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As filed with the Securities and Exchange Commission on December 31, 1998
Registration No. 333-_____
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_______________________
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ONHEALTH NETWORK COMPANY
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
WASHINGTON 7372 41-1686038
(State of incorporation or organization) Primary Standard Industrial (IRS Employer Identification No.)
Classification Code Number
</TABLE>
808 HOWELL STREET, SUITE 400
SEATTLE, WASHINGTON 98101
(206) 583-0100
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(Address, including zip code, and telephone number including area code, of
registrant's principal executive office)
ROBERT N. GOODMAN, CHIEF EXECUTIVE OFFICER
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808 HOWELL STREET, SUITE 400
SEATTLE, WASHINGTON 98101
(206) 583-0100
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(Name, address, including zip code, and telephone number, including area code,
of agent for service)
________________________________________
Copies of all communications to:
C. Kent Carlson
Christopher H. Cunningham
Preston Gates & Ellis LLP
701 Fifth Avenue Suite 5000
Seattle, Washington 98104-7078
(206) 623-7580
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AT SUCH TIME
OR TIMES AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS THE SELLING
SHAREHOLDERS SHALL DETERMINE.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIE REGISTERED REGISTERED OFFERING PRICE PER SHARE(1) AGGREGATE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 2,439,732 shares $4.3125 $10,521,344.25 $2,924.93
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Subject to Completion dated December 30, 1998
PROSPECTUS
2,439,732 Shares
OnHealth Network Company
Common Stock, $.01 par value per share
On October 30, 1998, we sold Common Stock and Warrants and on December 14,
1998 we sold more Common Stock to certain shareholders. We are filing this
prospectus on behalf of the selling shareholders and they are offering all the
shares of Common Stock offered in this Prospectus so that they may offer and
sell shares in the public market and otherwise. The selling shareholders and
the number of shares of our common stock the selling shareholders may sell under
this prospectus are listed on page 15 of this prospectus.
The selling shareholders may offer their shares through public or private
transactions, on or off the Nasdaq SmallCap Market, at prevailing market prices,
or at privately negotiated prices.
Our common stock is listed on the Nasdaq SmallCap Market under the ticker
symbol "ONHN". On December 29, 1998, the closing price of one share of OnHealth
common stock on the Nasdaq SmallCap Market was $4.375. We will receive none of
the proceeds from the sale of the Shares.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
____________________ ___, 1998
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT THAT WE HAVE FILED WITH THE
SEC. THE REGISTRATION STATEMENT CONTAINS EXHIBITS AND OTHER INFORMATION NOT
INCLUDED IN THE PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO GIVE INFORMATION OR
TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING DESCRIBED HEREIN.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the documents we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information in
documents we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we will make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934:
1. Annual Report of IVI Publishing, Inc.* on Form 10-K for the fiscal year
ended December 31, 1997;
2. Quarterly Report of IVI Publishing, Inc.* on Form 10-Q for the quarter
ended March 31, 1998;
3. Proxy Statement of IVI Publishing, Inc.* for the annual meeting of
shareholders held June 16, 1998;
4. Quarterly report on Form 10-Q for the quarter ended June 30, 1998; and
5. Quarterly report on Form 10-Q for the quarter ended September 30, 1998.
* We changed our name from IVI Publishing, Inc. to OnHealth Network Company on
June 16, 1998.
You may request a copy of these filings or a copy of any or all of the
documents referred to above which have been or may be incorporated in this
Prospectus by reference, at no cost, by writing us at the following address:
Corporate Secretary
808 Howell Street, Suite 400
Seattle, Washington 98101
(206) 583-0100
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THE COMPANY
It is our intent to become the premier source of health-related information
on the world wide web. In the past, under the name IVI Publishing, Inc., we
published in CD-ROM and other formats health related information for some of
America's best-known health-care facilities in partnership with some of
America's most prestigious media firms. Historically, our attention and
resources have been directed to the cable television, CD-ROM and online
interactive media markets.
With the rapid rise of the internet as a source of information for consumers,
we have focused our company's efforts at creating a web site for consumers of
health information that is easy to use, provides custom features for users and
encourages frequent usage. Our flagship web site, located at www.onhealth.com,
opened in July 1997 and was re-released in July of 1998.
We hope to distinguish ourselves by "cutting through the clutter" of the
internet becoming the source for health-related information by locating and
packaging up-to-date and reliable information. By doing so, we will attain a
large number of consumers visiting our web site, which is essential to obtaining
advertising revenues.
We were originally incorporated in August 1990 in the State of Minnesota under
the name Interactive Television, Inc. We changed our name to Interactive
Ventures, Inc. in March 1991, IVI Publishing, Inc. in August 1993, and in
connection with our move to Washington and re-incorporation there, OnHealth
Network Company in June of 1998. Our principal executive offices are located
at:
808 Howell Street, Suite 400
Seattle, Washington 98101
(206) 583-0100
RECENT DEVELOPMENT
On December 14, 1998, we completed the private placement of $2.0 million of
our common stock to one of the selling shareholders described in this
prospectus. The terms of this private placement were substantially identical to
those of our October 30, 1998 private placement and are further described in
this prospectus under "Description of Our Securities" and "Selling
Shareholders."
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RISK FACTORS
Investment in the shares of common stock offered in this Prospectus (the
"Shares") involves a high degree of risk. You should consider the following
discussion of risks as well as other information in this prospectus before
purchasing any Shares.
Except for historical information, the information contained in this
prospectus and in our SEC reports are "forward looking" statements about our
expected future business and performance. Our actual operating results and
financial performance may prove to be very different from what we might have
predicted as of the date of this prospectus. The risks described below address
some of the factors that may affect our future operating results and financial
performance:
. Reliance On External Financing. Based on our current cash and cash
equivalents, we expect to have sufficient resources to meet our ongoing
financial obligations and operate at least through March 31, 1999. Our
operations generated a negative cash flow during 1997 and during the first
nine months of 1998. The degree to which we are a net user of cash may
increase during the last quarter of 1998 and calendar 1999, as a result of
the expansion plans for the OnHealth network and our distribution
relationships and as a consequence of focusing on a new business model. We
are exploring and will continue to explore external financing to ensure
continued operations beyond March 31, 1999. There can be no assurance that
additional capital, on a debt or equity basis, will be found, or if found
that it will be on economically viable terms. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our shareholders will be reduced, shareholders may
experience additional dilution and such securities may have rights,
preferences or privileges senior to those of the holders of common stock.
. Limited Operating History and Accumulated Deficit; Continuing Operating
Losses. We were incorporated in 1990 and have been operating continuously
since 1991. However, we have only been active online since 1996 and the
OnHealth network web site was established in July 1997. Because of this
limited history on the internet, there is little information investors can
use to analyze our financial results relating to our internet web site.
Since 1990, we have generated an accumulated deficit of approximately $85
million (through September 30, 1998) and have incurred significant losses
in each of the last five years. Our ability to generate profits depends
upon our ability to attract consumers to our web site and how we leverage
those visits. This means we need to create significant revenue streams from
our web site, earn substantial gross margins on those revenue streams and
control our costs of operation. We anticipate continued significant
operating losses at least through the first half of 1999, as the OnHealth
web site is improved and the OnHealth network is enhanced. We can not
assure you that we will ever attain profitability.
. Shift to Advertising Revenues May Not Replace Revenues from Sales of CD-
ROMs. Since we began operations in 1990 and until early 1998, most of our
revenues were based on development, sales and support of CD-ROM titles. In
January 1998, the new management team changed our core business focus to
internet web site hosting of health care related content and the
dissemination of health and wellness information from our web site. The
principal form of revenue from this business model is advertising. Revenues
from CD-ROMs have declined significantly since 1995; however, advertising
revenues may never be sufficient to offset such declines in revenue. There
is little information available to assess the potential profitability or
viability of our business. In other words, we essentially face the same
risks and uncertainties of any new venture, and there can be no assurance
that we will be any more successful in this venture than in our previous
business activities.
. Reliance on Advertising Revenues. We anticipate that a substantial portion
of our revenues will come from the sale of advertisements on our web pages.
Our strategy is to continue to develop advertising and other methods of
generating revenues. We are in the early stages of licensing our products
and technology and in implementing our
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advertising program. To generate significant advertising revenues, several
things need to happen:
1. Advertisers must accept the internet as an attractive place to
advertise;
2. We need to attract a large number of consumers to our web site;
3. Those consumers need to have demographic characteristics
attractive to advertisers.
. Immature Advertising Market. There is fluid and intense competition in the
sale of advertising on the internet. Advertising rates quoted by different
vendors vary widely, which makes it difficult to project future levels of
advertising revenues. Further, significant and consistent use of the
internet by many advertisers depends upon confirmation that the internet is
an effective advertising medium. To date, advertisers have not by their
actions become convinced of that.
The internet as an advertising medium has not been available for a
sufficient period of time to gauge its effectiveness as compared with
traditional advertising media. No standards have been widely accepted for
the measurement of the effectiveness of internet-based advertising.
Internet advertising rates are based in part on third-party estimates of
users of an internet site (referred to as "impressions"). Such estimates
are often based on sampling techniques or other imprecise measures, and may
materially differ from our estimates. We do not know if advertisers will
accept our or other parties' measurements of impressions.
Filter software programs that limit or remove advertising from an internet
user's desktop are available to consumers. Widespread adoption or increased
use of such software by users or the adoption of such software by certain
internet access providers could have a material adverse effect upon the
viability of advertising on the internet and on our business, results of
operations and financial condition.
. Short Term Nature of Advertising Contracts; Guarantee of Minimum Impression
Levels. Substantially all of our advertising contracts have been for terms
averaging one to three months in length, with relatively few longer-term
advertising contracts. Many of our advertising customers have limited
experience with internet advertising, and may not believe internet
advertising to be effective compared to traditional advertising media. We
cannot assure you that our current advertisers will continue to purchase
advertisements on our web site.
Our advertising contracts typically guarantee the advertiser a minimum
number of impressions. To the extent that minimum impression levels are not
achieved for any reason, we may be required to "make good" or provide
additional impressions after the contract term. Providing additional
impressions may adversely affect the availability of advertising inventory
adversely affecting on our business, results of operations and financial
condition.
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. Need to Enhance and Develop OnHealth.com to Remain Competitive. To remain
competitive, we must continue to enhance and improve the responsiveness,
functionality and features of onhealth.com and develop other products and
services. Enhancements of or improvements to our web site may contain
undetected programming errors that require significant design
modifications, resulting in a loss of consumer confidence and user support
and a decrease in the value of our brand name recognition. We plan to
develop and introduce new features, functions, products and services, such
as increased capabilities for user personalization and interactivity. This
will require the development or licensing of increasingly complex
technologies. We may not succeed in developing or introducing features,
functions, products and services that will attract consumers. Such failure
would likely have a material adverse effect on our business, results of
operations and financial condition.
. Failure to Achieve Brand Identity. We believe that establishing and
maintaining brand identity is a critical aspect of our efforts to attract
and expand our user base, internet traffic and advertising relationships.
We believe that brand recognition will become increasingly important
because there are minimal barriers to entry with competing web sites. We
intend to increase our brand awareness through advertising campaigns in
publications, radio, online media and other marketing and promotional
efforts. If we cannot build a brand recognition that consumers (and
eventually advertisers) seek out, we will likely be unable to generate
revenues.
Developing brand recognition is a complex process. It depends, in part, on
our success in providing a high quality experience. The value of our brand
could be diluted by a variety of events, including poor consumer or
advertiser reaction to our web site and services offered on the web site.
. Unpredictability of Future Revenue Streams; Potential Fluctuations in
Quarterly Results. Since our online operating history is very limited and
the economics of the internet are still evolving, it is difficult to
forecast future revenues with a high degree of accuracy. The advertising
and retail industries typically experience their best quarter in the fourth
quarter of each year, and to the extent that we rely upon advertising
revenues, our revenues could similarly fluctuate. Due to the health related
nature of editorial content, however, we believe that our revenues may not
be as seasonal as the remainder of the advertising and retail industries.
Since our expense levels are based upon anticipated advertising and
licensing revenue, we may not be able to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in relation to our expectations would have an
immediate adverse impact on our business, results of operations and
financial condition. In addition, we plan to significantly increase our
operating expenses to develop new distribution channels, fund greater
levels of research and development, increase our sales and marketing
operations, broaden our customer support capabilities and establish brand
identity and strategic alliances.
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. Dependence on Third-Party Relationships. We are and will continue to be
significantly dependent on a number of third-party relationships to
increase traffic on onhealth.com and thereby generate advertising revenues
and maintain the current level of service and variety of content for our
users. We are generally dependent on other web site operators that provide
links to onhealth.com.
Most of our arrangements with third-party internet sites and other third-
party service providers do not require future minimum commitments to use
our services, are not exclusive and are short-term or may be terminated at
the convenience of the other party. Moreover, we do not have agreements
with the majority of other web site operators that provide links to
onhealth.com, and such web site operators may terminate such links at any
time without notice. There can be no assurance that third parties regard
our relationship with them as important to their own respective businesses
and operations, that they will not reassess their commitment to us at any
time in the future or that they will not develop their own competitive
services or products.
There can be no assurance that we will be able to maintain relationships
with third parties that supply us with software or products that are
crucial to our success, or that such software or products will be able to
sustain any third-party claims or rights against their use. Also, we cannot
assure you that the software, services or products of those companies that
provide access or links to our services or products will achieve market
acceptance or commercial success. Accordingly, we cannot assure you that
our existing relationships will result in sustained business partnerships,
successful service or product offerings or the generation of significant
revenues for us. Failure of one or more of our strategic relationships to
achieve or maintain market acceptance or commercial success or the
termination of one or more successful strategic relationships could have a
material adverse effect on our business, results of operations and
financial condition.
. Competition. There are a number of competitors currently delivering online
health content, and it is likely that more competitors will emerge in the
near future. Many of today's competitors are better financed, have longer
operating histories and better brand recognition than ours, and some have
internal distribution or cross-promotional opportunities to support their
online ventures that we do not have and can not
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replicate for a reasonable investment. It is possible that existing or
emerging competitors may be able to secure critical editorial content or
distribution relationships on an exclusive basis, or may raise a provider's
expectation about the value of such assets. For these reasons, increased
competition may result in diminished profit margins, market share or brand
value. We expect that competition will increase online in the future due to
more entrants introducing competitive products and industry consolidation,
which could result in better-financed competitors. The intense competition
in the consumer software business continues to accelerate as an increasing
number of companies, many of which have financial, managerial, technical
and intellectual property resources greater than ours, offer products that
compete directly with one or more of our products or services. We believe
that the principal competitive factors in attracting advertisers include
the amount of traffic on our web site, brand recognition, customer service,
the demographics of our user base, our ability to offer targeted audiences
and the overall cost effectiveness of the advertising medium we offer. We
believe that the number of internet companies relying on internet-based
advertising revenue, as well as the number of advertisers and the number of
users, will increase substantially in the future. Accordingly, we will
likely face increased competition, resulting in increased pricing pressures
on our advertising rates, which could have a material adverse effect on our
business, results of operation and financial condition.
. Dependence on Key Personnel. Our development and operation is substantially
dependent on the services of our President and Chief Executive Officer,
Robert N. Goodman and on our Editor-in-Chief, Rebecca Farwell. The loss of
either Mr. Goodman's or Ms. Farwell's services could materially and
adversely affect our business prospects. We are also dependent on the
continued service of certain other key management as well as our software
engineering personnel, the loss of whose services could significantly delay
the achievement of our planned development objectives. We have not
purchased key man life insurance on any of our personnel. Achievement of
our business objectives will require substantial additional expertise in
the areas of technology, finance, and marketing. We actively seek
additional qualified personnel. Competition for qualified personnel is
intense, and the loss of key personnel, or the inability to attract and
retain the additional highly skilled personnel required for the expansion
of our activities, could have a material adverse effect on our business,
results of operations and financial condition.
. Reliance on Intellectual Property and Proprietary Rights. We regard
substantial elements of our web site and underlying technology as
proprietary and attempt to protect them by relying on trademark, service
mark, copyright and trade secret laws and restrictions on disclosure and
transferring title and other methods. We also have entered into
confidentiality agreements with our consultants and in connection with our
license agreements with third parties and generally seek to control access
to and distribution of our technology, documentation and other proprietary
information. Despite these precautions, it may be possible for a third
party to copy or otherwise obtain and use our proprietary information
without authorization or to develop similar technology independently.
Effective trademark, service mark, copyright and trade
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secret protection may not be available in every country in which our
services are made available through the internet, and policing unauthorized
use of our proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the
future viability or value of any of our proprietary rights. There can be no
assurance that the steps taken will prevent misappropriation or
infringement of our proprietary information, which could have a material
adverse effect on our business, results of operations and financial
condition.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity
and scope of the proprietary rights of others. Such litigation might result
in substantial costs and diversion of resources and management attention.
We cannot assure you that our business activities will not infringe upon
the proprietary rights of others, or that other parties will not assert
infringement claims against us, including claims that by directly or
indirectly providing hyperlink text links to web sites operated by third
parties. Moreover, from time to time, we may be subject to claims of our
alleged infringement of the trademarks, service marks and other
intellectual property rights of third parties. Such claims and any
resultant litigation, should it occur, might subject us to significant
liability for damages, might result in invalidation of our proprietary
rights and, even if not meritorious, could result in substantial costs and
diversion of resources and management attention and could have a material
adverse effect on our business, results of operations and financial
condition.
We currently license from third parties certain technologies incorporated
into onhealth.com. As we continue to introduce new services that
incorporate new technologies, we may be required to license additional
technology from others. We cannot assure you that these third-party
technology licenses will continue to be available on commercially
reasonable terms, if at all. Additionally, we cannot assure you that the
third parties from which we currently license our technology will be able
to defend their proprietary rights successfully against claims of
infringement. As a result, any inability to obtain these technology
licenses could result in delays or reductions in the introduction of new
services or could adversely affect the performance of our existing services
until equivalent technology can be identified, licensed and integrated.
. Liability for Information Retrieved from or Transmitted over the Internet;
Liability for Products Sold over the Internet. Because materials may be
downloaded by the online or internet services that we operate or the
internet access providers with which we have relationships and may be
subsequently distributed to others, there is a potential that claims will
be made against us for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of such
materials. In addition, the increased attention focused upon liability
issues and legislative proposals could materially impact the overall growth
of internet use. We
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could also be exposed to liability with respect to third-party information
that may be accessible through our web site, or through content and
materials that may be posted by our users on discussion boards that we
offer. Such claims might include, among others, that, by directly or
indirectly providing hyperlink text links to web sites operated by third
parties, we are liable for copyright or trademark infringement or other
wrongful actions by such third parties through such web sites. It is also
possible that, if any third-party content information provided on our web
site contains errors, third parties could make claims against us for losses
incurred in reliance on such information.
Even to the extent such claims do not result in liability, we could incur
significant costs in investigating and defending against such claims. The
imposition of potential liability for information carried on or
disseminated through our systems could require us to implement measures to
reduce our exposure to such liability, which may require the expenditure of
substantial resources and limit the attractiveness of our services to
users.
Our general liability insurance may not cover all potential claims to which
we are exposed or may not be adequate to indemnify for all liability that
may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could have a material
adverse effect on our business, results of operations and financial
condition.
. Risks Related To System Operation. All companies that rely on the internet
are dependent upon the continuous, reliable and secure operation of
internet servers and related hardware and software. To the extent that
service is interrupted, consumers will be inconvenienced and commercial
clients will suffer from a loss in advertising or transaction delivery.
These shortfalls would directly result in a revenue loss. Our computer and
communications hardware are protected through physical and software
safeguards. However, they are still vulnerable to fire, earthquake, flood,
power loss, telecommunications failures, physical or software break-ins and
similar events. We do not have full redundancy for all of our computer and
telecommunications facilities and do not carry business interruption
insurance to protect us in the event of a catastrophe. Such an event could
lead to significant negative impacts on our operating results and financial
condition. We are also dependent upon third parties to provide potential
users with web browsers and internet and online services necessary for
access to our web site. In the past, users have occasionally experienced
difficulties with internet and online services due to system failures,
including failures unrelated to our systems. Any sustained disruption in
internet access provided by third parties could have a material adverse
effect on our business, results of operations and financial condition.
. Impact of the Year 2000. The Year 2000 issue is the potential for system
and processing failures of date-related data and the result of computer-
controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize a date using "00" as the
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year 1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities .
We could be affected by Year 2000 issues related to non-compliant
information technology ("IT") systems or non-IT systems that either we
operate or are operated by third parties. We have substantially completed
assessment of our internal and external (third-party) IT systems and non-IT
systems. At this point in our assessment, we are not currently aware of any
Year 2000 problems relating to systems we operate or that are operated by
third parties that would have a material effect on our business, results of
operations or financial condition, without taking into account our efforts
to avoid such problems. Based on our assessment to date, we do not
anticipate that costs associated with remediating our non-compliant IT
systems or non-IT systems will be material, although there can be no
assurance to such effect.
To the extent that our assessment is finalized without identifying any
additional material non-compliant IT systems we operate or that are
operated by third parties, the most reasonably likely worst case Year 2000
scenario is a systemic failure beyond our control, such as a prolonged
telecommunications or electrical failure. Such a failure could prevent us
from operating our business, prevent users from accessing our web site, or
change the behavior of advertising customers or persons accessing our web
site. We believe that the primary business risks, in the event of such
failure, would include, but not be limited to, lost advertising revenues,
increased operating costs, loss of customers or persons accessing our web
site, or other business interruptions of a material nature, as well as
claims of mismanagement, misrepresentation, or breach of contract, any of
which could have a material adverse effect on our business, results of
operations and financial condition. We have not made any contingency plans
to address such risks.
. Management of Potential Growth. To accommodate the demand of additional
editorial content and distribution channels for the OnHealth network, the
employee base could grow significantly from the December 29, 1998 level of
35 employees. The expansion of our workforce could place a significant
strain on our management, financial resources and infrastructure. We cannot
assure you that we will be able to attract and retain employees with the
appropriate skill sets, or that we will be able to manage growth
effectively. If we are unable to manage growth in the coming years, there
could be an adverse affect on our operations.
. Risk Associated with Certain Litigation. In February 1996, an action in the
District Court of Hennepin County (Minnesota) was brought by T. Randal
Productions et al. against the company and one current and two former
employees. The plaintiffs made various allegations, including the existence
of a joint venture and misappropriation of corporate opportunities by the
company and its employees, and sought award of monetary damages of
$14,000,000 to $16,000,000. In November 1997, a jury found that there was
no joint venture between T. Randal and the company and/or any of its
employees but awarded T. Randal $480,000 for damages sustained to its
business.
11
<PAGE>
The jury verdict was upheld by the trial court on plaintiffs' motion for a
new trial, amended findings and for judgment notwithstanding the verdict,
and is currently on appeal to the Minnesota Court of Appeals. The
plaintiffs also have an action pending against certain of our affiliates on
the same grounds on which the action against us was based. We have
indemnified these affiliates against any damages arising out of these
claims. While we are unable to predict the ultimate outcome of this legal
action, an outcome whereby T. Randal was completely successful on its claim
would have a material adverse effect on us and could cause us to
discontinue operations.
. Reliance On External Content. We intend to produce only a portion of the
editorial content that will be found on the OnHealth network. We will be
reliant on third-party firms that have the expertise, technical capability,
name recognition, and willingness to syndicate product content for branding
and distribution by others. As health-related content grows on the web,
there may be increasing competition for the best product suppliers, which
may result in a competitor acquiring a key supplier on an exclusive basis,
or in significantly higher content prices. Such an outcome could make the
OnHealth network less attractive or useful for an end user, or could reduce
our profitability. Either event would have a materially adverse impact our
results.
. Governmental Regulation and Legal Issues. We are not governed by any laws
of any government entity, other than general business and taxation
regulations and the general regulations that surround online enterprises.
However, with the growing popularity of online usage, various new
regulations are possible which may affect privacy, intellectual property
rights, marketing, pricing, content, or other issues. The adoption of
additional laws in this field may reduce consumer demand for online
services, or adversely impact our cost of doing business. Either outcome
could have a material adverse affect on our financial results.
. Security Risks. Experienced programmers or "hackers" could attempt to
penetrate our network security. Because a hacker who is able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our products and services, we may be required to expend
capital and resources to protect against or to alleviate problems caused by
such parties. In addition, we may not have a timely remedy against a hacker
who is able to penetrate our network security. Such purposeful security
breaches could have a material adverse effect on our business, results of
operations and financial condition. In addition, the inadvertent
transmission of computer viruses could expose us to a material risk of loss
or litigation and possible liability.
. Impact of General Economic Conditions. Time spent on the internet by
individuals, purchases of new computers and purchases of membership
subscriptions to internet sites are typically discretionary for consumers
and may be particularly affected by adverse trends in the general economy.
The success of our operations depends to a significant extent upon a number
of factors relating to discretionary consumer spending, including economic
conditions (and perceptions of such conditions by consumers) affecting
disposable consumer income such as employment, wages and
12
<PAGE>
salaries, business conditions, interest rates, availability of credit and
taxation, for the economy as a whole and in regional and local markets
where we operate. There can be no assurance that consumer spending will not
be adversely affected by general economic conditions, which could
negatively impact our results of operations or financial condition. Any
significant deterioration in general economic conditions or increases in
interest rates may inhibit consumers' use of credit and cause a material
adverse effect on our revenues and profitability. In addition, our business
strategy relies on advertising by and agreements with other internet
companies. Any significant deterioration in general economic conditions
that adversely affected these companies could also have a material adverse
effect on our business, results of operations and financial condition.
. Absence of Dividends. We have not paid cash dividends since our inception.
We intend to retain all of our earnings, if any, for use in the business
and do not anticipate paying any cash dividends in the foreseeable future.
Pursuant to our Articles of Incorporation and Bylaws, the payment of
dividends is subject to the discretion of our Board of Directors and any
terms and conditions imposed by law.
NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements made in this Prospectus, that are summarized here, are
forward-looking statements that involve risk and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include, but are not limited to those identified:
. The expectation that we will become the leading on-line health information
network depends on our ability to obtain high quality editorial content,
our ability to implement effective traffic building programs and
distribution relationships, as well as other general market conditions and
competitive conditions within this market, including the introduction and
further development of competitive web sites.
. The expectation that we will see a growth in revenues and positive net
income as a result of our shift in focus to our on-line health network
depends on customer interest, the ability to obtain successful revenue
sources from advertisers, as well as other general market and competitive
conditions within the on-line health network market.
. The expectation that we will be able to meet our ongoing financial
obligations and operate through, at least March 31, 1999 depends on our
ability to meet our goals, acceptance of our products, the ability to raise
sufficient capital and our ability to control our costs of operations.
USE OF PROCEEDS
All net proceeds from the sale of the Shares which are covered by this
Prospectus will go to the Selling Shareholders (as defined on page 15) who offer
and sell their shares. We will not receive any proceeds from sales of Shares by
the Selling Shareholders.
13
<PAGE>
DESCRIPTION OF OUR SECURITIES
COMMON STOCK
Our articles of incorporation authorize 29,000,000 shares of common stock
and 1,000,000 shares of preferred stock. As of December 16, 1998, there were
approximately 12,752,572 shares of common stock outstanding held of record by
approximately 3,175 shareholders. Each holder of a share of common stock gets
one vote per share on all matters submitted to a vote of shareholders but may
not cumulate votes for the election of directors. Holders of common stock also
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of our
dissolution, liquidation or winding up, holders of common stock are entitled to
share ratably in all assets. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. All the outstanding shares of
common stock are, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
The Shares issued to the Selling Shareholders were issued pursuant to a
subscription agreement. Pursuant to the subscription agreement, the Shares are
held by an escrow agent and may be released at the discretion of the Selling
Shareholders beginning on the effective date of the Registration Statement of
which this Prospectus is a part. The subscription agreement provides that we
could be required to issue additional Shares ("Adjustment Shares") to the
Selling Shareholders if the "Adjustment Price" of our common stock (which is
defined as the lesser of $6.50 and the average of the closing bid prices for the
immediately preceding fifteen trading days) on the earlier of the date (the
"Reset Date") of the launch of our proposed e-commerce web site, March 31, 1999
or, such later date when the Registration Statement of which this Prospectus is
a part is declared effective, is less than a floor price of $4.24. If the
Adjustment Price is lower, then we will issue to each Selling Shareholder
additional Shares, if any, equal to (i) the product of (x) the quotient obtained
by dividing $4.24 by the Adjustment Price and (y) the number of Shares initially
held in escrow on behalf of each Selling Shareholder on such date (and not
previously withdrawn) , less (ii) such number of Shares initially held in escrow
on behalf of each Selling Shareholder on such date. Additional Shares will be
required to be issued on Reset Dates every three months thereafter until the
earlier of November 10, 2001 or the date when all Shares are released from
escrow, based on a similar formula if the Adjustment Price at the end of any
such three month period is lower than 1.0125 times the preceding Adjustment
Price. To the extent that the number of Shares issuable under the foregoing
formulas on any such Reset Date is negative, those Shares will be returned by
the escrow agent to us and be cancelled. The Adjustment Price is subject to
reduction under certain conditions primarily involving our failure to keep the
Registration Statement of which this Prospectus forms a part available for use
for resales of the Shares. We may be required to repurchase the Shares
initially issued, the Adjustment Shares and the shares issued upon exercise of
the Warrants under certain conditions, including our default of our obligations
under the subscription agreement, the continued unavailability of the
Registration Statement, and the absence of reported prices for the Common Stock
on the Nasdaq National Market or the Nasdaq SmallCap Market; provided, however
that we may elect to issue additional Shares in lieu of repurchasing such shares
if the circumstances triggering the repurchase obligation is not solely within
our control.
14
<PAGE>
WARRANTS
Including the Warrants issued to one of the Selling Shareholders described
below, we have outstanding warrants to purchase 678,477 shares of common stock
with various parties with varying exercise prices.
The Warrants. On October 30, 1998, in connection with the issuance of
1,000,898 of the Shares, we issued to one of the Selling Shareholders warrants
to purchase a total of 124,756 shares of common stock at an exercise price of
$4.809375 per share. The Warrants expire October 30, 2003.
In addition, we have two warrants for the aggregate amount of 66,778 shares
with two investors each with a exercise price of $11.23125. Such warrants
expire April 10, 2003. Also, we have 20,000 warrants with Vance Corp. (our
landlord) with an exercise price of $3.32. Finally, we have issued a warrant to
Frazier Investments for 224,349 shares of common stock exercisable at a price of
$6.61 per share expiring June 3, 2000.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by the selling shareholders (the "Selling
Shareholders") and as adjusted to give effect to the sale of the Shares offered
by this Prospectus:
<TABLE>
<CAPTION>
Beneficial Ownership
AFTER OFFERING (3)
----------------------
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BEING
SELLING SHAREHOLDER OFFERING OFFERED (2) SHARES PERCENT
- ------------------------- ------------------- ------------------ --------- ----------
<S> <C> <C> <C> <C>
Advantage Fund II Ltd. 1,125,654(1) 1,626,103 -0- -0-
----------- ---------
Koch Industries, Inc. 542,419 813,629 -0- -0-
----------- ---------
</TABLE>
(1) Includes 124,756 Shares issuable upon exercise of warrants.
(2) The number of shares of common stock shown as beneficially owned and offered
by the Selling Shareholder represents the number of shares which we
initially agreed to register, including additional Shares which may be
issued to the Selling Shareholders in the future pursuant to the
subscription agreement.
(3) Assumes the sale of all of the Shares being offered hereby.
THE SELLING SHAREHOLDERS AND THEIR RESPECTIVE OFFICERS AND DIRECTORS HAVE
NOT HELD ANY POSITIONS OR OFFICE OR HAD ANY OTHER MATERIAL RELATIONSHIP WITH THE
COMPANY OR ANY OF OUR AFFILIATES WITHIN THE PAST THREE YEARS.
We have agreed with the Selling Shareholders to file with the Commission,
under the Securities Act, the Registration Statement of which this Prospectus
forms a part, with respect to the resale of the
15
<PAGE>
Shares, and have agreed to prepare and file such amendments and supplements to
the Registration Statement as may be necessary to keep the Registration
Statement effective until the earlier of (i) three years after the last
Adjustment Shares may be issued to the Selling Shareholders, (ii) the date that
all of the Selling Shareholders may sell all of their Shares under Rule 144(k)
of the Securities Act, or (iii) such date that none of the Selling Shareholders
own any of the Shares offered hereby.
PLAN OF DISTRIBUTION
The Selling Shareholders, or their pledgees, donees, transferees or others
who succeed to their interest, may offer their Shares at various times in one or
more of the following transactions:
. on the Nasdaq SmallCap Market;
. in the over-the-counter market;
. in negotiated transactions other than the Nasdaq SmallCap Market or the
over-the-counter market;
. in connection with short sales;
. by pledge to secure debts and other obligations;
. in connection with the writing of call options, in hedging transactions and
in settlement of other transactions in standardized or over-the-counter
options; or
. in a combination of any of the above transactions.
The Selling Shareholders may sell their Shares at market prices at the time
of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices.
The Selling Shareholders may use broker-dealers to sell their Shares. If
this happens, broker-dealers will either receive discounts or commissions from
the Selling Shareholder, or they will receive commissions from purchasers for
whom they acted as agents.
If the Selling Shareholders give or pledge their Shares to another person,
such person may sell such Shares as a Selling Shareholder under this Prospectus.
Any Shares that qualify for sale under Rule 144 of the Securities Act may be
sold under such rule rather than pursuant to this Prospectus.
LEGAL MATTERS
For purposes of this offering, Preston Gates & Ellis LLP, Seattle,
Washington, is giving its opinion on the validity of the Shares.
16
<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule included in our Annual Report on Form 10-K for the year
ended December 31, 1997, as set forth in their report, which is incorporated in
this prospectus by reference. Our financial statements are incorporated by
reference in reliance on their report, given on their authority as experts in
accounting and auditing.
17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
---------------------------------------------
The expenses relating to the registration of the Shares will be borne by the
registrant. Such expenses are estimated to be as follows:
<TABLE>
<S> <C>
Registration Fee
Securities and Exchange Commission $ 2,924.93
Accountants' Fees $ 7,500.00
Legal Fees $ 8,000.00
Printer's Fees $ 1,000.00
Miscellaneous $ 500.00
----------
Total $19,924.93
</TABLE>
Item 15. Indemnification of Directors and Officers.
------------------------------------------
Article XII of the Articles of Incorporation of the Company authorizes the
Company to indemnify any present or former director or officer to the fullest
extent not prohibited by the Washington Business Corporation Act, public policy
or other applicable law. Chapter 23B.8.510 and .570 of the Washington Business
Corporation Act authorizes a corporation to indemnify its directors, officers,
employees, or agents in terms sufficiently broad to permit such indemnification
under certain circumstances for liabilities (including provisions permitting
advances for expenses incurred) arising under the 1933 Act. The directors and
officers of the Company are entitled to indemnification by the Selling
Shareholders against any cause of action, loss, claim, damage, or liability to
the extent it arises out of or is based upon the failure of the Selling
Shareholder (or his donees, legatees, or pledgees) to comply with the Prospectus
delivery requirements under the federal securities laws or any applicable state
securities laws or upon any untrue statement or alleged untrue statement or
omission or alleged omission made in this Registration Statement and the
Prospectus contained herein, as the same shall be amended or supplemented, made
in reliance upon or in conformity with written information furnished to the
Company by such Selling Shareholder.
In addition, the Company maintains directors' and officers' liability
insurance under which its directors and officers are insured against loss (as
defined in the policy) as a result of claims brought against them for their
wrongful acts in such capacities.
Item 16. Exhibits and Financial Statement Schedules.
-------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
(a)
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------------
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Form of Subscription Agreement relating to the purchase of the Common Stock*
4.2 Form of Registration Rights Agreement*
4.3 Form of Common Stock Purchase Warrant*
4.4 Form of Escrow Agreement*
5 Opinion of Preston Gates & Ellis LLP regarding legality
23.1 Consent of Ernst & Young LLP
23.2 Consent of Preston Gates & Ellis LLP**
</TABLE>
1
<PAGE>
* Incorporated by reference to the Form 10-Q of the Registrant for the three
months ended September 30, 1998.
** Contained within Exhibit 5
Item 17. Undertakings.
------------
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors and executive officers of the Registrant pursuant
to provisions described in Item 15 or otherwise, the Registrant has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director or
executive officer of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director or executive officer in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement.
(2) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that
is incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To deliver or cause to be delivered with the Prospectus, to each person
to whom the Prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the Prospectus and furnished
pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Exchange Act; and where interim financial information required to be presented
by Article 3 of Regulation S-X are not set forth in the Prospectus, to deliver
or caused to be delivered to each person to whom the Prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the Prospectus to provide such interim financial information.
(4) That, for the purposes of determining liability under the Securities
Act, each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(6) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(7) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on the 30th day of
December, 1998.
ONHEALTH NETWORK COMPANY
By \s\ Robert N. Goodman
----------------------
Robert N. Goodman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-3 has been signed by the following persons in
the capacities indicated on the 29th day of December, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------------- --------------------------------------------------
<S> <C>
\s\ Robert N. Goodman President, Chief Executive Officer, Director
-----------------------------------------
Robert N. Goodman (Principal Executive Officer)
\s\ Michael D. Conway
------------------------------------------
Michael D. Conway Controller, Vice President and Secretary (Principal
Financial and Accounting Officer)
\s\ Michael A. Brochu
------------------------------------------
Michael A. Brochu Chairman of the Board of Directors
\s\ Ann Kirschner Director
------------------------------------------
Ann Kirschner
Director
__________________________________________
Ram Shriram
\s\ Rick Thompson Director
------------------------------------------
Rick Thompson
</TABLE>
3
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ONHEALTH NETWORK COMPANY
ARTICLE I
NAME
The name of the corporation is OnHealth Network Company.
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the registered office of the "Corporation" is 5000 Columbia
Center, 701 Fifth Avenue, Seattle, Washington 98104-7078, and the name of the
registered agent at such address is PTSGE Corp.
ARTICLE III
PURPOSE
The Corporation is organized for the purposes of transacting any and all
lawful business for which a corporation may be incorporated under the Washington
Business Corporation Act, Title 23B of the Revised Code of Washington, now or
hereafter in force (the "Act").
ARTICLE IV
CAPITAL SHARES
4.1 AUTHORIZED SHARES. The authorized capital stock of the Company
------------------
consists of 29,000,000 shares of common stock $.01 par value per share ("Common
Stock") and 1,000,000 shares ("Preferred Shares") shares of Preferred Stock,
$.01 par value per share of which 5,800
<PAGE>
have been designated Series B Convertible Preferred Stock (the "Series B
Convertible Preferred Stock" or the "Preferred Stock"). The rights and
preferences for such Series B Convertible Preferred Stock are as set forth in
Section 4.2 herein.
4.2 DESIGNATION AND AMOUNT. The shares of the series of Preferred Stock
----------------------
created hereby shall be designated as "Series B Convertible Preferred Stock",
and the number of shares constituting the Series B Convertible Preferred Stock
shall be 5,800, and shall not be subject to increase. Of the authorized shares
of Series B Convertible Preferred Stock, 800 shares may be issued only as
dividends on the outstanding shares of Series B Convertible Preferred Stock.
4.2 (a) DEFINITIONS. As used herein, the following terms shall have
-----------
the following meanings:
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the subject Person; for purposes
of this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
"Aggregated Person" means, with respect to any Person, any Person
whose beneficial ownership of shares of Common Stock would be aggregated with
the beneficial ownership of shares of Common Stock by such Person for purposes
of Section 13(d) of the Exchange Act, and Regulation 13D-G thereunder.
"AMEX" means the American Stock Exchange, Inc.
"Average Market Price" for any date means the arithmetic average of
the Market Price on each of the four Trading Days, whether or not consecutive,
during the applicable Measurement Period having the lowest Market Prices.
"Blackout Period" means any Trading Day, but not in excess of an
aggregate of 30 Trading Days, occurring after the SEC Effective Date as to which
the Corporation has notified the holders of shares of Series B Convertible
Preferred Stock on or prior to such Trading Day in accordance with Section 3(f)
of the Registration Rights Agreements that they are required, pursuant to
Section 3(f) of the Registration Rights Agreements, to suspend offers and sales
of shares of Common Stock pursuant to the Registration Statement as a result of
an event or circumstance which relates to a development concerning a business
combination involving the Corporation which development occurred subsequent to
the later of (x) the SEC Effective Date and (y) the latest date prior to such
notice on which the Corporation has amended or supplemented the Registration
Statement as to which the Board of Directors shall have
-2-
<PAGE>
determined in good faith that public disclosure of such event or circumstance at
such time would not be in the best interests of the Corporation, which
determination shall be set forth in a resolution duly adopted by the Board of
Directors and copies of which shall be furnished to the holders of shares of
Series B Convertible Preferred Stock; provided, however, that not more than two
periods of such Trading Days in any period of 365 consecutive days shall be
Blackout Periods.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Ceiling Price" means $9.73 (subject to equitable adjustments from
time to time by the Corporation on terms reasonably acceptable to the Majority
Holders for stock splits, stock dividends, combinations, recapitalizations,
reclassifications and similar events occurring or with respect to which "ex-"
trading commences on or after April 10, 1998); provided, however, that,
notwithstanding any other provision hereof, the Ceiling Price applicable to a
particular conversion shall be subject to reduction as provided in Section
4.2(i)(b)(6); provided further, however, that if a Registration Event occurs,
then, in addition to any other right or remedy of any holder of shares of Series
B Convertible Preferred Stock thereafter the Ceiling Price shall be permanently
reduced on each Computation Date by an amount equal to one percent of the amount
that the Ceiling Price otherwise would have been without any reduction pursuant
to this proviso.
"Certificate of Designation" means that certain Certificate of
Designation for the Series B Convertible Preferred Stock of IVI Publishing, Inc.
(the predecessor in interest of the Corporation), filed with the Secretary of
State of Minnesota on April 10, 1998.
"Closing Bid Price" of any security on any date means the closing bid
price of such security on such date on the securities exchange or other market
on which such security is listed for trading which constitutes the principal
securities market for such security, as reported by Bloomberg, L.P.
"Common Stock" means the Common Stock, $.01 par value, of the
Corporation.
"Computation Date" means, if a Registration Event occurs, any of (1)
the date which is 30 days after such Registration Event occurs, if any
Registration Event is continuing on such date, (2) each date which is 30 days
after a Computation Date, if any Registration Event is continuing on such date,
and (3) the date on which all Registration Events cease to continue.
"Conversion Agent" means American Stock Transfer & Trust Company, or
its duly appointed successor, as conversion agent for the Series B Convertible
Preferred Stock pursuant to the Transfer Agent Instruction.
"Conversion Amount" initially shall be equal to $1,000.00, subject to
adjustment as herein provided.
-3-
<PAGE>
"Conversion Date" means, with respect to each conversion of shares of
Series B Convertible Preferred Stock pursuant to Section 4.2(i), the date on
which the Conversion Notice relating to such conversion is actually received by
the Conversion Agent, whether by mail, courier, personal service, telephone line
facsimile transmission or other means, in case of a conversion pursuant to
Section 4.2(i)(a).
"Conversion Notice" means a written notice, duly signed by or on
behalf of a holder of shares of Series B Convertible Preferred Stock, stating
the number of shares of Series B Convertible Preferred Stock to be converted in
the form specified in the Subscription Agreements.
"Conversion Percentage" means, for any Conversion Date during any
period set forth below, the applicable percentage set forth below:
Conversion
Conversion Date Percentage
--------------- ----------
Issuance Date through 90th day after Issuance Date N/A
91st through 180th day after Issuance Date 100%
181st through 270th day after Issuance Date 95%
271st day after Issuance Date and thereafter 90%
; provided, however, that, notwithstanding any other provision hereof, if a
Registration Event occurs, then each percentage stated above shall be
permanently reduced by one percentage point on each Computation Date (pro rated
in the case of any Computation Date which is less than 30 days after a
Registration Event occurs or less than 30 days after another Computation Date).
"Conversion Price" means:
(1) for any Conversion Date on or prior to the date which is 90 days
after the Issuance Date, $9.73 (subject to equitable adjustments from time to
time on terms reasonably acceptable to the Majority Holders for stock splits,
stock dividends, combinations, recapitalizations, reclassifications and similar
events occurring or with respect to which "ex-" trading commences on or after
April 10, 1998); and
(2) for any Conversion Date on or after the date which is 91 days
after the Issuance Date, the lesser of:
-4-
<PAGE>
(A) the product of (a) the Average Market Price for such date times
(b) the applicable Conversion Percentage; and
(B) the Ceiling Price;
provided, however, that in the case of this clause (2) the Conversion Price
applicable to a particular conversion shall be subject to reduction as provided
in Section 4.2(i)(b)(6).
"Conversion Rate" shall have the meaning provided in Section
4.2(i)(a).
"Converted Market Price" means, for any share of Series B Convertible
Preferred Stock as of any date of determination, an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would, at
the time of such determination, be issuable on conversion in accordance with
Section 4.2(i)(a) of one share of Series B Convertible Preferred Stock and any
accrued and unpaid dividends thereon and any accrued and unpaid interest on
dividends thereon in arrears if a Conversion Notice were given by the holder of
such share of Series B Convertible Preferred Stock on the date of such
determination (determined without regard to any limitation on conversion based
on beneficial ownership contained in 4.2(i)(a)) times (y) the arithmetic average
of the Market Price of the Common Stock for the five consecutive Trading Days
ending on the Trading Day prior to the date of such determination.
"Corporation Optional Redemption Notice" means a notice given by the
Corporation to the holders of shares of Series B Convertible Preferred Stock
pursuant to Section 4.2(h)(a) which notice shall state (1) that the Corporation
is exercising its right to redeem all or a portion of the outstanding shares of
Series B Convertible Preferred Stock pursuant to Section 4.2(h)(a), (2) the
number of shares of Series B Convertible Preferred Stock held by such holder
which are to be redeemed, (3) the Redemption Price per share of Series B
Convertible Preferred Stock to be redeemed or the formula for determining the
same, determined in accordance herewith and (4) the applicable Redemption Date.
"Current Price" means with respect to any date the arithmetic average
of the Market Price of the Common Stock on the 30 consecutive Trading Days
commencing 45 Trading Days before such date.
"Dividend Shares" means shares of Series B Convertible Preferred Stock
issued as dividends on outstanding shares of Series B Convertible Preferred
Stock in accordance with Section 4.2(d)(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder Optional Redemption Date" shall mean the date of redemption of
shares of Series B Convertible Preferred Stock pursuant to Section 4.2(j).
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"Inconvertibility Notice" shall have the meaning provided in Section
4.2(f)(a)(2).
"Issuance Date" means the first date of original issuance of any
shares of Series B Convertible Preferred Stock.
"Junior Dividend Stock" means, collectively, the Common Stock and any
other class or series of capital stock of the Corporation ranking junior as to
dividends to the Series B Convertible Preferred Stock.
"Junior Liquidation Stock" means the Common Stock or any other class
or series of the Corporation's capital stock ranking junior as to liquidation
rights to the Series B Convertible Preferred Stock.
"Liquidation Preference" means, for each share of Series B Convertible
Preferred Stock, the sum of (i) all dividends accrued and unpaid thereon to the
date of final distribution to such holders, (ii) accrued and unpaid interest on
dividends in arrears (computed in accordance with Section 4.2(d)(a)) to the date
of distribution, and (iii) $1,000.00.
"Majority Holders" means at any time the holders of shares of Series B
Preferred Stock which shares constitute a majority of the outstanding shares of
Series B Preferred Stock.
"Market Price" of the Common Stock on any date means the closing bid
price for one share of Common Stock on such date on the first applicable among
the following: (a) the national securities exchange on which the shares of
Common Stock are listed which constitutes the principal securities market for
the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the principal market
for the Common Stock on such date, or (c) the Nasdaq SmallCap, if the Nasdaq
SmallCap constitutes the principal securities market for the Common Stock on
such date, in any such case as reported by Bloomberg, L.P.; provided, however,
that if during any Measurement Period or other period during which the Market
Price is being determined:
(i) The Corporation shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock or fix any record date for any such action, then the Market
Price for each day in such Measurement Period or such other period which
day is prior to the earlier of (1) the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution and
(2) the date on which ex-dividend trading in the Common Stock with respect
to such dividend or distribution begins shall be reduced by multiplying the
Market Price (determined without regard to this proviso) for each such day
in such Measurement Period or such other period by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the earlier of (1) the record date
fixed for such determination and (2) the date on which ex-dividend trading
in the Common Stock with respect to such dividend or distribution begins
and the
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denominator of which shall be the sum of such number of shares and the
total number of shares constituting such dividend or other distribution;
(ii) The Corporation shall issue rights or warrants to all holders
of its outstanding shares of Common Stock, or fix a record date for such
issuance, which rights or warrants entitle such holders (for a period
expiring within forty-five (45) days after the date fixed for the
determination of shareholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share
less than the Market Price (determined without regard to this proviso) for
any day in such Measurement Period or such other period which day is prior
to the end of such 45-day period, then the Market Price for each such day
shall be reduced so that the same shall equal the price determined by
multiplying the Market Price (determined without regard to this proviso) by
a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding at the close of business on the record date fixed for the
determination of shareholders entitled to receive such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Market Price, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the close of business on such record date plus the total
number of additional shares of Common Stock so offered for subscription or
purchase. In determining whether any rights or warrants entitle the holders
to subscribe for or purchase shares of Common Stock at less than the Market
Price (determined without regard to this proviso), and in determining the
aggregate offering price of such shares of Common Stock, there shall be
taken into account any consideration received for such rights or warrants,
the value of such consideration, if other than cash, to be determined in
good faith by a resolution of the Board of Directors of the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the day upon which such subdivision becomes effective
and (2) the date on which ex-dividend trading in the Common Stock with
respect to such subdivision begins shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Market Price
for each day in such Measurement Period or such other period which day is
prior to the earlier of (1) the date on which such combination becomes
effective and (2) the date on which trading in the Common Stock on a basis
which gives effect to such combination begins, shall be proportionately
increased;
(iv) The Corporation shall, by dividend or otherwise, distribute to
all holders of its Common Stock shares of any class of capital stock of the
Corporation (other than any dividends or distributions to which clause (i)
of this proviso applies) or evidences of its indebtedness, cash or other
assets (including securities, but excluding any rights or
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warrants referred to in clause (ii) of this proviso and dividends and
distributions paid exclusively in cash and excluding any capital stock,
evidences of indebtedness, cash or assets distributed upon a merger or
consolidation) (the foregoing hereinafter in this clause (iv) of this
proviso called the "Securities"), or fix a record date for any such
distribution, then, in each such case, the Market Price for each day in
such Measurement Period or such other period which day is prior to the
earlier of (1) the record date for such distribution and (2) the date on
which ex-dividend trading in the Common Stock with respect to such
distribution begins shall be reduced so that the same shall be equal to the
price determined by multiplying the Market Price (determined without regard
to this proviso) by a fraction, the numerator of which shall be the Market
Price (determined without regard to this proviso) for such trade less the
fair market value (as determined in good faith by resolution of the Board
of Directors of the Corporation) on such date of the portion of the
Securities so distributed or to be distributed applicable to one share of
Common Stock and the denominator of which shall be the Market Price
(determined without regard to this proviso); provided, however, that in the
event the then fair market value (as so determined) of the portion of the
Securities so distributed applicable to one share of Common Stock is equal
to or greater than the Market Price (determined without regard to this
clause (iv) of this proviso) for any such Trading Day, in lieu of the
foregoing adjustment, adequate provision shall be made so that the holders
of shares of Series B Preferred Stock shall have the right to receive in
payment of dividends on the shares of Series B Preferred Stock or upon
conversion of the shares of Series B Preferred Stock, as the case may be,
the amount of Securities the holders of shares of Series B Preferred Stock
would have received had the number of shares of Common Stock to be issued
in payment of such dividends on the shares of Series B Preferred Stock been
issued, or had the holders of shares of Series B Preferred Stock converted
the shares of Series B Preferred Stock, in either such case immediately
prior to the record date for such distribution. If the Board of Directors
of the Corporation determines the fair market value of any distribution for
purposes of this clause (iv) by reference to the actual or when issued
trading market for any securities comprising all or part of such
distribution, it must in doing so consider the prices in such market on the
same day for which an adjustment in the Market Price is being determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this
proviso, any dividend or distribution to which this clause (iv) is
applicable that also includes shares of Common Stock, or rights or warrants
to subscribe for or purchase shares of Common Stock to which clause (i) or
(ii) of this proviso applies (or both), shall be deemed instead to be (1) a
dividend or distribution of the evidences of indebtedness, assets, shares
of capital stock, rights or warrants other than such shares of Common Stock
or rights or warrants to which clause (i) or (ii) of this proviso applies
(and any Market Price reduction required by this clause (iv) with respect
to such dividend or distribution shall then be made) immediately followed
by (2) a dividend or distribution of such shares of Common Stock or such
rights or warrants (and any further Market Price reduction required by
clauses (i) and (ii) of this proviso with respect to such dividend or
distribution shall then
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be made), except that any shares of Common Stock included in such dividend
or distribution shall not be deemed "outstanding at the close of business
on the date fixed for such determination" within the meaning of clause (i)
of this proviso;
(v) The Corporation or any subsidiary of the Corporation shall (x) by
dividend or otherwise, distribute to all holders of its Common Stock cash
in (or fix any record date for any such distribution), or (y) repurchase or
reacquire shares of its Common Stock (other than an Option Share Surrender)
for, in either case, an aggregate amount that, combined with (1) the
aggregate amount of any other such distributions to all holders of its
Common Stock made exclusively in cash after the Issuance Date and within
the twelve (12) months preceding the date of payment of such distribution,
and in respect of which no adjustment pursuant to this clause (v) has been
made, (2) the aggregate amount of any cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Corporation) of consideration paid in respect of any repurchase or other
reacquisition by the Corporation or any subsidiary of the Corporation of
any shares of Common Stock (other than an Option Share Surrender) made
after the Issuance Date and within the twelve (12) months preceding the
date of payment of such distribution or making of such repurchase or
reacquisition, as the case may be, and in respect of which no adjustment
pursuant to this clause (v) has been made, and (3) the aggregate of any
cash plus the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Corporation) of consideration
payable in respect of any Tender Offer by the Corporation or any of its
subsidiaries for all or any portion of the Common Stock concluded within
the twelve (12) months preceding the date of payment of such distribution
or completion of such repurchase or reacquisition, as the case may be, and
in respect of which no adjustment pursuant to clause (vi) of this proviso
has been made (such aggregate amount combined with the amounts in clauses
(1), (2) and (3) above being the "Combined Amount"), exceeds 10% of the
product of the Market Price (determined without regard to this proviso) for
any day in such Measurement Period or such other period which day is prior
to the earlier of (A) the record date with respect to such distribution and
(B) the date on which ex-dividend trading in the Common Stock with respect
to such distribution begins or the date of such repurchase or
reacquisition, as the case may be, times the number of shares of Common
Stock outstanding on such date, then, and in each such case, the Market
Price for each such day shall be reduced so that the same shall equal the
price determined by multiplying the Market Price (determined without regard
to this proviso) for such day by a fraction (i) the numerator of which
shall be equal to the Market Price (determined without regard to this
proviso) for such day less an amount equal to the quotient of (x) the
excess of such Combined Amount over such 10% and (y) the number of shares
of Common Stock outstanding on such day and (ii) the denominator of which
shall be equal to the Market Price (determined without regard to this
proviso) for such day; provided, however, that in the event the portion of
the cash so distributed or paid for the repurchase or reacquisition of
shares (determined per share based on the number of shares of Common Stock
outstanding) applicable to one share of Common Stock is equal to or greater
than the Market Price (determined without regard to
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this clause (v) of this proviso) of the Common Stock for any such day, then
in lieu of the foregoing adjustment with respect to such day, adequate
provision shall be made so that the holders of shares of Series B Preferred
Stock shall have the right to receive in payment of dividends on shares of
Series B Preferred Stock or upon conversion of shares of Series B Preferred
Stock, as the case may be, the amount of cash the holders of shares of
Series B Preferred Stock would have received had the number of shares of
Common Stock to be issued in payment of such dividends on shares of Series
B Preferred Stock been issued, or had the holders of shares of Series B
Preferred Stock converted shares of Series B Preferred Stock, in either
such case, immediately prior to the record date for such distribution or
the payment date of such repurchase, as applicable; or
(vi) A Tender Offer made by the Corporation or any of its
subsidiaries for all or any portion of the Common Stock shall expire and
such Tender Offer (as amended upon the expiration thereof) shall require
the payment to shareholders (based on the acceptance (up to any maximum
specified in the terms of the Tender Offer) of Purchased Shares (as defined
below)) of an aggregate consideration having a fair market value (as
determined in good faith by resolution of the Board of Directors of the
Corporation) that combined together with (1) the aggregate of the cash plus
the fair market value (as determined in good faith by a resolution of the
Board of Directors of the Corporation), as of the expiration of such Tender
Offer, of consideration payable in respect of any other Tender Offers, by
the Corporation or any of its subsidiaries for all or any portion of the
Common Stock expiring within the 12 months preceding the expiration of such
Tender Offer and in respect of which no adjustment pursuant to this clause
(vi) has been made, (2) the aggregate amount of any cash plus the fair
market value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration paid in respect of any
repurchase or other reacquisition by the Corporation or any subsidiary of
the Corporation of any shares of Common Stock (other than an Option Share
Surrender) made after the Issuance Date and within the 12 months preceding
the expiration of such Tender Offer and in respect of which no adjustment
pursuant to clause (v) of this proviso has been made, and (3) the aggregate
amount of any distributions to all holders of Common Stock made exclusively
in cash within 12 months preceding the expiration of such Tender Offer and
in respect of which no adjustment pursuant to clause (v) of this proviso
has been made, exceeds 10% of the product of the Market Price (determined
without regard to this proviso) for any day in such period times the number
of shares of Common Stock outstanding on such day, then, and in each such
case, the Market Price for such day shall be reduced so that the same shall
equal the price determined by multiplying the Market Price (determined
without regard to this proviso) for such day by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding on such
day multiplied by the Market Price (determined without regard to this
proviso) for such day and the denominator of which shall be the sum of (x)
the fair market value (determined as aforesaid) of the aggregate
consideration payable to shareholders based on the acceptance (up to any
maximum specified in the terms of the Tender Offer) of all shares validly
tendered and not withdrawn as of the last time tenders
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could have been made pursuant to such Tender Offer (the "Expiration Time")
(the shares deemed so accepted, up to any such maximum, being referred to
as the "Purchased Shares") and (y) the product of the number of shares of
Common Stock outstanding (less any Purchased Shares) on such day times the
Market Price (determined without regard to this proviso) of the Common
Stock on the Trading Day next succeeding the Expiration Time. If the
application of this clause (vi) to any Tender Offer would result in an
increase in the Market Price (determined without regard to this proviso)
for any trade, no adjustment shall be made for such Tender Offer under this
clause (vi) for such day.
"Maximum Share Amount" means 2,025,000 shares, or such greater number
as permitted by the rules of the Nasdaq SmallCap (such amount to be subject to
equitable adjustment from time to time on terms reasonably acceptable to the
Majority Holders for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring or
with respect to which "ex-" trading commences after April 10, 1998), of Common
Stock.
"Measurement Period" means, with respect to any date during a period
specified below, the number of consecutive Trading Days specified below ending
on the Trading Day prior to such date:
Number of
Date Trading Days
---- ------------
Issuance Date through 90th day after Issuance Date N/A
91st through 180th day after Issuance Date 10
181st through 270th day after Issuance Date 15
271st day after Issuance Date and thereafter 20
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"NYSE" means the New York Stock Exchange, Inc.
"Option Share Surrender" means the surrender of shares of Common Stock
to the Corporation in payment of the exercise price or tax obligations incurred
in connection with the exercise of a stock option granted by the Corporation to
any of its employees, directors or consultants.
"Optional Redemption Event" means any one of the following events:
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(1) For any period of five consecutive Trading Days commencing on or
after the Issuance Date there shall be no closing bid price of the Common
Stock on any national securities exchange, the Nasdaq or the Nasdaq
SmallCap;
(2) The Common Stock ceases to be listed for trading on any of the
NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap;
(3) The inability for 30 or more days (whether or not consecutive) of
any holder of shares of Series B Convertible Preferred Stock to sell such
shares of Common Stock issued or issuable on conversion of shares of Series
B Convertible Preferred Stock pursuant to the Registration Statement for
any reason other than a Blackout Period on each of such 30 days;
(4) The Corporation shall fail or default in the timely performance
of any obligation (A) to issue shares of Common Stock upon conversion of
shares of Series B Convertible Preferred Stock as and when required by
Section 4.2(i) or (B) any other material obligation, in each case to a
holder of shares of Series B Convertible Preferred Stock under the terms of
these Articles of Incorporation or under the Registration Rights Agreement
with such holder or any other agreements or documents entered into in
connection with the issuance of shares of Series B Convertible Preferred
Stock, as such instruments may be amended from time to time, provided, that
an event described in clause (B) above shall be an Optional Redemption
Event only if such failure or default shall have continued for a period of
15 days after notice thereof is given to the Corporation by any holder of
shares of Series B Convertible Preferred Stock;
(5) Any consolidation or merger of the Corporation with or into
another entity (other than a merger or consolidation of a subsidiary of the
Corporation into the Corporation or a wholly-owned subsidiary of the
Corporation) where the shareholders of the Corporation immediately prior to
such transaction do not collectively own at least 51% of the outstanding
voting securities of the surviving corporation of such consolidation or
merger immediately following such transaction or the common stock of such
surviving corporation is not listed for trading on the NYSE, the AMEX, the
Nasdaq or the Nasdaq SmallCap or any sale or other transfer of all or
substantially all of the assets of the Corporation; or
(6) The taking of any action to amend any of the Corporation's
charter documents, including any amendment to the Corporation's Articles of
Incorporation, without the consent of the Majority Holders which materially
and adversely affects the rights of any holder of shares of Series B
Convertible Preferred Stock.
"Optional Redemption Notice" means a notice from a holder of shares of
Series B Convertible Preferred Stock to the Corporation which states (1) that
the holder delivering such
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notice is thereby requiring the Corporation to redeem shares of Series B
Convertible Preferred Stock pursuant to Section 4.2(j), (2) in general terms the
Optional Redemption Event giving rise to such redemption, and (3) the number of
shares of Series B Convertible Preferred Stock held by such holder which are to
be redeemed.
"Optional Redemption Price" means the greater of (i) the Premium Price
on the applicable redemption date, and (ii) Converted Market Price on the
applicable redemption date.
"Parity Dividend Stock" means any class or series or the Corporation's
capital stock ranking, as to dividends, on a parity with the Series B
Convertible Preferred Stock.
"Parity Liquidation Stock" means any class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series B Convertible Preferred Stock.
"Par Redemption Date" means the date of redemption of shares of Series
B Convertible Preferred Stock pursuant to Section 4.2(h)(b), determined in
accordance therewith.
"Par Redemption Event" means that, during any period of 20 consecutive
Trading Days commencing after the date which is 271 days after the Issuance Date
effective by the SEC, the Market Price of the Common Stock shall be at least
equal to 150% of the Ceiling Price on each Trading Day in such period.
"Par Redemption Notice" means a notice given by the Corporation to
each holder of Series B Convertible Preferred Stock pursuant to Section
4.2(h)(b), which notice shall state (1) that the Corporation is exercising its
right to redeem all outstanding shares of Series B Convertible Preferred Stock
pursuant to Section 4.2(h)(b), (2) if such right is being exercised by reason of
a Par Redemption Event, that a Par Redemption Event has occurred the date on
which such Par Redemption Event occurred and a brief statement of the facts
showing such occurrence, (3) the number of shares of Series B Convertible
Preferred Stock held by such holder which are to be redeemed, (4) the Par
Redemption Price per share of Series B Convertible Preferred Stock held by such
holder which are to be redeemed, determined in accordance herewith, and (5) the
Par Redemption Date.
"Par Redemption Price" on any date means an amount equal to the sum of
(a) $1,000 plus (b) an amount equal to the accrued but unpaid dividends on the
share of Series B Convertible Preferred Stock to be redeemed to the Par
Redemption Date, plus (c) an amount equal to the accrued and unpaid interest on
dividends in arrears on such share of Series B Convertible Preferred Stock to
the Par Redemption Date (determined as provided in Section 4.2(d)).
"Person" means an individual, partnership, corporation, limited
liability company, trust, incorporated organization, unincorporated association
or joint stock company.
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"Premium Percentage" means 115%.
"Premium Price" means, for any share of Series B Convertible Preferred
Stock as of any date of determination, the product obtained by multiplying (a)
the sum of (1) the Conversion Amount plus (2) an amount equal to the accrued but
unpaid dividends on such share of Series B Convertible Preferred Stock to the
date of determination, plus (3) an amount equal to the accrued and unpaid
interest on dividends in arrears (as provided in Section 4.2(d)) to the date of
determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of shares of Series B
Convertible Preferred Stock pursuant to Section 4.2(h)(a), as the case may be,
determined in accordance therewith.
"Redemption Price" means:
(1) in the case of any Redemption Date which is on or prior to the
date which is 180 days after the Issuance Date, the Premium Price on the
Redemption Date; and
(2) in the case of any Redemption Date which is after the date which
is 180 days after the Issuance Date, the greater of (A) the Premium Price
on the Redemption Date and (B) the Converted Market Price on the Redemption
Date.
"Registration Event" shall mean (1) the Registration Statement is not
effective within 120 days after the Issuance Date, (2) the Company fails to file
the Registration Statement with the SEC within 45 days after the Issuance Date,
(3) the Company fails to submit a request for acceleration of the effective date
of the Registration Statement in accordance with Section 3(a) of the
Registration Rights Agreement, (4) the Registration Statement shall cease to be
available for use by any holder of shares of Series B Convertible Preferred
Stock who is named therein as a selling shareholder for any reason (including,
without limitation, by reason of an SEC stop order, a material misstatement or
omission in the Registration Statement or the information contained in the
Registration Statement having become outdated) other than as a result of a
Blackout Period; provided, however, that no Registration Event pursuant to this
clause (4) shall be deemed to occur prior to the SEC Effective Date, (5) the
Common Stock ceases to be listed for trading on any of the NYSE, the AMEX, the
Nasdaq or the Nasdaq SmallCap, or (6) a holder of shares of Series B Preferred
Stock having become unable to convert any shares of Series B Preferred Stock in
accordance with Section 4.2(i)(a) for any reason (other than by reason of the
4.9% limitation on beneficial ownership set forth therein or a redemption or
repurchase thereof).
"Registration Rights Agreements" means the several Registration Rights
Agreements entered into between the Corporation and the original holders of the
shares of Series B Convertible Preferred Stock, as amended or modified from time
to time in accordance with their respective terms.
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"Registration Statement" means the Registration Statement required to
be filed by the Corporation with the SEC pursuant to Section 2(a) of the
Registration Rights Agreements.
"SEC" means the United States Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement is
first declared effective by the SEC.
"Securities" shall have the meaning, for purposes of the definition of
the term "Market Price," set forth in clause (iv) of the proviso to the
definition of the term "Market Price."
"Senior Dividend Stock" means any class or series of capital stock of
the Corporation ranking senior as to dividends to the Series B Convertible
Preferred Stock.
"Senior Liquidation Stock" means any class or series of capital stock
of the Corporation ranking senior as to liquidation rights to the Series B
Convertible Preferred Stock.
"Series B Convertible Preferred Stock" means the Series B Convertible
Preferred Stock, $.01 par value, of the Corporation.
"Share Limitation Redemption Date" shall mean each date on which the
Corporation is required to redeem shares of Series B Convertible Preferred Stock
as provided in Section 4.2(f)(a).
"Share Limitation Redemption Price" means the greater of (i) the
Premium Price on the applicable Share Limitation Redemption Date and (ii) the
Converted Market Price on the applicable Share Limitation Redemption Date.
"Shareholder Approval" shall mean the approval by a majority of the
votes cast by the holders of shares of Common Stock (in Person or by proxy) at a
meeting of the shareholders of the Corporation (duly convened at which a quorum
was present), or a written consent of holders of shares of Common Stock entitled
to such number of votes given without a meeting, of the issuance by the
Corporation of 20% or more of the Common Stock of the Corporation outstanding on
the Issuance Date for less than the greater of the book or market value of such
Common Stock on conversion of the Series B Convertible Preferred Stock, as and
to the extent required under Rule 4310(c)(25)(H) of the Nasdaq SmallCap as in
effect from time to time or any successor provision.
"Subscription Agreements" means the several Subscription Agreements by
and between the Corporation and the original holders of shares of Series B
Convertible Preferred Stock pursuant to which the shares of Series B Convertible
Preferred Stock were issued.
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"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time
constitutes the principal securities market for the Common Stock is open for
general trading.
"Transfer Agent Instruction" means the Transfer Agent Instruction,
dated April 9, 1998, from the Corporation to the Conversion Agent for the
benefit of the holders of shares of Series B Convertible Preferred Stock.
4.2(b) DESIGNATION AND AMOUNT. The shares of the series of Preferred
----------------------
Stock created hereby shall be designated as "Series B Convertible Preferred
Stock", and the number of shares constituting the Series B Convertible Preferred
Stock shall be 5,800, and shall not be subject to increase. Of the authorized
shares of Series B Convertible Preferred Stock, 800 shares may be issued only as
dividends on the outstanding shares of Series B Convertible Preferred Stock.
4.2(c) RANK. Except as approved by the affirmative vote or written
----
consent of the Majority Holders pursuant to Section 4.2(k)(b), all Series B
Convertible Preferred Stock shall rank (i) senior to the Common Stock, now or
hereafter issued, as to payment of dividends and distribution of assets upon
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary, (ii) senior to any additional series of the class of Preferred
Stock which series the Board of Directors may from time to time authorize, both
as to payment of dividends and as to distributions of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary
and (iii) senior to any additional class of preferred stock (or series of
preferred stock of such class) which the Board of Directors or the shareholders
may from time to time authorize in accordance herewith.
4.2(d) DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of
---------------------------
Series B Convertible Preferred Stock shall be entitled to receive, when, as, and
if declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $50.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
of each share of Series B Convertible Preferred Stock and shall be payable
quarterly on January 15, April 15, July 15, and October 15 of each year
commencing July 15, 1998 (except that if any such date is a Saturday, Sunday, or
legal holiday, then such dividend shall be payable on the next succeeding day
that is not a Saturday, Sunday, or legal holiday) to holders of record as they
appear on the stock books of the Corporation on such record dates, not more than
20 nor less than 10 days preceding the payment dates for such dividends, as
shall be fixed by the Board. Dividends on the Series B Convertible Preferred
Stock shall be paid in cash or, subject to the limitations in Section 4.2(d)(b)
hereof, Dividend Shares or any combination of cash and
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Dividend Shares, at the option of the Corporation as hereinafter provided. The
amount of the dividends payable per share of Series B Convertible Preferred
Stock for each quarterly dividend period shall be computed by dividing the
annual dividend amount by four. The amount of dividends payable for the initial
dividend period and any period shorter than a full quarterly dividend period
shall be computed on the basis of a 360-day year of twelve 30-day months.
Dividends not paid on a payment date, whether or not such dividends have been
declared, will bear interest at the rate of 12% per annum until paid (or such
lesser rate as shall be the maximum rate allowable by applicable law). No
dividends or other distributions, other than the dividends payable solely in
shares of any Junior Dividend Stock, shall be paid or set apart for payment on
any shares of Junior Dividend Stock, and no purchase, redemption, or other
acquisition shall be made by the Corporation of any shares of Junior Dividend
Stock (except for Option Share Surrenders), unless and until all accrued and
unpaid dividends on the Series B Convertible Preferred Stock and interest on
dividends in arrears at the rate specified herein shall have been paid or
declared and set apart for payment.
If at any time any dividend on any Senior Dividend Stock shall be in
arrears, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series B Convertible Preferred Stock unless and until
all accrued and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividends for the then current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any Parity
Dividend Stock for any period unless all accrued but unpaid dividends (and
interest on dividends in arrears at the rate specified herein) have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series B Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series B Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series B Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series B
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or declared
and set apart for payment per share on the Series B Convertible Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series B
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 4.2(d)
shall not be deemed to include any stock dividend or distributions made in
connection with any liquidation, dissolution, or winding up of the Corporation,
whether voluntary or involuntary.
(b) If the Corporation elects in the exercise of its sole discretion
to issue Dividend Shares in payment of dividends on the Series B Convertible
Preferred Stock in respect
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of any dividend payment date, the Corporation shall issue and deliver, or cause
to be issued and delivered, by the third Trading Day after such dividend payment
date to each holder of shares of Series B Convertible Preferred Stock a
certificate representing the number of whole Dividend Shares arrived at by
dividing (x) the total amount of cash dividends such holder would be entitled to
receive if the aggregate dividends on the Series B Convertible Preferred Stock
held by such holder which are being paid in Dividend Shares were being paid in
cash by (y) $1,000.00; provided, however, that if certificates representing
Dividend Shares are issued and delivered to holders of Series B Convertible
Preferred Stock subsequent to the third Trading Day after a dividend payment
date, the amount so divided into such total amount of cash dividends will be
reduced by $10.00 for each Trading Day after the third Trading Day following
such dividend payment date to the date of delivery of Dividend Shares. No
fractional Dividend Shares shall be issued in payment of dividends. In lieu
thereof, the Corporation shall pay cash in an amount equal to the product of (x)
the arithmetic average of the Market Price of the Common Stock for the five
consecutive Trading Days ending on the Trading Day prior to such dividend
payment date times (y) the number of shares of Common Stock which the fraction
of a Dividend Share which would otherwise be issuable by the Corporation would
be convertible in accordance with Section 4.2(i)(a) if so converted on the
applicable dividend payment date. The Corporation shall not exercise its right
to issue Dividend Shares in payment of dividends on Series B Convertible
Preferred Stock if:
(i) the number of shares of Series B Convertible Preferred Stock at
the time authorized, unissued and unreserved for all purposes, or held in
the Corporation's treasury, is insufficient to permit the conversion of
such Dividend Shares into shares of Common Stock;
(ii) the issuance or delivery of Dividend Shares as a dividend
payment or the issuance of shares of Common Stock upon conversion of such
Dividend Shares would require registration with or approval of any
governmental authority under any law or regulation, and such registration
or approval has not been effected or obtained;
(iii) the shares of Common Stock issuable upon conversion of such
Dividend Shares have not been authorized for listing, upon official notice
of issuance, on any securities exchange or market on which the Common Stock
is then listed; or have not been approved for quotation if the Common Stock
is traded in the over-the-counter market;
(iv) the Conversion Price is less than the par value of one share of
Common Stock;
(v) the shares of Common Stock issuable upon conversion of such
Dividend Shares (A) cannot be sold or transferred without restriction by
unaffiliated holders who receive such Dividend Shares or (B) are no longer
listed on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap; or
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(vi) an Optional Redemption Event shall have occurred and any holder
of shares of Series B Convertible Preferred Stock (A) shall be entitled to
exercise optional redemption rights under Section 4.2(j) of shares of
Series B Convertible Preferred Stock by reason of such Optional Redemption
Event or (B) shall have exercised optional redemption rights under Section
4.2(j) by reason of such Optional Redemption Event and the Corporation
shall not have paid the Optional Redemption Price to each holder.
Dividend Shares issued in payment of dividends on Series B Convertible
Preferred Stock pursuant to this Section and shares of Common Stock issuable
upon conversion of such Dividend Shares shall be, and for all purposes shall be
deemed to be, validly issued, fully paid and nonassessable shares of the
Corporation; the issuance and delivery thereof is hereby authorized; and the
delivery will be, and for all purposes shall be deemed to be, payment in full of
the cumulative dividends to which holders are entitled on the applicable
dividend payment date.
(c) Neither the Corporation nor any subsidiary of the Corporation
shall redeem, repurchase or otherwise acquire in any one transaction or series
of related transactions any shares of Common Stock, Junior Dividend Stock or
Junior Liquidation Stock if the number of shares so repurchased, redeemed or
otherwise acquired in such transaction or series of related transactions
(excluding any Option Share Surrender) is more than either (x) 5.0% of the
number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation
Stock, as the case may be, outstanding immediately prior to such transaction or
series of related transactions or (y) 1% of the number of shares of Common
Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be,
outstanding immediately prior to such transaction or series of related
transactions if such transaction or series of related transactions is with any
one Person or group of affiliated Persons, unless the Corporation or such
subsidiary offers to purchase for cash from each holder of shares of Series B
Convertible Preferred Stock at the time of such redemption, repurchase or
acquisition the same percentage of such holder's shares of Series B Convertible
Preferred Stock as the percentage of the number of outstanding shares of Common
Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, to
be so redeemed, repurchased or acquired at a purchase price per share of Series
B Convertible Preferred Stock equal to the greater of (i) the Premium Price in
effect on the date of purchase pursuant to this Section 4.2(d)(c) and (ii) the
Converted Market Price on the date of purchase pursuant to this Section
4.2(d)(c).
(d) Neither the Corporation nor any subsidiary of the Corporation
shall (1) make any Tender Offer for outstanding shares of Common Stock, unless
the Corporation contemporaneously therewith makes an offer, or (2) enter into an
agreement regarding a Tender Offer for outstanding shares of Common Stock by any
Person other than the Corporation or any subsidiary of the Corporation, unless
such Person agrees with the Corporation to make an offer, in either such case to
each holder of outstanding shares of Series B Convertible Preferred Stock to
purchase for cash at the time of purchase in such Tender Offer the same
percentage of shares
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of Series B Convertible Preferred Stock held by such holder as the percentage of
outstanding shares of Common Stock offered to be purchased in such Tender Offer
at a price per share of Series B Convertible Preferred Stock equal to the
greater of (i) the Premium Price in effect on the date of purchase pursuant to
this Section 4.2(d)(d) and (ii) the Converted Market Price on the date of
purchase pursuant to this Section 4.2(d)(d).
4.2(e) LIQUIDATION PREFERENCE. In the event of a liquidation,
----------------------
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series B Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series B Convertible
Preferred Stock equal to the Liquidation Preference, and no more, before any
payment shall be made or any assets distributed to the holders of Junior
Liquidation Stock; provided, however, that such rights shall accrue to the
holders of Series B Convertible Preferred Stock only in the event that the
Corporation's payments with respect to the liquidation preference of the holders
of Senior Liquidation Stock are fully met. After the liquidation preferences of
the Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series B Convertible Preferred Stock and any Parity Liquidation Stock in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
liquidation price of the shares of the Series B Convertible Preferred Stock and
the Parity Liquidation Stock, the holders of such shares shall not be entitled
to any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
nor a sale or transfer of all or part of the Corporation's assets for cash,
securities, or other property in and of itself will be considered a liquidation,
dissolution or winding up of the Corporation.
4.2(f) MANDATORY REDEMPTION.
--------------------
(a) MANDATORY REDEMPTION BASED ON MAXIMUM SHARE AMOUNT. (1)
--------------------------------------------------
Notwithstanding any other provision herein, unless the Shareholder Approval
shall have been obtained from the shareholders of the Corporation or waived by
the Nasdaq, so long as the Common Stock is listed on the Nasdaq or the Nasdaq
SmallCap the Corporation shall not be required to issue upon conversion of
shares of Series B Convertible Preferred Stock pursuant to Section 4.2(i) more
than the Maximum Share Amount. The Maximum Share Amount shall be allocated
among the shares of Series B Convertible Preferred Stock at the time of initial
issuance thereof pro rata based on the initial issuance of 5,000 shares of
Series B Convertible Preferred Stock. Each certificate for shares of Series B
Convertible Preferred Stock initially issued shall bear a notation as to the
number of shares constituting the portion of the Maximum Share Amount allocated
to the shares of Series B Convertible Preferred Stock represented by such
certificate for purposes of conversion thereof. The Corporation shall maintain
records which show the number of shares of Series B Convertible Preferred Stock
issued by the Corporation pursuant to Section 4.2(d) as dividends on the shares
of Series B Convertible Preferred Stock represented by each certificate, which
records shall be controlling in the absence of manifest
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<PAGE>
error. Each such additional share of Series B Convertible Preferred Stock shall
be allocated a portion of the Maximum Share Amount allocated to the shares of
Series B Convertible Preferred Stock in respect of which such additional shares
of Series B Convertible Preferred Stock are issued as a dividend and the
certificate for such additional shares of Series B Convertible Preferred Stock
shall bear a notation as to the certificate number of the share of Series B
Convertible Preferred Stock in respect of which such additional share of Series
B Convertible Preferred Stock is issued as a dividend. Upon surrender of any
certificate for shares of Series B Convertible Preferred Stock for transfer or
re-registration thereof (or, at the option of the holder, for conversion
pursuant to Section 4.2(i)(a) of less than all of the shares of Series B
Convertible Preferred Stock represented thereby), the Corporation shall make a
notation on the new certificate issued upon such transfer or re-registration or
evidencing such unconverted shares, as the case may be, as to the remaining
number of shares of Common Stock from the Maximum Share Amount remaining
available for conversion of the shares of Series B Convertible Preferred Stock
evidenced by such new certificate. If any certificate for shares of Series B
Convertible Preferred Stock is surrendered for split-up into two or more
certificates representing an aggregate number of shares of Series B Convertible
Preferred Stock equal to the number of shares of Series B Convertible Preferred
Stock represented by the certificate so surrendered (as reduced by any
contemporaneous conversion of shares of Series B Convertible Preferred Stock
represented by the certificate so surrendered), each certificate issued on such
split-up shall bear a notation of the portion of the Maximum Share Amount
allocated thereto determined by pro rata allocation from among the remaining
portion of the Maximum Share Amount allocated to the certificate so surrendered.
If any shares of Series B Convertible Preferred Stock represented by a single
certificate are converted in full pursuant to Section 4.2(i), all of the portion
of the Maximum Share Amount allocated to such shares of Series B Convertible
Preferred Stock which remains unissued after such conversion shall be re-
allocated pro rata to the outstanding shares of Series B Convertible Preferred
Stock held of record by the holder of record at the close of business on the
date of such conversion of the shares of Series B Convertible Preferred Stock so
converted, and if there shall be no other shares of Series B Convertible
Preferred Stock held of record by such holder at the close of business on such
date, then such portion of the Maximum Share Amount shall be allocated pro rata
among the shares of Series B Convertible Preferred Stock outstanding on such
date.
(2) The Corporation shall promptly, but in no event later than five
business days after the occurrence, give notice to each holder of shares of
Series B Convertible Preferred Stock (by telephone line facsimile transmission
at such number as such holder has specified in writing to the Corporation for
such purposes or, if such holder shall not have specified any such number, by
overnight courier or first class mail, postage prepaid, at such holder's address
as the same appears on the stock books of the Corporation) and any holder of
shares of Series B Convertible Preferred Stock may at any time after the
occurrence give notice to the Corporation, in either case, if on any ten Trading
Days within any period of 20 consecutive Trading Days the Corporation would not
have been required to convert shares of Series B Convertible Preferred Stock of
such holder in accordance with Section 4.2(i)(a) as a consequence of the
limitations set forth in Section 4.2(f)(a)(1) had the shares of Series B
Convertible Preferred Stock held by such
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<PAGE>
holder been converted in full into Common Stock on each such day, determined
without regard to the limitation, if any, on such holder contained in the
proviso to the second sentence of Section 4.2(i)(a) (any such notice, whether
given by the Corporation or a holder, an "Inconvertibility Notice"). If the
Corporation shall have given or been required to give any Inconvertibility
Notice, or if a holder shall have given any Inconvertibility Notice, then within
ten Trading Days after such Inconvertibility Notice is given or was required to
be given, the holder receiving or giving, as the case may be, such
Inconvertibility Notice shall have the right by written notice to the
Corporation (which written notice may be contained in the Inconvertibility
Notice given by such holder) to direct the Corporation to redeem the portion of
such holder's outstanding shares of Series B Convertible Preferred Stock (which,
if applicable, shall be all of such holder's outstanding shares of Series B
Convertible Preferred Stock) as shall not, on the business day prior to the date
of such redemption, be convertible into shares of Common Stock by reason of the
limitations set forth in Section 4.2(f)(a)(1) (determined without regard to the
limitation, if any, on beneficial ownership of Common Stock by such holder
contained in the proviso to the second sentence of Section 4.2(i)(a)), within
five business days after such holder so directs the Corporation, at a price per
share equal to the Share Limitation Redemption Price. If a holder of shares of
Series B Convertible Preferred Stock directs the Corporation to redeem
outstanding shares of Series B Convertible Preferred Stock and, prior to the
date the Corporation is required to redeem such shares of Series B Convertible
Preferred Stock, the Corporation would have been able, within the limitations
set forth in Section 4.2(f)(a)(1), to convert all of such holder's shares of
Series B Convertible Preferred Stock (determined without regard to the
limitation, if any, on beneficial ownership of shares of Common Stock by such
holder contained in the proviso to the second sentence of Section 4.2(i)(a)) on
any ten Trading Days within any period of 15 consecutive Trading Days commencing
after the period of 20 consecutive Trading Days which gave rise to the
applicable Inconvertibility Notice from the Corporation or such holder of shares
of Series B Convertible Preferred Stock, as the case may be, had all of such
holder's shares of Series B Convertible Preferred Stock been surrendered for
conversion into Common Stock on each of such ten Trading Days within such 15
Trading Day period, then the Corporation shall not be required to redeem any
shares of Series B Convertible Preferred Stock by reason of such
Inconvertibility Notice.
(3) Notwithstanding the giving of any Inconvertibility Notice by the
Corporation to the holders of Series B Convertible Preferred Stock pursuant to
Section 4.2(f)(a)(2) or the giving or the absence of any notice by the holders
of the Series B Convertible Preferred Stock in response thereto or any
redemption of shares of Series B Convertible Preferred Stock pursuant to Section
4.2(f)(a)(2), thereafter the provisions of Section 4.2(f)(a)(2) shall continue
to be applicable on any occasion unless the Shareholder Approval shall have been
obtained from the shareholders of the Corporation or waived by the Nasdaq.
(4) On each Share Limitation Redemption Date (or such later date as a
holder of shares of Series B Convertible Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series B Convertible Preferred
Stock being redeemed pursuant to this Section 4.2(f)(a)), the Corporation shall
make payment in immediately available funds of the
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applicable Share Limitation Redemption Price to such holder of shares of Series
B Convertible Preferred Stock to be redeemed to or upon the order of such holder
as specified by such holder in writing to the Corporation at least one business
day prior to such Share Limitation Redemption Date. Upon redemption of less
than all of the shares of Series B Convertible Preferred Stock evidenced by a
particular certificate, promptly, but in no event later than three business days
after surrender of such certificate to the Corporation, the Corporation shall
issue a replacement certificate for the shares of Series B Convertible Preferred
Stock evidenced by such certificate which have not been redeemed. Only whole
shares of Series B Convertible Preferred Stock may be redeemed.
(b) NO OTHER MANDATORY REDEMPTION. The shares of Series B
-----------------------------
Convertible Preferred Stock shall not be subject to mandatory redemption by the
Corporation except as provided in Section 4.2(f)(a).
4.2(g) NO SINKING FUND. The shares of Series B Convertible Preferred
---------------
Stock shall not be subject to the operation of a purchase, retirement or sinking
fund.
4.2(h) OPTIONAL REDEMPTION.
-------------------
(a) CORPORATION OPTIONAL REDEMPTION. If (1) the Corporation shall
-------------------------------
be in compliance in all material respects with its obligations to the holders of
shares of Series B Convertible Preferred Stock (including, without limitation,
its obligations under the Subscription Agreement, the Registration Rights
Agreement and the provisions of the Certificate of Designation), (2) on the date
the Corporation Optional Redemption Notice is given and at all times until the
Redemption Date, the Registration Statement is effective and available for use
by each holder of shares of Series B Convertible Preferred Stock for the resale
of shares of Common Stock acquired by such holder upon conversion of all shares
of Series B Convertible Preferred Stock held by such holder and (3) no Optional
Redemption Event shall have occurred with respect to which, on the date a
Redemption Notice is to be given or on the Redemption Date, any holder of shares
of Series B Convertible Preferred Stock (A) shall be entitled to exercise
optional redemption rights under Section 4.2(j) by reason of such Optional
Redemption Event or (B) shall have exercised optional redemption rights under
Section 4.2(j) by reason of such Optional Redemption Event and the Corporation
shall not have paid the Optional Redemption Price to such holder, then the
Corporation shall have the right, exercisable by giving a Corporation Optional
Redemption Notice not less than 20 days or more than 60 days prior to the
Redemption Date to all holders of record of the shares of Series B Convertible
Preferred Stock, at any time to redeem all or from time to time to redeem any
part of the outstanding shares of Series B Convertible Preferred Stock in
accordance with this Section 4.2(h)(a). If the Corporation shall redeem less
than all outstanding shares of Series B Convertible Preferred Stock, such
redemption shall be made as nearly as practical pro rata from all holders of
shares of Series B Convertible Preferred Stock. Any Corporation Optional
Redemption Notice under this Section 4.2(h)(a) shall be given to the holders of
record of the shares of Series B Convertible Preferred Stock at their addresses
appearing on the records of the Corporation; provided, however, that any failure
or
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<PAGE>
defect in the giving of such notice to any such holder shall not affect the
validity of notice to or the redemption of shares of Series B Convertible
Preferred Stock of any other holder. On the Redemption Date (or such later date
as a holder of shares of Series B Convertible Preferred Stock surrenders to the
Corporation the certificate(s) for shares of Series B Convertible Preferred
Stock to be redeemed pursuant to this Section 4.2(h)(a)), the Corporation shall
make payment of the applicable Redemption Price to each holder of shares of
Series B Convertible Preferred Stock to be redeemed in immediately available
funds to such account as specified by such holder in writing to the Corporation
at least one business day prior to the Redemption Date. A holder of shares of
Series B Convertible Preferred Stock to be redeemed pursuant to this Section
4.2(h)(a) shall be entitled to convert such shares of Series B Convertible
Preferred Stock in accordance with Section 4.2(i) (1) through the day prior to
the Redemption Date and (2) if the Corporation shall fail to pay the Redemption
Price of any share of Series B Convertible Preferred Stock when due, at any time
after the due date thereof until such date as the Corporation pays the
Redemption Price of such share of Series B Convertible Preferred Stock. No
share of Series B Convertible Preferred Stock as to which the holder exercises
the right of conversion pursuant to Section 4.2(i) or the optional redemption
right pursuant to Section 4.2(j) may be redeemed by the Corporation pursuant to
this Section 4.2(h)(a) on or after the date of exercise of such conversion right
or optional redemption right, as the case may be, regardless of whether the
Corporation Optional Redemption Notice shall have been given prior to, or on or
after, the date of exercise of such conversion right or optional redemption
right, as the case may be.
(b) REDEMPTION BASED ON PAR REDEMPTION EVENT. The Corporation shall
----------------------------------------
have the right to redeem all, but not less than all, outstanding shares of
Series B Convertible Preferred Stock (x) if at any time prior to the date which
is 1,080 days after the Issuance Date a Par Redemption Event shall have occurred
or (y) at any time on or after the date which is 1,080 days after the Issuance
Date so long as (1) the Corporation shall be in compliance in all material
respects with its obligations to the holders of the Series B Convertible
Preferred Stock (including, without limitation, its obligations under the
Subscription Agreements, the Registration Rights Agreements and the Certificate
of Designation) and (2) no Optional Redemption Event shall have occurred with
respect to which on the date a Par Redemption Notice is to be given or on the
Par Redemption Date, any holder of shares of Series B Convertible Preferred
Stock (a) shall be entitled to exercise optional redemption rights under Section
4.2(j) by reason of such Optional Redemption Event or (b) shall have exercised
optional redemption rights under Section 4.2(j) by reason of such Optional
Redemption Event and the Corporation shall not have paid the Optional Redemption
Price to such holder. In order to exercise its rights under this Section
4.2(h)(b), the Corporation shall give a Par Redemption Notice not less than 15
or more than 20 Trading Days prior to the Par Redemption Date (and, in the case
of such redemption by reason of the occurrence of a Par Redemption Event, within
10 days after the occurrence of such Par Redemption Event) to all holders of
record of the shares of Series B Convertible Preferred Stock. Any Par
Redemption Notice shall be given to the holders of record of the shares of
Series B Convertible Preferred Stock by telephone line facsimile transmission to
such number as shown on the records of the Corporation for such purpose;
provided, however, that any failure or defect in the giving of such notice to
any such holder shall
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<PAGE>
not affect the validity of notice to or the redemption of shares of Series B
Convertible Preferred Stock of any other holder. On the Par Redemption Date (or
such later date as a holder of shares of Series B Convertible Preferred Stock
surrenders to the Corporation the certificate(s) for shares of Series B
Convertible Preferred Stock to be redeemed pursuant to this Section 4.2(h)(b)),
the Corporation shall make payment of the applicable Par Redemption Price to
each holder of shares of Series B Convertible Preferred Stock to be redeemed in
immediately available funds to such account as specified by such holder in
writing to the Corporation at least one business day prior to the Par Redemption
Date. A holder of shares of Series B Convertible Preferred Stock to be redeemed
pursuant to this Section 4.2(h)(b) shall be entitled to convert such shares of
Series B Convertible Preferred Stock in accordance with Section 4.2(i) through
the day prior to the Par Redemption Date and (2) if the Corporation shall fail
to pay the Par Redemption Price of any share of Series B Convertible Preferred
Stock when due, at any time after the due date thereof until such date as the
Corporation pays the Par Redemption Price of such share of Series B Convertible
Preferred Stock to such holder. If a Par Redemption Event shall have occurred
and the Corporation shall not have exercised its redemption rights under this
Section 4.2(h)(b) within 15 days after the occurrence of such Par Redemption
Event, then the Corporation shall not be entitled to redeem shares of Series B
Convertible Preferred Stock by reason of another occurrence of a Par Redemption
Event unless such Par Redemption Event occurs more than 30 days after the
earlier occurrence of a Par Redemption Event. No share of Series B Convertible
Preferred Stock as to which a holder exercises the right of conversion pursuant
to Section 4.2(i) or the optional redemption right pursuant to Section 4.2(j)
may be redeemed by the Corporation pursuant to this Section 4.2(h)(b) on or
after the date of exercise of such conversion right or optional redemption
right, as the case may be, regardless of whether the Par Redemption Notice shall
have been given prior to, or on or after, the date of exercise of such
conversion right or optional redemption right, as the case may be. In the case
of any redemption pursuant to this Section 4.2(h)(b) for which the Par
Redemption Notice is given on or after the date which is 1,080 days after the
Issuance Date, the Corporation shall have the right, exercisable by a statement
to such effect in the Par Redemption Notice, to pay the Par Redemption Price by
the issuance to the holders of shares of Series B Convertible Preferred Stock to
be redeemed of shares of Common Stock, valued for this purpose at the Conversion
Price on the Par Redemption Date, in lieu of payment of cash, so long as all
shares of Common Stock to be so issued would, if issued as dividends on shares
of Series B Convertible Preferred Stock, meet the criteria in clauses (i)
through (vi) of Section 4.2(d)(b).
(c) NO OTHER OPTIONAL REDEMPTION. The shares of Series B Convertible
----------------------------
Preferred Stock shall not be subject to redemption at the option of the
Corporation except as provided in Sections 4.2(h)(a) and 4.2(h)(b).
4.2(i) CONVERSION.
----------
(a) CONVERSION AT OPTION OF HOLDER. The holders of the Series B
------------------------------
Convertible Preferred Stock may at any time on or after the earlier of (x) the
SEC Effective Date and (y) the date which is 90 days after the Issuance Date
convert at any time all or from time to
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<PAGE>
time any part of their shares of Series B Convertible Preferred Stock into fully
paid and nonassessable shares of Common Stock and such other securities and
property as herein provided. Each share of Series B Convertible Preferred Stock
may be converted at the office of the Conversion Agent or at such other
additional office or offices, if any, as the Board of Directors may designate,
into such whole number of fully paid and nonassessable shares of Common Stock
(calculated as to each conversion by rounding to the nearest whole share)
determined by dividing (x) the sum of (i) the Conversion Amount, (ii) accrued
but unpaid dividends to the applicable Conversion Date on the share of Series B
Convertible Preferred Stock being converted, and (iii) accrued but unpaid
interest on the dividends on the share of Series B Convertible Preferred Stock
being converted in arrears to the applicable Conversion Date at the rate
provided in Section 4.2(d) by (y) the Conversion Price for such Conversion Date
(the "Conversion Rate"); provided, however, that in no event shall any holder of
shares of Series B Convertible Preferred Stock be entitled to convert any shares
of Series B Convertible Preferred Stock in excess of that number of shares of
Series B Convertible Preferred Stock upon conversion of which the sum of (1) the
number of shares of Common Stock beneficially owned by such holder and all
Aggregated Persons of such holder (other than shares of Common Stock deemed
beneficially owned through the ownership of unconverted shares of Series B
Convertible Preferred Stock) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series B Convertible
Preferred Stock with respect to which the determination in this proviso is being
made, would result in beneficial ownership by such holder and all Aggregated
Persons of such holder 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
Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in
clause (1) of the proviso to the immediately preceding sentence.
(b) OTHER PROVISIONS. (1) Notwithstanding anything in this Section
----------------
4.2(i)(b) to the contrary, no change in the Conversion Amount pursuant to this
Section 4.2(i)(b) shall actually be made until the cumulative effect of the
adjustments called for by this Section 4.2(i)(b) since the date of the last
change in the Conversion Amount would change the Conversion Amount by more than
1%. However, once the cumulative effect would result in such a change, then the
Conversion Amount shall actually be changed to reflect all adjustments called
for by this Section 4.2(i)(b) and not previously made. Notwithstanding anything
in this Section 4.2(i)(b), no change in the Conversion Amount shall be made that
would result in the price at which a share of Series B Convertible Preferred
Stock is converted being less than the par value of the Common Stock into which
shares of Series B Convertible Preferred Stock are at the time convertible.
(2) The holders of shares of Series B Convertible Preferred Stock at
the close of business on the record date for any dividend payment to holders of
Series B Convertible Preferred Stock shall be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after such dividend payment record date
or the Corporation's default in payment of the dividend due on such dividend
payment date; provided, however, that the holder of shares of Series B
Convertible
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<PAGE>
Preferred Stock surrendered for conversion during the period between the close
of business on any record date for a dividend payment and the opening of
business on the corresponding dividend payment date must pay to the Corporation,
within five days after receipt by such holder, an amount equal to the dividend
payable on such shares on such dividend payment date if such dividend is paid by
the Corporation to such holder. A holder of shares of Series B Convertible
Preferred Stock on a record date for a dividend payment who (or whose
transferee) tenders any of such shares for conversion into shares of Common
Stock on or after such dividend payment date will receive the dividend payable
by the Corporation on such shares of Series B Convertible Preferred Stock on
such date, and the converting holder need not make any payment of the amount of
such dividend in connection with such conversion of shares of Series B
Convertible Preferred Stock. Except as provided above, no adjustment shall be
made in respect of cash dividends on Common Stock or Series B Convertible
Preferred Stock that may be accrued and unpaid at the date of surrender of
shares of Series B Convertible Preferred Stock.
(3) (A) The right of the holders of Series B Convertible Preferred
Stock to convert their shares shall be exercised by giving (which may be done by
telephone line facsimile transmission) a Conversion Notice to the Conversion
Agent. Such holder shall also give a copy of any Conversion Notice to the
Corporation; provided, however, that for all purposes a Conversion Notice shall
be deemed given when given to the Conversion Agent as provided herein and in the
Transfer Agent Instruction. If a holder of Series B Convertible Preferred Stock
elects to convert any shares of Series B Convertible Preferred Stock in
accordance with Section 4.2(i)(a), such holder shall not be required to
surrender the certificate(s) representing such shares of Series B Convertible
Preferred Stock to the Corporation unless all of the shares of Series B
Convertible Preferred Stock represented thereby are so converted. Each holder
of shares of Series B Convertible Preferred Stock and the Corporation shall
maintain records showing the number of shares so converted and the dates of such
conversions or shall use such other method, satisfactory to such holder and the
Corporation, so as to not require physical surrender of such certificates upon
each such conversion. In the event of any dispute or discrepancy, such records
of the Corporation shall be controlling and determinative in the absence of
manifest error. Notwithstanding the foregoing, if any shares of Series B
Convertible Preferred Stock evidenced by a particular certificate therefor are
converted as aforesaid, the holder of Series B Convertible Preferred Stock may
not transfer the certificate(s) representing such shares of Series B Convertible
Preferred Stock unless such holder first physically surrenders such
certificate(s) to the Corporation, whereupon the Corporation will forthwith
issue and deliver upon the order of such holder of shares of Series B
Convertible Preferred Stock new certificate(s) of like tenor, registered as such
holder of shares of Series B Convertible Preferred Stock (upon payment by such
holder of shares of Series B Convertible Preferred Stock of any applicable
transfer taxes) may request, representing in the aggregate the remaining number
of shares of Series B Convertible Preferred Stock represented by such
certificate(s). Each holder of shares of Series B Convertible Preferred Stock,
by acceptance of a certificate for such shares, acknowledges and agrees that (1)
by reason of the provisions of this paragraph, following conversion of any
shares of Series B Convertible Preferred Stock represented by such certificate,
the number of shares of Series B Convertible Preferred Stock represented by such
certificate may be less than the number
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<PAGE>
of shares stated on such certificate, and (2) the Corporation may place a legend
on the certificates for shares of Series B Convertible Preferred Stock which
refers to or describes the provisions of this paragraph.
(b) The Corporation shall pay any transfer tax arising in connection
with any conversion of shares of Series B Convertible Preferred Stock except
that the Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery upon
conversion of shares of Common Stock or other securities or property in a name
other than that of the holder of the shares of the Series B Convertible
Preferred Stock being converted, and the Corporation shall not be required to
issue or deliver any such shares or other securities or property unless and
until the Person or Persons requesting the issuance thereof shall have paid to
the Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid. The number of
shares of Common Stock to be issued upon each conversion of shares of Series B
Convertible Preferred Stock shall be the number set forth in the applicable
Conversion Notice which number shall be conclusive absent manifest error. The
Corporation shall notify a holder who has given a Conversion Notice of any claim
of manifest error within two Trading Days after such holder gives such
Conversion Notice and no such claim of error shall limit or delay performance of
the Corporation's obligation to issue upon such conversion the number of shares
of Common Stock which are not in dispute. A Conversion Notice shall be deemed
for all purposes to be in proper form unless the Corporation notifies a holder
of shares of Series B Convertible Preferred Stock being converted within two
Trading Days after a Conversion Notice has been given (which notice shall
specify all defects in the Conversion Notice) and any Conversion Notice
containing any such defect shall nonetheless be effective on the date given if
the converting holder promptly corrects all such defects.
(4) The Corporation (and any successor corporation) shall take all
action necessary so that a number of shares of the authorized but unissued
Common Stock (or common stock in the case of any successor corporation)
sufficient to provide for the conversion of the Series B Convertible Preferred
Stock outstanding upon the basis hereinbefore provided are at all times reserved
by the Corporation (or any successor corporation), free from preemptive rights,
for such conversion, subject to the provisions of the next succeeding paragraph.
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 B Convertible Preferred Stock shall be convertible as
herein provided, 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 B Convertible Preferred Stock on the new
basis. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all of the outstanding
shares of Series B Convertible Preferred Stock, the Corporation promptly shall
seek, and use its best efforts to obtain and complete, such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
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<PAGE>
(5) In case of any consolidation or merger of the Corporation with
any other corporation (other than a wholly-owned subsidiary of the Corporation)
in which the Corporation is not the surviving corporation, or in case of any
sale or transfer of all or substantially all of the assets of the Corporation,
or in the case of any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property, the
Corporation shall make appropriate provision or cause appropriate provision to
be made so that each holder of shares of Series B Convertible Preferred Stock
then outstanding shall have the right thereafter to convert such shares of
Series B Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series B Convertible Preferred Stock could have been converted
immediately prior to the effective date of such consolidation, merger, sale,
transfer, or share exchange and on a basis which preserves the economic benefits
of the conversion rights of the holders of shares of Series B Convertible
Preferred Stock on a basis as nearly as practical as such rights exist hereunder
prior thereto. If, in connection with any such consolidation, merger, sale,
transfer, or share exchange, each holder of shares of Common Stock is entitled
to elect to receive securities, cash, or other assets upon completion of such
transaction, the Corporation shall provide or cause to be provided to each
holder of Series B Convertible Preferred Stock the right to elect the
securities, cash, or other assets into which the Series B Convertible Preferred
Stock held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable to
holders of the Common Stock (including, without limitation, notice of the right
to elect, limitations on the period in which such election shall be made, and
the effect of failing to exercise the election). The Corporation shall not
effect any such transaction unless the provisions of this paragraph have been
complied with. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, or share exchanges.
(6) If a holder shall have given a Conversion Notice for shares of
Series B Convertible Preferred Stock, the Corporation shall issue and deliver to
such Person certificates for the Common Stock issuable upon such conversion
within three Trading Days after such Conversion Notice is given and the Person
converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, and all rights with respect to the shares
surrendered shall forthwith terminate except the right to receive the Common
Stock or other securities, cash, or other assets as herein provided. If a
holder shall have given a Conversion Notice as provided herein, the
Corporation's obligation to issue and deliver the certificates for Common Stock
shall be absolute and unconditional, irrespective of any action or inaction by
the converting holder to enforce the same, any waiver or consent with respect to
any provision thereof, the recovery of any judgment against any Person or any
action to enforce the same, any failure or delay in the enforcement of any other
obligation of the Corporation to such holder, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by such
holder or any other Person of any obligation to the Corporation or any violation
or alleged violation of law by such holder or any other Person, and irrespective
of any other circumstance which might otherwise limit such obligation of the
Corporation to the holder in
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<PAGE>
connection with such conversion. If the Corporation fails to issue and deliver
the certificates for the Common Stock to the holder converting shares of Series
B Convertible Preferred Stock pursuant to the first sentence of this paragraph
as and when required to do so, in addition to any other liabilities the
Corporation may have hereunder and under applicable law (1) the Corporation
shall pay or reimburse such holder on demand for all reasonable out-of-pocket
expenses including, without limitation, fees and expenses of legal counsel
incurred by such holder as a result of such failure, (2) the Conversion
Percentage used to determine the Conversion Price applicable to such conversion
shall be reduced by one percentage point from the Conversion Percentage
otherwise used to calculate the Conversion Price applicable to such conversion
for each Trading Day the Corporation fails to so issue and deliver such
certificates and (3) such holder may by written notice (which may be given by
mail, courier, personal service or telephone line facsimile transmission) or
oral notice (promptly confirmed in writing) given at any time prior to delivery
to such holder of the certificates for the shares of Common Stock issuable upon
such conversion of shares of Series B Convertible Preferred Stock, rescind such
conversion, whereupon such holder shall have the right to convert such shares of
Series B Convertible Preferred Stock thereafter in accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series B Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock to purchase fractional shares of Common Stock which
would otherwise be issuable in respect of the aggregate number of such shares
surrendered for conversion at one time by the same holder, the number of shares
of Common Stock to be issued on conversion shall be rounded to the nearest whole
share of Common Stock.
(8) The Conversion Amount shall be adjusted from time to time under
certain circumstances, subject to the provisions of Section 4.2(i)(b)(1), as
follows:
(i) In case the Corporation shall issue rights or warrants on a pro
rata basis to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock on the record date referred to below at a
price per share less than the Current Price for such record date, then in each
such case the Conversion Amount in effect on such record date shall be adjusted
in accordance with the formula
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<PAGE>
C\\1\\ = C x O + N
-----
O + N x P
-----
M
where
C\\1\\ = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record
date.
N = the number of additional shares of Common Stock issuable pursuant
to the exercise of such rights or warrants.
P = the offering price per share of the additional shares (which
amount shall include amounts received by the Corporation in respect
of the issuance and the exercise of such rights or warrants).
M = the Current Price per share of Common Stock on the record date.
Such adjustment shall become effective immediately after the record date for the
determination of shareholders entitled to receive such rights or warrants. If
any or all such rights or warrants are not so issued or expire or terminate
before being exercised, the Conversion Amount then in effect shall be readjusted
appropriately.
(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as hereinafter defined) evidences
of its indebtedness or assets (including securities, but excluding any warrants
or subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be adjusted in
accordance with the formula
C\\1\\ = C x M
--------
M - F
where
C\\1\\ = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Price per share of Common Stock on the record date
mentioned below.
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<PAGE>
F = the aggregate amount of such cash dividend and/or the fair market
value on the record date of the assets or securities to be distributed
divided by the number of shares of Common Stock outstanding on the
record date. The Board of Directors shall determine such fair market
value, which determination shall be conclusive.
Such adjustment shall become effective immediately after the record date for the
determination of shareholders entitled to receive such dividend or distribution.
For purposes of this subparagraph (ii), "Junior Stock" shall include any class
of capital stock ranking junior as to dividends or upon liquidation to the
Series B Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to
Section 4.2(i)(b)(5), the holder of any Series B Convertible Preferred Stock
thereafter surrendered for conversion shall become entitled to receive
securities, cash, or assets other than Common Stock, the number or amount of
such securities or property so receivable upon conversion shall be subject to
adjustment from time to time in a manner and on terms nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
subparagraphs (i) to (iii) above.
(9) Except as otherwise provided above in this Section 4.2(i), no
adjustment in the Conversion Amount shall be made in respect of any conversion
for share distributions or dividends theretofore declared and paid or payable on
the Common Stock.
(10) Whenever the Conversion Amount is adjusted as herein provided,
the Corporation shall send to each holder and each transfer agent, if any, for
the Series B Convertible Preferred Stock and the transfer agent for the Common
Stock, a statement signed by the Chairman of the Board, the President, or any
Vice President of the Corporation and by its Treasurer or its Secretary or an
Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 4.2(i), and any adjustment so evidenced, given in good
faith, shall be binding upon all shareholders and upon the Corporation. Whenever
the Conversion Amount is adjusted, the Corporation will give notice by mail to
the holders of record of Series B Convertible Preferred Stock, which notice
shall be made within 15 days after the effective date of such adjustment and
shall state the adjustment and the Conversion Amount. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give such notice or a
defect in such notice shall not affect the binding nature of such corporate
action of the Corporation.
(11) Whenever the Corporation shall propose to take any of the
actions specified in Section 4.2(i)(b)(5) or in subparagraphs (i) or (ii) of
Section 4.2(i)(b)(8) which would result in any adjustment in the Conversion
Amount under this Section 4.2(i)(b), the Corporation shall cause a notice to be
mailed at least 20 days prior to the date on which the books of the Corporation
will close or on which a record will be taken for such action, to the holders of
record of the outstanding Series B Convertible Preferred Stock on the date of
such notice. Such notice shall specify the action proposed to be taken by the
Corporation and the date as of which holders of record of the Common
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<PAGE>
Stock shall participate in any such actions or be entitled to exchange their
Common Stock for securities or other property, as the case may be. Failure by
the Corporation to mail the notice or any defect in such notice shall not affect
the validity of the transaction.
4.2(j) REDEMPTION AT OPTION OF HOLDERS.
-------------------------------
(a) REDEMPTION RIGHT. If an Optional Redemption Event occurs, then,
----------------
in addition to any other right or remedy of any holder of shares of Series B
Convertible Preferred Stock, each holder of shares of Series B Convertible
Preferred Stock shall have the right, at such holder's option, to require the
Corporation to redeem all of such holder's shares of Series B Convertible
Preferred Stock, or any portion thereof, on the date that is three business days
after the date such holder gives the Corporation an Optional Redemption Notice
with respect to such Optional Redemption Event at any time while any of such
holder's shares of Series B Convertible Preferred Stock are outstanding, at a
price equal to the Optional Redemption Price.
(b) NOTICES; METHOD OF EXERCISING OPTIONAL REDEMPTION RIGHTS, ETC.
-------------------------------------------------------------
(1) On or before the fifth business day after the occurrence of an Optional
Redemption Event, the Corporation shall give to each holder of outstanding
shares of Series B Convertible Preferred Stock a notice of the occurrence of
such Optional Redemption Event and of the redemption right set forth herein
arising as a result thereof. Such notice from the Corporation shall set forth:
(i) the date by which the optional redemption right must be
exercised, and
(ii) a description of the procedure (set forth below) which each
such holder must follow to exercise such holder's optional redemption
right.
No failure of the Corporation to give such notice or defect therein shall limit
the right of any holder of shares of Series B Convertible Preferred Stock to
exercise the optional redemption right or affect the validity of the proceedings
for the redemption of such holder's shares of Series B Convertible Preferred
Stock.
(2) To exercise its optional redemption right, each holder of
outstanding shares of Series B Convertible Preferred Stock shall deliver to the
Corporation on or before the thirtieth day after the notice required by Section
4.2(j)(b)(1) is given to such holder (or if no such notice has been given by the
Corporation to such holder, within forty days after such holder first learns of
such Optional Redemption Event) an Optional Redemption Notice to the
Corporation. An Optional Redemption Notice may be revoked by such holder giving
such Optional Redemption Notice by giving notice of such revocation to the
Corporation at any time prior to the time the Corporation pays the Optional
Redemption Price to such holder.
(3) If a holder of shares of Series B Convertible Preferred Stock
shall have given an Optional Redemption Notice, on the date which is three
business days after the date such Optional Redemption Notice is given (or such
later date as such holder surrenders such holder's certificates for the shares
of Series B Convertible Preferred Stock redeemed) the Corporation shall make
payment in immediately available funds of the applicable Optional Redemption
Price to such
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<PAGE>
account as specified by such holder in writing to the Corporation at least one
business day prior to the applicable redemption date.
(c) OTHER. (1) In connection with a redemption pursuant to this
-----
Section 4.2(j) of less than all of the shares of Series B Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three Trading Days after surrender of such certificate to the Corporation,
the Corporation shall issue and deliver to such holder a replacement certificate
for the shares of Series B Convertible Preferred Stock evidenced by such
certificate which have not been redeemed.
(2) An Optional Redemption Notice given by a holder of shares of
Series B Convertible Preferred Stock shall be deemed for all purposes to be in
proper form unless the Corporation notifies such holder in writing within three
business days after such Optional Redemption Notice has been given (which notice
shall specify all defects in such Optional Redemption Notice), and any Optional
Redemption Notice containing any such defect shall nonetheless be effective on
the date given if such holder promptly undertakes to correct all such defects.
No such claim of error shall limit or delay performance of the Corporation's
obligation to redeem all shares of Series B Convertible Preferred Stock not in
dispute whether or not such holder makes such undertaking.
4.2(k) VOTING RIGHTS; CERTAIN RESTRICTIONS.
-----------------------------------
(a) VOTING RIGHTS. Except as otherwise required by law or expressly
--------------
provided herein, shares of Series B Convertible Preferred Stock shall not be
entitled to vote on any matter.
(b) ARTICLES OF INCORPORATION; CERTAIN STOCK. The affirmative vote
----------------------------------------
or consent of the Majority Holders, voting separately as a class, will be
required for (1) any amendment, alteration, or repeal, whether by merger or
consolidation or otherwise, of the Corporation's Articles of Incorporation if
the amendment, alteration, or repeal materially and adversely affects the
powers, preferences, or special rights of the Series B Convertible Preferred
Stock, or (2) the creation and issuance of any Senior Dividend Stock or Senior
Liquidation Stock; provided, however, that any increase in the authorized
Preferred Stock of the Corporation or the creation and issuance of any stock
which is both Junior Dividend Stock and Junior Liquidation Stock shall not be
deemed to affect materially and adversely such powers, preferences, or special
rights and any such increase or creation and issuance may be made without any
such vote by the holders of Series B Convertible Preferred Stock except as
otherwise required by law.
(c) REPURCHASES OF SERIES B CONVERTIBLE PREFERRED STOCK. The
---------------------------------------------------
Corporation shall not repurchase or otherwise acquire any shares of Series B
Convertible Preferred Stock (other than pursuant to Sections 4.2(f)(a),
4.2(h)(a), 4.2(h)(b) or 4.2(j)) unless the Corporation offers to repurchase or
otherwise acquire simultaneously a pro rata portion of each holder's shares of
Series B Convertible Preferred Stock for cash at the same price per share.
(d) OTHER. So long as any shares of Series B Convertible Preferred
-----
Stock are outstanding:
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<PAGE>
(1) PAYMENT OF OBLIGATIONS. The Corporation will pay and discharge,
----------------------
and will cause each subsidiary of the Corporation to pay and discharge, when due
all their respective obligations and liabilities which are material to the
Corporation and its subsidiaries taken as a whole, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings.
(2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will
----------------------------------
keep, and will cause each subsidiary of the Corporation to keep, all material
property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted.
(B) The Corporation will maintain, and will cause each subsidiary of
the Corporation to maintain, with financially sound and responsible insurance
companies, insurance against loss or damage by fire or other casualty and such
other insurance, including but not limited to, product liability insurance, in
such amounts and covering such risks as is reasonably adequate for the conduct
of their businesses and the value of their properties.
(3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The
------------------------------------------------
Corporation will continue, and will cause each subsidiary of the Corporation to
continue, to engage in business of substantially the same general type as
conducted by the Corporation and its operating subsidiaries at the time the
Certificate of Designation was filed with the Secretary of State of the State of
Minnesota, and will preserve, renew and keep in full force and effect, and will
cause each subsidiary of the Corporation to preserve, renew and keep in full
force and effect, their respective corporate existence and their respective
material rights, privileges and franchises necessary or desirable in the normal
conduct of business.
(4) COMPLIANCE WITH LAWS. The Corporation will comply, and will
--------------------
cause each subsidiary of the Corporation to comply, in all material respects
with all applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Corporation and its subsidiaries taken as a
whole.
(5) INVESTMENT COMPANY ACT. The Corporation will not be or become
----------------------
an open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended, or any successor provision.
(6) TRANSACTIONS WITH AFFILIATES. The Corporation will not, and
----------------------------
will not permit any subsidiary of the Corporation, directly or indirectly, to
pay any funds to or for the account of, make any investment (whether by
acquisition of stock or indebtedness, by loan, advance, transfer of property,
guarantee or other agreement to pay, purchase or service, directly or
indirectly, any indebtedness, or otherwise) in, lease, sell, transfer or
otherwise dispose of any assets, tangible or
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<PAGE>
intangible, to, or participate in, or effect any transaction in connection with,
any joint enterprise or other joint arrangement with, any Affiliate of the
Corporation, except, on terms to the Corporation or such subsidiary no less
favorable than terms that could be obtained by the Corporation or such
subsidiary from a Person that is not an Affiliate of the Corporation, as
determined in good faith by the Board of Directors.
4.2(l) OUTSTANDING SHARES. For purposes of this Section 4.2, all
------------------
shares of Series B Convertible Preferred Stock shall be deemed outstanding
except (i) from the applicable Conversion Date, each share of Series B
Convertible Preferred Stock converted into Common Stock, unless the Corporation
shall default in its obligation to issue and deliver shares of Common Stock upon
such conversion as and when required by Section 4.2(i); (ii) from the date of
registration of transfer, all shares of Series B Convertible Preferred Stock
held of record by the Corporation or any subsidiary or Affiliate of the
Corporation (other than any original holder of shares of Series B Convertible
Preferred Stock) and (iii) from the applicable Redemption Date, Share Limitation
Redemption Date, Par Redemption Date or date of redemption pursuant to Section
4.2(j), all shares of Series B Convertible Preferred Stock which are redeemed or
repurchased, so long as in each case the Redemption Price, the Share Limitation
Redemption Price, the Par Redemption Price, the Optional Redemption Price or
other repurchase price, as the case may be, of such shares of Series B
Convertible Preferred Stock shall have been paid by the Corporation as and when
due hereunder.
4.2(m) MISCELLANEOUS.
-------------
(a) NOTICES. Any notices required or permitted to be given under
-------
the terms of this Section 4.2 of the Articles of Incorporation, as amended,
shall be in writing and shall be delivered personally (which shall include
telephone line facsimile transmission) or by courier and shall be deemed given
upon receipt (a) in the case of the Corporation, addressed to the Corporation at
808 Howell Street, Suite 400, Seattle, Washington, 98101, Attention: Chief
Financial Officer (telephone line facsimile transmission number (206) 652-8665),
with a copy to C. Kent Carlson, Esq., Preston Gates & Ellis LLP, 701 Fifth
Avenue, Seattle, Washington 98104 (telephone line facsimile number (206) 623-
7022), or, in the case of any holder of shares of Series B Convertible Preferred
Stock, at such holder's address or telephone line facsimile transmission number
shown on the stock books maintained by the Corporation with respect to the
Series B Convertible Preferred Stock or such other address as the Corporation
shall have provided by notice to the holders of shares of Series B Convertible
Preferred Stock in accordance with this Section or any holder of shares of
Series B Convertible Preferred Stock shall have provided to the Corporation in
accordance with this Section.
(b) REPLACEMENT OF CERTIFICATES. Upon receipt by the Corporation of
---------------------------
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series B
Convertible Preferred Stock and (1) in the case of loss, theft or destruction,
of indemnity from the record holder of the certificate for such shares of Series
B Convertible Preferred Stock reasonably satisfactory in form to the Corporation
(and without the requirement to post any bond or other security) or (2) in the
case of mutilation, upon surrender and cancellation of the certificate for such
shares of Series B Convertible Preferred Stock, the
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Corporation will execute and deliver to such holder a new certificate for such
shares of Series B Convertible Preferred Stock without charge to such holder.
(c) OVERDUE AMOUNTS. Except as otherwise specifically provided in
---------------
Section 4.2(d) with respect to dividends in arrears on the Series B Convertible
Preferred Stock, whenever any amount which is due to any holder of shares of
Series B Convertible Preferred Stock is not paid to such holder when due, such
amount shall bear interest at the rate of 12% per annum ( or such other rate as
shall be the maximum rate allowable by applicable law) until paid in full.
4.3 ISSUANCE OF PREFERRED SHARES. The Board of Directors is hereby
-----------------------------
authorized from time to time, without shareholder action, to provide for the
issuance of Preferred Shares in one or more series other than the Series B
Convertible Preferred Stock and subject to the rights and preferences of the
Series B Convertible Preferred Stock described herein not exceeding in the
aggregate the number of Preferred Shares authorized by these Articles of
Incorporation, as amended from time to time; and to determine with respect to
each such series the voting powers, if any (which voting powers, if granted, may
be full or limited), designations, preferences, and relative, participating,
option, or other special rights, and the qualifications, limitations, or
restrictions relating thereto, including without limiting the generality of the
foregoing, the voting rights relating to Preferred Shares of any series (which
may be one or more votes per share or a fraction of a vote per share, which may
vary over time, and which may be applicable generally or only upon the happening
and continuance of stated events or conditions), the rate of dividend to which
holders of Preferred Shares of any series may be entitled (which may be
cumulative or noncumulative), the rights of holders of Preferred Shares of any
series in the event of liquidation, dissolution, or winding up of the affairs of
the Corporation, the rights, if any, of holders of Preferred Shares of any
series to convert or exchange such Preferred Shares of such series for shares of
any other class or series of capital stock or for any other securities,
property, or assets of the Corporation or any subsidiary (including the
determination of the price or prices or the rate or rates applicable to such
rights to convert or exchange and the adjustment thereof, the time or times
during which the right to convert or exchange shall be applicable, and the time
or times during which a particular price or rate shall be applicable), whether
or not the shares of that series shall be redeemable, and if so, the terms and
conditions of such redemption, including the date or dates upon or after which
they shall be redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and at different
redemption dates, and whether any shares of that series shall be redeemed
pursuant to a retirement or sinking fund or otherwise and the terms and
conditions of such obligation.
4.4 FILINGS AND EFFECTIVENESS. Before the Corporation shall issue any
--------------------------
Preferred Shares of any series, Articles of Amendment or Restated Articles of
Incorporation, fixing the voting powers, designations, preferences, the
relative, participating, option, or other rights, if any, and the
qualifications, limitations, and restrictions, if any, relating to the Preferred
Shares of such series, and the number of Preferred Shares of such series
authorized by the Board of Directors to be issued shall be filed with the
secretary of state in accordance with the Washington Business Corporation Act
("WBCA") and shall become effective without any shareholder action. The Board
of Directors is further authorized to increase or decrease (but not below the
number of such shares of such series then outstanding) the number of shares of
any series subsequent to the issuance of shares of that
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series.
ARTICLE V
NO PREEMPTIVE RIGHT'S
Shareholders of the Corporation have no preemptive rights to acquire
additional shares of stock or securities convertible into shares of stock issued
by the Corporation.
ARTICLE VI
DIRECTORS
6.1 NUMBER. The number of directors of the Corporation shall be fixed in
-------
the manner specified by the bylaws of the Corporation.
6.2 VACANCIES. Vacancies and newly created directorships resulting from
----------
any increase in the authorized number of directors shall be filled only by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director, unless for any reason there are no directors in office
in which case they shall be filled by a special election by shareholders.
ARTICLE VII
ELECTION OF DIRECTORS
Shareholders of the Corporation shall not have the right to cumulate votes
in the election of directors.
ARTICLE VIII
SPECIAL SHAREHOLDER MEETINGS
Special meetings of the shareholders of the Corporation for any purpose or
purposes may be called at any time by the Board of Directors, or by a committee
of the Board of Directors which has been duly designated by the Board of
Directors and whose powers and authority, as provided in a resolution of the
Board of Directors or in the bylaws of the Corporation, include the power to
call such meetings, but such special meetings may not be called by any other
person or persons.
ARTICLE IX
AMENDMENT OF BYLAWS
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In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, adopt, repeal, alter,
amend, and rescind the bylaws of the Corporation by a resolution adopted by a
majority of the directors.
ARTICLE X
LIMITATION OF DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a director,
except for:
(a) Acts or omissions involving intentional misconduct by the director or
a knowing violation of law by the director;
(b) Conduct violating Section 23B.08.310 of the Act (which involves
distributions by the Corporation);
(c) Any transaction from which the director will personally receive a
benefit in money, property, or services to which the director is not
legally entitled.
If the Washington Business Corporation Act is amended to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent not prohibited by the Washington Business Corporation Act, as
so amended. The provisions of this Article shall be deemed to be a contract
with each Director of the Corporation who serves as such at any time while such
provisions are in effect, and each such Directors shall be deemed to be serving
as such in reliance on the provisions of this Article. Any repeal or
modification of the foregoing paragraph by the shareholders of the Corporation
shall not adversely affect any right or protection of a director of the
Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XI
MERGERS, SHARE EXCHANGES, AND OTHER TRANSACTIONS
A merger, share exchange, sale of substantially all of the Corporation's
assets, or dissolution must be approved by the affirmative vote of a majority of
the Corporation's outstanding shares entitled to vote, or if separate voting by
voting groups is required then by not less than a majority of all the votes
entitled to be cast by that voting group.
ARTICLE XII
INDEMNIFICATION
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12.1 DEFINITIONS. As used in this Article:
------------
a. "Agent" means an individual who is or was an agent of the
Corporation or an individual who, while an agent of the Corporation, is or
was serving at the Corporation's request as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other
enterprise. "Agent" includes, unless the context requires otherwise, the
spouse, heirs, estate and personal representative of an agent.
b. "Corporation" means the Corporation, and any domestic or foreign
predecessor entity which, in a merger or other transaction, ceased to
exist.
c. "Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the Corporation, is
or was serving at the Corporation's request as a director officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, limited liability company, limited liability
partnership, trust, employee benefit plan or other enterprise. "Director"
includes, unless the context requires otherwise, the spouse, heirs, estate
and personal representative of a director.
d. "Employee" means an individual who is or was an employee of the
Corporation or an individual, while an employee of the Corporation, is or
was serving at the Corporation's request as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, limited liability company, limited liability
partnership, trust, employee benefit plan, or other enterprise- "Employee"
includes, unless the context requires otherwise, the spouse, heirs, estate
and personal representative of an employee.
e. "Expenses" include counsel fees.
f. "Indemnitee" means an individual made a party to a proceeding
because the individual is or was a Director, Officer, Employee, or Agent of
the Corporation, and who possesses indemnification rights pursuant to these
Articles or other corporate action. "Indemnitee" includes, unless the
context requires otherwise, the spouse, heirs, estate, and personal
representative of such individuals.
g. "Liability" means the obligation to pay a judgment, settlement,
penalty, fine, including an excise tax with respect to an employee benefit
plan, or reasonable Expenses incurred with respect to a proceeding.
h. "Officer" means an individual who is or was an officer of the
Corporation (regardless of whether or not such individual was also a
Director) or an individual who, while an officer of the Corporation, is or
was serving at the Corporation's request as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, limited liability company, limited liability
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partnership, trust, employee benefit plan, or other enterprise. "Officer"
includes, unless the context requires otherwise, the spouse, heirs, estate
and personal representative of an officer.
i. "Party" includes an individual who was, is, or is threatened to
be named a defendant, respondent or witness in a proceeding.
j. "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, derivative, criminal, administrative,
or investigative, and whether formal or informal.
12.2 INDEMNIFICATION RIGHTS OF DIRECTORS AND OFFICERS. The Corporation
------------------------------------------------
shall indemnify its Directors and Officers to the full extent not prohibited by
applicable law now or hereafter in force against liability arising out of a
Proceeding to which such individual was made a Party because the individual is
or was a Director or an Officer. However, such indemnity shall not apply on
account of:
(a) Acts or omissions of a Director or Officer finally adjudged to be
intentional misconduct or a knowing violation of law;
(b) Conduct of a Director or Officer finally adjudged to be in violation
of Section 23B.09.3 10 of the Act relating to distributions by the
Corporation; or
(c) Any transaction with respect to which it was finally adjudged that
such Director or Officer personally received a benefit in money,
property, or services to which the Director or Officer was not legally
entitled.
Subject to the foregoing, it is specifically intended that Proceedings covered
by indemnification shall include Proceedings brought by the Corporation
(including derivative actions), Proceedings by government entities and
governmental officials or other third party actions.
12.3 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
-----------------------------------------------------------
Corporation may, by action of its Board of Directors from time to time, provide
indemnification and pay Expenses in advance of the final disposition of a
Proceeding to Employees and Agents of the Corporation who are not also
Directors, in each case to the same extent as to a Director with respect to the
indemnification and advancement of Expenses pursuant to rights granted under, or
provided by, the Act or otherwise.
12.4 PARTIAL INDEMNIFICATION. If an Indemnitee is entitled to
------------------------
indemnification by the Corporation for some or a portion of Expenses,
liabilities, or losses actually and reasonably incurred by Indemnitee in an
investigation, defense, appeal or settlement but not, however, for the total
amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the
portion of such Expenses, liabilities or losses to which Indemnitee is entitled.
12.5 PROCEDURE FOR SEEKING INDEMNIFICATION AND/OR ADVANCEMENT OF EXPENSES.
--------------------------------------------------------------------
The following procedures shall apply in the absence of (or at the option of the
Indemnitee, in lieu
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thereof), specific procedures otherwise applicable to an Indemnitee pursuant to
a contract, trust agreement, or general or specific action of the Board of
Directors:
12.5.1 Notification and Defense of Claim. Indemnitee shall promptly
notify the Corporation in writing of any proceeding for which
indemnification could be sought under this Article. In addition,
Indemnitee shall give the Corporation such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
With respect to any such proceeding as to which Indemnitee has notified the
Corporation:
(a) The Corporation will be entitled to participate therein at its
own expense; and
(b) Except as otherwise provided below, to the extent that it may
wish, the Corporation, jointly with any other indemnifying party
similarly notified, will be entitled to assume the defense
thereof, with counsel satisfactory to Indemnitee. Indemnitee's
consent to such counsel may not be unreasonably withheld.
After notice from the Corporation to Indemnitee of its election to
assume the defense, the Corporation will not be liable to Indemnitee under
this Article for any legal or other Expenses subsequently incurred by
Indemnitee in connection with such defense. However, Indemnitee shall
continue to have the right to employ its counsel in such proceeding, at
Indemnitee's expense; and if:
(i) The employment of counsel by Indemnitee has been
authorized by the Corporation;
(ii) Indemnitee shall have reasonably concluded that there may
be a conflict of interest between the Corporation and
Indemnitee in the conduct of such defense; or
(iii) The Corporation shall not in fact have employed counsel to
assume the defense of such proceeding,
the fees and Expenses of Indemnitee's counsel shall be at the expense of
the Corporation.
The Corporation shall not be entitled to assume the defense of any
proceeding brought by or on behalf of the Corporation or as to which
Indemnitee shall reasonably have made the conclusion that a conflict of
interest may exist between the Corporation and the Indemnitee in the
conduct of the defense.
12.5.2 Information to be Submitted and Method of Determination and
Authorization of Indemnification. For the purpose of pursuing rights to
indemnification under this Article, the Indemnitee shall submit to the
Board a sworn statement requesting indemnification and
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reasonable evidence of all amounts for which such indemnification is
requested (together, the sworn statement and the evidence constitute an
"Indemnification Statement").
Submission of an Indemnification Statement to the Board shall create a
presumption that the Indemnitee is entitled to indemnification hereunder,
and the Corporation shall, within sixty (60) calendar days thereafter, make
the payments requested in the Indemnification Statement to or for the
benefit of the Indemnitee, unless: (1) within such sixty (60) calendar day
period it shall be determined by the Corporation that the Indemnitee is not
entitled to indemnification under this Article; (2) such determination
shall be based upon clear and convincing evidence (sufficient to rebut the
foregoing presumption); and (3) the Indemnitee shall receive notice in
writing of such determination, which notice shall disclose with
particularity the evidence upon which the determination is based.
The foregoing determination may be made: (1) by the Board of Directors
by majority vote of a quorum of Directors who are not at the time parties
to the proceedings; (2) if a quorum cannot be obtained, by majority vote of
a committee duly designated by the Board of Directors (in which designation
Directors who are parties may participate) consisting solely of two (2) or
more Directors not at the time parties to the proceeding; (3) by special
legal counsel; or (4) by the shareholders as provided by Section 23B.08.550
of the Act.
Any determination that the Indemnitee is not entitled to
indemnification, and any failure to make the payments requested in the
Indemnification Statement, shall be subject to judicial review by any court
of competent jurisdiction.
12.5.3 Special Procedure Regarding Advance for Expenses. An
Indemnitee seeking payment of Expenses in advance of a final disposition of
the proceeding must furnish the Corporation, as part of the Indemnification
Statement:
(a) A written affirmation of the Indemnitee's good faith belief
that the Indemnitee has met the standard of conduct required
to be eligible for indemnification; and
(b) A written undertaking, constituting an unlimited general
obligation of the Indemnitee, to repay the advance if it is
ultimately determined that the Indemnitee did not meet the
required standard of conduct.
Upon satisfaction of the foregoing the Indemnitee shall have a
contractual right to the payment of such Expenses.
12.5.4 Settlement. The Corporation is not liable to indemnify
Indemnitee for any amounts paid in settlement of any proceeding without the
Corporation's written consent. The Corporation shall not settle any
proceeding in any manner which would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Corporation
nor Indemnitee may unreasonably withhold its consent to a proposed
settlement.
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12.6. CONTRACT AND RELATED RIGHTS.
----------------------------
12.6.1 Contract Rights. The right of an Indemnitee to
indemnification and advancement of Expenses is a contract right upon which
the Indemnitee shall be presumed to have relied in determining to serve or
to continue to serve in his or her capacity with the Corporation. Such
right shall continue as long as the Indemnitee shall be subject to any
possible proceeding. Any amendment to or repeal of this Article shall not
adversely affect any right or protection of an Indemnitee with respect to
any acts or omissions of such Indemnitee occurring prior to such amendment
or repeal.
12.6.2 Optional Insurance, Contracts, and Funding. The Corporation
may:
(a) Maintain insurance, at its expense, to protect itself and
any Indemnitee against any liability, whether or not the
Corporation would have power to indemnify the individual
against the same liability under Section 23B.08.510 or .520
of the Act;
(b) Enter into contracts with any Indemnitee in furtherance of
this Article and consistent with the Act; and
(c) Create a trust fund, grant a security interest, or use other
means (including without limitation a letter of credit) to
ensure the payment of such amounts as may be necessary to
effect indemnification as provided in this Article.
12.6.3 Severability. If any provision or application of this Article
shall be invalid or unenforceable, the remainder of this Article and its
remaining applications shall not be affected thereby, and shall continue in
full force and effect.
12.6.4 Right of Indemnitee to Bring Suit. If (1) a claim under this
Article for indemnification is not paid in full by the Corporation within
sixty (60) days after a written claim has been received by the Corporation;
or (2) a claim under this Article for advancement of Expenses is not paid
in full by the Corporation within twenty (20) days after a written claim
has been received by the Corporation, then the Indemnitee may, but need
not, at any time thereafter bring suit against the Corporation to recover
the unpaid amount of the claim. To the extent successful in whole or in
part, the Indemnitee shall be entitled to also be paid the expense (to be
proportionately prorated if the Indemnitee is only partially successful) of
prosecuting such claim. Neither (1) the failure of the Corporation
(including its Board of Directors, its shareholders, or independent legal
counsel) to have made a determination prior to the commencement of such
proceeding that indemnification or reimbursement or advancement of Expenses
to the Indemnitee is proper in the circumstances; nor (2) an actual
determination by the Corporation (including its Board of Directors, its
shareholders, or independent legal counsel that the Indemnitee is not
entitled to indemnification or to the reimbursement or advancement of
Expenses, shall be a defense to the proceeding or create a presumption that
the Indemnitee is not so entitled.
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12.6.5 Nonexclusivity of Rights. The right to indemnification and
the payment of Expenses incurred in defending a Proceeding in advance of
its final disposition granted in this Article shall not be exclusive of any
other right which any Indemnitee may have or hereafter acquire under any
statute, provision of this Article or the Bylaws, agreement, vote of
shareholders or disinterested directors, or otherwise. The Corporation
shall have the express right to grant additional indemnity without seeking
further approval or satisfaction by the shareholders. All applicable
indemnity provisions and any applicable law shall be interpreted and
applied so as to provide an Indemnitee with the broadest but nonduplicative
indemnity to which he or she is entitled.
12.7 CONTRIBUTION. If the indemnification provided in Section 12.2 of
------------
this Article is not available to be paid to Indemnitee for any reason other than
those set forth in subparagraphs 12.2(a), 12.2(b), and 12.2(c) of Section 12.2
of this Article (for example, because indemnification is held to be against
public policy even though otherwise permitted under Section 12.2) then in
respect of any proceeding in which the Corporation is jointly liable with
Indemnitee (or would be if joined in such proceeding), the Corporation shall
contribute to the amount of loss paid or payable by Indemnitee in such
proportion as is appropriate to reflect:
The relative benefits received by the Corporation on the one hand
and the Indemnitee on the other hand from the transaction from
which such proceeding arose, and
The relative fault of the Corporation on the one hand and the
Indemnitee on the other hand in connection with the events which
resulted in such loss, as well as any other relevant equitable
consideration.
The relative benefits received by and fault of the Corporation on the one
hand and the Indemnitee on the other shall be determined by a court of
appropriate jurisdiction (which may be the same court in which the proceeding
took place) with reference to, among other things, the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent the
circumstances resulting in such loss. The Corporation agrees that it would not
be just and equitable if a contribution pursuant to this Article was determined
by pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable considerations.
12.8 EXCEPTIONS. Any other provision herein to the contrary
----------
notwithstanding, the Corporation shall not be obligated pursuant to the terms of
these Articles to indemnify or advance Expenses to Indemnitee with respect to
any proceeding.
12.8.1 Claims Initiated by Indemnitee. Initiated or brought
------------------------------
voluntarily by Indemnitee and not by way of defense, but such
indemnification or advancement of Expenses may be provided by the
Corporation in specific cases if the Board of Directors finds it to be
appropriate. Notwithstanding the foregoing, the Corporation shall provide
indemnification including the advancement of Expenses with respect to
Proceedings brought
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to establish or enforce a right to indemnification under these Articles or
any other statute or law or as otherwise required under the statute.
12.8.2 Lack of Good Faith. Instituted by Indemnitee to enforce or
------------------
interpret this Article, if a court of competent jurisdiction determines
that each of the material assertions made by Indemnitee in such proceeding
was not made in good faith or was frivolous.
12.8.3 Insured Claims. For which any of the Expenses or
--------------
liabilities for indemnification is being sought have been paid directly to
Indemnitee by an insurance carrier under a policy of officers' and
directors' liability insurance maintained by the Corporation.
12.8.4 Prohibited by Law. If the Corporation is prohibited by the
-----------------
Act or other applicable law as then in effect from paying such
indemnification and/or advancement of Expenses. For example, the
Corporation and Indemnitee acknowledge that the Securities and Exchange
Commission ("SEC") has taken the position that indemnification is not
possible for liabilities arising under certain federal securities laws.
Indemnitee understands and acknowledges that the Corporation has undertaken
or may be required in the future to undertake with the SEC to submit the
question of indemnification to a court in certain circumstances for a
determination of the Corporation's right to indemnify Indemnitee.
12.9 SUCCESSORS AND ASSIGNS. All obligations of the Corporation to
-----------------------
indemnify any Director or Officer shall be binding upon all successors and
assigns of the Corporation (including any transferee of all or substantially all
of its assets and any successor by merger or otherwise by operation of law).
The Corporation shall not effect any sale of substantially all of its assets,
merger, consolidation, or other reorganization, in which it is not the surviving
entity, unless the surviving entity agrees in writing to assume all such
obligations of the Corporation.
ARTICLE XIII
CORPORATION'S ACQUISITION OF ITS OWN SHARES
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The Corporation may purchase, redeem, receive, take or otherwise acquire,
own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge,
use and otherwise deal with and in its own shares. As a specific modification
of Section 23B.06.310 of the Act, pursuant to the authority in Section
23B.02.020(5)(c) of the Act, to include provisions related to the management of
the business and the regulation of the affairs of the Corporation, shares of the
Corporation's stock acquired by it pursuant to this Article shall be considered
"Treasury Stock" and so held by the Corporation. The shares so acquired by the
Corporation shall not be considered as authorized and unissued but rather as
authorized, issued, and held by the Corporation. The shares, so acquired shall
not be regarded as cancelled or as a reduction to the authorized capital of the
Corporation unless specifically so designated by the Board of Directors in an
amendment to these Articles of Incorporation. The provisions of this Article do
not alter or effect the status of the Corporation's acquisition of its shares as
a "distribution" by the Corporation as defined in Section 23B.01.400(6) of the
Act, nor alter or effect the limitations on distributions by the Corporation as
set forth in Section 23B.06.400 of the Act. Any shares so acquired by the
Corporation, unless otherwise specifically designated by the Board of Directors,
at the time of acquisition, shall be considered on subsequent disposition, as
transferred rather than reissued. Nothing in this Article limits or restricts
the right of the Corporation to resell or otherwise dispose of any of its shares
previously acquired for such consideration and according to such procedures as
established by the Board of Directors.
The undersigned has signed these Articles of Incorporation as of June 16,
1998.
\s\ Michael D. Conway
---------------------
Michael D. Conway
Vice President
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RESTATEMENT CERTIFICATE
The undersigned Secretary of OnHealth Network Company (the "Corporation"),
hereby certifies that the Amended and Restated Articles of Incorporation of the
Corporation supersede in their entirety the original Articles of Incorporation
as amended by the Corporation's Amended and Restated Articles of Incorporation
filed June 15, 1996.
No shares have been issued by the Corporation, therefore shareholder action is
not required. The amendments were duly approved by the directors in
accordance with the provisions of RCW 23B.10.030 and RCW 23B.10.040. The date
of the adoption by the directors was June 10, 1998.
\s\ Michael Conway, Secretary
-----------------------------
Michael Conway, Secretary
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
ONHEALTH NETWORK COMPANY
ARTICLE I
---------
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. Annual Meeting. An annual meeting of the shareholders of this
--------------
Corporation shall be held each year in May, June or July or at such other time
specified by the Board of Directors. If the Corporation is required to hold an
annual meeting of shareholders for the purpose of electing directors, the
meeting shall be held no later than 120 days after the occurrence of the event
requiring the meeting. The failure to hold an annual meeting at the time stated
or fixed in accordance with these By-laws does not affect the validity of any
corporate action.
Section 2. Special Meetings. Except as otherwise provided by law, special
----------------
meetings of shareholders of this Corporation shall be held whenever called by
the Board of Directors.
Section 3. Place of Meetings. The Board of Directors may designate any
-----------------
place, either within or without the State of Washington, as the place of meeting
for any annual meeting or for any special meeting, pursuant to proper notice.
Section 4. Notice. Written notice of each shareholders' meeting stating
------
the date, time, and place and, in case of a special meeting, the purpose(s) for
which such meeting is called, shall be given by the Corporation not less than
ten (10) (unless a greater period of notice is required by law in a particular
case) nor more than sixty (60) days prior to the date of the meeting, to each
shareholder of record entitled to vote at such meeting unless required by law to
send notice to all shareholders (regardless of whether or not such shareholders
are entitled to vote), to the shareholder's address as it appears on the current
record of shareholders of this Corporation.
Section 5. Waiver of Notice. A shareholder may waive any notice required
----------------
to be given by these By-laws, or the Articles of Incorporation of this
Corporation, or any of the corporate laws of the State of Washington, before or
after the meeting that is the subject of such notice. A valid waiver is created
by any of the following three methods: (a) in writing, signed by the
shareholder entitled to the notice and delivered to the Corporation for
inclusion in its corporate records; (b) attendance at the meeting, unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting; or (c) failure to object at
<PAGE>
the time of presentation of a matter not within the purpose or purposes
described in the meeting notice.
Section 6. Shareholders' List. The officer having charge of the stock
------------------
ledger of the Corporation shall make, beginning ten (10) days prior to the
meeting and continuing through the meeting of the shareholders, a complete list
of the shareholders entitled to vote at such meeting arranged in alphabetical
order, showing the address of each shareholder and the number of shares
registered in the name of each shareholder, and must be arranged by voting
group, and within each voting group by class or series of shares. The list must
be available for inspection at the Corporation's principal office or at a place
identified in the meeting notice in the city where the meeting will be held.
Such list shall be available for inspection by any shareholder, a shareholder's
agent or a shareholder's attorney for any purpose germane to the meeting, during
regular business hours, and at the shareholder's expense, during the period it
is available for inspection. The list shall also be produced and available at
the meeting or any adjournment, and may be inspected by any shareholder, the
shareholder's agent, or the shareholder's attorney who is present.
Section 7. Quorum of Shareholders. Except as otherwise provided in the
----------------------
Washington Business Corporation Act (the "Act") or the Articles of
Incorporation, at any meeting of the shareholders, a majority in interest of all
the shares entitled to vote on a matter, represented by shareholders of record
in person or by proxy, shall constitute a quorum of that voting group for action
on that matter.
Once a share is represented at a meeting, other than solely to object to
holding the meeting or transacting business, it is deemed to be present for
quorum purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for the adjourned meeting.
At such reconvened meeting, any business may be transacted that might have been
transacted at the meeting as originally notified.
If a quorum exists, action on a matter is approved by a voting group if the
votes cast within the voting group favoring the action exceed the votes cast
within the voting group opposing the action, unless the question is one upon
which by express provision of the Act or other applicable law or of the Articles
of Incorporation or of these By-laws a different vote is required.
Section 8. Adjourned Meetings. A majority of the shares represented at
------------------
the meeting, even if less than a quorum, may adjourn the meeting from time to
time. At such reconvened meeting at which a quorum is present any business may
be transacted at the meeting as originally notified. If a meeting is adjourned
to a different date, time, or place, notice need not be given of the new date,
time, or place if a new date, time, or place is announced at the meeting before
adjournment; however, if a new record date for the adjourned meeting is or must
be fixed in accordance with the corporate laws of the State of Washington,
notice of the adjourned meeting must be given to persons who are shareholders as
of the new record date.
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<PAGE>
Section 9. Voting. Subject to the provisions of the Act and other
------
applicable laws of the State of Washington, and unless otherwise provided in the
Articles of Incorporation, each outstanding share, regardless of class, is
entitled to one (1) vote on each matter voted on at a shareholders' meeting.
Section 10. Proxies. Shareholders of record may vote at any meeting
-------
either in person or by proxy executed in writing. A proxy is effective when
received by the person authorized to tabulate votes for the Corporation. A
proxy is valid for eleven (11) months unless a longer period is expressly
provided in the proxy. A duly executed proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally. Any
proxy is suspended when the person executing the proxy is present at a meeting
of shareholders and elects to vote, except that when such proxy is coupled with
an interest and the fact of the interest appears on the face of the proxy, the
agent named in the proxy shall have all voting and other fights referred to in
the proxy, notwithstanding the presence of the person executing the proxy. At
each meeting of the shareholders, and before any voting commences, all proxies
filed at or before the meeting shall be submitted to and examined by the
secretary or a person designated by the secretary, and no shares may be
represented or voted under a proxy that has been found to be invalid or
irregular.
Section 11. Business Brought Before an Annual Meeting. At an annual
-----------------------------------------
meeting of the shareholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an
annual meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the board of directors, (ii)
brought before the meeting by or at the direction of the board of directors, or
(iii) otherwise properly brought before the meeting by a shareholder. For
business to be properly brought before an annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the secretary of
the corporation. To be timely, unless otherwise required under federal
dsecurities laws, a shareholder's notice must be delivered to or mailed and
received at the principal executive offices of the corporation, not less than
sixty (60) days nor more than ninety (90) days prior to the meeting; provided,
--------
however, that in the event that less than seventy days' notice or prior public
- -------
announcement of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so received not later than the close of
business on the tenth (10th) day following the date on which such notice of the
date of the annual meeting was mailed or such public announcement was made A
shareholder's notice to the secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the shareholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the shareholder, and (iv) any material interest
of the shareholder in such business. Notwithstanding anything in these by-laws
to the contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 11. The presiding
officer of an annual meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting and in
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<PAGE>
accordance with the provisions of this Section 11; and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. For purposes of this Section
11, "public announcement" shall mean disclosure in a press release reported by
Dow Jones News Service, Associated Press or a comparable national news service.
Nothing in this Section 11 shall be deemed to affect any fights of shareholders
to request inclusion of proposals in the corporation's proxy statement pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
ARTICLE II
----------
DIRECTORS
---------
Section 1. General Powers. All corporate powers shall be exercised by or
--------------
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the Board of Directors, except as otherwise
provided by its Articles of Incorporation.
Section 2. Number, Election and Term of Office. The number of directors
-----------------------------------
which shall constitute the Board shall be such as from time to time shall be
fixed by resolution adopted by the affirmative vote of two-thirds 66.67% of the
total number of directors then in office but in no event shall such number be
greater than nine (9) directors. The directors shall be elected by a plurality
of the votes of the shares present in person or represented by proxy at the
meeting and entitled to vote in the election of directors; provided that,
whenever the holders of any class or series of capital stock of the Corporation
are entitled to elect one or more directors pursuant to the provisions of the
Articles of Incorporation of the Corporation, such directors shall be elected by
a plurality of the votes of such class or series present in person or
represented by proxy at the meeting and entitled to vote in the election of such
directors. Directors need not be shareholders of this Corporation or residents
of the State of Washington, but must have reached the age of majority. The terms
of the initial directors expire at the first shareholders' meeting at which
directors are elected. The directors shall be elected by the shareholders at
each annual shareholders' meeting to hold office until the next annual meeting
of the shareholders and until their respective successors are elected and
qualified. If, for any reason, the directors shall not have been elected at any
annual meeting, they may be elected at a special meeting of shareholders called
for that purpose in the manner provided by these By-laws.
Section 3. Removal and Resignation. Any director of this Corporation may
-----------------------
resign at any time by giving written notice to the Board of Directors, its
Chairman, the President, or Secretary of this Corporation. Any such resignation
is effective when the notice is delivered, unless the notice specifies a later
effective date. The shareholders, at a special meeting called expressly for
that purpose, may remove from office with or without cause one or more directors
and elect their successors. Shareholders may remove one or more directors
without cause only in accordance with the Corporation's Articles of
Incorporation. A director may be removed only if the number of votes cast for
removal exceeds the number of votes cast against removal.
Section 4. Vacancies. Vacancies and newly created directorships resulting
---------
from any increase in the total number of directors may be filled by the Board of
Directors. The term of a
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<PAGE>
director elected to fill a vacancy expires at the next shareholders' meeting at
which directors are elected.
Section 5. Nominations.
-----------
(a) Only persons who are nominated in accordance with the procedures set
forth in these by-laws shall be eligible to serve as directors. Nominations of
persons for election to the board of directors of the corporation may be made at
a meeting of shareholders (i) by or at the direction of the board of directors
or (ii) by any shareholder of the corporation who was a shareholder of record at
the time of giving of notice provided for in this by-law, who is entitled to
vote for the election of directors at the meeting and who shall have complied
with the notice procedures set forth below in Section 5(b).
(b) In order for a shareholder to nominate a person for election to the
board of directors of the corporation at a meeting of shareholders, such
shareholder shall have delivered timely notice of such shareholder's intent to
make such nomination in writing to the secretary of the corporation. To be
timely, a shareholder's notice shall be delivered to or mailed and received at
the principal executive offices of the corporation (i) in the case of an annual
meeting, not less than sixty (60) nor more than ninety (90) days prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is changed by more than
thirty (30) days from such anniversary date, notice by the shareholder to be
timely must be so received not later than the close of business on the tenth
(10th) day following the earlier of the day on which notice of the date of the
meeting was mailed or public disclosure of the meeting was made, and (ii) in the
case of a special meeting at which directors are to be elected, not later than
the close of business on the tenth (10th) day following the earlier of the day
on which notice of the date of the meeting was mailed or public announcement of
the meeting was made. Such shareholder's notice shall set forth (i) as to each
person whom the shareholder proposes to nominate for election as a director at
such meeting all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (ii) as to the
shareholder giving the notice (A) the name and address, as they appear on the
corporation's books, of such shareholder and 03) the class and number of shares
of the corporation which are beneficially owned by such shareholder and also
which are owned of record by such shareholder; and (iii) as to the beneficial
owner, if any, on whose behalf the nomination is made, (A) the name and address
of such person and (B) the class and number of shares of the corporation which
are beneficially owned by such person. At the request of the board of
directors, any person nominated by the board of directors for election as a
director shall furnish to the secretary of the corporation that information
required to be set forth in a shareholder's notice of nomination which pertains
to the nominee.
(c) No person shall be eligible to serve as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section 5.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the procedures
prescribed by this Section 5, and if he should so
-5-
<PAGE>
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded. A shareholder seeking to nominate a person to serve as a
director must also comply with all applicable requirements of the Exchange Act,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 5.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
----------------
shall be held at such places, and at such times as the Board by vote may
determine, and, if so determined, no notice thereof need be given.
Section 7. Special Meetings. Special meetings of the Board of Directors
----------------
may be held at any time or place whenever called by any officer or one (1) or
more directors, notice thereof being given to each director by the officer
calling or by the officer directed to call the meeting.
Section 8. Notice. No notice is required for regular meetings of the
------
Board of Directors. Notice of special meetings of the Board of Directors,
stating the date, time, and place thereof, shall be given at least two (2) days
prior to the date of the meeting. The purpose of the meeting need not be given
in the notice. Such notice may be oral or written.
Section 9. Waiver of Notice. A director may waive notice of a special
----------------
meeting of the Board either before or after the meeting, and such waiver shall
be deemed to be the equivalent of giving notice. The waiver must be in writing,
signed by the director and entitled to the notice and delivered to the
Corporation for inclusion in its corporate records. Attendance of a director at
a meeting shall constitute waiver of notice of that meeting unless said director
attends for the express purpose of objecting to the transaction of business
because the meeting has not been lawfully called or convened.
Section 10. Chairman of the Board, Quorum, Required Vote and Adjournment.
------------------------------------------------------------
The Board of Directors shall elect, by the affirmative vote of two-thirds 66.67%
of the total number of directors then in office, a chairman of the Board, who
shall preside at all meetings of the shareholders and Board of Directors at
which he or she is present. If the chairman of the Board is not present at a
meeting of the shareholders or the Board of Directors, the president (if the
president is a director and is not also the chairman of the Board) shall preside
at such meeting, and, if the president is not present at such meeting, a
majority of the directors present at such meeting shall elect one of their
members to so preside. A majority of the total number of directors then in
office shall constitute a quorum for the transaction of business. When a quorum
is present at any meeting, a majority of the members present thereat shall
decide any question brought before such meeting, except as otherwise provided by
the Act, the Articles of Incorporation or by these By-laws.
Section 11. Adjournment. A majority of the directors present, even if
-----------
less than a quorum, may adjourn a meeting and continue it to a later time.
Notice of the adjourned meeting or of the business to be transacted thereat,
other than by announcement, shall not be necessary. At any adjourned meeting at
which a quorum is present, any business may be transacted which could have been
transacted at the meeting as originally called.
-6-
<PAGE>
Section 12. Committees. The Board of Directors, by resolution adopted by
----------
two-thirds of the full Board of Directors, may designate from among its members
an Executive Committee and one or more other committees, each of which:
a. Must have two (2) or more members;
b. Must be governed by the same rules regarding meetings, action
without meetings, notice, and waiver of notice, and quorum and voting
requirements as applied to the Board of Directors; and
c. To the extent provided in such resolution, shall have and may
exercise all the authority of the Board of Directors, except no such
committee shall have the authority to:
(1) Authorize or approve a distribution except according to a
general formula or method prescribed by the Board of Directors;
(2) Approve or propose to shareholders action which the
Washington Business Corporation Act (the "Act") requires to be
approved by shareholders;
(3) Fill vacancies on the Board of Directors or on any of its
committees;
(4) Amend the Articles of Incorporation;
(5) Adopt, amend, or repeal the By-laws;
(6) Approve a plan of merger not requiring shareholder approval;
or
(7) Authorize or approve the issuance or sale or contract for
sale of shares, or determine the designation and relative rights,
preferences, and limitations on a class or series of shares, except
that the Board of Directors may authorize a committee, or a senior
executive officer of the Corporation, to do so within limits
specifically prescribed by the Board of Directors.
Section 13. Communications Equipment. Members of the Board of Directors
------------------------
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
and speak with each other, and participation in the meeting pursuant to this
Section 13 shall constitute presence in person at the meeting.
Section 14. Presumption of Assent. A director of this Corporation who is
---------------------
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless:
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<PAGE>
a. The director objects at the beginning of the meeting, or promptly
upon the director's arrival, to holding it or transacting business at the
meeting;
b. The director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or
c. The director shall file written dissent or abstention with the
presiding officer of the meeting before its adjournment or to the
Corporation within a reasonable time after adjournment of the meeting.
The right of dissent or abstention is not available to a director who votes in
favor of the action taken.
Section 15. Compensation. By resolution of the Board of Directors, each
------------
director may be paid expenses, if any, of attendance at each meeting of the
Board of Directors, and may be paid a stated salary as director, or a fixed sum
for attendance at each meeting of the Board of Directors, or both. No such
payment shall preclude any director from serving this Corporation in any other
capacity and receiving compensation therefor.
Section 16. Action by Written Consent. Unless otherwise restricted by the
-------------------------
articles of incorporation, any action required or permitted to be taken at any
meeting of the board of directors, or of any committee thereof, may be taken
without a meeting if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
ARTICLE III
-----------
OFFICERS
--------
Section 1. Number. The officers of the Corporation shall be appointed by
------
the Board of Directors and shall consist of a chief executive officer, a
president, one or more vice-presidents, a secretary, a chief financial officer,
a Controller and such other officers and assistant officers as may be deemed
necessary or desirable by the Board of Directors. Such other officers and
assistant officers as may be necessary may also be appointed by a duly appointed
officer to whom such authority has been delegated by Board resolution. Any
number of offices may be held by the same person. In its discretion, the Board
of Directors may choose not to fill any office for any period as it may deem
advisable, except that the offices of president and secretary shall be filled as
expeditiously as possible.
The Board of Directors in its discretion may elect a Chairman from amongst
its members to serve as Chairman of the Board of Directors, who, when present
shall preside at all meetings of the Board of Directors, and who shall have such
other powers as the Board may determine.
Section 2. Election and Term of Office. The officers of the Corporation
---------------------------
shall be appointed annually by the Board of Directors at its first meeting held
after each annual meeting
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<PAGE>
of shareholders or as soon thereafter as convenient. Vacancies may be filled or
new offices created and filled at any meeting of the Board of Directors. Each
officer shall hold office until a successor is duly elected and qualified or
until his or her earlier death, resignation or removal as hereinafter provided.
Section 3. Removal. Any officer appointed by the Board of Directors may
-------
be removed by the Board of Directors with or without cause at its discretion,
but such removal shall be without prejudice to the contract rights, if any, of
the person so removed.
Section 4. Vacancies. If any office becomes vacant by any reason, the
---------
directors may appoint a successor or successors who shall hold office for the
unexpired term. Any vacancy occurring in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors.
Section 5. Compensation and Contract Rights. Compensation of all
--------------------------------
executive officers shall be approved by the Board of Directors, and no officer
shall be prevented from receiving such compensation by virtue of his or her also
being a director of the Corporation. The appointment of an officer shall not of
itself create contract rights.
Section 6. Chief Executive Officer. The chief executive officer shall
-----------------------
have the powers and perform the duties incident to that position. Subject to
the powers of the Board of Directors, he shall be in the general and active
charge of the entire business and affairs of the Corporation, and shall be its
chief policy making officer. He shall preside at all meetings of the Board of
Directors and shareholders and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or provided in these
By-laws. The chief executive officer is authorized to execute bonds, mortgages
and other contracts requiring a seal, under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the Board of Directors to some other officer or agent of the Corporation.
Whenever the president is unable to serve, by reason of sickness, absence or
otherwise, the chief executive officer shall perform all the duties and
responsibilities and exercise all the powers of the president.
Section 7. The President. The president of the Corporation shall, subject
-------------
to the powers of the Board of Directors and the chairman of the Board, have
general charge of the business, affairs and property of the Corporation, and
control over its officers, agents and employees; and shall see that all orders
and resolutions of the Board of Directors are carried into effect. The
president is authorized to execute bonds, mortgages and other contracts
requiting a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation. The president
shall have such other powers and perform such other duties as may be prescribed
by the chief executive officer, the Board of Directors or as may be provided in
these By-laws.
Section 8. Vice-Presidents. The vice-president, or if there shall be more
---------------
than one, the vice-presidents in the order determined by the Board of Directors
or the chairman of the Board,
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<PAGE>
shall, in the absence or disability of the president, act with all of the powers
and be subject to all the restrictions of the president. The vice-presidents
shall also perform such other duties and have such other powers as the Board of
Directors, the chief executive officer, the president or these By-laws may, from
time to time, prescribe. The vice-presidents may also be designated as executive
vice-presidents or senior vice-presidents, as the Board of Directors may from
time to time prescribe.
Section 9. The Secretary and Assistant Secretaries. The secretary shall
---------------------------------------
attend all meetings of the Board of Directors, all meetings of the committees
thereof and all meetings of the shareholders and record all the proceedings of
the meetings in a book or books to be kept for that purpose or shall ensure that
his or her designee attends each such meeting to act in such capacity. Under
the chairman of the Board's supervision, the secretary shall give, or cause to
be given, all notices required to be given by these By-laws or by law; shall
have such powers and perform such duties as the Board of Directors, the chief
executive officer, the president or these By-laws may, from time to time,
prescribe; and shall have custody of the corporate seal of the Corporation. The
secretary, or an assistant secretary, shall authenticate records of the
Corporation and shall have authority to affix the corporate seal to any
instrument requiring it and when so affixed, it may be attested by his or her
signature or by the signature of such assistant secretary, the Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his or her signature. The
assistant secretary, or if there be more than one, any of the assistant
secretaries, shall in the absence or disability of the secretary, perform the
duties and exercise the powers of the secretary and shall perform such other
duties and have such other powers as the Board of Directors, the chief executive
officer, the president, or secretary may, from time to time, prescribe.
Section 10. The Chief Financial Officer. The chief financial officer
---------------------------
shall have the custody of the corporate funds and securities; shall keep full
and accurate all books and accounts of the Corporation as shall be necessary or
desirable in accordance with applicable law or generally accepted accounting
principles; shall deposit all monies and other valuable effects in the name and
to the credit of the Corporation as may be ordered by the chairman of the Board
or the Board of Directors; shall cause the funds of the Corporation to be
disbursed when such disbursements have been duly authorized, taking proper
vouchers for such disbursements; and shall render to the Board of Directors, at
its regular meeting or when the Board of Directors so requires, an account of
the Corporation; shall have such powers and perform such duties as the Board of
Directors, the chief executive officer, the president or these By-laws may, from
time to time, prescribe. If required by the Board of Directors, the chief
financial officer shall give the Corporation a bond (which shall be rendered
every six years) in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of the office of chief financial officer and for the restoration to the
Corporation, in case of death, resignation, retirement, or removal from office,
of all books, papers, vouchers, money, and other property of whatever kind in
the possession or under the control of the chief financial officer belonging to
the Corporation.
Section 11. Controller. The Controller shall, in the absence or
----------
disability of the chief financial officer, act with all of the powers and be
subject to all the restrictions of the chief
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<PAGE>
financial officer. The Controller shall also perform such other duties and have
such other powers as the Board of Directors, the chief executive officer, the
chief financial officer or these By-laws may, from time to time, prescribe.
Section 12. Other Officers, Assistant Officers and Agents. Officers,
---------------------------------------------
assistant officers and agents, if any, other than those whose duties are
provided for in these By-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the Board of Directors.
Section 13. Absence or Disability of Officers. In the case of the absence
---------------------------------
or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the Board of Directors may by resolution delegate the powers and
duties of such officer to any other officer or to any director, or to any other
person selected by it.
ARTICLE IV
----------
CERTIFICATES AND TRANSFER OF STOCK
----------------------------------
Section 1. Issuance; Certificates of Shares. No shares of this
--------------------------------
Corporation shall be issued unless authorized by the Board. Such authorization
shall include the maximum number of shares to be issued, the consideration to be
received, and a statement that the Board considers the consideration to be
adequate. Certificates for shares of the Corporation shall be in such form as
is consistent with the provisions of the Act and shall state:
a. The name of the Corporation and that the Corporation is organized
under the laws of the State of Washington;
b. The name of the person to whom issued; and
c. The number and class of shares and the designation of the series,
if any, which such certificate represents.
The certificate shall be signed by original or facsimile signature of two
officers of the Corporation, and the seal of the Corporation may be affixed
thereto. If the person who signed, either manually or in facsimile, a
certificate no longer holds office when the certificate is issued, the
certificate is nevertheless valid.
Section 2. Transfer of Stock. Shares of stock may be transferred by
-----------------
delivery of the certificate accompanied by either an assignment in writing on
the back of the certificate or by a written power of attorney to assign and
transfer the same on the books of this Corporation, signed by the record holder
of the certificate. The shares shall be transferable on the books of this
Corporation upon surrender thereof so assigned or endorsed. The board of
directors may appoint a bank or trust company organized under the laws of the
United States or any state
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<PAGE>
thereof to act as its transfer agent or registrar, or both in connection with
the transfer of any class or series of securities of the corporation.
Section 3. Loss or Destruction of Certificates. In case of the loss,
-----------------------------------
mutilation, or destruction of a certificate of stock, a duplicate certificate
may be issued upon such terms as the Board of Directors shall prescribe.
Section 4. Record Date and Transfer Books. For the purpose of determining
------------------------------
shareholders who are entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors may fix in advance a record date for any
such determination of shareholders, such date in any case to be not more than
seventy (70) days and, in case of a meeting of shareholders, not less than ten
(10) days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken.
If no record date is fixed for such purposes, the date on which notice of
the meeting is mailed or the date on which the resolution of the Board of
Directors declaring such dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned more than one hundred
twenty (120) days after the date fixed for the original meeting.
ARTICLE V
---------
GENERAL PROVISIONS
------------------
Section 1. Distributions. Distributions may be authorized by the Board of
-------------
Directors at any regular or special meeting and made by the Corporation, subject
to the provisions of the Articles of Incorporation, if any, and in accordance
with the Act. No distribution may be paid if, after giving it effect: (i) the
Corporation would not be able to pay its debts as they become due in the usual
course; or (ii) the Corporation's total assets would be less than the sum of its
total liabilities plus, unless the Articles of Incorporation permit otherwise,
the amount that would be needed if the Corporation were to be dissolved at the
time of the distribution to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
Section 2. Checks, Drafts or Orders. All checks, drafts, or other orders
------------------------
for the payment of money by or to the Corporation and all notes and other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer or officers, agent or agents of the Corporation, and in such
manner, as shall be determined by resolution of the Board of Directors or a duly
authorized committee thereof.
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<PAGE>
Section 3. Contracts. In addition to the powers otherwise granted to
---------
officers pursuant to ARTICLE III hereof, the Board of Directors may authorize
-----------
any officer or officers, or any agent or agents, of the Corporation to enter
into any contract or to execute and deliver any instrument in the name of and on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
Section 4. Loans. The Corporation may lend money to, or guarantee any
-----
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiaries, including any officer or employee who is a
director of the Corporation or its subsidiaries, whenever, in the judgment of
the directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.
Section 5. Fiscal Year. The fiscal year of the Corporation shall be fixed
-----------
by resolution of the Board of Directors.
Section 6. Corporate Seal. The Board of Directors may provide a corporate
--------------
seal which shall be in the form of a circle and shall have inscribed thereon the
name of the Corporation and the words "Corporate Seal, Washington." The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. No seal is required and the absence thereof does not
affect the validity of any document.
Section 7. Voting Securities Owned By Corporation. Voting securities in
--------------------------------------
any other corporation held by the Corporation shall be voted by the chief
executive officer, the president or a vice-president, unless the Board of
Directors specifically confers authority to vote with respect thereto, which
authority may be general or confined to specific instances, upon some other
person or officer. Any person authorized to vote securities shall have the
power to appoint proxies, with general power of substitution.
Section 8. Books of Accounts, Minutes, and Share Register. The
----------------------------------------------
Corporation:
a. Shall keep as permanent records minutes of all meetings of its
shareholders and Board of Directors, a record of all actions taken by the
shareholders or Board of Directors without a meeting, and a record of all
actions taken by a committee of the Board of Directors exercising the
authority of the Board of Directors on behalf of the corporation;
b. Shall maintain appropriate accounting records;
c. Or its agent shall maintain a record of its shareholders, in
a form that permits preparation of a list of the names and addresses of all
shareholders, in
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<PAGE>
alphabetical order by class of shares showing the number and class of shares
held by each; and
d. Shall keep a copy of the following records at its principal
office:
(1) The Articles or Restated Articles of Incorporation and all
amendments to them currently in effect;
(2) The By-laws or Restated By-laws and all amendments to them
currently in effect;
(3) The minutes of all shareholders' meetings, and records of all
actions taken by shareholders without a meeting, for the past three
(3) years;
(4) Its financial statements for the past three (3) years,
including balance sheets showing in reasonable detail the financial
condition of the Corporation as of the close of each fiscal year, and
an income statement showing the results of its operations during each
fiscal year prepared on the basis of generally accepted accounting
principles or, if not, prepared on a basis explained therein;
(5) All written communications to shareholders generally within
the past three (3) years;
(6) A list of the names and business addresses of its current
directors and officers; and
(7) Its most recent annual report delivered to the Secretary of
State of Washington.
Section 9. Copies of Resolutions. Any person dealing with the Corporation
---------------------
may rely upon a copy of any of the records of the proceedings, resolutions, or
votes of the Board of Directors or shareholders, when certified by the Chairman,
President, Secretary or any Assistant Secretary.
Section 10. Section Headings. Section headings in these By-laws are for
----------------
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 11. Inconsistent Provisions. In the event that any provision of
-----------------------
these By-laws is or becomes inconsistent with any provision of the Articles of
Incorporation, the Act or any other applicable law, the provision of these By-
laws shall not be given any effect to the extent of such inconsistency but shall
otherwise be given full force and effect.
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<PAGE>
ARTICLE VI
----------
AMENDMENT OF BY-LAWS
--------------------
Section 1. By the Board of Directors. In furtherance and not in
-------------------------
limitation of the powers conferred by statute, the Board of Directors of the
Corporation is expressly authorized to make, alter, amend, change, add to or
repeal these By-laws by the affirmative vote of two-thirds of the total number
of directors then in office of any meeting of the Board, if notice of the
proposed amendment is contained in the notice of the meeting.
Section 2. By the Shareholders. Any alteration or repeal of these By-laws
-------------------
by the shareholders of the Corporation shall require the affirmative vote of a
majority of the outstanding shares of the Corporation entitled to vote on such
alteration or repeal; provided, however, that Sections 2, 3 and 4 of ARTICLE II
-------- ------- ----------
and this ARTICLE VI of these By-laws shall not be altered, amended or repealed
----------
and no provision inconsistent therewith shall be adopted without the affirmative
vote of the holders of at least 66 2/3% of the outstanding shares of the
Corporation entitled to vote on such alteration or repeal.
ARTICLE VII
-----------
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
------------------------------------------------------------
Section A. Definitions. As used in this Article:
---------- -----------
(a) "Agent" means an individual who is or was an agent of the Corporation
or an individual who, while an agent of the Corporation, is or was serving at
the Corporation's request as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan, or other enterprise. "Agent" includes, unless the
context requires otherwise, the spouse, heirs, estate and personal
representative of an agent.
(b) "Corporation" means the Corporation, its Subsidiaries, and any domestic
or foreign predecessor entity which, in a merger or other transaction, ceased to
exist.
(c) "Director" means an individual who is or was a Director of the
Corporation or an individual who, while a Director of the Corporation, is or was
serving at the Corporation's request as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, limited liability
company, partnership, joint venture, trust, employee benefit plan or other
enterprise. "Director" includes, unless the context requires otherwise, the
spouse, heirs, estate and personal representative of a Director.
(d) "Employee" means an individual who is or was an employee of the
Corporation or an individual, while an employee of the Corporation, is or was
serving at the Corporation's request as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, limited liability
company, partnership, joint venture, trust, employee
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<PAGE>
benefit plan, or other enterprise. "Employee" includes, unless the context
requires otherwise, the spouse, heirs, estate, and personal representative of an
employee.
(e) "Expenses" include counsel fees.
(f) "Indemnitee" means an individual made a party to a proceeding because
the individual is or was a Director, Officer, Employee, or Agent of the
Corporation, and who possesses indemnification rights pursuant to these Articles
or other corporate action. "Indemnitee" includes, unless the context requires
otherwise, the spouse, heirs, estate, and personal representative of such
individuals.
(g) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine, including an excise tax with respect to an employee benefit plan,
or reasonable Expenses incurred with respect to a proceeding.
(h) "Officer" means an individual who is or was an officer of the
Corporation (regardless of whether or not such individual was also a Director)
or an individual who, while an officer of the Corporation, is or was serving at
the Corporation's request as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation, limited liability company,
partnership, joint venture, trust, employee benefit plan, or other enterprise.
"Officer" includes, unless the context requires otherwise, the spouse, heirs,
estate and personal representative of an officer.
(i) "Party" includes an individual who was, is, or is threatened to be
named a defendant, respondent or witness in a proceeding.
(j) "Proceeding" means any threatened, pending, or completed action, suit,
or proceeding, whether civil, derivative, criminal, administrative, or
investigative, and whether formal or informal.
(k) "Subsidiary" means any corporation or other entity that is wholly owned
by the Corporation, directly or indirectly, and any other entities that are
specifically designated as "Subsidiaries" for purposes of this Article by the
Board of Directors.
Section B. Indemnification Rights of Directors and Officers. The
--------- ------------------------------------------------
Corporation shall indemnify its Directors and Officers to the full extent not
prohibited by applicable law now or hereafter in force against liability arising
out of a Proceeding to which such individual was made a Party because the
individual is or was a Director or an Officer. However, such indemnity shall
not apply on account of:
(a) Acts or omissions of a Director or Officer finally adjudged to be
intentional misconduct or a knowing violation of law;
(b) Conduct of a Director or Officer finally adjudged to be in violation of
Section 23B.08.310 of the Act relating to distributions by the Corporation; or
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<PAGE>
(c) Any transaction with respect to which it was finally adjudged that such
Director or Officer personally received a benefit in money, property, or
services to which the Director or Officer was not legally entitled.
Subject to the foregoing, it is specifically intended that Proceedings covered
by indemnification shall include Proceedings brought by the Corporation
(including derivative actions), Proceedings by government entities and
governmental officials, or other third party actions.
Section C. Indemnification of Employees and Agents of the Corporation.
--------- -----------------------------------------------------------
The Corporation may, by action of its Board of Directors from time to time,
provide indemnification and pay Expenses in advance of the final disposition of
a Proceeding to Employees and Agents of the Corporation who are not also
Directors, in each case to the same extent as to a Director with respect to the
indemnification and advancement of Expenses pursuant to rights granted under, or
provided by, the Act or otherwise.
Section D. Partial Indemnification. If an Indemnitee is entitled to
--------- -----------------------
indemnification by the Corporation for some or a portion of Expenses,
liabilities, or losses actually and reasonably incurred by Indemnitee in an
investigation, defense, appeal or settlement but not, however, for the total
amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the
portion of such Expenses, liabilities or losses to which Indemnitee is entitled.
Section E. Procedure for Seeking Indemnification and/or Advancement of
--------- -----------------------------------------------------------
Expenses. The following procedures shall apply in the absence of (or at the
- --------
option of the Indemnitee, in lieu thereof), specific procedures otherwise
applicable to an Indemnitee pursuant to a contract, trust agreement, or general
or specific action of the Board of Directors:
Section E.1. Notification and Defense of Claim. Indemnitee shall
----------- ---------------------------------
promptly notify the Corporation in writing of any proceeding for which
indemnification could be sought under this Article. In addition,
Indemnitee shall give the Corporation such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
With respect to any such proceeding as to which Indemnitee has notified the
Corporation:
(a) The Corporation will be entitled to participate therein at its
own expense; and
(b) Except as otherwise provided below, to the extent that it may
wish, the Corporation, jointly with any other indemnifying party
similarly notified, will be entitled to assume the defense
thereof, with counsel satisfactory to Indemnitee. Indemnitee's
consent to such counsel may not be unreasonably withheld.
-17-
<PAGE>
After notice from the Corporation to Indemnitee of its election to
assume the defense, the Corporation will not be liable to Indemnitee under
this Article for any legal or other Expenses subsequently incurred by
Indemnitee in connection with such defense. However, Indemnitee shall
continue to have the right to employ its counsel in such proceeding, at
Indemnitee's expense; and if:
(i) The employment of counsel by Indemnitee has been authorized
by the Corporation;
(ii) Indemnitee shall have reasonably concluded that there may be
a conflict of interest between the Corporation and
Indemnitee in the conduct of such defense; or
(iii) The Corporation shall not in fact have employed counsel to
assume the defense of such proceeding,
the fees and Expenses of Indemnitee's counsel shall be at the expense of
the Corporation.
The Corporation shall not be entitled to assume the defense of any
proceeding brought by or on behalf of the Corporation or as to which
Indemnitee shall reasonably have made the conclusion that a conflict of
interest may exist between the Corporation and the Indemnitee in the
conduct of the defense.
Section E.2. Information to be Submitted and Method of Determination
------------ -------------------------------------------------------
and Authorization of Indemnification. For the purpose of pursuing rights
------------------------------------
to indemnification under this Article, the Indemnitee shall submit to the
Board a sworn statement requesting indemnification and reasonable evidence
of all amounts for which such indemnification is requested (together, the
sworn statement and the evidence constitute an "Indemnification
Statement").
Submission of an Indemnification Statement to the Board shall create a
presumption that the Indemnitee is entitled to indemnification hereunder,
and the Corporation shall, within sixty (60) calendar days thereafter, make
the payments requested in the Indemnification Statement to or for the
benefit of the Indemnitee, unless: (1) within such sixty (60. ) calendar
day period it shall be determined by the Corporation that the Indemnitee is
not entitled to indemnification under this Article; (2) such determination
shall be based upon clear and convincing evidence (sufficient to rebut the
foregoing presumption); and (3) the Indemnitee shall receive notice in
writing of such determination, which notice shall disclose with
particularity the evidence upon which the determination is based.
The foregoing determination may be made: (1) by the Board of Directors
by majority vote of a quorum of Directors who are not at the time parties
to the proceedings; (2) if a quorum cannot be obtained, by majority vote of
a committee duly designated by the Board of Directors (in which
designation, Directors who are parties may participate)
-18-
<PAGE>
consisting solely of two (2) or more Directors not at the time parties to
the proceeding; (3) by special legal counsel; or (4) by the shareholders as
provided by Section 23B.08.550 of the Act.
Any determination that the Indemnitee is not entitled to
indemnification, and any failure to make the payments requested in the
Indemnification Statement, shall be subject to judicial review by any court
of competent jurisdiction.
Section E.3 Special Procedure Regarding Advance for Expenses. An
----------- ------------------------------------------------
Indemnitee seeking payment of Expenses in advance of a final disposition of
the proceeding must furnish the Corporation, as part of the Indemnification
Statement:
(a) A written affirmation of the Indemnitee's good faith belief
that the Indemnitee has met the standard of conduct required
to be eligible for indemnification; and
(b) A written undertaking, constituting an unlimited general
obligation of the Indemnitee, to repay the advance if it is
ultimately determined that the Indemnitee did not meet the
required standard of conduct.
Upon satisfaction of the foregoing, the Indemnitee shall have a
contractual right to the payment of such Expenses.
Section E.4 Settlement. The Corporation is not liable to indemnify
----------- ----------
Indemnitee for any amounts paid in settlement of any proceeding without the
Corporation's written consent. The Corporation shall not settle any
proceeding in any manner which would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Corporation
nor Indemnitee may unreasonably withhold its consent to a proposed
settlement.
Section F. Contract and Related Rights.
---------- ----------------------------
Section F.1 Contract Rights. The right of an Indemnitee to
----------- ---------------
indemnification and advancement of Expenses is a contract right upon which
the Indemnitee shall be presumed to have relied in determining to serve or
to continue to serve in his or her capacity with the Corporation. Such
right shall continue as long as the Indemnitee shall be subject to any
possible proceeding. Any amendment to or repeal of this Article shall not
adversely affect any right or protection of an Indemnitee with respect to
any acts or omissions of such Indemnitee occurring prior to such amendment
or repeal.
Section F.2 Optional Insurance, Contracts, and Funding. The
----------- ------------------------------------------
Corporation may:
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<PAGE>
(a) Maintain insurance, at its expense, to protect itself and
any Indemnitee against any liability, whether or not the
Corporation would have power to indemnify the individual
against the same liability under Section 23B.08.510 or .520
of the Act;
(b) Enter into contracts with any Indemnitee in furtherance of
this Article and consistent with the Act; and
(c) Create a trust fund, grant a security interest, or use other
means (including without limitation a letter of credit) to
ensure the payment of such amounts as may be necessary to
effect indemnification as provided in this Article.
Section F.3 Severability. If any provision or application of this
----------- ------------
Article shall be invalid or unenforceable, the remainder of this Article
and its remaining applications shall not be affected thereby, and shall
continue in full force and effect.
Section F.4 Right of Indemnitee to Bring Suit. If (1) a claim under
----------- ---------------------------------
this Article for indemnification is not paid in full by the Corporation
within sixty (60) calendar days after an Indemnification Statement has been
received by the Corporation; or (2) a claim under this Article for
advancement of Expenses is not paid in full by the Corporation within
twenty (20) calendar days after a written claim has been received by the
Corporation, then the Indemnitee may, but need not, at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim. To the extent successful in whole or in part, the Indemnitee shall
be entitled to also be paid the expense (to be proportionately prorated if
the Indemnitee is only partially successful) of prosecuting such claim.
Neither (1) the failure of the Corporation (including its Board of
Directors, its shareholders, or independent legal counsel) to have made a
determination prior to the commencement of such proceeding that
indemnification or reimbursement or advancement of Expenses to the
Indemnitee is proper in the circumstances; nor (2) an actual determination
by the Corporation (including its Board of Directors, its shareholders, or
independent legal counsel) that the Indemnitee is not entitled to
indemnification or to the reimbursement or advancement of Expenses, shall
be a defense to the proceeding or create a presumption that the Indemnitee
is not so entitled.
Section F.5 Nonexclusivity of Rights. The right to indemnification
----------- ------------------------
and the payment of Expenses incurred in defending a Proceeding in advance
of its final disposition granted in this Article shall not be exclusive of
any other right which any Indemnitee may have or hereafter acquire under
the Act, any statute, provision of this Article or the Bylaws, agreement,
vote of shareholders or disinterested directors, or otherwise. The
Corporation shall have the express right to grant additional indemnity
without seeking further approval or satisfaction by the shareholders. All
applicable indemnity provisions and any applicable law shall be interpreted
and applied so as to provide an Indemnitee with the broadest but
nonduplicative indemnity to which he or she is entitled.
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<PAGE>
Section G. Contribution. If the indemnification provided in Section B of
---------- ------------
this Article is not available to be paid to Indemnitee for any reason other than
those set forth in subparagraphs (a), (b), and (c) of Section B of this Article
(for example, because indemnification is held to be against public policy even
though otherwise permitted under Section B) then in respect of any proceeding in
which the Corporation is jointly liable with Indemnitee (or would be if joined
in such proceeding), the Corporation shall contribute to the amount of loss paid
or payable by Indemnitee in such proportion as is appropriate to reflect:
The relative benefits received by the Corporation on the one hand
and the Indemnitee on the other hand from the transaction from
which such proceeding arose, and
The relative fault of the Corporation on the one hand and the
Indemnitee on the other hand in connection with the events which
resulted in such loss, as well as any other relevant equitable
consideration.
The relative benefits received by and fault of the Corporation on the one
hand and the Indemnitee on the other shall be determined by a court of competent
jurisdiction (which may be the same court in which the proceeding took place)
with reference to, among other things, the parties' relative intent, knowledge,
access to information, and opportunity to correct or prevent the circumstances
resulting in such loss. The Corporation agrees that it would not be just and
equitable if a contribution pursuant to this Article was determined by pro rata
allocation or any other method of allocation which does not take account of the
foregoing equitable considerations.
Section H. Exceptions. Any other provision herein to the contrary
---------- -----------
notwithstanding, the Corporation shall not be obligated pursuant to the terms of
these Articles to indemnify or advance Expenses to Indemnitee with respect to
any proceeding.
Section H.1 Claims Initiated by Indemnitee. Initiated or brought
----------- ------------------------------
voluntarily by Indemnitee and not by way of defense, but such
indemnification or advancement of Expenses may be provided by the
Corporation in specific cases if the Board of Directors finds it to be
appropriate. Notwithstanding the foregoing, the Corporation shall provide
indemnification including the advancement of Expenses with respect to
Proceedings brought to establish or enforce a right to indemnification
under these Articles or any other statute or law or as otherwise required
under the statute.
Section H.2 Lack of Good Faith. Instituted by Indemnitee to enforce
----------- ------------------
or interpret this Article, if a court of competent jurisdiction determines
that each of the material assertions made by Indemnitee in such proceeding
was not made in good faith or was frivolous.
Section H.3 Insured Claims. For which any of the Expenses or
----------- --------------
liabilities for indemnification is being sought have been paid directly to
Indemnitee by an insurance
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<PAGE>
carrier under a policy of officers' and directors' liability insurance
maintained by the Corporation.
Section H.4 Prohibited by Law. If the Corporation is prohibited by
----------- -----------------
the Act or other applicable law as then in effect from paying such
indemnification and/or advancement of Expenses. For example, the
Corporation and Indemnitee acknowledge that the Securities and Exchange
Commission ("SEC") has taken the position that indemnification is not
possible for liabilities arising under certain federal securities laws.
Indemnitee understands and acknowledges that the Corporation has undertaken
or may be required in the future to undertake with the SEC to submit the
question of indemnification to a court in certain circumstances for a
determination of the Corporation's right to indemnify Indemnitee.
Section I. Successors and Assigns. All obligations of the Corporation to
---------- -----------------------
indemnify any Director or Officer shall be binding upon all successors and
assigns of the Corporation (including any transferee of all or substantially all
of its assets and any successor by merger or otherwise by operation of law).
The Corporation shall not effect any sale of substantially all of its assets,
merger, consolidation, or other reorganization, in which it is not the surviving
entity, unless the surviving entity agrees in writing to assume all such
obligations of the Corporation.
<PAGE>
EXHIBIT 5
[LETTERHEAD OF PRESTON GATES & ELLIS LLP]
December 30, 1998
OnHealth Network Company
808 Howell Street, Suite 400
Seattle, Washington 98101
Re: OnHealth Network Company
Form S-3 Registration Statement
Dear Sir or Madam:
We have acted as counsel for OnHealth Network Company, a Washington
corporation (the "Company"), in connection with certain transactions involving
the private placement of shares of the Company's Common Stock (the "Shares") and
warrants to purchase Shares (the "Warrants") to certain investors (the
"Investors"). The Warrants may be exercised to purchase Shares. In connection
with the private placement, on certain "Reset Dates", the Company may be
obligated to issue additional Shares to the Investors.
In connection with the preparation and filing of a registration statement
on Form S-3 (the "Registration Statement"), under the Securities Act of 1933, we
have reviewed the Company's articles of incorporation and bylaws and the record
of its corporate proceedings and have made such other investigations as we
deemed necessary in order to express the opinions set forth below. Based on the
foregoing, it is our opinion that the Shares issued are duly and validly issued,
fully paid and nonassessable, and the Shares issuable on exercise of the
Warrants or in certain circumstances on "Reset Dates", will, when issued, be
duly and validly issued, fully paid and nonassessable.
We hereby consent to all references to us in the Registration Statement and
all amendments thereto. We further consent to the use of this opinion as an
exhibit to the Registration Statement. We express no opinion as to any matters
not expressly set forth herein.
PRESTON GATES & ELLIS LLP
By /s/ C. Kent Carlson
-------------------
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of OnHealth Network
Company for the registration of 2,439,732 shares of its Common Stock and to the
incorporation by reference therein of our report dated February 12, 1998, except
Note 2 as to which the date is April 13, 1998, with respect to the financial
statements and schedule of OnHealth Network Company (formerly IVI Publishing,
Inc.) included in its Annual Report (Form 10-K) for the year ended December 31,
1997, filed with the Securities and Exchange Commission.
\s\
ERNST & YOUNG LLP
Minneapolis, Minnesota
December 28, 1998
5
