<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
---------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 0-28284
INFONAUTICS, INC.
(exact name of registrant as specified in its charter)
Pennsylvania 23-2707366
------------ ----------
(State or other jurisdiction (IRS Employer ID No.)
of incorporation of organization)
900 West Valley Road, Suite 1000, Wayne, Pa 19087
--------------------------------------------------
(Address of principal executive offices)
(610) 971-8840
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at March 31, 2000
----- -----------------------------
<S> <C>
Class A Common Stock, no par value 12,075,483
Class B Common Stock, no par value 100,000
</TABLE>
<PAGE>
INFONAUTICS, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31,
2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 2000 and
March 31, 1999 4
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 2000 and March 31, 1999 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II: OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
</TABLE>
2
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INFONAUTICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,563,368 $ 3,739,024
Receivables:
Trade, less allowance for doubtful accounts of $99,800 in 2000
and 1999 756,669 637,316
Due from affiliate -- 13,500,000
Other 193,972 513,231
Prepaid expenses and other assets 245,797 267,230
------------ ------------
Total current assets 15,759,806 18,656,801
Property and equipment, net 567,884 492,438
Investments in affiliates 8,386,613 10,885,773
Intangible and other assets 214,616 26,415
------------ ------------
Total assets $ 24,928,919 $ 30,061,427
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 919,404 $ 916,292
Due to affiliate 646,695 --
Accrued expenses 920,182 2,438,515
Accrued royalties -- 75,606
Deferred revenue 834,979 858,159
Convertible debt 3,043,046 2,857,322
------------ ------------
Total current liabilities 6,364,306 7,145,894
------------ ------------
Total liabilities 6,364,306 7,145,894
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Class A common stock, no par value; 25,000,000 shares authorized; one vote
per share; 12,075,483 and 11,757,076 shares issued and
outstanding at March 31, 2000 and December 31, 1999, respectively -- --
Class B common stock, no par value; 100,000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 59,258,546 58,316,564
Accumulated deficit (40,693,933) (35,401,031)
------------ ------------
Total shareholders' equity 18,564,613 22,915,533
------------ ------------
Total liabilities and shareholders' equity $ 24,928,919 $ 30,061,427
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 3,041,137 $ 5,231,028
------------ ------------
Costs and expenses:
Cost of revenues 803,627 1,709,119
Customer support expenses 19,727 272,031
Technical operations and development expenses 1,430,113 2,216,562
Sales and marketing expenses 2,883,446 2,804,552
General and administrative expenses 703,339 751,574
------------ ------------
Total costs and expenses 5,840,252 7,753,838
------------ ------------
Loss from operations (2,799,115) (2,522,810)
Equity in net losses of unconsolidated affiliate (2,499,160) --
Interest income (expense), net 5,373 (287,330)
------------ ------------
Net loss (5,292,902) (2,810,140)
Redemption of preferred stock in excess of carrying amount -- (74,875)
Net loss attributable to common shareholders $ (5,292,902) $ (2,885,015)
============ ============
Loss per common share- basic and diluted $ (.44) $ (.25)
============ ============
Weighted average shares
outstanding- basic and diluted 12,034,300 11,647,200
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,292,902) $ (2,810,140)
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Depreciation and amortization 133,747 349,306
Amortization of discount on debt 133,224 296,415
Accretion on convertible debt 52,500 --
Provision for losses on accounts receivable -- 21,800
Amortization of deferred compensation -- 31,250
Equity in investee losses 2,499,160 --
Changes in operating assets and liabilities:
Receivables:
Trade (119,353) 220,106
Other 319,259 (51,045)
Prepaid and other assets 12,676 170,369
Accounts payable 163,769 (244,342)
Due to affiliate 646,695 --
Accrued expenses (32,980) (300,313)
Accrued royalties (75,606) 310,081
Deferred revenue (23,180) (722,343)
------------ ------------
Net cash used in operating activities (1,582,991) (2,728,856)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (198,637) (62,254)
Receipts from disposition of businesses, net 11,853,990 --
Purchases of intangibles (70,000) --
------------ ------------
Net cash provided by (used in) investing activities 11,585,353 (62,254)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 821,982 84,999
Repurchase of preferred stock -- (333,358)
Proceeds from long term borrowings -- 3,000,000
Payments on capital lease obligations -- (84,999)
------------ ------------
Net cash provided by financing activities 821,982 2,666,642
------------ ------------
Net increase (decrease) in cash and cash equivalents 10,824,344 (124,468)
Cash and cash equivalents, beginning of period 3,739,024 3,267,811
Cash and cash equivalents, end of period $ 14,563,368 $ 3,143,343
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS AND PRESENTATION:
The unaudited consolidated financial statements of Infonautics, Inc. (including
its subsidiaries, "Infonautics," and the "Company) presented herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission for quarterly reports on Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these financial statements be read in conjunction with the
financial statements for the year ended December 31, 1999 and the notes thereto
included in the Company's 1999 Annual Report on Form 10-K.
The financial information in this report reflects, in the opinion of management,
all adjustments of a normal recurring nature necessary to present fairly the
results for the interim period. Quarterly operating results may not be
indicative of results which would be expected for the full year.
2. THE COMPANY AND OUR RECENT TRANSACTION:
Infonautics, Inc. is a provider of personalized information agents and
Internet sites. The Infonautics Network of web properties includes the free,
advertising supported Sleuth Center content notification sites featuring
Company Sleuth, Sports Sleuth, Job Sleuth, Entertainment Sleuth, Mobile
Sleuth and Shopping Sleuth. The Infonautics Network also includes search and
reference sites consisting of the subscriber based Electric Library and the
free Encyclopedia.com, eLibrary Tracker and Newsdirectory.com.
On December 15, 1999, Infonautics completed a transaction in which Infonautics
contributed its Electric Library K-12 and public library contracts, assets,
liabilities and related commitments into what is now bigchalk.com, Inc.
("bigchalk.com"), an Internet education company, in exchange for $16.5 million
in cash and a 30.89 percent interest in bigchalk.com. Infonautics collected the
$13.5 million note receivable from the transaction in January 2000.
Infonautics continues to develop and market its Sleuth Center sites. The Company
also retained the rights to market Electric Library to end-users (subject to an
option granted to bigchalk.com to purchase the end-user business).
3. INVESTMENT IN AFFILIATES:
During January 2000, the Company's equity interest in bigchalk.com was diluted
to from 30.89% to 30.28% of the outstanding common stock as a result of a
private financing closed by bigchalk.com. For the three months ended March 31,
2000, the Company expensed $2,499,000 as its equity in the unaudited losses of
bigchalk.com for the corresponding quarter.
The Company also incurred $696,241 of content royalties and $240,083 of
technical services fees to bigchalk.com during the three months ended March 31,
2000. These costs were the result of our content and technical services
agreements with bigchalk.com. At March 31, 2000, $646,695 is due to bigchalk.com
for these content royalties and technical services fees.
The unaudited statement of operations of bigchalk.com for the three months ended
March 31, 2000 is as follows, in millions:
<TABLE>
<CAPTION>
<S> <C>
Net revenues $ 8
Gross profit 3
Loss from
continuing operations (8)
Net loss (8)
</TABLE>
6
<PAGE>
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The Company collected a note receivable for $13,500,000 in January 2000 on the
transaction with bigchalk.com. Related expenses of $1,646,010, which had been in
accrued expenses as December 31, 1999, were paid in the quarter ended March 31,
2000.
Interest expense of $28,000 and $52,500 was accrued on the February 1999
convertible debt instrument during the three months ended March 31, 1999 and
2000, respectively. Approximately $197,000 was recognized during the three
months ended March 31, 1999 as amortization of the discount associated with the
beneficial conversion feature on the convertible debt.
Approximately $800,000 was recorded in February 1999 as an additional discount
on debt related to the valuation of warrants issued in connection with the
convertible debt. During the three months ended March 31, 1999 and 2000, $71,000
and $133,225 of this discount was amortized and recorded as interest expense,
respectively.
Cash paid for interest expense was $20,342 and $4,933, for 1999 and 2000
respectively.
In connection with the repurchase of 283 shares of Series A Convertible
Preferred Stock made under the July 1998 financing, the Company charged
additional paid-in capital in the first quarter of 1999 for approximately
$75,000, which represents the excess of the redemption price over the
accreted carrying value of the Series A Preferred Stock.
The Company issued common stock in February 2000, as part of a purchase of
intangibles, with a fair value of approximately $120,000.
Gross barter income and expenses of $151,500 and $55,000 are included in revenue
and marketing expenses for the quarters ended March 31, 2000 and 1999,
respectively.
5. Commitments and Contingencies:
Marketing Agreement:
The Company entered into a marketing agreement in March 1998, in which we agreed
to pay $4.0 million in placement fees to America Online for anchor placements of
our Electric Library site. In March 2000, the Company made the final required
payment of $500,000 due under this agreement. At March 31, 2000, accrued
expenses included $136,119 related to this agreement for additional fees
calculated in accordance with the contract. Included in prepaid expenses was
$169,743, representing one month of fixed placement fees paid in March 2000.
Letter of Credit:
The Company had an outstanding letter of credit which expired on March 31,
2000. This letter of credit, in the amount of $110,000, collateralized our
obligations to a third party under a leasing arrangement.
Leases:
In April 2000, the Company entered a lease agreement to occupy office space for
a term of three years. The lease terms provide for up to six free months of
rent, commencing in July 2000, followed by annual commitments of $286,500,
$301,500 and $316,500 for 2001, 2002 and 2003, respectively. The Company expects
to occupy the space in July 2000, and begin payments in January 2001.
7
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
This Report on Form 10-Q contains, in addition to historical information,
forward-looking statements by the Company with regard to its expectations as
to financial results and other aspects of its business that involve risks and
uncertainties and may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Words such as
"may," "should," "anticipate," "believe," "plan," "estimate," "expect" and
"intend," and other similar expressions are intended to identify
forward-looking statements. These include, for example, statements regarding
the sufficiency of the Company's liquidity, including cash resources and
capital, the number of registered users and subscribers, gross margins,
current and future expenses and costs, future revenues and shortfalls in
revenue, use of system resources and marketing effects, growth and expansion
plans, sales and marketing plans, changes in our marketing partners, capital
expenditures, seasonality, operating results, licensing and service contracts
with bigchalk.com, Inc., and the transaction with bigchalk.com, Inc, Such
statements are based on management's current expectations and are subject to
a number of uncertainties and risks that could cause actual results to differ
materially from those described in the forward-looking statements. Factors
that may cause such a difference include, but are not limited to, the risks
set forth in the Company's filing with the Securities and Exchange
Commission. All forward-looking statements included in this document are
based on information available to the Company as of the date of this
document, and the Company assumes no obligation to update these cautionary
statements or any forward-looking statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1999
PRO FORMA RESULTS OF OPERATIONS:
The pro forma results of operations reflected here are based on available
information and certain information and assumptions that the Company's
management believes are reasonable. As a result of the transaction with
bigchalk.com and Bell & Howell Company, the following pro forma information for
the three months ended March 31, 1999 has been prepared for comparative purposes
to the ongoing operations of the Company:
<TABLE>
<CAPTION>
<S> <C>
Revenues $1,996,000
Costs and Expenses 3,037,000
Loss from Operations (1,041,000)
</TABLE>
REVENUES. Total revenues were $3,041,000 for the three months ended March 31,
2000, and $5,231,000 for the three months ended March 31, 1999. Pro forma
revenues for the three months ended March 31, 1999 were $1,996,000.
End-user subscription revenue, a continuing market for us, accounted for
$2,401,000 or 79% of revenue for the three months ended March 31, 2000 and
$1,767,000 or 89% of pro forma revenue for the three months ended March 31,
1999. The increase in the total revenues is primarily a result of the increasing
number of subscribers, as we had approximately 100,000 Electric Library
subscribers at March 31, 2000 compared to approximately 75,000 at March 31,
1999.
Advertising and other e-commerce revenues, a continuing market for us, were
$634,000, or 21% of revenues for the three months ended March 31, 2000 and
$140,000, or 7% of pro forma revenues for the three months ended March 31, 1999.
Barter revenue accounted for $152,000 of this revenue in 2000 and $55,000 in
1999. These revenues consist of advertising revenues from advertising that are
displayed on the Infonautics Network sites. Since March 31, 1999, we have
introduced new sites which are available to sell advertising on, such as Sports
Sleuth, Job Sleuth, Shopping Sleuth and Entertainment Sleuth. E-commerce
revenues include referral revenues from partners who pay us for selling trial
offers for their products (typically magazine or newspaper subscriptions),
revenues from co-branding of our sites, and revenues from participation in
affiliate networks. Direct marketing fee revenues consist of e-mails that are
sent to our users with advertising promotions.
Reseller revenue was approximately $6,000 for the three months ended March 31,
2000, compared to approximately $89,000 for the three months ended March 31,
1999. All reseller contracts have expired and we are no longer pursuing the
reseller business.
Educational revenue accounted for $2,705,000 or 52% of revenue for the three
months ended March 31, 1999. There were no educational revenues in 2000, as all
educational contracts are now owned by bigchalk.com.
E-commerce online publishing revenue was $223,000 or 4% of revenue in the three
months ended March 31, 1999. There were no revenues from E-commerce online
publishing in 2000, as we sold this business to Bell & Howell
8
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Information and Learning Company as part of our bigchalk.com transaction.
Extranet and intranet knowledge management services (IntelliBank) revenue was
$115,000, or 2% of revenue in the three months ended March 31, 1999. There were
no IntelliBank revenues in 2000 as we have discontinued that business.
Other revenue was $192,000, for the three months ended March 31, 1999. Other
revenue consisted primarily of sales of Electric Library through international
partners, which was transferred to bigchalk.com.
At March 31, 2000 we had deferred revenue of approximately $835,000, compared to
$858,000 at December 31, 1999. The deferred revenue consists of revenue to be
recognized from annual end-user subscriptions. We would expect deferred revenue
to remain at this level unless the number of annual end-user subscriptions
increased significantly.
COST OF REVENUES. The principal elements of our cost of revenues during 2000 are
royalty and license fees on end-user revenues paid to bigchalk.com, which is
currently the sole provider of content, hardware and software, and communication
costs associated with the delivery of the Electric Library services. Cost of
revenues was $804,000 for the three months ended March 31, 2000 compared to
$1,709,000 for the three months ended March 31, 1999. Cost of revenues in the
first quarter of 2000 decreased due to the decrease in revenues as a result of
the sale of the educational and international contracts to bigchalk.com.
Additionally, the percentage of cost of revenues decreased as a result of change
in the product mix, as the advertising and e-commerce revenues make up a greater
portion of revenues in 2000, and there are no royalty or license fees on these
revenues.
CUSTOMER SUPPORT. Customer support expenses consist primarily of costs
associated with the staffing of professionals responsible for assisting users
with technical and product issues and monitoring customer feedback. Customer
support expenses were $20,000 for the three months ended March 31, 2000,
compared to $272,000 for the three months ended March 31, 1999, a 93% decrease.
As a percentage of revenue, customer support expenses for the first quarter were
less than 1% in 2000 and 5% in 1999. The decrease in 2000 resulted primarily
from lower staffing levels as a result of the bigchalk.com transaction. We
anticipate continuing to make increasing customer support expenditures,
including hiring customer support personnel, as we improve our customer service
for all products on the Infonautics Network.
TECHNICAL OPERATIONS AND DEVELOPMENT. Technical operations and development
expenses consist primarily of costs associated with maintaining our service,
data center operations, hardware expenses and data conversion costs as well as
the design, programming, testing, documentation and support of our new and
existing sites. To date, all of our costs for technical operations and
development have been expensed as incurred. Technical operations and development
expenses were $1,430,000 or 47% of total revenues for the three months ended
March 31, 2000, compared to $2,217,000 or 42% of total revenues for the three
months ended March 31, 1999. A significant portion of these development costs in
2000 have resulted from the technical services agreement with bigchalk.com,
requiring a percentage of Electric Library end-user revenues to be paid to
bigchalk.com for use of the Electric Library technical support and datacenter
operations. The absolute dollar decrease was largely due to the bigchalk.com
transaction, as many of our personnel and costs associated with those personnel
were included in the sale to bigchalk.com. However, we expect that the level of
technical operations and development expenses may increase quarter over quarter
as we develop new and enhanced sites and upgrades to the current sites which may
include the use of outside consultants and additional hiring.
SALES AND MARKETING. Sales and marketing costs consist primarily of costs
related to compensation, attendance at conferences and trade shows, marketing
programs, advertising and promotion. Sales and marketing expenses were
$2,883,000 for the three months ended March 31, 2000, compared to $2,805,000 for
the three months ended March 31, 1999, representing a 3% increase. The principal
reasons for the increase in absolute dollars was a Sport Sleuth marketing
campaign in March 2000, which cost approximately $1 million. This cost was
partially offset by a decrease in sales personnel costs as a result of the
bigchalk.com transaction. Additionally, during 1999, we were
9
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implementing cost reduction efforts in our marketing programs. As a percentage
of revenue, sales and marketing costs were 95% and 54% for the three months
ended March 31, 2000 and 1999, respectively. We currently have no plans for a
significant marketing program similar to the first quarter of 2000. The
marketing of the Electric Library end-user business has been and will continue
to be limited. We use affiliate and other marketing programs to acquire
registered users. We may accelerate these programs which could increase the cost
of acquisition. Additionally, we will no longer incur the trade show, conference
and other costs of marketing to the educational market as a result of our
bigchalk.com transaction.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of expenses for administration, office operations, finance and general
management activities, including legal, accounting and other professional fees.
General and administrative expenses were $703,000 for the three months ended
March 31, 2000, compared to $752,000 for the three months ended March 31, 1999.
We do not anticipate that general and administrative expenses will increase
significantly in the second quarter unless we consider or enter into any
strategic alliances or transactions, or hire additional management.
INCOME (LOSS) IN EQUITY INVESTMENT. The loss in equity investment consists of
our share of the results of operations of bigchalk.com. The loss of equity in
the investment was $2,499,000 during the first quarter of 2000. There were no
such costs during 1999. As of March 31, 2000, we held a 30.28% interest in the
common stock of bigchalk.com. We expect that bigchalk.com will continue to
generate net losses in 2000 as it develops its business and expands market
share.
INTEREST INCOME (EXPENSE), NET. We recorded net interest income of $5,000 in
the three months ended March 31, 2000, as compared to net interest expense of
$287,000 in the three months ended March 31, 1999. Approximately $196,000 of
interest income was earned in the current quarter. Offsetting this income was
$191,000 in interest expense primarily arising from interest accrued upon the
convertible debt issued on February 11, 1999, and the amortization of the
debt discount (which is due to the warrant valuation and beneficial
conversion feature of the convertible debt). Approximately $300,000 of
interest expense was incurred in the prior year quarter as a result of the
amortization of the debt discount and interest expense related to the
convertible debentures. Interest expense in the second quarter of 2000 is
expected to remain consistent as we will continue to incur interest expense
for the amortization of the debt discount and interest incurred on the
debenture, and interest income will decrease as our cash balances decrease.
INCOME TAXES. We have incurred net operating losses since inception and
accordingly, have not recorded an income tax benefit for these losses.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded our operations and capital requirements through proceeds
from the private sale of equity securities, our initial public offering,
proceeds from the transaction with Bell & Howell Company and bigchalk.com,
proceeds from the issuance of preferred stock, utilization of an accounts
receivable purchase agreement, and, to a lesser extent, operating leases.
We had cash, cash equivalents and investments of approximately $14,563,000 at
March 31, 2000, as compared to $3,739,000 at December 31, 1999, an increase of
$10,824,000. We collected a $13.5 million receivable note arising from the Bell
& Howell and bigchalk.com transaction in January. We monitor our cash and
investment balances regularly and invest excess funds in short-term money market
funds, corporate bonds and commercial paper.
We had working capital of approximately $9.4 million at March 31, 2000, which
includes $3 million of convertible debt which is due to be paid or converted in
August 2000.
We used cash in operations of approximately $1,583,000 for the three months
ended March 31, 2000 compared with $2,729,000 for the comparable period in
10
<PAGE>
1999. This decrease in cash used is primarily a result of the timing of payables
as well as a decrease in costs related to the sale of the educational and online
publishing businesses during the fourth quarter of 1999.
Net cash provided by investing activities was $11,585,000 for the three months
ended March 31, 2000, reflecting the collection of the note receivable from the
transaction with bigchalk.com net of related fees. This compares to cash
provided used in investing activities of $62,000 for the three months ended
March 31, 1999. Net cash used for capital expenditures was $199,000 and $62,000,
respectively, for the three months ended March 31, 2000 and 1999. Net cash used
for the purchase of intangibles related to Newsdirectory.com was $70,000 for the
three months ended March 31, 2000.
Our principal commitments at March 31, 2000 consisted of obligations under the
bigchalk.com service and license agreements. In addition, in April 2000, we
entered into a 42-month facility lease agreement (see Note 5 in Item 1).
Capital expenditures have been, and future expenditures are anticipated to be,
primarily for facilities and equipment to support the expansion of our
operations and systems. We expect that our capital expenditures will increase as
the number of sites on the Infonautics Network increases. As of March 31, 2000,
we had commitments for less than $100,000 in capital expenditures for equipment
to support the increased customer base. We anticipate that our planned purchases
of capital equipment, a move to new offices and the related expenses will
require additional expenditures of approximately $1,000,000 for the remainder of
2000, a portion of which we may finance through equipment leases, or a working
capital line of credit. We have obtained financing for some of this equipment
through an equipment lease, however, there can be no guarantee we will obtain
future lease financing.
Net cash provided by financing activities was $822,000 in the three months ended
March 31, 2000, compared to $2,667,000 in the three months ended March 31, 1999.
During 2000, we received funds through the exercise of stock options of former
employees who were hired by bigchalk.com and had until March 30, 2000 to
exercise options. In February 1999, we raised an additional $3 million through
the issuance of convertible debt.
We currently anticipate that the cash balances and cash from operations, will be
sufficient to meet our anticipated needs for at least the next twelve months. We
may need to raise additional funds in the future in order to fund more
aggressive marketing or growth, to develop new or enhanced services, to respond
to competitive pressures or to make acquisitions. Any required additional
financing may not be available on terms favorable to us, or at all, and may
result in dilution to our shareholders.
SEASONALITY
During the summer months, and possibly during other times of the year such as
major holidays, Internet usage often declines. As a result, our sites may
experience reduced user traffic. For example, our experience with Electric
Library shows that new user registrations and usage of the site declines during
the summer months and around the year-end holidays. Our experience with Company
Sleuth shows that new user registrations and usage of the site declines at about
the same times. Not all of our sites may experience the same seasonal effects
and some, Shopping Sleuth, for example, might experience increased usage during
the gift-buying season around the year-end holidays. Seasonality may also affect
advertising and affiliate performance which could in turn affect our sites'
performance.
11
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PART II. OTHER INFORMATION
Item 5. Other Information
On January 10, 2000, we entered into a Stockholders Agreement with
bigchalk.com, Inc. and Bell & Howell Information and Learning Company, as well
as with the investors in a private placement of bigchalk.com preferred stock and
common stock. The Stockholders Agreement specifies the rights and obligations of
the bigchalk.com founders, Infonautics and Bell & Howell Information and
Learning Company, as well as the private placement investors. Under the
agreement, we have, among other rights, limited registration rights for our
bigchalk.com stock. We, along with the other investors, are also subject to
certain lock-up provisions as specified in the Stockholders Agreement.
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits:
3.1 - Form of Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File
No. 333-2428) as amended in part by the Exhibit 3.1 attached to this
Form 10-Q)
10.20 - Stockholders Agreement dated January 10, 2000 between the
Company, bigchalk.com, Inc., Bell & Howell Information and Learning
Company, TBG Information Investors LLC, Core Learning Group LLC, Core
Learning Group - BC, LLC, APA Excelsior V, L.P.., Patricof Private
Investment Club II, L.P., Frank A. Bonsal, Jr., WS Investment Company
99B, Alan K. Austin, The San Domenico Trust, Timothy J. Sparks, and
Daniel K. Yuen
27.0 - Financial Data Schedule
(b) Reports on Form 8-K:
None.
12
<PAGE>
SIGNATURES
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 thereunto duly authorized.
INFONAUTICS, INC.
Date: May 15, 2000 /s/ David Van Riper Morris
----------------------------
David Van Riper Morris
Chief Executive Officer
Date: May 15, 2000 /s/ Federica F. O'Brien
----------------------------
Federica F. O'Brien
Principal Financial
and Accounting Officer
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<PAGE>
Exhibit 3.1
EXHIBIT A TO STATEMENT WITH RESPECT TO SHARES FOR
SERIES A CONVERTIBLE PREFERRED STOCK
OF
INFONAUTICS, INC.
RESOLVED, that pursuant to the authority granted to and vested in the
board of directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Articles of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock (the "Preferred Stock"), and hereby states the designation and
number of shares, and fixes the relative rights, preferences, privileges, powers
and restrictions thereof as follows:
Series A Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 5,000 shares of
Preferred Stock, is Series A Convertible Preferred Stock (the "Series A
Preferred Stock") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "Stated Value").
<PAGE>
II. RANK
The Series A Preferred Stock shall rank (i) prior to the Corporation's
Class A common stock, no par value (the "Common Stock") and Class B common
stock, no par value; (ii) prior to any class or series of capital stock of the
Corporation hereafter created (unless, with the consent of the holders of Series
A Preferred Stock obtained in accordance with Article IX hereof, such class or
series of capital stock specifically, by its terms, ranks senior to or PARI
PASSU with the Series A Preferred Stock) (collectively, with the Common Stock,
"Junior Securities"); (iii) PARI PASSU with any class or series of capital stock
of the Corporation hereafter created (with the consent of the holders of Series
A Preferred Stock obtained in accordance with Article IX hereof) specifically
ranking, by its terms, on parity with the Series A Preferred Stock ("PARI PASSU
Securities"); and (iv) junior to any class or series of capital stock of the
Corporation hereafter created (with the consent of the holders of Series A
Preferred Stock obtained in accordance with Article IX hereof) specifically
ranking, by its terms, senior to the Series A Preferred Stock ("Senior
Securities"), in each case as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
III. DIVIDENDS
The Series A Preferred Stock shall not bear any dividends. In no event,
so long as any Series A Preferred Stock shall remain outstanding, shall any
dividend whatsoever be declared or paid upon, nor shall any distribution be made
upon, any Junior Securities, nor shall any shares of Junior Securities be
purchased or redeemed by the Corporation nor shall any moneys be paid to or made
available for a sinking fund for the purchase or redemption of any Junior
Securities (other than a distribution of Junior Securities), without, in each
such case, the written consent of the holders of a majority of the outstanding
shares of Series A Preferred Stock, voting together as a class.
IV. LIQUIDATION PREFERENCE
A. LIQUIDATION EVENT. If the Corporation shall commence a voluntary
case under the Federal bankruptcy laws or any other applicable Federal or State
bankruptcy, insolvency or similar law, or consent to the entry of an order for
relief in an involuntary case under any law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the Corporation or of any substantial part of its property, or make
an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the Federal bankruptcy
laws or any other applicable Federal or state bankruptcy, insolvency or similar
law resulting in the appointment of a receiver, liquidator, assignee,
2
<PAGE>
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or ordering the winding up or
liquidation of its affairs, and any such decree or order shall be unstayed and
in effect for a period of thirty (30) consecutive days and, on account of any
such event, the Corporation shall liquidate, dissolve or wind up, or if the
Corporation shall otherwise liquidate, dissolve or wind up (each such event
being considered a "Liquidation Event"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other than Senior
Securities) upon liquidation, dissolution or winding up unless prior thereto,
the holders of shares of Series A Preferred Stock, subject to Article VI, shall
have received the Liquidation Preference (as defined in Article IV.C) with
respect to each share. If upon the occurrence of a Liquidation Event, the assets
and funds available for distribution among the holders of the Series A Preferred
Stock and holders of PARI PASSU Securities (including any dividends or
distribution paid on any PARI PASSU Securities after the date of filing of this
Statement With Respect To Shares for the Series A Preferred Stock (the
"Statement") shall be insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series A Preferred Stock
and the PARI PASSU Securities shall be distributed ratably among such shares in
proportion to the ratio that the Liquidation Preference payable on each such
share bears to the aggregate liquidation preference payable on all such shares.
Any prior dividends or distribution made after the date of filing of this
Statement shall offset, dollar for dollar, the amount payable to the class or
series to which such distribution was made.
B. CERTAIN ACTS DEEMED LIQUIDATION EVENT. At the option of any holder
of Series A Preferred Stock, the sale, conveyance or disposition of all or
substantially all of the assets of the Corporation, the effectuation by the
Corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the Corporation is disposed of, or the
consolidation, acquisition, merger or other business combination of the
Corporation with or into any other Person (as defined below) or Persons when the
Corporation is not the survivor shall either: (i) be deemed to be a liquidation,
dissolution or winding up of the Corporation pursuant to which the Corporation
shall be required to distribute upon consummation of and as a condition to such
transaction an amount equal to 120% of the Liquidation Preference with respect
to each outstanding share of Series A Preferred Stock in accordance with and
subject to the terms of this Article IV or (ii) be treated pursuant to Article
VI.C(b) hereof, PROVIDED, HOWEVER, that no such distribution pursuant to clause
(i) above will be available and such event will be required to be treated
pursuant to clause (ii) above, where (A) the Corporation undertakes such an
event and plans to account for such event as a "pooling of interests" in
accordance with generally accepted accounting principles; and (B) the value of
the distribution that would have been received pursuant to clause (i) above
would be less than the value of the Common Stock that would be received upon
conversion of the Series A Preferred Stock in accordance with Article VI below
(treating the Trading Day (as defined in Article VI.B) immediately preceding the
date of such distribution as the "Conversion Date" (as defined in Article
VI.B(a)). "Person" shall mean any individual, corporation, limited liability
company, partnership, association, trust or other entity or organization.
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<PAGE>
C. LIQUIDATION PREFERENCE. For purposes hereof, the "Liquidation
Preference" with respect to a share of the Series A Preferred Stock shall mean
an amount equal to the sum of (i) the Stated Value thereof plus (ii) an amount
equal to five percent (5%) per annum of such Stated Value for the period
beginning on the date of issuance of the Series A Preferred Stock (the "Issue
Date") and ending on the date of final distribution to the holder thereof
(prorated for any portion of such period). The liquidation preference with
respect to any PARI PASSU Securities shall be as set forth in this Statement
filed in respect thereof.
V. REDEMPTION
A. MANDATORY REDEMPTION. If any of the following events (each, a
"Mandatory Redemption Event") shall occur:
(i) The Corporation fails to issue shares of Common Stock to
the holders of Series A Preferred Stock upon exercise by the holders of their
conversion rights in accordance with the terms of this Statement (for a period
of at least sixty (60) days if such failure is solely as a result of the
circumstances governed by the second paragraph of Article VI.F below and the
Corporation is using all commercially reasonable efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable), fails to
transfer or to cause its transfer agent to transfer (electronically or in
certificated form) any certificate for shares of Common Stock issued to the
holders upon conversion of the Series A Preferred Stock as and when required by
this Statement or the Registration Rights Agreement, dated as of July 22, 1998,
by and among the Corporation and the other signatories thereto (the
"Registration Rights Agreement"), fails to remove any restrictive legend (or to
withdraw any stop transfer instructions in respect thereof) on any certificate
or any shares of Common Stock issued to the holders of Series A Preferred Stock
upon conversion of the Series A Preferred Stock as and when required by this
Statement, the Securities Purchase Agreement dated as of July 22, 1998, by and
between the Corporation and the other signatories thereto (the "Purchase
Agreement") or the Registration Rights Agreement, or fails to fulfill its
obligations pursuant to Sections 4(c), 4(h), 4(i), 4(j) or 5 of the Purchase
Agreement (or makes any announcement, statement or threat that it does not
intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement, statement or threat not to
honor its obligations shall not be rescinded in writing) for ten (10) business
days after the earlier of (i) the receipt by the Corporation of notice of such
breach from a holder or (ii) the Corporation's actual knowledge of such breach,
irrespective of the receipt of any notice thereof.
(ii) The Corporation fails to obtain effectiveness with the
Securities and Exchange Commission (the "SEC") of the Registration Statement (as
defined in the Registration Rights Agreement) prior to January 22, 1999 or such
Registration Statement lapses in effect (or sales otherwise cannot be made
thereunder, whether by reason of the Company's failure to amend or supplement
the prospectus included therein in accordance with the Registration Rights
Agreement or otherwise) for more than thirty (30) consecutive days or
4
<PAGE>
sixty (60) days in any twelve (12) month period after such Registration
Statement becomes effective;
(iii) The Corporation shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for it or for all or substantially all of its property or business; or
such a receiver or trustee shall otherwise be appointed;
(iv) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation or
any subsidiary of the Corporation and such proceedings remain outstanding for a
period of sixty (60) days;
(v) The Corporation shall fail to maintain the listing of the
Common Stock on the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap
Market ("Nasdaq SmallCap"), the New York Stock Exchange ("NYSE") or the American
Stock Exchange ("AMEX") and such failure shall remain uncured for at least ten
(10) days,
then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs (i), (ii) or (v) at the option of
the holders of at least 50% of the then outstanding shares of Series A Preferred
Stock by written notice (the "Mandatory Redemption Notice") to the Corporation
of such Mandatory Redemption Event, or upon the occurrence of any Mandatory
Redemption Event specified in subparagraphs (iii) or (iv), the Corporation shall
purchase each holder's shares of Series A Preferred Stock for an amount per
share equal to the greater of (1) 120% multiplied by the sum of (a) the Stated
Value of the shares to be redeemed plus (b) an amount equal to five percent (5%)
per annum of such Stated Value for the period beginning on the Issue Date and
ending on the date of payment of the Mandatory Redemption Amount (the "Mandatory
Redemption Date"), and (2) the "parity value" of the shares to be redeemed,
where parity value means the product of (a) the number of shares of Common Stock
issuable upon conversion of such shares in accordance with Article VI below
(without giving any effect to any limitations or conversions of shares set forth
in Article VI.A(b) below, and treating the Trading Day (as defined in Article
VI.B.) immediately preceding the Mandatory Redemption Date as the "Conversion
Date" (as defined in Article VI.B(a)) unless the Mandatory Redemption Event
arises as a result of a breach in respect of a specific Conversion Date in which
case such Conversion Date shall be the Conversion Date), multiplied by (b) the
Closing Price (as defined in Article VI.A(b)) for the Common Stock on such
"Conversion Date" (the greater of such amounts being referred to as the
"Mandatory Redemption Amount").
In the case of a Mandatory Redemption Event, if the Corporation fails
to pay the Mandatory Redemption Amount for each share within five (5) business
days of written notice that such amount is due and payable, then (assuming there
are sufficient authorized shares) in addition to all other available remedies,
each holder of Series A Preferred Stock shall have the right at any time, so
long as the Mandatory Redemption Event continues, to require the
5
<PAGE>
Corporation, upon written notice, to immediately issue (in accordance with and
subject to the terms of Article VI below), in lieu of the Mandatory Redemption
Amount, with respect to each outstanding share of Series A Preferred Stock held
by such holder, the number of shares of Common Stock of the Corporation equal to
the Mandatory Redemption Amount divided by the Conversion Price then in effect.
B. 19.99% REDEMPTION. If the Series A Preferred Stock ceases to be
convertible as a result of the limitations described in Article VI.A(c) below (a
"19.99% Redemption Event"), and the Corporation has not prior to, or within
thirty (30) days of, the date that such 19.99% Redemption Event arises, (i)
obtained approval of the issuance of the additional shares of Common Stock by
the requisite vote of the holders of the then-outstanding Common Stock and Class
B Common Stock (not including any shares of Common Stock held by present or
former holders of Series A Preferred Stock that were issued upon conversion of
Series A Preferred Stock) or (ii) received other permission pursuant to Nasdaq
Marketplace Rule 4460(i) allowing the Corporation to resume issuances of shares
of Common Stock upon conversion of Series A Preferred Stock, then the
Corporation shall be obligated to redeem immediately all of the then outstanding
Series A Preferred Stock, in accordance with this Article V.B. An irrevocable
Redemption Notice shall be delivered promptly to the holders of Series A
Preferred Stock at their registered address appearing on the records of the
Corporation and shall state (1) that 19.99% of the Outstanding Common Amount (as
defined in Article VI.A) has been issued upon exercise of the Series A Preferred
Stock, (2) that the Corporation is obligated to redeem all of the outstanding
Series A Preferred Stock and (3) the Mandatory Redemption Date, which shall be a
date within five (5) business days of the date of the Redemption Notice. On the
Mandatory Redemption Date, the Corporation shall make payment of the Mandatory
Redemption Amount (as defined in Article V.A. above) in cash. If the Corporation
fails to redeem in accordance with this Article V.B., then, in addition to all
other remedies available to the holders of the Series A Preferred Stock, upon
request of a majority-in-interest of the Series A Preferred Stock, the
Corporation shall terminate the listing of its Common Stock on Nasdaq
Marketplace (and any other exchange or quotation system with a rule
substantially similar to Rule 4460(i)) and cause its Common Stock to be eligible
for trading on the over-the-counter electronic bulletin board.
C. REDEMPTION IN LIEU OF CONVERSION. Notwithstanding anything to the
contrary contained in this Article V, so long as (i) on the Conversion Date (as
defined herein), the Closing Price (as defined herein) is below $2.80, (ii) no
Mandatory Redemption Event shall have occurred and be continuing and (iii) the
Registration Statement is then in effect and has been in effect and sales can be
made thereunder for at least twenty (20) days prior to the Optional Redemption
Date (as defined below), then the Corporation shall have the right, in lieu of
converting the shares of Series A Preferred Stock submitted for conversion, to
redeem such shares of Series A Preferred Stock in accordance with this Article
V. On the date fixed for redemption (the "Redemption Date"), the Corporation
shall make payment of the Redemption Amount (as defined below) to or upon the
order of the holders as specified by the holders in writing to the Corporation
at least one (1) business day prior to the Redemption Date. If the Corporation
exercises its right to redeem the shares of Series A Preferred Stock, the
6
<PAGE>
Corporation shall make payment to the holders of an amount in cash (the
"Redemption Amount") equal to the number of shares of Common Stock that would
have been issued upon conversion multiplied by the Closing Price of the Common
Stock on the Conversion Date. The Corporation will provide to the holders of
Series A Preferred Stock advance notice on a monthly basis as to whether the
Corporation will issue shares of Common Stock upon conversion of shares of
Series A Preferred Stock or redeem such shares in the event the Corporation
elects to redeem the shares of Series A Preferred Stock pursuant to this Article
V.C during the applicable one month period. The Corporation will be bound by
such election for a period of thirty (30) days, at which time its election may
be modified or extended for an additional period of thirty (30) days. Any notice
hereunder shall be delivered to the holders of Series A Preferred Stock at their
registered addresses appearing on the books and records of the Corporation. A
failure to properly provide notice or to properly modify or extend any prior
notice shall be deemed to be an election not to redeem in lieu of conversion
during the applicable thirty (30) day period.
VI. CONVERSION AT THE OPTION OF THE HOLDER
A. OPTIONAL CONVERSION.
(a) CONVERSION AMOUNT. Subject to the conversion schedule set
forth in Article VI.A(b) below, each holder of shares of Series A Preferred
Stock may, at its option at any time and from time to time, upon surrender of
the certificates therefor, convert any or all of its shares of Series A
Preferred Stock into Common Stock as follows (an "Optional Conversion"). Each
share of Series A Preferred Stock shall be convertible into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing (1)
the sum of (a) the Stated Value thereof plus (b) the Premium Amount (as defined
below), by (2) the then effective Conversion Price (as defined below); PROVIDED,
HOWEVER, that, unless the holder delivers a waiver in accordance with the
immediately following sentence, in no event (other than pursuant to the
Automatic Conversion (as defined herein)) shall a holder of shares of Series A
Preferred Stock be entitled to convert any such shares in excess of that number
of shares upon conversion of which the sum of (x) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the shares of Series A Preferred Stock) and (y) the
number of shares of Common Stock issuable upon the conversion of the shares of
Series A Preferred Stock with respect to which the determination of this proviso
is being made, would result in beneficial ownership by a holder and such
holder's affiliates of more than 4.9% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (x) of such proviso. The "Premium Amount" means the
product of the Stated Value, multiplied by .05, multiplied by (N/365), where "N"
equals the number of days elapsed from the Issue Date to and including the
conversion Date (as defined in Article VI.B, below).
7
<PAGE>
(b) CONVERSION RESTRICTIONS. Each holder of shares of Series A
Preferred Stock may convert only up to that percentage of all of such holder's
shares specified below during the time period set forth opposite such
percentage.
<TABLE>
<CAPTION>
Percentage Time Period
---------- -----------
<S> <C>
0% Issue Date through January 22, 1999
25% January 23, 1999 through February 22, 1999
50% February 23, 1999 through March 22, 1999
75% March 23, 1999 through April 22, 1999
100% On or after April 23, 1999
</TABLE>
; PROVIDED, HOWEVER, that the restrictions on conversion set forth above shall
not apply to, and shall be exclusive of, conversions taking place on any
Conversion Date (i) if on the Conversion Date the Closing Price (as defined
below) of the Common Stock is greater than or equal to (x) 120% of the then
applicable Market Price (as defined herein) or (y) the Fixed Conversion Price
(as defined herein) or (ii) on or after the date the Corporation makes a public
announcement that it intends to merge or consolidate with any other corporation
or sell or transfer substantially all of the assets of the Corporation or (iii)
on or after the date any person, group or entity (including the Corporation)
publicly announces a tender offer to purchase 50% or more of the Corporation's
Common Stock or otherwise publicly announces an intention to replace a majority
of the Corporation's Board of Directors by waging a proxy battle or otherwise or
(iv) on or after there is a material adverse change in the business, operation,
assets, financial condition or prospects of the Corporation or its subsidiaries,
taken as a whole. "Closing Price," as of any date, means the last sale price of
the Common Stock on the Nasdaq as reported by Bloomberg Financial Markets or an
equivalent reliable reporting service mutually acceptable to and hereafter
designated by the holders of a majority in interest of the shares of Series A
Preferred Stock and the Corporation ("Bloomberg") or, if Nasdaq is not the
principal trading market for such security, the last sale price of such security
on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
last sale price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
last sale price of such security or in the over-the-counter market on the
electronic bulletin board for such security in any of the foregoing manners the
average of the bid prices of any market makers for such or security as reported
in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Price
cannot be calculated for such security on such date in the manner provided
above, the Closing Price shall be the fair market value as mutually determined
by the Corporation and the holders of a majority in interest of shares of Series
A Preferred Stock being converted for which the calculation of the Closing Price
is required in order to determine the Conversion Price of such Series A
Preferred Stock.
(c) 19.99% LIMITATION. So long as the Common Stock is listed
for trading on Nasdaq or an exchange or quotation system with a rule
substantially similar to Rule 4460(i) then, notwithstanding anything to the
contrary contained herein if, at any time, the
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<PAGE>
aggregate number of shares of Common Stock then issued upon conversion of the
Series A Preferred Stock (including any shares of capital stock or rights to
acquire shares of capital stock issued by the Corporation which are aggregated
or integrated with the Common Stock issued or issuable upon conversion of the
Series A Preferred Stock for purposes of such rule) and upon exercise of the
Warrants issued pursuant to the terms of the Purchase Agreement equals 19.99% of
the Outstanding Common Amount (as hereinafter defined), the Series A Preferred
Stock shall, from that time forward, cease to be convertible into Common Stock
in accordance with the terms of this Article VI and Article VII below, unless
the Corporation (i) has obtained approval of the issuance of the Common Stock
upon conversion of the Series A Preferred Stock by a majority of the total votes
cast on such proposal, in person or by proxy, by the holders of the then
outstanding Common Stock and Class B Common Stock (not including any shares of
Common Stock held by present or former holders of Series A Preferred Stock that
were issued upon conversion of Series A Preferred Stock), or (ii) shall have
otherwise obtained permission to allow such issuances from Nasdaq in accordance
with Rule 4460(i). If the Corporation's Common Stock is not then listed on
Nasdaq or an exchange or quotation system that has a rule substantially similar
to Rule 4460(i) limitations set forth herein shall be inapplicable and of no
force and effect. For purposes of this paragraph, "Outstanding Common Amount"
means (i) the number of shares of the Common Stock outstanding on the Initial
Closing Date (as defined in the Purchase Agreement) plus (ii) any additional
shares of Common Stock issued thereafter in respect of such shares pursuant to a
stock dividend, stock split or similar event. The maximum number of shares of
Common Stock issuable as a result of the 19.99% limitation set forth herein is
hereinafter referred to as the "Maximum Share Amount." With respect to each
holder of Series A Preferred Stock, the Maximum Share Amount shall refer to such
holder's PRO RATA share thereof determined in accordance with Article X below.
In the event that Corporation obtains Shareholder Approval or the approval of
Nasdaq, by reason of the inapplicability of the rules of Nasdaq or otherwise and
concludes that it is able to increase the number of shares to be issued above
the Maximum Share Amount (such increased number being the "New Maximum Share
Amount"), the references to Maximum Share Amount, above, shall be deemed to be,
instead, references to the greater New Maximum Share Amount. In the event that
Shareholder Approval is not obtained, there are insufficient reserved or
authorized shares or a registration statement covering the additional shares of
Common Stock which constitute the New Maximum Share Amount is not effective
prior to the Maximum Share Amount being issued (if such registration statement
is necessary to allow for the public resale of such securities), the Maximum
Share Amount shall remain unchanged; PROVIDED, HOWEVER, that the Holder may
grant an extension to obtain a sufficient reserved or authorized amount of
shares or of the effective date of such registration statement. In the event
that (a) the aggregate number of shares of Common Stock issued pursuant to the
outstanding Series A Preferred Stock represents at least twenty percent (20%) of
the Maximum Share Amount and (b) the sum of (x) the aggregate number of shares
of Common Stock issued upon conversion of Series A Preferred Stock PLUS (y) the
aggregate number of shares of Common Stock that remain issuable upon conversion
of Series A Preferred Stock, represents at least one hundred percent (100%) of
the Maximum Share Amount (the "Triggering Event"), the Corporation will use its
best efforts to seek and obtain Shareholder Approval (or obtain such other
relief as will allow conversions hereunder in excess of the Maximum Share
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<PAGE>
Amount) as soon as practicable following the Triggering Event and before the
Mandatory Redemption Date.
B. CONVERSION PRICE. The "Conversion Price" shall be the lesser of the
Applicable Percentage (as defined below) of the Market Price (as defined herein)
and the Fixed Conversion Price (as defined herein), subject to adjustments
pursuant to the provisions of Article VI.C below. "Applicable Percentage" shall
mean 100%; PROVIDED, HOWEVER, that for any conversions effected in reliance on
the exclusions set forth in the proviso to Article VI.A(b) above, the Applicable
Percentage shall mean 105%. "Market Price" shall mean the average of the Closing
Bid Prices for any five (5) consecutive Trading Days, as designated by the
holder, during the applicable Pricing Period (as defined below). The "Pricing
Period" means(i) the twenty (20) Trading Day period ending one (1) Trading Day
prior to the date (the "Conversion Date") the Conversion Notice is sent by a
holder to the Corporation via facsimile in respect of any Conversion Date
occurring on or before 240 days following the Issue Date and (ii) the thirty
(30) Trading Day period ending one (1) Trading Day prior to the Conversion Date
in respect of any Conversion Date occurring after 240 days following the Issue
Date. "Fixed Conversion Price" shall mean 150% of the average of the Closing Bid
Prices over the ten (10) Trading Days beginning on July 16, 1998 or, in the case
of any Subsequent Closing (as defined in the Purchase Agreement), 130% of the
average of the Closing Bid Prices over the five (5) Trading Days immediately
preceding the Subsequent Closing. "Closing Bid Price" means, for any security as
of any date, the closing bid price on Nasdaq as reported by Bloomberg or, if
Nasdaq is not the principal trading market for such security, the closing bid
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg, or if the
foregoing do not apply, the closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security or in
any of the foregoing manners, the average of the bid prices of any market makers
for such security or as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on
such date in the manner provided above, the Closing Bid Price shall be the fair
market value as mutually determined by the Corporation and the holders of a
majority in interest of shares of Series A Preferred Stock being converted for
which the calculation of the Closing Bid Price is required in order to determine
the Conversion Price of such Series A Preferred Stock. "Trading Day" shall mean
any day on which the Common Stock is traded for any period on Nasdaq, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded.
C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be
subject to adjustment from time to time as follows:
(a) ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK
DIVIDEND, ETC. If at any time when Series A Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, combination, reclassification,
rights offering below the Trading Price (as
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defined below) to all holders of Common Stock or other similar event, which
event shall have taken place during the reference period for determination of
the Conversion Price for any Optional Conversion or Automatic Conversion of the
Series A Preferred Stock, then the Conversion Price shall be calculated giving
appropriate retroactive effect to the stock split, stock dividend, combination,
reclassification or other similar event. In such event, the Corporation shall
notify the Transfer Agent of such change on or before the effective date
thereof.
(b) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any
time when Series A Preferred Stock is issued and outstanding and prior to the
conversion of all Series A Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Corporation
shall be changed into the same or a different number of shares of another class
or classes of stock or securities of the Corporation or another entity, or in
case of any sale or conveyance of all or substantially all of the assets of the
Corporation other than in connection with a plan of complete liquidation of the
Corporation, then the holders of Series A Preferred Stock shall thereafter have
the right to receive upon conversion of the Series A Preferred Stock, upon the
bases and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the holders of Series A Preferred Stock would
have been entitled to receive in such transaction had the Series A Preferred
Stock been converted in full (without regard to any limitations on conversion
contained herein) immediately prior to such transaction, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the holders of Series A Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares of Common Stock issuable upon conversion of
the Series A Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities or assets thereafter deliverable
upon the conversion of Series A Preferred Stock. The Corporation shall not
effect any transaction described in this subsection (b) unless (a) it first
gives, to the extent practical, thirty (30) days' prior written notice (but in
any event at least fifteen (15) business days prior written notice) of such
merger, consolidation, exchange of shares, recapitalization, reorganization or
other similar event or sale of assets (during which time the holders of Series A
Preferred Stock shall be entitled to convert the Series A Preferred Stock) and
(b) the resulting successor or acquiring entity (if not the Corporation) assumes
by written instrument the obligations of this subsection (b). The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers or share exchanges.
(c) ADJUSTMENT DUE TO DISTRIBUTION. Subject to Article III, if
the Corporation shall declare or make any distribution of its assets (or rights
to acquire its assets) to holders of Common Stock as a dividend, stock
repurchase, by way of return of capital or otherwise (including any dividend or
distribution to the Corporation's shareholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a
"Distribution"), then the holders of Series A Preferred Stock shall be entitled,
upon any conversion of shares of Series A Preferred Stock after the date of
record for determining
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shareholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to the holder with respect to the shares of Common
Stock issuable upon such conversion had such holder been the holder of such
shares of Common Stock on the record date for the determination of shareholders
entitled to such Distribution.
(d) PURCHASE RIGHTS. Subject to Article III, if at any time
when any Series A Preferred Stock is issued and outstanding, the Corporation
issues any convertible securities or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the holders of Series A Preferred
Stock will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Common Stock acquirable upon
complete conversion of the Series A Preferred Stock (without regard to any
limitations on conversion contained herein) immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights, or,
if no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(e) ADJUSTMENT FOR RESTRICTED PERIODS. In the event that (1)
the Corporation fails to obtain effectiveness with the Securities and Exchange
Commission of the Registration Statement (as defined in the Registration Rights
Agreement) in a timely manner, as set forth in the Registration Rights
Agreement, or (2) such Registration Statement lapses in effect through no fault
of the holders of Series A Preferred Stock, or sales otherwise cannot be made
thereunder, whether by reason of the Corporation's failure or inability to amend
or supplement the prospectus (the "Prospectus") included therein in accordance
with the Registration Rights Agreement or otherwise, after such Registration
Statement becomes effective (including, without limitation, during an Allowed
Delay (as defined in Section 3(f) of the Registration Rights Agreement), then
the Pricing Period shall be comprised of, (i) in the case of an event described
in clause (1), the thirty (30) Trading Days preceding the required effectiveness
date under the Registration Rights Agreement, plus all Trading Days through and
including the third Trading Day following the date of effectiveness of the
Registration Statement; and (ii) in the case of an event described in clause
(2), the number of Trading Days preceding the date on which the holder of the
Series A Preferred Stock is first notified that sales may not be made under the
Prospectus that would otherwise then be included in the Pricing Period in
accordance with the definition thereof set forth in Article VI.B(a), plus all
Trading Days through and including the third Trading Day following the date on
which the Holder is first notified that such sales may again be made under the
Prospectus. If a holder of Series A Preferred Stock determines that sales may
not be made pursuant to the Prospectus (whether by reason of the Corporation's
failure or inability to amend or supplement the Prospectus) it shall so notify
the Corporation in writing and, unless the Corporation provides such holder with
a written opinion of the Corporation's counsel to the contrary, such
determination shall be binding for purposes of this paragraph.
(f) NOTICE OF ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article
VI.C, the Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to
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each holder of Series A Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, furnish to such
holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of a share of Series A Preferred
Stock.
D. TRADING PRICE. For purposes of Article VI.C(a) above, "Trading
Price," which shall be measured as of the record date in respect of the rights
offering means (i) the average of the last reported sale prices for the shares
of Common Stock on Nasdaq as reported by Bloomberg, as applicable, for the five
(5) Trading Days immediately preceding such date, or (ii) if Nasdaq is not the
principal trading market for the shares of Common Stock, the average of the last
reported sale prices on the principal trading market for the Common Stock during
the same period as reported by Bloomberg, or (iii) if market value cannot be
calculated as of such date on any of the foregoing bases, the Trading Price
shall be the fair market value as reasonably determined in good faith by (a) the
Board of Directors of the Corporation or, (b) at the option of a
majority-in-interest of the holders of the outstanding Series A Preferred Stock
by an independent investment bank of nationally recognized standing in the
valuation of businesses similar to the business of the Corporation.
E. MECHANICS OF CONVERSION. In order to convert Series A Preferred
Stock into full shares of Common Stock, a holder of Series A Preferred Stock
shall: (i) submit a copy of the fully executed notice of conversion in the form
attached hereto as Exhibit A ("Notice of Conversion") to the Corporation by
facsimile dispatched on the Conversion Date (or by other means resulting in
notice to the Corporation on the Conversion Date) at the office of the
Corporation or its designated Transfer Agent for the Series A Preferred Stock
that the holder elects to convert the same, which notice shall specify the
number of shares of Series A Preferred Stock to be converted, the applicable
Conversion Price and a calculation of the number of shares of Common Stock
issuable upon such conversion (together with a copy of the first page of each
certificate to be converted) prior to 9:00 p.m., New York City time (the
"Conversion Notice Deadline"), on the date of conversion specified on the Notice
of Conversion; and (ii) surrender the original certificates representing the
Series A Preferred Stock being converted (the "Preferred Stock Certificates"),
duly endorsed, along with a copy of the Notice of Conversion to the office of
the Corporation or the Transfer Agent for the Series A Preferred Stock as soon
as practicable thereafter. The Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion, unless either the Preferred Stock Certificates are delivered to the
Company or its Transfer Agent as provided above, or the holder notifies the
Corporation or its Transfer Agent that such certificates have been lost, stolen
or destroyed (subject to the requirements of subparagraph (a) below). In the
case of a dispute as to the calculation of the Conversion Price, the Corporation
shall promptly issue such number of shares of Common Stock that are not disputed
in accordance with subparagraph (b) below. The Corporation shall submit the
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disputed calculations to its outside accountant via facsimile within two (2)
business days of receipt of the Notice of Conversion. The accountant shall
review the calculations and notify the Corporation and the holder of the results
no later than 48 hours from the time it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive absent manifest error.
(a) LOST OR STOLEN CERTIFICATES. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series A Preferred Stock,
and of indemnity reasonably satisfactory to the Corporation, and upon surrender
and cancellation of the Preferred Stock Certificate(s), if mutilated, the
Corporation shall execute and deliver new Preferred Stock Certificate(s) of like
tenor and date.
(b) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the
surrender of certificates as described above together with a Notice of
Conversion, the Corporation shall issue and, within two (2) business days after
such surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of agreement and indemnification pursuant to subparagraph (a) above)
(the "Delivery Period"), deliver (or cause its Transfer Agent to so issue and
deliver) to or upon the order of the holder (i) that number of shares of Common
Stock for the portion of the shares of Series A Preferred Stock converted as
shall be determined in accordance herewith and (ii) a certificate representing
the balance of the shares of Series A Preferred Stock not converted, if any. In
addition to any other remedies available to the holder, including actual damages
and/or equitable relief, the Corporation shall pay to a holder $1,500 per day in
cash for each day beyond a two (2) day grace period following the Delivery
Period that the Corporation fails to deliver Common Stock (a "Conversion
Default") issuable upon surrender of shares of Series A Preferred Stock with a
Notice of Conversion until such time as the Corporation has delivered all such
Common Stock (the "Conversion Default Payments"). Such cash amount shall be paid
to such holder by the fifth day of the month following the month in which it has
accrued or, at the option of the holder (by written notice to the Corporation by
the first day of the month following the month in which it has accrued), shall
be convertible into Common Stock in accordance with the terms of this Article
VI.
In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Corporation's Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the holder and its compliance with
the provisions contained in Article VI.A. and in this Article VI.E., the
Corporation shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and
penalties described in the immediately preceding paragraph shall apply to the
electronic transmittals described herein.
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(c) NO FRACTIONAL SHARES. If any conversion of Series A
Preferred Stock would result in a fractional share of Common Stock or the right
to acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon Conversion of
the Series A Preferred Stock shall be the next higher number of shares or the
Company at its option may pay cash in lieu of such fractional shares.
(d) CONVERSION DATE. The "Conversion Date" shall be the date
specified in the Notice of Conversion, provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in notice) to the
Corporation or its Transfer Agent before 9:00 p.m., New York City time, on the
Conversion Date. The person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such securities as of the Conversion Date and all rights
with respect to the shares of Series A Preferred Stock surrendered shall
forthwith terminate except the right to receive the shares of Common Stock or
other securities or property issuable on such conversion and except that the
holders preferential rights as a holder of Series A Preferred Stock shall
survive to the extent the corporation fails to deliver such securities.
F. RESERVATION OF SHARES. A number of shares of the authorized but
unissued Common Stock sufficient to provide for the conversion of the Series A
Preferred Stock outstanding at the then current Conversion Price shall at all
times be reserved by the Corporation, free from preemptive rights, for such
conversion or exercise. As of the date of issuance of the Series A Preferred
Stock, 2,580,646 authorized and unissued shares of Common Stock have been duly
reserved for issuance upon conversion of the Series A Preferred Stock (the
"Reserved Amount"). The Reserved Amount shall be increased from time to time in
accordance with the Company's obligations pursuant to Section 4(h) of the
Purchase Agreement. In addition, if the Corporation shall issue any securities
or make any change in its capital structure which would change the number of
shares of Common Stock into which each share of the Series A Preferred Stock
shall be convertible at the then current Conversion Price, the Corporation shall
at the same time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Series A Preferred Stock.
If at any time a holder of shares of Series A Preferred Stock submits a
Notice of Conversion, and the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article VI (a "Conversion Default"), the
Corporation shall issue to the holder (or holders, if more than one holder
submits a Notice of Conversion in respect of the same Conversion Date, pro rata
based on the ratio that the number of shares of Series A Preferred Stock then
held by each such holder bears to the aggregate number of such shares held by
such holders) all of the shares of Common Stock which are available to effect
such conversion. The number of shares of Series A Preferred Stock included in
the Notice of Conversion which exceeds the amount which is then convertible into
available shares of Common Stock (the "Excess Amount") shall,
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notwithstanding anything to the contrary contained herein, not be convertible
into Common Stock in accordance with the terms hereof until (and at the holder's
option at any time after) the date additional shares of Common Stock are
authorized by the Corporation to permit such conversion, at which time the
Conversion Price in respect thereof shall be the lesser of (i) the Conversion
Price on the Conversion Default Date (as defined below) and (ii) the Conversion
Price on the Conversion Date elected by the holder in respect thereof. The
Corporation shall use its best efforts to effect an increase in the authorized
number of shares of Common Stock as soon as possible following a Conversion
Default. In addition, the Corporation shall pay to the holder payments
("Conversion Default Payments") for a Conversion Default in the amount of (a)
(N/365), multiplied by (b) the sum of the Stated Value plus the Premium Amount
per share of Series A Preferred Stock through the Authorization Date (as defined
below), multiplied by (c) the Excess Amount on the day the holder submits a
Notice of Conversion giving rise to a Conversion Default (the "Conversion
Default Date"), multiplied by (d) .24, where (i) N = the number of days from the
Conversion Default Date to the date (the "Authorization Date") that the
Corporation authorizes a sufficient number of shares of Common Stock to effect
conversion of the full number of shares of Series A Preferred Stock. The
Corporation shall send notice to the holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of holder's
accrued Conversion Default Payments. The accrued Conversion Default Payment for
each calendar month shall be paid in cash or shall be convertible into Common
Stock at the Conversion Price, at the holder's option, as follows:
(a) In the event the holder elects to take such payment in
cash, cash payment shall be made to holder by the fifth day of the month
following the month in which it has accrued; and
(b) In the event the holder elects to take such payment in
Common Stock, the holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of Conversion) at any time after
the fifth day of the month following the month in which it has accrued in
accordance with the terms of this Article VI (so long as there is then a
sufficient number of authorized shares).
Nothing herein shall limit the holder's right to pursue actual damages
for the Corporation's failure to maintain a sufficient number of authorized
shares of Common Stock, and each holder shall have the right to pursue all
remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
G. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article VI,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
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to such holder a like certificate setting forth (i) such adjustment or
readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of a share of
Series A Preferred Stock.
H. STATUS AS SHAREHOLDERS. Upon submission of a Notice of Conversion by
a holder of Series A Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their issuance would exceed
such holder's allocated portion of the Reserved Amount) shall be deemed
converted into shares of Common Stock and (ii) the holder's rights as a holder
of such converted shares of Series A Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such holder because of a failure by the Corporation to comply with the terms
of this Statement. Notwithstanding the foregoing, if a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
shares of Series A Preferred Stock for any reason, then (unless the holder
otherwise elects to retain its status as a holder of Common Stock by so
notifying the Corporation) the holder shall regain the rights of a holder of
such shares of Series A Preferred Stock with respect to such unconverted shares
of Series A Preferred Stock and the Corporation shall, as soon as practicable,
return such unconverted shares of Series A Preferred Stock to the holder or, if
such shares of Series A Preferred Stock have not been surrendered, adjust its
records to reflect that such shares of Series A Preferred Stock have not been
converted. In all cases, the holder shall retain all of its rights and remedies
(including, without limitation, the right to receive Conversion Default Payments
pursuant to Article IV.E. to the extent required thereby for such Conversion
Default and any subsequent Conversion Default).
VII. AUTOMATIC CONVERSION
So long as the Registration Statement is effective and there is not
then a continuing Mandatory Redemption Event, each share of Series A Preferred
Stock issued and outstanding on July 22, 2001, subject to any adjustment
pursuant to Article V.A.(ii) (the "Automatic Conversion Date"), automatically
shall be converted into shares of Common Stock on such date at the then
effective Conversion Price in accordance with, and subject to, the provisions of
Article VI hereof (the "Automatic Conversion"). The Automatic Conversion Date
shall be delayed by one (1) Trading Day each for each Trading Day occurring
prior thereto and prior to the full conversion of the Series A Preferred Stock
that (i) sales cannot be made pursuant to the Registration Statement (whether by
reason of the Company's failure to properly supplement or amend the prospectus
included therein in accordance with the terms of the Registration Rights
Agreement or otherwise [including any Allowed Delays (as defined in Section 3(f)
of the Registration Rights Agreement]) or (ii) any Default Event (as defined in
Article V.A.) exists, without regard to whether any cure periods shall have run.
The Automatic Conversion Date shall be the Conversion Date for purposes of
determining the Conversion Price and the time within which certificates
representing the Common Stock must
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be delivered to the holder.
VIII. VOTING RIGHTS
The holders of the Series A Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Pennsylvania Business
Corporation Law ("PBCL"), in this Article VIII, and in Article IX below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein, of the date on which any such record is to be taken for the
purpose of such dividend, distribution, right or other event, and a brief
statement regarding the amount and character of such dividend, distribution,
right or other event to the extent known at such time.
To the extent that under the PBCL the vote of the holders of the Series
A Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series A
Preferred Stock then outstanding represented at a duly held meeting at which a
quorum is present or by written consent of a majority of such shares of Series A
Preferred Stock (except as otherwise may be required under the PBCL) shall
constitute the approval of such action by the class. To the extent that under
the PBCL holders of the Series A Preferred Stock are entitled to vote on a
matter with holders of Common Stock, voting together as one class, each share of
Series A Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated. Holders of the Series A Preferred Stock
shall be entitled to notice of all shareholder meetings or written consents (and
copies of proxy materials and other information sent to shareholders) with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Corporation's bylaws and the PBCL.
IX. PROTECTIVE PROVISIONS
So long as shares of Series A Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the
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PBCL of the holders of at least a majority of the then outstanding shares of
Series A Preferred Stock):
(a) alter or change the rights, preferences or privileges of
the Series A Preferred Stock or any Senior Securities so as to affect adversely
the Series A Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "Senior Securities");
(c) create any new class or series of capital stock ranking
PARI PASSU with the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "PARI PASSU Securities");
(d) increase the authorized number of shares of Series A
Preferred Stock; or
(e) do any act or thing not authorized or contemplated by this
Statement which would result in taxation of the holders of shares of the Series
A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as hereafter
from time to time amended).
In the event holders of at least a majority of the then outstanding
shares of Series A Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series A Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series A Preferred
Stock, then the Corporation will deliver notice of such approved change to the
holders of the Series A Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) days to convert pursuant to the terms of this
Statement as they exist prior to such alteration or change or continue to hold
their shares of Series A Preferred Stock.
X. PRO RATA ALLOCATIONS
The Maximum Share Amount and the Reserved Amount (including any
increases thereto) shall be allocated by the Corporation pro rata among the
holders of Series A Preferred Stock based on the number of shares of Series A
Preferred Stock then held by each holder relative to the total aggregate number
of shares of Series A Preferred Stock then outstanding.
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IN WITNESS WHEREOF, this Statement is executed on behalf of the
Corporation this 22nd day of July, 1998.
INFONAUTICS, INC.
By: /s/ David Van Riper Morris
David Van Riper Morris
President and Chief Executive Officer
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EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series A Preferred Stock)
The undersigned hereby irrevocably elects to convert ______ shares of
Series A Preferred Stock, represented by stock certificate No(s). __________
(the "Preferred Stock Certificates") into shares of common stock ("Common
Stock") of Infonautics, Inc., (the "Corporation") according to the conditions of
the Statement of Series A Preferred Stock, as of the date written below. If
securities are to be issued in the name of a person other than the undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates. No fee will be charged to the Holder for
any conversion, except for transfer taxes, if any. A copy of each Preferred
Stock Certificate is attached hereto (or evidence of loss, theft or destruction
thereof).
The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable to the undersigned upon conversion of
the Series A Preferred Stock have been or shall be made only pursuant to a
registration of the securities under the Securities Act of 1933, as amended (the
"Act") (in which case the undersigned has complied or will comply with all
applicable prospectus delivery requirements), or pursuant to an exemption from
registration under the Act.
Date of Conversion:___________________________
Applicable Conversion Price:____________________
Number of Shares of
Common Stock to be Issued:_____________________
Signature:____________________________________
Name:_______________________________________
Address:______________________________________
*The Corporation is not required to issue shares of Common Stock until the
original Series A Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
Transfer Agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant to the Statement for the number of business days such issuance
and delivery is late.
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Exhibit 10.20
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of January 10, 2000, by and among
bigchalk.com, inc., a Delaware corporation (the "Company"), the investors listed
on Schedule A hereto (collectively the "Investors" and individually an
"Investor"), those existing holders (collectively the "Founders") of the
Company's outstanding Common Stock, $.01 par value per share (the "Common
Stock"), who appear on Schedule A hereto, and any subsequent stockholder of the
Company who becomes a party to this Agreement pursuant to the terms and
conditions hereof (collectively, the "Additional Stockholders," and with the
Investors and the Founders sometimes hereinafter collectively referred to herein
as the "Stockholders" or individually as the "Stockholder").
PREAMBLE
The Investors are purchasing shares of the Company's Series A
Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred
Stock"), pursuant to that certain Series A Preferred Stock Purchase Agreement of
the same date herewith between the Company and the Investors (the "Stock
Purchase Agreement") in the amounts set forth on Schedule A, and the Founders
hold shares of Common Stock of the Company in the amounts set forth on Schedule
A; and
One of the conditions to the Closing as defined in the Stock Purchase
Agreement is the execution by the holders of the outstanding Series A Preferred
Stock and outstanding Common Stock of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
ELECTION OF DIRECTORS
1.1 Election of Directors. At each annual meeting of the stockholders
of the Company, or at each special meeting of the stockholders of the Company
involving the election of directors of the Company, and at any other time at
which stockholders of the Company will have the right to or will vote for or
render consent in writing regarding the election of directors of the Company,
then and in each event, the Stockholders hereby covenant and agree to vote all
shares of voting capital stock of the Company presently owned or hereafter
acquired by them (whether owned of record or over which any person exercises
voting control) in favor of the following
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actions:
(a) to fix and maintain the number of directors initially at ten which
number may not be further changed except by an amendment to this Agreement
approved by the consent of the holders of fifty-one percent (51%) or more of the
Series A Preferred Stock and;
(b) to cause and maintain the election to the Board of Directors of the
Company (i) so long as at least one-third of the number of shares of Series A
Preferred Stock set forth on Schedule A are outstanding, three representatives
designated by the Investors, one of whom shall be a representative of TBG
Information Investors LLC (the "TBG Director"), who shall initially be Oakleigh
Thorne, one of whom shall be a representative of Core Learning Group LLC (the
"Core Learning Director"), who shall initially be William Oberndorf, and the
other of whom shall be a representative of the Investors as a class (the
"Investor Director" and, with the TBG Director and the Core Learning Director,
the "Investor Directors"), who shall initially be George Jenkins; (ii) three
nominees designated by Bell & Howell Company; (iii) two nominees designated by
Infonautics, Inc., who shall initially be Lloyd Morrisett and David Van Riper
Morris; and (iv) two nominees represented by the Company's management, who shall
initially be John J. Lynch, Jr. and Susan Harman. The Investor Director shall be
nominated by holders of a majority of the outstanding Series A Preferred Stock
owned by the Investors.
1.2 Removal of Directors. None of the parties hereto, except in the
case of a director designated or nominated by any such party by right in
accordance with Section 1(b), shall vote any voting capital stock held by it to
remove a director, except for bad faith or willful misconduct. Each of the
parties hereto shall vote or cause to be voted all shares of voting capital
stock owned by them or over which they have voting control (i) to remove from
the Board of Directors any director designated by any party pursuant hereto at
the request of such party, and (ii) to fill any vacancy in the membership of the
Board of Directors with a designee of the party whose designee's resignation or
removal from the Board caused such vacancy.
1.3 Notice. The Company shall provide to each party entitled to
designate directors hereunder prior written notice of any intended mailing of
notice to stockholders for a meeting at which directors are to be elected, and
any party entitled to designate directors pursuant hereto shall notify the
Company in writing, prior to such mailing, of the person designated by it or
them as its or their nominee for election as director. If any party entitled to
designate directors hereunder fails to give notice to the Company as provided
above, it shall be deemed that the designee of such party then serving as
director shall be its designee for reelection.
1.4 Committees. The Board of Directors shall establish an Audit and a
Compensation Committee of the Board of Directors, each of which (i) shall
consist of three "Non-Employee
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Directors" (as that term is defined in Rule 16b-3 of the Exchange Act of 1934,
as amended), and (ii) shall include at least one of the Investor Directors who
shall be different for each of the audit and Compensation Committee. Any other
committee of the Board shall have at least one of the TBG Director or the
Investor Directors as a member.
1.5 Observer Rights. As long as any Investor owns not less than ten
percent (10%) of the shares of Series A Preferred Stock issued pursuant to the
Stock Purchase Agreement (or an equivalent amount of Common Stock issued upon
conversion thereof) and they are not otherwise represented on the Board by one
of the Investor Directors directly affiliated with them, the Company shall
invite a representative of such Investor to attend all meetings of its Board of
Directors in a nonvoting-observer capacity and, in this respect, shall give such
representative copies of all notices, minutes, consents and other materials it
provides to its directors; provided, however, that such representative shall
agree to hold such in confidence; and, provided further, that the Company
reserves the right to withhold any information and to exclude such
representative from any meeting or portion thereof if access to such information
or attendance at such meeting will adversely affect the attorney-client
privilege between the Company and its counsel.
1.6 Approval of Indebtedness. So long as at least one-third of the
number of shares of Series A Preferred Stock set forth on Schedule A are
outstanding, the Company will not incur indebtedness in excess of $2,500,000, in
one or a series of related transactions, without the prior approval of two of
the three Investor Directors.
1.7 Termination of Rights. The rights and obligations of the Company
and the Stockholders set forth in this Article I shall terminate upon the
earlier of (i) the consummation of a sale of two-thirds or more of the Series A
Preferred Stock issued in accordance with the terms of the Stock Purchase
Agreement and (ii) the closing of an underwritten public offering of shares of
Common Stock of the Company at a public offering price of at least $11.50 per
share (as adjusted for any stock split, stock dividend or recapitalization after
the date of the first issuance of the Series A Preferred Stock) and gross
proceeds to the Company in excess of $40,000,000 (a "Qualified IPO").
Additionally, with respect to each party which has the right to designate or
nominate a director pursuant to Section 1(b) above, such right shall terminate
if such party holds less than 100,000 shares of Common Stock of the Company
(assuming the conversion of all Series A Preferred Stock, if applicable, and as
adjusted for stock split, dividend, combination or like forms of
recapitalization). Any vacancy in the Board of Directors resulting from the
termination of such right shall be filled by a director elected by all holders
of voting capital stock of the Company in a single class.
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ARTICLE II
RIGHTS OF CO-SALE
2.1 Proposed Transfer of Shares. The Stockholders shall not transfer
either in a single transaction or in a series of transactions any shares of
capital stock of the Company (the "Shares") or any right or interest therein
then owned by him or it except by a transfer that meets the requirements of this
Article II and of this Agreement generally. In the event that a Stockholder (a
"Transferring Stockholder") proposes to transfer any portion of the Shares
(each, a "Shares Transfer"), whether voluntarily or involuntarily, other than a
Permitted Transfer (as defined below), then at least 60 days prior to any
proposed Shares Transfer, such Transferring Stockholder shall give written
notice (the "TS Notice") to the Company and the Investors of his or its
intention to effect the Shares Transfer. The TS Notice shall set forth (i) its
bonafide intention to offer such shares, (ii) the class, series and number of
Shares to be sold by the Transferring Stockholder (the "Sale Shares"), (iii) the
date or proposed date of the Shares Transfer and the name and address of the
proposed transferee, and (iv) the principal terms of the Shares Transfer,
including the cash or other property or consideration to be received upon such
Shares Transfer. The term "Permitted Transfer" shall mean (i) a Shares Transfer
made pursuant to the rights and obligations set forth in Article X of the Master
Transaction Agreement, dated as of July 8, 1999, as amended on September 28 and
December 15, 1999, by and among the Founders, Bell & Howell Company and
Infonautics Corporation (the "MTA"), (ii) a Shares Transfer from a Stockholder
to one or more of its "Affiliates" or "Subsidiaries" as those terms are defined
in Rule 405 ("Rule 405") of the Securities Act of 1933, as amended, and (iii) a
Shares Transfer to a spouse (other than pursuant to any divorce or separation
proceedings or settlement), parents, children (natural or adopted), stepchildren
or grandchildren or a trust for any of their benefit in the case of a
Transferring Stockholder that is an individual (each recipient pursuant to any
of (i), (ii) or (iii) being a "Permitted Transferee"); provided, however, that
prior to such Shares Transfer, such Permitted Transferee shall agree in writing
to be bound by the obligations imposed upon Stockholders under this Agreement as
if such transferee were originally a signatory to this Agreement.
2.2 Right to Participate in Transfer. In the event the Transferring
Stockholder desires to effect a Shares Transfer, other than a Permitted
Transfer, then, upon receipt of the TS Notice specified in Section 2.1, each
Investor shall have the right (by written notice to the Transferring Stockholder
and the Company to be sent within 20 days after the Investor receives the TS
Notice) to require the Transferring Stockholder to cause to be purchased from
such Investor the number of shares of Common Stock issued or issuable upon
conversion of shares of Series A Preferred Stock then held by such Investor that
equals (x) the number of Sale Shares that the Transferring Stockholder proposes
to transfer, multiplied by (y) the percentage determined by dividing (i) the
number of shares of Series A Preferred Stock (or Common Stock, as the case may
be) then held by the Investor by (ii) the sum of the number of shares of Series
A Preferred Stock (or Common Stock, as the case may be) then held by all of the
Investors plus the number of Shares then held by the Transferring Stockholder.
For purposes of this Section 2.2, the Series A Preferred Stock
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shall be treated as if it had been converted into the number of shares of Common
Stock then issuable upon such conversion. The foregoing restriction shall not
apply to a transfer or series of transfers by an employee or employees of the
Company which transfer or series of transfers results in the transfer of less
than 5% of the Shares outstanding on a fully diluted basis (including, for
purpose of such calculation, all Shares issuable upon exercise of outstanding
options as being issued for any such employee and for outstanding Shares
generally).
2.3 Terms of Purchase. The purchase from the Investors pursuant to
Section 2.2 shall be on the same terms and conditions, including per Share price
and date of Shares Transfer, as are received by the Transferring Stockholder and
stated in the TS Notice provided to the Investors; provided, however, that, in
all events, the Sale Shares (and any shares sold by Investors in accordance with
Section 2.2 above) shall continue to be subject to the terms of this Agreement
and any such transferee shall agree in writing to be bound by the obligations
imposed upon Stockholders under this Agreement as if such transferee were
originally a signatory to this Agreement.
2.4 Transfers Void. Any attempted Shares Transfer by the Stockholders
in violation of the terms of this Article II shall be ineffective to vest in any
transferee any interest held by the Transferring Stockholder in the Shares.
Without limiting the foregoing, any purported Shares Transfer in violation
hereof shall be ineffective as against the Investors and the Investors shall
have a continuing right and option (but not an obligation), until the
restrictions contained in this Article II terminate, to purchase the Shares
purported to be transferred by the Transferring Stockholders for a price and on
terms the same as those at which the purported Shares Transfer was effected.
2.5 Termination of Restrictions. The restrictions in this Article II
shall terminate upon the consummation of a Qualified IPO.
ARTICLE III
RIGHT OF FIRST OFFER
3.1 Right of First Offer. Subject to the terms and conditions specified
in this Article III, the Company hereby grants to each Investor and each Founder
a right of first offer with respect to future sales by the Company of its Shares
or securities convertible into or exercisable for any Shares (collectively,
"Offered Securities"). For purposes of this Section, "Investor" includes
transferees of any Investor and any general partners, members and/or affiliates
of an Investor and "Founder" includes transferees of any Founder. An Investor
shall be entitled to apportion the right of first offer hereby granted it among
itself and its partners and affiliates in such proportions as it deems
appropriate.
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Each time the Company proposes to offer any Offered Securities, the
Company shall first make an offering of such Offered Securities to each Investor
and Founder in accordance with the following provisions:
(a) The Company shall deliver written notice (the "Offer Notice") to
the Investors and Founders stating (i) its bona fide intention to offer such
Offered Securities, (ii) the class, series and number of Offered Securities to
be offered, and (iii) the price and terms upon which it proposes to offer such
Offered Securities.
(b) Within 30 days after receipt of the Offer Notice, each Investor and
Founder may elect to purchase, at the price and on the terms specified in the
Offer Notice, up to that portion of such Offered Securities which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Series A Preferred Stock then held, by such
Investor or Founder, as the case may be, bears to the total number of shares of
Common Stock of the Company (assuming full conversion and exercise of all
convertible or exercisable securities) then held by all the Company's
Stockholders. The Company shall promptly give written notice to each Investor
and Founder which purchases all the Offered Securities available to it (each, a
"Fully-Exercising Investor or Founder") of any other Investor's or Founder's, as
the case may be, failure to do likewise. During the 20-day period commencing
after receipt of such information, each Fully-Exercising Investor or Founder
shall be entitled to obtain that portion of the Offered Securities not
subscribed for by the Investors or Founders equal to the proportion the number
of shares of Common Stock issued and held, or issuable upon conversion of Series
A Preferred Stock then held, by such Fully-Exercising Investor or Founder bears
to the total number of shares of Common Stock issued and held, or issuable upon
conversion of the Series A Preferred Stock then held, by all Fully-Exercising
Investors or Founders who wish to purchase some of the unsubscribed shares.
(c) If all Offered Securities are not purchased as provided in
subsection (b), the Company may, during the 45-day period following the
expiration of the period provided in subsection (b) hereof, offer the remaining
unsubscribed portion of such Offered Securities to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than, those
specified in the Notice. If the Company does not enter into an agreement for the
sale of the Offered Securities within such period, or if such agreement is not
consummated within 45 days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Offered Securities shall not be
offered unless first reoffered to the Investors and Founders in accordance
herewith.
(d) The right of first offer in this Article III shall not be
applicable to (i) the issuance by the Company of options to employees, directors
or unaffiliated consultants (or to the exercise of such options) pursuant to
option plans adopted by the Board of Directors in amounts calculated as follows:
(A) options to purchase up to 3,000,000 shares of Common Stock, heretofore
reserved for issuance (subject to appropriate adjustments in the event of any
stock dividend,
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stock split, combination or similar recapitalization affecting such shares),
(B) options to purchase such number of shares of Common Stock that equals up to
20% of the Series A Preferred Stock (calculated on an as-converted basis), and
(C) options to purchase such number of shares of Common Stock that equals up to
20% of any shares of future equity issued by the Company (calculated on an
as-converted basis); (ii) the issuance of securities pursuant to the conversion
or exercise of convertible or exercisable securities; (iii) the issuance of
securities in connection with a bona fide business acquisition of or by the
Company, whether by merger, consolidation, sale of assets, sale or exchange of
stock or otherwise; (iv) the issuance of securities pursuant to equipment lease
financing arrangements with equipment lessors which have been approved by the
Board, including two of the three Investor Directors; or (v) the issuance of
securities pursuant to a Qualified IPO.
3.2 Termination of Rights. The rights and obligations of the Company
and Stockholders set forth in this Article III shall terminate upon the Closing
of a Qualified IPO.
ARTICLE IV
MANAGEMENT AND CONTROL
4.1 General. The business and affairs of the Company shall be managed,
controlled and operated in accordance with its certificate of incorporation and
bylaws, as the same may be amended from time to time, except that neither the
certificate of incorporation nor the bylaws shall be amended in any manner that
would conflict with, or be inconsistent with, the provisions of this Agreement.
4.2 Limitation on Certain Actions by the Company. The Company shall not
take any of the following actions without the written consent or affirmative
vote of the holders of at least fifty-one percent (51%) of the then outstanding
shares of Series A Preferred Stock, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a class: (i) any
amendment or change of the rights, preferences, privileges or powers of, or the
restrictions provided for the benefit of, the Series A Preferred Stock; (ii) any
action that authorizes, creates or issues shares of any class or series of stock
having preferences superior to the Series A Preferred Stock; (iii) any action
that reclassifies any outstanding shares into shares having preferences or
priority as to dividends or assets senior to preferences of the Series A
Preferred Stock; (iv) any amendment of the Company's Articles of Incorporation
that adversely affects the rights of the Series A Preferred Stock; (v) any
merger or consolidation of the Company with one or more other corporations in
which the Stockholders of the Company immediately after such merger or
consolidation hold stock representing less than forty percent (40%) of the
voting power of the outstanding stock of the surviving corporation unless
holders of Series A Preferred Stock receive at least $21 per share (subject to
appropriate adjustments in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting
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such shares); (vi) the sale of all or substantially all of the Company's assets
unless holders of Series A Preferred Stock receive at least $21 per share
(subject to appropriate adjustments in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares);
(vii) the liquidation or dissolution of the Company; (viii) the declaration or
payment of a dividend on the Common Stock (other than a dividend payable solely
in shares of Common Stock); (ix) taking any other actions adversely affecting
the Series A Preferred Stock vis-a-vis the right of holders of any other
securities of the Corporation; (x) the repurchase of any shares of Common Stock
except from employees upon termination of employment pursuant to the terms and
conditions of employment agreements approved by the Board.
ARTICLE V
REGISTRATION RIGHTS
5.1 Definitions. As used in this Article V, the following terms shall
have the following meanings:
(a) "Commission" shall mean the Securities and Exchange Commission, or
any other federal agency at the time administering the Securities Act.
(b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(c) "Holder" shall mean any holder of outstanding Registrable
Securities or anyone who holds outstanding Registrable Securities to whom the
registration rights conferred by this Agreement have been transferred in
compliance with this Agreement.
(d) "Initiating Holders" shall mean any Holder or Holders of at least
twenty-five percent (25%) of the Registrable Securities then outstanding.
(e) "Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement, and compliance with applicable
state securities laws of such states in which Holders notify the Company of
their intention to offer Registrable Securities.
(f) "Registrable Securities" shall mean all of the following to the
extent the same have not been sold to the public (i) any and all shares of
Common Stock of the Company, issued or issuable, upon conversion of shares of
the Company's Series A Preferred Stock and up to an aggregate of 7,600,000
shares (subject to appropriate adjustments in the event of any stock
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dividend, stock split, combination or other similar recapitalization affecting
such shares) of Common Stock owned by Founders; or (ii) stock issued in respect
of stock referred to in (i) above in any reorganization; or (iii) stock issued
in respect of the stock referred to in (i) or (ii) as a result of a stock split,
stock dividend, recapitalization or combination. Notwithstanding the foregoing,
Registrable Securities shall not include otherwise Registrable Securities
(i) sold by a person in a transaction in which his rights under this Agreement
are not properly assigned; (ii) (A) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, or
(B) sold in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that all
transfer restrictions, and restrictive legends with respect thereto, if any, are
removed upon the consummation of such sale; or (iii) if they are held by a
Holder who can sell all Registrable Securities held by such holder in any
three-month period without registration pursuant to Rule 144.
(g) "Rule 144" shall mean Rule 144 under the Securities Act or any
successor or similar rule as may be enacted by the Commission from time to time,
but shall not include Rule 144A.
(h) "Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute and the rules and regulations thereunder, all as
the same shall be in effect at the time.
5.2 Demand Registration.
(a) If the Company shall receive from Initiating Holders a written
request that the Company effect any registration with respect to all or at least
25% of the issued and outstanding Registrable Securities held by Holders, the
Company shall:
i. promptly give written notice of the proposed registration
to all other Holders; and
ii. as soon as practicable use its best efforts to register
(including, without limitation, the execution of an undertaking to file
post-effective amendments and any other governmental requirements) all
Registrable Securities which the Initiating Holders request to be registered;
provided, that the Company shall not be obligated to file a registration
statement pursuant to this Section 5.2:
(A) prior to the date which is six months after the
closing of the Company's first underwritten public offering of securities;
(B) in any particular state in which the Company
would be required to execute a general consent to service of process in
effecting such registration;
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(C) within 180 days following the effective date of
any registered offering of the Company's securities to the general public in
which the Holders of Registrable Securities shall have been able effectively to
register all Registrable Securities as to which registration shall have been
requested;
(D) in any registration having an aggregate offering
price (before deduction of underwriting discounts and expenses of sale) of less
than $5,000,000;
(E) after the Company has effected two such
registrations by the Investors and two such Registrations by the Founders
pursuant to this Section 5.2 and such registrations have been declared or
ordered effective, except as provided in Section 5.3; or
(F) during the period starting with the date sixty
(60) days prior to the Company's good faith estimate of the date of filing of,
and ending on a date one hundred eighty (180) days after the effective date of,
a registration subject to Section 5.3 hereof; provided that the Company is
actively employing in good faith its best efforts to cause such registration
statement to become effective; and provided further that the Company may not
rely on this Section 5.2(a)(ii)(F) more than once during the term of this
Agreement to not register Registrable Securities pursuant to a request made by
Initiating Holders pursuant to this Section 5.2.
Subject to the foregoing clauses (A) through (F), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practical, but in any event within 60 days after receipt
of the request or requests of the Initiating Holders and shall use reasonable
best efforts to have such registration statement promptly declared effective by
the Commission whether or not all Registrable Securities requested to be
registered can be included; provided, however, that 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 and its Stockholders for such registration statement
to be filed within such 60-day period and it is therefore essential to defer the
filing of such registration statement, the Company shall have an additional
period of not more than 60 days after the expiration of the initial 60-day
period within which to file such registration statement; provided, that during
such time the Company may not file a registration statement for securities to be
issued and sold for its own account except as contemplated by Section
5.2(a)(ii)(F) above.
(b) 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. In such event, if so requested in
writing by the Company, the Initiating Holders shall negotiate with an
underwriter selected by the Company with regard to the underwriting of such
requested registration; provided, however, that if a majority in interest of the
Initiating Holders have not agreed with such underwriter as to the terms and
conditions of such underwriting within 20 days following commencement of such
negotiations, a majority in interest of the Initiating
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Holders may select an underwriter of their choice. The right of any Holder to
registration pursuant to Section 5.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. The Company shall (together with all Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 5, if the managing underwriter advises the Initiating Holders in writing
that marketing factors require a limitation of the number of shares to be
underwritten, the Company shall so advise all Holders, and the number of shares
of Registrable Securities that may be included in the registration and
underwriting may be reduced up to an amount that is not less than 25% of all the
securities included in such registration and the Registrable Securities to be
included shall be allocated among all Holders thereof in proportion, as nearly
as practicable, to the respective amounts of Registrable Securities held by such
Holders; provided, however, that securities to be included in such registration
statement as a result of piggyback registration rights not contained in this
Article V as well as any securities to be offered by the Company, its officers
and employees shall be excluded from the registration statement prior to the
exclusion of any Registrable Securities held by the Holders and further provided
that no Registrable Securities held by Holders other than the Founders shall be
reduced if any Registrable Securities held by the Founders are included in the
registration. If any Holder disapproves of the terms of the underwriting, he may
elect to withdraw therefrom by written notice to the Company, the managing
underwriter and the Initiating Holders. If, by the withdrawal of such
Registrable Securities, a greater number of Registrable Securities held by other
Holders may be included in such registration (up to the limit imposed by the
underwriters) the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used in determining the limitation
as set forth above. Any Registrable Securities which are excluded from the
underwriting by reason of the underwriter's marketing limitation or withdrawn
from such underwriting shall be withdrawn from such registration.
5.3 Piggyback Registration.
(a) If at any time or from time to time, the Company shall determine to
register any of its securities, for its own account or the account of any of its
Stockholders, other than a registration relating solely to employee benefit
plans, or a registration relating solely to a transaction pursuant to Rule 145
under the Securities Act, a transaction relating solely to the sale of debt or
convertible debt instruments or a registration on any form (other than Form S-1,
S-2 or S-3, or their successor forms) which does not include substantially the
same information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
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i. give to each Holder written notice thereof as soon as
practicable prior to filing the registration statement; and
ii. include in such registration and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 15 days after receipt of such written notice from the
Company, by any Holder or Holders, except as set forth in subsection (b) below.
(b) If the registration 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 subsection 5.3. In such event, the right of any
Holder to registration pursuant to Section 5.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. 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 in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 5.3, if the
managing underwriter advises the Holders who are participating in such
underwriting in writing that marketing factors require a limitation of the
number of shares to be underwritten, the managing underwriter may limit the
number of Registrable Securities to be included in the registration and
underwriting to an amount that is not less than 25% of all the securities
included in such registration, or may exclude Registrable Securities entirely
from such registration if the registration is the first registered offering for
the sale of the Company's equity securities to the general public (provided that
no shares held by officers and directors of the Company, other than Registrable
Securities that may be owned by officers and directors, are included in the
registration and underwriting and further provided that no Registrable
Securities held by Holders other than the Founders shall be reduced if any
Registrable Securities held by the Founders are included in the registration).
The Company 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 first among all Holders in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities held by such Holders at the
time of filing the registration statement and next to holders of piggyback
registration rights not contained in this Article V. If any Holder disapproves
of the terms of any such underwriting, he may elect to withdraw therefrom by
written notice to the Company and the managing underwriter. If, by the
withdrawal of such Registrable Securities, a greater number of Registrable
Securities held by other Holders may be included in such registration (up to the
limit imposed by the underwriters), the Company shall offer to all Holders who
have included Registrable Securities in the registration the right to include
additional Registrable Securities. Any Registrable Securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
5.4. Form S-3. The Company shall use its reasonable best efforts to
qualify for registration on Form S-3 or its successor form. After the Company
has qualified for the use of
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Form S-3, Initiating Holders shall have the right at any time to request
registrations on Form S-3 (such requests shall be in writing and shall state the
number of shares of Registrable Securities to be disposed of and the intended
method of disposition of shares by such Holders), subject only to the following:
(a) The Company shall not be required to file a registration statement
pursuant to this Section 5.4 within 180 days of the effective date of any
registration referred to in Sections 5.2 and 5.3 above.
(b) The Company shall not be required to file a registration statement
pursuant to this Section 5.4 unless the Holder or Holders requesting
registration propose to dispose of shares of Registrable Securities having an
aggregate disposition price (before deduction of underwriting discounts and
expenses of sale) of at least $1,000,000.
(c) The Company shall not be required to file more than two
registration statements pursuant to this Section 5.4 within any twelve-month
period.
The Company shall give written notice to all Holders of Registrable
Securities of the receipt of a request for registration pursuant to this Section
5.4 and shall provide a reasonable opportunity for other Holders to participate
in the registration; provided, that if the registration is for an underwritten
offering, the following terms shall apply to all participants in such offering:
The right of any Holder to registration pursuant to Section 5.4 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. 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 in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 5.4, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, the Company shall so advise all Holders,
and the number of shares of Registrable Securities that may be included in the
registration and underwriting may be reduced up to an amount that is not less
than 25% of all the securities included in such registration and the Registrable
Securities to be included shall be allocated among all Holders thereof in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holders; provided, however, that securities to be
included in such registration statement as a result of piggyback registration
rights not contained in this Article V as well as any securities to be offered
by the Company, its officers and employees shall be excluded from the
registration statement prior to the exclusion of any Registrable Securities held
by the Holders and further provided that no Registrable Securities held by
Holders other than the Founders shall be reduced if any Registrable Securities
held by the Founders are included in the registration. If any Holder disapproves
of the terms of any such underwriting, he may elect to withdraw therefrom by
written notice to the Company and the underwriter. If, by
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the withdrawal of such Registrable Securities, a greater number of Registrable
Securities held by other Holders may be included in such registration (up to the
limit imposed by the underwriters), the Company shall offer to all Holders who
have included Registrable Securities in the registration the right to include
additional Registrable Securities in the same proportion used in determining the
limitation as set forth above. Any Registrable Securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration. Subject to the
foregoing, the Company will use its best efforts to effect promptly the
registration of all shares of Registrable Securities on Form S-3 to the extent
requested by the Holder or Holders thereof for purposes of disposition.
5.5 Expenses of Registration. In addition to the fees and expenses
contemplated by Section 5.6 hereof, all expenses incurred in connection with
registrations pursuant to Sections 5.2, 5.3 and 5.4 hereof, including without
limitation all registration, filing and qualification fees, printing expenses,
fees and disbursements of counsel for the Company and expenses of any special
audits of the Company's financial statements incidental to or required by such
registration, shall be borne by the Company, except that the Company shall not
be required to pay underwriters' fees, discounts or commissions relating to
Registrable Securities or fees of a separate legal counsel of a Holder.
5.6 Registration Procedures. In the case of each registration effected
by the Company pursuant to this Agreement, the Company will keep each Holder
participating therein advised in writing as to the initiation of each
registration and as to the completion thereof. At its expense the Company will:
(a) keep such registration pursuant to Sections 5.2, 5.3 and 5.4
continuously effective for periods of 120 days, or, in each case, such
reasonable period necessary to permit the Holder or Holders to complete the
distribution described in the registration statement relating thereto, whichever
first occurs;
(b) promptly prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to comply with the provisions of the Securities
Act, and to keep such registration statement effective for that period of time
specified in Subsection 5.6(a) above;
(c) furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request;
(d) use reasonable best efforts to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of any
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction, at the earliest possible moment;
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(e) subject to Subsection 5.2(a)(ii)(B), register or qualify such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions as any Holder or underwriter reasonably requires, and keep
such registration or qualification effective during the period set forth in
Subsection 5.6(a) above;
(f) cause all Registrable Securities covered by such registrations to
be listed on each securities exchange, including NASDAQ, on which similar
securities issued by the Company are then listed or, if no such listing exists,
use reasonable best efforts to list all Registrable Securities on one of the New
York Stock Exchanges, the American Stock Exchange or NASDAQ; and
(g) cause its accountants to issue to the underwriter, if any, or the
Holders, if there is no underwriter, comfort letters and updates thereof, in
customary form and covering matters of the type customarily covered in such
letters with respect to underwritten offerings;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably, request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent retained by
any such seller or underwriter, such financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply such
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement; and
(j) if the offering is underwritten, at the request of any Holder of
Registrable Securities to furnish on the date that Registrable Securities are
delivered to the underwriters for sale pursuant to such registration: (i) an
opinion dated such date of counsel representing the Company for the purposes of
such registration, addressed to the underwriters and to such Holder, stating
that such registration statement has become effective under the Securities Act
and that (A) to the best knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Securities Act, (B) the
registration statement, the related prospectus and each amendment or supplement
thereof comply as to form in all material respects with the requirements of the
Securities Act (except that such counsel need not express any opinion as to
financial statements or other financial data contained therein) and (C) to such
other effects as reasonably may be requested by counsel for the underwriters or
by such Holder or its counsel and (ii) a letter dated such date from the
independent public accountants retained by the Company, addressed to the
underwriters and to such seller, stating that they are independent public
accountants within the
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meaning of the Securities Act and that, in the opinion of such accountants, the
financial statements of the Company included in the registration statement or
the prospectus, or any amendment or supplement thereof, comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act, and such letter shall additionally cover such other financial matters
(including information as to the period ending no more than five business days
prior to the date of such letter) with respect to such registration as such
underwriters reasonably may request;
(k) notify each Holder, at any time a prospectus covered by such
registration statement is required to be delivered under the Securities Act, of
the happening of any event of which it has knowledge 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; and
(l) take such other actions as shall be reasonably requested by any
Holder.
5.7 Indemnification.
(a) In the event of a registration of any of the Registrable Securities
under the Securities Act pursuant to Sections 5.2, 5.3 or 5.4, the Company will
indemnify, defend and hold harmless each Holder of such Registrable Securities
thereunder, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such Holder or underwriter within the meaning
of the Securities Act, against any losses, claims, damages or liabilities, joint
or several, to which such Holder, underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such Registrable Securities
were registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or arise
out of or are based upon the 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 any rule or
regulation promulgated under the Securities Act or any state securities law
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, and will indemnify each such
Holder, each of its officers, directors and partners, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any reasonable legal and any other expenses incurred in
connection with investigating, defending or settling any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage or liability arises
out of or is based on any untrue statement or omission based upon written
information furnished to the Company by an instrument duly executed by such
Holder or underwriter specifically for use therein; provided, further, that the
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Company shall not be liable if any such omission or statement of material fact
is corrected in a later prospectus that was provided to the Investors in a
timely manner by the Company and the Investors did not deliver such updated
prospectus.
(b) Each Holder will, if Registrable Securities held by or issuable to
such Holder are included in the securities as to which such registration is
being effected, indemnify and hold harmless the Company, each of its directors
and officers, each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company and each
underwriter within the meaning of the Securities Act, and each other such
Holder, each of its officers, directors and partners and each person controlling
such Holder, against all claims, losses, expenses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or 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, and will reimburse
the Company, such Holders, such directors, officers, partners, persons or
underwriters for any reasonable legal or any other expenses incurred in
connection with investigating, defending or settling 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 an instrument duly executed by such Holder
specifically for use therein; provided, however, the total amount for which any
Holder, its officers, directors and partners, and any person controlling such
Holder, shall be liable under this Section 5.7 shall not in any event exceed the
aggregate proceeds received by such Holder from the sale of Registrable
Securities sold by such Holder in such registration.
(c) Each party entitled to indemnification under this Section 5.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claims as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations hereunder, unless such failure resulted in actual detriment to
the Indemnifying Party. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of such claim or
litigation.
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(d) Notwithstanding the foregoing, to the extent that the provisions on
indemnification contained in the underwriting agreements entered into among the
selling Holders, the Company and the underwriters in connection with the
underwritten public offering are in conflict with the foregoing provisions, the
provisions in the underwriting agreement shall be controlling as to the
Registrable Securities included in the public offering; provided, however, that
if, as a result of this Subsection 5.7(d), any Holder, its officers, directors,
and partners and any person controlling such Holder is held liable for an amount
which exceeds the aggregate proceeds received by such Holder from the sale of
Registrable Securities included in a registration, as provided in Subsection
5.7(b) above, pursuant to such underwriting agreement (the "Excess Liability"),
the Company shall reimburse any such Holder for such Excess Liability.
(e) If the indemnification provided for in this Section 5.7 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage or expense 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 hand in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relevant fault of the indemnifying party and 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 or alleged
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. Notwithstanding the foregoing, the amount any Holder
shall be obligated to contribute pursuant to this Subsection 5.7(e) shall be
limited to an amount equal to the proceeds to such Holder of the Restricted
Securities sold pursuant to the registration statement which gives rise to such
obligation to contribute (less the aggregate amount of any damages which the
Holder has otherwise been required to pay in respect of such loss, claim,
damage, liability or action or any substantially similar loss, claim, damage,
liability or action arising from the sale of such Restricted Securities).
(f) Survival of Indemnity. The indemnification provided by this Section
5.7 shall be a continuing right to indemnification and shall survive the
registration and sale of any securities by any Person entitled to
indemnification hereunder and the expiration or termination of this Agreement.
5.8 Lockup Agreement. In consideration for the Company agreeing to its
obligations under this Agreement, each Holder agrees in connection with any
registration of the Company's securities (whether or not such Holder is
participating in such registration) upon the request of the Company and the
underwriters managing any underwritten offering of the Company's
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securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed 180 days in the case of the Company's initial public offering and 90
days in any other public offering) from the effective date of such registration
as the Company and the underwriters may specify, so long as all Holders or
stockholders holding more than one percent (1%) of the outstanding common stock
and all officers and directors of the Company are, and continue to be, bound by
a comparable obligation; provided, however, that nothing herein shall prevent
any Holder that is a partnership or corporation from making a distribution of
Registrable Securities to the partners or Stockholders thereof that is otherwise
in compliance with applicable securities laws, so long as such distributees
agree to be so bound.
5.9 Rule 144. With a view to making available to Holders of Registrable
Securities the benefits of certain rules and regulations of the Commission which
may permit the sale of the Registrable Securities to the public without
registration, the Company agrees at all times after ninety (90) days after the
effective date of the first registration filed by the Company for an offering of
its securities to the general public to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144; and
(b) use its reasonable best efforts to 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.
5.10 Transfer of Registration Rights. The rights to cause the Company
to register Registrable Securities of a Holder and other rights under this
Section 5 may be assigned by a Holder to any partner or Stockholder of such
Holder, to any other Holder, or to a transferee or assignee who receives at
least 50,000 shares of Registrable Securities (as adjusted for any stock split,
stock dividend or recapitalization after the date of the first issuance of the
Series A Preferred Stock); provided, that the Company is given written notice by
the Holder at the time of or within a reasonable time after said transfer,
stating the name and address of said transferee or assignee and identifying the
securities with respect to which such registration rights are being assigned.
5.11. Limitations on Subsequent Registration Rights. From and after the
date these registration rights are granted, the Company shall not, without the
prior written consent of the Holders of not less than a majority of the
Registrable Securities then held by Holders, enter into any agreement with any
holder or prospective holder of any securities of the Company which would allow
such holder or prospective holder to include such securities in any registration
filed under Sections 5.2, 5.3 and 5.4 hereof other than rights subordinate to
the rights of any Holder
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hereunder; provided, further, that granting registration rights to holders in
connection with a Rule 145 transaction shall not require the approval of the
Holders.
5.12. Termination of Rights. The rights and obligations of the Company
and the Stockholders set forth in this Article V shall terminate on December 31,
2006 (except for the provisions in regard to indemnification which shall
continue and shall survive the termination hereof).
ARTICLE VI
MISCELLANEOUS
6.1 Information Rights. For so long as the Company is not subject to
the periodic reporting requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the Investors shall have the right to receive the
information stated in this Section 6.1 from the Company:
(a) Periodic Financial and Other Information. So long as an Investor is
the holder of not less than 100,000 shares of Series A Preferred Stock:
(i) within 90 days after the end of each fiscal year of the
Company, commencing with the year ending December 31, 1999; the Company will
provide such Investor with financial statements of the Company for such fiscal
year, consisting of an income statement, balance sheet and statement of changes
in financial position, and prepared in accordance with generally accepted
accounting principles consistently applied ("GAAP") which may be audited by such
Investor's internal auditors at such times and from time to time as such
Investor deems appropriate; the Company shall provide such Investor with full
access to its premise, officers, employees, books and records as shall be
requested by such Investor in order to exercise such audit right;
(ii) within 45 days after the end of each quarterly accounting
period of each fiscal year of the Company, commencing with the quarter ending
March 31, 2000, the Company will provide such Investor with an unaudited income
statement, balance sheet and statement of changes in financial position with
comparisons to budget and the immediately preceding fiscal year for such quarter
and for the year to date, prepared in accordance with GAAP;
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(iii) within 30 days after the end of each fiscal month,
commencing with the first fiscal month ending after the date hereof or ending in
the 30 day period before the date hereof, the Company will provide such Investor
with internal monthly financial and operating statements for such month, plus a
statement setting forth a comparison by reasonable categories to the applicable
budget and comparable figures for the prior year; and
(iv) within 30 days after the end of each fiscal year, the
Company will provide such Investor with an annual budget for the next succeeding
fiscal year, with the first such annual budget to be provided January 30, 2001.
(b) Additional Information. So long as an Investor is the holder of not
less than 100,000 shares of Series A Preferred Stock, the Company will permit
such Investor or any representative of such Investor to visit and inspect the
Company's premises and properties, including its books and records of account,
from time to time, and to discuss the Company's business, finances and accounts
with the Company's officers at reasonable times during the Company's regular
business hours, upon reasonable advance written notice to the Company and in a
manner that will not unreasonably interfere with the normal business operations
of the Company; and
(c) Books and Records. So long as an Investor is the holder of not less
than 100,000 shares of Series A Preferred Stock, the Company will keep books and
records of account in which full, accurate and correct entries in all material
respects will be made of all dealings and transactions in relation to the
business and affairs of the Company in accordance with GAAP.
6.2 Transfer of Stock. Except as otherwise expressly provided by this
Agreement, each Stockholder agrees not to transfer any of his shares of capital
stock of the Company unless the transferee agrees in writing to be bound by the
terms and conditions of this Agreement and executes a counterpart of this
Agreement, and unless such Stockholder has complied with applicable law and all
provisions of this Agreement in connection with such transfer.
6.3 Duration of Agreement. Except for those provisions that, by their
terms, terminate sooner, the rights and obligations of the Company and each
Stockholder under this Agreement shall terminate as to such Stockholder on the
earliest to occur of the following: (a) the transfer in accordance with this
Agreement of all Shares held by such Stockholder or (b) upon the written consent
of the Company and Stockholders holding at least 66 2/3 % of the Registrable
Securities.
6.4 Legend. In addition to any legends which the Company determines to
be reasonably necessary at the time of issuance to comply with restrictions or
requirements imposed by Federal or state securities laws or by General
Corporation Law of the State of Delaware, each certificate representing shares
of Series A Preferred Stock and Common Stock shall bear the following legend,
until such time as the shares of Series A Preferred Stock and Common Stock
represented thereby are no longer subject to the provisions hereof:
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"THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A CERTAIN STOCKHOLDERS AGREEMENT WHICH INCLUDES A VOTING
AGREEMENT. COPIES OF THE STOCKHOLDERS AGREEMENT MAY BE OBTAINED UPON
WRITTEN REQUEST TO THE COMPANY'S SECRETARY."
6.5 Severability; Governing Law. If any provisions of this Agreement
shall be determined to be illegal or unenforceable by any court of law, the
remaining provisions shall be severable and enforceable in accordance with their
terms. This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of New York.
6.6 Injunctive Relief. It is acknowledged that it will be impossible to
measure the damages that would be suffered by the nonbreaching party if any
party fails to comply with the provisions of this Agreement and that in the
event of any such failure, the nonbreaching parties will not have an adequate
remedy at law. The non-breaching parties shall, therefore, be entitled to obtain
specific performance of the breaching party's obligations hereunder and to
obtain immediate injunctive relief. The breaching party shall not urge, as a
defense to any proceeding for such specific performance or injunctive relief,
that the nonbreaching parties have an adequate remedy at law. If any action at
law or in equity is necessary to enforce or interpret the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees,
costs and necessary disbursements in addition to any other relief to which such
party may be entitled.
6.7 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective permitted successors and
assignees, legal representatives and heirs. Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. The administrator, executor or legal representative of any
deceased or incapacitated Stockholder shall have the right to execute and
deliver all documents and perform all acts necessary to exercise and perform the
rights and obligations of such Stockholder under the terms of this Agreement.
6.8 Additional Stockholders. Prior to being issued Shares, all future
stockholders of the Company during the term of this Agreement shall agree to be
Additional Stockholders and to be bound by the terms and provisions of this
Agreement, including, without limitation, those who obtain Shares through the
exercise of the options described in Section 3.1(d). The Company shall add
Additional Stockholders by joinder whereby the Additional Stockholders shall
sign a counterpart to this Agreement and the Schedule A hereto shall be amended
to reflect the Shares issued to the Additional Stockholder. The joinder of an
Additional Stockholder as contemplated by the preceding sentence shall not
constitute an amendment to this Agreement requiring the consent of the existing
Stockholders except as may otherwise required by this Agreement in connection
with the issuance of such Shares. Promptly following the addition of an
Additional
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Stockholder, the Company shall distribute to all Stockholders copies of this
Agreement executed by the Additional Stockholder with a revised Schedule A.
6.9 Modification or Amendment. Neither this Agreement nor any
provisions hereof can be modified, amended, changed, discharged or terminated
except by an instrument in writing, signed by the holders of at least a majority
of the shares of capital stock then subject to this Agreement, based upon voting
power and calculated on an "as if converted" basis, together with the consent of
Investors and Founders holding at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding Shares held by the Investors and the Founders
outstanding on the date hereof.
6.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
6.11 Notices. All notices to be given or otherwise made to any party to
this Agreement shall be deemed to be sufficient if contained in a written
instrument, delivered by hand in person, or by express overnight courier
service, or by electronic facsimile transmission (with a copy sent by
first-class mail, postage prepaid), or by registered or certified mail, return
receipt requested, postage prepaid, addressed to such party at the address set
forth on the signature page hereof or at such other address as may hereafter be
designated in writing by the addressee to the addressor listing all parties.
All such notices shall, when mailed or transmitted, be effective when
received or when attempted delivery is refused.
6.12 Waiver of Preemptive Rights. Except as is expressly set forth in
Article III, the Founders agree that the Amended and Restated Limited Liability
Company Agreement of BHW/INFO/EDOC.COM, LLC, dated December 15, 1999, by and
between the Founders (the "LLC Agreement"), is terminated in all regards, and
without limitation to the foregoing, the Founders hereby waive any and all
preemptive and other rights that they may have, or have had, pursuant to the LLC
Agreement or otherwise outside the scope of this Agreement.
6.13 Amendment to Master Transaction Agreement. The Founders, Bell &
Howell Company, Infonautics Corporation and the Company agree that (a) the
definition of "Change of Control" as is set forth in Annex A of the MTA shall
hereby be amended for purposes of the MTA and the Related Agreements (as defined
in the MTA) to delete: "; or (iii) any other change in 'control' (as defined in
Rule 405 promulgated pursuant to the Securities Act) of such Party" and (b)
Section 9.1 of the MTA shall be deleted in its entirety.
6.14 No Other Agreements. Each Stockholder represents that he has not
granted and is not a party to any proxy, voting trust or other agreement which
is inconsistent with or conflicts with the provisions of this Agreement, and no
holder of Shares shall grant any proxy or become
23
<PAGE>
party to any voting trust or other agreement which is inconsistent with or
conflicts with the provisions of this Agreement.
6.15 Certificate of Incorporation and Bylaws. The certificate of
incorporation and bylaws of the Company may be amended in any manner permitted
thereunder, except that neither the certificate nor the bylaws shall be amended
in any manner that would conflict with, or be inconsistent with, the provisions
of this Agreement.
24
<PAGE>
IN WITNESS WHEREOF, the Company, the Investors and the Founders have
executed this agreement in counterparts as of the date first above specified.
BIGCHALK.COM, INC.
By: /s/ John J. Lynch, Jr.
-------------------------------
Name: John J. Lynch, Jr.
Title: CEO
Address: 900 West Valley Road, Suite 1000, Wayne, PA 19087-1830
Fax No.:
FOUNDERS:
BELL & HOWELL INFORMATION AND
LEARNING COMPANY
By: /s/ Joseph P. Reynolds
-------------------------------
Name: Joseph P. Reynolds
Title: President & CEO
Address: 300 N. Zeeb; Ann Arbor, MI 48103
Fax No.: 734.975.6450
BELL & HOWELL COMPANY (for purposes of Section 6.13 only)
By: /s/ Nils A. Johansson
-------------------------------
Name: Nils A. Johansson
Title: Executive Vice President - Chief Financial Officer
Address: 5215 Orchard Road; Skokie, IL 60077
Fax No.: 847-470-9425
[SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT]
25
<PAGE>
INFONAUTICS, INC.
By: /s/ David Van Riper Morris
-------------------------------
Name: David Van Riper Morris
Title: CEO
Address: 900 West Valley Road, Wayne, PA
Fax No.: 610-971-8850
INFONAUTICS CORPORATION (for purposes of Section 6.13 only)
By: /s/ David Van Riper Morris
-------------------------------
Name: David Van Riper Morris
Title: CEO
Address: 900 West Valley Road, Wayne, PA
Fax No.: 610-971-8850
INVESTOR STOCKHOLDERS:
TBG INFORMATION INVESTORS LLC
By: /s/ Oakleigh Thorne
-------------------------------
Name: Oakleigh Thorne
Title: CEO
Address: PO Box 871, Lake Forest, IL 60045
Fax No.: 847.615.8659
[SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT]
26
<PAGE>
CORE LEARNING GROUP LLC
By: /s/ William E. Oberndorf
-------------------------------
Name: William E. Oberndorf
Title: Chairman
Address: 3270 Blazer Parkway, Suite 202, Lexington, KY 40509
Fax No.:
CORE LEARNING GROUP - BC, LLC
By: /s/ William E. Oberndorf
-------------------------------
Name: William E. Oberndorf
Title: Chairman
Address: 3270 Blazer Parkway, Suite 202, Lexington, KY 40509
Fax No.:
APA EXCELSIOR V, L.P.
By: APA Excelsior Partners L.P.,
its General Partner
By: Patricof & Co. Managers, Inc.
its General Partner
By: /s/ George Jenkins
-------------------------------
George Jenkins
Vice President
27
<PAGE>
[SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT]
PATRICOF PRIVATE INVESTMENT CLUB II, L.P.
By: APA Excelsior Partners L.P.,
its General Partner
By: Patricof & Co. Managers, Inc.
its General Partner
By: /s/ George Jenkins
------------------------------------
George Jenkins
Vice President
By: /s/ Frank A. Bonsal, Jr.
------------------------------------
Frank A. Bonsal, Jr.
Address: 1119 Saint Paul Street, Baltimore, MD 21202
Fax No.:410 752-7721
WS INVESTMENT COMPANY 99B
By: /s/ Alan K. Austin
------------------------------------
Name: Alan K. Austin
Title: Partner
Address: 650 Page Mill Road, Palo Alto, CA 94304
Fax No.: 650-493-6811
28
<PAGE>
[SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT]
THE SAN DOMENICO TRUST
By: /s/ Mark L. Reinstra
------------------------------------
Name: Mark L. Reinstra
Title: Co-Trustee
Address: 2312 Warner Range, Menlo Park, CA 94025
Fax No.:650-565-5100
/s/ Alan K. Austin
- ------------------------------------
Alan K. Austin
Address: Address: 975 Page Mill Road, Palo Alto, CA 94304
Fax No.:650-461-5375
/s/ Timothy J. Sparks
- ------------------------------------
Timothy J. Sparks
Address: 650 Page Mill Road, Palo Alto, CA 94304
Fax No.: 650-493-6811
/s/ Daniel K. Yuen
- ------------------------------------
Daniel K. Yuen
Address: Address: 975 Page Mill Road, Palo Alto, CA 94304
Fax No.:650-461-5375
29
<PAGE>
[SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT]
30
<PAGE>
ADDITIONAL STOCKHOLDERS:
By: ___________________________ Dated: ____________________
Name:
Title:
Address:
Fax No.:
By: ___________________________ Dated: ____________________
Name:
Title:
Address:
Fax No.:
By: ___________________________ Dated: ____________________
Name:
Title:
Address:
Fax No.:
By: ___________________________ Dated: ____________________
Name:
Title:
Address:
Fax No.:
[SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT]
31
<PAGE>
SCHEDULE A
FORMATION ISSUANCES
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
FOUNDER Number of Date Issued
Shares of Common Stock
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BELL & HOWELL INFORMATION 10,366,667 1-10-00
AND LEARNING COMPANY
------------------------------------------------------------------------------------------------------------------
INFONAUTICS, INC. 4,633,333 1-10-00
------------------------------------------------------------------------------------------------------------------
</TABLE>
CLOSING
<TABLE>
------------------------------------------------------------------------------------------------------------------
INVESTOR Number of Shares of Series A Preferred Date Issued
Stock
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TBG INFORMATION 3,010,000 1-10-00
INVESTORS LLC
------------------------------------------------------------------------------------------------------------------
CORE LEARNING GROUP LLC 2,510,000 1-10-00
------------------------------------------------------------------------------------------------------------------
CORE LEARNING GROUP - 500,000 1-10-00
BC, LLC
------------------------------------------------------------------------------------------------------------------
APA EXCELSIOR V, L.P.. 1,486,941 1-10-00
------------------------------------------------------------------------------------------------------------------
PATRICOF PRIVATE INVESTMENT CLUB II, L.P. 18,060 1-10-00
------------------------------------------------------------------------------------------------------------------
FRANK A. BONSAL, JR. 35,715 1-10-00
------------------------------------------------------------------------------------------------------------------
WS INVESTMENT 14,286 1-10-00
COMPANY 99B
------------------------------------------------------------------------------------------------------------------
ALAN K. AUSTIN 14,286 1-10-00
------------------------------------------------------------------------------------------------------------------
THE SAN DOMENICO TRUST 3,286 1-10-00
------------------------------------------------------------------------------------------------------------------
TIMOTHY J. SPARKS 7,143 1-10-00
------------------------------------------------------------------------------------------------------------------
DANIEL K. YUEN 285 1-10-00
------------------------------------------------------------------------------------------------------------------
SERIES A PREFERRED TOTAL 7,600,002 1-10-00
------------------------------------------------------------------------------------------------------------------
</TABLE>
ADDITIONAL ISSUANCES
<TABLE>
------------------------------------------------------------------------------------------------------------------
NAME Number and Class of Shares Date Issued
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 14,563,368
<SECURITIES> 0
<RECEIVABLES> 856,469
<ALLOWANCES> 99,800
<INVENTORY> 0
<CURRENT-ASSETS> 15,759,806
<PP&E> 1,914,861
<DEPRECIATION> 1,346,977
<TOTAL-ASSETS> 24,928,919
<CURRENT-LIABILITIES> 6,364,306
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,564,613
<TOTAL-LIABILITY-AND-EQUITY> 24,928,919
<SALES> 3,041,137
<TOTAL-REVENUES> 3,041,137
<CGS> 803,627
<TOTAL-COSTS> 5,840,252
<OTHER-EXPENSES> 2,499,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,760
<INCOME-PRETAX> (5,292,902)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,292,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,292,902)
<EPS-BASIC> (.44)
<EPS-DILUTED> (.44)
</TABLE>
