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) February 14, 2000
PHOTOWORKS, INC.
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(Exact name of registrant as specified in its charter)
Washington 000-15338 91-0964899
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(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification No.)
1260 16th Avenue West
Seattle, Washington 98119
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (206) 281-1390
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Item 5. Other Events.
On February 14, 2000, PhotoWorks, Inc. (the "Company") issued a press
release relating to the closing of a $15 million financing previously discussed
in the Company's Quarterly Report on Form 10-Q for the quarter ending December
25, 1999. The February 14, 2000 press release is attached to this report at
Exhibit 99.1.
In the financing, which was led by Orca Bay Partners and its affiliates and
Madrona Venture Group, the Company issued 15,000 shares of Series A Preferred
Stock which are convertible into 3,157,895 shares of common stock at a
conversion price of $4.75 per share and warrants to purchase 789,474 shares of
common stock at an exercise price of $6.00 per share.
The terms of the Series A Preferred Stock are set forth in the Articles of
Amendment which are attached to this report as Exhibit 3.1 and incorporated
herein by reference. The Series A Preferred is convertible into common stock at
the holders' option at any time after August 1, 2000, or upon an earlier
secondary offering by the Company or merger or sale of the Company which is
approved by the Company's board of directors. The holders of Series A Preferred
are entitled to elect one director and an additional director at any time there
are 10,000 or more shares outstanding. The holders of Series A Preferred have
rights to approve certain corporate actions but otherwise vote as a single class
with the common stock on an as-converted basis. The Series A Preferred is
entitled to receive cumulative dividends, which must be paid before any
dividends are payable on the common stock, at the rate of 6% (which may increase
to 10% in certain instances) but only when and if declared by the Board. The
Series A Preferred is also entitled to a liquidation preference of $1,000 per
share of Series A Preferred plus the amount of dividends which would have
accrued at the rate of 6%. The Company has the right to redeem the Series A
Preferred at any time after February 14, 2003.
In connection with the sale of the Series A Preferred and warrants, the
Company also entered into an Investor Rights Agreement which grants the
investors certain rights to require the Company to register on Form S-3 the
shares of common stock issuable upon conversion of the Series A Preferred or
exercise of the warrants or to include such shares in a registration being
effected for the Company's own account. In addition, this agreement grants the
investors certain pre-emptive rights to purchase additional securities offered
by the Company.
On February, 16, 2000, the Company issued a press release relating to the
resignation of Sam Rubinstein from the Company's board of directors and the
reduction in the number of directors elected by the holders of common stock from
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five to four. In addition, the Company announced the appointment of Ross Chapin
from Orca Bay Partners and Paul Goodrich from Madrona Venture Group, as nominees
of the holders of the recently-issued Series A Preferred Stock, thereby
increasing the size of the board of directors to six. The February 16, 2000
press release is attached to this report as Exhibit 99.2.
Item 7. Exhibits.
3.1 Articles of Amendment dated February 9, 2000.
4.1 Form of Warrant to be issued to investors under the Series A
Preferred Stock and Warrant Purchase Agreement dated January
31, 2000.
10.1 Series A Preferred Stock and Warrant Purchase Agreement dated
January 31, 2000 by and among the Company and the Investors
listed on Exhibit A thereto.
10.2 Investor Rights Agreement dated February 14, 2000 by and among
the Company and the Investors listed on Exhibit A thereto.
99.1 Press Release issued by the Company on February 14, 2000.
99.2 Press Release issued by the Company on February 16, 2000.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
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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, thereto duly authorized.
PHOTOWORKS, INC.
By: /s/ Loran Cashmore Bond
Loran Cashmore Bond
Chief Financial Officer and
Treasurer
Date: February 16, 2000
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EXHIBIT INDEX
3.1 Articles of Amendment dated February 9, 2000.
4.1 Form of Warrant to be issued to investors under the Series A
Preferred Stock and Warrant Purchase Agreement dated January
31, 2000.
10.1 Series A Preferred Stock and Warrant Purchase Agreement dated
January 31, 2000 by and among the Company and the Investors
listed on Exhibit A thereto.
10.2 Investor Rights Agreement dated February 14, 2000 by and among
the Company and the Investors listed on Exhibit A thereto.
99.1 Press Release issued by the Company on February 14, 2000.
99.2 Press Release issued by the Company on February 16, 2000.
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
PHOTOWORKS, INC.
Pursuant to the provisions of RCW 23B.10 of the Washington Business
Corporation Act, PhotoWorks, Inc., a Washington corporation (the "Corporation")
hereby adopts the following articles of amendment to its articles of
incorporation.
FIRST: The name of the Corporation is PhotoWorks, Inc.
SECOND: The Corporation hereby creates, from the 2,000,000 shares of
preferred stock, $0.01 par value per share, authorized pursuant to Article IV of
the articles of incorporation of the Corporation, a series of preferred stock
and hereby fixes the designation, powers, preferences, limitations, and relative
rights of the shares of such series as follows:
Section 1. Designation.
Of the 2,000,000 shares of authorized Preferred Stock, 15,000 shares shall
be designated and known as "Series A Preferred".
Section 2. Dividend Preference.
The Series A Preferred shall be entitled to cumulative dividends at the
annual dividend rate provided below when and if such dividends are declared by
the Board of Directors, in its sole discretion. The annual dividend rate per
share of Series A Preferred shall initially be equal to 6% of the Original
Series A Issue Price (as defined herein) (as adjusted for combinations,
consolidations, subdivisions, or stock splits with respect to such shares),
provided that such annual rate shall increase to 10% of the Original Series A
Issue Price beginning on August 15, 2000 if the Corporation has not hired a
Chief Operating Officer acceptable to the holders of Series A Preferred prior to
such date. The Corporation may not pay any dividends or make any other
distribution on shares of Common Stock (other than dividends payable solely in
Common Stock or involving the repurchase of shares of Common Stock from
terminated employees, officers, directors, or consultants pursuant to
contractual arrangements) unless prior to such payment, it has paid in full all
cumulative dividends which would have accrued on the Series A Preferred at the
annual dividend rate provided herein, from the date of issuance of such shares
until the date of such payment, whether or not such dividends have been declared
by the Board of Directors.
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Section 3. Liquidation Preference.
In the event of (i) any liquidation, dissolution or winding up of the
Corporation, whether voluntary or not or (ii) any sale of all or substantially
all of the assets of the Corporation or acquisition of this Corporation by
another entity by means of consolidation, corporate reorganization or merger in
which the shareholders of the Corporation immediately prior such transaction
possess less than 50% of the outstanding voting power of this Corporation after
the transaction, which is approved by the Board of Directors (each a
"Liquidation Event"), distributions to the shareholders of the Corporation shall
be made in the following manner:
(a) Each holder of Series A Preferred shall receive, in preference to the
holders of the Common Stock and any series of Preferred Stock designated in the
future to be junior to the Series A Preferred with respect to liquidation
preference, and subject to the rights of the holders of any series of Preferred
Stock designated in the future to be senior to the Series A Preferred with
respect to liquidation preference, the amount of $1,000 (the "Original Series A
Issue Price") per share (as adjusted for combinations, consolidations,
subdivisions, or stock splits with respect to such shares) for each share of
Series A Preferred then held by such holder, plus an amount equal to either (i)
the amount, if any, of accrued and unpaid dividends on each such share up to the
time of such payment, or (ii) if no dividends have been declared by the Board of
Directors, an amount equal to the amount of dividends which would have accrued
on such share up to the time of such payment at an annual dividend rate per
share equal to 6% of the Original Series A Issue Price (collectively, the
"Series A Preference"). If, upon the occurrence of a Liquidation Event, the
assets and funds available to be distributed among the holders of the Series A
Preferred shall be insufficient to permit the payment to such holders of the
full Series A Preference, then the entire assets and funds of the Corporation
legally available for distribution to such holders shall be distributed ratably
based on the total Series A Preference due each such holder under this Section
3(a);
(b) After payment has been made to the holders of Series A Preferred of the
full amounts to which they are entitled pursuant to paragraph (a) above, the
remaining assets and funds of the Corporation available for distribution to
shareholders shall be distributed pro rata to the holders of Common Stock.
Each holder of Series A Preferred shall be deemed to have consented to
distributions made by the Corporation in connection with the repurchase of
shares of Common Stock issued to or held by officers, directors, or employees
of, or consultants or contractors to, the Corporation or its subsidiaries upon
termination of their employment or services pursuant to agreements (whether now
existing or hereafter entered into) providing for the right of said repurchase
between the Corporation and such persons.
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The value of securities or property other than cash paid or distributed
pursuant to this Section 3 shall be computed at fair market value at the time of
payment to the Corporation or at the time made available to shareholders, all as
determined by the Board of Directors in the good faith exercise of its
reasonable business judgment, provided that (i) if such securities are listed on
any established stock exchange or a national market system (including NASDAQ),
their fair market value shall be the closing sales price for such securities as
quoted on such system or exchange (or the largest such exchanges) for the date
the value is to be determined (or if there are no sales for such date, then for
the last preceding business day on which there were sales), as reported in the
Western Edition of the Wall Street Journal, and (ii) if such securities are
regularly quoted by a recognized securities dealer but selling prices are not
reported, their fair market value shall be the mean between the high bid and low
asked prices for such securities on the date the value is to be determined (or
if there are no quoted prices for such date, then for the last preceding
business day on which there were quoted prices).
Nothing set forth above shall affect in any way the right of each holder of
Series A Preferred to convert such shares at any time and from time to time into
Common Stock in accordance with Section 5 below.
Section 4. Redemption Rights.
(a) The Corporation shall have the right to redeem, on the terms and
conditions stated herein, out of funds legally available therefor, the Series A
Preferred, in one or more installments, beginning on the third anniversary of
the initial issuance of the Series A Preferred (the "Series A Original Issue
Date"). The redemption price (the "Series A Redemption Price") for each share of
Series A Preferred shall be equal to the Original Series A Issue Price (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares), plus an amount equal to the unpaid
dividends which would have accrued thereon at the annual dividend rate set forth
in Section 2 above, had such dividends been declared.
(b) If the Corporation chooses to redeem less than all outstanding shares
of Series A Preferred, such redemption shall be made ratably among the holders
of the Series A Preferred in proportion to the aggregate Series A Redemption
Price to which each holder is entitled under paragraph (a) of this Section 4.
(c) If the Corporation elects to exercise its redemption rights under this
Section 4, it shall give written notice by certified or registered mail, postage
prepaid, to all holders of outstanding Series A Preferred, at the address last
shown on the records of the Corporation for each holder, stating the date for
such redemption, (the "Series A Redemption Date"), the Series A Redemption
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Price, the number of shares of Series A Preferred held by such holder that the
Company proposes to redeem, the then applicable conversion rate (as provided in
Section 5(a)) for such shares, and the date of termination of the right to
convert (which date shall not be earlier than 20 days after the written notice
by the Corporation has been given) and shall call upon such holder to surrender
to the Corporation on the Series A Redemption Date at the place designated in
the notice, such holder's certificate or certificates representing the shares to
be redeemed. On or after the Series A Redemption Date, the holder of each share
of Series A Preferred called for redemption shall surrender the certificate
evidencing such shares to the Corporation at the place designated in such notice
and shall thereupon be entitled to receive payment of the Series A Redemption
Price for the shares surrendered. If less than all the shares represented by any
such surrendered certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. If such notice of redemption shall have been
duly given, and if on the Series A Redemption Date funds necessary for the
redemption shall be available therefor, then, as to any certificates evidencing
any Series A Preferred so called for redemption and not surrendered, all rights
of the holders of such shares so called for redemption and not surrendered shall
cease with respect to such shares, except only the right of the holders to
receive the Series A Redemption Price for the shares of Series A Preferred which
they hold, without interest, upon surrender of their certificates therefor.
Section 5. Conversion Rights.
The holders of Series A Preferred shall have conversion rights as follows:
(a) Right to Convert. Each share of Series A Preferred shall be convertible
at the option of each holder thereof (i) at any time after August 1, 2000, (ii)
if earlier, prior to the closing of a secondary public offering by the
Corporation of any shares of Common Stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act") in
which the holder elects to participate, or (iii) if earlier, upon receipt of
notice of an event described in Section 5(g)(iv) which has been approved by the
Board of Directors, into such number of fully-paid and non-assessable shares of
Common Stock as is determined by dividing the Original Series A Issue Price by
the Series A Conversion Price (as defined herein) in effect at the time of
conversion. The price at which shares of Common Stock shall be deliverable upon
conversion of the Series A Preferred (the "Series A Conversion Price") shall
initially be $4.75. The initial Series A Conversion Price shall be subject to
adjustment as provided in accordance with Paragraph (c) of this Section 5.
(b) Mechanics of Conversion. No fractional shares of Common Stock shall be
issued upon conversion of Series A Preferred. In lieu of any fractional shares
to which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Series A Conversion
Price. Before any holder of Series A Preferred shall be entitled to convert the
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same into full shares of Common Stock and to receive certificates therefor, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for the Series A
Preferred, and shall give written notice to the Corporation at such office that
it elects to convert the same. The Corporation shall, as soon as practicable
after such delivery, issue and deliver at such office to such holder of Series A
Preferred, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid and a check payable to
the holder in the amount of any cash amounts payable as the result of a
conversion into fractional shares of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Series A Preferred to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(c) Adjustments to the Series A Conversion Price.
(i) Adjustments for Dividends, Splits, Subdivisions, Combinations, or
Consolidation of Common Stock. If the outstanding shares of Common Stock shall
be increased by stock dividend payable in Common Stock, stock split,
subdivision, or other similar transaction occurring after the Series A Original
Issue Date into a greater number of shares of Common Stock, the Series A
Conversion Price then in effect shall, concurrently with the effectiveness of
such event, be decreased in proportion to the percentage increase in the
outstanding number of shares of Common Stock. If the outstanding shares of
Common Stock shall be decreased by reverse stock split, combination,
consolidation, or other similar transaction occurring after the Series A
Original Issue Date into a lesser number of shares of Common Stock, the Series A
Conversion Price then in effect shall, concurrently with the effectiveness of
such event, be increased in proportion to the percentage decrease in the
outstanding number of shares of Common Stock.
(ii) Adjustments for Other Distributions. If the Corporation at any time or
from time to time makes, or fixes a record date for the determination of holders
of Common Stock entitled to receive, any distribution payable in securities of
the Corporation other than shares of Common Stock and other than as otherwise
adjusted in this Section 5, then and in each such event provision shall be made
so that the holders of Series A Preferred shall receive upon conversion thereof,
in addition to the number of shares of Common Stock receivable thereupon, the
amount of securities of the Corporation which they would have received had their
Series A Preferred been converted into Common Stock on the date of such event
and had they thereafter, during the period from the date of such event to and
including the date of conversion, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 5 with respect to the rights of the holders of
the Series A Preferred.
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(iii) Adjustments for Reclassification, Exchange and Substitution. If the
Common Stock issuable upon conversion of the Series A Preferred shall be changed
into the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification, or otherwise (other
than a subdivision or combination of shares provided for above), the Series A
Conversion Price then in effect shall, concurrently with the effectiveness of
such reorganization or reclassification, be proportionately adjusted such that
the Series A Preferred shall be convertible into, in lieu of the number of
shares of Common Stock which the holders would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock equivalent
to the number of shares of Common Stock that would have been subject to receipt
by the holders upon conversion of such Series A Preferred immediately before
that change.
(iv) Adjustments on Issuance of Additional Stock. If the Corporation shall
issue "Additional Stock" (as defined below) for a consideration per share less
than the Series A Conversion Price in effect on the date and immediately prior
to such issue, then and in such event, the Series A Conversion Price shall be
reduced concurrently with such issue to a price (calculated to three decimal
places) determined by multiplying such Series A Conversion Price by a fraction
(i) the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration received by the Corporation for the
total number shares of Additional Stock so issued (or deemed to be issued) would
purchase at the Series A Conversion Price; and (ii) the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of shares of Additional Stock so issued; provided
that for purposes of this Section 5(c)(iv), all shares of Common Stock issuable
(a) upon conversion of the outstanding Series A Preferred, (b) upon exercise of
warrants or options outstanding as of the Series A Original Issue Date or which
are otherwise excluded from the definition of "Additional Stock" below, (c)
pursuant to any stock option, stock purchase or other stock incentive plan,
provided such plan or the amendment to such plan under which such shares are
available has been approved by the Board of Directors as of the Series A
Original Issue Date or such shares are otherwise excluded from the definition of
"Additional Stock" below, and (d) upon exercise or conversion of any other
security or debt instrument of the Corporation outstanding as of the Series A
Original Issue Date or which are otherwise excluded from the definition of
"Additional Stock" below shall be deemed to be Common Stock outstanding.
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For purposes of this subsection (iv) "Additional Stock" shall mean all
Common Stock issued (or deemed to be issued upon the issuance of Options or
Convertible Securities as provided below) by the Corporation after the Series A
Original Issue Date, other than Common Stock issued or issuable at any time (a)
upon conversion of the Series A Preferred; (b) to officers, directors, and
employees of, and consultants or contractors to, the Corporation pursuant to any
stock option, stock purchase or other stock incentive plan, provided such plan
or the amendment to such plan under which such shares are available has been
approved by the Board of Directors as of the Series A Original Issue Date; (c)
as a dividend or distribution with respect to the Series A Preferred; (d) to
financial institutions or lessors in connection with commercial credit
arrangements, equipment financings, leasing arrangements or similar
transactions; (e) in connection with a merger of the Corporation with or into
another corporation or the acquisition by the Corporation of another entity; (f)
at any time by way of dividend or other distribution on shares of Common Stock
excluded from the definition of Additional Shares of Common Stock; (g) upon
exercise of the warrants issued to the original purchasers of the Series A
Preferred; (h) that is designated as excluded from the definition of Additional
Stock by the vote or written consent (before or after the date of issuance or
deemed issuance) of holders of at least a majority of the then outstanding
shares of Series A Preferred; or (i) that is described in subsections (i), (ii)
or (iii) of this Section 5(c).
For the purpose of making any adjustment in the Series A Conversion Price
as provided above, the consideration received by the Corporation for any issue
or sale of Additional Stock will be computed as follows:
(1) to the extent it consists of cash, as the amount of cash received by the
Corporation before deduction of any offering expenses payable by the
Corporation and any underwriting or similar commissions, compensation, or
concessions paid or allowed by the Corporation in connection with such
issue or sale;
(2) to the extent it consists of property other than cash, at the fair market
value of that property as determined in good faith by the Corporation's
Board of Directors; and
(3) if Common Stock is issued or sold together with other stock or securities
or other assets of the Corporation for a consideration which covers both,
as the portion of the consideration so received that may be reasonably
determined in good faith by the Board of Directors to be allocable to such
Common Stock.
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If the Corporation (1) grants any rights or options to subscribe for,
purchase, or otherwise acquire shares of Common Stock or Convertible Securities
(collectively, "Options"), or (2) issues or sells any security convertible into
or exchangeable for shares of Common Stock (collectively, "Convertible
Securities"), then, in each case, the maximum number of shares of Common Stock
issuable upon the exercise of such Options or conversion or exchange of such
Convertible Securities shall be deemed to be Additional Stock issued as of the
time such Options or Convertible Securities are issued (except to the extent
excluded from the definition of Additional Stock) above, and the Series A
Conversion Price will be adjusted as above provided to reflect (on the basis of
the determination of the price per share as provided below) the issue or sale.
In such event, the price per share or Common Stock issuable on the exercise of
the Options or the conversion or exchange of the Convertible Securities will be
determined by dividing the total amount, if any, received or receivable by the
Corporation as consideration for the granting of the Options or the issue or
sale of the Convertible Securities, plus the minimum aggregate amount of
additional consideration payable to the Corporation on exercise of the Options
or conversion of the Convertible Securities, by the maximum number of shares of
Common Stock issuable on the exercise or conversion. No further adjustment of
the Series A Conversion Price will be made as a result of the actual issuance of
shares of Common Stock on the exercise of any such rights or options or the
conversion of any such convertible securities.
Upon the redemption or repurchase of any such Options or Convertible
Securities or the expiration or termination of the right to convert into,
exchange for, or exercise with respect to, Common Stock, the Series A Conversion
Price will be readjusted to such price as would have been obtained had the
adjustment made upon their issuance been made upon the basis of the issuance of
only the number of such Options or Convertible Securities as were actually
converted into, exchanged for, or exercised with respect to, Common Stock. If
the purchase price or conversion or exchange rate provided for in any such
Option or Convertible Security changes at any time, then, upon such change
becoming effective, the Series A Conversion Price then in effect will be
readjusted to such price as would have been obtained had the adjustment made
upon the issuance of such Options or Convertible Securities been made upon the
basis of (1) the issuance of only the number of shares of Common Stock actually
delivered upon the conversion, exchange or exercise of such Options or
Convertible Securities, and the total consideration received therefor, and (2)
the granting or issuance, at the time of such change, of any such Options or
Convertible Securities then still outstanding for the consideration, if any,
received by the Corporation therefor and to be received on the basis of such
changed price or rate.
(v) Adjustments in the event of a Distribution Date. In the event of any
conversion of the Series A Preferred following the occurrence of a Distribution
Date (as defined in the Rights Agreement, dated as of December 16, 1999, between
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the Corporation and ChaseMellon Shareholder Services L.L.C., as Rights Agent),
provision shall be made so that the holders of Series A Preferred effecting such
conversion shall receive upon conversion thereof, the number of shares of Common
Stock and other purchase rights of the Corporation which they would have
received had their Series A Preferred been converted into Common Stock
immediately prior to such Distribution Date.
(d) Rounding of Calculations; Minimum Adjustment. All calculations under
Section 5(c) shall be made by rounding downward to the nearest cent or rounding
upward to the nearest one-tenth (1/10th) of a share, as the case may be. Any
provision of Section 5(c) to the contrary notwithstanding, no adjustment in the
Series A Conversion Price shall be made if the amount of such adjustment would
be less than 1% thereof, but any such amount shall be carried forward and an
adjustment with respect thereto shall be made at the time of and together with
any subsequent adjustment which, together with such amount and any other amount
or amounts so carried forward, shall aggregate 1% or more of the Series A
Conversion Price then in effect.
(e) No Impairment. The Corporation will not, by amendment of its Articles
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series A Preferred against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Series A Conversion Price pursuant to this Section 5, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and upon the written request of
any holder of Series A Preferred, furnish or cause to be furnished to such
holder a certificate of the Corporation's President or Chief Financial Officer
setting forth (i) such adjustments and readjustments, (ii) the Series A
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of such series of Series A Preferred.
(g) Notices of Record Date. If the Corporation shall propose at any time:
(i) to declare any dividend or distribution upon its Common Stock, whether
in cash, property, stock, or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus;
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(ii) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights;
(iii) to effect any reclassification or recapitalization of its Common
Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate into or with any other corporation or to sell,
lease or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up;
then, in connection with each such event, this Corporation shall send to
the holders of the Series A Preferred at least 20 days' prior written notice of
the date on which a record shall be taken for such dividend, distribution, or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in (iii) and (iv) above. Notwithstanding the foregoing,
the Corporation's compliance with this Section 5(g) can be waived by the written
consent of the holders of a majority of the outstanding shares of Series A
Preferred.
Each such written notice shall be delivered personally, given by first
class mail or private carrier, postage prepaid, addressed to the holders of the
Series A Preferred at the address for each such holder as shown on the books of
this Corporation, or may be transmitted by facsimile, or e-mail, or by any other
means permitted by the Washington Business Corporation Act.
(h) Issue Taxes. The Corporation shall pay any and all issue and other
taxes (other than income taxes) that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of shares of Series A Preferred
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(i) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series A Preferred such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
shareholder approval of any necessary amendment to its Articles of
Incorporation.
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(j) Status of Converted Stock. If any shares of Series A Preferred shall be
converted pursuant to this Section 5, the shares so converted shall resume the
status of authorized but unissued shares of Preferred Stock undesignated as to
series.
Section 6. Voting Rights.
Except as otherwise required by law or hereunder, the holder of each share
of Common Stock issued and outstanding shall have one vote and the holder of
each share of Series A Preferred shall be entitled to the number of votes equal
to the number of shares of Common Stock into which such share of Series A
Preferred could be converted at the record date for determination of the
shareholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited. Except as otherwise provided herein or required by
law, the holders of Common Stock and Series A Preferred shall vote together as a
single class. Fractional votes by the holders of Series A Preferred shall not,
however, be permitted and any fractional voting rights shall (after aggregating
all shares into which shares of Series A Preferred held by each holder could be
converted) be rounded to the nearest whole number (with one-half or greater
being rounded upward). Holders of Common Stock and Series A Preferred shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws of
the Corporation.
The holders of the outstanding shares of Series A Preferred Stock shall
have the exclusive right, separately from the Common Stock, (a) to elect one (1)
director of the Corporation at all times during which shares of Series A
Preferred Stock remain outstanding and (b) to elect an additional director, at
any time at which there are more than 10,000 shares of Series A Preferred
outstanding (the "Preferred Directors"). The Preferred Directors shall be
elected by the vote or written consent of the holders of a majority in voting
power of the outstanding Series A Preferred Stock. If either of the Preferred
Directors shall cease to serve as directors for any reason, another director
elected by the holders of the Series A Preferred Stock shall replace such
director. The Preferred Directors may be removed, with or without cause, and a
replacement Preferred Director may be elected in his or her stead, at any time
by the affirmative vote at a meeting of shareholders called for that purpose, or
by written consent, of the holders of a majority of the then outstanding shares
of Series A Preferred Stock.
Section 7. Covenants. In addition to any other rights provided by law, the
Corporation shall not, without first obtaining the affirmative vote or written
consent of the holders of a majority of the outstanding shares of Series A
Preferred, voting as a single class:
Page 11
<PAGE>
(a) amend or repeal any provision of, or add any provision to, the
Corporation's Articles of Incorporation or Bylaws if such action would alter or
change the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, the Series A Preferred, or otherwise adversely
affect the Series A Preferred;
(b) authorize or issue shares of any class or series of stock having any
preference or priority as to dividends or redemption rights, liquidation
preferences, conversion rights, or voting rights, superior to or on a parity
with any preference or priority of the Series A Preferred;
(c) apply any of its assets to the redemption, retirement, purchase or
acquisition of any shares of any class or series of Common Stock, except the
repurchase of shares of Common Stock held by officers, directors, or employees
of, or consultants or contractors to, the Corporation or its subsidiaries upon
termination of their employment or services pursuant to agreements (whether now
existing or hereafter entered into) providing for the right of said repurchase
between the Corporation and such persons;
(d) consent to any voluntary liquidation, dissolution or winding up of the
Corporation;
(e) engage in any transaction or series of related transactions
constituting a Liquidation Event if the proceeds which would be payable to the
holders of Series A Preferred in such transaction would be less than the Series
A Redemption Price;
(f) effect any materially adverse amendment, restatement or modification of
the terms or documentation relating to any existing indebtedness of the
Corporation, or incur any additional indebtedness in excess of $15 million from
a third party lending institution, except in the ordinary course of business; or
(g) issue any equity securities of any subsidiary of the Corporation.
Section 8. Residual Rights.
All rights accruing to the outstanding shares of the Corporation not expressly
provided for to the contrary herein shall be vested in the Common Stock. The
Common Stock shall not be redeemable.
THIRD: These Articles of Amendment were duly adopted on January 31, 2000.
Page 12
<PAGE>
FOURTH: These Articles of Amendment were duly adopted by the Board of
Directors, pursuant to the provisions of RCW 23B.06.020 and RCW 23B.08.210, by
written consent of all of the directors.
[Remainder of page intentionally left blank.]
Page 13
<PAGE>
Executed this 9th day of February, 2000.
PHOTOWORKS, INC.
By: /s/ Mich Earl
Mich Earl, Corporate Secretary
Page 14
SCHEDULE OF HOLDERS TO FORM OF WARRANT
<TABLE>
<CAPTION>
Holder Number of Shares
- ----------------------------- -----------------
<S> <C>
The Tahoma Fund, L.L.C. 410,526
Madrona Venture Fund I-A, L.P 212,210
Orca Bay Capital Corporation 104,211
Madrona Managing Director Fund, LLC 26,474
Madrona Venture Fund I-B, L.P. 24,474
Tim and Alexa Carver 5,263
Stanley McCammon 5,263
Aaron Singleton 1,053
</TABLE>
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK THAT MAY BE PURCHASED PURSUANT TO
THE EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
UNLESS THE TRANSFER IS IN ACCORDANCE WITH RULE 144 OR A SIMILAR RULE AS THEN IN
EFFECT UNDER THE ACT, OR APPLICABLE STATE SECURITIES LAWS OR UNLESS THE
CORPORATION RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING
THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF THE ACT.
Void after February 14, 2005
No.____ PHOTOWORKS, INC.
WARRANT
________________________
THIS CERTIFIES THAT, for $125.00 and other value received, _____________
(together with its permitted assignees, the "Holder") is entitled to subscribe
for and purchase ________ shares (as adjusted pursuant to Section 3 hereof) of
the fully paid and nonassessable Common Stock, par value $0.01 per share (the
"Shares"), of PhotoWorks, Inc., a Washington corporation (the "Company"), at the
price of $6.00 per share (the "Exercise Price") (as adjusted pursuant to
Section 3 hereof), subject to the provisions and upon the terms and conditions
hereinafter set forth.
1. Method of Exercise; Payment.
(a) Cash Exercise. Subject to Section 8 hereof, the purchase rights
represented by this Warrant may be exercised by the Holder from time to time, in
whole or in part, by the surrender of this Warrant (with the notice of exercise
form attached hereto as Exhibit A duly executed) at the principal office of the
Company, and by payment to the Company, by certified, cashier's or other check
acceptable to the Company, of an amount equal to the aggregate Exercise Price of
the shares being purchased.
<PAGE>
(b) Net Issue Exercise.
(i) in lieu of exercising this Warrant, the Holder may elect to receive
shares equal to the value of this Warrant (or the portion thereof being
cancelled) by surrender of this Warrant at the principal office of the Company
together with notice of such election, in which event the Company shall issue to
the Holder a number of shares of the Company's Common Stock computed using the
following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the Holder.
Y = the number of shares of Common Stock purchasable under this Warrant.
A = the fair market value of one share of the Company's Common Stock.
B = the Exercise Price (as adjusted to the date of such calculation).
(ii) This Warrant shall automatically be exercised pursuant to Section 1(b)
hereof immediately before its expiration pursuant to Section 9 hereof unless
Holder notifies the Company in writing to the contrary before such termination.
(c) Fair Market Value. For purposes of this Section 1, the fair market
value of the Company's Common Stock shall mean:
(i) The average of the closing bid and asked prices of the Company's Common
Stock quoted in the NASDAQ National Market System or the closing price quoted on
any exchange on which the Common Stock is listed, whichever is applicable, as
published in the Western Edition of The Wall Street Journal for the five trading
days prior to the date of determination of fair market value;
(ii) If the Company's Common Stock is not traded in the Nasdaq Stock
Market, over-the-counter market or on an exchange, the fair market value of the
Common Stock per share shall be the price per share that the Company could
obtain from a willing buyer for shares sold by the Company from authorized but
unissued shares of Common Stock as such price shall be agreed by the parties
hereto, or if agreement cannot be reached within five (5) business days of
delivery of the notice pursuant to Section 1(b) hereof, as shall be determined
by a panel of appraisers. One appraiser shall be selected by the Holder, one
appraiser shall be chosen by the Company and the third appraiser shall be chosen
by the first two appraisers. If the appraisers cannot reach agreement as to the
fair market value on the foregoing basis on or before the thirtieth (30th) day
following the Holder's notice of election pursuant to Section 1(b), then each
2
<PAGE>
appraiser shall deliver its appraisal and the appraisal which is neither the
highest nor the lowest shall be the fair market value of a share of Common
Stock. In the event that the Holder fails to choose an appraiser or the three
appraisers fail to deliver an appraisal on or before the thirtieth (30th) day
after such notice, the appraisal of the appraiser selected by the Company shall
control and shall be fair market value for the purposes of this Warrant. The
cost of the appraiser selected by each party shall be borne by that party and
the cost of the third appraiser shall be borne one-half (1/2) by each party.
Appraisers selected under this Section 1(c) must be unaffiliated with the Holder
and the Company and must have reasonable professional qualifications for the
appraisal.
(d) Stock Certificates. In the event of any exercise of the rights
represented by this Warrant, certificates for the Shares so purchased shall be
delivered to the Holder within a reasonable time and, unless this Warrant has
been fully exercised or has expired, a new Warrant representing the shares with
respect to which this Warrant shall not have been exercised shall also be issued
to the Holder within such time.
2. Stock Fully Paid; Reservation of Shares. All of the Shares issuable upon
the exercise of the rights represented by this Warrant will, upon issuance and
receipt of the Exercise Price therefor, be fully paid and nonassessable, and
free from all preemptive rights, rights of first refusal, taxes, liens and
charges with respect to the issue thereof. During the period within which the
rights represented by this Warrant may be exercised, the Company shall at all
times have authorized and reserved for issuance sufficient shares of its Common
Stock to provide for the exercise of the rights represented by this Warrant.
3. Adjustment of Exercise Price and Number of Shares. Subject to the
provisions of Section 8 hereof, the number and kind of securities purchasable
upon the exercise of this Warrant and the Exercise Price therefor shall be
subject to adjustment from time to time upon the occurrence of certain events,
as follows:
(a) Reference Price. The price upon which adjustments to the Exercise Price
and number of Shares pursuant to Section 3(d) below shall be based shall
initially be $4.75 (the "Reference Price"). The initial Reference Price shall be
subject to adjustment as provided in accordance with this Section 3.
(b) Adjustments for Dividends, Splits, Subdivisions, Combinations, or
Consolidation of Common Stock. If the outstanding shares of Common Stock shall
be increased by stock dividend payable in Common Stock, stock split,
subdivision, or other similar transaction occurring after the date of this
Warrant into a greater number of shares of Common Stock, concurrently with the
effectiveness of such event, the number of Shares issuable upon exercise of this
Warrant shall be increased in proportion to the percentage increase in the
outstanding number of shares of Common Stock and the Exercise Price and
3
<PAGE>
Reference Price shall proportionately be decreased. If the outstanding shares of
Common Stock shall be decreased by reverse stock split, combination,
consolidation, or other similar transaction occurring after the date of this
Warrant into a lesser number of shares of Common Stock, concurrently with the
effectiveness of such event, the number of shares issuable upon exercise of this
Warrant shall be decreased in proportion to the percentage decrease in the
outstanding number of shares of Common Stock and the Exercise Price and
Reference Price shall be proportionately increased.
(c) Adjustments for Reclassification, Exchange and Substitution. If the
Common Stock shall be changed into the same or a different number of shares of
any other class or classes of stock, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
shares provided for above or in connection with a merger of the Company as
provided in Section 8 below), concurrently with the effectiveness of such
reorganization or reclassification, this Warrant shall be proportionately
adjusted such that upon exercise, the Holder shall receive, in lieu of the
number of shares of Common Stock which the holders would otherwise have been
entitled to receive, a number of shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that the Holder would have
received had this Warrant been exercised immediately before that change.
(d) Adjustments on Issuance of Additional Stock. If the Company shall issue
"Additional Stock" (as defined below) for a consideration per share less than
the Reference Price in effect on the date and immediately prior to such issue,
then and in such event, each of the Reference Price and the Exercise Price shall
be reduced concurrently with such issue to a price (calculated to three decimal
places) determined by multiplying such price by a fraction (i) the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the Company for the total number shares of
Additional Stock so issued (or deemed to be issued) would purchase at the
Reference Price; and (ii) the denominator of which shall be the number of shares
of Common Stock outstanding immediately prior to such issue plus the number of
shares of Additional Stock so issued; provided that for purposes of this Section
3(d), all shares of Common Stock issuable (a) upon conversion of the outstanding
Series A Preferred Stock, (b) upon exercise of warrants or options outstanding
as of the date of this Warrant or which are otherwise excluded from the
definition of "Additional Stock" below, (c) pursuant to any stock option, stock
purchase or other stock incentive plan, provided such plan or the amendment to
such plan under which such shares are available has been approved by the Board
of Directors as of the date of this Warrant or such shares are otherwise
excluded from the definition of "Additional Stock" below, and (d) upon exercise
or conversion of any other security or debt instrument of the Company
outstanding as of the date of this Warrant or which is otherwise excluded from
the definition of "Additional Stock" below shall be deemed to be Common Stock
outstanding.
4
<PAGE>
Upon any adjustment in the Exercise Price pursuant to this subsection (d),
the number of Shares purchasable upon the exercise of this Warrant shall be
adjusted to the number obtained by (i) multiplying the number of Shares subject
to this Warrant by the Exercise Price, each as in effect immediately prior to
such adjustment and (ii) dividing the product so obtained by the Exercise Price
in effect immediately after such adjustment.
For purposes of this subsection (d) "Additional Stock" shall mean all
Common Stock issued (or deemed to be issued upon the issuance of Options or
Convertible Securities as provided below) by the Company after the date of this
Warrant, other than Common Stock issued or issuable at any time (a) upon
conversion of the Series A Preferred; (b) to officers, directors, and employees
of, and consultants or contractors to, the Company pursuant to any stock option,
stock purchase or other stock incentive plan, provided such plan or the
amendment to such plan under which such shares are available has been approved
by the Board of Directors as of the date of this Warrant; (c) as a dividend or
distribution with respect to the Series A Preferred; (d) to financial
institutions or lessors in connection with commercial credit arrangements,
equipment financings, leasing arrangements or similar transactions; (e) in
connection with a merger of the Company with or into another corporation or the
acquisition by the Company of another entity; (f) at any time by way of dividend
or other distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common Stock; (g) upon exercise of the warrants issued to
the original purchasers of the Series A Preferred; (h) that is designated as
excluded from the definition of Additional Stock by the vote or written consent
(before or after the date of issuance or deemed issuance) of holders of at least
a majority of the then outstanding shares of Series A Preferred; or (i) that is
described in subsections (b) or (c) of this Section 3.
For the purpose of making any adjustment in the Reference Price and the
Exercise Price as provided above, the consideration received by the Company for
any issue or sale of Additional Stock will be computed as follows:
(i) to the extent it consists of cash, as the amount of cash received by
the Company before deduction of any offering expenses payable by the Company and
any underwriting or similar commissions, compensation, or concessions paid or
allowed by the Company in connection with such issue or sale;
(ii) to the extent it consists of property other than cash, at the fair
market value of that property as determined in good faith by the Company's Board
of Directors; and
5
<PAGE>
(iii) if Common Stock is issued or sold together with other stock or
securities or other assets of the Company for a consideration which covers both,
as the portion of the consideration so received that may be reasonably
determined in good faith by the Board of Directors to be allocable to such
Common Stock.
If the Company (1) grants any rights or options to subscribe for, purchase,
or otherwise acquire shares of Common Stock or Convertible Securities
(collectively, "Options"), or (2) issues or sells any security convertible into
or exchangeable for shares of Common Stock (collectively, "Convertible
Securities"), then, in each case, the maximum number of shares of Common Stock
issuable upon the exercise of such Options or conversion or exchange of such
Convertible Securities shall be deemed to be Additional Stock issued as of the
time such Options or Convertible Securities are issued (except to the extent
excluded from the definition of Additional Stock) above, and the Reference Price
and Exercise Price will be adjusted as above provided to reflect (on the basis
of the determination of the price per share as provided below) the issue or
sale. In such event, the price per share or Common Stock issuable on the
exercise of the Options or the conversion or exchange of the Convertible
Securities will be determined by dividing the total amount, if any, received or
receivable by the Company as consideration for the granting of the Options or
the issue or sale of the Convertible Securities, plus the minimum aggregate
amount of additional consideration payable to the Company on exercise of the
Options or conversion of the Convertible Securities, by the maximum number of
shares of Common Stock issuable on the exercise or conversion. No further
adjustment of the Reference or Exercise Prices will be made as a result of the
actual issuance of shares of Common Stock on the exercise of any such rights or
options or the conversion of any such convertible securities.
Upon the redemption or repurchase of any such Options or Convertible
Securities or the expiration or termination of the right to convert into,
exchange for, or exercise with respect to, Common Stock, the Reference and
Exercise Prices will be readjusted to such price as would have been obtained had
the adjustment made upon their issuance been made upon the basis of the issuance
of only the number of such Options or Convertible Securities as were actually
converted into, exchanged for, or exercised with respect to, Common Stock. If
the purchase price or conversion or exchange rate provided for in any such
Option or Convertible Security changes at any time, then, upon such change
becoming effective, the Reference Price and Exercise Price then in effect will
be readjusted to such price as would have been obtained had the adjustment made
upon the issuance of such Options or Convertible Securities been made upon the
basis of (1) the issuance of only the number of shares of Common Stock actually
delivered upon the conversion, exchange or exercise of such Options or
Convertible Securities, and the total consideration received therefor, and (2)
the granting or issuance, at the time of such change, of any such Options or
Convertible Securities then still outstanding for the consideration, if any,
received by the Company therefor and to be received on the basis of such changed
price or rate.
6
<PAGE>
(e) Adjustments. Whenever the number of Shares purchasable hereunder or the
Exercise Price thereof shall be adjusted pursuant to Section 3 hereof, the
Company shall provide notice to the holder of this Warrant setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the number
of Shares which may be purchased and the Exercise Price therefor after giving
effect to such adjustment.
4. Fractional Shares. No fractional shares of Common Stock will be issued
in connection with any exercise hereunder. In lieu of such fractional shares the
Company shall make a cash payment therefor based upon the Exercise Price then in
effect.
5. Restrictions Upon Transfer.
(a) The Company need not register a transfer of this Warrant unless the
conditions specified in the legend on the front page hereof are satisfied.
Subject to the satisfaction of such conditions, any transfer of this Warrant and
all rights hereunder, in whole or in part, shall be registered on the books of
the Company to be maintained for such purpose, upon surrender of this Warrant at
the principal office of the Company, or the office or agency designated by the
Company, together with a written assignment of this Warrant substantially in the
form of Exhibit C hereto duly executed by Holder or its agent or attorney and
funds sufficient to pay any transfer taxes payable upon the making of such
transfer. Upon such surrender and, if required, such payment, the Company shall,
subject to the conditions set forth in the legend, execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination specified in such instrument of assignment, and shall issue to the
assignor a new Warrant evidencing the portion of this Warrant not so assigned,
and this War-rant shall promptly be canceled. A Warrant, if properly assigned,
may be exercised by a new Holder for the purchase of Shares without having a new
Warrant issued.
(b) Subject to the conditions set forth in the legend, this Warrant may be
divided or combined with other Warrants upon presentation hereof at the
aforesaid office or agency of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by Holder or its agent or attorney. Subject to compliance with this
Section 6 as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
(c) The Company shall prepare, issue and deliver at its own expense (other
than transfer taxes) the new Warrant or Warrants under this Section 5.
(d) The Company agrees to maintain, at its aforesaid office or agency,
books for the registration and the registration of transfer of the Warrants.
7
<PAGE>
6. Restrictive Legend.
(a) The Shares issuable upon exercise of this Warrant (unless registered
under the Act) shall be stamped or imprinted with a legend in substantially the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS. THESE
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE TRANSFER IS IN
ACCORDANCE WITH RULE 144 OR A SIMILAR RULE AS THEN IN EFFECT UNDER THE ACT,
OR APPLICABLE STATE SECURITIES LAWS OR UNLESS THE CORPORATION RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR
TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT.
(b) The Company need not register a transfer of Shares bearing the
restrictive legend set forth in this Section 5, unless the conditions specified
in such legend are satisfied. The Company may also instruct its transfer agent
not to register the transfer of the Shares, unless one of the conditions
specified in the legend set forth in this Section 5 is satisfied.
7. Rights of Shareholders. No holder of this Warrant shall be entitled, as
a Warrant holder, to vote or receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the rights
of a shareholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, consolidation, merger, conveyance, or otherwise) or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Warrant shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein.
8. Expiration of Warrant. This Warrant shall expire and shall no longer be
exercisable upon the first to occur of the following:
(a) at 5:00 p.m., Washington local time, on February 14, 2005; and
8
<PAGE>
(b) the closing of any sale of all or substantially all of the assets of
the Company or acquisition of this Company by another entity by means of
consolidation, corporate reorganization or merger in which the shareholders of
the Company immediately prior such transaction possess less than 50% of the
outstanding voting power of the Company after the transaction; provided that the
Company shall provide at least 20 days' prior written notice of the date of any
such event to the Holder.
9. Notices, Etc. All notices and other communications from the Company to
the Holder and from the Holder to the Company shall be delivered personally or
by nationally-recognized overnight courier at such address as may have been
furnished to the Company in writing by the Holder or by the Holder in writing to
the Company.
10. Governing Law, Headings. This Warrant is being delivered in the State
of Washington and shall be construed and enforced in accordance with and
governed by the laws of such State. The headings in this Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of the
terms hereof.
Issued this ________ day of _____________________, 2000.
PHOTOWORKS, INC.
By: _____________________
Title:___________________
9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PhotoWorks, INC.
SERIES A PREFERRED STOCK AND
WARRANT PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. Purchase and Sale of Series A Preferred Stock and Issuance of Warrants...1
1.1 Issuance of Series A Preferred Stock and Warrants...............1
1.2 Closing.........................................................1
2. Definitions..............................................................2
2.1 Commission......................................................2
2.2 Intellectual Property...........................................2
2.3 Incentive Plans.................................................2
2.4 Material Adverse Event..........................................2
2.5 Material Contracts..............................................2
2.6 Rights Agreement................................................3
2.7 Schedule of Exceptions..........................................3
2.8 Securities Act..................................................3
2.9 SEC Reports.....................................................3
2.10 Subsidiary......................................................3
2.11 Transactional Agreements........................................3
3. Representations and Warranties of the Company to Investors...............3
3.1 Corporate Organization and Authority............................3
3.2 Capitalization..................................................3
3.3 Subsidiaries....................................................4
3.4 Corporate Power.................................................4
3.5 Financial Statements............................................5
3.6 Authorization...................................................5
3.7 Validity of Shares..............................................5
3.8 Changes in Condition............................................6
3.9 Litigation......................................................6
3.10 Patents and Other Proprietary Rights............................7
3.11 Taxes...........................................................8
3.12 Company's Contracts.............................................8
3.13 Compliance With Other Agreements................................9
3.14 Employees.......................................................9
3.15 Transactions with Affiliates...................................10
3.16 Governmental and Third Party Consents..........................10
3.17 Compliance with Laws; Permits..................................10
3.18 Registration Rights............................................11
3.19 Offering Valid.................................................11
3.20 Brokers and Finders............................................11
3.21 SEC Reports....................................................11
3.22 Environmental..................................................11
3.23 Properties.....................................................12
<PAGE>
4. Representations and Warranties of the Investors.........................12
4.1 Authorization..................................................12
4.2 Investment.....................................................12
4.3 No Public Market...............................................12
4.4 Limitations on Transferability.................................13
4.5 Experience; Receipt of Information.............................13
4.6 Accredited Investor............................................14
4.7 Confidentiality................................................14
4.8 Brokers and Finders............................................14
5. Legends.................................................................15
6. Conditions of Investors'Obligations at Closing..........................15
6.1 Representations and Warranties.................................15
6.2 Performance....................................................15
6.3 Proceedings Satisfactory; Compliance Certificate...............16
6.4 Rights Agreement...............................................16
6.5 Articles of Amendment..........................................16
6.6 Opinion of the Company's Counsel...............................16
6.7 Approvals and Consents.........................................16
6.8 Agreement as to Registration Rights............................16
7. Conditions of the Company's Obligations at Closing......................16
7.1 Representations and Warranties.................................16
7.2 Payment of Purchase Price......................................17
7.3 Articles of Amendment..........................................17
7.4 Rights Agreement...............................................17
8. Covenants of the Company................................................17
8.1 Use of Proceeds................................................17
8.2 Management.....................................................17
9. Miscellaneous...........................................................17
9.1 Governing Law..................................................17
9.2 Counterparts...................................................17
9.3 Headings.......................................................17
9.4 Notices........................................................17
9.5 Amendment of Agreement.........................................18
9.6 Expenses.......................................................18
9.7 Entire Agreement; Successors and Assigns.......................18
9.8 Severability...................................................18
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PHOTOWORKS, INC.
SERIES A PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (the
"Agreement") is made as of January 31, 2000, by and among PhotoWorks, Inc.
(f/k/a Seattle FilmWorks, Inc.), a Washington corporation (the "Company"), and
the entities listed on the attached Exhibit A who become signatories to this
Agreement (collectively, the "Investors").
RECITALS
A. The Board of Directors of the Company has adopted the Articles of
Amendment (the "Articles of Amendment") in the form attached hereto as Exhibit B
which, among other matters, establish the rights, preferences, and privileges of
the Company's $0.01 par value Series A Preferred Stock (the "Series A Preferred
Stock").
B. The Company desires to sell up to 15,000 shares of Series A Preferred
Stock to the Investors and to issue warrants to purchase up to 789,474 shares of
the Company's $0.01 par value Common Stock at an exercise price of $6.00 per
share, substantially in the form of Exhibit C attached hereto (the "Warrants")
to the Investors, and the Investors desire to purchase up to 15,000 shares of
Series A Preferred Stock from the Company and be issued the Warrants, subject to
the terms and conditions set forth in this Agreement.
THE PARTIES AGREE AS FOLLOWS:
1. Purchase and Sale of Series A Preferred Stock and Issuance of
Warrants.
1.1 Issuance of Series A Preferred Stock and Warrants. Subject to the
terms and conditions of this Agreement, the Company shall issue and sell to the
Investors and the Investors shall purchase from the Company, a total of up to
15,000 shares of Series A Preferred Stock (the "Shares") and Warrants to
purchase up to a total of 789,474 shares of Common Stock (the "Warrant Shares"),
at the purchase price of $1,000 per unit. The number of Shares, the number of
Warrant Shares issuable upon exercise of the Warrant to be purchased by each
Investor is set forth opposite the name of each Investor on Exhibit A.
1.2 Closing. The closing of the purchase and sale of the Shares and
Warrants shall take place at the offices of Heller Ehrman White & McAuliffe,
6100 Columbia Center, 701 Fifth Avenue, Seattle, WA 98104-7098, on February 14,
2000, at 3:00 p.m. local time (the "Closing") or at such other place and time as
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the Company and the Investors may agree. At the Closing, each Investor shall
purchase that number of Shares and a Warrant for that number of Warrant Shares
designated opposite such Investor's name on Exhibit A in exchange for the total
purchase price set forth on Exhibit A. At the Closing, the Company will deliver
to each Investor a certificate representing the Shares and a Warrant for the
number of Warrant Shares which that Investor is obtaining against delivery to
the Company by such Investor at the Closing of (a) an executed counterpart of
this Agreement, and (b) the issue price of such Shares and Warrants as set forth
on Exhibit A by wire transfer or by a check payable to the Company. The date on
which the Closing occurs is referred to herein as the "Closing Date."
2. Definitions. For purposes of this Agreement the following terms shall
have the following meanings:
2.1 "Commission" shall mean the Securities and Exchange Commission.
2.2 "Intellectual Property" shall mean patents, patent applications,
trademarks, service marks, mask works, trade names, copyrights, trade secrets,
information, proprietary rights and processes.
2.3 "Incentive Plans" shall mean collectively the Incentive Stock Option
Plan as amended and restated as of April 1, 1996, the 1987 Stock Option Plan, as
amended and restated as of April 1, 1996, the 1993 Employee Stock Purchase Plan,
as amended and restated as of May 31, 1995, the 1999 Employee Stock Option Plan
dated October 20, 1999 and the 1999 Stock Incentive Compensation Plan, approved
by the Company's board of directors on November 23, 1999.
2.4 "Material Adverse Event" shall mean any change, event or effect that is
materially adverse to the general affairs, business, operations, assets,
condition (financial or otherwise) or results of operations of the Company and
its Subsidiaries taken as a whole; provided, however, that the following shall
not be taken into account in determining a "Material Adverse Event": (a) any
adverse change, event or effect that is directly attributable to conditions
affecting the United States economy generally unless such conditions adversely
affect such party in a materially disproportionate manner, and (b) any adverse
change, event or effect that is directly attributable to conditions affecting
the Company's industry generally, unless such conditions adversely affect such
party in a materially disproportionate manner.
2.5 "Material Contracts" shall have the meaning ascribed to such term in
Section 3.12.
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2.6 "Rights Agreement" shall mean the Investor Rights Agreement in
substantially the form attached as Exhibit 6.4 hereto.
2.7 "Schedule of Exceptions" shall mean the schedule of exceptions to the
representations and warranties of the Company in Section 3. The Schedule of
Exceptions is attached as Exhibit 3 hereto.
2.8 "Securities Act" shall mean the Securities Act of 1933, as amended and
the rules and regulations of the Commission promulgated thereunder.
2.9 "SEC Reports" shall have the meaning ascribed to such term in Section
3.21.
2.10 "Subsidiary" shall mean any corporation, partnership or other entity
more than 50% of whose equity interests (measured by virtue of voting rights) in
the aggregate is owned by the Company.
2.11 "Transactional Agreements" shall mean this Agreement and the Rights
Agreement.
3. Representations and Warranties of the Company to Investors. Except as
set forth in the Schedule of Exceptions, the Company hereby represents and
warrants to each Investor that:
3.1 Corporate Organization and Authority. The Company:
(a) is a corporation duly organized and validly existing under the laws of
the State of Washington;
(b) has the corporate power and corporate authority to own and operate its
properties and to carry on its business as now conducted and as currently
proposed to be conducted; and
(c) is qualified as a foreign corporation in all jurisdictions in which
such qualification is required, other than those jurisdictions in which its
failure to so qualify would not constitute a Material Adverse Event.
3.2 Capitalization. The authorized capital of the Company consists of:
(a) Preferred Stock. 2,000,000 shares of Preferred Stock, $0.01 par value,
of which 105,000 shares have been designated Series RP Preferred Stock (none of
which are outstanding) and 15,000 shares will be designated as Series A
Preferred Stock upon filing of the Articles of Amendment, (none of which will be
issued or outstanding prior to the Closing).
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(b) Common Stock. 101,250,000 shares of Common Stock, $0.01 par value, of
which 16,347,890 shares are duly and validly issued (including, without
limitation, issued in compliance with applicable federal and state securities
laws), fully paid, and nonassessable.
(c) Other Securities. The Company has reserved: (a) 15,000 shares of
Series A Preferred Stock for issuance pursuant to the terms of this Agreement;
(b) 3,157,895 shares of Common Stock for issuance upon conversion of the
Series A Preferred Stock; (c) 105,000 shares of Series RP Preferred Stock,
(d) 789,474 shares of Common Stock for issuance upon exercise of the Warrants;
and (e) 2,953,187 shares of Common Stock for issuance under the Company's
Incentive Plans. Except for (i) the conversion privileges of the Series A
Preferred Stock to be issued under this Agreement, (ii) the Warrants to be
issued under this Agreement, (iii) the options and other rights granted under
the Company's Incentive Plans, and (iv) the preferred share purchase rights
issued as a dividend on the Company's Common Stock, there are no outstanding
rights of first refusal, preemptive rights or other rights, warrants, options,
conversion privileges, subscriptions, or other rights or agreements, either
directly or indirectly, to purchase or otherwise acquire or issue any equity
securities of the Company.
3.3 Subsidiaries. The Company does not presently own, have any investment
in, or control, directly or indirectly, any Subsidiaries, other than Seattle
FilmWorks Manufacturing Company, OptiColor, Inc. and FilmWorks Express Inc. Each
of the Subsidiaries:
(a) is duly organized, validly existing and in good standing in the state
of its incorporation;
(b) has the corporate power and corporate authority to own and operate its
properties and to carry on its business as now conducted and as currently
proposed to be conducted; and
(c) is qualified as a foreign corporation in all jurisdictions in which
such qualification is required, other than those jurisdictions in which its
failure to qualify would not constitute a Material Adverse Event.
3.4 Corporate Power. The Company will have at the Closing Date all
requisite legal and corporate power and authority to execute and deliver the
Transactional Agreements, to sell and issue the Shares hereunder, to issue the
Common Stock issuable upon conversion of the Shares (the "Conversion Shares"),
to issue and sell the Warrants hereunder, to issue the Warrant Shares upon
exercise of the Warrants, and to carry out and perform its obligations under the
terms of the Transactional Agreements.
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3.5 Financial Statements. The financial statements of the Company as of and
for the period ended September 25, 1999 and the unaudited balance sheet of the
Company as of December 25, 1999 and the unaudited statement of operations for
the three-month period then ended (which have been provided to the Investors)
are complete and correct in all material respects, have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and fairly present the Company's
financial position as of those dates and the results of operations and changes
in its financial position for such periods then ended; provided however, that
the unaudited financial statements are subject to normal recurring year-end
adjustments (which are not expected to be material), and do not contain all
footnotes required under generally accepted accounting principles. Except as set
forth in the unaudited balance sheet of the Company as of December 25, 1999, the
Company has no material liabilities except for current liabilities incurred in
the ordinary course of business subsequent to December 25, 1999 which are not,
either individually or in the aggregate, materially adverse to the Company. The
Company has no material contingent obligations which are not disclosed in the
SEC Reports.
3.6 Authorization. All corporate action on the part of the Company, its
officers and directors necessary for the authorization, execution, delivery, and
performance of all obligations under the Transactional Agreements, and for the
authorization, issuance, and delivery of the Shares, the Conversion Shares, the
Warrants and the Warrant Shares has been taken. The Transactional Agreements
constitute legally binding and valid obligations of the Company enforceable in
accordance with their respective terms, except to the extent that such
enforcement may be subject to applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium, fraudulent conveyance or other laws or court decisions
relating to or affecting the rights of creditors generally, and such enforcement
may be limited by equitable principles of general applicability.
3.7 Validity of Shares. The Shares, when issued, sold, and delivered in
accordance with the terms and for the consideration expressed in this Agreement,
will be duly and validly issued (including, without limitation, issued in
compliance with applicable federal and state securities laws) and
non-assessable. The Conversion Shares and Warrant Shares have been duly and
validly reserved and, assuming the Conversion Shares are issued in accordance
with the Articles of Amendment and the Warrant Shares are issued in accordance
with the terms of the Warrants, will be duly and validly issued (including,
without limitation, issued in compliance with all applicable federal and state
securities laws) and non-assessable and will be free of any liens or
encumbrances other than any liens or encumbrances created by or imposed thereon
by the holders; provided, however, that the Shares, Conversion Shares, Warrants
and Warrant Shares shall be subject to restrictions on transfer under state
and/or federal securities laws. The Shares, Conversion Shares, Warrants and
Warrant Shares are not subject to any preemptive rights or rights of first
refusal, except as otherwise so agreed to by the holders thereof.
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3.8 Changes in Condition. Except as specifically set forth in this
Agreement or in the SEC Reports, since September 25, 1999, (a) the Company has
not entered into any transaction which was not in the ordinary course of
business, (b) there has been no Material Adverse Event, (c) the Company has not
incurred any material tax liability, (d) there has been no resignation or
termination of employment of any executive officer or key employee of the
Company and the Company does not know of any impending resignation or
termination of employment of any such officer or key employee, (e) there has
been no labor dispute involving the Company or any of its respective employees
and, to the Company's knowledge, none is pending or threatened, (f) there has
been no waiver by the Company of a valuable right or of a debt owing to the
Company, (g) there has not been any satisfaction or discharge of any material
lien, claim or encumbrance or any payment of any material obligation by the
Company except in the ordinary course of business, (h) there has been no direct
or indirect loans made by the Company to any shareholder, employee, officer or
director of the Company, other than advances made in the ordinary course of
business, (i) there has been no material change in any compensation arrangement
or agreement with any executive officer, director, key employee or shareholder,
(j) the Company has not declared or paid any dividend or other distribution of
assets of the Company, (k) there has not been any sale, assignment or transfer
of any Intellectual Property other than in the ordinary course of business,
(l) the Company has not incurred, assumed or guaranteed any debt, obligation or
liability except for immaterial amounts and for current liabilities incurred in
the ordinary course of business, and (m) there has not been any change in a
Material Contract to which the Company is a party or by which it is bound which
would result in a Material Adverse Event.
3.9 Litigation. There is no action, proceeding, or, to the Company's
knowledge, investigation pending or threatened, or any basis therefor known to
the Company, that questions the validity of the Transactional Agreements or the
right of the Company to enter into the Transactional Agreements or to consummate
the transactions contemplated thereby or that would result, either individually
or in the aggregate, in any Material Adverse Event. There is no judgment,
decree, or order of any court in effect against the Company and the Company is
not in default with respect to any order of any governmental authority to which
the Company is a party or by which it is bound. There is no action, suit,
proceeding, or investigation by the Company currently pending or which the
Company presently intends to initiate.
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3.10 Patents and Other Proprietary Rights.
(a) To the Company s knowledge the Company has sufficient title and
ownership of or sufficient right to use all Intellectual Property necessary for
its business as now conducted, and believes it can obtain, on commercially
reasonable terms, any additional rights necessary for its business as
contemplated at the Closing.
(b) No claims have been asserted by any person with respect to the validity
of the Company's ownership or right to use the Intellectual Property.
(c) The Company does not have any knowledge of, and the Company has not
given or received any notice of, any pending conflicts with or infringement of
the rights of others with respect to any Intellectual Property or with respect
to any license of Intellectual Property which are material to the business of
the Company.
(d) No action, suit, arbitration, or legal, administrative or other
proceeding, or investigation is pending, or, to the best knowledge of the
Company, threatened, which involves any Intellectual Property and the Company is
not subject to any judgment, order, writ, injunction or decree of any court or
any Federal, state, local, foreign or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or any
arbitrator, and has not entered into or is not a party to any contract which
restricts or impairs the use of any such Intellectual Property in a manner which
would result in Material Adverse Event.
(e) The Company has not entered into any consent, indemnification,
forbearance to sue or settlement agreement with respect to Intellectual Property
other than in the ordinary course of business or which does not restrict its
business as presently proposed to be conducted.
(f) The Company is not aware that any of its employees is obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would conflict with the Company's business as
proposed to be conducted.
(g) The Company has not received any communications alleging that the
Company or its employees has violated or infringed any of the patents,
trademarks, service marks, trade names, copyrights, or trade secrets, or any
proprietary rights of any other person or entity.
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(h) The Company has taken reasonable measures to protect the value (and, to
the extent applicable, the confidentiality and security) of all Intellectual
Property used in its products, services and business. The Company has taken
reasonable steps to ensure that employees and consultants who, either alone or
in concert with others, developed, invented, discovered, derived, programmed or
designed Intellectual Property, or who have knowledge of or access to
information about Intellectual Property, have entered into an Employee
Confidentiality, Inventions, and Non-Competition Agreement, substantially in the
form of Exhibit 3.10 to this Agreement.
(i) The Company has reviewed its operations to evaluate the extent to which
the business or operations of the Company will be affected by the Year 2000
Problem (as defined below). As a result of such review, the Company has not
noted any material Year 2000 Problems which would prevent its products and
systems from being capable of correctly interpreting dates beyond the year 1999.
Based on the Company's testing to date, the Company has no reason to believe
that Year 2000 Problems caused by its own products or internal operations would
have a Material Adverse Event. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000.
3.11 Taxes.
(a) (i) All federal, state, local, and foreign tax returns required to be
filed by the Company have been filed and are true in all material respects and
(ii) (A) all taxes, assessments, fees, and other governmental charges upon the
Company, or upon any of its properties, income, or franchises, shown in such
returns to be due and payable, (B) any assessments imposed, and (C) to the
Company's knowledge, all other taxes due and payable by the Company, have been
paid or will be paid prior to the time they become delinquent, except for such
failures to file or to pay as would not in the aggregate constitute a Material
Adverse Event.
(b) The Company has not been advised (i) that any of its tax returns have
been or are being audited as of the date hereof or (ii) of any deficiency in
assessment related to its federal, state or other taxes. The Company has no
knowledge of any liability for any tax to be imposed upon its properties or
assets as of the date of this Agreement that is not adequately provided for.
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3.12 Company's Contracts.
(a) Legality of Contracts. Except as disclosed in the SEC Reports, the
Company is not a party to or bound by any contract, commitment or understanding
which (i) is a material contract (as defined in Item 601(b)(10) of Regulation
S-K of the Commission) which is to be performed after the date of this
Agreement, (ii) involves a license or grant of rights to or from the Company
involving Intellectual Property applicable to the business of the Company,
(iii) contains provisions restricting the development, manufacture or
distribution of the Company's products or services, or (iv) provides
indemnification by the Company with respect to infringements of proprietary
rights to which the Company or any Subsidiary is a party (collectively "Material
Contracts"). All such contracts and agreements are legally binding, valid, and
in full force and effect in all material respects.
(b) Dividends; Indebtedness. Except as disclosed in the SEC Reports, the
Company has not (i) incurred any indebtedness for money borrowed in excess of
$1,000,000 (either individually or in the aggregate), (ii) made any loans or
advances to any person, other than ordinary advances for travel expenses,
(iii) sold, exchanged or otherwise disposed of any of its assets or rights or
entered into any agreement or arrangement with respect thereto, other than the
sale of its inventory in the ordinary course of business, or (iv) declared or
paid any dividends, or authorized any distribution upon or with respect to any
class or series of its capital stock.
3.13 Compliance With Other Agreements. The Company is not in violation of
(i) any term or provision of its articles of incorporation or bylaws, each as in
effect as of the Closing, (ii) any material term or provision of any Material
Contract (iii) to the Company's knowledge, any decree, order, statute, rule or
regulation applicable to the Company, in each case, or in the aggregate, the
violation of which would constitute a Material Adverse Event. The execution,
delivery and performance of the Transactional Agreements by the Company will not
result in any violation of, be in conflict with, or constitute a default under,
with or without the passage of time or the giving of notice:
(a) any provision of the Company's articles of incorporation or bylaws;
(b) any provision of any judgment, decree or order to which the Company is
a party or by which it is bound;
(c) any Material Contract to which the Company is a party or by which it is
bound; or
(d) to the Company's knowledge, any statute, rule or governmental
regulation applicable to the Company.
3.14 Employees. The Company believes its relations with its employees are
satisfactory. The Company's employees are not represented by any labor unions
nor, to the Company's knowledge, is any union organization campaign in progress.
The Company is not aware that any of its executive officers or key employees
intends to terminate employment nor does the Company have any present intention
to terminate the employment of any thereof.
9
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3.15 Transactions with Affiliates. Except as disclosed in the SEC Reports,
no employee, officer, or director of the Company or member of his or her
immediate family is indebted to the Company, nor is the Company indebted (or
committed to make loans or extend or guarantee credit) to any of them other than
(i) for payment of salary and services rendered, (ii) reimbursement for
reasonable expenses incurred on behalf of the Company, and (iii) for other
standard employee benefits made generally available to all employees (including
stock option agreements outstanding under any Incentive Plans). To the Company's
knowledge, none of such persons has any direct or indirect ownership interest in
any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation that competes
with the Company, except that employees, officers, or directors of the Company
and members of their immediate families may own stock in publicly traded
companies that may compete with the Company. No member of the immediate family
of any officer or director of the Company is directly or indirectly interested
in any Material Contract with the Company. Except for agreements between the
Company and its employees pertaining to the terms of their employment or the
purchase of shares of Common Stock under the Incentive Plans, there are no
agreements, understandings or proposed transactions between the Company and any
of its officers, directors or affiliates.
3.16 Governmental and Third Party Consents. Subject to the accuracy of the
Investors' representations in Section 4 of this Agreement, no consent, approval,
order, or authorization of, or registration, qualification, designation,
declaration, or filing with, any federal, state, local, or provincial
governmental authority on the part of the Company is required in connection with
the consummation of the transactions contemplated by this Agreement, except for
filings as are required by federal and state securities laws.
3.17 Compliance with Laws; Permits. To its knowledge, the Company is not in
violation of any applicable statute, rule, regulation or restriction of any
government, administrative agency or instrumentality in respect of the conduct
of its business or the ownership of its properties, the violation of which would
constitute a Material Adverse Event. The Company has all franchises, permits,
licenses, and any similar governmental authority necessary for the conduct of
its business as now being conducted by it and as currently proposed to be
conducted, the lack of which would constitute a Material Adverse Event. The
Company is not in default under any of such franchises, permits, license, or
other similar authority except for such defaults as will not, individually or in
the aggregate, constitute a Material Adverse Event.
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3.18 Registration Rights. Except as required pursuant to the Rights
Agreement, the Company is not presently under any obligation, and has not
granted any rights to register any of the Company's presently outstanding
securities or any securities that may hereinafter be issued under the Securities
Act.
3.19 Offering Valid. Assuming the accuracy of the representations and
warranties of the Investors contained in Section 4 hereof, the offer, sale and
issuance of the Shares and the Conversion Shares will be exempt from the
registration requirements of the Securities Act and will have been registered or
qualified or are exempt from registration and qualification under the
registration, permit or qualification requirements of all applicable state
securities laws. Neither the Company nor any agent on its behalf will take any
action that would cause the loss of any such exemption.
3.20 Brokers and Finders. The Company has not retained any investment
banker, broker or finder in connection with the transactions contemplated by
this Agreement.
3.21 SEC Reports. The Company has filed with the Commission all required
forms, reports, registration statements and documents required to be filed by it
with the Commission and made all disclosures required by the Securities Act or
the Exchange Act (collectively, the "SEC Reports"), all of which complied as to
form when filed in all material respects with the applicable provisions of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as the case may be. Accurate and complete copies of the SEC
reports have been available to Buyer. As of their respective dates the SEC
Reports (including all exhibits and schedules thereto and documents incorporated
by reference therein) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
3.22 Environmental. Except as would not, singly or in the aggregate,
reasonably be expected to have a Material Adverse Event, (A) the Company is in
compliance with all applicable Environmental Laws (as defined below), (B) the
Company has all permits, authorizations and approvals required under any
applicable Environmental Laws and is in compliance with the requirements of such
permits authorizations and approvals, and (C) there are no pending or, to the
best knowledge of the Company, threatened Environmental Claims against the
Company.
For purposes of this Agreement, the following terms shall have the following
meanings: "Environmental Law" means any United States (or other applicable
jurisdiction's) Federal, state, local or municipal statute, law, rule,
regulation, ordinance, code, policy or rule of common law and any judicial or
administrative interpretation thereof, including any judicial or administrative
11
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order, consent decree or judgement, relating to the environment, health, safety
or any chemical, material or substance, exposure to which is prohibited, limited
or regulated by any governmental authority. "Environmental Claims" means any and
all administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation, investigations or
proceedings relating in any way to any Environmental Law.
3.23 Properties. The Company does not own any real property. The Company's
personal properties are, in the aggregate, in good repair (reasonable wear and
tear excepted), suitable for their respective uses, and free from any liens,
charges or encumbrances, other than those imposed in connection with the
Company's credit facilities or capital leases disclosed in the SEC Reports or
the Schedule of Exceptions. Any real properties held under lease by the Company
are held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the conduct of the
business of the Company.
4. Representations and Warranties of the Investors. Each Investor,
severally and not jointly, represents and warrants to the Company as follows:
4.1 Authorization. When executed and delivered by the Investor, and
assuming execution and delivery by the Company, the Transactional Agreements
will each constitute a valid obligation of the Investor, enforceable in
accordance with its terms.
4.2 Investment. This Agreement is made with the Investor in reliance upon
its representation to the Company, which by the Investor's execution of this
Agreement Investor hereby confirms, that the Shares, the Warrant and the Warrant
Shares to be received by the Investor will be acquired for investment for
Investor's own account, not as a nominee or agent, and not with a view to the
sale or distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
any of the Shares, the Warrants or the Warrant Shares. By executing this
Agreement, the Investor further represents that it has no contract, undertaking,
agreement, or arrangement with any person to sell, transfer, or grant
participation to such person or to any third person, with respect to any of the
Shares, the Warrant or the Warrant Shares.
4.3 No Public Market. The Investor understands and acknowledges that the
offering of the Shares, the Warrant and the Warrant Shares pursuant to this
Agreement will not be registered under the Securities Act on the grounds that
the offering and sale of securities contemplated by this Agreement are exempt
from registration pursuant to Section 4(2) of the Securities Act, and that the
Company's reliance upon such exemption is predicated upon Investor's
representations as set forth in this Agreement. The Investor further understands
that no public market now exists for any of the securities issued by the Company
and that the Company has given no assurances that a public market will ever
exist for the Company's securities.
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4.4 Limitations on Transferability. Investor covenants that in no event
will it dispose of any of the Shares, the Warrant or the Warrant Shares (other
than pursuant to Rule 144 promulgated by the Commission under the Securities Act
("Rule 144") or any similar or analogous rule or pursuant to an effective
registration statement under the Securities Act) unless and until (a) the
Investor shall have notified the Company of the proposed disposition and shall
have furnished the Company with a statement of the circumstances surrounding the
proposed disposition, and (b) if requested by the Company, the Investor shall
have furnished the Company with an opinion of counsel satisfactory in form and
substance to the Company and the Company's counsel to the effect that (i) such
disposition will not require registration under the Securities Act and
(ii) appropriate action necessary for compliance with the Securities Act and any
applicable state, local, or foreign law has been taken. Notwithstanding the
limitations set forth in the foregoing sentence, if the Investor is a
partnership or limited liability company, it may transfer Shares, the Warrant or
the Warrant Shares to its constituent partners or members or a retired partner
or member of such partnership or Company who retires after the date hereof, or
to the estate of any such partner, member or retired partner or member or
transfer by gift, will, or intestate succession to any such partner's or
member's spouse or lineal descendants or ancestors without the necessity of
registration or opinion of counsel if the transferee agrees in writing to be
subject to the terms of this Agreement to the same extent if such transferee
were an Investor; provided, however, that Investor hereby covenants not to
effect such transfer if such transfer either would invalidate the securities
laws exemptions pursuant to which the Shares, the Warrant or the Warrant Shares
were originally offered and sold or would itself require registration and/or
qualification under the Securities Act or applicable state securities laws. Each
certificate evidencing the Shares, the Warrant or the Warrant Shares transferred
as above provided shall bear the appropriate restrictive legend set forth in
Section 5 below, except that such certificate shall not bear such legend if the
transfer was made in compliance with subsection (k) of Rule 144 or if the
opinion of counsel referred to above is to the further effect that such legend
is not required in order to establish compliance with any provisions of the
Securities Act.
4.5 Experience; Receipt of Information. The Investor represents that:
(a) it has such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of its prospective investment in
the Shares, the Warrant and the Warrant Shares; (b) it believes it has received
all the information it has requested from the Company and considers necessary or
appropriate for deciding whether to obtain the Shares, the Warrant and the
Warrant Shares; (c) it has had the opportunity to discuss the Company's
13
<PAGE>
business, management, and financial affairs with the Company's management;
(d) it has the ability to bear the economic risks of its prospective investment;
and (e) it is able, without materially impairing its financial condition, to
hold the Shares, the Warrant and the Warrant Shares for an indefinite period of
time and to suffer a complete loss on its investment.
4.6 Accredited Investor. The Investor presently qualifies and will as of
the Closing Date qualify, as an "accredited investor" within the meaning of
Regulation D of the rules and regulations promulgated under the Securities Act.
4.7 Confidentiality. The Investor agrees that it will keep confidential
and will not use, disclose or divulge for a period of two years after receipt,
any information which such Investor may obtain from the Company, pursuant to
financial statements, reports and other materials submitted by the Company as
required hereunder or under any other documents, or pursuant to information
rights granted under the Rights Agreement or any other documents unless such
information is known, or until such information becomes known, to the public
through no fault of such Investor or its agents, or unless the President of the
Company gives his written consent to the Investor's release of such information,
except that no such written consent shall be required (and Investor shall be
free to release such information) if such information is to be provided to
Investor's counsel or accountant, or to an officer, director, general partner,
limited partner, shareholder, investment counselor or advisor, or employee of an
Investor with a need to know such information; provided that any such counsel,
accountant, officer, director, general partner, limited partner, shareholder,
investment counselor or advisor, or employee shall be bound by the provisions of
this Section 4.7. Notwithstanding the foregoing, this Section 4.7 shall not
apply (a) to information which an Investor learns from a third party with the
right to make such disclosure, provided Investor complies with the restrictions
imposed by the third party, (b) to information which is in Investor's possession
prior to the time of disclosure by the Company and not acquired by Investor
under a confidentiality obligation, (c) to the minimum extent (after requesting
and pursuing confidential treatment to the extent reasonably possible) the
Investor is required to disclose such information by law or a governmental
regulatory authority, (d) to the minimum extent (after requesting and pursuing
confidential treatment to the extent reasonably possible) Investor is required
to disclose such information by court order.
4.8 Brokers and Finders. The Investor has not retained any investment
banker, broker, or finder in connection with the transactions contemplated by
this Agreement.
14
<PAGE>
5. Legends.
5.1 The Warrants and certificates for the Shares and the Warrant Shares
shall bear such restrictive legends as the Company and the Company's counsel
deem necessary or advisable under applicable law or pursuant to this Agreement,
including, without limitation, the following:
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION UNLESS THE TRANSFER IS IN ACCORDANCE WITH RULE 144 OR
A SIMILAR RULE AS THEN IN EFFECT UNDER THE ACT, OR APPLICABLE STATE
SECURITIES LAWS OR UNLESS THE CORPORATION RECEIVES AN OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT."
5.2 The Warrants and certificates evidencing the Shares and the Warrant
Shares shall also bear any legend required pursuant to any state, local, or
foreign law governing such securities.
6. Conditions of Investors' Obligations at Closing. The obligations of
each Investor under Section 1 of this Agreement are subject to the fulfillment
at or before the Closing of each of the following conditions, any of which may
be waived in writing by such Investor:
6.1 Representations and Warranties. The representations and warranties of
the Company contained in Section 3 shall be true in all material respects on and
as of the Closing with the same effect as if made on and as of the Closing,
except (a) to the extent such representations and warrants speak of an earlier
date, in which case, they shall be true and correct in all material respects as
of such earlier date and (b) for representations qualified by materiality, which
shall be correct in all respects.
6.2 Performance. The Company shall have performed or fulfilled in all
material respects all agreements, obligations, and conditions contained herein
required to be performed or fulfilled by the Company before the Closing.
15
<PAGE>
6.3 Proceedings Satisfactory; Compliance Certificate. All corporate and
legal proceedings taken by the Company in connection with the transactions
contemplated by this Agreement and all documents and papers relating to such
transactions shall be reasonably satisfactory to the Investors. The Company
shall have delivered to the Investors a certificate dated as of the Closing,
signed by the Company's CEO and President, certifying that the conditions set
forth in Sections 6.1 and 6.2 have been satisfied.
6.4 Rights Agreement. The Company and the Investors shall have entered
into the Rights Agreement in substantially the form attached as Exhibit 6.4.
6.5 Articles of Amendment. The Company shall have filed its Articles of
Amendment with the Secretary of State of the State of Washington, which Articles
of Amendment shall be in full force and effect on the Closing Date.
6.6 Opinion of the Company's Counsel. The Investors shall have received
from Heller Ehrman White & McAuliffe LLP, legal counsel for the Company, an
opinion dated the Closing Date, substantially in the form of Exhibit 6.6 hereto.
6.7 Approvals and Consents. All transfers of permits or licenses and all
approvals of or notices to public agencies, federal, state, local or foreign,
the granting or delivery of which is necessary for the consummation of the
transactions contemplated hereby, including, if applicable, approvals or notices
required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, or for the continued operation of the Company, shall have been
obtained, and all waiting periods specified by law shall have passed.
6.8 Agreement as to Registration Rights. The Investors, the Company and
Sam Rubinstein shall have reached a mutually acceptable agreement as to the
priority between Mr. Rubinstein and the Investors with respect to their
respective rights to include shares in a registration of shares under the
Securities Act effected by the Company.
7. Conditions of the Company's Obligations at Closing. The obligations of
the Company under Section 1 of this Agreement are subject to the fulfillment at
or before the Closing of each of the following conditions, any of which may be
waived in writing by the Company.
7.1 Representations and Warranties. The representations and warranties of
the Investors contained in Section 4 shall be true in all material respects on
and as of the Closing with the same effect as if made on and as of the Closing.
16
<PAGE>
7.2 Payment of Purchase Price. Each Investor shall have delivered to the
Company in accordance with Section 1.2 the purchase price specified in Section
1.1.
7.3 Articles of Amendment. The Articles of Amendment shall have been filed
with the Secretary of State of the State of Washington and shall be in full
force and effect on the Closing Date.
7.4 Rights Agreement. The Company and the Investors shall have entered
into the Rights Agreement in substantially the form attached as Exhibit 6.4.
8. Covenants of the Company.
8.1 Use of Proceeds. The Company shall use the proceeds from the sale of
the Series A Preferred Stock under this Agreement to hire additional members of
the Company's management team, build the Company's Internet-related business,
and for marketing and general corporate purposes.
8.2 Management. From and after the date of this Agreement, the Company
shall use its reasonable best efforts, including, without limitation, retaining
recruiting firms, making its management available for interviews and offering
stock option packages deemed necessary and appropriate by the Board of
Directors, to recruit a Chief Operating Officer and such additional officers as
the Board of Directors deems advisable.
9. Miscellaneous.
9.1 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington, excluding those laws that
direct the application of the laws of another jurisdiction.
9.2 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
9.3 Headings. The headings of the sections of this Agreement are for
convenience and shall not by themselves determine the interpretation of this
Agreement.
9.4 Notices. Any notice required or permitted hereunder shall be given in
writing and shall be conclusively deemed effectively given upon personal
delivery or delivery by courier, or on the first business day after transmission
if sent by confirmed facsimile transmission or electronic mail transmission, or
five days after deposit in the United States mail, by registered or certified
mail, postage prepaid, addressed (i) if to the Company, as set forth below the
17
<PAGE>
Company's name on the signature page of this Agreement, and (ii) if to an
Investor, at such Investor's address as set forth below such Investor's name on
the signature page to this Agreement, or at such other address as the Company or
such Investor may designate by 10 days' advance written notice to the other
parties hereto.
9.5 Amendment of Agreement. Any provision of this Agreement may be
amended, and the obligations of the Company under this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) by a written instrument signed by the Company and by persons who
after the Closing will hold at least a majority of the aggregate of (a) the then
outstanding Shares; and (b) the then outstanding Common Stock into which the
Shares have been converted, other than Common Stock which has been sold to the
public. Any amendment, modification or waiver pursuant to, and in accordance
with, this Section 9.5 shall be binding on the Company, all holders of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible) and each future holder of
any such securities. The foregoing notwithstanding, this Agreement and any term
thereof may be amended, waived, discharged or terminated by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
9.6 Expenses. The Company and the Investors will bear their respective
legal and other fees and expenses with respect to this Agreement and the
transactions contemplated hereby; provided, however, if the sale of the Shares
is consummated, the Company shall pay the reasonable fees and expenses of
counsel to Investors in an amount not to exceed an aggregate maximum of $20,000.
9.7 Entire Agreement; Successors and Assigns. This Agreement (and the
Exhibits and Schedules hereto) and the Rights Agreement constitute the entire
contract between the Company and the Investors relative to the subject matter
hereof. Any prior and contemporaneous agreement, discussion, understanding or
correspondence between the Company and the Investors regarding the purchase of
capital stock of the Company is superseded by this Agreement and the Rights
Agreement. Subject to the exceptions specifically set forth in this Agreement,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective executors, administrators, heirs, successors, and
assigns of the parties.
9.8 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision was so excluded and shall be enforceable in accordance with its terms.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Series A
Preferred Stock and Warrant Purchase Agreement as of the date first above
written.
Company: PHOTOWORKS, INC., a Washington corporation
By: /s/ Gary Christophersen
Gary Christophersen, President and CEO
Address: 1260 16th Avenue West
Seattle, Washington 98119
Fax No. (206) 284-5357
Investors: ORCA BAY PARTNERS
By: /s/ Ross K. Chapin
Name: Ross K. Chapin
Title: Managing Member
Address: P.O. Box 21749
Seattle, WA 98111
19
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
<PAGE>
MADRONA VENTURE FUND I-A, L.P.
By Madrona Investment Partners, LLC,
its General Partner
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98104
MADRONA VENTURE FUND I-B, L.P.
By Madrona Investment Partners, LLC,
its General Partner
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98014
20
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
<PAGE>
MADRONA MANAGING DIRECTOR FUND, LLC
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98014
21
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
<PAGE>
THE TAHOMA FUND, L.L.C.
By: /s/ Ross Chapin
Name: Ross Chapin
Title: Managing Member
Address: P.O. Box 21749
Seattle, WA 98111
ORCA BAY CAPITAL CORPORATION
By: /s/ Stanley McCammon
Name: John E. McCaw, Jr.
Title: Trustee
Address: P.O. Box 21749
Seattle, WA 98111
22
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
<PAGE>
TIM and ALEXA CARVER
By: /s/ Tim Carver
Name: Tim Carver
By: /s/ Alexa Carter
Name: Alexa Carver
Address: P.O. Box 21749
Seattle, WA 98111
STANLEY McCAMMON
By: /s/ Stanley McCammon
Name: Stanley McCammon
Address: P.O. Box 21749
Seattle, WA 98111
AARON SINGLETON
By: /s/ Aaron Singleton
Name: Aaron Singleton
Address: P.O. Box 21749
Seattle, WA 98111
23
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
<PAGE>
EXHIBIT A
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Number of Number of Total
Name Shares Purchased Warrant Shares Purchase Price
---- ---------------- -------------- --------------
<S> <C> <C> <C>
The Tahoma Fund, L.L.C. 7,800 410,526 $7,800,000
Orca Bay Capital Corporation 1,980 104,211 $1,980,000
Tim and Alexa Carver 100 5,263 $100,000
Stanley McCammon 100 5,263 $100,000
Aaron Singleton 20 1053 $20,000
Madrona Venture Fund I-A,
L.P. 4,032 212,210 $4,032,000
Madrona Venture Fund I-B,
L.P. 465 24,474 $465,000
Madrona Managing Director
Fund, LLC 503 26,474 $503,000
------ ------- ----------
Total 15,000 789,474 $15,000,000
</TABLE>
________________________________________________________________________________
________________________________________________________________________________
PHOTOWORKS, INC.
INVESTOR RIGHTS AGREEMENT
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
PHOTOWORKS, INC.
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is made as of February 14,
2000, by and among PhotoWorks, Inc., a Washington corporation (the "Company")
and the persons listed on the attached Exhibit A who from time to time become
signatories to this Agreement (collectively, the "Investors").
RECITALS
A. The Company and the Investors have entered into a Series A Preferred
Stock and Warrant Purchase Agreement for sale by the Company and purchase by the
Investors of the Company's Series A Preferred Stock and warrants to purchase the
Company's Common Stock (the "Purchase Agreement").
B. In connection with the purchase and sale of the Company's securities,
the Company and the Investors desire to provide for the rights of the Investors
with respect to information about the Company, the nomination of members to the
Company's board of directors and registration of the Common Stock issued upon
conversion of the securities according to the terms of this Agreement.
THE PARTIES AGREE AS FOLLOWS:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
1.1 "Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
1.2 "Convertible Securities" shall mean the shares of Series A Preferred
Stock and the Warrants purchased by the Investors pursuant to the Purchase
Agreement.
1.3 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.4 "Form S-3" shall mean Form S-3 issued by the Commission or any
substantially similar form then in effect.
1.5 "Holder" shall mean any holder of outstanding Registrable Securities
which have not been sold to the public, but only if such holder is one of the
Investors or an assignee or transferee of registration rights as permitted by
Section 12.
<PAGE>
1.6 "Incentive Plans" shall mean collectively the Incentive Stock Option
Plan as amended and restated as of April 1, 1996, the 1987 Stock Option Plan, as
amended and restated as of April 1, 1996, the 1993 Employee Stock Purchase Plan,
as amended and restated as of May 31, 1995, the 1999 Employee Stock Option Plan
dated October 20, 1999 and the 1999 Stock Incentive Compensation Plan, approved
by the Company's board of directors on November 23, 1999.
1.7 "Initiating Holders" shall mean Holders who in the aggregate hold at
least 50% of the Registrable Securities.
1.8 "Material Adverse Event" shall mean an occurrence having a consequence
that either (a) is materially adverse as to the business, properties, prospects,
or financial condition of the Company or (b) is reasonably foreseeable, has a
reasonable likelihood of occurring, and if it were to occur might materially
adversely affect the business, properties, prospects or financial condition of
the Company; provided, however, that the following shall not be taken into
account in determining a "Material Adverse Event": (i) any adverse change, event
or effect that is directly attributable to conditions affecting the United
States economy generally unless such conditions adversely affect such party in a
materially disproportionate manner, and (ii) any adverse change, event or effect
that is directly attributable to conditions affecting the Company's industry
generally, unless such conditions adversely affect such party in a materially
disproportionate manner.
1.9 "New Securities" shall mean any capital stock of the Company, whether
authorized or not, and any rights, options, or warrants to purchase said capital
stock, and securities of any type whatsoever that are, or may become,
convertible into said capital stock; provided that "New Securities" does not
include (i) the Convertible Securities and the Common Stock issuable upon
conversion or exercise of the Convertible Securities, (ii) securities offered to
the public pursuant to a registration statement filed under the Securities Act,
(iii) securities issued pursuant to the acquisition of another corporation by
the Company by merger, purchase of substantially all of the assets, or other
reorganization, if approved by the Company's Board of Directors, (iv) shares
issued or issuable to the Company's officers, directors, employees and
consultants, contractors and advisors to the Company pursuant to any stock
option, subscription or stock purchase right or restricted stock grant
outstanding as of the date of this Agreement or which is subsequently issued
under the Company's Incentive Plans as such plans have been approved by the
Company's Board of Directors as of the date of this Agreement, (v) shares issued
without consideration pursuant to a stock dividend, stock split, or similar
transaction, (vi) shares or warrants, and shares issuable upon exercise of such
warrants, issued to financial institutions or lessors in connection with
commercial credit arrangements, equipment financings, leasing arrangements or
similar transactions, and (vii) any other shares of Common Stock or any other
2
<PAGE>
securities convertible into or exchangeable or exercisable for shares of Common
Stock that are designated as excluded from the definition of New Securities by
the vote or written consent of holders of at least a majority of the then
outstanding shares of Convertible Securities.
1.10 The terms "Register", "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement on Form
S-1 or S-3 (or a successor form) in compliance with the Securities Act
("Registration Statement") and the declaration or ordering of the effectiveness
of such Registration Statement.
1.11 "Registrable Securities" shall mean all Common Stock not previously
sold to the public and issued or issuable upon conversion or exercise of any of
the Company's Convertible Securities purchased by or issued to the Investors,
including Common Stock issued pursuant to stock splits, stock dividends and
similar distributions, and any securities of the Company granted registration
rights pursuant to Section 14 of this Agreement.
1.12 "Registration Expenses" shall mean all expenses incurred by the
Company in complying with Section 9 of this Agreement, including, without
limitation, all federal and state registration, qualification and filing fees,
printing expenses, fees and disbursements of counsel for the Company and one
special counsel for all Holders (if different from counsel to the Company), blue
sky fees and expenses, and the expense of any special audits incident to or
required by any such registration.
1.13 "Rubinstein Debenture Agreement" shall mean that certain Debenture
Subscription Agreement dated August 14, 1981, as amended by Amendment No. 1
dated June 1984, Amendment No. 2 dated January 1986, Amendment No. 3 dated June
1996 and Amendment No. 4 dated February 2000.
1.14 "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
1.15 "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities pursuant to this
Agreement.
1.16 "Shelf Registration Statement" shall mean a Registration Statement for
an offering to be made on a continuous basis pursuant to Rule 415 of the
Securities Act (or such successor rule or similar provision then in effect)
1.17 "Warrants" shall mean the warrants to purchase shares of the Company's
Common Stock issued to the Investors pursuant to the Purchase Agreement.
3
<PAGE>
2. Financial Statements and Reports. As long as an Investor holds Series A
Preferred, the Company will deliver to such Investor:
(a) as soon as practicable after the end of each fiscal year of the
Company, and in any event within 90 days thereafter, an audited balance sheet of
the Company as of the end of such year and audited statements of income,
shareholders' equity and cash flow for such year, which year-end financial
reports shall be in reasonable detail and shall be prepared in accordance with
generally accepted accounting principles and accompanied by the opinion of the
Company's independent public accountants;
(b) as soon as practicable after the end of each of first three quarters of
any fiscal year, and in any event within 45 days thereafter, an unaudited
balance sheet of the Company as of the end of such quarter, and unaudited
statements of income and cash flow for such quarter and for the current fiscal
year to date, prepared in accordance with generally accepted accounting
principles (other than for accompanying notes);
(c) as soon as practicable after the end of the month, and in any event
within 20 days of the end of each month, an unaudited balance sheet of the
Company and unaudited statements of income and cash flow for and as of the end
of such month;
(d) as soon as practicable following submission to and approval by the
Board of Directors of the Company, but in no event later than the start of the
next fiscal year, an operating budget respecting the next fiscal year and copies
of all monthly budgets and forecasts presented to the Board of Directors;
(e) copies of all audit letters delivered by the Company's independent
public accountants to management;
(f) copies of all written information distributed to the Board of Directors
at or prior to Board meetings; and
(g) a capitalization table reflecting the number of outstanding shares of
capital stock, warrants, options, rights and other convertible securities as of
the Company's fiscal year-end and any other capitalization information in the
Company's possession which is reasonably requested by an Investor.
3. Board of Directors
3.1 Investor Nominees. Promptly following the annual meeting of the
Company's shareholders scheduled to be held on February 15, 2000, the Company
shall cause the Board of Directors to be increased to seven members, and the
existing directors shall appoint one individual designated by Orca Bay Partners
("Orca Bay") and one individual designated by Madrona Venture Fund I, L. P.
4
<PAGE>
("Madrona") to fill the vacancies created thereby. So long as the holders of
Series A Preferred Stock have the right to elect two directors, the Investors
agree to vote the shares of Series A Preferred Stock they hold to elect one
director nominated by Orca Bay and one director nominated by Madrona to the
Board of Directors. The size of the Board of Directors may be decreased to less
than seven in the future, provided that such decrease does not affect the rights
of the holders of Series A Preferred Stock to nominate individuals to the Board
pursuant to the Company's articles of incorporation.
3.2 Expenses of Attending Board Meetings. The Company shall reimburse the
representatives of the Investors serving on the Board of Directors for their
reasonable travel and out-of-pocket expenses incurred in attending meetings of
the Board of Directors or any committee on which they serve.
3.3 Observer Rights. So long as Orca Bay Partners or its affiliates owns at
least 2,500 shares of Series A Preferred Stock, Tim Carver (so long as he is
affiliated with Orca Bay Partners) shall have the right to attend meetings of
the Board of Directors as a non-voting observer, on behalf of Orca Bay Partners,
subject to the Board's right to call an executive session at any time outside of
Mr. Carver's presence.
4. Right of First Refusal.
4.1 Right of First Refusal of New Securities. The Company hereby grants to
each Investor the right of first refusal to purchase up to its "Pro Rata Share"
(as defined below) of New Securities which the Company may, from time to time,
propose to sell and issue. The Investors may purchase said New Securities on the
same terms and at the same price at which the Company proposes to sell the New
Securities. The "Pro Rata Share" of each Investor, for purposes of this right of
first refusal, is the ratio of (i) the total number of shares of Common Stock
held by such Investor (including any shares of Common Stock into which shares of
the Convertible Securities held by such Investor are convertible) to (ii) the
total number of shares of Common Stock outstanding immediately prior to the
issuance of the New Securities (including any shares of Common Stock issuable
upon exercise or conversion of all outstanding options, warrants or rights to
acquire or debt or equity securities convertible into Common Stock, including
all outstanding Convertible Securities).
4.2 Notice. In the event the Company proposes to undertake an issuance of
New Securities, it shall give to each Investor written notice (the "Notice") of
its intention, describing the type of New Securities, the price, the terms upon
which the Company proposes to issue the same, the number of shares which such
Investor is entitled to purchase pursuant to Section 4.1, and a statement that
each Investor shall have 20 days to respond to such Notice. Each Investor shall
have 20 days from the date of receipt of the Notice to agree to purchase any or
all of its Pro Rata Share of the New Securities for the price and upon the terms
specified in the Notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased and forwarding payment
for such New Securities to the Company if immediate payment is required by such
terms.
5
<PAGE>
4.3 Sale of New Securities. In the event an Investor fails to exercise in
full its right of first refusal within such 20 day period, the Company shall
have 90 days thereafter to sell or enter into an agreement (pursuant to which
the sale of New Securities covered thereby shall be closed, if at all, within 60
days after the date of such agreement) to sell the New Securities respecting
which such Investor's rights were not exercised, at a price and upon general
terms no more favorable to the purchaser thereof than specified in the Notice.
In the event the Company has not sold the New Securities within such 90 day
period (or sold and issued New Securities in accordance with the foregoing
within 60 days from the date of such agreement), the Company shall not
thereafter issue or sell any New Securities without first offering such
securities to such Investor in the manner provided above.
(a) Termination of Right of First Refusal. The right of first refusal
granted under this Section 4 shall expire upon the date on which such Investor
no longer holds any Series A Preferred Stock.
5. Demand Registration.
5.1 Request for Registration on Form S-3. If a Holder or Holders of at
least 50% of the outstanding Registrable Securities request that the Company
file a Registration Statement on Form S-3 (or any successor form to Form S-3)
for a public offering of shares of Registrable Securities and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities for
such an offering, the Company shall use all reasonable efforts to cause such
Registrable Securities to be Registered for the offering on such form and to
cause such Registrable Securities to be qualified in such jurisdictions as the
Holder or Holders may reasonably request; provided, however, that the Company
shall not be required to effect more than two Registrations pursuant to this
Section 5.1. If requested by the Initiating Holders, the Company shall file a
Shelf Registration Statement for one of the Registrations effected pursuant to
this Section 5.1 and shall use its reasonable best efforts to keep such
Registration Statement effective for a period of 12 months.
5.2 Right of Deferral. Notwithstanding the foregoing, the Company shall not
be obligated to file a registration statement pursuant to this Section 5:
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(a) in any particular jurisdiction in which the Company would be required
to execute a general consent to service of process in effecting such
Registration, qualification, or compliance, unless the Company is already
subject to service in such jurisdiction and except as may be required by the
Securities Act;
(b) if the Company, within ten days of the receipt of the request of the
Initiating Holders, gives notice of its bona fide intention to effect the filing
of a Registration Statement with the Commission within 90 days of receipt of
such request (other than with respect to a registration statement relating to a
Rule 145 transaction or an offering solely to employees), provided that the
Company is actively employing in good faith all reasonable efforts to cause such
Registration Statement to become effective;
(c) within three months immediately following the effective date of any
Registration Statement pertaining to the securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan); or
(d) if the Company shall furnish to such Holders a certificate signed by
the President of the Company stating that in the good faith judgment of the
Board of Directors it would be seriously detrimental to the Company or its
shareholders for a Registration Statement to be filed at such time, then the
Company's obligation to use its best efforts to file a Registration Statement
shall be deferred for a period not to exceed 90 days from the receipt of the
request to file such registration by Initiating Holders provided that the
Company shall not exercise the right contained in this paragraph (d) more than
once in any 12 month period.
5.3 Registration of Other Securities in Demand Registration. Any
Registration Statement filed pursuant to the request of the Initiating Holders
under this Section 5 may, subject to the provisions of Section 5.4, include
securities of the Company other than Registrable Securities.
5.4 Underwriting in Demand Registration.
(a) Notice of Underwriting. If the Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 5. The right of any Holder to Registration pursuant to Section 5
shall be conditioned upon such Holder's agreement to participate in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting.
(b) Inclusion of Other Holders in Demand Registration. If the Company,
officers or directors of the Company holding Common Stock other than Registrable
Securities, or holders of securities other than Registrable Securities, request
inclusion in such Registration, the Initiating Holders, to the extent they deem
advisable and consistent with the goals of such Registration, may, in their sole
discretion, on behalf of all Holders, offer to any or all of the Company, such
officers or directors, and such holders of securities other than Registrable
Securities that such securities other than Registrable Securities be included in
the underwriting and may condition such offer on the acceptance by such persons
of the terms of this Section 5.
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(c) Selection of Underwriter in Demand Registration. The Company shall
(together with all Holders proposing to distribute their securities through such
underwriting) enter into an underwriting agreement with the representative
("Underwriter's Representative") of the underwriter or underwriters selected for
such underwriting by the Holders of a majority of the Registrable Securities
being registered by the Initiating Holders and agreed to by the Company.
(d) Marketing Limitation in Demand Registration. In the event the
Underwriter's Representative advises the Initiating Holders in writing that
market factors (including, without limitation, the aggregate number of shares of
Common Stock requested to be Registered, the general condition of the market,
and the status of the persons proposing to sell securities pursuant to the
Registration) require a limitation of the number of shares to be underwritten,
then (i) first, the securities other than Registrable Securities, and (ii)
second, the securities requested to be registered by the Company, shall be
excluded from such Registration to the extent required by such limitation. If a
limitation of the number of shares is still required, the Initiating Holders
shall so advise all Holders and the number of shares of Registrable Securities
that may be included in the Registration and underwriting shall be allocated
among all Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities entitled to inclusion in such Registration
held by such Holders at the time of filing the Registration Statement. No
Registrable Securities or other securities excluded from the underwriting by
reason of this Section 5.4(d) shall be included in such Registration Statement.
(e) Right of Withdrawal in Demand Registration. If any Holder of
Registrable Securities, or a holder of other securities entitled (upon request)
to be included in such Registration, disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the Underwriter's Representative and the Initiating Holders
delivered at least seven days prior to the effective date of the Registration
Statement. The securities so withdrawn shall also be withdrawn from the
Registration Statement.
5.5 Blue Sky in Demand Registration. In the event of any Registration
pursuant to Section 5, the Company will exercise its best efforts to Register
and qualify the securities covered by the Registration Statement under such
other securities or Blue Sky laws of such jurisdictions as shall be reasonably
appropriate for the distribution of such securities; provided, however, that (i)
the Company shall not be required to do business or to file a general consent to
service of process in any such states or jurisdictions, and (ii) notwithstanding
anything in this Agreement to the contrary, in the event any jurisdiction in
which the securities shall be qualified imposes a non-waivable requirement that
expenses incurred in the connection with the qualification of the securities be
borne by selling shareholders, such expenses shall be payable pro rata by
selling shareholders.
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6. Piggyback Registration.
6.1 Notice of Piggyback Registration and Inclusion of Registrable
Securities. Subject to the terms of this Agreement, if the Company decides to
Register any of its Common Stock (either for its own account or the account of a
security holder or holders exercising their respective demand registration
rights) on a form that would be suitable for a registration involving solely
Registrable Securities, the Company will: (i) within 15 days prior to the filing
of any registration statement give each Holder written notice thereof and
(ii) include in such Registration (and any related qualification under Blue Sky
laws or other compliance), and in any underwriting involved therein, all the
Registrable Securities specified in a written request delivered to the Company
by any Holder within 20 days after delivery of such written notice from the
Company.
6.2 Underwriting in Piggyback Registration.
(a) Notice of Underwriting in Piggyback Registration. If the Registration
of which the Company gives notice is for a Registered public offering involving
an underwriting, the Company shall so advise the Holders as a part of the
written notice given pursuant to Section 6.1. In such event, the right of any
Holder to Registration shall be conditioned upon such underwriting and the
inclusion of such Holder's Registrable Securities in such underwriting to the
extent provided in this Section 6. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company and the
other holders distributing their securities through such underwriting) enter
into an underwriting agreement with the Underwriter's Representative for such
offering. The Holders shall have no right to participate in the selection of the
underwriters for an offering pursuant to this Section 6.
(b) Marketing Limitation in Piggyback Registration. In the event the
Underwriter's Representative advises the Holders seeking registration of
Registrable Securities pursuant to this Section 6 in writing that market factors
(including, without limitation, the aggregate number of shares of Common Stock
requested to be Registered, the general condition of the market, and the status
of the persons proposing to sell securities pursuant to the Registration)
require a limitation of the number of shares to be underwritten, the
Underwriter's Representative (subject to the allocation priority set forth in
Section 6.2(c)) may limit the number of shares of Registrable Securities to be
included in such Registration and underwriting.
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(c) Allocation of Shares in Piggyback Registration. In the event that the
Underwriter's Representative limits the number of shares to be included in a
Registration pursuant to Section 6.2(b), the number of shares to be included in
such Registration shall be allocated in the following manner: the number of
shares that may be included in the Registration and underwriting shall be
allocated first to the Company; second, to the Holders and Sam Rubinstein and
his successors and assigns on a pro rata basis based on the total number of
Registrable Securities held by a Holder or, in the case of Sam Rubinstein and
his successors and assigns, the total number of shares of common stock that such
person has a right to require the Company to register under the Securities Act
pursuant to Section 6.2 of the Rubinstein Debenture Agreement; and third, to any
shareholder of the Company other than a Holder or Sam Rubinstein (or his
successors and assigns) on a pro rata basis. No Registrable Securities or other
securities excluded from the underwriting by reason of this Section 6.2(c) shall
be included in the Registration Statement.
(d) Withdrawal in Piggyback Registration. If any Holder disapproves of the
terms of any such underwriting, such person may elect to withdraw therefrom by
written notice to the Company and the Underwriter's Representative delivered at
least seven days prior to the effective date of the Registration Statement. Any
Registrable Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such Registration.
7. Expenses of Registration. All Registration Expenses incurred in
connection with two Registrations pursuant to Section 5.1 and unlimited
Registrations pursuant to Section 6, shall be borne by the Company. All
Registration Expenses incurred in connection with any other Registration,
qualification, or compliance, shall be apportioned among the Holders and other
holders of the securities so registered on the basis of the number of shares so
registered. Notwithstanding the above, the Company shall not be required to pay
for any expenses of any Registration proceeding begun pursuant to Section 5 if
the Registration request is subsequently withdrawn at the request of the Holders
of a majority of the Registrable Securities to be registered (which Holders
shall bear such expenses), unless the Holders of a majority of the Registrable
Securities agree to forfeit their right to one demand Form S-3 Registration
pursuant to Section 5; provided further, however, that if at the time of such
withdrawal, the Holders have learned of a Material Adverse Event with respect to
the condition, business, or prospects of the Company not known to the Holders at
the time of their request, then the Holders shall not be required to pay any of
such expenses and shall retain their rights pursuant to Section 5. All Selling
Expenses shall be borne by the holders of the securities Registered pro rata on
the basis of the number of shares Registered.
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8. Termination of Registration Rights. The rights to cause the Company to
register securities granted under Sections 5 and 6 of this Agreement shall
terminate, with respect to each Holder, as soon as such Holder is eligible to
sell all of such Holder's Registrable Securities under Rule 144 of the
Securities Act within any three month period without volume limitations, or
under Rule 144(k) thereunder.
9. Registration Procedures and Obligations. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the Commission a Registration Statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such Registration Statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such Registration Statement effective for up to 120 days, or in the case of the
Shelf Registration Statement, 12 months.
(b) Prepare and file with the Commission such amendments and supplements to
such Registration Statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, and provided further
that in the event any jurisdiction in which the securities shall be qualified
imposes a non-waivable requirement that expenses incurred in connection with the
qualification of the securities be borne by selling shareholders, such expenses
shall be payable pro rata by selling shareholders.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
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(f) Promptly notify each Holder of Registrable Securities covered by such
Registration Statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act (i) of the happening of any
event as a result of which the prospectus included in such Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing, (ii) of any request by the SEC or any state securities authority
for amendments and supplements to a Registration Statement and prospectus or for
additional information after the Registration Statement has become effective and
(iii) of the issuance by the SEC or any state securities authority of any stop
order suspending the effectiveness of a Registration Statement or the initiation
of any proceedings for that purpose. In the case of a Shelf Registration
Statement, the Company agrees that, upon the happening of any event described in
subsections (i), (ii) and (iii) of this Section 9(f), the Company shall use its
best efforts to file and have declared effective (if an amendment) as soon as
practicable an amendment or supplement to the Shelf Registration Statement and
shall extend the period during which such Shelf Registration Statement shall be
maintained effective by the number of days in the period from and including the
date of the giving of notice of such event to and including the date when the
Company gives notice that the amendment or supplement has been filed and
declared effective (if an amendment).
(g) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant to such Registration Statement and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
(h) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Agreement, on the date that such
Registrable Securities are delivered for sale in connection with a registration
pursuant to this Agreement, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, and (ii) a letter dated such date, from the independent certified
public accountants of the Company, in form and substance as is customarily given
by independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters.
10. Information Furnished by Holder. It shall be a condition precedent of
the Company's obligations under this Agreement that each Holder of Registrable
Securities included in any Registration furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder or Holders as
the Company may reasonably request.
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11. Indemnification.
11.1 Company's Indemnification of Holders. To the extent permitted by law,
the Company will indemnify each Holder, each of its officers, directors,
constituent partners, legal counsel for the Holders, and each person controlling
such Holder, with respect to which Registration, qualification, or compliance of
Registrable Securities has been effected pursuant to this Agreement, and each
underwriter, if any, and each person who controls any underwriter against all
claims, losses, damages, liabilities, or actions in respect thereof
(collectively, "Damages") to the extent such Damages arise out of or are based
upon any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus or other document (including any related
Registration Statement or amendment or supplement thereto) incident to any such
Registration, qualification, or compliance, or are based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of the Securities Act, the Exchange Act, any state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange Act or
any state securities law applicable to the Company in connection with any such
Registration, qualification, or compliance; and the Company will reimburse each
such Holder, each such underwriter, and each person who controls any such Holder
or underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action; provided, however, that the indemnity contained in this
Section 11.1 shall not apply to amounts paid in settlement of any such Damages
if settlement is effected without the consent of the Company (which consent
shall not unreasonably be withheld); and provided, further, that the Company
will not be liable in any such case to the extent that any such Damages arise
out of or are based upon any untrue statement or omission based upon written
information furnished to the Company by such Holder, underwriter, or controlling
person and stated to be for use in connection with the offering of securities of
the Company.
11.2 Holder's Indemnification of Company. To the extent permitted by law,
each Holder will, if Registrable Securities held by such Holder are included in
the securities as to which such Registration, qualification or, compliance is
being effected pursuant to this Agreement, indemnify the Company, each of its
directors and officers, each legal counsel and independent accountant of the
Company, each underwriter, if any, of the Company's securities covered by such a
Registration Statement, each person who controls the Company or such underwriter
within the meaning of the Securities Act, and each other such Holder, each of
its officers, directors, and constituent partners, and each person controlling
such other Holder, against all Damages arising out of or based upon any untrue
statement (or alleged untrue statement) of a material fact contained in any such
Registration Statement or amendment or supplement thereto, prospectus, offering
circular, or other document, or any omission (or alleged omission) to state
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<PAGE>
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by such Holder of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law applicable to such Holder in connection with any such
Registration, qualification, or compliance, and will reimburse the Company, such
Holders, such directors, officers, partners, persons, law and accounting firms,
underwriters or control persons for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such Registration Statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder and stated to be
specifically for use in connection with the offering of securities of the
Company, provided, however, that the indemnity contained in this Section 11.2
shall not apply to amounts paid in settlement of any such Damages if settlement
is effected without the consent of such Holder (which consent shall not be
unreasonably withheld) and provided, further, that each Holder's liability under
this Section 11.2 shall not exceed such Holder's gross proceeds from the
offering of securities made in connection with such Registration.
11.3 Indemnification Procedure. Promptly after receipt by an indemnified
party under this Section 11 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party under this Section 11, notify the indemnifying party in
writing of the commencement thereof and generally summarize such action. The
indemnifying party shall have the right to participate in and to assume the
defense of such claim; provided, however, that the indemnifying party shall be
entitled to select counsel for the defense of such claim with the approval of
any parties entitled to indemnification, which approval shall not be
unreasonably withheld; provided further, however, that if either party
reasonably determines that there may be a conflict between the position of the
Company and the Investors in conducting the defense of such action, suit, or
proceeding by reason of recognized claims for indemnity under this Section 11,
then counsel for such party shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interest of such party and the fees and expenses of counsel for such party shall
be paid by the Company. The failure to notify an indemnifying party promptly of
the commencement of any such action, if prejudicial to the ability of the
indemnifying party to defend such action, shall relieve such indemnifying party,
to the extent so prejudiced, of any liability to the indemnified party under
this Section 11, but the omission so to notify the indemnifying party will not
relieve such party of any liability that such party may have to any indemnified
party otherwise other than under this Section 11.
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11.4 Contribution. If the indemnification provided for in this Section 11
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any Damages referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party hereunder, shall
contribute to the amount paid or payable by such indemnified party as a result
of such Damages in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and of the indemnified party on
the other in connection with the statements or omissions that resulted in such
Damages as well as any other relevant equitable considerations. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission; provided, however, that in no
event shall any contribution by a Holder exceed the gross proceeds from the
offering of securities made in connection with such Registration received by
such Holder.
11.5 Conflicts. Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
11.6 Survival of Obligations. The obligations of the Company and Holders
under this Section 11 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Agreement or
otherwise.
12. Transfer of Rights. The rights to information under Section 2, the
right of first refusal under Section 4 and the right to cause the Company to
Register securities granted by the Company to the Investors under this Agreement
may be assigned by any Holder to a transferee or assignee of any Convertible
Securities or Registrable Securities which is a subsidiary, parent, general
partner, limited partner, retired partner, member or retired member of a Holder;
provided, however, that (i) the Company must receive written notice prior to the
time of said transfer, stating the name and address of said transferee or
assignee and identifying the securities with respect to which such rights are
being assigned, and (ii) the transferee or assignee of such rights must not be a
person deemed by the Board of Directors of the Company, in its reasonable
judgment, to be a competitor or potential competitor of the Company.
15
<PAGE>
13. Market Stand-off. Each Holder hereby agrees that, if so requested by
the Company and the Underwriter's Representative (if any) in connection with any
Registration effected by the Company, such Holder shall not sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise transfer or
dispose of any Registrable Securities or other securities of the Company without
the prior written consent of the Underwriter's Representative for such period of
time (not to exceed 180 days) following the effective date of a Registration
Statement of the Company filed under the Securities Act as may be requested by
the Underwriter's Representative.
14. No-Action Letter or Opinion of Counsel in Lieu of Registration;
Conversion of Preferred Stock. Notwithstanding anything else in this Agreement,
if the Company shall have obtained from the Commission a "no-action" letter in
which the Commission has indicated that it will take no action if, without
Registration under the Securities Act, any Holder disposes of Registrable
Securities covered by a request for Registration made under Section 5.1 in the
specific manner in which such Holder proposes to dispose of the Registrable
Securities included in such request, and that such Registrable Securities may be
sold to the public without Registration, or if in the opinion of counsel for the
Company concurred in by counsel for such Holder, which concurrence shall not be
unreasonably withheld, no Registration under the Securities Act is required in
connection with such disposition and that such Registrable Securities may be
sold to the public without Registration, the Registrable Securities included in
such request pursuant to Section 5.1 shall not be eligible for Registration
under this Agreement; provided, however, that any Registrable Securities not so
disposed of shall be eligible for Registration in accordance with the terms of
this Agreement with respect to other proposed dispositions to which this
Section 14 does not apply. The Registration rights of the Holders of the
Registrable Securities set forth in this Agreement are conditioned upon the
conversion of the Registrable Securities with respect to which registration is
sought into Common Stock prior to the effective date of the Registration
Statement.
15. Reports Under the Exchange Act. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Securities Act and any
other rule or regulation of the Commission that may at any time permit a Holder
to sell securities of the Company to the public without Registration or pursuant
to a registration on Form S-3, the Company agrees to:
(a) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(b) furnish to any Holder, so long as the Holder owns any Registrable
Securities, promptly upon request (i) a written statement by the Company that it
has complied with the reporting requirements of Rule 144, the Securities Act and
the Exchange Act, or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the Commission which permits
the selling of any such securities without Registration or pursuant to such
form.
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16. Miscellaneous.
16.1 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington excluding those laws that
direct the application of the laws of another jurisdiction.
16.2 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
16.3 Headings. The headings of the Sections of this Agreement are for
convenience and shall not by themselves determine the interpretation of this
Agreement.
16.4 Notices. Any notice required or permitted hereunder shall be given in
writing and shall be conclusively deemed effectively given upon personal
delivery or delivery by courier, or on the first business day after transmission
if sent by confirmed facsimile transmission or electronic mail transmission, or
five days after deposit in the United States mail, by registered or certified
mail, postage prepaid, addressed (i) if to the Company, as set forth below the
Company's name on the signature page of this Agreement, and (ii) if to an
Investor, at such Investor's address as set forth on the signature page to this
Agreement, or at such other address as the Company or such Investor may
designate by 10 days' advance written notice to the other parties hereto.
16.5 Amendment or Waiver. This Agreement may be amended or modified, and
the obligations of the Company under the Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only upon the written consent of the Company and holders of more
than a majority of the Registrable Securities. Any amendment, modification or
waiver pursuant to, and in accordance with, this Section 16.5 shall be binding
on the Company, all holders of Registrable Securities at the time outstanding
and each future holder of any such securities. Notwithstanding the foregoing,
this Agreement may be amended by the Company with no further action on the part
of any other party hereto to include as Investors hereunder any persons or
entities who purchase Convertible Securities in a "Subsequent Closing" pursuant
to the Purchase Agreement, which amendment will be effective when the purchaser
evidences his, her or its agreement to be bound by the terms of this Agreement
by executing a counterpart signature page of this Agreement as an Investor, and
thereby shall be deemed "Holders" for all purposes under this Agreement. The
foregoing notwithstanding, this Agreement and any term thereof may be amended,
waived, discharged or terminated by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
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16.6 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
16.7 Entire Agreement; Successors and Assigns. This Agreement constitutes
the entire contract among the Company and the Investors relative to the subject
matter hereof. Any previous agreement between the Company and any Investor
concerning Registration rights is superseded by this Agreement. Subject to the
exceptions specifically set forth in this Agreement and the limitations on
transfer set forth in Section 12, the terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective executors,
administrators, heirs, successor, and permitted assigns of the parties.
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IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights
Agreement as of the day and year first above written.
Company: PHOTOWORKS, INC., a Washington corporation
By: /s/ Gary Christopherson
Gary Christophersen, President and CEO
Address: 1260 16th Avenue West
Seattle, Washington 98119
Fax No. (206) 284-5357
Investors: MADRONA VENTURE FUND I-A, L.P.
By Madrona Investment Partners, LLC,
its General Partner
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98104
{SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}
<PAGE>
MADRONA VENTURE FUND I-B, L.P.
By Madrona Investment Partners, LLC,
its General Partner
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98104
MADRONA MANAGING DIRECTOR FUND, LLC
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98104
{SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}
<PAGE>
THE TAHOMA FUND, L.L.C.
By: /s/ Ross Chapin
Name: Ross Chapin
Title: Managing Member
Address: P.O. Box 21749
Seattle, WA 98111
ORCA BAY CAPITAL CORPORATION
By: /s/ Stanley McCammon
Name: Stanley McCammon
Title: President
Address: P.O. Box 21749
Seattle, WA 98111
TIM and ALEXA CARVER
By: /s/ Tim Carver
Name: Tim Carver
By: /s/ Alexa Carver
Name: Alexa Carver
Address: P.O. Box 21749
Seattle, WA 98111
{SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}
<PAGE>
STANLEY McCAMMON
By: /s/ Stanley McCammon
Name: Stanley McCammon
Address: P.O. Box 21749
Seattle, WA 98111
AARON SINGLETON
By: /s/ Aaron Singleton
Name: Aaron Singleton
Address: P.O. Box 21749
Seattle, WA 98111
{SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}
<PAGE>
EXHIBIT A
SCHEDULE OF INVESTORS
The Tahoma Fund, L.L.C.
Orca Bay Capital Corporation
Tim and Alexa Carver
Stanley McCammon
Aaron Singleton
Madrona Venture Fund I-A, L.P.
Madrona Venture Fund I-B, L.P.
Madrona Managing Director Fund, LLC
Investor Contact:
Lillian Armstrong/David Barnard
[email protected]/[email protected]
Lippert/Heilshorn & Associates
Investor Relations/San Francisco
(415) 433-3777
Keith Lippert 212/838-3777
PhotoWorks, Inc. Closes $15 Million Preferred Stock Financing
PhotoWorks Online Archive Now Hosts 80 Million Customer Photos
Company Closes $15 Million Capital Infusion from Orca Bay Partners and its
Affiliates and Madrona Venture Group
SEATTLE - February 14, 2000 - Enhancing its leadership position in the online
Internet based image management space, PhotoWorks, Inc. (Nasdaq NM: FOTO) today
announced the closing of its $15 million preferred stock and warrant financing
previously announced on February 1, 2000.
Orca Bay Partners and its affiliates, a private equity investment firm
affiliated with John McCaw (a co-founder of McCaw Cellular) led the $15 million
round of financing, with Madrona Venture Group. The investment, which closed
today, is intended to allow PhotoWorks to leverage its leading technology, photo
processing capabilities and customer base to capitalize on the expected
explosive growth in the digital image management and Internet photo processing
market. The Company intends to use the proceeds to expand the Company's
marketing presence, enhance its branding campaign, leverage its Internet
position through additional strategic alliances and add senior management
resources.
Ross Chapin from Orca Bay Partners and Paul Goodrich from Madrona Venture Group
are expected to join the Board of Directors, increasing the number of Board
members from five to seven.
"Ross Chapin and Paul Goodrich will add new dimensions to our Board," stated
Gary Christophersen, President and CEO of PhotoWorks. "Their experience with a
variety of technology and Internet companies will help us mold our emerging web
centric business. Their investment is very timely-- we have just confirmed the
market's expectations for rapid growth in the demand for online photo services
at the recent Photo Marketing Association annual meeting. Our customers seem to
be noticing as well, our PhotoWorks archive now hosts over 80 million customer
images."
About Orca Bay Partners
Orca Bay Partners is a private equity investment firm providing equity capital
for transactions ranging from recapitalizations of mature businesses to growth
capital for emerging companies. Founded in 1998, and based in Seattle, Orca Bay
Partners makes investments in companies that are uniquely positioned to benefit
from growing or changing markets.
<PAGE>
About Madrona Venture Group
Madrona Venture Group (http://www.madronagroup.com) is an early-stage investor
focused on the Internet Economy in the Northwest. The firm recently closed a
$250 million venture fund directed at emerging Internet, software and
telecommunication businesses. Some of Madrona's early-stage investments include
Amazon.com, Homegrocer.com, and Nordstrom.com.
About PhotoWorks
PhotoWorks, Inc. (formerly Seattle FilmWorks, Inc.) is a photofinishing and
online image management company and a leader in providing digital images over
the Internet. PhotoWorks online is an increasingly popular way for people to
share photos over the Internet. With more than 80 million images archived,
PhotoWorks online is the largest online consumer photo archive site on the Web.
The PhotoWorks online service includes free scanning of every photograph (with
normal film processing fees), Web posting to a private site and lifetime
archiving, as long as the consumer remains an active customer of PhotoWorks. The
online archive is expanding the way people can enjoy their photos by enabling
the growing popularity of photo e-mails and the ability to order photographic
reprints online without the need for negatives. To get started, customers can
request a free film processing starter kit at www.photoworks.com.
Based in Seattle, PhotoWorks (Nasdaq NM: FOTO) was founded in 1978.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:
Statements in this news release concerning, leadership in the provision of
digital images over the Internet, the market's expectations for rapid growth in
the digital image management and Internet photo processing market or the demand
for online photo services and the Company's ability to capitalize on that
growth, the growing popularity of online photos and photo e-mails and any other
statement which may be construed as a prediction of future capabilities,
performance or events are forward-looking statements, the occurrence of which
are subject to a number of known and unknown risks and uncertainties which might
cause actual performance to differ materially from those expressed or implied by
such statements. These risks and uncertainties include the possibility of delays
in the expansion of image storage capacity due to delays in deliveries from
suppliers or technical problems; system performance problems due to technical
difficulties, system malfunctions, Internet interruptions or other factors;
pricing and other activities by competitors; and other risks including those
described in the Company's Annual Report on Form 10-K and those described from
time to time in the Company's other filings with the Securities and Exchange
Commission, press releases and other communications.
All companies and product names are trademarks of their respective owners. For
more information, e-mail [email protected] or call 800.PHOTOWORKS
(800.746.8696). Copyright 2000 PhotoWorks, Inc.
Investor Contact:
Lillian Armstrong/David Barnard
[email protected]/[email protected]
Lippert/Heilshorn & Associates
Investor Relations/San Francisco
(415) 433-3777
Keith Lippert (212) 838-3777
PHOTOWORKS DETAILS ONLINE INTERNET STRATEGY AT ANNUAL SHAREHOLDER MEETING
New Investors Join Board of Directors
Sam Rubinstein Retires From the Board of Directors
SEATTLE February 16, 2000 - PhotoWorks, Inc. (Nasdaq: FOTO) announced today at
its annual shareholder meeting in Seattle, Washington, that it is establishing a
new paradigm within its industry by focusing its strategy on the digital imaging
opportunities provided by the Internet and the promotion of its online personal
image banks.
With what is believed to be the largest photo archive in the industry, combined
with its history of high-quality photo-finishing services and unique customer
acquisition techniques, PhotoWorks is positioned to enhance its leadership in
the online image management space.
80 Million Photos in Free Online Image Archive
PhotoWorks has already developed a market leadership position in personal image
banks. Since 1999, the Company has focused on changing customer behavior
patterns by encouraging customers to archive their images at PhotoWorks . As a
result, the Company has developed what is believed to be the most expansive
online archive of customer photos - over 80 million images. The Company has
roughly 750,000 online customers, and recent data indicates the average
PhotoWorks customer utilizing digital services processed approximately 50% more
rolls of film with the Company during 1999 than the average customer who only
ordered traditional services. PhotoWorks is uniquely positioned to continue to
build its online customer base due to its ability to serve both the analog and
digital customers.
An Integrated Solution: Serving Both Digital and Analog Camera Users
Differentiating it from many competitors, PhotoWorks offers both digital and
analog services, allowing it to address the entire photo market. The offering is
now "camera agnostic" serving digital or analog camera users with any brand of
film. While many analysts expect dramatic growth in the use of digital cameras,
today, traditional analog film captures a majority of the market. PhotoWorks
allows its customers using either digital or analog cameras to store, view and
share their images online, and PhotoWorks has the back-end processing
capability in-house to produce high-quality prints from either medium. As people
increasingly view their photos as objects that can be enhanced by online
applications, PhotoWorks will strive to continue to provide unmatched service
and product offerings.
Board of Directors
PhotoWorks also announced at the meeting that Mr. Sam Rubinstein has retired
from the Board of Directors effective immediately. As previously announced, Mr.
Ross Chapin from Orca Bay Partners and Mr. Paul Goodrich from Madrona
Investments have joined the Board of Directors as representatives of the holders
of the recently-issued Series A Preferred Stock. With Mr. Rubinstein's departure
and the arrival of two new Board members, the Board membership has increased to
six.
Mr. Rubinstein, age 82, has been a director of the Company since 1986 and has
been associated with the Company since 1981. Gary Christophersen, President and
CEO, thanked Mr. Rubinstein for his contribution to the success of the Company
and stated, "Mr. Rubinstein has been a valuable asset to the Company in many
ways, including his experience, leadership and financial acumen."
-- MORE --
<PAGE>
About Orca Bay Partners
Orca Bay Partners is a private equity investment firm providing equity capital
for transactions ranging from recapitalizations of mature businesses to growth
capital for emerging companies. Founded in 1998, and based in Seattle, Orca Bay
Partners makes investments in companies that are uniquely positioned to benefit
from growing or changing markets.
About Madrona Venture Group
Madrona Venture Group (http://www.madronagroup.com) is an early-stage investor
focused on the Internet Economy in the Northwest. The firm recently closed a
$250 million venture fund directed at emerging Internet, software and
telecommunication businesses. Some of Madrona's early-stage investments include
Amazon.com, Homegrocer.com, and Nordstrom.com.
About PhotoWorks
PhotoWorks, Inc. (formerly Seattle FilmWorks, Inc.) is a photofinishing and
online image management company and a leader in providing digital images over
the Internet. PhotoWorks online is an increasingly popular way for people to
share photos over the Internet. With more than 80 million images archived,
PhotoWorks online is the largest online consumer photo archive site on the Web.
The PhotoWorks online service includes free scanning of every photograph (with
normal film processing fees), Web posting to a private site and lifetime
archiving, as long as the consumer remains an active customer of PhotoWorks.
The online archive is expanding the way people can enjoy their photos by
enabling the growing popularity of photo e-mails and the ability to order
photographic reprints online without the need for negatives. To get started,
customers can request a free film processing starter kit at www.photoworks.com.
Based in Seattle, PhotoWorks (Nasdaq NM: FOTO) was founded in 1978.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:
Statements in this news release concerning leadership in the provision of
digital images over the Internet, the Company's current strategy focus, the
establishment of a new industry paradigm, the Company's position to enhance its
leadership in the online image management space or continue to build its online
customer base, future product and service offerings by the Company, expectations
for growth in the use of digital cameras, and any other statement which may be
construed as a prediction of future capabilities, performance or events are
forward-looking statements, the occurrence of which are subject to a number of
known and unknown risks and uncertainties which might cause actual performance
to differ materially from those expressed or implied by such statements. These
risks and uncertainties include the possibility of delays in the expansion of
image storage capacity due to delays in deliveries from suppliers or technical
problems; system performance problems due to technical difficulties, system
malfunctions, Internet interruptions or other factors; pricing and other
activities by competitors; and other risks including those described in the
Company's Annual Report on Form 10-K and those described from time to time in
the Company's other filings with the Securities and Exchange Commission, press
releases and other communications.
All companies and product names are trademarks of their respective owners. For
more information, e-mail [email protected] or call 800.PHOTOWORKS
(800.746.8696). Copyright 2000 PhotoWorks, Inc.
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