) above by delivering to the
Corporation the certificate or certificates for the shares to be converted, duly
endorsed or assigned in blank or to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares and stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. Conversion shall
be deemed to have been effected on the date when such delivery is made (the
"Conversion Date"). As promptly as practicable thereafter, the Corporation shall
issue and deliver to such holder's address appearing on the Corporation's
records or upon the written order of such holder, to the place designated by
such holder, a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled, and a cash amount in respect of
any fractional interest in a share of Common Stock as provided in paragraph (c)
below. The person in whose name the certificate or certificates for Common Stock
are to be issued shall be deemed to have become a stockholder of record on the
applicable Conversion Date unless the transfer books of the Corporation are
closed on that date, in which event such person shall be deemed to have become a
stockholder of record on the next succeeding date on which the transfer books
are open, but the Conversion Price shall be that in effect on the Conversion
Date. Upon conversion of only a portion of the number of shares covered by a
certificate representing shares of Series A Preferred Stock surrendered for
conversion, the Corporation shall issue and deliver to or upon the written order
of 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.
(c) No fractional shares of Common Stock or scrip shall be issued upon
conversion of shares of Series A Preferred Stock. The number of full shares of
Common Stock issuable upon conversion of Series A Preferred Stock shall be
computed on the basis of the aggregate number of shares of Series A Preferred
Stock to be converted. Instead of any fractional shares of Common Stock which
would otherwise be issuable upon conversion of any shares of Series A Preferred
Stock, the Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount equal to the product of (i) the price of one share of
Common Stock as determined in good faith by the Board of Directors and (ii) such
fractional interest. The holders of fractional interests shall not be entitled
to any rights as stockholders of the Corporation in respect of such fractional
interests.
(d) The Conversion Price applicable to the Series A Preferred Stock
shall be subject to adjustment from time to time as follows:
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(i) If the Corporation shall at any time during the period
beginning on the Original Issuance Date and ending on the date of the
consummation of the Qualified Financing issue any shares of Common Stock
(including shares of Common Stock deemed to be issued pursuant to Subdivision
(3) of clause (iii) below) other than Excluded Stock (as defined in clause (iv)
below), without consideration or for a consideration per share less than the
Conversion Price applicable to the Series A Preferred Stock in effect
immediately prior to each such issuance of equity, then the applicable
Conversion Price in effect immediately prior to each such issuance shall
forthwith be lowered to a price equal to the amount of such lower consideration
per share.
(ii) If the Corporation shall at any time or from time to time
after the date of the consummation of the Qualified Financing issue any shares
of Common Stock (including shares of Common Stock deemed to be issued pursuant
to subdivision (3) of clause (iv) below) other than Excluded Stock (as defined
in clause (iv) below) without consideration or for a consideration per share
less than the Conversion Price applicable to the Series A Preferred Stock in
effect immediately prior to the issuance of such Common Stock, then the
applicable Conversion Price in effect immediately prior to each such issuance
shall forthwith be lowered to a price equal to the quotient obtained by
dividing:
(1) an amount equal to the sum of (x) the total number of
shares of Common Stock outstanding (including any shares of Common Stock deemed
to have been issued pursuant to subdivision (3) of clause (iii) below)
immediately prior to such issuance, multiplied by the applicable Conversion
Price in effect immediately prior to such issuance, and (y) the consideration
received by the Corporation upon such issuance; by
(2) the total number of shares of Common Stock outstanding
(including any shares of Common Stock deemed to have been issued pursuant to
subdivision (3) of clause (iii) below) immediately after the issuance of such
Common Stock.
(iii) For the purposes of any adjustment of the Conversion Price
pursuant to clauses (i) and (ii) above, the following provisions shall be
applicable:
(1) In the case of the issuance of Common Stock for cash in a
public offering or private placement, the consideration shall be deemed to be
the amount of cash paid therefor after deducting therefrom any discounts,
commissions or placement fees payable by the Corporation to any underwriter or
placement agent in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof (such fair market value
being determined as provided in the definition thereof but with reference to
such consideration), irrespective of any accounting treatment.
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(3) The issuance after the Original Issuance Date of options
to purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock, or options to purchase or
rights to subscribe for such convertible or exchangeable securities shall be
deemed to be an issuance of Common Stock for purposes of clauses (i) and (ii)
above. In the case of any such issuance of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock, or options to purchase or rights to subscribe for
such convertible or exchangeable securities:
a. the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or
rights were issued and for a consideration equal to the consideration
(determined in the manner provided in subdivisions (1) and (2) above), if any,
received by the Corporation upon the issuance of such options or rights plus the
minimum purchase price provided in such options or rights for the Common Stock
covered thereby;
b. the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities, options, or rights were issued and for a consideration equal to
the consideration received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration in each case
to be determined in the manner provided in subdivisions (1) and (2) above);
c. on any change in the number of shares or exercise price
of Common Stock deliverable upon exercise of any such options or rights or
conversions of or exchange for such securities, other than a change resulting
from the antidilution provisions thereof, the applicable Conversion Price shall
forthwith be readjusted to such Conversion Price as would have been obtained had
the adjustment made upon the issuance of such options, rights or securities not
converted prior to such change or options or rights related to such securities
not converted prior to such change been made upon the basis of such change; and
d. on the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
applicable Conversion Price shall forthwith be readjusted to such Conversion
Price as would have been obtained had the adjustment made upon the issuance of
such options, rights, securities or options or rights related to such securities
been made upon the basis of the issuance of only the number of shares of Common
Stock actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities, or upon the exercise of the options
or rights related to such securities and subsequent conversion or exchange
thereof.
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<PAGE>
(iv) "Excluded Stock" means (A) up to 2,900,000 shares of Common
Stock, and options therefor, issued or granted from time to time to employees,
directors and officers of and consultants to the Corporation pursuant to
agreements, plans or arrangements approved by the Board of Directors; (B) shares
of Common Stock issued upon conversion of shares of Series A Preferred Stock or
Series B Preferred Stock; (C) shares of Common Stock issued by the Corporation
as a stock dividend or upon any subdivision, split-up or combination of shares
of Common Stock; and (D) shares of Common Stock issued in the Qualified
Financing only if the issuance price of such Common Stock is no less than 85% of
the Original Issuance Price.
(v) If, at any time after the Original Issuance Date, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date for the determination of holder of Common
Stock entitled to receive such stock dividend, subdivision or split-up, the
Conversion Price shall be appropriately decreased so that the number of shares
of Common Stock issuable on conversion of each share of Preferred Stock shall be
increased in proportion to such increase in outstanding shares.
(vi) If, at any time after the Original Issuance Date, the number
of shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of Series
A Preferred Stock shall be decreased in proportion to such decrease in
outstanding shares.
(vii) In the event of any capital reorganization of the
Corporation, any reclassification of the stock of the Corporation (other than a
change in par value or from par value to no par value or from no par value to
par value or as a result of a stock dividend or subdivision, split-up or
combination of shares), or any consolidation or merger of the Corporation (other
than a consolidation or merger in which the Corporation is the continuing
corporation and which does not result in any change in the Common Stock), each
share of Series A Preferred Stock shall after such reorganization,
reclassification, consolidation or merger (unless, in the case of a
consolidation or merger, payment shall have been made to the holders of Series A
Preferred Stock of the full amount to which they shall have been entitled
pursuant to Section 2 hereof) be convertible into the kind and number of shares
of stock or other securities or property of the Corporation or of the
corporation resulting from such consolidation or surviving such merger to which
the holder of the number of shares of Common Stock deliverable (immediately
prior to the time of such reorganization, reclassification, consolidation or
merger) upon conversion of such share of Series A Preferred Stock would have
been entitled upon such reorganization, reclassification, consolidation or
merger. The provisions of this clause shall similarly apply to successive
reorganizations, reclassifications, consolidations or mergers.
(viii) All calculations under this paragraph shall be made to the
nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a
share, as the case may be.
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(ix) In any case in which the provisions of this paragraph (d)
shall require that an adjustment shall become effective immediately after a
record date of an event, the Corporation may defer until the occurrence of such
event (A) issuing to the holder of any share of Series A Preferred Stock
converted after such record date and before the occurrence of such event the
shares of capital stock issuable upon such conversion by reason of the
adjustment required by such event in addition to the shares of capital stock
issuable upon such conversion before giving effect to such adjustments, and (B)
paying to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to paragraph (c) above; provided, however, that the
Corporation shall deliver to such holder an appropriate instrument evidencing
such holder's right to receive such additional shares and such cash.
(e) Whenever the Conversion Price shall be adjusted as provided in
paragraph (d), the Corporation shall make available for inspection during
regular business hours, at its principal executive offices or at such other
place as may be designated by the Corporation, a statement, signed by its chief
executive officer, showing in detail the facts requiring such adjustment and the
Conversion Price that shall be in effect after such adjustment. The Corporation
shall also cause a copy of such statement to be sent by first class certified
mail, return receipt requested and postage prepaid, to each holder of Series A
Preferred Stock as to which the Conversion Price shall be so adjusted at such
holder's address appearing on the Corporation's records. Where appropriate, such
copy may be given in advance and may be included as part of any notice required
to be mailed under the provisions of paragraph (f) below.
(f) If the Corporation shall propose to take any action of the types
described in clauses (v), (vi) or (vii) of paragraph (d) above, the Corporation
shall give notice to each holder of shares of Series A Preferred Stock, in the
manner set forth in paragraph (e) above, which notice shall specify the record
date, if any, with respect to any such action and the date on which such action
is to take place. Such notice shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect of such action
(to the extent such effect may be known at the date of such notice) on the
Conversion Price and the number, kind or class of shares or other securities or
property which shall be deliverable or purchasable upon the occurrence of such
action or deliverable upon conversion of shares of Series A Preferred Stock. In
the case of any action which would require the fixing of a record date, such
notice shall be given at least 20 days prior to the date so fixed, and in case
of all other action, such notice shall be given at least 30 days prior to the
taking of such proposed action. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of any such action.
(g) The Corporation shall reserve, and at all times from and after the
date of Original Issuance Date keep reserved, free from preemptive rights, out
of its authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Series A Preferred Stock, sufficient
shares of Common Stock to provide for the conversion of all outstanding shares
of Series A Preferred Stock.
(h) At any time the Corporation makes or fixes a record date for the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in securities of the Corporation other than shares of
Common Stock, provision shall be made so that each holder of shares of Series A
Preferred Stock shall receive upon conversion thereof, in addition to the shares
of Common Stock receivable thereupon, the number of securities of the
Corporation which it would have received had its shares of Series A Preferred
Stock been converted into shares of Common Stock on the date of such event and
had such holder thereafter, during the period from the date of such event to and
including the date of conversion, retained such securities receivable by it
pursuant to this paragraph during such period, subject to the sum of all other
adjustments called for during such period under this Section 5 with respect to
the rights of such holder of shares of Series A Preferred Stock.
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<PAGE>
6. Mandatory Conversion.
(a) Upon the consummation of the first underwritten public offering for
the account of the Corporation of its Common Stock pursuant to a registration
statement filed under the Securities Act of 1933, as amended, at a net offering
price per share of Common Stock that represents a pre-offering market
capitalization of no less than $150,000,000 and with aggregate proceeds (net of
underwriting discounts and commissions) to the Corporation of not less than
$25,000,000 (a "Qualified Public Offering"), each share of Series A Preferred
Stock then outstanding shall, by virtue of and simultaneously with such
Qualified Public Offering, be deemed automatically converted into the number of
fully paid and nonassessable shares of Common Stock equal to the quotient
obtained by dividing (i) the Original Issuance Price of the Series A Preferred
Stock by (ii) the applicable Conversion Price, as last adjusted and then in
effect.
(b) As promptly as practicable after the date of consummation of any
Qualified Public Offering and the delivery to the Corporation of the certificate
or certificates for the shares of Series A Preferred Stock which have been
converted, duly endorsed or assigned in blank to the Corporation (if required by
it), the Corporation shall issue and deliver to or upon the written order of
each holder of Series A Preferred Stock, to the place designated by such holder,
a certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled, and a cash amount in respect of any fractional
interest in a share of Common Stock as provided in paragraph (c) below. The
person in whose name the certificate or certificates for Common Stock are to be
issued shall be deemed to have become a stockholder of record on the date of
such Qualified Public Offering and on such date the shares of Series A Preferred
Stock shall cease to be outstanding, whether or not the certificates
representing such shares have been received by the Corporation.
(c) The provisions set forth in Sections 5(b) and (c) shall apply to
the conversion of Series A Preferred Stock pursuant to this Section in the same
manner as they apply to the conversion of Series A Preferred Stock pursuant to
Section 5.
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CERTIFICATE OF DESIGNATION
OF
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
HEALTHAXIS.COM, INC.
HEALTHAXIS.COM, INC., a Pennsylvania corporation (the
"Corporation"), acting pursuant to Section 1522 of the Pennsylvania Business
Corporation Law, does hereby submit the following Certificate of Designation of
Series and Determination of Rights and Preferences of its Series B Preferred
Stock.
FIRST: The name of the Corporation is HealthAxis.com, Inc.
SECOND: By unanimous consent of the Board of Directors of the
Corporation dated November 11, 1998, the following resolutions were duly
adopted:
WHEREAS the Amended and Restated Articles of Incorporation of
the Corporation authorizes Preferred Stock consisting of 5,000,000 shares, par
value $1.00 per share, issuable from time to time in one or more series; and
WHEREAS the Board of Directors of the Corporation is
authorized, subject to limitations prescribed by law and by the provisions of
Article 5 of the Corporation's Amended and Restated Articles of Incorporation to
establish and fix the number of shares to be included in any series of Preferred
Stock and the designation, rights, preferences and limitations of the shares of
such series; and
WHEREAS it is the desire of the Board of Directors to
establish and fix the number of shares to be included in a new series of
Preferred Stock and the designation, rights, preferences and limitations of the
shares of such new series.
NOW, THEREFORE, BE IT RESOLVED that pursuant to Article 5 of
the Corporation's Amended and Restated Articles of Incorporation, there is
hereby established a new series of 625,529 shares of Preferred Stock of the
Corporation (the "Series B Preferred Stock") to have the designation, rights,
preferences, powers, restrictions and limitations set forth in a supplement of
Article 5 as follows:
1. Dividends.
(a) The holder of each share of Series B Preferred Stock shall
be entitled to receive, before dividends shall be declared or paid upon or set
aside for the Common Stock, $.10 par value of the Corporation (the "Common
Stock") or Series A Preferred Stock, $1.00 par value of the Corporation (the
"Series A Preferred Stock"), dividends in cash at the per annum rate of $.13 per
share of such Series B Preferred Stock (subject to equitable adjustment to
reflect stock splits, stock dividends, stock combinations, recapitalizations,
and like occurrences), and no more,
<PAGE>
when and as declared by the Board of Directors of the Corporation, out of funds
legally available for that purpose. Dividends on each share of Series B
Preferred Stock shall accrue and be cumulative from the applicable Original
Issuance Date (whether or not there shall be surplus or net profits of the
Corporation legally available for the payment of such dividends and whether or
not declared by the Board of Directors of the Corporation) so that if at any
time Accrued Dividends (as hereinafter defined) upon the Series B Preferred
Stock shall not have been paid or declared and a sum sufficient for payment
thereof set apart, the amount and deficiency in such dividends shall be fully
paid (but without interest) or dividends in such amount shall have been declared
on the shares of the Series B Preferred Stock and a sum sufficient for the
payment thereof shall have been set apart for such payment, before any dividend
shall be declared or paid or any other distribution ordered or made upon shares
of Common Stock or Series A Preferred Stock and before any sum or sums shall be
set aside for or applied to the purchase or redemption of any shares of Common
Stock or Series A Preferred Stock other than the repurchase by the Corporation
of shares of Common Stock from any employee thereof upon cessation of their
employment, which shall under all circumstances be permitted notwithstanding the
foregoing. Dividends payable on the Series B Preferred Stock for any period less
than a full year shall be computed on the basis of the actual number of days
elapsed and the actual number of days in the relevant year.
(b) "Accrued Dividends" shall mean (whether or not there shall
have been net profits or net assets of the Corporation legally available for the
payment of dividends) that amount that shall be equal to dividends at the full
rate fixed for the Series B Preferred Stock as provided herein (plus any other
dividends declared but unpaid) for the period of time elapsed from the Original
Issuance Date to the date as of which Accrued Dividends are to be computed less
an amount equal to all dividends paid on the Series B Preferred Stock through
the date of calculation thereof.
2. Liquidation.
(a) Upon a Liquidation (as defined below), after payment or
provision for payment of the debts and other liabilities of the Corporation and
all amounts which the holder of any class of capital stock ranking senior to the
Series B Preferred Stock shall be entitled to receive upon such Liquidation:
(i) the holders of Series B Preferred Stock shall be
entitled to receive, prior and in preference to the holders of Common Stock and
Series A Preferred Stock, out of the remaining assets of the Corporation
available for distribution to its stockholders with respect to each share of
Series B Preferred Stock, an amount (the "Series B Preference Amount") per share
of Series B Preferred equal to the sum of (A) $4.396279 (the "Original Issuance
Price" of the Series B Preferred Stock) and (B) all Accrued Dividends payable
with respect to such share under Section 1. If upon any Liquidation the assets
of the Corporation available for distribution to its stockholders shall be
insufficient to pay the holders of Series B Preferred Stock the full respective
Series B Preference Amounts to which they shall be entitled, the holders of
Series B Preferred Stock shall share ratably in any distribution of assets based
on the amounts which would be payable to them on or with respect to the shares
of Series B Preferred Stock held by them upon such distribution pursuant to this
Section 2 as if all amounts payable on or with respect to such shares were paid
in full.
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<PAGE>
(ii) After distribution to the holders of Series B
Preferred Stock of the full Series B Preference Amount set forth in Section
2(a)(i), the holders of Series A Preferred Stock shall be entitled to receive,
prior and in preference to the holders of Common Stock, out of the remaining
assets of the Corporation available for distribution to its Stockholders with
respect to each share of Series A Preferred Stock an amount per share of Series
A Preferred Stock equal to its liquidation preference as currently provided (the
"Series A Preference Amount" and the Series B Preference Amount and the Series A
Preferred Amount collectively the "Preferred Amount"). If upon any Liquidation
the assets of the Corporation available for distribution to its stockholders
shall be insufficient to pay the holders of Series A Preferred Stock the full
respective Series A Preference Amounts to which they shall be entitled, the
holders of Series A Preferred Stock shall share ratably in any distribution of
assets based on the amounts which would be payable to them on or with respect to
the shares of Series A Preferred Stock held by them upon such distribution
pursuant to this Section 2 as if all amounts payable on or with respect to such
shares were paid in full.
(iii) After distribution to the holders of Series B
Preferred Stock of the full Series B Preference Amount set forth in Section
2(a)(i) and distribution to the holders of Series A Preferred Stock of the full
Series A Preference Amount set forth in Section 2(a)(ii), the holders of Series
B Preferred Stock, Series A Preferred Stock and Common Stock shall be entitled
to receive, on a pari passu basis (determined, in the case of Series A Preferred
and Series B Preferred, on an "as converted" basis), the remaining assets of the
Corporation available for distribution to its stockholders.
(b) For purposes of this Section 2, a Corporate Transaction
(as defined below) shall be treated as a Liquidation and shall entitle the
holders of Preferred Stock to receive, upon the consummation of such Corporate
Transaction, consideration in the same form as is to be provided in such
Corporate Transaction (whether cash, securities, other property or any
combination thereof), having a value (as determined in accordance with the next
sentence) equivalent to the amounts to which such holders of Series A Preferred
Stock and Series B Preferred Stock would otherwise have been entitled pursuant
to Section 2(a) assuming such Corporate Transaction had constituted a
Liquidation within the meaning of said Section 2(a).
(c) As used herein, the following terms shall have the
following respective meanings:
(i) "Corporate Transaction" means (A) any consolidation or
merger of the Corporation, other than any merger or consolidation resulting in
the holders of the capital stock of the Corporation entitled to vote for the
election of directors holding a majority of the capital stock of the surviving
or resulting entity entitled to vote for the election of directors, (B) any
person or entity (including any affiliates thereof) becoming the holder of a
majority of the capital stock of the Corporation entitled to vote for the
election of directors, or (C) any sale or other disposition by the Corporation
of all or substantially all of its assets.
(ii) "Liquidation" means any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, other
than any dissolution, liquidation or winding up in connection with any
reincorporation of the Corporation in another jurisdiction.
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<PAGE>
(iii) "Original Issuance Date" means the date of original
issuance of the first share of Series B Preferred Stock.
3. Optional Redemption.
(a) Subject to Section 3(c), each holder of Series B Preferred
Stock shall have the option, exercisable upon request by the holders of 51% of
the outstanding shares of Series B Preferred Stock within six months after the
later of the occurrence, or the notice thereof, of any Trigger Event (as
hereinafter defined) (the "Optional Redemption Period") to cause the Corporation
to redeem any or all, and the Corporation shall (unless prohibited by law) so
redeem any or all (the "Optional Redemption"), of the number of shares of Series
B Preferred Stock requested by such holder to be redeemed, at a redemption price
per share (the "Optional Redemption Price") equal to the Original Issuance Price
(subject to equitable adjustment to reflect stock splits, stock dividends, stock
combinations, recapitalizations and like occurrences), plus an amount that would
yield a total annualized return of 10% calculated daily and compounded annually
from the later to occur of (i) the Original Issuance Date and (ii) the date on
which a holder acquires shares of Series B Preferred Stock, through the date of
Redemption.
(b) Notice of the exercise of the redemption option (the
"Notice of Exercise") pursuant to Section 3(a) shall be sent by first-class
certified mail, postage prepaid and return receipt requested, or by overnight
courier to the Corporation. The Corporation shall, within fifteen (15) days of
receipt of the Notice of Exercise, send notice to those holders of Series B
Preferred Stock who sent the Notice of Exercise informing them of whether the
Corporation is legally permitted to effectuate the Optional Redemption. If the
Corporation is legally permitted to effectuate the Optional Redemption, then at
any time during the Optional Redemption Period, the holders of record of shares
of Series B Preferred Stock shall, as to the shares of Series B Preferred Stock
to be redeemed on such date, be entitled to receive payment in cash of the
Optional Redemption Price with respect to such Series B Preferred Stock
simultaneous with actual delivery to the Corporation or its agent of the
certificate or certificates representing the shares of Series B Preferred Stock
to be redeemed.
(c) "Trigger Event" shall mean (i) January 31, 2002, if by
such time the Corporation has not consummated an underwritten public offering
for the account of the Corporation of Common Stock pursuant to a registration
statement filed under the Securities Act of 1933, as amended, at a net offering
price per share of Common Stock that represents a pre-offering market
capitalization of no less than $150,000,000 and with aggregate proceeds (net of
underwriting discounts and commissions) to the Corporation of not less than
$25,000,000, (ii) failure to renew by the Corporation or any material breach by
any party other than America Online, Inc.("AOL) or termination of the Amended
and Restated Marketing Interactive Agreement dated as of February 1, 1998 (the
"Original Agreement"), by and between Provident Health Services, Inc.("PHS") and
AOL, as amended by the First Amendment to the Original Agreement dated as of
November 10, 1998, by and between AOL, the Corporation and PHS in accordance
with its terms, (iii) the date of the occurrence of a Liquidation or (iv) March
31, 1999, if by such time the Corporation has not consummated a Qualified
Financing.
(d) "Qualified Financing" shall mean the consummation by the
Corporation of an equity financing, in a single transaction or series or related
transactions, yielding aggregate
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gross proceeds to the Corporation of not less than $10,500,000 at a price per
share of Common Stock equal to at least $3.74 (appropriately adjusted to reflect
the occurrence of any stock split, stock dividend, recapitalization or like
occurrences).
(e) Anything contained herein to the contrary notwithstanding,
the holders of shares of Series B Preferred Stock exercising their optional
redemption rights under this Section 3 shall have the right, exercisable at any
time during the Optional Redemption Period, to convert all or any part of such
shares into shares of Common Stock pursuant to Section 5 hereof.
4. Voting Rights.
(a) In addition to the rights provided by law or in the
Corporation's By-laws, each share of Series B Preferred Stock shall entitle the
holder thereof to such number of votes as shall equal the nearest whole number
of shares of Common Stock into which such share of Series B Preferred Stock is
then convertible pursuant to Section 5. Except as provided in paragraph (b)
below or as otherwise provided by law, the holders of Series B Preferred Stock,
shall be entitled to vote on all matters as to which holders of Common Stock
shall be entitled to vote, in the same manner and with the same effect as such
holders of Common Stock, voting together with the holders of Common Stock as one
class.
(b) The Corporation shall not, without the affirmative consent
or approval of the holders of at least a majority of the shares of Series B
Preferred Stock then outstanding, voting as a separate class:
(1) authorize, create, designate or establish any
class or series of capital stock or other security or other instrument
convertible into or exchangeable for any security ranking senior or pari passu
with the Series B Preferred Stock or reclassify any shares of Common Stock into
shares having any preference or priority as to dividends or assets superior to
any such preference or priority of the Series B Preferred Stock;
(2) in any other manner amend or modify the powers,
privileges, preferences, or rights, or qualifications, limitations or
restrictions of the Series B Preferred Stock as to materially adversely affect
the holders thereof;
(3) amend the Amended and Restated Articles of
Incorporation of the Corporation so as to materially adversely affect the
powers, preferences or rights, or qualification, limitations or restrictions, of
the shares of Series B Preferred Stock;
(4) amend the By-laws of the Corporation in any manner
that would materially adversely affect the powers, preferences or rights, or
qualifications, limitations or restrictions of the Series B Preferred Stock;
(5) consummate any Corporate Transaction;
(6) increase or decrease the total number of
authorized shares of Series B Preferred Stock;
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(7) directly or indirectly pay or declare any dividend
or make any distribution upon, or redeem, retire or repurchase or otherwise
acquire, any shares of capital stock or other securities of the Corporation
(other than the repurchase of Common Stock from employees upon termination or
employment);
(8) consummate any transaction whereby the Corporation
shall obtain control, directly or indirectly, of an insurance Corporation;
(9) effect any change in or enter into any business
other than the business conducted by the Corporation on the Original Issuance
Date.
5. Optional Conversion.
(a) Upon the terms set forth in this Section 5, the holder of
shares of Series B Preferred Stock shall have the right, at the holder's option,
at any time and from time to time, to convert any of such shares into the number
of fully paid and nonassessable shares of Common Stock equal to the quotient
obtained by dividing (i) the Original Issuance Price of the Series B Preferred
Stock by (ii) the Conversion Price (as defined below) therefor, as last adjusted
and then in effect, by surrender of the certificates representing the shares of
Series B Preferred Stock to be converted. The conversion price per share at
which shares of Common Stock shall be issuable upon conversion of shares of
Series B Preferred Stock shall initially be the Original Issuance Price for the
Series B Preferred Stock (the "Conversion Price"), subject to adjustment as set
forth in paragraph (d) below.
(b) The holder of the shares of Series B Preferred Stock may
exercise the conversion right pursuant to paragraph (a) above by delivering to
the Corporation the certificate or certificates for the shares to be converted,
duly endorsed or assigned in blank or to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares and stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. Conversion shall
be deemed to have been effected on the date when such delivery is made (the
"Conversion Date"). As promptly as practicable thereafter, the Corporation shall
issue and deliver to at such holder's address appearing on the Corporation's
records or upon the written order of such holder, to the place designated by
such holder, a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled, and a cash amount in respect of
any fractional interest in a share of Common Stock as provided in paragraph (c)
below. The person in whose name the certificate or certificates for Common Stock
are to be issued shall be deemed to have become a stockholder of record on the
applicable Conversion Date unless the transfer books of the Corporation are
closed on that date, in which event such person shall be deemed to have become a
stockholder of record on the next succeeding date on which the transfer books
are open, but the Conversion Price shall be that in effect on the Conversion
Date. Upon conversion of only a portion of the number of shares covered by a
certificate representing shares of Series B Preferred Stock surrendered for
conversion, the Corporation shall issue and deliver to or upon the written order
of the holder of the certificate so surrendered for conversion, at the expense
of
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the Corporation, a new certificate covering the number of shares of Series B
Preferred Stock representing the unconverted portion of the certificate so
surrendered.
(c) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series B Preferred Stock. The number of full
shares of Common Stock issuable upon conversion of Series B Preferred Stock
shall be computed on the basis of the aggregate number of shares of Series B
Preferred Stock to be converted. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of Series
B Preferred Stock, the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to the product of (i) the price of
one share of Common Stock as determined in good faith by the Board of Directors
and (ii) such fractional interest. The holders of fractional interests shall not
be entitled to any rights as stockholders of the Corporation in respect of such
fractional interests.
(d) The Conversion Price applicable to the Series B Preferred
Stock shall be subject to adjustment from time to time as follows:
(i) If the Corporation shall at any time during the period
beginning on the Original Issuance Date and ending on the date of the
consummation of the Qualified Financing issue any shares of Common Stock
(including shares of Common Stock deemed to be issued pursuant to Subdivision
(3) of clause (iii) below) other than Excluded Stock (as defined in clause (iv)
below), without consideration or for a consideration per share less than the
Conversion Price applicable to the Series B Preferred Stock in effect
immediately prior to each such issuance of equity, then the applicable
Conversion Price in effect immediately prior to each such issuance shall
forthwith be lowered to a price equal to the amount of such lower consideration
per share.
(ii) If the Corporation shall at any time or from time to
time after the date of the consummation of the Qualified Financing issue any
shares of Common Stock (including shares of Common Stock deemed to be issued
pursuant to subdivision (3) of clause (iv) below) other than Excluded Stock (as
defined in clause (iv) below) without consideration or for a consideration per
share less than the Conversion Price applicable to the Series B Preferred Stock
in effect immediately prior to the issuance of such Common Stock, then the
applicable Conversion Price in effect immediately prior to each such issuance
shall forthwith be lowered to a price equal to the quotient obtained by
dividing:
(1) an amount equal to the sum of (x) the total number
of shares of Common Stock outstanding (including any shares of Common Stock
deemed to have been issued pursuant to subdivision (3) of clause (iii) below)
immediately prior to such issuance, multiplied by the applicable Conversion
Price in effect immediately prior to such issuance, and (y) the consideration
received by the Corporation upon such issuance; by
(2) the total number of shares of Common Stock
outstanding (including any shares of Common Stock deemed to have been issued
pursuant to subdivision (3) of clause (iii) below) immediately after the
issuance of such Common Stock.
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(iii) For the purposes of any adjustment of the Conversion
Price pursuant to clauses (i) and (ii) above, the following provisions shall be
applicable:
(1) In the case of the issuance of Common Stock for
cash in a public offering or private placement, the consideration shall be
deemed to be the amount of cash paid therefor after deducting therefrom any
discounts, commissions or placement fees payable by the Corporation to any
underwriter or placement agent in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the Fair Market Value thereof (such Fair Market Value
being determined as provided in the definition thereof but with reference to
such consideration), irrespective of any accounting treatment.
(3) The issuance after the Original Issuance Date of
options to purchase or rights to subscribe for Common Stock, securities by their
terms convertible into or exchangeable for Common Stock, or options to purchase
or rights to subscribe for such convertible or exchangeable securities shall be
deemed to be an issuance of Common Stock for purposes of clauses (i) and (ii)
above. In the case of any such issuance of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock, or options to purchase or rights to subscribe for
such convertible or exchangeable securities:
a. the aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in subdivisions (1) and (2) above), if any,
received by the Corporation upon the issuance of such options or rights plus the
minimum purchase price provided in such options or rights for the Common Stock
covered thereby;
b. the aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities, options, or rights were issued and for a
consideration equal to the consideration received by the Corporation for any
such securities and related options or rights (excluding any cash received on
account of accrued interest or accrued dividends), plus the additional
consideration, if any, to be received by the Corporation upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
subdivisions (1) and (2) above);
c. on any change in the number of shares or
exercise price of Common Stock deliverable upon exercise of any such options or
rights or conversions of or exchange for such securities, other than a change
resulting from the antidilution provisions
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thereof, the applicable Conversion Price shall forthwith be readjusted to such
Conversion Price as would have been obtained had the adjustment made upon the
issuance of such options, rights or securities not converted prior to such
change or options or rights related to such securities not converted prior to
such change been made upon the basis of such change; and
d. on the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the applicable Conversion Price shall forthwith be readjusted to
such Conversion Price as would have been obtained had the adjustment made upon
the issuance of such options, rights, securities or options or rights related to
such securities been made upon the basis of the issuance of only the number of
shares of Common Stock actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities, or upon the exercise
of the options or rights related to such securities and subsequent conversion or
exchange thereof.
(iv) "Excluded Stock" means (A) up to 2,900,000 shares of
Common Stock, and options therefor, issued or granted from time to time to
employees, directors and officers of and consultants to the Corporation pursuant
to agreements, plans or arrangements approved by the Board of Directors; (B)
shares of Common Stock issued upon conversion of shares of Series A Preferred
Stock or Series B Preferred Stock; (C) shares of Common Stock issued by the
Corporation as a stock dividend or upon any subdivision, split-up or combination
of shares of Common Stock; and (D) shares of Common Stock issued in the
Qualified Financing only if the issuance price of such Common Stock is no less
than 85% of the Original Issuance Price so long as the Corporation does not
agree to provide any purchaser of Common Stock pursuant to such Qualified
Financing with additional contractual rights that are related to such issuance
or otherwise provide such purchaser with additional value.
(v) If, at any time after the Original Issuance Date, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date for the determination of holder of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Conversion Price shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of Preferred Stock
shall be increased in proportion to such increase in outstanding shares.
(vi) If, at any time after the Original Issuance Date, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of
Preferred Stock shall be decreased in proportion to such decrease in outstanding
shares.
(vii) In the event of any capital reorganization of the
Corporation, any reclassification of the stock of the Corporation (other than a
change in par value or from par value to no par value or from no par value to
par value or as a result of a stock dividend or subdivision, split-up or
combination of shares), or any consolidation or merger of the Corporation (other
than a consolidation or merger in which the Corporation is the continuing
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corporation and which does not result in any change in the Common Stock), each
share of Series B Preferred Stock shall after such reorganization,
reclassification, consolidation or merger (unless, in the case of a
consolidation or merger, payment shall have been made to the holders of Series B
Preferred Stock of the full amount to which they shall have been entitled
pursuant to Section 2 hereof) be convertible into the kind and number of shares
of stock or other securities or property of the Corporation or of the
corporation resulting from such consolidation or surviving such merger to which
the holder of the number of shares of Common Stock deliverable (immediately
prior to the time of such reorganization, reclassification, consolidation or
merger) upon conversion of such share of Series B Preferred Stock would have
been entitled upon such reorganization, reclassification, consolidation or
merger. The provisions of this clause shall similarly apply to successive
reorganizations, reclassifications, consolidations or mergers.
(viii) All calculations under this paragraph shall be made
to the nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10)
of a share, as the case may be.
(ix) In any case in which the provisions of this paragraph
(d) shall require that an adjustment shall become effective immediately after a
record date of an event, the Corporation may defer until the occurrence of such
event (A) issuing to the holder of any share of Preferred Stock converted after
such record date and before the occurrence of such event the shares of capital
stock issuable upon such conversion by reason of the adjustment required by such
event in addition to the shares of capital stock issuable upon such conversion
before giving effect to such adjustments, and (B) paying to such holder any
amount in cash in lieu of a fractional share of capital stock pursuant to
paragraph (c) above; provided, however, that the Corporation shall deliver to
such holder an appropriate instrument evidencing such holder's right to receive
such additional shares and such cash.
(e) Whenever the Conversion Price shall be adjusted as
provided in paragraph (d), the Corporation shall make available for inspection
during regular business hours, at its principal executive offices or at such
other place as may be designated by the Corporation, a statement, signed by its
chief executive officer, showing in detail the facts requiring such adjustment
and the Conversion Price that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by first class
certified mail, return receipt requested and postage prepaid, to each holder of
Series B Preferred Stock as to which the Conversion Price shall be so adjusted
at such holder's address appearing on the Corporation's records. Where
appropriate, such copy may be given in advance and may be included as part of
any notice required to be mailed under the provisions of paragraph (f) below.
(f) If the Corporation shall propose to take any action of the
types described in clauses (v), (vi) or (vii) of paragraph (d) above, the
Corporation shall give notice to each holder of shares of Series B Preferred
Stock, in the manner set forth in paragraph (e) above, which notice shall
specify the record date, if any, with respect to any such action and the date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Conversion Price and the number, kind or class of shares or other
securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of shares of Series B
Preferred Stock. In the case of any action which would require the fixing of a
record date, such notice shall be
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given at least 20 days prior to the date so fixed, and in case of all other
action, such notice shall be given at least 30 days prior to the taking of such
proposed action. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any such action.
(g) The Corporation shall reserve, and at all times from and
after the date of Original Issuance Date keep reserved, free from preemptive
rights, out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of Series B Preferred
Stock, sufficient shares of Common Stock to provide for the conversion of all
outstanding shares of Series B Preferred Stock.
(h) At any time the Corporation makes or fixes a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in securities of the Corporation other than shares
of Common Stock, provision shall be made so that each holder of shares of Series
B Preferred Stock shall receive upon conversion thereof, in addition to the
shares of Common Stock receivable thereupon, the number of securities of the
Corporation which it would have received had its shares of Series B Preferred
Stock been converted into shares of Common Stock on the date of such event and
had such holder thereafter, during the period from the date of such event to and
including the date of conversion, retained such securities receivable by it
pursuant to this paragraph during such period, subject to the sum of all other
adjustments called for during such period under this Section 4 with respect to
the rights of such holder of shares of Series B Preferred Stock.
6. Mandatory Conversion.
(a) Upon the consummation of the first underwritten public
offering for the account of the Corporation of its Common Stock pursuant to a
registration statement filed under the Securities Act of 1933, as amended, at a
net offering price per share of Common Stock that represents a pre-offering
market capitalization of no less than $200,000,000 and with aggregate proceeds
(net of underwriting discounts and commissions) to the Corporation of not less
than $25,000,000 (a "Qualified Public Offering"), each share of Series B
Preferred Stock then outstanding shall, by virtue of and simultaneously with
such Qualified Public Offering, be deemed automatically converted into the
number of fully paid and nonassessable shares of Common Stock equal to the
quotient obtained by dividing (i) the Original Issuance Price of the Series B
Preferred Stock by (ii) the applicable Conversion Price, as last adjusted and
then in effect.
(b) As promptly as practicable after the date of consummation
of any Qualified Public Offering and the delivery to the Corporation of the
certificate or certificates for the shares of Series B Preferred Stock which
have been converted, duly endorsed or assigned in blank to the Corporation (if
required by it), the Corporation shall issue and deliver to or upon the written
order of each holder of Series B Preferred Stock, to the place designated by
such holder, a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled, and a cash amount in respect of
any fractional interest in a share of Common Stock as provided in paragraph (c)
below. The person in whose name the certificate or certificates for Common Stock
are to be issued shall be deemed to have become a stockholder of record on the
date of such Qualified Public Offering and on such date the shares of Series B
Preferred Stock
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shall cease to be outstanding, whether or not the certificates representing such
shares have been received by the Corporation.
(c) The provisions set forth in Sections 5(b) and (c) shall
apply to the conversion of Series B Preferred Stock pursuant to this Section in
the same manner as they apply to the conversion of Series B Preferred Stock
pursuant to Section 5.
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