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As filed with the Securities and Exchange Commission on May 22, 1998
Registration No. 333-_____
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
IVI PUBLISHING, INC.
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(Exact name of registrant as specified in its charter)
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MINNESOTA 7372 41-1686038
(State of incorporation or organization) Primary Standard Industrial (IRS Employer Identification No.)
Classification Code Number
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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)
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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
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES REGISTERED REGISTERED OFFERING PRICE PER SHARE(1) AGGREGATE OFFERING PRICE REGISTRATION FEE
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Common Stock, $0.01 par value 2,150,000 shares(2) $7.40625 $15,923,437.50 $4,697.41
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Pursuant to Rule 416 under the Securities Act of 1933, there are also
being registered such indeterminate number of additional shares of
Common Stock as may be issuable upon (i) conversion of the Series B
Convertible Preferred Stock described herein and payment of dividends
thereon in additional shares of Preferred Stock pursuant to the
provisions of such Preferred Stock and (ii) upon exercise of the
Warrants described herein.
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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PROSPECTUS
IVI PUBLISHING, INC.
2,150,000 Shares of Common Stock
The shares offered hereby (the "Shares") consist of shares of common
stock, $.01 par value ("Common Stock"), of IVI Publishing, Inc., a Minnesota
corporation (the "Company"), that may be offered and sold from time to time by
the shareholders described herein under "Selling Shareholders" (the "Selling
Shareholders") or by pledgees, donees, transferees, or other successors in
interest that receive such shares as a gift, distribution, or other non-sale
related transfer. The Company will not receive any of the proceeds from the sale
of the Shares by the Selling Shareholders. The Company has agreed to bear all
expenses in connection with the registration of the Shares being offered by the
Selling Shareholders. The Company has agreed to indemnify the Selling
Shareholders against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
The Shares may be sold from time to time in transactions on the NASDAQ
Small Cap Market ("Nasdaq SmallCap") at the market prices then prevailing, in
privately negotiated transactions or otherwise. In connection with any sales,
the Selling Shareholders and any brokers and dealers participating in such sales
may be deemed to be "underwriters" within the meaning of the Securities Act. See
"Plan of Distribution."
On April 10, 1998, the Company sold 5,000 shares of its Series B
Convertible Preferred Stock, $.01 par value (the "Preferred Stock"), and
warrants to purchase 66,778 shares of Common Stock (the "Warrants") to the
Selling Shareholders in a private transaction. The Shares being offered hereby
by the Selling Shareholders may be acquired, from time to time, upon conversion
of the Preferred Stock, including additional shares of Preferred Stock which may
be issued as dividends on the Preferred Stock, exercise of the Warrants, or in
all three circumstances. The Shares include such presently indeterminate number
of additional shares of Common Stock as may be issued on conversion of the
shares of its Preferred Stock held by the Selling Shareholders pursuant to the
provisions of the Certificate of Designation of the Preferred Stock regarding
determination of the applicable conversion price and on exercise of the
Warrants. The actual number of shares of Common Stock issued or issuable upon
conversion of the Preferred Stock is subject to adjustment depending on factors
which cannot be predicted by the Company at this time, including, among others,
the future market prices of the Common Stock.
The Common Stock is listed on the Nasdaq SmallCap under the symbol IVIP.
On May 21, 1998, the closing price for the Common Stock was $7.375.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS-EFFECT
ON FORWARD LOOKING STATEMENTS" BEGINNING ON PAGE 5 FOR CERTAIN FACTORS RELATED
TO THIS OFFERING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not lawfully be made. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as to which information has
been given herein.
The date of this Prospectus is ______________ _____, 1998.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION........................................................................................3
PROSPECTUS SUMMARY...........................................................................................4
RECENT DEVELOPMENTS..........................................................................................4
RISK FACTORS-EFFECT ON FORWARD LOOKING STATEMENTS............................................................5
YEAR 2000 COMPLIANCE.........................................................................................9
SELECTED FINANCIAL DATA.....................................................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................11
BUSINESS....................................................................................................16
DESCRIPTION OF PROPERTY.....................................................................................24
USE OF PROCEEDS.............................................................................................24
SELLING SHAREHOLDERS........................................................................................25
PLAN OF DISTRIBUTION........................................................................................26
DIRECTORS AND EXECUTIVE OFFICERS............................................................................27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................30
DESCRIPTION OF SECURITIES...................................................................................31
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.........................32
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS.....................................................33
EXECUTIVE COMPENSATION......................................................................................34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................................37
LEGAL MATTERS...............................................................................................37
EXPERTS.....................................................................................................37
FINANCIAL STATEMENTS.......................................................................................F-1
INFORMATION NOT REQUIRED IN PROSPECTUS....................................................................II-1
SIGNATURES................................................................................................II-7
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AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and files reports and other
information with the Securities and Exchange Commission (the "Commission") in
accordance therewith. Such reports, proxy statements, and other information
filed by the Company are available for inspection and copying at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth St., N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission. The Common Stock is currently listed on the
Nasdaq Small Cap Market under the symbol IVIP.
No dealer, salesman, or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus, and,
if given or made, such information and representation must not be relied upon as
having been authorized by the Company. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby in any state to any person to whom it is unlawful to make such offer in
such state. Neither the delivery of this Prospectus nor any sales made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
and related notes thereto appearing elsewhere in this Prospectus. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements.
THE COMPANY
IVI Publishing, Inc. ("IVI" or the "Company") was incorporated under the
laws of the State of Minnesota in 1990. The Company corporate offices,
previously located in Minnesota, are now located at 808 Howell Street, Suite
400, Seattle, Washington 98101 and its telephone number is (206) 583-0100.
THE OFFERING
Securities offered..................... 2,150,000 shares of Common Stock (plus
an indeterminate number of additional
shares of Common Stock issuable by the
Company upon conversion of the Preferred
Stock, including issuance of dividends
on the Preferred Stock in the form of
additional shares of Preferred Stock,
and exercise of the Warrants). See
"Description of Securities."
Common Stock to be outstanding
after the offering..................... Approximately 12,289,710 shares
(assuming exercise of all Warrants and
further assuming that the Preferred
Stock and dividends issuable thereon,
are converted into Common Stock at the
maximum rate allowable by the terms of
the agreements relating to the issuance
of the Preferred Stock).
Use of Proceeds........................ The Company will receive no proceeds
from the sale of the Common Stock by the
Selling Shareholders.
Risk Factors........................... Investment in the Common Stock involves
a high degree of risk. See "Risk
Factors."
Nasdaq Small Cap Market symbol......... IVIP
RECENT DEVELOPMENTS
Change of Core Business Focus. In the first quarter of 1998, the
management of the Company, including the Board of Directors, determined to
change the core business focus of the Company from the development, sales and
support of CD-ROM products to an Internet Web Site design and hosting company
(primarily of the Web Site onhealth.com). See "Risk Factors-Effect on Forward
Looking Statements" and "Business."
Private Placement. On April 10, 1998, the Company raised $5,000,000,
less expenses, through the sale to the Selling Shareholders of 5,000 shares of
Preferred Stock and the issuance of the Warrants. See "Selling Shareholders."
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RISK FACTORS-EFFECT ON FORWARD LOOKING STATEMENTS
Prospective investors should carefully consider the factors set forth
below, in addition to the other information contained and incorporated in this
Prospectus, in evaluating an investment in the Common Stock, offered hereby.
Limited Operating History and Accumulated Deficit; Continuing Operating
Losses. The Company was incorporated in 1990 and has been operating continuously
since 1991. However, it has only been active online since 1996 and the OnHealth
network web site made its debut in July 1997 ("OnHealth Network"). The Company,
therefore, has a limited history of operation on which to base analysis of
financial results relating to its internet Web Site hosting of healthcare
information. Since its founding in 1990, the Company has generated an
accumulated deficit of approximately $80.8 million and has incurred significant
losses in each of the last five years. The Company's ability to generate
profits will be dependent upon creating services with high degrees of leverage.
In turn, that will require creation of significant revenue streams from its
online properties, earning substantial gross margins on those revenue streams
and controlling its costs of operation. The Company anticipates continued
significant operating losses at least through 1998, as the OnHealth flagship
site is redesigned and the OnHealth Network is enhanced. There is no assurance
that the Company will ever attain profitability.
Shift to Advertising Revenues May Not Replace Revenues from Sales of
CD-ROMs. Since its inception until early 1998, a vast percentage of the
Company's revenues were based on development, sales and support of CD-ROM
titles. In January 1998, the company's new management team determined to change
the Company's core business focus to Internet Web site hosting of health care
related content and the dissemination of health and wellness information from
the Company's web sites. The principal form of revenue from this business model
is advertising. Although revenues from CD-ROMs have declined significantly since
1995, advertising revenues may never be sufficient to offset such declines in
revenue. Since the Company has not completed this transformation, there are no
results on which to base the potential profitability or viability of the
Company. The Company will face essentially the same risks and uncertainties of
any new venture, and there can be no assurance that the Company will be anymore
successful in this venture than in its previous business activities.
Reliance on Advertising Revenues. The Company's new business model
provides that the Company will derive a substantial portion of its revenues from
the sale of advertisements on its Web pages. For the year ended December 31,
1997, advertising revenues did not represent a significant portion of the
Company's total revenues. The Company's strategy is to continue to develop
advertising and other methods of generating revenues. The Company is in the
early stages of licensing its products and technology and in implementing its
advertising program. The Company's ability to generate significant advertising
revenues will depend, among other things, on advertisers' acceptance of the
Internet as an attractive and sustainable medium, the development of a large
base of users of the Company's products and services possessing demographic
characteristics attractive to advertisers and the expansion of the Company's
advertising sales force. In addition, there is fluid and intense competition in
the sale of advertising on the Internet, resulting in a wide range of rates
quoted by different vendors for a variety of advertising services which makes it
difficult to project future levels of advertising revenues which will be
realized generally or by any specific company. Further, significant and
consistent investment on the Internet by many advertisers is dependent upon
validation that the Internet is an effective advertising medium, which
validation has not yet occurred and which is essential to the achievement of
steady and predictable advertising revenues. See "Business--Marketing and
Promotion" and "Business--Web Activities: Prospective."
Mature Market; Unproven Acceptance of the Company's Products and
Services; Uncertain Adoption of the Internet as an Advertising Medium. The
market for the Company's products and services has recently rapidly matured,
leading to significant reductions in income since 1995. The market is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services for use on the Internet. The
Company's market is highly dependent upon the increased use of the Internet for
information publication, distribution and commerce, and on the development of
the Internet as an advertising medium. The Company's future operating results
will depend upon the continued emergence of the Internet advertising market, the
successful implementation of the Company's advertising program and its ability
to establish licensing relationships for the Company's content with leading
Internet businesses. There can be no assurance, however, that the Internet
advertising market will develop as an attractive and sustainable medium, that
the Company will achieve market acceptance of its health related products and
services or that the Company will be able to execute its business plan
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successfully. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. The industry is young and has few proven
products. Moreover, critical issues concerning the commercial use of the
Internet (including security, reliability, cost, ease of use and access, quality
of service and acceptance of advertising) remain unresolved and may impact the
growth of Internet use or the placement of advertisements on the Internet. If
widespread commercial use of the Internet does not develop, or if the Internet
does not develop as an attractive medium for advertising, the Company's
business, results of operations and financial condition will be materially
adversely affected.
Because the market for the Company's products and services is new and
evolving, it is difficult to predict the size of this market and growth rate, if
any. There can be no assurance that the market for the Company's products and
services will develop or that satisfactory demand for the Company's products or
services will emerge or become sustainable. If the market fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
the Company's products and services do not achieve or sustain market acceptance,
the Company's business, results of operations and financial condition will be
materially adversely affected. See "Business--Web Activities: Prospective."
Unpredictability of Future Revenue Streams; Potential Fluctuations in
Quarterly Results. Since the Company's 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. While the investments
that the Company plans in personnel, product and development are largely fixed
and are committed to in the near term, the expected operating profits are highly
variable with respect to consumer demand over the longer term. For this reason,
shortfalls in consumer demand will have a significant negative impact on Company
profitability.
Results are expected to vary to some extent on a quarterly basis. The
advertising and retail industries typically experience their best quarter in the
fourth quarter of each year, and to the extent that the Company relies upon
advertising and transactional revenues, its revenues will be similarly variable.
Due to the health related nature of editorial content, management believes that
OnHealth revenues will not be as seasonal as the remainder of the advertising
and retail industries. Since the Company's expense levels are based upon
anticipated advertising and licensing revenue, the Company 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 the Company's
expectations would have an immediate adverse impact on the Company's business,
results of operations and financial condition. In addition, the Company plans to
significantly increase its operating expenses to fund greater levels of research
and development, increase its sales and marketing operations, develop new
distribution channels, broaden its customer support capabilities and establish
brand identity and strategic alliances.
The Company expects CD-ROM sales, as a percentage of gross revenues, to
continue to decrease significantly and continue to be subject to the seasonality
that generally affects the computer software business. Typically net revenues,
gross margins and operating income are fairly constant in the first, second and
third quarters and are highest during the fourth quarter. This seasonality is
due principally to the increased demand for the Company's CD-ROM products during
the holiday season. Because revenues from other segments of the Company's
integrated publishing and Web site hosting strategies are not subject to the
same seasonality, the development of these aspects of the Company's business in
1997 did reduce the impact the seasonality in the CD-ROM segment of the
Company's business has on the Company's operations.
Reliance On External Financing. The Company's operations generated a
negative cash flow during 1997. The degree to which the Company is a net user of
cash is likely to increase in 1998, as a result of the expansion plans for the
OnHealth Network and as a consequence of focusing on a new business model. The
Company will therefore depend upon external financing for operations and
liquidity. 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. See "Recent Developments".
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 the Company, and some have
internal distribution or cross-promotional opportunities to support their online
ventures that the Company does not have and can not replicate for a reasonable
investment. It is possible that existing or emerging competitors may be able to
secure critical editorial
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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. The Company expects 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 those of
the Company, offer products that compete directly with one or more of the
Company's products. Sales of products on older platforms have declined, and
there can be no assurance that sales of these products will not decline further
or experience lower than expected sales levels. There can be no assurance that
sales of the Company's existing products will continue to sustain market
acceptance and to generate significant levels of revenue in subsequent quarters.
In addition, retailers of the Company's products typically have a limited amount
of shelf space and promotional resources for which there is intense competition.
There can be no assurance that retailers will continue to purchase all of these
products or provide these products with adequate levels of shelf space and
promotional support.
Dependence on Key Personnel. The Company's development and operation,
especially of its new business focus, is expected to be substantially dependent
on the services of its President and Chief Executive Officer, Robert N.Goodman
and on the Company's Editor-in-Chief, Rebecca Farwell. The loss of either
Mr. Goodman's or Ms. Farwell's services could materially and adversely affect
the Company's business prospects. The Company is also dependent on the continued
service of certain other key management as well as its software engineering
personnel, the loss of whose services could significantly delay the achievement
of the Company's planned development objectives. The Company has not purchased
key man life insurance on any of its personnel. Achievement of the Company's
business objectives will require substantial additional expertise in the areas
of technology, finance, manufacturing and marketing. The Company is actively
seeking 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 the
Company's activities, could have a material adverse effect on the Company's
business and results of operations. See "Business - Employees."
Risks Related To System Development and Operation. The enhancement of
OnHealth.com as part of the OnHealth Network is dependent upon various
development efforts which will be performed by in-house Company employees and by
contractors. There can be no assurance that this development effort will be
completed in a timely fashion. To the extent that development is incomplete or
delayed, the Company will incur additional development expense and may lose a
portion of its advantage to competitors.
All companies that rely on the Web are dependent upon the continuous,
reliable and secure operation of Web 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 will directly result in a revenue loss to the
Company.
The Company's 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. The Company does not have full redundancy for all
of its computer and telecommunications facilities and it does not carry business
interruption insurance to protect it in the event of a catastrophe. Such an
event could lead to significant negative impacts on the Company's operating
results and financial condition.
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 March 31, 1998 level of 25
employees. The expansion of the Company's workforce could place a significant
strain on the Company's management, financial resources and infrastructure.
There is no assurance that the Company will be able to attract and retain
employees with the appropriate skill sets, or that the Company will be able to
manage growth effectively. If the Company is unable to manage growth in the
coming years, there could be an adverse affect on the Company's 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
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former employees. The plaintiffs make various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10,000,000. 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 plus interest for damages sustained
to its business. The jury verdict is subject to motions for a new trial, amended
findings and for judgment notwithstanding the verdict and to appeal to the Court
of Appeals. The plaintiffs also have an action pending against certain
affiliates of the Company on the same grounds on which the action against the
Company was based. The Company has indemnified these principles against any
damages arising out of these claims. While the Company is 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 the
Company and could cause it to discontinue operations.
Risks of New Business Areas. Some of the incremental opportunities that
will comprise the OnHealth Network may follow business models that are
unfamiliar to the Company today, or that are completely without precedent. These
expansions will require significant commitment of resources and time, and there
is no assurance that the Company will benefit from being the first entrant in a
new business or economic model, or that such business or economic model will be
viable. It is also possible that new businesses or economic models will impair
the Company's ability or reputation with respect to existing customers or
suppliers, to the detriment of the OnHealth brand. A lack of market response or
the failure of an economic model could have detrimental effects on the Company's
results.
Risks Associated With Strategic Alliances. The Company may elect to
enter into strategic alliances with respect to content provision, promotion,
distribution or technology, among other areas. Such alliances carry risks that
are associated with any alliance. These risks may include difficulty in
coordinating the roles of strategic allies, the possibility of disruption of the
Company's core business, maintenance of editorial or quality standards and the
potential to damage relationships with current Company employees. There is no
assurance that the Company's alliances will avoid these and similar risks.
Rapid Technological Change. The Internet's technology is changing at a
rapid pace. In order to remain competitive, the Company must remain at the
forefront of the new features and capabilities that are being and that will be
introduced. This may entail a continuous level of development and capital
spending. If the Company is unable to make these changes, for financial,
operational, legal, or any other reason, it risks a loss of market share and
some portion of its brand identity.
Reliance On External Content. The Company intends to produce only a
portion of the editorial content that will be found on the OnHealth Network, and
none of the content utilized by CD-ROM or cable television distribution media.
It 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 to the Company 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 the
profitability of IVI. Either event would have a materially adverse impact on the
Company's results.
Governmental Regulation and Legal Issues. The Company is 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 the
Company's cost of doing business. Either outcome could have a material adverse
affect on the Company's financial results.
Control By Existing Shareholders. As of May 15, 1998, the Company's
executive officers, directors and 5% shareholders and their affiliates
beneficially own approximately 44%, of the Company's outstanding shares of
Common Stock. Accordingly, these individuals will have the ability to influence
the election of the Company's directors as well as significant corporate matters
requiring approval by the shareholders of the Company. Such concentration of
ownership and the lack of cumulative voting also may have the effect of delaying
or preventing a change in control of the Company.
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Absence of Dividends. The Company has not paid cash dividends since its
inception. The Company intends to retain all of its earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. Pursuant to the Company's Articles of Incorporation and
Bylaws, the payment of dividends is subject to the discretion of the Company's
Board of Directors and any terms and conditions imposed by law.
NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements made in this Prospectus, 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 the Company will become the leading on-line health
information network depends on the Company's ability to obtain high quality
editorial content, its ability to implement effective traffic building
programs, 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 the Company will re-release its OnHealth.com web site
in the third quarter of 1998 and that it will launch a family of web sites
to be included in the OnHealth network depends upon successful development
efforts and meeting the currently scheduled timetable for such development,
as well as being able to obtain any necessary or desired licensing or other
content rights on a timely basis.
- - The expectation that the Company will see a growth in revenues and positive
net income as a result of its shift in focus to its 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.
- - On April 10, 1998, the Company completed a $5,000,000 non-voting
Convertible Redeemable Preferred Stock financing. The Company believes that
the proceeds from this financing transaction, in addition to cash and cash
equivalents and anticipated operating cash flows will allow the Company to
continue to meet its ongoing financial obligations and operate through, at
least December 31, 1998.
- - The Company's net revenues have declined 69% in the past two years to
approximately $3.8 million in 1997. This is largely attributable to the
shift in the Company's focus from CD-ROM publishing and marketing to online
publishing. Management anticipates that the shift in focus will result in
growth in revenues and in positive net income in future years. The Company
has accumulated net losses of approximately $80.8 million through
March 31, 1998.
YEAR 2000 COMPLIANCE
The Company has determined that it will need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company's Year
2000 initiative is being managed by internal staff. The activities are designed
to ensure that there is no adverse effect on the Company's core business
operations and that the transactions with customers, suppliers and financial
institutions are fully supported. The Company is well underway with these
efforts, which are scheduled to be completed by 1999. While the Company believes
its planning efforts are adequate to address its Year 2000 concerns, there can
be no guarantee that the systems of other companies on which the Company's
systems and operations rely will be converted on a timely basis and will not
have a material effect on the Company. The cost of the Year 2000 initiative is
not expected to be material to the Company's results of operations or financial
position.
9
<PAGE> 12
SELECTED FINANCIAL DATA
The following table presents summary historical financial information of
the Company. The financial information as of December 31, 1997, 1996, 1995, 1994
and December 31, 1993 has been derived from the financial statements. The
audited balance sheet at December 31, 1997 and 1996 and the related statements
of operations, cash flows and changes in shareholders' equity (deficit) for
each of the three years in the period ended December 31, 1997 and the notes
thereto (the "Audited Financial Statements"), together with unaudited
information as of and for the three months ended March 31, 1998 and 1997,
appear elsewhere in this Prospectus. This summary financial information should
be read in conjunction with the Financial Statements and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA: Year Ended December 31
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenue $ 3,761 $ 9,470 $ 11,970 $ 7,013 $ 2,264
Cost of revenues 2,541 5,076 6,231 2,402 580
-------- -------- -------- -------- --------
Gross margin 1,220 4,394 5,739 4,611 1,684
Cost and expenses:
Product development 4,243 5,651 7,494 19,503 6,614
Sales and marketing 1,347 2,705 7,473 9,694 2,586
General and administrative 6,892 6,364 5,647 5,585 1,495
Investment in affiliate 2,263
-------- -------- -------- -------- --------
Loss from operations (11,262) (10,326) (14,875) (32,434) (9,011)
Other income, net 315 169 641 1,177 184
-------- -------- -------- -------- --------
Net loss (10,947) (10,157) (14,234) (31,257) (8,827)
Preferred stock dividends (100) (119) (20)
Preferred stock accretion (43) (60)
Preferred stock deemed dividend (2,875)
-------- -------- -------- -------- --------
Net loss applicable to common stock
($13,965) ($10,336) ($14,254) ($31,257) ($ 8,827)
======== ======== ======== ======== ========
Net loss per common share
Basic and diluted ($ 1.73) ($ 1.36) ($ 1.90) ($ 4.75) ($ 5.11)
======== ======== ======== ======== ========
BALANCE SHEET DATA: December 31
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Cash, cash equivalents and
short-term investments $ 2,488 $ 3,462 $ 7,759 $ 20,653 $ 19,835
Working capital (deficiency) (1,252) 3,230 8,607 20,735 19,622
Total assets 4,577 13,411 18,352 32,101 22,561
Convertible
subordinated debentures 3,500
Total liabilities 4,559 8,606 3,627 5,133 1,556
Convertible redeemable preferred
stock 1,905 1,845
Shareholders' equity 18 2,900 12,880 26,968 21,005
</TABLE>
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
OVERVIEW
Since its inception, the Company's strategy has been to develop online
and cable television platforms, as well as maintain its staple platform,
CD-ROMs, in order to enhance an integrated approach to publishing electronic
health and medical information. In 1997, the Company was distributing its health
and medical information to end users via all three platforms. Under this
strategy, the Company was never able to attain profitability, and, at December
31, 1997, had an accumulated deficit of $78,576,000. In 1997, the Company's
Board of Directors revised its business strategy and brought in an entirely new
management team and other key employees skilled in the development of internet
websites. The Company's current strategy is to focus its resources on the
development of an internet-delivered, consumer-oriented network of health and
wellness sites.
RESULTS OF OPERATIONS
The following table sets forth selected income statement data of IVI
Publishing, Inc. and such data as a percentage of net revenues for the three
years ended December 31, 1997.
<TABLE>
<CAPTION>
Year ended December 31,
(Dollar amounts in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ 3,761 100% $ 9,470 100% $ 11,970 100%
Gross margin 1,220 32% 4,394 46% 5,739 48%
Operating expenses 12,482 332% 14,720 155% 20,614 172%
Operating loss (11,262) (299)% (10,326) (109)% (14,875) (124)%
Net loss ($10,947) (291)% ($10,157) (107)% ($14,234) (119)%
</TABLE>
REVENUES
Revenues for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Product sales and licensing revenue $ 1,990,000 $ 5,152,000 $ 8,333,000
Contract development revenue 1,220,000 1,346,000 1,637,000
Cable television licensing revenue 493,000 1,972,000 1,000,000
Online revenue 58,000 1,000,000 1,000,000
----------- ----------- -----------
Net revenues $ 3,761,000 $ 9,470,000 $11,970,000
=========== =========== ===========
</TABLE>
Sales for 1997, 1996 and 1995 of $3,761,000, $9,470,000 and $11,970,000,
respectively, represent a decrease of 60% from 1996 to 1997 and 21% from 1995 to
1996. The 60% decrease in 1997 is due to a substantial reduction in product
sales and licensing revenue of $3,162,000, or 61%, a substantial reduction in
cable television licensing revenue of $1,479,000, or 75%, and a decrease in
online revenue from $1,000,000 to $58,000. The 21% decrease in 1996 is due
primarily to lower product sales and licensing revenue which declined
$3,181,000, or 38%, relative to the previous year. This was partially offset by
a $972,000 increase in cable television licensing revenue.
PRODUCT SALES AND LICENSING REVENUE
11
<PAGE> 14
Product sales and licensing revenue has declined steadily from 1995 to
1997. The decrease in revenue of $3,162,000 from 1996 to 1997 was a result of
increased competition and lower unit sales as the Company shifted its focus to
its online efforts and released fewer new CD-ROM products. In 1998, the Company
expects a continued shift in focus toward the online efforts, and anticipates
intense competition to continue in the CD-ROM business.
In late 1995, the Company signed a new CD-ROM distribution agreement
which resulted in a lower net sales price to the Company on products sold and
contributed to the decrease of $3,181,000 in revenue from 1995 to 1996. Also
during this period, increased competition for shelf space led to further price
erosion in addition to a decrease in unit sales.
CONTRACT DEVELOPMENT REVENUE
Contract development revenues decreased slightly from 1996 to 1997, and
from 1995 to 1996. The decrease represents management's efforts to control costs
and focus on more profitable contracts.
CABLE TELEVISION LICENSING REVENUE
Cable television licensing revenue reflects revenue from the content
and royalty agreement with America's Health Network (AHN). Under the agreement,
the Company is licensing its multimedia content to AHN from May 1995 to March
25, 2001, and is to receive a minimum of $11,000,000 in licensing royalties
over the life of the agreement. This revenue was being recognized evenly over
the life of the contract. Due to the gradual increase in actual payments versus
the straight-line revenue recognition policy, a receivable was recorded for the
difference between the revenue recognized and the cash received during the
early years of the contract. The $972,000 increase in revenue from 1995 to 1996
was a result of a full year of revenue in 1996 compared to a partial year in
1995. The $1,479,000 decrease in revenue from 1996 to 1997 was a result of
AHN's inability to make the required payment due to its financial difficulties.
In June 1997, as a result of the Company not receiving its quarterly payment,
the outstanding AHN receivable was fully reserved. As a result of the
uncertainty of AHN's ability to pay royalties under the agreement, the Company
began recognizing royalty revenue only on a cash basis. In December, AHN
resumed payments and the Company received a royalty payment of $1,313,000. This
payment was applied against the previously recorded receivable, and the related
bad debt reserve of $1,313,000 was reversed. At December 31, 1997, the Company
has a fully reserved receivable of $715,000.
ONLINE REVENUES
The online revenues recorded in 1995 and 1996 related to nonrefundable
advances payable to the Company under the exclusive agreement signed with AT&T
in October 1995. Online revenues decreased $942,000 from 1996 to 1997 due the
discontinuance by AT&T of the AT&T Healthsite in August 1996. The $58,000 in
revenue in 1997 was generated through the sale of site sponsorships, advertising
and premium services on its OnHealth.com and former O@sis Web site. In September
1997, the Company entered into an agreement with Mayo Foundation which included
the full transfer to Mayo of the Company's ownership interest in the O@sis
Website (See Note 15 to the financial statements).
GROSS MARGIN
Gross margin as a percentage of net revenues was 32% in 1997 compared to
46% in 1996. The decrease in gross margin in 1997 was primarily due to decreases
in higher margin cable television licensing and online revenue and to a lesser
extent to continued lower margin realized on CD-ROM sales.
Gross margin as a percentage of net revenues was 46% in 1996 compared to
48% in 1995. The slight reduction in gross margin percentage was due to lower
gross margins realized on CD-ROM retail sales due to decreased pricing as a
result of increased competition.
OPERATING EXPENSES
12
<PAGE> 15
Product Development
Product development expenses were $4,243,000 for 1997, a decrease of
$1,408,000, or 25% from 1996, due to the Company's release of fewer CD-ROM
products and its shift to online publishing.
Product development expenses decreased in 1996 to $5,651,000 from
$7,494,000 in 1995, or 25% resulting from fewer CD-ROM titles being developed
combined with management's efforts to reduce costs.
SALES AND MARKETING
Sales and marketing expenses were $1,347,000 in 1997, compared to
$2,705,000 in 1996. The decrease of 50% was a result of the release of fewer
CD-ROM titles in 1997, decreases in expenditures to promote the Company's
products and a smaller expense structure created by the downsizing of operations
in late 1996.
Sales and marketing expenses were $2,705,000 in 1996, compared to
$7,473,000 in 1995. The decrease of 64% is primarily a result of the delegation
of retail product distribution to Davidson in September of 1995. Additionally,
there were fewer CD-ROM titles in 1996 than in 1995, which contributed to
reduced marketing expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $6,892,000 in 1997 compared to
$6,364,000 in 1996. The increase of 8% was due to extensive litigation and
special charges in 1997. The Company recorded $808,000 in expenses related to a
settlement of litigation with Viridis, Inc. and received an adverse jury award
of $480,000, plus interest from a dispute with T. Randal Productions, et al. in
1997 (See Note 17 to the financial statements). In the fourth quarter of 1997,
the Company recorded charges of $1,572,000 for the relocation of the Company's
headquarters from Minneapolis, Minnesota to Seattle, Washington. These charges
included $610,000 in severance to officers and employees and $973,000 for asset
dispositions and lease termination costs (See Note 17 to the financial
statements). Also in 1997, the Company wrote-off $1,741,000 in other assets
related to an agreement with Time Life, Inc. (See Note 4 to the financial
statements). Excluding the litigation and special charges, the Company's
reduction in general and administrative expenses was the result of the
downsizing of the facilities and personnel and management's efforts to
streamline operating costs.
General and administrative expenses were $6,364,000 in 1996 compared to
$5,647,000 in 1995. The overall increase of 13% was due to special charges
incurred in the third and fourth quarters of 1996. These charges included
$978,000 related to the downsizing of facilities and personnel. Additionally,
there was a write-off of an $836,000 receivable to bad debt expense. Finally, in
the fourth quarter, there was a special charge of $300,000 due to an adverse
arbitration award. Excluding these special charges, the resulting decrease in
general and administrative expenses was the result of management's efforts to
streamline operating costs.
INTEREST INCOME (EXPENSE)
Interest income was $106,000 in 1997 and $203,000 in 1996. The decrease
of 48% was due to decreases in cash balances in 1997. Interest expense was
$264,000 in 1997 compared to $34,000 in 1996. Interest expense increased in 1997
because the Company's convertible subordinated debentures were issued in late
1996 and were outstanding for most of 1997.
Interest income was $203,000 in 1996 compared to $641,000 in 1995. The
decrease was due to lower cash balances.
OTHER INCOME, NET
Other income was $473,000 in 1997 which included a $2,700,000 cash
payment that the Company received in connection with the transfer of ownership
of the Company's O@sis Web site to Mayo and an expense of $2,229,000 in
connection with the Company's conversion of its Convertible Subordinated
Debentures in 1997. The expense represents the excess of the fair market value
of Common
13
<PAGE> 16
Stock issued over the fair value of the Common Stock issuable pursuant to the
original conversion terms of the debentures. The Company did not have any other
income in 1996 or 1995.
LIMITATION ON USE OF NET OPERATING LOSS AND OTHER TAX CREDIT CARRYFORWARDS
At December 31, 1997, the Company had available net operating loss
carryforwards of approximately $64,699,000 and available research and
development credits of approximately $326,000 for federal income tax purposes.
The balance of the net operating loss carryforwards of $64,699,000 and the
credits expire at various times through 2012. The research and development
credits will also be subject to limitations under the regulations. These
carryforwards are subject to Internal Revenue Code Section 382 which limits the
availability of net operating losses to offset current taxable income if
significant ownership changes have occurred for federal tax purposes. The
Company incurred "ownership changes," pursuant to regulations currently in
effect under Internal Revenue Code Section 382, as a result of sales of the
Company's Preferred Stock in 1992 and 1993 and may have incurred ownership
changes since that time .
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 1997 were
$2,488,000. The Company used $909,000 of cash in operating activities in 1997,
compared to $8,256,000 in 1996. The decrease in cash used by operating
activities in 1997 was a result of the Company carrying a larger receivable
balance in 1996 and incurring larger losses from operations, net of special
charges in 1996. The Company did not generate or use significant cash in 1997 in
investing or financing activities. In 1996, the Company generated $3,737,000 of
cash primarily from financing activities primarily from the issuance of
$3,500,000 of 9% Convertible Subordinated Debentures.
The Company believes that its cash and cash equivalents, in addition to
$5,000,000 which the Company obtained in early April through a private equity
placement to certain institutional investors, will be sufficient to fund its
operations through December 31, 1998. (See Note 2 of the financial statements.)
However, the Company's projected costs in 1998 in connection with the redesign
and the launch of the onhealth.com website, and associated personnel, marketing
and distribution costs, will be substantial. Any material unforeseen increases
in expenses or reductions in projected revenues will likely require the Company
to seek additional debt or equity financing to be able to continue operations.
Because of the Company's financial history, there is no assurance that such
financing could be obtained, or, if obtained that the terms of the financing
would be acceptable.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
RESULTS OF OPERATIONS
The following table sets forth selected income statement data of IVI
Publishing, Inc. and such data as a percentage of net revenues for the three
months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended March 31,
(Dollar amounts in thousands)
----------------------------------------------------------
1998 1997
------- -------
<S> <C> <C> <C> <C>
Net revenues $ 330 100% $ 1,719 100%
Gross margin (358) (108%) 949 55%
Operating expenses 1,907 578% 2,471 144%
Operating loss (2,265) (686%) (1,522) (89%)
Net loss ($2,253) (683%) ($1,624) (94%)
</TABLE>
REVENUES
Revenues for the three months ended March 31, 1998 and 1997 were as
follows:
14
<PAGE> 17
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Product sales and licensing revenue $ 44 $ 888
Contract development revenue and other 197 338
Cable television licensing revenue 0 493
Online revenue 89 0
------ ------
Net revenues $ 330 $1,719
</TABLE>
Sales for the three months ended March 31, 1998 of $330,000 represent a
decrease of 81% relative to the previous year. The decrease is primarily
attributable to reduced product sales and licensing revenue which decreased from
$888,000 to $44,000 and cable television licensing revenue which decreased from
$493,000 to $0. The decrease in product sales and licensing revenue is a result
of market conditions for CD ROM products, and the Company's lack of new CD ROM
product releases as it transitions to an internet-focused business. The decrease
in cable royalty revenues reflects a cash basis revenue recognition policy
related to a cable television contract with America's Health Network (AHN).
Online revenue was generated from the Company's OnHealth.com web site through
site sponsorships and advertising.
GROSS MARGIN
Gross margin as a percentage of net revenues was (108%) for the three
months ended March 31, 1998 compared to 55% for the comparable period in 1997.
The negative gross margin percentage in 1998 is primarily the result of royalty
expenses related to cable television licensing revenue, but is in part due to
the high cost of revenues related to the CD ROM business.
OPERATING EXPENSES
PRODUCT DEVELOPMENT
For the three months ended March 31, 1998, product development expenses
were $728,000, representing a $583,000, or 44%, decrease relative to the same
period in 1997. The decrease relates to the shift away from the CD-ROM product
development business and toward an internet focused business.
SALES AND MARKETING
Sales and marketing expenses for the three months ended March 31, 1998
increased $42,000, or 11%, relative to the same three months in 1997. Although
expenses are comparable, 1998 expenditures are focused primarily on internet
marketing and sales activities while 1997 activities include expenditures for
the Company's CD-ROM business.
GENERAL AND ADMINISTRATIVE
For the quarter ended March 31, 1998, general and administrative
expenses decreased $23,000, or 3%, relative to the same period in the previous
year. Lower professional fees in 1998 were partially offset by higher travel and
related expenses.
INTEREST INCOME (EXPENSE)
The quarter ended March 31, 1998 has net interest income of $12,000
compared to net interest expense of $59,000 for the quarter ended March 31,
1997. The 1998 net interest income includes interest income generated from cash
equivalents. The 1997 net interest expense includes interest income from cash
equivalents that is more than offset by interest expense related to $3,500,000
in convertible subordinated debentures which were converted into common stock
during the fourth quarter of 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
15
<PAGE> 18
At March 31, 1998, the Company had cash and cash equivalents of
$571,000. Total cash used by operating activities during the three months ended
March 31, 1998 totaled $1,983,000 and is primarily due to a net loss of
$2,253,000. Investing activities used cash of $18,000 for purchases of computer
equipment. Financing activities provided cash of $84,000 from stock option
exercises.
On April 10, 1998, the Company completed a $5,000,000 non-voting
Convertible Redeemable Preferred Stock financing. The Company believes that the
proceeds from this financing transaction, in addition to cash and cash
equivalents and anticipated operating cash flows will allow the Company to
continue to meet its ongoing financial obligations and operate through, at least
December 31, 1998.
BUSINESS
The Company intends to become the premier network of health-related
channels on the World Wide Web to help adults make smarter, better-informed
health decisions. IVI was incorporated in August 1990 in the State of Minnesota
under the name Interactive Television, Inc. Its name was subsequently changed to
Interactive Ventures, Inc. in March 1991, and to IVI Publishing, Inc. in August
1993. IVI has created interactive programs for some of America's best-known
content owners. The Company has also distributed content in various forms of
media and in partnership with some of America's most prestigious media firms.
Historically, IVI's attention and resources have been directed to the cable
television, CD-ROM and online interactive media markets. The Company expects to
leverage its years of experience in developing content for interactive media,
its skill in working with third-party medical content providers, and its
knowledge of consumers of medical information to develop the leading online
health information network.
The Company's flagship site, located at www.onhealth.com, opened in July
1997 and is currently being enhanced and redesigned. The Company intends to
re-release OnHealth in the third quarter of 1998. To reflect its new
Web-oriented focus, the Company plans to propose to shareholders at the 1998
Annual Meeting a corporate name change to "OnHealth Network Company," as part of
a reincorporation under Washington law
The Company's common stock is listed on Nasdaq SmallCap under the symbol
"IVIP."
The Company plans to distinguish itself in the market for consumer
health-related information and commerce by "cutting through the clutter" of the
Internet and locating and packaging the best informational, transactional and
archival content for its customers. By doing so, the Company will attain high
levels of targeted usage and an attractive editorial context, both of which are
necessary for creating an advertising-supported medium.
IVI's first Web venture was the development, production, and hosting of
Mayo Health O@sis which was jointly owned with the Mayo Foundation and which
went live in July 1996. Under the initial intent of the venture, the Mayo
Foundation was to provide intellectual property and IVI Publishing was to
provide production, hosting and marketing services. Revenues were to be split
between the companies. IVI transferred full ownership of the Mayo O@sis website
to Mayo Foundation in September 1997. See "Mayo Relationship and Transfer of
Ownership of Mayo Health O@sis Web Site."
The Company's previous principal line of business consisted of CD-ROM
development, production, and distribution. IVI's best-known title has been Mayo
Clinic Ultimate Medical Guide. The Company has also produced numerous other
CD-ROM titles. IVI continues to distribute these products through retail
channels and computer OEM (bundling) channels, but its future business focus
will de-emphasize reliance on revenues from such sales.
IVI has had a significant venture with Time Life Books, including the
production of a CD-ROM, "Taking Control of Your Health" as well as other titles.
The Company is also a supplier of content to America's Health Network (AHN), a
health and medical cable TV network, which began with AHN's launch in March
1996. IVI also develops web sites for third parties. To date, web development
customers have been primarily from the medical field.
The Company's net revenues have declined 69% in the past two years to
approximately $3.8 million in 1997. This is largely attributable to the shift in
the Company's focus from CD-ROM publishing and marketing to
16
<PAGE> 19
online publishing. Management anticipates that the shift in focus will result in
growth in revenues and in positive net income in future years. The Company has
accumulated net losses of approximately $80.8 million through March 31, 1998.
WEB ACTIVITIES: CURRENT
The Company believes that it will be able to create the best online
resources for equipping users to actively and successfully manage their health
and well-being. By doing so, management believes that it can create a large,
loyal and active user base, and, by extension, that it can create a significant
hub for online advertising and transactional commerce. The key attributes for
success in this venture include building deep, high-value editorial content
(proprietary, licensed, and linked); developing a friendly, accessible and
useful editorial character; creating an image of trust and credibility;
encouraging a sense of community among site users; and striving to develop the
OnHealth brand as the leading brand in its segment.
WEB ACTIVITIES: PROSPECTIVE
The Company intends to launch a family of Web sites that leverage the
branding, customer set, and market awareness created by the OnHealth site. The
editorial focus, business models, and revenue streams of these additional sites
are still under development. Collectively, IVI intends to call these sites and
the OnHealth flagship site the OnHealth Network.
MARKETING AND PROMOTION
The Company's strategy is designed to strengthen the OnHealth brand
name, drive traffic to the network of OnHealth Network sites, build the duration
and frequency of visitor usage, encourage user loyalty and develop incremental
revenue opportunities. Some of the specific strategies that are, or will be,
employed to do so include:
Advertising: Raising awareness of the OnHealth brand through banner
advertising campaigns in relevant high-traffic sites. Online advertising may
also be supplemented through brand based media outside the web.
Public relations: An active campaign by which the OnHealth brand and its
products are highlighted in news, features and related editorial contexts to
increase consumer and trade awareness.
Promotion: Traffic building programs with publicity value will be
implemented quarterly. Relevant and preferred listings in directories, databases
and search engines will also be pursued.
Cooperative Marketing: Co-promotion through compatible editorial sites
and media partners.
Syndication: OnHealth editorial content will appear on other sites, in
exchange for payment or for promotional consideration.
CONTENT STRATEGY
The Company's goals for its editorial content are to create high-value,
useful, accessible, and trustworthy editorial elements for its users. These
elements may be:
Proprietary: Created exclusively for OnHealth by Company employees or
contractors.
Syndicated: Licensed for distribution via OnHealth, on an exclusive or
non-exclusive basis.
Linked: OnHealth may "point" to other content elsewhere on the World
Wide Web. Although this content is not exclusive to OnHealth, the Company adds
value by finding and pre-qualifying the best health-related content on the
Internet.
Additional content to be added to the Network in the future may include
high-value content, which may be licensed in context of user models that go
beyond advertising support.
17
<PAGE> 20
Management believes that through a combination of these content
strategies, the OnHealth brand can create a unique product that will have more
user value and will have a potential for greater levels of usage than any
health-related content now on the World Wide Web.
OTHER IVI ACTIVITIES
Agreement With and Investment in America's Health Network ("AHN")
As part of its integrated publishing strategy, the Company has developed
a strategic relationship with AHN to provide health and medical programming on
cable television. AHN has developed a consumer health information cable
television network which features a physician and other health care
professionals responding to viewers' call-in questions interspersed with home
shopping segments featuring health related products. AHN began broadcasting on
March 25, 1996.
The Company entered into an agreement with AHN dated May 25, 1995 (the
"AHN Agreement") pursuant to which the Company agreed to provide health and
medical information for AHN's cable television programming. The AHN Agreement
provides that the health and medical content produced by the Company for
broadcast on AHN shall remain the property of the Company but shall be licensed
exclusively to AHN for use in a televised program. AHN has agreed to pay the
Company a fee for the production of content used by AHN equal to the Company's
cost of producing or obtaining the requested content plus 15%. In addition, AHN
has agreed to pay the Company $11,000,000 in royalties over the life of the AHN
Agreement. The Company recognized $493,000 in royalty revenue in 1997, and
applied additional payments made by AHN against previously reserved receivables.
The Company expects to receive $2,250,000 in cash during 1998 under this
agreement. The first $715,000 will be applied against the previously reserved
receivables. The AHN Agreement extends to five years beyond the date AHN began
broadcasting. The amount of future royalties is subject to reduction, however,
in the event the Company fails to deliver health and medical content in
accordance with the terms of the agreement. The royalties will also be reduced
to 25% of their original amount in the event the Company terminates the
exclusivity provisions of the AHN Agreement. In the event AHN achieves its
revenue forecasts for its first five years of operations, the Company may earn
additional royalties which are payable within 45 days after the end of the fifth
year of AHN's operations.
The Company holds an equity position in AHN which it acquired in March
1994 in exchange for an investment of $2,000,000, which was expensed in 1994.
AHN subsequently has acquired additional financing from other investors. The
Company estimates that its percentage interest in the equity of AHN at December
31, 1997 is approximately 4%.
Over the past year, AHN has been unable to consistently make the minimum
payments under this agreement, due to its own lack of funding. In late 1997,
however, AHN received new venture funding, became current on payments owed to
IVI, and its contractual relationship with IVI continues.
Time Life Relationship
The Company has established a strategic relationship with Time Life to
broaden its content base. In February 1994, the Company entered into a license
agreement (the "First Time Life Agreement") with Time Life for the exclusive
license to develop, manufacture and distribute to third party resellers
interactive multimedia versions of six Time Life books. In September 1994, the
Company and Time Life entered into a second license agreement (the "Second Time
Life Agreement") which grants the Company an exclusive right-of-first-offer for
the right to publish non-print versions for any and all health and/or medical
material and/or titles which Time Life intends to publish for commercial
purposes in print media.
Pursuant to the First Time Life Agreement, three titles for children
were released during 1994. In order to focus on its integrated publishing
strategy to distribute health and medical information primarily to adult
audiences, the Company has suspended efforts to produce any further children's
titles and is closing out remaining inventory of the titles.
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<PAGE> 21
Pursuant to the Second Time Life Agreement, the first title developed by
the Company was Taking Control Of Your Health. Released in September 1996, this
home medical guide on CD-ROM provides comprehensive information on alternative
and conventional medicine. Based on the book from Time Life entitled The Medical
Advisor - The Complete Guide to Alternative & Conventional Treatments, released
in September 1996, the content for this product was developed by a team of over
60 physicians.
As compensation for developing the Taking Control of Your Health
concept, the Company granted Time Life 60,000 restricted shares of its Common
Stock. Under the Second Time Life Agreement, the Company funded Time Life's
development of the print version of the series at an estimated cost of
approximately $2.2 million through September 1996. At December 31, 1996, the
Company recorded an asset of $1,778,000, which represented the Company's
payments to Time Life, net of royalty payments received from Time Life. The
Company's policy was to amortize this asset over the period that revenues were
recognized. During 1997, revenues from the print version were not as high as
anticipated, and management determined that the asset was not realizable.
Accordingly, the Company wrote-off the then remaining asset balance and expensed
$1,741,000 in general and administrative expenses. Time Life retains the right
for marketing and distributing the print version of each title while the Company
has the sole right for the marketing and distribution of the non-print versions
of the title. The Company has the right to receive a royalty from Time Life for
the sale of the print version of the title and has a royalty-free license for
the distribution of the electronic version of the title. The term of the license
is perpetual from the date the title was accepted by the Company. Time Life has
the right to approve the final versions of the title, which approval shall not
be unreasonably withheld, prior to distribution. To date, Time Life has not
refused approval for a title developed by the Company.
Massachusetts Medical Society License Agreement
In November 1994, the Company and Massachusetts Medical Society ("MMS")
entered into a license agreement pursuant to which the Company was granted an
exclusive license to develop and distribute to end users the digital format
versions of the monthly newsletter "Health News" currently published by MMS. In
exchange for these rights, the Company assisted MMS with the funding of the
newsletter at a rate of $250,000 per year for the three years ended November
1997. The Company will also pay MMS a royalty based on a percentage of the net
revenues earned by sale of the digital format versions of the newsletter.
The term of the license agreement is five years after the date on which
the design format was approved by MMS and the content was available to the
Company and will thereafter automatically renew for periods of one year each.
MMS has the sole right to and responsibility for the marketing and distribution
of the title in any non-digital format. MMS has the right to approve the final
form of each digital newsletter, which approval shall not be, and to date has
not been, unreasonably withheld or delayed, prior to distribution.
Web Site Production
The Company operates a New Media division whose goal is to build Web
sites for third parties. Third party customers currently include Searle, North
Memorial Hospital, MGI Pharma, and St. Jude Medical Center.
Mayo Relationship and Transfer of Ownership of Mayo Health O@sis Web
Site
Until the third quarter of 1997, the Company's relationship with Mayo
had been one of the most significant elements in the Company's development. Mayo
Foundation, parent corporation for Mayo Foundation for Medical Education and
Research, is the legal entity under which Mayo Clinic Group Practices, Mayo
Medical School and certain other Mayo institutions operate. In September 1997,
the Company completed a transfer of control and ownership interest in the Mayo
Health O@sis Internet web site to Mayo. The principal terms of the transfer of
ownership included: 1) Mayo made a cash payment to the Company of $2.7 million;
2) Mayo returned 490,000 shares of the Company's common stock which Mayo had
received as partial payment in two previous license agreements with the Company;
3) Mayo agreed to make payments to the Company of certain royalties on all net
revenues received by Mayo in connection with O@sis and certain non-O@sis
Internet projects through the year 2001; 4) Mayo was released from the Company's
previously granted "right of first offer" on all Mayo products published in
electronic media; and 5) Mayo assumed all O@sis operational expenses retroactive
to January 1, 1997. In addition, the Company is no longer required to gain
Mayo's approval before entering into agreements concerning
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<PAGE> 22
the health or medical education materials of another entity.
Current Mayo License Agreements
In April 1991, the Company entered into a License Agreement (the "1991
License Agreement") pursuant to which it obtained an exclusive five-year license
from Mayo and William Morrow Company to develop, manufacture and distribute
interactive multimedia versions of Mayo Clinic Family Health Book. William
Morrow receives a minimum annual royalty, or if greater, a percentage of net
sales of the title. In December 1995, the Company amended the agreement with
Mayo and William Morrow to include online distribution rights and to extend the
rights period until September 2000.
In April 1993, the Company and Mayo entered into a License Agreement
(the "1993 License Agreement") which granted the Company an exclusive license to
develop, produce and market up to ten title areas with specific content to be
determined jointly by Mayo and the Company, in all digital optical electronic
publishing formats. The licenses with respect to the ten title areas are
severable, so that if one is terminated the others are not affected. Mayo
retains the right to market the titles developed under the 1993 License
Agreement to end users or persons employing or educating end users. The term of
the license is ten years for each title from the date of first commercial sale.
The term as to any new edition of a title recommences when the new edition is
released. Mayo retains broad approval rights with respect to the substance of
each title, the marketing plan, the business plan and advertising and
distribution and also receives a royalty based on a percentage of net sales for
each title. All of the Company's CD-ROM titles produced in conjunction with
Mayo, excluding Mayo Clinic Family Health Book, were granted under the 1993
License Agreement.
In September 1994, the Company and Mayo entered into another License
Agreement (the "1994 License Agreement") which grants the Company, for a period
of five years, the right to produce up to five additional titles in various
interactive or multimedia formats. The licenses with respect to each other are
severable so that if one is terminated the others are not affected. The term of
the license is ten years from the date of first commercial sale and the term, as
to any new edition of a title, recommences when the new edition is released.
Mayo Health O@sis, which was sold back to Mayo in September 1997, is the only
title produced under the 1994 License Agreement.
Mayo CD-ROM Titles
Pursuant to its still existing license agreements with Mayo (see "Mayo
License Agreements"), the Company markets six consumer reference titles or
packages and one professional title, all on CD-ROM.
Consumer Reference CD-ROM Titles
Mayo Clinic Family Health. This title is a source of health care
information for family members of all ages, including information on nutrition,
wellness, first aid, the health care system and the symptoms, prognosis and
treatment for more than 1,000 diseases and disorders. In September 1997, the
Company introduced the updated version 4.0 of Mayo Clinic Family Health, adding
built-in Microsoft Internet Explorer browser support for linking to Mayo Health
O@sis web site, several new graphics and illustrations and a new Personal Food
Pyramid.
Mayo Clinic Family Pharmacist. Released in June 1994 and updated with a
new 1997 drug database, this title is a comprehensive home reference guide to
prescription and over-the-counter medications and therapeutic and diagnostic
procedures. The USP, DI Volume II, "Advice for The Patient" (The United States
Pharmacopeial Convention, Inc.) is the core database for the disc and has been
supplemented with information provided by pharmacists and physicians from Mayo.
The Company also added built-in Microsoft Internet Explorer browser support for
linking to Mayo Health O@sis on the Internet.
Mayo Clinic Ultimate Medical Guide II. Released in September 1997, it is
a combination of the latest versions of both Mayo Clinic Family Health and Mayo
Clinic Family Pharmacist packaged together. This powerful combination of two
highly-acclaimed titles is packed with information essential to family health.
With Mayo Clinic Family Health, consumers can search for in-depth facts about
diseases, nutrition, anatomy, common symptoms, home safety and more. Mayo Clinic
Family Pharmacist offers details on thousands of drugs, early detection and
first aid.
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<PAGE> 23
Mayo Clinic - The Total Heart. This title is a comprehensive source of
information concerning the heart, cardiovascular disease, diet plans and
exercise programs to promote a healthy heart. The print version of the title,
entitled Mayo Clinic Heart Book, was released by Mayo in August 1993, and the
Company released the interactive multimedia version in October 1993.
Mayo Clinic Sports, Health & Fitness. Released in November 1994, this
title was developed in cooperation with the Mayo sports medicine department and
in collaboration with ESPN. It is an individualized interactive fitness,
nutrition, and sports physiology guide.
Mayo Clinic Health Encyclopedia. First released in 1994 and updated in
1995, this product combines all four Mayo Clinic CD-ROM titles into a single
package.
Professional CD-ROM Title
PrimePractice. This title is a comprehensive resource developed to meet
the ongoing education needs of primary care physicians. PrimePractice is a
CD-ROM series marketed to physicians in North America specializing in internal
medicine, general practice or family practice. The first issue of this series
was completed in July 1994 and the last in December 1996. Subscribers to
PrimePractice receive a CD-ROM series covering current topics of interest to
primary care physicians including the latest developments in cardiovascular
disease, endocrinology, gastroenterology, hematology, pulmonary medicine and
other areas. Each issue of the series provides the physician with ten hours of
continuing medical education credits (CME). By subscribing to the series, a
physician can obtain up to 40 hours of CME on an annual basis. Although
requirements for annual CME vary from state to state, most primary care
physicians are required to obtain 50 hours of CME per year.
In December 1995, the Company entered into a Distribution Agreement with
Churchill Livingstone whereby Churchill Livingstone agreed to market
PrimePractice to physicians and others with influence over physicians'
continuing education. Before entering into this agreement, the Company marketed
PrimePractice through its own sales staff, catalogs and health sciences
bookstores. Churchill Livingstone was acquired by Harcourt Brace, Inc. in
September 1997 and the Company and representatives of Harcourt Brace, Inc. are
currently discussing a termination and settlement related to the Distribution
Agreement.
Agreement With Davidson & Associates, Inc. for CD-ROM Distribution
In late 1995, the Company entered into an agreement with Davidson &
Associates, Inc. to strengthen distribution capabilities. Under the agreement,
Davidson handles the sales and marketing of the Company's consumer oriented
family health reference CD-ROM titles. Davidson is a leading publisher and
distributor of multimedia educational and entertainment software for both the
home and school markets. As such, the Company believes that this agreement has
provided greater access to consumer channels while enabling the Company to focus
its marketing and sales staff on the Company's online business.
Marketing, Distribution and Manufacturing of CD-ROMs
The Company's non-retail distribution is done outside of the Davidson
agreement. This includes arrangements and sales to original equipment
manufacturers ("OEM") for bundling with the OEM's hardware. Bundling consists of
selling software titles to computer hardware vendors and computer and peripheral
manufacturers for inclusion with their products. In addition to revenue,
bundling creates positive word-of-mouth endorsements from consumers of the
Company's titles which could ultimately lead to greater sales at the retail
level.
The number of CD-ROM titles competing for retail shelf space has
increased substantially in recent years. In addition, the distribution channels
through which the Company sells its products are known for rapid change.
Mergers, consolidations and financial difficulties of both distributors and
retailers are typical as is the emergence of new retailers. This environment
breeds an intense competition among software products for shelf space and
retailer support. In order to remain competitive and maintain distributor
relationships, the Company's policy is to accept product returns from its
distributors.
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<PAGE> 24
All of the Company's CD-ROM titles are currently replicated by Sony Disc
Manufacturing ("Sony"), a division of Sony Electronic Publishing Company. Sony
also warehouses the Company's finished goods inventory and handles order
fulfillment. Although the Company anticipates that its relationship with Sony
will continue, the Company believes that other manufacturers are available to
replicate its titles and handle its order fulfillment.
TECHNOLOGY
The Company has implemented, and intends to continue to implement, a
combination of proprietary technologies developed in-house by the Company and
commercially obtained, licensed technologies. These technologies are employed in
hosting the Company's Web sites, delivering licensed and original content and
advertising, supporting content development and maintenance, transaction
processing, security, and back-end functions.
COMPETITION
The editorial environment in interactive media is new, highly
competitive and rapidly evolving. The competitive frame varies depending upon
the area of the company.
Online Competitors
There is significant interest in health-related content among online
consumers. Demographic factors and the growth of online audiences suggest that
the popularity of this content will continue to increase. Similarly, major
health advertisers are showing increased levels of interest in the Internet.
The key operators of health-related sites on the Internet today include:
Divisions or affiliates of print publishers, including Healthy Ideas
(Rodale Press), Phys (Conde Nast), and Thrive (jointly owned by Time Inc. and
America Online).
Ventures of online service firms, including Better Health (iVillage) and
Thrive (partly owned by America Online and Time Inc.).
Public Sector and institutional sites, including the National Institute
of Health and university sites. While these sites compete for viewer time and
attention, they do not typically compete for advertising or transactional
revenues.
Commercial online services, principally the proprietary health-related
content presented to subscribers to America Online and Microsoft Network.
Internet sites other than health-related sites, including general
interest sites, such as news sites and search engines, which often host some
health-related content in context of other editorial materials.
In addition, the online sites compete to some extent with other media,
including print and television. The Company believes that the principal
competitive factors which differentiate OnHealth from competing brands and sites
include timeliness of content, the users' perception of content interactivity,
content reliability and trustworthiness, design and usability factors,
comprehensiveness and level of promotion.
This level of competition may result in an environment in which content
or promotional expenses to the Company increase. It may also result in a higher
level of competition for key promotional vehicles. The known and prospective
competitors to the Company are often significantly larger and better financed
than the Company and will likely be better able to afford a more intense
competitive environment than the Company.
Web Site Production Competitors
The Company's web site production business competes with development
resources in independent production shops, advertising agencies and client
company's' in-house production resources. The Company believes
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that competitive factors that favor IVI's Web site production business include
better knowledge of the health marketplace, Company relationships acquired
through the OnHealth Network and an established base of talented professionals.
CD-ROM 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 those of
the Company, offer products that compete directly with one or more of the
Company's products. In the CD-ROM line of business, the Company competes with
other CD-ROM publishers for rights acquisition, retail and OEM distribution and
retail shelf space. The key competitive factors that may favor the Company
include the brand names on some of its successful titles and its existing retail
distribution relationships.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to its
success, and relies on trademark, copyright, trade secret and patent protection
to protect its proprietary rights. While the Company tries to assure that the
quality of its brand is maintained through such actions, there can be no
assurance that steps taken by the Company to protect its proprietary rights will
be adequate or that third parties will not infringe on the Company's
intellectual property. In addition, there can be no assurance that third parties
will not assert infringement claims against the Company which, even if not
meritorious, could result in the expenditure of substantial resources and
management effort.
LEGAL PROCEEDINGS
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 misappropriation of corporate opportunities and trade secrets by the
Company and its employees and sought award of monetary damages, exemplary
damages and royalties substantially in excess of $10.0 million. 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 plus interest
for damages sustained to its business. The jury verdict and the resulting
judgment entered by the court on March 24, 1998 is subject to motions for a new
trial, amended findings and for judgment notwithstanding the verdict and to
appeal to the Court of Appeals. The plaintiffs also have an action pending
against certain affiliates of the Company on the same grounds on which the
action against the Company was based. The Company has indemnified these
principles against any damages arising out of these claims.
In 1996, Berkshire Multimedia Group, Inc. ("Berkshire") initiated
mediation regarding a dispute with the Company. Shortly after an unsuccessful
mediation conference was held in September 1996, Berkshire Multimedia Group
filed a demand for arbitration alleging that the Company breached its
obligations under a contract. An arbitration hearing was completed in January
1997, and in February 1997 the arbitration panel awarded Berkshire $300,000.
Hennepin County (Minnesota) District Court vacated that award on May 29, 1997,
and Berkshire appealed the case. The Court of Appeals heard the case in late
1997 and reinstated the original decision of the arbitration panel in January
1998. On February 25, 1998, the Hennepin County (Minnesota) District Court
issued an order directing that judgment be entered against the Company in the
amount of $300,000 plus interest. In March 1998, the Company paid Berkshire
$305,000 in full satisfaction of such judgement.
EMPLOYEES
As of March 31, 1998, the Company employed 25 people on a full-time
basis. As the situation arises, the Company also uses part-time employees. None
of the Company's employees are represented by a labor union and the Company
considers its relationship with its employees to be good. The Company believes
that some measure of its future success is dependent upon attracting and
retaining qualified employees, and competition for hiring such employees is
intense.
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DESCRIPTION OF PROPERTY
During 1997, the Company's principal executive and administrative
offices consisted of approximately 40,000 square feet in an office building in
Eden Prairie, Minnesota, a suburb of Minneapolis. The lease also covered
approximately 2,000 square feet of storage space. The Company terminated the
Eden Prairie lease effective March 31, 1998.
Effective in the first quarter of 1998, the Company's principal
executive and administrative offices are located in Seattle, Washington.
Starting in January 1998, the Company began subleasing approximately 1,500
square feet of office space in Seattle, Washington on a month-to-month basis.
Subsequently, the Company has entered into a lease for approximately 7,000
square feet of space located at 808 Howell Street, suite 400, Seattle,
Washington 98101. The lease expires approximately 62 months from the move in
date which occurred May 1, 1998.
The Company's sales personnel are currently located in an office
building in Edina, Minnesota, a suburb of Minneapolis. The lease is for
approximately 1,000 square feet and expires in September 1998.
The Company also leases space in the following locations: (1) 4,124
square feet in an office building in Carlsbad, California ending in June 1999
and (2) 790 square feet in an office building in Carlsbad, California ending in
May 1998. The Company does not currently intend to renew either of these leases
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common
Stock offered hereby; nor will such proceeds be available for the Company's use
or benefit.
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SELLING SHAREHOLDERS
On April 10, 1998, Advantage Fund II Ltd. acquired 3,000 shares of
Preferred Stock and 40,067 of the Warrants and Koch Industries, Inc. acquired
2,000 shares of Preferred Stock and 26,711 of the Warrants.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock by the Selling Shareholders and as
adjusted to give effect to the sale of the Shares offered hereby:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER OFFERING(2)
SHARES BENEFICIALLY ---------------------
OWNED PRIOR TO SHARES BEING
SELLING SHAREHOLDER OFFERING (1) OFFERED(1) SHARES PERCENT
------------------- ------------------- ------------ ------ -------
<S> <C> <C> <C> <C>
Advantage Fund II Ltd. 1,290,000 1,290,000 -0- -0-
--------- --------- --- ---
Koch Industries, Inc. 860,000 860,000 -0- -0-
--------- --------- --- ---
</TABLE>
(1) The number of shares of Common Stock shown as beneficially owned and
offered by the Selling Shareholders represents the number of shares
which the Company has initially agreed to register. Pursuant to Rule 416
under the Securities Act, the number of shares of Common Stock offered
by the Selling Shareholders hereby and included in the Registration
Statement of which this Prospectus is a part also includes such
presently indeterminate number of additional shares as may be issued on
conversion of the Preferred Stock, including the payment of dividends
thereon in additional shares of Preferred Stock pursuant to the
provisions of the Certificate of Designation of the Preferred Stock
regarding determination of the applicable conversion price and upon
exercise of the Warrants. Accordingly, the actual number of shares of
Common Stock issued or issuable upon the conversion of the Preferred
Stock and upon exercise of the Warrants thereon is subject to adjustment
depending upon factors which cannot be predicted by the Company at this
time, including among others, the future market prices of the Common
Stock and the payment of dividends on the Preferred Stock in additional
shares of Preferred Stock. Pursuant to the terms of the Certificate of
Designation of the Preferred Stock, the Preferred Stock is convertible
by each holder thereof only to the extent that the number of shares of
Common Stock then beneficially owned by such holder and its related
persons (not including shares underlying unconverted shares of Preferred
Stock) would not exceed 4.9% of the then outstanding shares of Common
Stock as determined in accordance with Sections 13(d) and 16 of the
Exchange Act. Accordingly, the number of shares of Common Stock set
forth for a Selling Shareholder may exceed the actual number of shares
of Common Stock that the Selling Shareholder could own beneficially at
any given time through its ownership of the Preferred Stock. The above
numbers assume that the Selling Shareholders will exercise the Warrants
for cash. If the Selling Shareholders use the cashless exercise
alternative, the actual number of shares of Common Stock issued will be
fewer, depending on the market value of the underlying shares of Common
Stock immediately prior to exercise.
(2) 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 its affiliates within the past three years.
The Company has 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 Shares, and has
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 from the effectiveness of the Registration
Statement (ii) the date that the Selling Shareholders may sell all of its Shares
under Rule 144 of the Securities Act, or (iii) such date that none of the
Selling Shareholders own any of the Shares offered hereby.
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<PAGE> 28
PLAN OF DISTRIBUTION
The Selling Shareholders may sell the Shares from time to time in
transactions on the Nasdaq SmallCap Market, in the over-the-counter market, in
negotiated transactions, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. The
Selling Shareholders may effect such transactions by selling the Shares to or
through broker-dealers' including block trades in which brokers or dealers will
attempt to sell the Shares as agent but may position and resell the block as
principal to facilitate the transaction, or in one or more underwritten
offerings on a firm commitment or best efforts basis. Sales of Selling
Shareholders' Shares may also be made pursuant to Rule 144 under the Securities
Act, where applicable.
To the extent required under the Securities Act, the aggregate amount of
Selling Shareholders' Shares being offered and the terms of the offering, the
names of any such agents, brokers, dealers or underwriters and any applicable
commission with respect to a particular offering will be set forth in an
accompanying Prospectus supplement. Any underwriters, dealers, brokers or agents
participating in the distribution of the Shares may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Shareholders or the purchasers of the Shares for whom such underwriters or
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation to a particular underwriter or broker-dealer might be in
excess of customary commissions). The Selling Shareholders will be responsible
for all brokerage commissions and other amounts payable with respect to any sale
of Shares with respect to such Selling Shareholders and any legal, accounting or
other expenses incurred.
From time to time, one or more of the Selling Shareholders may pledge,
hypothecate or grant a security interest in some or all of the Shares owned by
them, and the pledgees, secured parties or person to whom such securities have
been hypothecated shall, upon foreclosure in the event of default, be deemed to
be Selling Shareholders hereunder. In addition, a Selling Shareholder may, from
time to time, sell short the Common Stock of the Company, and in such instances
the Shares offered hereby may be used to cover such short sales and this
Prospectus may be delivered in connection with such sales.
From time to time, one or more of the Selling Shareholders may transfer,
pledge, donate or assign such Selling Shareholders' Shares to lenders or others
and each of such persons will be deemed to be a "Selling Shareholder" for
purposes of this Prospectus. The number of Selling Shareholders' Shares
beneficially owned by those Selling Shareholders who so transfer, pledge, donate
or assign Selling Shareholders' Shares will decrease as and when they take such
actions. The plan of distribution for Selling Shareholders' Shares sold
hereunder will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be Selling Shareholders hereunder.
A Selling Shareholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the Common
Stock in the course of hedging the position they assume with such Selling
Shareholder, including, without limitation, in connection with distributions of
the Common Stock by such broker-dealers. A Selling Shareholder may also enter
into options or other transactions with broker-dealers that involve the delivery
of the Common Stock to the broker-dealers, who may then resell or otherwise
transfer such Common Stock. A Selling Shareholder may also loan or pledge the
Common Stock to a broker-dealer and the broker-dealer may sell the Common Stock
so loaned or, upon a default, may sell or otherwise transfer the pledged Common
Stock.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirements is available and is complied with.
The Selling Shareholders and any broker-dealers who act in connection
with the sale of Shares hereunder may be deemed to be "underwriters," as such
term is defined in the Securities Act, and any commissions received by them or
profit on any resale of the Shares might be deemed to be underwriting discounts
and commissions under the Securities Act.
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<PAGE> 29
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not bid for or purchase
shares of Common Stock during a period which commences one business day (5
business days, if the Company's public float is less than $25 million or its
average daily trading volume is less than $100,000) prior to such person's
participation in the distribution, subject to exceptions for certain passive
market making activities. In addition and without limiting the foregoing, each
Selling Shareholder will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, including without limitation,
Regulation M, which provisions may limit the timing of purchases and sales of
shares of the Company's Common Stock by such Selling Shareholder.
The Company is bearing all costs relating to the registration of the
Shares. Any commissions, discounts or other fees payable to brokers or dealers
in connection with any sale of the Shares will be borne by the Selling
Shareholders, the purchasers participating in such transaction, or both. None of
the proceeds from the sale of the Shares by the Selling Shareholders will be
received by the Company. The Company and the Selling Shareholders each have
agreed to indemnify the other against certain liabilities, including liabilities
arising under the Securities Act.
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the directors and executive officers of
the Company as of May 22, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert N. Goodman 46 President and Chief Executive Officer of the Company
Michael D. Conway 30 Controller, Vice President of Finance, Secretary
Rebecca Farwell 36 Editor in Chief
Jim L. Dixon 33 Vice President of Development
Deborah K. Taylor 39 Vice President of Marketing
Miriam Adelman 26 Vice President of New Media
Timothy J. Walsh 36 Vice President of Sales
Michael A. Brochu 44 Chairman of the Board of Directors
Ronald E. Eibensteiner 47 Director
Alan D. Frazier 46 Director
Timothy I. Maudlin 47 Director
Ann Kirschner 47 Director
Ram Shriram 41 Director
Rick Thompson 38 Director
</TABLE>
Executive officers of the Company are elected at the discretion of the
Board of Directors with no fixed term. There are no family relationships between
or among any of the executive officers or directors of the Company.
BACKGROUNDS OF EXECUTIVE OFFICERS AND DIRECTORS
ROBERT N. GOODMAN. Mr. Goodman joined the Company in November 1997 as
president and chief executive officer. From April 1997 to November 1997, he was
the director of business development for MSNBC Interactive News, LLC. From
December 1995 to April 1997, Mr. Goodman was an independent consultant working
for Microsoft Corporation. Mr. Goodman was in the process of moving from San
Francisco, CA to Seattle, WA during October and November 1995. From November
1993 to October 1995, he was Assistant General Counsel for
27
<PAGE> 30
The 3DO Company. From April 1993 to November 1993, Mr. Goodman was General
Counsel for Asymetrix Corporation.
MICHAEL D. CONWAY. Mr. Conway joined the Company in early January 1998
as controller and vice president of finance. From November 1997 to December
1997, he worked as an independent contractor for PhotoDisc, Inc. - a developer
of high-resolution photographs on CD-ROM , and Sierra On-Line, Inc.- a leader in
entertainment software and a subsidiary of Cendant. From May 1996 to October
1997, Mr. Conway served as the Accounting Manager at Sierra On-Line, Inc. From
August 1994 to May 1996, Mr. Conway served as a Senior Accountant at Deloitte &
Touche LLP. From October 1992 to August 1994, he held various positions at KPMG
Peat Marwick including Senior Accountant. Mr. Conway received his B.A. in
Economics/Accounting from Claremont McKenna College, and his M.B.A. from the
Claremont Graduate School's Peter Drucker School of Management.
REBECCA FARWELL. Ms. Farwell joined the Company in early February 1998.
Prior to that, she was the editorial director for Discovery Channel Online
(DCOL) and Discovery Publishing. She began her career at the Discovery Channel
in 1987 as the managing editor of TDC Magazine.
JIM L. DIXON. Mr. Dixon joined the Company in early January 1998 as Vice
President of Development. From October 1996 to December 1997, Jim was the
principal of his own business (The Voodoo Softworks), where he secured several
contracts with Microsoft and other companies as an independent software
development house. From March 1996 to October 1996, he was the lead developer
for Alpenglow, Inc., a small multimedia and web development house. From February
1994 to March 1996, he was the lead developer for Medio Multimedia, Inc.--a
producer of multimedia title and magazine CD-ROMs. And from September 1990 to
February 1994, Jim was a software test manager at Microsoft, in charge of the
Visual Basic products. In 1988, he graduated with a B.S. in Computer Science and
Minor in Business from the Evergreen State College in Olympia, WA.
DEBORAH K. TAYLOR. Ms. Taylor joined the Company in January 1998 as Vice
President of Marketing. From April 1994 to December 1997, she was employed as a
Senior Vice President, Management Supervisor for Elgin DDB, the Seattle office
of DDB, one of the world's largest advertising and communications agencies,
managing new business and the Nordstrom retail account. From January 1990 to
April 1994, Ms. Taylor was the Vice President, Account Director of McCann
Erickson in Seattle, another worldwide advertising agency. At McCann Erickson,
she ran the strategic communications efforts for several consumer products
accounts. Ms. Taylor has a B.A. in American History from Mills College in
California.
MIRIAM ADELMAN. Ms. Adelman joined the Company in March 1998 as vice
president of new media. From November 1996 to March 1998, she ran Adelwave
Productions,a sole proprietorship that produced websites for Microsoft. From
June 1994 to November 1996, Miriam worked as an interactive media producer and
marketing consultant for Microsoft. From September 1993 to June 1994, Miriam was
a freelance illustrator for print magazines. Miriam received her BA in studio
art from Carleton College.
TIMOTHY J. WALSH. Mr. Walsh has been Vice President of Sales and
Marketing since October 1996. Prior thereto, Mr. Walsh was the Vice President of
International Operations at TRO Learning, Inc. from October 1995 to September
1996. Mr. Walsh held various other management positions during his 10 years at
that company.
MICHAEL A. BROCHU Mr. Brochu was appointed as a member of the Company's
Board of Directors in April 1997 and has also served as Chairman of the Company
since October 1997. Mr. Brochu has served as President and Chief Executive
Officer of Primus since November 1997. From October 1995 to October 1997, he
served as President and Chief Operating Officer of Sierra On-Line, Inc. and as
its Chief Financial Officer and Executive Vice President from July 1994 to
October 1995. From 1987 to July 1994, Mr. Brochu served in the positions of
Senior Vice President, Chief Financial Officer and Chief Operating Officer of
Burlington Environmental.
RONALD E. EIBENSTEINER Mr. Eibensteiner has been a Director of the
Company since October 1997. He also served as Director of the Company from
February 1991 to June 1997. Mr. Eibensteiner has served as President of Wyncrest
Capital, Inc., a venture capital firm, since he founded it in January 1992. Mr.
Eibensteiner is also
28
<PAGE> 31
independent consultant. Mr. Eibensteiner is a director of OneLink
Communications, Inc., Reality Interactive, Inc. and Intranet Solutions, Inc.
ALAN D. FRAZIER Mr. Frazier has been a Director of the Company since
January 1994. He has been managing partner of Frazier & Company LP, a venture
capital firm, since 1991. In addition, Mr. Frazier is a Director of NeoPath,
Inc., InControl, Inc. and Integrated Medical Resources, Inc.
TIMOTHY I. MAUDLIN Mr. Maudlin was appointed as a member of the
Company's Board of Directors in August 1991. Mr. Maudlin also served as the
Company's Acting President and Chief Executive Officer from October 1997 to
November 1997 and as Chairman from August 1996 to October 1997. Mr. Maudlin has
been Managing Partner of Medical Innovation Partners, a medical venture capital
firm, since December 1988 and has also served as an officer of an affiliated
management company. Mr. Maudlin also serves as a director of Curative Health
Services, Inc.
ANN KIRSCHNER Ms. Kirschner was elected as a Director of the Company on
February 23, 1998. She has served as Vice President of NFL Interactive for NFL
Enterprises, Inc. since December 1994, prior to which, she served as President
of Comma Communications for more than two years.
RAM SHRIRAM Mr. Shriram was elected as a Director of the Company on
February 23, 1998. Mr. Shriram has served as Vice President of Netscape
Communications Corp., an internet company, since November 1994. Mr. Shriram
served as Director, Channel Sales of Network Computing Devices from October 1990
to November 1994.
RICK THOMPSON Mr. Thompson was elected as a Director of the Company on
February 23, 1998. Mr. Thompson has served as Vice President of Microsoft
Corporation's Hardware Division since October 1987.
Executive officers are elected by the Board of Directors of the Company
at the first meeting after each annual meeting of shareholders and hold office
until their successors are elected and duly qualified.
29
<PAGE> 32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned by (i) each director and nominee for election to
the Board of Directors of the Company; (ii) each of the named executive officers
in the Summary Compensation Table; (iii) all directors and executive officers as
a group; and (iv) to the best of the Company's knowledge, all beneficial owners
of more than 5% of the outstanding shares of the Company's Common Stock as of
May 15, 1998. Unless otherwise indicated, the shareholders listed in the table
have sole voting and investment power with respect to the shares indicated.
<TABLE>
<CAPTION>
COMMON SHARES
NAME (AND ADDRESS OF 5% BENEFICIALLY PERCENT OF
HOLDER) OR IDENTITY OF GROUP(1) OWNED(2) CLASS(2)
- ------------------------------- ------------- ----------
<S> <C> <C>
Robert N. Goodman 0 --
Michael A. Brochu 12,500(3) *
Timothy I. Maudlin 762,620(4) 7.4%
Alan D. Frazier 251,135(5) 2.5%
Ronald E. Eibensteiner 327,062(6) 3.2%
Ann Kirschner 0 --
Ram Shriram 0 --
Rick Thompson 0 --
Timothy J. Walsh 66,053(7) *
Joy A. Solomon 182,500(8) 1.8%
Perkins Group 1,765,925(9) 17.4%
Medical Innovation Partners 707,922(10) 6.9%
Wayne W. Mills 529,500(11) 5.2%
Nevis Capital Management, Inc. 902,800(12) 8.9%
All Directors and Executive 1,283,517(13) 12.2%
Officers as a Group (9 persons)
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
(1) The addresses of the more than 5% holders are: Perkins Group (Perkins
Capital Management, Inc. and Perkins Opportunity Fund) - 730 East Lake
Street, Wayzata, MN 55391; Medical Innovation Partners and Timothy I.
Maudlin - 421 Opus Center, 9900 Bren Road East, Minneapolis, MN 55343;
Alan D. Frazier - Two Union Square, 601 Union Street, Suite 2110,
Seattle, WA 98101; Wayne W. Mills - 5500 Wayzata Boulevard, Suite 290,
Minneapolis, MN 55416; Nevis Capital Management, Inc. - 1119 St. Paul
Street, Baltimore, MD 21202.
(2) Under the rules of the Securities and Exchange Commission, shares not
actually outstanding are nevertheless deemed to be beneficially owned by
a person if such person has the right to acquire the shares within 60
days. Pursuant to such SEC rules, shares deemed beneficially owned by
virtue of a person's right to acquire them are also treated as
outstanding when calculating the percent of class owned by such person
and when determining the percentage owned by a group.
(3) Includes 12,500 shares which may be purchased by Mr. Brochu upon
exercise of currently exercisable options.
(4) Includes 487,376 shares held by Medical Innovation Fund ("MIF"), 135,853
shares held by Medical Innovation Fund II ("MIF II") and 909 shares held
by MICI Limited Partnership ("MLP"); 25,150 shares held by or for family
members; 83,784 shares which may be purchased by MIF upon the exercise
of a currently exercisable warrant; and 15,000 shares which may be
purchased by Mr. Maudlin upon exercise of currently exercisable options.
Mr. Maudlin is the (i) Managing General Partner of Medical Innovation
Partners ("MIP"), which is the General Partner of MIF, (ii) Managing
General Partner of Medical Innovation Partners II ("MIP II"), which is
the General Partner of MIF II and (iii) General Partner of MLP and an
officer and principal shareholder of Medical Innovation Capital, Inc.,
which is the Managing General Partner of MLP.
(5) Includes 160 shares held by Frazier & Company, Inc., 2,260 shares held
by Frazier Management LLC, 224,349 shares which may be purchased by
Frazier & Company, L.P. upon exercise of a currently exercisable warrant
and 15,000 shares which may be purchased by Mr. Frazier upon exercise of
currently exercisable options. Mr. Frazier is the sole stockholder of
Frazier & Company, Inc., which is the managing member of
30
<PAGE> 33
Frazier Management, LLC and the managing member of Frazier & Company,
L.P. Mr. Frazier may be deemed to share voting and investment power with
respect to such shares. Mr. Frazier disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest in such
shares arising from his interest in the entities referred to herein.
(6) Includes 135,853 shares held by MIF II, 33,750 shares which may be
purchased by Mr. Eibensteiner upon exercise of currently exercisable
options and 11,217 shares which may be purchased by Mr. Eibensteiner
upon exercise of a currently exercisable warrant. Mr. Eibensteiner is a
limited partner of MIP II, which is a General Partner of MIF II. Mr.
Eibensteiner disclaims beneficial ownership of such shares.
(7) Includes 16,053 shares which may be purchased by Mr. Walsh upon exercise
of currently exercisable options.
(8) Includes 182,500 shares which may be purchased by Ms. Solomon upon
exercise of currently exercisable options.
(9) Of the shares, 1,181,550 shares are owned by clients of Perkins Capital
Management, Inc. ("Perkins Capital") and 584,375 shares are owned by
Perkins Opportunity Fund ("Perkins Fund"). Perkins Capital has the sole
power to vote 1,061,675 shares, including 584,375 shares held by Perkins
Fund, and no power to vote 703,620 shares. Perkins Capital has the sole
investment power for all of the shares, including the 584,375 shares
held by Perkins Fund. The Company has relied on information contained in
a Schedule 13G Amendment filed with the Securities and Exchange
Commission on February 11, 1998 by Perkins Capital and Perkins Fund as a
group.
(10) Includes 487,376 shares held by MIF, 135,853 shares held by MIF II and
909 shares held by MLP and 83,784 shares which may be purchased by MIF
upon exercise of a currently exercisable warrant. MIP is the General
Partner of MIF, MIP II is the General Partner of MIF II and Timothy I.
Maudlin is the General Partner of MLP.
(11) The Company has relied on information contained in a Schedule 13D
Amendment dated September 10, 1997 filed with the Securities and
Exchange Commission by Mr. Mills.
(12) The Company has relied on information contained in a Schedule 13G dated
April 30, 1998 filed with the Securities and Exchange Commission by
Nevis Capital Management, Inc., a registered investment advisor.
(13) Includes 103,520 shares which may be purchased upon exercise of
currently exercisable options and 308,133 shares which may be purchased
upon exercise of currently exercisable warrants.
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized Common Stock of the Company consists of 30,000,000
shares, no par value. As of May 15, 1998, there were approximately 10,136,710
shares of Common Stock outstanding held of record by 117 shareholders. Holders
of Common Stock are entitled to one vote per share on all matters submitted to a
vote of shareholders and 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 the liquidation, dissolution or winding up of the
Company, 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.
SERIES B CONVERTIBLE PREFERRED STOCK
The Preferred Stock accrues dividends quarterly in the amount of 5% per
annum. The Preferred Stock is convertible into Common Stock as follows: (i)
during the period from April 10 through July 9, 1998, the Preferred Stock,
together with accrued and unpaid dividends, may be converted into Common Stock
at a conversion price equal to $9.73, (ii) during the period from July 10, 1998
through October 7, 1998, the Preferred Stock, together with accrued and unpaid
dividends, may be converted into Common Stock at a conversion price equal to an
average of the closing bid prices of the Common Stock on selected dates prior to
conversion or $9.73, whichever is lower, and (iii) during the period from
October 8, 1998 through January 5, 1999, the Preferred Stock, together with
accrued and unpaid dividends, may be converted into Common Stock at a conversion
price equal to a 5% discount to the average of the closing bid prices of the
Common Stock computed from selected dates prior to the conversion or $9.73,
whichever is lower. Thereafter, each Preferred Share, together with accrued and
unpaid dividends, is convertible at a price per share of Common Stock at a
discount of 10% from the average of the closing bid prices of the Common Stock
computed from selected dates prior to the conversion or $9.73, whichever is
lower. Pursuant to the terms of the Certificate of Designation for the Preferred
Stock, the $9.73 amount and the percentage discounts described above are subject
to adjustment in certain circumstances and no holder can convert such holder's
Preferred Stock if such conversion would cause its beneficial ownership of
Common Stock (other than shares so owned through
31
<PAGE> 34
ownership of the Preferred Stock) to exceed 4.9%.
WARRANTS
Other than the Warrants issued to the Selling Shareholders described
below, the Company has outstanding warrants to purchase 547,260 shares of
Common Stock. One, an underwriters' warrant for 100,000 shares of Common Stock
exercisable at a price of $17.04 per share expiring October 6, 1999. Another is
with Frazier Investments for 224,349 shares exercisable at a price of $6.61 per
share expiring June 3, 2000. The balance of the warrants are with various
parties with varying exercise prices.
The Warrants. On April 10, 1998, in connection with the issuance of the
Preferred Stock, the Company issued to the Selling Shareholders Warrants to
purchase a total of 66,778 shares of Common Stock at an exercise price of $11.23
per share (subject to adjustment). The Warrants expire April 10, 2003.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Article V of the Company's Bylaws (the "Bylaws"), requires
indemnification of directors or officers of the Company to the fullest extent
not prohibited by the Minnesota Business Corporation Act (the "Act"). The
effects of the Bylaws and the Act (the "Indemnification Provisions") are
summarized as follows:
(a) The Indemnification Provisions grant a right of indemnification
in respect of any action, suit or proceeding (other than an action by or in the
right of the Company) against expenses (including attorney fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred, if the
person concerned acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Company, was not
adjudged liable on the basis of receipt of an improper personal benefit and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. The termination of an action, suit or
proceeding by judgment, order, settlement, conviction or plea of nolo contendere
does not, of itself, create a presumption that the person did not meet the
required standards of conduct.
(b) The Indemnification Provisions grant a right of indemnification
in respect of any action or suit by or in the right of the Company against the
expenses (including attorney fees) actually and reasonably incurred if the
person concerned acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Company, except
that no right of indemnification will be granted if the person is adjudged to be
liable to the Company.
(c) Every person who has been wholly successful on the merits of a
controversy described in (a) or (b) above is entitled to indemnification as a
matter of right.
(d) Because the limits of permissible indemnification under
Minnesota law are not clearly defined, the Indemnification Provisions may
provide indemnification broader than that described in (a) and (b).
(e) The Company may advance to a director or officer the expenses
incurred in defending any action, suit or proceeding in advance of its final
disposition if the director or officer affirms in writing in good faith that he
or she has met the standard of conduct to be entitled to indemnification as
described in (a) or (b) above and furnishes the company a written undertaking to
repay any amount advanced if it is determined that the person did not meet the
required standard of conduct.
The Company may obtain insurance for the protection of its directors and
officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of shareholders or directors or
otherwise. The Company believes that its Articles of Incorporation and Bylaw
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the
32
<PAGE> 35
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock, initially offered to the public on October
6, 1993, is quoted on the Nasdaq SmallCap Market system under the symbol "IVIP."
The following table sets forth the high and low bid quotations for the
Company's Common Stock as reported by Nasdaq SmallCap for the last two fiscal
years. Such quotations reflect inter-dealer prices, without retail mark-up, mark
down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ---- ---
<S> <C> <C>
Second Quarter* 8.625 $ 5.375
First Quarter 6.00 $ 2.625
1997
----
Fourth Quarter $ 4 1/4 $ 2
Third Quarter 4 5/16 2
Second Quarter 3 7/8 2 1/16
First Quarter 4 1/2 2 7/8
1996
----
Fourth Quarter $ 3 7/8 $ 2 15/16
Third Quarter 7 3/8 1 1/8
Second Quarter 14 3/8 5 7/8
First Quarter 14 1/2 11 1/4
</TABLE>
* Through May 20, 1998.
At May 15, 1998, there were approximately 117 record holders of the
Company's Common Stock, excluding shareholders whose stock is held either in
nominee name and/or street name brokerage accounts. Based on information which
the Company obtained from its transfer agent, there are approximately 2,508
shareholders of the Company's Common Stock, including shareholders whose stock
is held either in nominee name and/or street name brokerage accounts.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the near
future. To date, the Company has incurred losses and presently expects to retain
its future anticipated earnings to finance development of and expansion of its
business. The payment by the Company of dividends, if any, on its Common Stock
in the future is subject to the discretion of the Board of Directors and will
depend on the Company's earnings, financial condition, capital requirements and
other relevant factors.
33
<PAGE> 36
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation paid or to be paid
by the Company, as well as certain other compensation paid or accrued, during
each of the Company's last three fiscal years to each person who served as Chief
Executive Officer during fiscal 1997 and the only other executive officer who
earned more than $100,000 in salary and bonuses in 1997.
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------
Awards Payouts
--------------------------------
Annual Compensation Restricted LTIP All Other
Name and Principal Fiscal ------------------------------------ Stock Awards Payouts Compensation
Position Year Salary($) Bonus($) Other($) ($) Options ($) ($)
- ------------------ ------ --------- -------- -------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert N. Goodman 1997 53,548 -- -- -- 450,000 -- --
President and Chief
Executive Officer
Timothy I. Maudlin 1997 0 -- -- -- 65,000 -- --
Former President and
Chief Executive
Officer(1)
Joy A. Solomon 1997 180,000 -- -- -- 45,000 -- --
Former President and 1996 171,000 21,000 -- -- 180,000 -- --
Chief Executive Officer 1995 171,000 45,000 -- -- 30,000 -- 1,000
Timothy J. Walsh 1997 113,300 11,330 -- -- 84,212 -- --
Vice President of 1996 27,659 22,729 -- -- 30,000 -- --
Sales(2)
</TABLE>
- --------------
(1) Mr. Maudlin, a director of the Company, served as an interim President
and Chief Executive Officer of the Company from October 1997 to November
1997, for which he received a stock option to purchase 60,000 shares of
the Company's Common Stock and no cash compensation.
(2) Mr. Walsh joined the Company in October 1996.
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<PAGE> 37
OPTION GRANTS DURING 1997 FISCAL YEAR
The following table provides information regarding stock options granted
during fiscal 1997 to the named executive officers in the Summary Compensation
Table. The Company has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
Percent of Total
Options Potential Realizable Value at
Number of Shares Granted to Exercise or Assumed Annual Rates of Stock Price
Underlying Options Employees Base Price Expiration Appreciation for Option
Name Granted in Fiscal Year Per Share(1) Date Term(2)
- ------------------ ------------------ ---------------- ------------- ---------- -----------------------------------
<S> <C> <C> <C> <C> <C>
5% 10%
-- ---
Robert N. Goodman 450,000(3) 37.3% $ 2.50 12/10/07 $ 707,506 $1,792,960
Timothy I. Maudlin 5,000(4) 0.4% $ 3.22 02/28/07 $ 10,125 $ 25,659
60,000(5) 5.0% $ 2.31 10/08/07 $ 87,165 220,893
Joy A. Solomon 45,000(6) 3.7% $ 3.25 02/18/07 $ 91,976 $ 233,085
Timothy J. Walsh 30,000(6) 2.5% $ 3.25 02/18/07 $ 61,317 $ 155,390
50,000(5) 4.1% $ 2.31 10/08/07 $ 72,637 $ 184,077
4,212(7) 0.3% $ 2.69 10/13/07 $ 7,126 $ 18,058
</TABLE>
- ----------
(1) The exercise price is equal to the fair market value of the Common Stock
on the date of each grant.
(2) The potential realizable value portion of the foregoing table
illustrates value that might be realized upon exercise of the options
immediately prior to the expiration of their term, assuming the
specified compounded rates of appreciation on the Company's Common Stock
over the term of the options. These numbers do not take into account
provisions of certain options providing for termination of the option
following termination of employment, nontransferability or vesting over
periods of up to five years.
(3) The option was granted on December 11, 1997 and will become exercisable
to the extent of 37,500 shares on November 10, 1998, 3,125 shares on the
tenth day of each month from December 10, 1998 through November 10, 2001
and, subject to acceleration if the Company's stock price reaches
certain targets, 300,000 shares on November 10, 2002.
(4) The option was granted on March 1, 1997 and became exercisable to the
extent of 1,250 shares on each of September 2, 1997 and March 1, 1998
and will become exercisable to the extent of 1,250 shares on each of
March 1, 1999 and 2000.
(5) The option was granted on October 8, 1997 and will become exercisable in
full on October 8, 2002, subject to acceleration if the Company's stock
price reaches certain targets.
(6) The option was granted on February 19, 1997 and will become exercisable
in full on February 19, 2002, subject to acceleration if the Company's
stock price reaches certain targets.
(7) The option was granted on October 13, 1997 and became exercisable to the
extent of 1,053 shares immediately and, subject to acceleration if the
Company's stock price reaches certain targets, will become exercisable
to the extent of 3,159 shares on October 13, 2004.
35
<PAGE> 38
OPTION EXERCISES DURING 1997 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information as to options exercised by the
named executive officers in the Summary Compensation Table during fiscal 1997
and the number and value of all outstanding options at December 31, 1997. The
Company has no outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Shares Options at December 31, 1997 Money Options at December
Acquired Value Exercisable/ 31, 1997 Exercisable/
Name on Exercise Realized Unexercisable Unexercisable(1)
- ---- ----------- -------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Robert N. Goodman -- -- 0 exercisable $0
450,000 unexercisable $28,350
Timothy I. Maudlin -- -- 1,250 exercisable $0
63,750 unexercisable $138,600
Joy A. Solomon -- -- 135,000 exercisable $137,500
175,000 unexercisable $357,500
Timothy J. Walsh -- -- 16,053 exercisable $0
98,159 unexercisable $12,650
</TABLE>
(1) Value is calculated on the basis of the difference between the option
exercise price and $2.563, the closing sale price for the Company's
Common Stock at December 31, 1997 as quoted on the Nasdaq SmallCap,
multiplied by the number of shares underlying the option.
COMPENSATION OF DIRECTORS
DIRECTORS' FEES. The Company's directors receive no fees for attendance
at meetings of the Board of Directors, but they are reimbursed for out-of-pocket
expenses relating to attendance at the meetings; provided, however, Mr. Brochu
is paid an annual fee of $30,000 for his services as Chairman of the Board, as
well as out-of-pocket expenses.
STOCK OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. The Director Option Plan
has provided for the automatic option grants to each director who is not an
employee of the Company (a "Non-Employee Director") as follows: (i) 25,000 share
option upon initial election and (ii) 5,000 share option on March 1 of each year
thereafter. The per share option price is equal to 100% of the fair market value
of the Common Stock on the date of grant. The options vest to the extent of
one-fourth of the shares immediately and on each of the first three anniversary
dates of the date of grant; provided, however, that the option may be exercised
as to the vested shares during the term of the option beginning six months and
one day after the date of grant. The options expire on the earlier of (i) 10
years after the date of grant (provided, however, that options granted to a
Non-Employee Director who is a party to a partnership or other agreement
requiring a reduction in compensation pursuant to such agreement based on the
value of options granted under the Plan, shall have a five-year term) and (ii)
one year after the Non-Employee Director ceases to be a director for any reason.
On December 11, 1997, the Board adopted, subject to shareholder
approval, the 1997 Stock Option Plan, which provides for similar automatic
grants to Non-Employee Directors.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
In August 1996, the Company entered into a two-year employment agreement
with Joy Solomon, former President and Chief Executive Officer, pursuant to
which Ms. Solomon received an annual base salary of $171,000. Pursuant to a
Separation Agreement and Release of Claims ("Separation Agreement") entered into
between the Company and Ms. Solomon, Ms. Solomon's employment with the Company
terminated on December 31, 1997. Under
36
<PAGE> 39
the Separation Agreement, Ms. Solomon will receive her base salary as in effect
on December 31, 1997 for the period January 1, 1998 through June 30, 1999. In
addition, the Separation Agreement amended Ms. Solomon's stock options to
provide that the options shall continue to vest according to their respective
vesting schedules until June 30, 1999 and shall be exercisable to the extent
vested until the respective original expiration dates. The Separation Agreement
contains mutual releases and is subject to confidentiality provisions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Alan D. Frazier, a director of the Company, is a principal of Frazier &
Company, L.P. In 1997, the Company paid Frazier & Company, L.P. a total of
$7,230 for financial consulting services.
On November 22, 1996, the Company issued convertible debentures in the
principal amount of $3,500,250, which were convertible into the Company's Common
Stock at a conversion price of $3.25 per share. On October 1, 1997, primarily to
meet maintenance requirements for continued listing on the Nasdaq SmallCap
Market and to improve its balance sheet as the Company sought various financing
alternatives, the Company reduced the conversion price to $2.00 per share to
provide an incentive for conversion. On October 28, 1997, all of the debentures
were converted into 1,750,125 shares of the Company's Common Stock. Certain
officers, directors and principal shareholders purchased debentures in the
aggregate principal amount of $897,500, which debentures were converted into an
aggregate of 448,750 shares of the Company's Common Stock on October 28, 1997,
including (i) 50,000 shares acquired by Ronald E. Eibensteiner, a director of
the Company, (ii) 100,000 shares acquired by Medical Innovation Fund, a more
than 5% holder and of which Timothy I. Maudlin, a director of the Company, is an
affiliate, (iii) 125,000 shares acquired by Frazier Healthcare Investments,
L.P., of which Alan D. Frazier, a director of the Company, is an affiliate, (iv)
50,000 shares by Timothy J. Walsh, Vice President of Sales of the Company, (v)
10,000 shares acquired by Joy A. Solomon, Former President and Chief Executive
Officer of the Company, and (vi) 113,750 shares acquired by Wayne W. Mills, a
more than 5% holder.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Preston Gates & Ellis LLP, 5000 Columbia Center, 701 Fifth
Avenue, Seattle, Washington 98104.
EXPERTS
The financial statements of IVI Publishing, Inc. at December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
37
<PAGE> 40
FINANCIAL STATEMENTS
Index To Financial Statements
Independent Auditors' Report......................................... F-2
Balance Sheets....................................................... F-3
Statements of Operations............................................. F-4
Statements of Shareholders' (Deficit) Equity......................... F-5
Statements of Cash Flows............................................. F-6
Notes to Financial Statements (audited).............................. F-7
F-1
<PAGE> 41
REPORT OF THE INDEPENDENT AUDITORS
The Board of Directors and Shareholders
IVI Publishing, Inc.
We have audited the accompanying balance sheets of IVI Publishing, Inc.
as of December 31, 1997 and 1996, and the related statements of operations, cash
flows and shareholders' equity for each of the three years in the period ended
December 31, 1997. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of IVI Publishing, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/
ERNST & YOUNG LLP
Minneapolis, Minnesota
February 12, 1998, except for Note 2 as
to which the date is April 13, 1998
F-2
<PAGE> 42
IVI PUBLISHING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
March 31 December 31
(unaudited)
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 571 $ 2,488 $ 3,462
Accounts receivable, net of allowances
for returns and doubtful accounts of
$1,011 in 1997 and $277 in 1996 65 337 4,134
Inventories 46 150 155
Other current assets 263 332 585
------------ ------------ ------------
Total current assets 945 3,307 8,336
Furniture and equipment:
Computers and software 2,874 2,856 4,583
Office equipment 1,403 1,403 1,546
Leasehold improvements -- 683
------------ ------------ ------------
4,277 4,259 6,812
Accumulated depreciation (3,184) (2,989) (3,622)
------------ ------------ ------------
1,093 1,270 3,190
Long-term receivables and other assets -- -- 1,885
------------ ------------ ------------
TOTAL ASSETS $ 2,038 $ 4,577 $ 13,411
============ ============ ============
Current liabilities:
Accounts payable $ 1,725 $ 1,919 $ 3,206
Other accrued expenses 2,464 2,640 1,900
------------ ------------ ------------
Total current liabilities 4,189 4,559 5,106
Convertible subordinated debentures -- -- 3,500
Convertible redeemable preferred stock -- -- 1,905
(redemption value of $2,000)
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding shares -
10,106 and 7,612 at December 31,
1997 and 1996, respectively 101 101 76
Additional paid-in capital 78,577 78,493 70,453
Accumulated deficit (80,829) (78,576) (67,629)
------------ ------------ ------------
Total shareholders' equity (2,151) 18 2,900
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,038 $ 4,577 $ 13,411
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 43
IVI PUBLISHING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31 Year Ended December 31
--------------------------- --------------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues 330 1,719 $ 3,761 $ 9,470 $ 11,970
Cost of revenues 688 770 2,541 5,076 6,231
---------- ---------- ---------- ---------- ----------
Gross margin (358) 949 1,220 4,394 5,739
Operating expenses:
Product development 728 1,311 4,243 5,651 7,494
Sales and marketing 436 394 1,347 2,705 7,473
General and administrative 743 766 6,892 6,364 5,647
---------- ---------- ---------- ---------- ----------
Loss from operations 2,265 (1,522) (11,262) (10,326) (14,875)
Interest income 12 -- 106 203 641
Interest expense -- (59) (264) (34) --
Other income, net -- -- 473 -- --
---------- ---------- ---------- ---------- ----------
Net loss (2,253) (1,581) (10,947) (10,157) (14,234)
========== ========== ========== ========== ==========
Preferred stock dividends -- (30) (100) (119) (20)
Preferred stock accretion -- (13) (43) (60) --
Preferred stock deemed dividend -- -- (2,875) -- --
---------- ---------- ---------- ---------- ----------
Net loss applicable to
common shareholders (2,253) (1,624) ($ 13,965) ($ 10,336) ($ 14,254)
========== ========== ========== ========== ==========
Net loss per common share --
basic and diluted ($ 0.22) ($ 0.21) ($ 1.73) ($ 1.36) ($ 1.90)
========== ========== ========== ========== ==========
Weighted average number of
common shares outstanding 10,150 7,653 8,056 7,580 7,484
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 44
IVI PUBLISHING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Common Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
------------------ ------------ ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 7,478 $75 $70,131 ($43,238) $26,968
Issuance of common stock
through exercise of options 46 166 166
Dividends on convertible
redeemable preferred stock
($.01 per share) (20) (20)
Net loss (14,234) (14,234)
------------------ ------------ ---------------- ----------------- -------------------
BALANCE AT DECEMBER 31, 1995 7,524 75 70,277 (57,472) 12,880
Issuance of common stock
through exercise of options 88 1 355 356
Dividends on convertible
redeemable preferred stock
($.06 per share) (119) (119)
Preferred stock accretion (60) (60)
Net loss (10,157) (10,157)
------------------ ------------ ---------------- ----------------- -------------------
BALANCE AT DECEMBER 31, 1996 7,612 76 70,453 (67,629) 2,900
Issuance of common stock
through exercise of options 59 1 97 98
Dividends on convertible
redeemable preferred stock
($.06 per share) (100) (100)
Preferred stock accretion (43) (43)
Issuance of common stock
as lawsuit settlement 175 2 431 433
Return of common stock
per Mayo agreement (490) (5) 5 --
Debenture conversion 1,750 17 5,712 5,729
Preferred stock conversion 1,000 10 1,938 1,948
Net loss (10,947) (10,947)
------------------ ------------ ---------------- ----------------- -------------------
BALANCE AT DECEMBER 31, 1997 10,106 $101 $78,493 ($78,576) $18
Issuance of Common Stock through 19 84 84
exercise of options
Net Loss (2,253) (2,253)
_______ _______ _______ _______ _______
BALANCE AT MARCH 31, 1998 $10,125 $101 $78,577 ($80,829) ($2,151)
======= ======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE> 45
IVI PUBLISHING, INC.
STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31 Year Ended December 31
------------------------ ---------------------------------------
(unaudited)
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss ($ 2,253) ($ 1,581) ($ 10,947) ($ 10,157) ($ 14,234)
Adjustments to reconcile net loss to
net cash used in operating activities:
Debenture conversion to equity -- -- 2,229
Depreciation 195 330 1,252 1,409 1,403
Loss (gain) on disposal of furniture and equipment -- -- 711 (3) (96)
Common stock issued as litigation settlement -- -- 433
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 272 970 3,797 (926) 240
Decrease in inventories 104 (26) 5 666 363
Decrease (increase) in other current assets 69 20 253 (139) 137
Decrease (increase) in other long-term assets 27 1,885 (585) (365)
(Decrease) increase in accounts payable (370) (2,292) (1,287) 843 (1,750)
Increase in other accrued expenses -- -- 760 636 224
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities (1,983) (1,442) (909) (8,256) (14,078)
Investing activities:
Purchase of furniture and equipment (18) (23) (104) (288) (1,026)
Proceeds from disposal of furniture and equipment -- -- 61 510 199
Purchase of short-term investments -- -- (4,388)
Maturity of short-term investments -- -- 22,218
---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by investing activities (18) (23) (43) 222 17,003
Financing activities:
Net proceeds from issuance of convertible -- --
redeemable preferred stock -- -- 1,845
Preferred stock dividends paid -- -- (120) (119)
Proceeds from exercised stock options 84 74 98 356 166
Proceeds from issuance of convertible
subordinated debentures -- -- 3,500
---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by financing activities 84 74 (22) 3,737 2,011
---------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (1,917) 2,071 (974) (4,297) 4,936
Cash and cash equivalents at beginning of year 2,488 2,071 3,462 7,759 2,823
========== ========== ========== ========== ==========
Cash and cash equivalents at end of year $ 571 $ 2,071 $ 2,488 $ 3,462 $ 7,759
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 46
IVI PUBLISHING, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. BUSINESS ACTIVITY
Formation of the Business
IVI Publishing, Inc. (the "Company"), which was founded in 1990 and commenced
operations in early 1991, is engaged in a single business consisting of
electronic publishing of health and medical information in interactive
multimedia formats.
NOTE 2. MANAGEMENT'S PLANS CONCERNING CASH FLOW AND ONGOING OPERATIONS
The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception through December 31, 1997 of approximately
$78,576,000. These conditions give rise to the question about the Company's
ability to generate positive cash flow and fund operations. In April 1998, the
Company completed a $5,000,000 issuance of non-voting Convertible Redeemable
Preferred Stock (CPS) to two institutional investors. As part of the
transaction, the Company also granted to the investors warrants to purchase an
aggregate of 66,778 shares of the Company's common stock at $11.23125 per share.
The CPS provides for the payment of dividends at a rate of 5%. The CPS also
provides the investors with certain conversion rights into Common Stock of the
Company and allows for redemption of the CPS by the Company. Further, the CPS
holders could require the Company to repurchase the CPS upon the occurrence of
certain events, such as the absence of any bids for the Common Stock for five
consecutive trading days or failure of the Common Stock to be listed for trading
on the AMEX, NASDAQ SmallCap Market, NASDAQ National Market, or the NYSE. The
Company believes that the completion of this financing transaction and
anticipated operating cash flows will allow the Company to continue to meet its
ongoing financial obligations and operate through December 31, 1998.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 1997 and
1996, cash and cash equivalents consisted principally of United States
Government obligations for which the carrying amount approximates fair value.
Furniture and Equipment
Furniture and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful life of the assets ranging from 5
to 7 years.
Product Development Costs
Product development costs consist principally of compensation to Company
employees, interactive design costs paid to outside consultants, travel and
supplies. Product development also includes costs incurred related to the
acquisition of content under license and publishing agreements. Costs related to
research, design and development of products are charged to product development
expenses as incurred. Under Statement of Financial Accounting Standards No. 86
(SFAS No. 86), software development costs are capitalized beginning when a
product's technological feasibility has been established and ending when a
product is available for general release to customers. The Company has not
capitalized any software development costs since such costs meeting the
requirements of SFAS No. 86 have not been significant.
Revenue Recognition
The Company's revenues consist of product sales and licensing revenue, contract
development revenue, fees relating to the licensing of its content for use on
cable television, and fees for online services.
F-7
<PAGE> 47
Product sales and licensing revenues are made up of retail distribution sales,
direct mail sales, and product sales and royalties on licenses to original
equipment manufacturers (OEM's). These revenues are recognized upon shipment of
the product or when the Company's obligations under the licensing agreements are
complete. Allowances for returns are recorded at the time revenue is recognized.
Contract development revenue is generated through the use of the Company's
personnel and facilities for the creation of custom multimedia products. This
revenue is recognized by contract on a percentage-of-completion basis or at a
specific hourly rate, depending on the terms of the contract.
Revenues are generated through the licensing of the Company's health and medical
content for use on cable television channels. The Company recognized revenue
under its cable television agreement with America's Health Network ("AHN")
during 1997, 1996 and 1995. (See Note 12).
Revenues are generated through the sale of advertising and sponsorships of the
Company's Onhealth web site. These revenues are recognized as they are earned.
During 1996, the Company also generated revenue through the Company's online
agreement with American Telephone and Telegraph ("AT&T"). These revenues were
nonrefundable advances payable to the Company under the exclusive agreement
signed with AT&T. They were recognized as they were earned. (See Note 13).
Revenues for each of the three years ended December 31, 1997, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Product sales $ 1,990,000 $ 5,152,000 $ 8,333,000
Contract development 1,220,000 1,346,000 1,637,000
Cable television 493,000 1,972,000 1,000,000
Online 58,000 1,000,000 1,000,000
----------- ----------- -----------
Net revenues $ 3,761,000 $ 9,470,000 $11,970,000
=========== =========== ===========
</TABLE>
Net sales to one OEM manufacturer in 1996 totaled $1,394,000. Additionally, for
1997 and 1996 respectively, $439,000 and $1,972,000 of revenue was recognized
from the Company's content agreement with AHN, and $1,000,000 of revenue was
recognized from the Company's online content agreement with AT&T in 1996.
No individual customer accounted for more than 10% of total net revenues in
1995.
Inventories
All inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of packaging supplies and finished goods.
Advertising Costs
The Company's policy is to expense advertising costs as they are incurred.
Advertising costs were $190,000, $556,000, and $1,732,000 for 1997, 1996, and
1995, respectively.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Income Taxes
Income taxes are provided based on earnings reported for financial statement
purposes. Deferred income taxes are provided for temporary differences between
financial reporting and income tax basis of assets and liabilities under the
liability method.
F-8
<PAGE> 48
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share (Statement 128). Statement 128 replaced the calculations of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements. The effect of outstanding options, warrants and convertible
securities are excluded from the computation for all periods as their effect is
antidilutive.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock Based Compensation
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, but
applies Accounting Principles Board Opinion No. 25 Accounting for Stock Issued
to Employees (APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, when the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded.
Reclassifications
Certain amounts for 1996 and 1995 have been reclassified to conform to the 1997
financial statement presentation.
Interim Financial Information
The accompanying financial statements as of March 31, 1998 and for the
three-month periods ended March 31, 1998 and 1997 are unaudited. In the opinion
of management of the Company, these financial statements reflect all
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial staements. The results of operations for the
three-month period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 1998.
NOTE 4. OTHER ASSETS
In 1994, the Company entered into an agreement with Time Life, Inc. ("Time
Life") pursuant to which the Company agreed to pay Time Life for the development
of a comprehensive home health reference guide. In exchange, the Company
receives royalty payments in the amount of 5% of Time Life's net revenue from
the sale of the print versions of the product. At December 31, 1996, the Company
recorded an asset of $1,778,000, which represented the Company's payments to
Time Life, net of royalty payments received from Time Life. The Company's policy
was to amortize this asset over the period that revenues were recognized. During
1997, revenues from the print version were not as high as anticipated, and
management determined that the asset was not realizable. Accordingly, the
Company wrote-off the remaining asset balance and expensed $1,741,000 in general
and administrative operating expenses.
NOTE 5. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31
1997 1996
---------- ----------
<S> <C> <C>
Litigation loss $ 961,000 $ 300,000
Severance 610,000 --
Royalties 501,000 993,000
Rent obligation 252,000 429,000
Other 316,000 178,000
========== ==========
Total $2,640,000 $1,900,000
========== ==========
</TABLE>
F-9
<PAGE> 49
NOTE 6. COMMON STOCK
As of December 31, 1997 and 1996, the Company had 30,000,000 shares of $.01 par
value capital stock authorized. As of December 31, 1996, the Company had
designated 2,000 of its shares to be 6% Series A Convertible Preferred Stock,
and such designation was canceled in December 1997.
NOTE 7. CONVERTIBLE SUBORDINATED DEBENTURES
In November 1996, the Company issued $3,500,000 of 9% Convertible Subordinated
Debentures ($3,325,000 net of debt issue costs). These debentures were converted
into Common Stock on October 28, 1997 at a rate of $2.00 per share, resulting in
the issuance of 1,750,000 shares of Common Stock. The original conversion price
was $3.25 per share. The excess of the fair value of the Common Stock issued
over the fair value of the shares issuable pursuant to the original conversion
terms was $2,229,000 and was recorded as an other expense at the date of
conversion.
On December 31, 1996, the estimated fair value of the Convertible Subordinated
Debentures approximated the recorded amount.
NOTE 8. CONVERTIBLE REDEEMABLE PREFERRED STOCK
In 1995, the Company issued 2,000 shares of 6% Series A Convertible Redeemable
Preferred Stock for $2,000,000 ($1,845,000 net of brokerage expenses) to
Davidson & Associates, Inc., ("Davidson") a distributor of multimedia
educational and entertainment software. The Preferred Stock was converted into
Common Stock on October 30, 1997 at a rate of $2.00 per share, resulting in the
issuance of 1,000,000 shares of Common Stock. The original conversion price was
$11.21 per share. The excess of the fair value of the Common Stock issued over
the fair value of the shares issuable pursuant to the original conversion terms
was $2,875,000 and was recorded as a deemed preferred dividend at the date of
conversion. This deemed dividend increased the net loss applicable to common
shareholders in the calculation of the net loss per share as shown in the
statements of operations.
NOTE 9. STOCK OPTIONS AND WARRANTS
The Company has a 1991 Stock Option Plan (the "Plan") for its employees. The
Plan, which is administered by the Board of Directors, permits the Company to
grant stock options for the purchase of Common Stock. The Plan provides for the
granting of Incentive Stock Options (ISO's) and Non-Qualified Options. In the
case of ISO's, the exercise price must be at least equal to the fair market
value per share of the Common Stock on the date of grant. In the case of
Non-Qualified Options, the exercise price must be at least 85% of the fair
market value per share on the date of grant. Options generally expire nine to
ten years from the date of grant.
In addition, the Company has a Director Stock Option Plan pursuant to which
current non-employee directors are eligible to receive options to purchase
shares of the Company's common stock at the market price on the date of grant.
From time to time, the Company's Board of Directors may grant stock options
outside of either of the existing stock option plans.
In December 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan for its employees and reserved 1,750,000 shares of the Company's Common
Stock for such plan. The 1997 Stock Option Plan is subject to shareholder
approval at the Company's 1998 Annual Meeting.
Activity in the plans is as follows:
F-10
<PAGE> 50
<TABLE>
<CAPTION>
Option Weighted-
Shares Shares Average Price
Reserved Outstanding Per Share
---------- ----------- -------------
<S> <C> <C> <C>
TOTAL OUTSTANDING AT DECEMBER 31, 1994 413,000 1,029,000 $ 15.72
Options Granted (467,000) 467,000 11.04
Options Exercised (46,000) 3.59
Options Canceled 543,000 (543,000) 19.72
---------- ----------
TOTAL OUTSTANDING AT DECEMBER 31, 1995 489,000 907,000 11.53
Options Reserved 200,000
Options Granted (582,000) 582,000 4.98
Options Exercised (88,000) 4.06
Options Canceled 461,000 (461,000) 13.24
---------- ----------
TOTAL OUTSTANDING AT DECEMBER 31, 1996 568,000 940,000 7.10
Options Reserved 1,750,000
Options Granted (684,000) 684,000 2.85
Options Exercised (59,000) 1.64
Options Canceled 474,000 (474,000) 9.86
---------- ----------
TOTAL OUTSTANDING AT DECEMBER 31, 1997 2,108,000 1,091,000 $ 3.53
========== ==========
</TABLE>
At December 31, 1997, 1996 and 1995, options to purchase 325,000, 602,000 and
557,000 shares were exercisable, respectively. Exercise prices for the options
outstanding as of December 31, 1997 range from $2.31 to $17.75.
F-11
<PAGE> 51
The following table summarizes information about the stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ---------------------------
Weighted- Weighted-
Average Weighted- Average
Range of Exercise Number Remaining Average Number Exercise
Prices Outstanding Contractual Life Exercise Price Exercisable Price
- ---------------------- ----------- ---------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.31 - 2.50 221,000 10 years $2.31 9,000 $2.31
2.51 - 3.00 346,000 9 years 2.78 121,000 2.81
3.01 - 3.50 398,000 9 years 3.22 86,000 3.00
3.51 - 17.75 126,000 7 years 8.75 109,000 8.81
$2.31 - 17.75 1,091,000 9 years $3.53 325,000 $4.86
</TABLE>
The Company reserved 547,260 and 559,760 shares of Common Stock for the issuance
of warrants at December 31, 1997 and 1996, respectively, and had warrants
outstanding at those dates to purchase 547,260 and 559,760 shares of Common
Stock at prices ranging from $3.25 per share to $30.94 per share. Warrants
outstanding at December 31, 1997 expire from 1998 through 2000. The warrants
were generally issued to underwriters and investment bankers for services
performed in connection with several of the Company's financing transactions.
In 1997, the Company granted non-qualified options outside any of the Company's
stock option plans to purchase 522,500 shares at prices ranging from $2.31 to
$2.50. These options expire in 2007. Of the options granted, one option to
purchase 60,000 shares becomes exercisable on October 8, 2002. This option
provides for earlier exercise in six 10,000-share tranches as the Company's
stock trades at various prices from $5.00 to $10.00 or more for 40 consecutive
trading days. The accounting for this option may result in the future
recognition of compensation expense.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate 5.50% 6.21% 5.37%
Dividend yield 0% 0% 0%
Volatility factor .760 .726 .613
Weighted-average expected life 5 years 5 years 5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-12
<PAGE> 52
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net loss applicable to common shareholders $ 14,294,000 $ 10,562,000 $ 14,378,000
Pro forma net loss per common share -
basic and diluted $ 1.77 $ 1.39 $ 1.92
Weighted average fair value of options
granted during year $ 1.74 $ 2.99 $ 6.15
</TABLE>
The pro forma effect on the net loss for 1997, 1996 and 1995 is not
representative of the pro forma effect on the net loss in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
NOTE 10. COMMITMENTS
The Company leases office space under agreements accounted for as operating
leases. The agreements expire at various times through 1999. Gross rent expense,
including charges for monthly operating costs, was $881,000, $1,433,000, and
$1,287,000 for 1997, 1996 and 1995, respectively. The Company has subleased
certain facilities to various tenants under non-cancelable operating leases
expiring in 1999. The Company also has several license agreements that require
minimum annual royalty payments. Scheduled minimum lease commitments and annual
royalty payments are as follows:
<TABLE>
<CAPTION>
Royalty
Lease Payments
----------- -----------
<S> <C> <C>
1998 $ 1,191,000 $ 303,000
1999 496,000 212,000
----------- -----------
1,687,000 515,000
Less Sublease
Rental Income (577,000)
----------- -----------
Total $ 1,110,000 $ 515,000
=========== ===========
</TABLE>
In 1998, the Company entered into a termination arrangement for its existing
lease in Minneapolis, Minnesota, effective March 31, 1998. As a result of the
arrangement, the Company paid $122,000 and contributed to the lessor $150,000 in
furniture and equipment for satisfaction of the above lease commitments. The
Company entered into new leases in Seattle, Washington and a substantially
smaller facility in Minneapolis, Minnesota. As a result, future minimum lease
commitments related to the new lease agreements would be $61,000 in 1998,
$128,000 in 1999, $134,000 in 2000, $142,000 in 2001, $151,000 in 2002, and
$52,000 thereafter.
NOTE 11. INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards of
$64,699,000 for income tax purposes and unused research and development credits
of $326,000 that expire at various times through 2012. These carryforwards are
subject to the limitations of Internal Revenue Code Section 382. This section
provides limitations on the availability of net operating losses to offset
current taxable income if significant ownership changes have occurred for
federal tax purposes. For financial reporting purposes, a valuation allowance
has been recognized to completely reserve for the deferred tax assets related to
those carryforwards. The reserve has been established because of the uncertainty
of future taxable income, which is necessary to realize the benefits of the net
operating loss carryforwards.
Components of the Company's deferred tax assets and liabilities are as follows:
F-13
<PAGE> 53
<TABLE>
<CAPTION>
December 31
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accrued expenses and allowances $ 2,788,000 $ 2,649,000
Stock issued for license agreements -- 1,351,000
Research and development credits 326,000 326,000
Net operating loss carryforwards 25,880,000 23,054,000
------------ ------------
28,994,000 27,380,000
DEFERRED TAX LIABILITIES:
Depreciation 16,000 186,000
------------ ------------
16,000 186,000
------------ ------------
Net deferred tax assets
before valuation allowance 28,978,000 27,194,000
Less valuation allowance (28,978,000) (27,194,000)
============ ============
NET DEFERRED TAX ASSETS $ -- $ --
============ ============
</TABLE>
NOTE 12. INVESTMENT IN AMERICA'S HEALTH NETWORK
In March 1994, the Company acquired an equity position in America's Health
Network ("AHN"), a health information cable television network that combines
live programming with medical consumer product sales. The network launched on
March 25, 1996.
In the first quarter of 1994, the Company expensed its entire investment of
$2,000,000 along with the related investment banking fees of approximately
$263,000. This approach to the investment was made on the basis that the
invested amounts are not assured of recoverability through future revenue
streams. As of December 31, 1997 and 1996, the Company's underlying equity in
its investment in AHN was $500,000 and $650,000 based on 4% and 8% of AHN's net
assets, respectively. However, because the Company expensed its investment, its
equity in AHN's net assets is not recognized in the balance sheet.
In May 1995, the Company entered into a content and royalty agreement with AHN.
Under the agreement the Company is licensing its multimedia content to AHN from
the date of the agreement until March 25, 2001, five years from the date the
cable television network launched. The Company will receive a minimum of
$11,000,000 in licensing royalties over the life of the agreement. This revenue
was being recognized evenly over the life of the contract. Due to the gradual
increase in actual payments versus the straight-line revenue recognition policy,
a receivable was recorded for the difference between the revenue recognized and
the cash received during the early years of the contract. In June 1997, as a
result of the Company not receiving their quarterly payment, the outstanding AHN
receivable was fully reserved. As such, the revenue recognized is currently on a
cash basis for the AHN royalties. In December, AHN resumed payments but due to
the uncertainty of future payments, the Company continues to recognize revenue
on a cash basis. At December 31, 1997, the Company has a fully reserved
receivable of $715,000 with scheduled payments in 1998. The Company recorded
$493,000, $1,972,000 and $1,000,000 in license royalty revenue in 1997, 1996 and
1995, respectively.
NOTE 13. AGREEMENT WITH AT&T
In October 1995, the Company entered into a four year agreement with AT&T
whereby the Company agreed to provide content for AT&T's HealthSite, a division
of AT&T's Personal Online Service ("POS"), in exchange for guaranteed revenues.
In August 1996, AT&T discontinued the HealthSite, and subsequently discontinued
POS. The Company received the 1996 guaranteed revenue payment of $1,000,000 from
AT&T.
Warrants held by AT&T to purchase up to 20% of the Company's common stock at a
price of $14.00 per share expired on March 31, 1997.
NOTE 14. BENEFIT PLAN
F-14
<PAGE> 54
The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The Plan allows eligible employees to make contributions up to the maximum
amount provided under the Code. The Company may also make a discretionary
contribution to the Plan. No such contributions have been made by the Company.
NOTE 15. MAYO AGREEMENT
In September 1997, the Company entered into an agreement with Mayo Foundation
("Mayo") which included a full transfer of ownership of IVI's O@sis web site to
Mayo and a new arrangement for revenues and cost sharing concerning O@sis. Under
the terms of the agreement, IVI received a $2,700,000 cash payment, an
additional $300,000 cash payment for hosting the web site for a transition
period, and the return of 490,000 shares of IVI common stock. Through the year
2001, the Company will receive a royalty from Mayo on certain revenues generated
by the Mayo Health O@sis site and certain other non-O@sis Internet projects. In
addition, Mayo was released from the Company's "right of first offer" on Mayo
health products produced for electronic media, and Mayo assumed operating
expenses incurred for the web site retroactive to January 1, 1997 which were
recorded as a reduction to product development expenses. The Company recorded
the $2,700,000 payment as other income and recorded the $300,000 payment as
contract development revenue during the third and fourth quarter.
NOTE 16. RELATED PARTY TRANSACTIONS
During 1997 and 1996, the Company subleased approximately 20,000 square feet of
its Eden Prairie office space to Reality Interactive, Inc. Reality Interactive,
Inc. and the Company share a common Board member.
The Company had a note receivable of approximately $88,000 and $229,000 from a
former officer of the Company at December 31, 1997 and 1996, respectively. This
note receivable, included in accounts receivable in the balance sheet, will be
used to offset future contract consulting fees.
During 1996, two officers of the Company participated in the Company's debt
offering. The total amount of debt issued by the Company to these individuals
was $120,000. Additionally, three directors of the Company participated in the
debt offering, either individually or through affiliated organizations. The
total amount of debt issued by the Company to these individuals and
organizations was $550,000. On October 28, 1997, this debt was converted into
common stock at a rate of $2.00 per share (See note 7).
NOTE 17. LEGAL PROCEEDINGS
In March 1996, the Company commenced an action seeking replevin of certain
computer equipment leased to a former contractor, Viridis, Inc. In May of 1996,
Viridis expanded the scope of the action by filing a cross-complaint against the
Company, alleging that the Company breached contractual obligations and
committed various torts by ending its business relationship with Viridis and
seeking $10,000,000. In October 1997, the Company and Viridis entered into a
settlement agreement resolving all disputes between them. Under the terms of
this agreement, the Company issued 175,000 shares of restricted common stock,
paid $225,000 and issued a $125,000 installment note payable in 15 monthly
installments ending December 1998. The estimated value of the shares issued,
$433,000, was recorded as a general and administrative expense at the date of
the settlement. The settlement agreement also called for an additional $25,000
to be paid by the Company when AHN resumed its quarterly payments. The Company
recorded total general and administrative expenses of $808,000 in connection
with the settlement. The outstanding obligations are secured by all of the
Company's assets except its interests in AHN.
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 make various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10,000,000. 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 plus interest for damages sustained
to its business. The jury verdict is subject to motions for a new trial, amended
findings and for judgment notwithstanding the verdict and to appeal to the Court
of Appeals. The plaintiffs also
F-15
<PAGE> 55
have an action pending against certain affiliates of the Company on the same
grounds on which the action against the Company was based. The Company has
indemnified these principles against any damages arising out of these claims.
While the Company is unable to predict the ultimate outcome of these legal
actions, it is the opinion of management that the disposition of these matters
will not have a material adverse effect on the Company's Financial Statements
taken as a whole.
In 1996, Berkshire Multimedia Group, Inc. ("Berkshire") initiated mediation
regarding a dispute with the Company. Shortly after an unsuccessful mediation
conference was held in September 1996, Berkshire Multimedia Group filed a demand
for arbitration alleging that the Company breached its obligations under a
contract. An arbitration hearing was completed in January 1997, and in February
1997 the arbitration panel awarded Berkshire $300,000. Hennepin County
(Minnesota) District Court vacated that award on May 29, 1997, and Berkshire
appealed the case. The Court of Appeals heard the case in late 1997 and
reinstated the original decision of the arbitration panel in January 1998. On
February 25, 1998, the Hennepin County (Minnesota) District Court issued an
order directing that judgment be entered against the Company in the amount of
$300,000 plus interest. The Company recorded general and administrative expense
of $300,000 in 1996.
NOTE 18. RELOCATION OF OPERATIONS
During 1997, the Company decided to move its primary operating facilities from
Minneapolis, Minnesota to Seattle, Washington in early 1998. As a result,
certain of the Company's leasehold improvements and computer and software
equipment having a carrying value of $721,000 is not transferable, or will not
be utilized in the Company's operations going forward in 1998. The Company plans
to sell salvageable assets in 1998 and has estimated the sale value, net of
related selling costs, to be immaterial. Accordingly, the Company has recorded
an impairment loss of $721,000 in 1997, which is included in general and
administrative expenses. In addition, the Company recorded $252,000 and $610,000
in general and administrative expenses related to lease termination costs and
severance for former officers and employees, respectively.
F-16
<PAGE> 56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses relating to the registration of the Common Stock, the
Warrants and the Warrant Shares will be borne by the registrant. Such expenses
are estimated to be as follows:
<TABLE>
<S> <C>
Registration Fee
Securities and Exchange Commission $4,697.41
Accountants' Fees $_____*__
Legal Fees $_____*__
Printer's Fees $_____*__
Miscellaneous $_____*__
Total $_____*__
</TABLE>
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Section 302A.521 of the Minnesota Business Corporation Act provides that
a corporation shall indemnify any person who was or is threatened to be made a
party to any proceeding by reason of the former or present official capacity of
such person, against judgments, penalties and fines, including, without
limitation, excise taxes assessed against such person with respect to an
employee benefit plan, settlements and reasonable expenses, including attorneys'
fees and disbursements, incurred by such person in connection with the
proceeding, if, with respect to the acts or omissions of such person complained
of in the proceeding, such person has not been indemnified by another
organization or employee benefit plan for the same expenses with respect to the
same acts or omissions, acted in good faith, received no improper personal
benefit and Section 302A.255 (which pertains to director conflicts of interest),
if applicable, has been satisfied; in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and in the case of acts or
omissions by person in their official capacity for the corporation, reasonably
believed that the conduct was in the best interests of the corporation, or in
the case of acts or omissions by persons in their capacity for other
organizations, reasonably believed that the conduct was not opposed to the best
interests of the corporation. The Company's Articles of Incorporation and Bylaws
do not limit the Registrant's obligation to indemnify such persons.
The Company's Articles of Incorporation limit the liability of its
directors to the full extent permitted by the Minnesota Business Corporation
Act. Specifically, directors of the Company will not be personally liable for
monetary damages for breach of fiduciary duty as directors except liability for
(i) any breach of the duty of loyalty to the Company or its shareholders, (ii)
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) dividends or other distributions of corporate
assets that are in contravention of certain statutory or contractual
restrictions, (iv) violations of certain Minnesota securities laws, or (v) any
transaction from which the director derives an improper personal benefit.
Liability under federal securities law is not limited by the Company's Articles
of Incorporation.
Item 15. Recent Sales of Unregistered Securities.
In November 1996, the Company issued $3,500,250 of 9% Convertible
Subordinated Debentures. These debentures were converted into Common Stock on
October 28, 1997 at a rate of $2.00 per share, resulting in the issuance of
1,750,000 unregistered shares of Common Stock. Because the offering involved
only 16 debenture holders and no general solicitation occurred, in addition to
other factors, the issuance did not involve a public offering and therefore the
Company relied upon Section 4(2) of the Security Act of 1933 for such issuance.
In November 1995, the Company issued 2,000 shares of 6% Series A
Convertible Redeemable Preferred Stock for $2,000,000 to Davidson & Associates,
Inc., in connection with entering into a distribution agreement. The
II-1
<PAGE> 57
Series A Preferred Stock was converted into Common Stock on October 30, 1997 at
a rate of $2.00 per share, resulting in the issuance of 1,000,000 unregistered
shares of Common Stock. The Company relied on Section 3(a)(9) of the Securities
Act of 1933 on the ground that the issuance was pursuant to conversion of
convertible securities.
On April 10, 1998, the Company completed the sale of 5,000 shares of its
Series B Convertible Preferred Stock to Advantage Fund II Ltd. and Koch
Industries, Inc. With regard to this sale, the company claims exemption from
registration under Section 4(2) of the Securities Act and Regulation D
promulgated thereunder because, to the Company's knowledge, each of the
purchases was made for the purchaser's own investment purposes and not for
further distribution or resale by accredited investors. In addition, the issuer
satisfied the other applicable requirements of Regulation D in connection with
such offering and sale.
II-2
<PAGE> 58
Item 16. Exhibits and Financial Statement Schedules.
(a)
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company,
incorporated herein by reference to Exhibit No. 3.2 to the
Company's Registration Statement on Form S-1, No. 33-76496 (the
1994 S-1)
3.2 Bylaws of the Company, incorporated herein by reference to
Exhibit No. 3.2 to the Company's Registration Statement on Form
S-1, No. 33-67064 (the 1993 S-1)
4.1 Form of Subscription Agreement relating to the purchase of the
Series B Preferred Stock
4.2 Form of Registration Rights Agreement
4.3 Form of Common Stock Purchase Warrant
4.4 Certificate of Designation for the Series B Convertible
Preferred Stock of the Registrant
5 Opinion of Preston Gates & Ellis LLP regarding legality
10.1 License Agreement, dated April 24, 1991, among the Company,
William Morrow Company and Mayo Foundation for Medical Education
and Research, as amended, incorporated herein by reference to
Exhibit No. 10.1 to the 1993 S-1
10.2 Electronic Publishing License, Development and Marketing
Agreement, dated April 28, 1993, between the Company and Mayo
Foundation for Medical Education and Research, incorporated
herein by reference to Exhibit No. 10.4 to the 1993 S-1
10.3 401(k) Savings and Investment Plan, incorporated herein by
reference to Exhibit No. 10.9 to Amendment No. 1 to the 1993 S-1
10.4 1991 Stock Option Plan, as amended, incorporated herein by
reference to Exhibit No. 10.11 to the 1994 S-1
10.5 IVI Publishing, Inc. Director Stock Option Plan, as amended,
incorporated herein by reference to Exhibit No. 10.12 to the
1994 S-1
10.6 License Agreement, dated February 9, 1994, between the Company
and Time Life, Inc. and First Amendment to Titles Development
Agreement, dated as of February 9, 1994 between the Company and
Time Life, Inc., incorporated herein by reference to Exhibit No.
10.19 to the 1994 S-1
10.7 Lease Agreement, dated March 30, 1994, between the Company and
Ryan/Wilson Limited Partnership, incorporated herein by
reference to Exhibit No. 10.25 to the 1994 S-1
10.8 License, Development and Marketing Agreement, dated September
28, 1994, between the Company and Time Life, Inc., incorporated
by reference to Exhibit No. 10.25 to the Company's Form 10-K for
the year ended December 31, 1994*
10.9 1994 License, Development and Marketing Agreement, dated
September 27, 1994, between the Company and Mayo Foundation for
Medical Education and Research, incorporated by reference to
Exhibit No. 10.26 to the Company's Form 10-K for the year ended
December 31, 1994*
10.10 License Agreement, dated November 10, 1994, between the Company
and Massachusetts Medical Society, incorporated by reference to
Exhibit No. 10.27 to the Company's Form 10-K for the year ended
December 31, 1994*
10.11 Sublicense Agreement, dated December 31, 1994, between the
Company and Georg von Holtzbrinck GmbH & Co., incorporated by
reference to Exhibit No. 10.28 to the Company's Form 10-K for
the year ended December 31, 1994*
II-3
<PAGE> 59
10.12 Agreement between America's Health Network, Inc. and the
Company, dated May 25, 1995, incorporated by reference to
Exhibit 10.14 to the Company's Form 10-K for the year ended
December 31, 1995*
10.13 Amendment No. 2 to License Agreement among William Morrow
Company, Mayo Foundation for Medical Education and Research and
the Company, dated December 29, 1995, incorporated by reference
to Exhibit 10.18 to the Company's Form 10-K for the year ended
December 31, 1995*
10.14 Financial Advisor and Consulting Agreement with Frazier &
Company LP, dated July 14, 1994, as amended by a letter
agreement, dated June 28, 1995, incorporated by reference to
Exhibit 10.19 to the Company's Form 10-K for the year ended
December 31, 1995**
10.15 First Amendment dated June, 27, 1994 and Second Amendment dated
October 10, 1995 to Lease Agreement between the Company and
Ryan/Wilson Limited Partnership, incorporated by reference to
Exhibit 10.20 to the Company's Form 10-K for the year ended
December 31, 1995
10.16 Agreement dated April 1995 among Ryan/Wilson Limited
Partnership, Wilson Learning Corporation the Company regarding a
certain lease, incorporated by reference to Exhibit 10.21 to the
Company's Form 10-K for the year ended December 31, 1995
10.17 Distribution on Consignment Agreement, dated February 29, 1996
between the Company and Davidson & Associates, Inc. ,
incorporated by reference to Exhibit 10.22 to the Company's Form
10-K for the year ended December 31, 1995*
10.18 Sublease Agreement, dated January 31, 1996, between the Company
and The McGraw-Hill Companies, Inc. related to a property leased
by Woodland Hills Property-W, Inc. pursuant to a May 23, 1993
lease with the Company, incorporated by reference to Exhibit
10.23 to the Company's Form 10-K for the year ended December 31,
1995
10.19 Employment Agreement between the Company and Joy A. Solomon,
dated August 7, 1996, incorporated herein by reference to
Exhibit 10.24 to the Company's Form 10-K for the year ended
December 31, 1996**
10.20 Separation Agreement between the Company and Ronald G. Buck,
dated August 1, 1996, incorporated herein by reference to
Exhibit 10.25 to the Company's Form 10-K for the year ended
December 31, 1996**
10.21 Notice of Lease Term to Sublease Agreement, dated April 1, 1996,
between the Company and The McGraw-Hill Companies, Inc. related
to a property leased by Woodland Hills Property-W, Inc. pursuant
to a May 23, 1993 lease and January 31, 1996, Sublease with the
Company, incorporated herein by reference to Exhibit 10.26 to
the Company's Form 10-K for the year ended December 31, 1996
10.22 Sublease Agreement, dated September 17, 1996, between the
Company and Reality Interactive, Inc. for the fourth floor
portion of the Main Lease between the Company and Ryan/Wilson
Limited Partnership, Wilson Learning Corporation, incorporated
herein by reference to Exhibit 10.27 to the Company's Form 10-K
for the year ended December 31, 1996
10.23 Letter of Employment to Tim Walsh, dated September 19, 1996, for
the position of Vice President of Sales and Marketing for the
Company, incorporated herein by reference to Exhibit 10.28 to
the Company's Form 10-K for the year ended December 31, 1996**
10.24 Settlement Agreement and Mutual Release dated September 12, 1997
between the Company and Mayo Foundation for Medical Education
and Research, incorporated herein by reference to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended September 30,
1997
10.25 Sublicense Agreement dated September 12, 1997 between the
Company and Mayo Foundation for Medical Education and Research,
incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended September 30, 1997
10.26 Separation Agreement and Release of Claims dated January 26,
1998 between the Company and Joy A. Solomon incorporated herein
by reference to Exhibit 10.26 to the Company's Form 10-K for the
year ended December 31, 1997**
II-4
<PAGE> 60
10.27 Letter Agreement dated November 9, 1997 between the Company and
Robert Goodman, incorporated herein by reference to Exhibit
10.27 to the Company's Form 10-K for the year ended December 31,
1997**
10.28 Nonqualified Stock option Agreement dated December 11, 1997
between the Company and Robert Goodman, incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 31, 1998**
23.1 Consent of Ernst & Young LLP
23.2*** Consent of Preston Gates & Ellis LLP
24 Power of Attorney
27.1+ Financial Data Schedule
- ---------------
* Portions of the Exhibit have been deleted pursuant to the Company's
request for confidential treatment pursuant to Rule 24b-2 promulgated under the
Securities Act of 1933, as amended
** Management Agreement or Compensatory Plan or Arrangement
*** Contained within Exhibit 5
+ To be filed by amendment.
II-5
<PAGE> 61
(b)
REPORT OF THE INDEPENDENT AUDITORS
The Board of Directors and Shareholders
IVI Publishing, Inc.
We have audited the financial statements of IVI Publishing, Inc. as of December
31, 1997 and 1996, and for each of the three years in the period ended December
31, 1997, and have issued our report thereon dated February 12, 1998, except for
Note 2 as to which the date is April 13, 1998 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 12, 1998 except for Note 2 as
to which the date is April 13, 1998
II-6
<PAGE> 62
IVI PUBLISHING, INC.
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and End
of Period Expenses Deductions of Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful accounts receivable,
promotional allowances and sales returns $ 277 $ 2,336 $ (1,602)(1) $ 1,011
Allowance for obsolete inventory 485 200 (234)(2) 451
---------- ---------- ---------- ----------
$ 762 $ 2,536 $ (1,836) $ 1,462
========== ========== ========== ==========
Year Ended December 31, 1996
Allowance for doubtful accounts receivable,
promotional allowances and sales returns $ 753 $ 1,675 $ (2,151)(1) $ 277
Allowance for obsolete inventory 682 365 (562)(2) 485
---------- ---------- ---------- ----------
$ 1,435 $ 2,040 $ (2,713) $ 762
========== ========== ========== ==========
Year Ended December 31, 1995
Allowance for doubtful accounts receivable,
promotional allowances and sales returns $ 730 $ 1,659 $ (1,636)(1) $ 753
Allowance for obsolete inventory 124 698 (140)(2) 682
---------- ---------- ---------- ----------
$ 854 $ 2,357 $ (1,776) $ 1,435
========== ========== ========== ==========
</TABLE>
(1) Deductions represent accounts receivable determined to be uncollectable
and therefore charged against the allowance account; accounts
receivable determined to be uncollectable due to return of product(s);
and accounts credited due to promotional and administrative allowance
arrangements with distributors
(2) Write-offs of inventory
II-7
<PAGE> 63
Item 17. Undertakings.
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:
(i) To include any prospectus required by section 10(a)(3)
of the 1933 Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement.
(2) That, for the purpose of determining any liability under the
1933 Act, each such 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.
(3) 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.
(4) Insofar as indemnification for liabilities arising under the
1933 Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company 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 1933 Act and will be governed by the final
adjudication of such issue.
II-8
<PAGE> 64
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-1 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 22nd day of May,
1998.
IVI PUBLISHING, INC.
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-1 has been signed by the following persons
in the capacities indicated on the 22nd day of May, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
* President, Chief Executive Officer, Director
- -------------------------------------------- (Principal Executive Officer)
Robert N. Goodman
*
- -------------------------------------------- Controller, Vice President and Secretary
Michael D. Conway (Principal Financial and Accounting Officer)
*
- -------------------------------------------- Chairman of the Board of Directors
Michael A. Brochu
- -------------------------------------------- Director
Alan D. Frazier
*
- -------------------------------------------- Director
Ronald E. Eibensteiner
- -------------------------------------------- Director
Timothy I. Maudlin
- -------------------------------------------- Director
Ann Kirschner
*
- -------------------------------------------- Director
Ram Shriram
*
- -------------------------------------------- Director
Rick Thompson
</TABLE>
* By /s/ Robert N. Goodman
------------------------
Robert N. Goodman
Attorney in Fact
II-9
<PAGE> 65
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company,
incorporated herein by reference to Exhibit No. 3.2 to the
Company's Registration Statement on Form S-1, No. 33-76496 (the
1994 S-1)
3.2 Bylaws of the Company, incorporated herein by reference to
Exhibit No. 3.2 to the Company's Registration Statement on Form
S-1, No. 33-67064 (the 1993 S-1)
4.1 Form of Subscription Agreement relating to the purchase of the
Series B Preferred Stock
4.2 Form of Registration Rights Agreement
4.3 Form of Common Stock Purchase Warrant
4.4 Certificate of Designation for the Series B Convertible
Preferred Stock of the Registrant
5 Opinion of Preston Gates & Ellis LLP regarding legality
10.1 License Agreement, dated April 24, 1991, among the Company,
William Morrow Company and Mayo Foundation for Medical Education
and Research, as amended, incorporated herein by reference to
Exhibit No. 10.1 to the 1993 S-1
10.2 Electronic Publishing License, Development and Marketing
Agreement, dated April 28, 1993, between the Company and Mayo
Foundation for Medical Education and Research, incorporated
herein by reference to Exhibit No. 10.4 to the 1993 S-1
10.3 401(k) Savings and Investment Plan, incorporated herein by
reference to Exhibit No. 10.9 to Amendment No. 1 to the 1993 S-1
10.4 1991 Stock Option Plan, as amended, incorporated herein by
reference to Exhibit No. 10.11 to the 1994 S-1
10.5 IVI Publishing, Inc. Director Stock Option Plan, as amended,
incorporated herein by reference to Exhibit No. 10.12 to the
1994 S-1
10.6 License Agreement, dated February 9, 1994, between the Company
and Time Life, Inc. and First Amendment to Titles Development
Agreement, dated as of February 9, 1994 between the Company and
Time Life, Inc., incorporated herein by reference to Exhibit No.
10.19 to the 1994 S-1
10.7 Lease Agreement, dated March 30, 1994, between the Company and
Ryan/Wilson Limited Partnership, incorporated herein by
reference to Exhibit No. 10.25 to the 1994 S-1
10.8 License, Development and Marketing Agreement, dated September
28, 1994, between the Company and Time Life, Inc., incorporated
by reference to Exhibit No. 10.25 to the Company's Form 10-K for
the year ended December 31, 1994*
10.9 1994 License, Development and Marketing Agreement, dated
September 27, 1994, between the Company and Mayo Foundation for
Medical Education and Research, incorporated by reference to
Exhibit No. 10.26 to the Company's Form 10-K for the year ended
December 31, 1994*
10.10 License Agreement, dated November 10, 1994, between the Company
and Massachusetts Medical Society, incorporated by reference to
Exhibit No. 10.27 to the Company's Form 10-K for the year ended
December 31, 1994*
10.11 Sublicense Agreement, dated December 31, 1994, between the
Company and Georg von Holtzbrinck GmbH & Co., incorporated by
reference to Exhibit No. 10.28 to the Company's Form 10-K for
the year ended December 31, 1994*
<PAGE> 66
10.12 Agreement between America's Health Network, Inc. and the
Company, dated May 25, 1995, incorporated by reference to
Exhibit 10.14 to the Company's Form 10-K for the year ended
December 31, 1995*
10.13 Amendment No. 2 to License Agreement among William Morrow
Company, Mayo Foundation for Medical Education and Research and
the Company, dated December 29, 1995, incorporated by reference
to Exhibit 10.18 to the Company's Form 10-K for the year ended
December 31, 1995*
10.14 Financial Advisor and Consulting Agreement with Frazier &
Company LP, dated July 14, 1994, as amended by a letter
agreement, dated June 28, 1995, incorporated by reference to
Exhibit 10.19 to the Company's Form 10-K for the year ended
December 31, 1995**
10.15 First Amendment dated June, 27, 1994 and Second Amendment dated
October 10, 1995 to Lease Agreement between the Company and
Ryan/Wilson Limited Partnership, incorporated by reference to
Exhibit 10.20 to the Company's Form 10-K for the year ended
December 31, 1995
10.16 Agreement dated April 1995 among Ryan/Wilson Limited
Partnership, Wilson Learning Corporation the Company regarding a
certain lease, incorporated by reference to Exhibit 10.21 to the
Company's Form 10-K for the year ended December 31, 1995
10.17 Distribution on Consignment Agreement, dated February 29, 1996
between the Company and Davidson & Associates, Inc. ,
incorporated by reference to Exhibit 10.22 to the Company's Form
10-K for the year ended December 31, 1995*
10.18 Sublease Agreement, dated January 31, 1996, between the Company
and The McGraw-Hill Companies, Inc. related to a property leased
by Woodland Hills Property-W, Inc. pursuant to a May 23, 1993
lease with the Company, incorporated by reference to Exhibit
10.23 to the Company's Form 10-K for the year ended December 31,
1995
10.19 Employment Agreement between the Company and Joy A. Solomon,
dated August 7, 1996, incorporated herein by reference to
Exhibit 10.24 to the Company's Form 10-K for the year ended
December 31, 1996**
10.20 Separation Agreement between the Company and Ronald G. Buck,
dated August 1, 1996, incorporated herein by reference to
Exhibit 10.25 to the Company's Form 10-K for the year ended
December 31, 1996**
10.21 Notice of Lease Term to Sublease Agreement, dated April 1, 1996,
between the Company and The McGraw-Hill Companies, Inc. related
to a property leased by Woodland Hills Property-W, Inc. pursuant
to a May 23, 1993 lease and January 31, 1996, Sublease with the
Company, incorporated herein by reference to Exhibit 10.26 to
the Company's Form 10-K for the year ended December 31, 1996
10.22 Sublease Agreement, dated September 17, 1996, between the
Company and Reality Interactive, Inc. for the fourth floor
portion of the Main Lease between the Company and Ryan/Wilson
Limited Partnership, Wilson Learning Corporation, incorporated
herein by reference to Exhibit 10.27 to the Company's Form 10-K
for the year ended December 31, 1996
10.23 Letter of Employment to Tim Walsh, dated September 19, 1996, for
the position of Vice President of Sales and Marketing for the
Company, incorporated herein by reference to Exhibit 10.28 to
the Company's Form 10-K for the year ended December 31, 1996**
10.24 Settlement Agreement and Mutual Release dated September 12, 1997
between the Company and Mayo Foundation for Medical Education
and Research, incorporated herein by reference to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended September 30,
1997
10.25 Sublicense Agreement dated September 12, 1997 between the
Company and Mayo Foundation for Medical Education and Research,
incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended September 30, 1997
10.26 Separation Agreement and Release of Claims dated January 26,
1998 between the Company and Joy A. Solomon incorporated herein
by reference to Exhibit 10.26 to the Company's Form 10-K for the
year ended December 31, 1997**
<PAGE> 67
10.27 Letter Agreement dated November 9, 1997 between the Company and
Robert Goodman, incorporated herein by reference to Exhibit
10.27 to the Company's Form 10-K for the year ended December 31,
1997**
10.28 Nonqualified Stock option Agreement dated December 11, 1997
between the Company and Robert Goodman, incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 31, 1998**
23.1 Consent of Ernst & Young LLP
23.2*** Consent of Preston Gates & Ellis LLP
24 Power of Attorney
27.1+ Financial Data Schedule
- ---------------
* Portions of the Exhibit have been deleted pursuant to the Company's
request for confidential treatment pursuant to Rule 24b-2 promulgated under the
Securities Act of 1933, as amended
** Management Agreement or Compensatory Plan or Arrangement
*** Contained within Exhibit 5
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 4.1
================================================================================
FORM OF
SUBSCRIPTION AGREEMENT
DATED AS OF APRIL 10, 1998
BY AND BETWEEN
IVI PUBLISHING, INC.
AND
-----------------------
--------------------
SERIES B CONVERTIBLE PREFERRED STOCK
AND
COMMON STOCK PURCHASE WARRANTS
--------------------
================================================================================
<PAGE> 2
SUBSCRIPTION AGREEMENT
SERIES B CONVERTIBLE PREFERRED STOCK
AND
COMMON STOCK PURCHASE WARRANTS
IVI PUBLISHING, INC.
<TABLE>
<CAPTION>
PAGE
- --------------------------------------------------------------------------------
<S> <C>
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE ........................... 1
(a) Subscription ................................................. 1
(b) Form of Payment .............................................. 1
2. BUYER REPRESENTATIONS, WARRANTIES, ETC ........................... 2
(a) Purchase for Investment ...................................... 2
(b) Accredited Investor .......................................... 2
(c) Reoffers and Resales ......................................... 2
(d) Company Reliance ............................................. 2
(e) Information Provided ......................................... 2
(f) Absence of Approvals ......................................... 2
(g) Subscription Agreement ....................................... 2
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC ......................... 3
(a) Organization and Authority ................................... 3
(b) Capitalization ............................................... 3
(c) Concerning the Shares and the Common Stock ................... 4
(d) Subscription Agreement; Certificate of Designation;
Registration Rights Agreement; Warrants; Transfer Agent
Instructions ................................................. 4
(e) Non-contravention ............................................ 4
(f) Approvals .................................................... 5
(g) Information Provided ......................................... 5
(h) Absence of Certain Changes ................................... 5
(i) Absence of Certain Proceedings ............................... 6
(j) Properties ................................................... 6
(k) Labor Relations .............................................. 7
(l) SEC Filings .................................................. 7
(m) Absence of Brokers, Finders, Etc ............................. 7
(n) No Solicitation .............................................. 7
(o) Certain Issuances of Securities .............................. 7
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS ............................ 8
(a) Transfer Restrictions ........................................ 8
(b) Restrictive Legend ........................................... 8
(c) Registration Rights Agreement ................................ 9
(d) Form D ....................................................... 9
</TABLE>
-3-
<PAGE> 3
<TABLE>
<S> <C>
(e) Authorization for Trading; Reporting Status .................. 9
(f) Use of Proceeds .............................................. 9
(g) Blue Sky Laws ................................................ 10
(h) Certain Expenses ............................................. 10
(i) Certain Issuances of Securities .............................. 10
(j) Certain Trading Restrictions ................................. 11
(k) Best Efforts ................................................. 12
5. TRANSFER AGENT INSTRUCTIONS; CONVERSION PROCEDURE ................ 12
(a) Transfer Agent Instructions .................................. 12
(b) Conversion Procedure ......................................... 12
6. CLOSING DATE ..................................................... 13
7. CONDITIONS TO THE COMPANYAES OBLIGATION TO SELL AND ISSUE ........ 13
8. CONDITIONS TO THE BUYERAES OBLIGATION TO PURCHASE ................ 13
9. MISCELLANEOUS .................................................... 14
(a) Governing Law ................................................ 14
(b) Counterparts ................................................. 14
(c) Headings, etc ................................................ 14
(d) Severability ................................................. 14
(e) Amendments ................................................... 14
(f) Waivers ...................................................... 15
(g) Notices ...................................................... 15
(h) Assignment ................................................... 15
(i) Survival of Representations and Warranties ................... 15
(j) Entire Agreement ............................................. 16
(k) Termination .................................................. 16
(l) Further Assurances ........................................... 16
(m) Public Statements, Press Releases, Etc ....................... 16
(n) Construction ................................................. 16
</TABLE>
ANNEXES
Annex I Form of Certificate of Designation
Annex II Form of Warrants
Annex III Form of Registration Rights Agreement
Annex IV Form of Transfer Agent Instructions
Annex V Form of Notice of Conversion of Series B Convertible Preferred Stock
Annex VI Form of Opinion of Counsel to be Delivered on Closing Date
-4-
<PAGE> 4
Annex VII Form of Opinion of Special Counsel to be Delivered on Closing Date
-5-
<PAGE> 5
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of April 10, 1998, by and
between IVI PUBLISHING, INC., a Minnesota corporation (the "Company"), with
headquarters located at 1601 Fifth Avenue, Suite 1900, Seattle, Washington,
98101, and ____________________________ (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, shares of non-voting, convertible preferred
stock of the Company which will be convertible into shares of Common Stock, $.01
par value (the "Common Stock"), of the Company and in connection therewith the
Company is to issue to the Buyer warrants to purchase shares of Common Stock as
provided in the Agreement; and
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act");
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) SUBSCRIPTION. The Buyer hereby agrees to purchase from the Company the
number of shares (the "Preferred Shares") of Series B Convertible Preferred
Stock, $.01 par value (the "Preferred Stock"), of the Company set forth on the
signature page of this Agreement, having the terms and conditions as set forth
in the form of Certificate of Designation of the Series B Convertible Preferred
Stock attached hereto as ANNEX I (the "Certificate of Designation") at the price
per share and for the aggregate purchase price set forth on the signature page
of this Agreement (the "Purchase Price"). The Purchase Price shall be payable in
United States Dollars. In connection with the purchase of the Preferred Shares
by the Buyer, the Company shall issue to the Buyer at the closing on the Closing
Date (as defined herein) Common Stock Purchase Warrants in the form attached
hereto as ANNEX II (the "Warrants") to purchase the number of shares of Common
Stock set forth therein (subject to adjustment as provided in the Warrants). The
shares of Preferred Stock issuable pursuant to Section 5 of the Certificate of
Designation as dividends on the Preferred Shares are referred to herein as the
"Dividend Shares." The shares of Common Stock issuable upon exercise of the
Warrants are referred to herein as the "Warrant Shares." The Warrant Shares and
the shares of Common Stock issuable upon conversion of the Preferred Shares and
the Dividend Shares are referred to
<PAGE> 6
herein collectively as the "Common Shares." The Common Shares, the Preferred
Shares and the Dividend Shares are referred to herein collectively as the
"Shares." The Shares and the Warrants are referred to herein collectively as the
"Securities."
(b) FORM OF PAYMENT. At the closing on the Closing Date (1) the Company shall
issue and deliver to the Buyer the Preferred Shares and the Warrants, registered
in the name of the Buyer or its nominee, against payment of the Purchase Price
to the Company and (2) the Buyer shall pay the Purchase Price to the Company, by
wire transfer of immediately available funds to such account as specified by the
Company to the Buyer at least one Business Day prior to the Closing Date,
against issuance and delivery to the Buyer of the Preferred Shares and the
Warrants. As used in this Agreement, the term "Business Day" means any day other
than a Saturday, Sunday or other day on which commercial banks in The City of
New York are authorized or required by law to remain closed.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
(a) PURCHASE FOR INVESTMENT. The Buyer is purchasing the Preferred Shares and
acquiring the Warrants for its own account for investment only and not with a
view towards the public sale or distribution thereof;
(b) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3);
(c) REOFFERS AND RESALES. All subsequent offers and sales of the Shares by the
Buyer shall be made pursuant to registration of the Shares being offered and
sold under the 1933 Act or pursuant to an exemption from registration;
(d) COMPANY RELIANCE. The Buyer understands that the Preferred Shares are being
offered and sold, the Warrants are being issued, and the Common Shares are being
offered, in each case to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and the Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Preferred Shares and the Warrants and to receive an offer of the Common Shares;
(e) INFORMATION PROVIDED. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Preferred
Shares and the issuance of the Warrants and the offer of the Common Shares which
have been requested by the Buyer; the Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company and have received
satisfactory answers to any such inquiries; without limiting the generality of
the foregoing, the Buyer has had the opportunity to obtain and to review the
Company's (1) Annual Report on Form 10-K for the
-7-
<PAGE> 7
fiscal year ended December 31, 1996 (the "1996 10-K"), (2) Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and September 30,
1997, (3) definitive proxy statement for the Company's 1997 Annual Meeting of
Shareholders and (4) Current Reports on Form 8-K dated October 16, 1997, October
28, 1997 (as amended by Amendment No. 1 thereto on Form 8-K/A) and November 3,
1997, in each case as filed with the SEC (collectively, the "SEC Reports"); and
the Buyer understands that its investment in the Securities involves a high
degree of risk;
(f) ABSENCE OF APPROVALS. The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities; and
(g) SUBSCRIPTION AGREEMENT. The Buyer has all requisite power and authority,
corporate or otherwise, to execute, deliver and perform its obligations under
this Agreement and the other agreements executed or to be executed by the Buyer
in connection herewith and to consummate the transactions contemplated hereby
and thereby. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
Except as set forth in the Company's Disclosure Letter delivered to
the Buyer prior to the execution and delivery of this Agreement (the "Company
Disclosure Letter"), the Company represents and warrants to, and covenants and
agrees with, the Buyer that:
(a) ORGANIZATION AND AUTHORITY. Each of the Company and its subsidiary listed in
Exhibit 21 to the 1996 10-K (the "Subsidiary") is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, and has all requisite corporate power and authority to (i) own,
lease and operate its properties and to carry on its business as described in
the SEC Reports and as now being conducted, and (ii) to execute, deliver and
perform its obligations under this Agreement, the Certificate of Designation,
the Warrants, the Registration Rights Agreement, the form of which is attached
hereto as ANNEX III (the "Registration Rights Agreement"), the Transfer Agent
Instructions, the form of which is attached hereto as ANNEX IV (the "Transfer
Agent Instructions"), and the other agreements to be executed and delivered by
the Company in connection herewith, and to consummate the transactions
contemplated hereby and thereby. Each of the Company and the Subsidiary is duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions wherein such qualification is necessary and where failure so to
qualify could have a material adverse effect on the business, properties,
operations, condition (financial or other), results of operations or prospects
of the Company and the Subsidiary, taken as a whole. The Company has no equity
investment in any person other than the Subsidiary.
-8-
<PAGE> 8
(b) CAPITALIZATION. The authorized capital stock of the Company consists of
30,000,000 shares of capital stock of which 10,135,201 shares of Common Stock
were outstanding on April 8, 1998, all of which are fully paid and
nonassessable; 5,800 shares of Preferred Stock, $.01 par value, will be
designated as Series B Convertible Preferred Stock of which 5,000 shares will be
issued pursuant to this Agreement and the other subscription agreement for the
purchase of shares of Preferred Stock and the acquisition of Warrants being
entered into by the Company in connection herewith (the "Other Subscription
Agreement"); and on the Closing Date there will be (x) no material increase from
April 8, 1998 in the number of shares of Common Stock outstanding and (y) no
issuances of preferred stock except pursuant to this Agreement and the Other
Subscription Agreement. As of April 8, 1998, the Company had outstanding
options, warrants and similar rights entitling the holders to purchase 2,698,200
shares of Common Stock. Other than as set forth in the preceding sentence, the
Company does not have outstanding any material amount of securities (or
obligations to issue any such securities) convertible into, exchangeable for or
otherwise entitling the holders thereof to acquire shares of Common Stock,
except as disclosed in the SEC Reports. The Company has duly reserved from its
authorized and unissued shares of Common Stock the full number of shares
required for (a) all options, warrants, convertible securities and other rights
to acquire shares of Common Stock which are outstanding and (b) all shares of
Common Stock and options and other rights to acquire shares of Common Stock
which may be issued or granted under the stock option and similar plans which
have been adopted by the Company or the Subsidiary. Each outstanding class or
series of securities, if any, for which any antidilution or similar adjustment
arising by reason of the issuance or conversion of the Preferred Shares and the
Dividend Shares or the issuance or exercise of the Warrants or the Shares of
Preferred Stock and Warrants to be issued pursuant to the Other Subscription
Agreement will occur is identified in Section 3(b)-1 of the Company Disclosure
Letter, together with the amount of such antidilution adjustment. The
outstanding shares of Common Stock and outstanding options, warrants and other
securities convertible into, exchangeable for or otherwise entitling the holder
thereof to acquire shares of Common Stock have been duly authorized and validly
issued. None of such outstanding shares of Common Stock, options, warrants and
other securities has been issued in violation of the preemptive rights of any
securityholder of the Company. The offers and sales of the outstanding shares of
Common Stock and such options, warrants and other securities were at all
relevant times either registered under the 1933 Act and applicable state
securities laws or exempt from such requirements. No holder of any of the
Company's securities has any rights, "demand," "piggy-back" or otherwise, to
have such securities registered by reason of the intention to file, filing or
effectiveness of the Registration Statement (as defined in the Registration
Rights Agreement).
(c) CONCERNING THE SHARES AND THE COMMON STOCK. The Shares have been duly
authorized. The Preferred Shares, when issued and paid for in accordance with
this Agreement, the Dividend Shares, when issued as dividends on the outstanding
shares of Preferred Stock, and the Common Shares, when issued upon conversion of
the Preferred Shares or the Dividend Shares or upon exercise of the Warrants, as
the case may be, will be duly and validly issued, fully paid and non-assessable
and will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive or similar rights of any shareholder of the
Company or any other person to acquire any of the Shares. The Company has duly
reserved 2,800,000 shares of Common Stock for conversion of the shares of
Preferred Stock and exercise of the Warrants and
-9-
<PAGE> 9
conversion of shares of preferred stock and exercise of warrants issued pursuant
to the Other Subscription Agreement, and such shares shall remain so reserved
(subject to reduction from time to time for shares of Common Stock issued upon
conversion of shares of Preferred Stock or redemption or other permitted
retirement of shares of Preferred Stock), and the Company shall from time to
time reserve such additional shares of Common Stock as shall be required to be
reserved pursuant to the Certificate of Designation, as long as the Preferred
Stock is convertible, and pursuant to the Warrants, as long as the Warrants are
exercisable. The Common Stock is listed for trading on the Nasdaq SmallCap
Market ("Nasdaq") and (1) the Company and the Common Stock meet the criteria for
continued listing and trading on Nasdaq; (2) the Company has not been notified
since January 1, 1996 by Nasdaq of any failure or potential failure to meet the
criteria for continued listing and trading on Nasdaq and (3) no suspension of
trading in the Common Stock is in effect. The Company knows of no reason that
the Common Shares will not be eligible for listing on Nasdaq.
(d) SUBSCRIPTION AGREEMENT; CERTIFICATE OF DESIGNATION; REGISTRATION RIGHTS
AGREEMENT; WARRANTS; TRANSFER AGENT INSTRUCTIONS. This Agreement, the
Certificate of Designation, the Registration Rights Agreement, the Warrants and
the Transfer Agent Instructions and the other agreements and instruments
contemplated hereby and thereby have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered by the Company and
this Agreement is, and the Registration Rights Agreement, the Warrants and the
Transfer Agent Instructions and such other agreements, when executed and
delivered by the Company, will be, valid and binding obligations of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
(e) NON-CONTRAVENTION. The execution and delivery by the Company of this
Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Preferred Shares and the
Warrants as contemplated by this Agreement, and the other transactions
contemplated by this Agreement, the Certificate of Designation, the Registration
Rights Agreement, the Warrants and the Transfer Agent Instructions do not and
will not, with or without the giving of notice or the lapse of time, or both (i)
result in any violation of any terms of the Articles of Incorporation or By-laws
of the Company or the Subsidiary, (ii) conflict with or result in a breach by
the Company or the Subsidiary of any of the terms or provisions of, or
constitute a default under, or result in the modification, amendment,
termination or cancellation of, result in the acceleration of any obligation of
the Company or the Subsidiary under, or result in the creation or imposition of
any lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company or the Subsidiary pursuant to, any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or the
Subsidiary is a party or by which the Company or the Subsidiary or any of their
respective properties or assets is bound or affected, (iii) violate or
contravene any applicable law, rule or regulation or any applicable decree,
judgment or order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or the Subsidiary or any of their respective properties or assets or
(iv) have any material adverse effect on any permit, certification,
registration, approval, consent, license or franchise necessary for the
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<PAGE> 10
Company or the Subsidiary to own or lease and operate any of their respective
properties or to conduct any of their respective businesses or the ability of
the Company or the Subsidiary to make use thereof.
(f) APPROVALS. No authorization, approval or consent of, or filing with, any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the shareholders of the Company is required to be
obtained or made by the Company for (1) the execution, delivery and performance
by the Company of this Agreement, the Registration Rights Agreement, the
Warrants, the Transfer Agent Instructions and the other agreements and
instruments contemplated hereby and thereby, (2) the execution, filing and
performance by the Company of the Certificate of Designation, (3) the issuance
and sale of the Preferred Shares and the issuance of the Warrants as
contemplated by this Agreement and (4) the issuance of Common Shares on
conversion of the Preferred Shares or the Dividend Shares or upon the exercise
of the Warrants or the issuance of Dividend Shares as dividends on shares of
Preferred Stock, other than (v) the listing of the Common Shares on Nasdaq, (w)
the filing of the Certificate or Designations with the Secretary of State of the
State of Minnesota, (x) registration of the resale of the Common Shares under
the 1933 Act as contemplated by the Registration Rights Agreement, (y) as may be
required under applicable state securities or "blue sky" laws and (z) filing of
one or more Forms D with respect to the Shares as required under Regulation D.
(g) INFORMATION PROVIDED. The information provided by or on behalf of the
Company to the Buyer in connection with the transactions contemplated by this
Agreement, including, without limitation, the information referred to in Section
2(e) of this Agreement, does not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading, it being understood that, for purposes of this Section 3(g), any
statement contained in such information shall be deemed to be modified or
superseded for purposes of this Section 3(g) to the extent that a statement in
any document included in such information which was prepared or filed with the
SEC on a later date modifies or replaces such statement, whether or not such
later prepared or filed statement so states. The Company has not filed any
reports with the SEC under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), since December 31, 1996 other than the SEC Reports.
(h) ABSENCE OF CERTAIN CHANGES. Except as disclosed in the SEC Reports, since
December 31, 1996, there has been no material adverse change and no material
adverse development in the business, properties, operations, condition
(financial or other), results of operations or prospects of the Company and the
Subsidiary taken as a whole. Except as and to the extent disclosed, reflected or
reserved against in the financial statements of the Company and the notes
thereto included in the SEC Reports, neither the Company nor the Subsidiary has
any material (individually or in the aggregate) liabilities, debts or
obligations whether accrued, absolute, contingent or otherwise, and whether due
or to become due. Subsequent to December 31, 1996, neither the Company nor the
Subsidiary has incurred any liabilities, debts or obligations of any nature
whatsoever which are individually or in the aggregate material to the Company
and the Subsidiary, taken as a whole, other than those incurred in the ordinary
course of their respective businesses or disclosed in the SEC Reports.
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<PAGE> 11
(i) ABSENCE OF CERTAIN PROCEEDINGS. Except as described in the SEC Reports,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body or governmental agency (collectively, an "Action")
pending or, to the knowledge of the Company or the Subsidiary, threatened
against the Company or the Subsidiary, in any such case wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
business, properties, condition (financial or other), results of operations or
prospects of the Company and the Subsidiary, taken as a whole or the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents; neither the Company or any subsidiary
nor any director or officer thereof is or has been the subject of any Action
involving (i) a claim of violation of or liability under federal or state
securities laws or (ii) a claim of breach of fiduciary duty; the Company does
not have pending before the SEC any request for confidential treatment of
information and to the best of the Company's knowledge no such request will be
made by the Company prior to the time the Registration Statement relating to the
Common Shares which is contemplated by the Registration Rights Agreement is
first ordered effective by the SEC; and there has not been, and to the best of
the Company's knowledge there is not pending or contemplated, any investigation
by the SEC involving the Company or any current or former director or officer of
the Company.
(j) PROPERTIES. The Company and the Subsidiary have good title to all property
real and personal (tangible and intangible) and other assets owned by them, free
and clear of all security interests, charges, mortgages, liens or other
encumbrances, except such as are described in the SEC Reports or such as do not
materially interfere with the use of such property made, or proposed to be made,
by the Company or the Subsidiary. The leases, licenses or other contracts or
instruments under which the Company and the Subsidiary lease, hold or are
entitled to use any property, real or personal, are valid, subsisting and
enforceable with only such exceptions as do not materially interfere with the
use of such property made, or proposed to be made, by the Company or the
Subsidiary. Neither the Company nor the Subsidiary has received notice of any
material violation of any applicable law, ordinance, regulation, order or
requirement relating to its owned or leased properties. The Company does not
have any knowledge of, and the Company has not given or received any notice of,
any pending conflicts with or infringement of the rights of others with respect
to any Company Proprietary Rights (as defined herein) or with respect to any
license of Company Proprietary Rights. No action, suit, arbitration, or legal,
administrative or other proceeding or investigation is pending, or, to the best
knowledge of the Company, threatened, which involves any Company Proprietary
Rights. Neither the Company nor the Subsidiary is subject to any judgment,
order, writ, injunction or decree of any court or any federal, state, local,
foreign or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or any arbitrator, or has entered into or
is a party to any contract which restricts or impairs the use of any such
Company Proprietary Rights in a manner which would have a material adverse
effect on the use by the Company or the Subsidiary of any of the Company
Proprietary Rights. To the best knowledge of the Company, no Company Proprietary
Rights and no services or products sold by the Company or the Subsidiary,
conflict with or infringe upon any proprietary rights available to any third
party. Neither the Company nor the Subsidiary has received written notice of any
pending conflict with or infringement upon such
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<PAGE> 12
third-party proprietary rights. Neither the Company nor the Subsidiary has
entered into any consent, indemnification, forbearance to sue or settlement
agreement with respect to Company Proprietary Rights other than in the ordinary
course of business. No claims have been asserted by any person with respect to
the validity of the Company's or the Subsidiary's ownership or right to use the
Company Proprietary Rights and, to the best knowledge of the Company, there is
no reasonable basis for any such claim to be successful. To the best knowledge
of the Company, the Company Proprietary Rights are valid and enforceable. No
registration relating to the Company Proprietary Rights has lapsed, expired or
been abandoned or canceled or is the subject of cancellation or other
adversarial proceedings, and all applications therefor are pending and are in
good standing, except for such lapses, expirations, abandonments, cancellations,
adversarial proceedings or failures to be in good standing which would not,
singly or in the aggregate, have a material adverse effect on the business,
properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company and the Subsidiary taken as a whole. The
Company and the Subsidiary have complied, in all material respects, with their
respective contractual obligations relating to the protection of the Company
Proprietary Rights used pursuant to licenses. To the best knowledge of the
Company, no person is infringing on or violating the Company Proprietary Rights.
As used herein, the term "Company Proprietary Rights" means all patents, patent
applications, inventions, trademarks, trade names, applications for registration
of trademarks, service marks, service mark applications, copyrights, know-how,
manufacturing processes, formulae, trade secrets, licenses and rights in any
thereof and any other intangible property and assets which are material to the
businesses of the Company and the Subsidiary as now conducted, as proposed to be
conducted or as described in this Agreement.
(k) LABOR RELATIONS. No material labor problem exists or, to the knowledge of
the Company or the Subsidiary, is imminent with respect to any of the employees
of the Company or the Subsidiary.
(l) SEC FILINGS. The Company has timely filed all required forms, reports and
other documents required to be filed with the SEC under the 1934 Act. All of
such forms, reports and other documents complied, when filed, in all material
respects, with all applicable requirements of the 1933 Act and the 1934 Act.
(m) ABSENCE OF BROKERS, FINDERS, ETC. No broker, finder or similar person is
entitled to any commission, fee or other compensation by reason of the
transactions contemplated by this Agreement and the Company shall pay, and
indemnify and hold harmless the Buyer from, any claim made against the Buyer by
any person for any such commission, fee or other compensation.
(n) NO SOLICITATION. No form of general solicitation or general advertising was
used by the Company or, to the best of its knowledge, any other person acting on
behalf of the Company, in respect of or in connection with the offer and sale of
the Shares. Neither the Company nor, to its knowledge, any person acting on
behalf of the Company has, either directly or indirectly, sold or offered for
sale to any person any of the Preferred Shares or the Warrants or, within the
six months prior to the date hereof, any other similar security of the Company
except as contemplated by this Agreement and the Other Subscription Agreement;
and neither the Company nor any person authorized to act on its behalf will sell
or offer for sale any shares of Preferred
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<PAGE> 13
Stock or shares of Common Stock or Warrants, or solicit any offers to buy any
shares of Preferred Stock or shares of Common Stock or Warrants, so as thereby
to cause the issuance or sale of any of the Shares or the issuance of the
Warrants to be in violation of Section 5 of the 1933 Act.
(o) CERTAIN ISSUANCES OF SECURITIES. The Company has not issued any shares of
Common Stock or shares of any series of preferred stock or other securities
convertible into, exchangeable for or otherwise entitling the holder to acquire
shares of Common Stock which are subject to Rule 4310(c)(25)(H)(i) of Nasdaq (or
any successor, replacement or similar provision thereof or of any other market
on which the Common Stock is listed for trading) and which would be integrated
with the sale of the Preferred Shares to the Buyer or the issuance of Common
Shares upon conversion of the Preferred Shares or the Dividend Shares or upon
exercise of the Warrants or the Dividend Shares in payment of dividends thereon
for purposes of such Rule 4310(c)(25)(H)(i) (or any successor, replacement or
similar provision thereof or of any other market on which the Common Stock is
listed for trading).
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Company and the Buyer acknowledge and agree that
(1) the Preferred Shares and the Warrants have not been and are not being
registered under the provisions of the 1933 Act and, except as provided in the
Registration Rights Agreement with respect to the resale of the Common Shares,
the Common Shares have not been and are not being registered for resale under
the 1933 Act, and the Securities may not be transferred unless (A) subsequently
registered for resale thereunder or (B) the Buyer shall have delivered to the
Company an opinion of counsel, reasonably satisfactory in form, scope and
substance to the Company, to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; (2) any resale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any such resale of
Securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Securities
(other than registration of the resale of the Common Shares pursuant to the
Registration Rights Agreement) under the 1933 Act or to comply with the terms
and conditions of any exemption thereunder (other than pursuant to Section 4(d)
hereof and pursuant to the Registration Rights Agreement).
(b) RESTRICTIVE LEGEND. (1) The Buyer acknowledges and agrees that the Preferred
Shares shall bear a restrictive legend in substantially the following form (and
a stop-transfer order may be placed against transfer of the Preferred Shares):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be sold,
transferred or assigned in the absence of an effective registration
statement for the
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<PAGE> 14
securities under the Securities Act of 1933, as amended, or an opinion
of counsel that registration is not required under said Act.
The number of shares constituting the portion of the Maximum Share
Amount, as defined in the Certificate of Designation of the Series B
Convertible Preferred Stock (the "Certificate of Designation"),
allocated to the Shares represented by this certificate for purposes of
conversion thereof is 1,215,000.
Section 10(b)(3)(a) of the Certificate of Designation permits a holder
of the securities represented by this certificate to convert such
securities in accordance with the Certificate of Designation without
being required to surrender this certificate to the Company unless all
of the securities represented hereby are so converted. Consequently,
following conversion of any of the securities represented by this
certificate, the number of shares represented by this certificate may be
less than the number of shares stated hereon. Upon request of any
proposed transferee of this certificate, the Company will provide
confirmation of the number of shares evidenced by this certificate.
(2) The Buyer further acknowledges and agrees that the Dividend
Shares shall bear restrictive legends in substantially the form set forth in the
first and third legends set forth in Section 4(b)(1) and a legend to the effect
specified in Section 7(a) of the Certificate of Designation.
(3) The Buyer further acknowledges and agrees that the Warrants
shall bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Warrants):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned
in the absence of an effective registration statement for the securities
under the Securities Act of 1933, as amended, or an opinion of counsel
that registration is not required under said Act.
(4) The Buyer further acknowledges and agrees that until such time
as the Common Shares have been registered for resale under the 1933 Act as
contemplated by the Registration Rights Agreement, the certificates for the
Common Shares may bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the certificates
for the Common Shares):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned
in the absence of an effective registration statement for the securities
under the Securities Act of 1933, as amended, or an opinion of counsel
that registration is not required under said Act.
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<PAGE> 15
(5) Once the Registration Statement required to be filed by the
Company pursuant to Section 2 of the Registration Rights Agreement has been
declared effective, thereafter (1) upon request of the Buyer the Company will
substitute certificates without restrictive legend for certificates for any
Common Shares issued prior to the date such Registration Statement is declared
effective by the SEC which bear such restrictive legend and remove any
stop-transfer restriction relating thereto promptly, but in no event later than
three trading days after surrender of such certificates by the Buyer and (2) the
Company shall not place any restrictive legend on certificates for Common Shares
issued on conversion of or as dividends on the Preferred Shares or upon exercise
of the Warrants or impose any stop-transfer restriction thereon.
(c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter into the
Registration Rights Agreement in the form attached hereto as ANNEX III on or
before the Closing Date.
(d) FORM D. The Company agrees to file a Form D with respect to the Securities
as required under Regulation D and to provide a copy thereof to the Buyer
promptly after such filing. The Buyer agrees to cooperate with the Company in
connection with such filing and, upon request of the Company, to provide all
information relating to the Buyer reasonably required for such filing.
(e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the Closing Date,
the Company shall file a notification for listing of additional shares with the
Nasdaq relating to the Common Shares and on or prior to the Closing Date shall
provide evidence of such filing to the Buyer. So long as the Buyer beneficially
owns any of the Preferred Shares, the Dividend Shares, the Warrants or the
Common Shares, the Company shall file all reports required to be filed with the
SEC pursuant to Section 13 or 15(d) of the 1934 Act and the Company shall not
terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would permit such
termination.
(f) USE OF PROCEEDS. Neither the Company nor the Subsidiary owns or has any
present intention of acquiring any "margin stock" as defined in Regulation G (12
CFR Part 207) of the Board of Governors of the Federal Reserve System ("margin
stock"). The proceeds of sale of the Preferred Shares will be used for general
working capital purposes and in the operation of the Company's business. None of
such proceeds will be used, directly or indirectly (1) to make any loan to or
investment in any other person (other than financing the Company's subsidiaries
in the ordinary course of business) or (2) for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying any margin stock or for the
purpose of maintaining, reducing or retiring any indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute the transactions
contemplated by this Agreement a "purpose credit" within the meaning of such
Regulation G. Neither the Company nor any agent acting on its behalf has taken
or will take any action which might cause this Agreement or the transactions
contemplated hereby to violate Regulation G, Regulation T or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the 1934 Act, in each case as in effect now or as the same may hereafter be in
effect.
(g) BLUE SKY LAWS. On or before the Closing Date, the Company shall take such
action as and to the extent it shall be necessary or required to qualify, or to
obtain an exemption for, the
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<PAGE> 16
Preferred Shares for sale to the Buyer and the Warrants for issuance to the
Buyer pursuant to this Agreement, the Dividend Shares for issuance to the Buyer
pursuant to the Certificate of Designation, and the Common Shares for issuance
to the Buyer on conversion of the Preferred Shares and the Dividend Shares and
exercise of the Warrants under such of the securities or "blue sky" laws of
jurisdictions as shall be applicable to the sale of the Preferred Shares and the
issuance of the Warrants pursuant to this Agreement, the issuance to the Buyer
of the Dividend Shares pursuant to the Certificate of Designation, and the
issuance to the Buyer of Common Shares on conversion of the Preferred Shares and
the Dividend Shares and exercise of the Warrants. The Company shall furnish
copies of all filings, applications, orders and grants or confirmations of
exemptions relating to such securities or "blue sky" laws on or prior to the
Closing Date.
(h) CERTAIN EXPENSES. Whether or not the closing occurs, the Company shall pay
or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer) incurred by the
Buyer, not in excess of $15,000 in the aggregate for the Buyer and the buyer
under the Other Subscription Agreement, in connection with this Agreement and
the transactions contemplated hereby. The Company shall pay on demand all
expenses incurred by the Buyer, including reasonable attorneys' fees and
expenses, as a consequence of, or in connection with (1) the negotiation,
preparation or execution of any amendment, modification or waiver of this
Agreement, the Certificate of Designation, the Registration Rights Agreement,
the Warrants, the Transfer Agent Instructions and the other agreements and
instruments contemplated hereby and thereby requested by the Company, (2) any
default or breach of any of the Company's obligations set forth in any of such
agreements or instruments and (3) the enforcement or restructuring of any right
of, including the collection of any payments due, the Buyer under any of such
agreements or instruments, including any action or proceeding relating to such
enforcement or any order, injunction or other process seeking to restrain the
Company from paying any amount due the Buyer, in which the Buyer prevails.
(i) CERTAIN ISSUANCES OF SECURITIES. (1) Unless the Company obtains the
Shareholder Approval (as defined in the Certificate of Designation) or a waiver
thereof from the Nasdaq, the Company will not issue any shares of Common Stock
or shares of any other series of preferred stock or other securities convertible
into, exchangeable for, or otherwise entitling the holder to acquire, shares of
Common Stock which would be subject to the requirements of Rule 4310(c)(25)(H)
of Nasdaq (or any successor, replacement, or similar provision thereof or of any
other market on which the Common Stock is listed for trading) and which would be
integrated with the sale of the Preferred Shares to the Buyer, the issuance of
the Dividend Shares or the issuance of Common Shares upon conversion thereof for
purposes of Rule 4310(c)(25)(H) of Nasdaq (or any successor, replacement or
similar provision thereof or of any other market on which the Common Stock is
listed for trading).
(2) During the period from the date of this Agreement to the date on
which the Registration Statement (as defined in the Registration Rights
Agreement) shall have been effective with the SEC for 180 consecutive days,
without the prior written consent of the Buyer, which shall not be unreasonably
withheld, the Company shall not offer, sell, contract to sell or issue (or
engage any person to assist the Company in taking any such action) (A) any
security (whether debt or equity) with conversion or exchange terms similar in
nature to the conversion rights of the
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<PAGE> 17
Preferred Stock or (B) any equity securities or securities convertible into,
exchangeable for or otherwise entitling the holder to acquire, any Common Stock
at a price below the market price of the Common Stock on the date of such
issuance or acquisition (collectively, "Discounted Securities"); provided,
however, that nothing in this Section 4(i) shall prohibit the Company from
issuing securities (v) pursuant to compensation plans for employees, directors,
officers, advisers or consultants of the Company and in accordance with the
terms of such plans as in effect as of the date of this Agreement, (w) upon
exercise of conversion, exchange, purchase or similar rights issued, granted or
given by the Company and outstanding as of the date of this Agreement and
disclosed in the SEC Reports or this Agreement, (x) pursuant to a public
offering underwritten on a firm commitment basis registered under the 1933 Act,
(y) as part of a transaction involving a strategic alliance, collaboration,
joint venture, partnership or other similar arrangement of the Company with
another corporation, partnership or other business entity which is engaged in a
business similar to, complementary to or related to the business of the Company,
so long as in the case of this clause (y) the Board of Directors by resolution
duly adopted (and a copy of which shall be furnished to the Buyer promptly after
adoption) determines that such issuance is fair to the holders of each class and
series of capital stock of the Company and to the Buyer in respect of its equity
interest in the Company that is represented by the Preferred Shares and the
Warrants or (z) through an investment banking or brokerage firm which, in the
reasonable judgment of the Buyer, is generally regarded as being in the top two
"tiers" of such firms determined on a national basis or on the basis of such
firms principally involved with the Company's industry, including, without
limitation, BancAmerica Robertson Stephens; Lehman Brothers Inc.; NationsBanc
Montgomery Securities LLC; Goldman, Sachs & Co; William Blair & Company, L.L ;
Credit Suisse First Boston Corporation; Smith Barney Inc.; Bear, Stearns & Co.
Inc.; BT Alex Brown Co.; Van Kasper & Company; Salomon Brothers Inc.; J Bradford
& Co.; Pacific Crest Securities Inc.; Dain Rauscher; Morgan Stanley & Co.
Incorporated; and Hambrecht & Quist LLC.
(3) Subject to the restrictions in Section 4(i)(1), during the
period from the date of execution and delivery of this Agreement to the date
which is one year after the Closing Date, the Company shall not offer, sell,
contract to sell or issue (or engage any person to assist the Company in taking
any such action) any Discounted Securities without giving the Buyer the first
right to acquire the Discounted Securities on the same terms as the Discounted
Securities are to be offered to other investors. The Company shall give notice
to the Buyer of the detailed terms of the Discounted Securities proposed to be
issued and, promptly after requested by the Buyer, such other information as
requested by the Buyer. The Buyer may, by notice to the Company, exercise such
right of first refusal at any time until the later of (x) ten Business Days
after such notice from the Company to the Buyer and (y) three Business Days
after the Company provides such additional information as shall have been
requested by the Buyer.
(j) CERTAIN TRADING RESTRICTIONS. The Buyer agrees that on the Closing Date it
will have no short position in the Common Stock. So long as the Company is in
compliance in all material respects with its obligations to the Buyer under this
Agreement, the Certificate of Designation and the Registration Rights Agreement,
the Buyer agrees that (1) from the Closing Date until the date the Registration
Statement is declared effective by the SEC, it will not sell or contract to sell
any equity security of the Company or engage in any short sales or other hedging
transactions relating to the Common Stock and (2) during the period from the
date the Registration Statement is
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<PAGE> 18
declared effective by the SEC to the date of the conversion in full or
redemption of all Preferred Shares owned by the Buyer, the Buyer shall not
engage in short sales or other hedging transactions relating to the Common
Stock; provided, however, that the Buyer may enter into and maintain such
transactions involving up to 70,000 shares of Common Stock at any one time.
(k) BEST EFFORTS. Each of the parties shall use its best efforts timely to
satisfy each of the conditions to the other party's obligations to sell and
purchase the Preferred Shares set forth in Section 7 or 8, as the case may be,
of this Agreement on or before the Closing Date.
5. TRANSFER AGENT INSTRUCTIONS; CONVERSION PROCEDURE.
(a) TRANSFER AGENT INSTRUCTIONS. Prior to the Closing Date, the Company will (1)
execute and deliver the Transfer Agent Instructions in the form attached hereto
as ANNEX IV and thereby irrevocably instruct, American Stock Transfer & Trust
Company, as Transfer Agent and Registrar (the "Transfer Agent"), to issue
certificates for the Common Shares from time to time upon conversion of the
Preferred Shares and the Dividend Shares and exercise of the Warrants in such
amounts as specified from time to time to the Transfer Agent in the Notices of
Conversion surrendered in connection with such conversions and referred to in
Section 5(b) of this Agreement and the Form of Subscription in the form attached
to the Warrants and (2) appoint the Transfer Agent the conversion agent for the
Preferred Stock and the exercise agent for the Warrants. The certificates for
the Common Shares may bear the restrictive legend specified in Section 4(b) of
this Agreement prior to registration of the resale of the Common Shares under
the 1933 Act. The certificates for the Common Shares shall be registered in the
name of the Buyer or its designee and in such denominations to be specified by
the Buyer in connection with each conversion of Preferred Shares or Dividend
Shares or exercise of the Warrants. The Company warrants that no instruction
other than (x) such instructions referred to in this Section 5, (y) stop
transfer instructions to give effect to Section 4(a) hereof prior to
registration of the resale of the Common Shares under the 1933 Act and (z) the
instructions required by Section 3(n) of the Registration Rights Agreement will
be given by the Company to the Transfer Agent and that the Common Shares shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement. Nothing in this Section 5(a) shall
limit in any way the Buyer's obligations and agreement to comply with the
registration and prospectus delivery requirements of the 1933 Act upon resale of
the Shares. If the Buyer provides the Company with an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company and its
legal counsel, that registration of a resale by the Buyer of any of the Shares
is not required under the 1933 Act, the Company shall permit the transfer of
such Shares and, in the case of the Common Shares in accordance with clause
(1)(B) of Section 4(a) of this Agreement, promptly instruct the Company's
transfer agent to issue upon transfer one or more share certificates in such
name and in such denominations as specified by the Buyer within three trading
days after receipt of such opinion. Nothing in this Section 5(a) shall limit the
obligations of the Company under Section 3(n) of the Registration Rights
Agreement.
(b) CONVERSION PROCEDURE. In connection with the exercise of conversion rights
relating to the Preferred Shares, the Buyer or any subsequent holder of the
Preferred Shares shall complete, sign and furnish to the Transfer Agent a Notice
of Conversion of Series B Convertible Preferred
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<PAGE> 19
Stock in the form attached hereto as ANNEX V, which shall be deemed to satisfy
all requirements of the Certificate of Designation. The Buyer shall also give a
copy of the Conversion Notice to the Company as provided in the Certificate of
Designation.
6. CLOSING DATE.
Subject to the satisfaction or waiver of the conditions set forth in
Sections 7 and 8, the date and time of the issuance and sale of the Preferred
Shares (the "Closing Date") shall be 12:00 noon, Seattle, Washington time, on or
before the date which is three Business Days after the date of this Agreement,
or such other mutually agreed to time. The closing shall occur on the Closing
Date at the offices of ___________________________________.
7. CONDITIONS TO THE COMPANYAES OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell the
Preferred Shares and issue the Warrants to the Buyer pursuant to this Agreement
on the Closing Date is conditioned upon the satisfaction of the following
conditions precedent on or before the Closing Date (any or all of which may be
waived by the Company in its sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) Delivery by the Buyer to the Company of good funds as payment in
full of an amount equal to the Purchase Price for the Preferred Shares in
accordance with Section 1(b) hereof;
(c) The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Closing
Date and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or before the
Closing Date; and
(d) On the Closing Date, no legal action, suit or proceeding shall
be pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement.
8. CONDITIONS TO THE BUYERAES OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Shares and acquire the Warrants from the Company pursuant to this
Agreement on the Closing Date is conditioned upon the satisfaction of the
following conditions precedent on or before the Closing Date (any or all of
which may be waived by the Buyer in its sole discretion):
(a) Delivery by the Company to the Buyer of the certificates for the
Preferred Shares and the Warrants in accordance with this Agreement;
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<PAGE> 20
(b) The accuracy on the Closing Date of the representations and
warranties of the Company contained in this Agreement as if made on the Closing
Date and the performance by the Company on or before the Closing Date of all
covenants and agreements of the Company required to be performed on or before
the Closing Date and receipt by the Buyer of a certificate, dated the Closing
Date, of the Chief Executive Officer or the Chief Financial Officer of the
Company confirming such matters and such other matters as the Buyer may
reasonably request;
(c) The receipt by the Buyer of confirmation of the filing with the
Secretary of State of the State of Minnesota of the Certificate of Designation;
(d) The receipt by the Buyer of a certificate, dated the Closing
Date, of the Secretary of the Company certifying (1) the Certificate of
Incorporation and By-Laws of the Company as in effect on the Closing Date, (2)
all resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated hereby and
(3) such other matters as reasonably requested by the Buyer;
(e) The Transfer Agent shall have acknowledged receipt of the
Transfer Agent Instructions in the form attached hereto as ANNEX IV;
(f) Receipt by the Buyer on the Closing Date of an opinion of
Preston Gates & Ellis, counsel for the Company, dated the Closing Date, in form,
scope and substance reasonably satisfactory to the Buyer, to the effect set
forth in ANNEX VI attached hereto, and an opinion of Fredrikson & Byron, P.A.,
special counsel for the Company, dated the Closing Date, in form, scope and
substance reasonably satisfactory to the Buyer to the effect set forth in ANNEX
VII attached hereto; and
(g) On the Closing Date, no legal action, suit or proceeding shall
be pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement.
9. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Washington.
(b) COUNTERPARTS. This Agreement may be executed in counterparts and by the
parties hereto on separate counterparts, all of which together shall constitute
one and the same instrument. A facsimile transmission of this Agreement bearing
a signature on behalf of a party hereto shall be legal and binding on such
party. Although this Agreement is dated as of the date first set forth above,
the actual date of execution and delivery of this Agreement by each party is the
date set forth below such party's signature on the signature page hereof. Any
reference in this Agreement or in any of the documents executed and delivered by
the parties hereto in connection herewith to (1) the date of execution and
delivery of this Agreement by the Buyer shall be deemed a reference to the date
set forth below the Buyer's signature on the signature page hereof, (2) the date
of execution and delivery of this Agreement by the Company shall be deemed a
reference to the date set forth below the Company's signature on the signature
page hereof and (3) the date of
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execution and delivery of this Agreement or the date of execution and delivery
of this Agreement by the Buyer and the Company shall be deemed a reference to
the later of the dates set forth below the signatures of the parties on the
signature page hereof.
(c) HEADINGS, ETC.. The headings, captions and footers of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) SEVERABILITY. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
(e) AMENDMENTS. No amendment, modification, waiver, discharge or termination of
any provision of this Agreement nor consent to any departure by the Buyer or the
Company therefrom shall in any event be effective unless the same shall be in
writing and signed by the party to be charged with enforcement, and then shall
be effective only in the specific instance and for the purpose for which given.
No course of dealing between the parties hereto shall operate as an amendment of
this Agreement.
(f) WAIVERS. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
or any course of dealings between the parties, shall not operate as a waiver
thereof or an amendment hereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to enforce
such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) NOTICES. Any notices required or permitted to be given under the terms of
this Agreement shall be sent by mail or delivered personally (which shall
include telephone line facsimile transmission with answer back confirmation) or
by courier and shall be effective five days after being placed in the mail, if
mailed, or upon receipt, if delivered personally or by courier, in the case of
the Company addressed to the Company at its address shown in the introductory
paragraph of this Agreement, Attention: Chief Financial Officer (telephone line
facsimile transmission number (206) 292-6836 or, in the case of the Buyer, at
its address or telephone line facsimile transmission number shown on the
signature page of this Agreement, with a copy to ___________________________
(telephone line facsimile transmission number _____________) or such other
address or telephone line facsimile transmission number as a party shall have
provided by notice to the other party in accordance with this provision. The
Buyer hereby designates as its address for any notice required or permitted to
be given to the Buyer pursuant to the Certificate of Designation the address
shown on the signature page of this Agreement, with a copy to:
_____________________ (facsimile number ______________), until the Buyer shall
designate another address for such purpose.
(h) ASSIGNMENT. Prior to the Closing Date, the Buyer shall have the right to
assign its rights and obligations under this Agreement with respect to the
purchase of all or any portion of the
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<PAGE> 22
Preferred Shares and the issuance of the Warrants to any affiliate of the Buyer,
provided any such assignee, by written instrument duly executed by such
assignee, assumes all obligations of the Buyer hereunder with respect to the
purchase of the portion of the Preferred Shares or the acquisition of the
Warrants so assigned and makes the same representations and warranties with
respect thereto as the Buyer makes in this Agreement, whereupon the Buyer shall
be relieved of any further obligations, responsibilities and liabilities with
respect to the purchase of all or the portion of the Preferred Shares and
acquisition of the related Warrants the obligation for the purchase or
acquisition of which has been so assigned. In the case of any such assignment,
the Company shall agree in writing with such assignee to make available to such
assignee the benefits of the Registration Rights Agreement with respect to the
Common Shares issuable on conversion of the Preferred Shares and exercise of the
Warrants with respect to which the purchase under this Agreement has been so
assigned. Any transfer of the Preferred Shares, Dividend Shares or the Warrants
by the Buyer after the Closing Date shall be made in accordance with Section
4(a). After the Closing Date, the Buyer shall have the right to assign its
rights and obligations under this Agreement in connection with any transfer of
the Buyer's rights under the Registration Rights Agreement by compliance with
the provisions of Section 9 of the Registration Rights Agreement.
(i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective representations,
warranties, covenants and agreements of the Buyer and the Company contained in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall survive the delivery of payment for the Preferred Shares and
shall remain in full force and effect regardless of any investigation made by or
on behalf of them or any person controlling or advising any of them.
(j) ENTIRE AGREEMENT. This Agreement and its Annexes set forth the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersede all prior agreements and understandings, whether written or oral,
with respect thereto.
(k) TERMINATION. The Buyer shall have the right to terminate this Agreement by
giving notice to the Company at any time at or prior to the Closing Date if:
(1) the Company shall have failed, refused, or been unable at or
prior to the date of such termination of this Agreement to perform any
of its obligations hereunder;
(2) any other condition of the Buyer's obligations hereunder is
not fulfilled; or
(3) the closing shall not have occurred on a Closing Date on or
before April 30, 1998, other than solely by reason of a breach of this
Agreement by the Buyer.
Any such termination shall be effective upon the giving of notice thereof by the
Buyer. Upon such termination, the Buyer shall have no further obligation to the
Company hereunder and the Company shall remain liable for any breach of this
Agreement or the other documents contemplated hereby which occurred on or prior
to the date of such termination.
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<PAGE> 23
(l) FURTHER ASSURANCES. Each party to this Agreement will perform any and all
acts and execute any and all documents as may be necessary and proper under the
circumstances in order to accomplish the intents and purposes of this Agreement
and to carry out its provisions.
(m) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and the Buyer shall have
the right to approve before issuance any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of the
Buyer, to make any press release or other public disclosure with respect to such
transactions as is required by applicable law and regulations (although the
Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release and shall be provided
with a copy thereof).
(n) CONSTRUCTION. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.
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<PAGE> 24
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
and the Company by their respective officers or other representatives thereunto
duly authorized on the respective dates set forth below.
NUMBER OF SHARES: ____________
PRICE PER SHARE: $1,000.00
AGGREGATE PURCHASE PRICE: $________________
By:________________________________
Date:______________________________
Address:
IVI PUBLISHING, INC.
By:________________________________
Name:
Title:
Date:______________________________
<PAGE> 1
EXHIBIT 4.2
FORM OF
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of April 10, 1998 (this
"Agreement"), is made by and between IVI PUBLISHING, INC., a Minnesota
corporation (the "Company"), and the person named on the signature page hereto
(the "Initial Investor").
W I T N E S S E T H:
WHEREAS, in connection with the Subscription Agreement, dated as of
April 10, 1998, between the Initial Investor and the Company (the "Subscription
Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Subscription Agreement, to issue and sell to the Initial
Investor shares (the "Preferred Shares") of Series B Convertible Preferred
Stock, $.01 par value (the "Series B Preferred Stock"), of the Company as
provided in the Subscription Agreement, which Preferred Shares are convertible
into shares (the "Conversion Shares") of Common Stock, $.01 par value (the
"Common Stock"), of the Company, and to issue common stock purchase warrants
(the "Warrants") to purchase shares (the "Warrant Shares") of Common Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares, the Warrant Shares and the shares of Common Stock issuable
upon conversion of shares (the "Dividend Shares") of Series B Preferred Stock
which are issuable in payment of dividends on the Preferred Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
"Certificate of Designations" means the Certificate of Designations of
the Series B Convertible Preferred Stock as filed by the Company with the
Secretary of State of the State of Minnesota.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE> 2
"Investor" means the Initial Investor and any transferee or assignee who
agrees to become bound by the provisions of this Agreement in accordance with
Section 9 hereof.
"Nasdaq" means the Nasdaq SmallCap Market.
"register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the Securities Act and pursuant to Rule 415 under the Securities
Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
"Registrable Securities" means the Conversion Shares, the Warrant Shares
and any shares of Common Stock issued by the Company to any Investor upon
conversion of any Dividend Shares.
"Registration Period" means the period from the Closing Date to the
earlier of (i) the date which is three years after the SEC Effective Date, (ii)
the date on which each Investor may sell all of its Registrable Securities
without registration under the Securities Act pursuant to Rule 144, without
restriction on the manner of sale or the volume of securities which may be sold
in any period and without the requirement for the giving of any notice to, or
the making of any filing with, the SEC and (iii) the date on which the Investors
no longer beneficially own any Registrable Securities.
"Registration Statement" means a registration statement of the Company
under the Securities Act, including any amendment thereto.
"Rule 144" means Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit a holder
of any securities to sell securities of the Company to the public without
registration under the Securities Act.
"SEC Effective Date" means the date the Registration Statement is first
declared effective by the SEC.
"SEC Filing Date" means the date the Registration Statement is first
filed with the SEC pursuant to Section 2(a).
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms defined in the introductory paragraph or the
recitals to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Subscription Agreement.
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<PAGE> 3
2. REGISTRATION.
(a) MANDATORY REGISTRATION. The Company shall prepare, and on or prior
to the date which is 45 days after the Closing Date, file with the SEC a
Registration Statement on Form S-3, or, if Form S-3 is not available, Form S-1
or S-2, which, on the date of filing with the SEC, covers the resale by the
Initial Investor of a number of shares of Common Stock at least equal to the sum
of (x) the number of shares of Common Stock issuable upon conversion of the
Preferred Shares, determined as if the Preferred Shares, together with accrued
and unpaid dividends thereon, were converted in full on the SEC Filing Date (and
determined without regard to the limitation on beneficial ownership contained in
the proviso to the second sentence of Section 10(a) of the Certificate of
Designations), plus (y) the number of Warrant Shares (determined without regard
to the limitation on beneficial ownership contained in Section 1.1(b) of the
Warrants) and the resale of such additional number of shares of Common Stock as
the Company shall in its discretion determine to register in connection with the
conversion of Dividend Shares, and which Registration Statement shall state
that, in accordance with Rule 416 under the Securities Act, such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Preferred Shares and
Dividend Shares or exercise of the Warrants to prevent dilution resulting from
stock splits, stock dividends or similar transactions or by reason of changes in
the conversion price of the Preferred Shares and Dividend Shares in accordance
with the terms thereof. If at any time the number of shares of Common Stock
included in the Registration Statement required to be filed as provided in the
first sentence of this Section 2(a) shall be insufficient to cover the number of
shares of Common Stock issuable on conversion in full of the unconverted
Preferred Shares and Dividend Shares or the unexercised portions of Warrants,
then promptly, but in no event later than 20 days after such insufficiency shall
occur, the Company shall file with the SEC an additional Registration Statement
on Form S-3, or, if Form S-3 is not available, Form S-1 or S-2 (which shall not
constitute a post-effective amendment to the Registration Statement filed
pursuant to the first sentence of this Section 2(a)), covering such number of
shares of Common Stock as shall be sufficient to permit such conversion and
exercise. For all purposes of this Agreement such additional Registration
Statement shall be deemed to be the Registration Statement required to be filed
by the Company pursuant to Section 2(a) of this Agreement, and the Company and
the Investors shall have the same rights and obligations with respect to such
additional Registration Statement as they shall have with respect to the initial
Registration Statement required to be filed by the Company pursuant to this
Section 2(a).
(b) CERTAIN OFFERINGS. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering,
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering shall have the right to select one legal counsel
and an investment banker or bankers and manager or managers to administer the
offering, which investment banker or bankers or manager or managers shall be
reasonably satisfactory to the Company. The Investors who hold the Registrable
Securities to be included in such underwriting shall pay all underwriting
discounts and commissions and other fees and expenses of such investment banker
or bankers and manager or managers so selected in accordance with this Section
2(b) (other than fees and expenses relating to registration of
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<PAGE> 4
Registrable Securities under federal or state securities laws, which are payable
by the Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(c) ADJUSTMENTS OF CONVERSION TERMS. The Certificate of Designations
provides, among other things, that, if (1) the Registration Statement covering
the Registrable Securities which is required to be filed by the Company pursuant
to the first sentence of Section 2(a) (A) is not filed with the SEC within 45
days of the Closing Date, (B) is not effective within 120 days after the Closing
Date or (C) shall cease to be available for use by any holder of shares of
Series B Convertible Preferred Stock which 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 such Registration Statement
or the information contained in such Registration Statement having become
outdated) other than a Blackout Period (as defined in the Certificate of
Designations), or (2) a holder of shares of Series B Convertible Preferred Stock
becomes unable to convert any shares of Series B Convertible Preferred Stock in
accordance with Section 10(a) of the Certificate of Designations (other than by
reason of the 4.9% limitation set forth therein), then the Conversion Percentage
(as defined in the Certificate of Designations) shall be adjusted as provided in
the Certificate of Designations.
(d) PIGGY-BACK REGISTRATIONS. If at any time the Company shall determine
to prepare and file with the SEC a Registration Statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its equity securities, other than on FormaS-4 or FormaS-8 or their
then equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each Investor who is entitled to registration rights under this Section
2(d) written notice of such determination and, if within ten (10) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering for the account of the Company,
the managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)' judgment, such limitation is necessary to
effect an orderly public distribution, then the Company shall be obligated to
include in such Registration Statement only such limited portion of the
Registrable Securities with respect to which such Investor has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Investors seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Investors; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
Registration Statement; and provided further, however, that, after giving effect
to the immediately preceding proviso, any exclusion of Registrable Securities
shall be made pro rata with holders of other securities having the right to
include such securities in the Registration Statement, based on the number of
securities for which registration is requested except to the extent such pro
rata exclusion of such other securities is prohibited under any written
agreement entered into by the Company with the holder of such other securities
prior to
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<PAGE> 5
the date of this Agreement, in which case such other securities shall be
excluded, if at all, in accordance with the terms of such agreement. No right to
registration of Registrable Securities under this Section 2(d) shall be
construed to limit any registration required under Section 2(a) hereof. The
obligations of the Company under this Section 2(d) may be waived by Investors
holding a majority in interest of the Registrable Securities and shall expire
after the Company has afforded the opportunity for the Investors to exercise
registration rights under this Section 2(d) for two registrations; provided,
however, that any Investor who shall have had any Registrable Securities
excluded from any Registration Statement in accordance with this Section 2(d)
shall be entitled to include in an additional Registration Statement filed by
the Company the Registrable Securities so excluded. Notwithstanding any other
provision of this Agreement, if the Registration Statement required to be filed
pursuant to Section 2(a) of this Agreement shall have been ordered effective by
the SEC and the Company shall have maintained the effectiveness of such
Registration Statement as required by this Agreement and if the Company shall
otherwise have complied in all material respects with its obligations under this
Agreement, then the Company shall not be obligated to register any Registrable
Securities on such Registration Statement referred to in this Section 2(d).
(e) ELIGIBILITY FOR REGISTRATION STATEMENT FORMS. The Company meets the
requirements for the use of Forms S-1 and S-2 for registration of the
Registrable Securities for resale by the Investors. When the Company becomes
eligible to use Form S-3, the Company shall file all reports required to be
filed by the Company with the SEC in a timely manner so as to maintain such
eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of
the Registrable Securities, the Company shall:
(a) prepare promptly, and file with the SEC not later than 45 days after
the Closing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter to use its best
efforts to cause each Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing, and keep the
Registration Statement effective pursuant to Rule 415 at all times during the
Registration Period; submit to the SEC, within three business days after the
Company learns that no review of the Registration Statement will be made by the
staff of the SEC or that the staff of the SEC has no further comments on the
Registration Statement, as the case may be, a request for acceleration of
effectiveness of the Registration Statement to a time and date not later than 48
hours after the submission of such request; notify the Investors of the
effectiveness of the Registration Statement on the date the Registration
Statement is declared effective; and the Company represents and warrants to, and
covenants and agrees with, the Investors that the Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein), at the time it is first filed with the SEC, at the time it is ordered
effective by the SEC and at all time during which it is required to be effective
hereunder (and each such amendment and supplement at the time it is filed with
the SEC and at all time during which it is available for use in connection with
the offer and sale of the Registrable Securities) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
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<PAGE> 6
stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel, (1) promptly after the same
is prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
each letter written by or on behalf of the Company to the SEC or the staff of
the SEC and each item of correspondence from the SEC or the staff of the SEC
relating to such Registration Statement (other than any portion of any thereof
which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such securities or blue
sky laws of such jurisdictions as the Investors who hold a majority in interest
of the Registrable Securities being offered reasonably request, (ii) prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times until the end of
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto (I) to qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of process in any such
jurisdiction, (IV) to provide any undertakings that cause more than nominal
expense or burden to the Company or (V) to make any change in its Certificate of
Incorporation or by-laws, which in each case the Board of Directors of the
Company determines to be contrary to the best interests of the Company and its
shareholders;
(e) in the event that the Registrable Securities are being offered in an
underwritten offering, enter into and perform its obligations under an
underwriting agreement, in
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<PAGE> 7
usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering;
(f) as promptly as practicable after becoming aware of such event or
circumstance, notify each Investor of any event or circumstance of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, file such supplement or amendment with the SEC at
such time as shall permit the Investors to sell Registrable Securities pursuant
to the Registration Statement as promptly as practical, and deliver a number of
copies of such supplement or amendment to each Investor as such Investor may
reasonably request;
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
(h) permit a single firm of counsel designated as selling shareholders'
counsel by the Investors who hold a majority in interest of the Registrable
Securities being sold to review and comment on the Registration Statement and
all amendments and supplements thereto a reasonable period of time prior to
their filing with the SEC;
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
(j) at the request of the Investors who hold a majority in interest of
the Registrable Securities being sold, furnish on the date that Registrable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by any such Investor or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company
-7-
<PAGE> 8
(collectively, the "Records"), as shall be reasonably necessary to enable each
Inspector to exercise its due diligence responsibility, and cause the Company's
officers, directors and employees to supply all information which any Inspector
may reasonably request for purposes of such due diligence; provided, however,
that each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction or (iii)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at the CompanyAEs own expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential. The Company shall hold in confidence and shall not make any
disclosure of information concerning an Investor provided to the Company
pursuant to Section 4(e) hereof unless (i) disclosure of such information is
necessary to comply with federal or state securities laws, (ii) the disclosure
of such information is necessary to avoid or correct a misstatement or omission
in any Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other order from a court or governmental body of
competent jurisdiction or (iv) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company agrees that it shall, upon learning that disclosure
of such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to such Investor, at such InvestorAEs own expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information;
(l) use its best efforts (i) to cause all the Registrable Securities
covered by the Registration Statement to be listed on the Nasdaq or such other
principal securities market on which securities of the same class or series
issued by the Company are then listed or traded or (ii) if securities of the
same class or series as the Registrable Securities are not then listed on Nasdaq
or any such other securities market, to cause all of the Registrable Securities
covered by the Registration Statement to be listed on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to
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<PAGE> 9
be offered pursuant to the Registration Statement and enable such certificates
to be in such denominations or amounts as the case may be, as the managing
underwriter or underwriters, if any, or the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request; and, within three business days after a Registration
Statement which includes Registrable Securities is ordered effective by the SEC,
the Company shall deliver to the transfer agent for the Registrable Securities
(with copies to the Investors whose Registrable Securities are included in such
Registration Statement) an instruction substantially in the form attached hereto
as EXHIBIT 1 and shall cause legal counsel selected by the Company to deliver to
the Investors an opinion of such counsel in the form attached hereto as EXHIBIT
2 (with a copy to the Company's transfer agent);
(o) during the period the Company is required to maintain effectiveness
of the Registration Statement pursuant to Section 3(a), the Company shall not
bid for or purchase any Common Stock or any right to purchase Common Stock or
attempt to induce any person to purchase any such security or right if such bid,
purchase or attempt would in any way limit the right of the Investors to sell
Registrable Securities by reason of the limitations set forth in Regulation M
under the Exchange Act; and
(p) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investors of the Registrable Securities pursuant
to the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least four (4) days prior
to the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if any of such Investor's
Registrable Securities are eligible for inclusion in the Registration Statement.
If at least one (1) business day prior to the filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor but shall not
be relieved of its obligation to file a Registration Statement with the SEC
relating to the Registrable Securities of such Non-Responsive Investor promptly
after such Non-Responsive Investor provides the Requested Information;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has
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<PAGE> 10
notified the Company in writing of such Investor's election to exclude all of
such Investor's Registrable Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses of
the underwriters applicable with respect to its Registrable Securities, in each
case to the extent not payable by the Company pursuant to the terms of this
Agreement.
5. EXPENSES OF REGISTRATION. All reasonable expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 3, including,
without limitation, all registration, listing and qualifications fees, printers
and accounting fees and the fees and disbursements of counsel for the Company
and the Investors, shall be borne by the Company, provided, however, that the
Investors shall bear the fees and out-of-pocket expenses of the one legal
counsel selected by the Investors pursuant to Section 2(b) hereof.
6. INDEMNIFICATION. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
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<PAGE> 11
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act, any underwriter (as defined in the
Securities Act) for the Investors, the directors, if any, of such underwriter
and the officers, if any, of such underwriter, and each person, if any, who
controls any such underwriter within the meaning of the Securities Act or the
Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages, liabilities or expenses (joint or several) incurred (collectively,
"Claims") to which any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any of the following statements, omissions or violations in the
Registration Statement, or any post-effective amendment thereof, or any
prospectus included therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to the restrictions set forth in Section 6(d) with
respect to the number of legal counsel, the Company shall reimburse the
Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (I) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement, the prospectus or any such amendment thereof or supplement thereto,
if such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) with respect to any preliminary prospectus shall not inure to
the benefit of any such person from whom the person asserting any such Claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(c) hereof; and (III)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investors pursuant to Section 9.
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<PAGE> 12
(b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, any underwriter and any other
shareholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such shareholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and such Investor will reimburse
any legal or other expenses reasonably incurred by any Indemnified Party in
connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 6(b) for only that amount of a Claim as does not
exceed the amount by which the net proceeds to such Investor from the sale of
Registrable Securities pursuant to such Registration Statement exceeds the cost
of such Registrable Securities to such Investor. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel selected by the indemnifying party but reasonably
acceptable to the Indemnified Person or the Indemnified Party, as the case may
be; provided, however, that an Indemnified Person or Indemnified Party shall
have the right to retain its own counsel with the fees and expenses to be paid
by the indemnifying party,
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<PAGE> 13
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. In such event, the
Company shall pay for only one separate legal counsel for the Investors; such
legal counsel shall be selected by the Investors holding a majority in interest
of the Registrable Securities included in the Registration Statement to which
the Claim relates. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as such
expense, loss, damage or liability is incurred and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the amount by which the net amount of proceeds received by such seller from
the sale of such Registrable Securities exceeds the purchase price paid by such
seller for such Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 and the Exchange
Act, (ii) a copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company and (iii) such
other information as may be reasonably requested to permit the Investors to sell
such securities pursuant to Rule 144 without registration.
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<PAGE> 14
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of all or any portion
of such securities (or all or any portion of the Preferred Shares, the Dividend
Shares or the Warrants) only if: (a) the Investor agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment, (b) the
Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (i) the name and address of such transferee or
assignee and (ii) the securities with respect to which such registration rights
are being transferred or assigned, (c) immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws, and (d) at or before the time the Company received the written notice
contemplated by clause (b) of this sentence the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein.
In connection with any such transfer the Company shall, at its sole cost and
expense, promptly after such assignment take such actions as shall be reasonably
acceptable to the Initial Investor and such transferee to assure that the
Registration Statement and related prospectus are available for use by such
transferee for sales of the Registrable Securities in respect of which the
rights to registration have been so assigned. In connection with any such
assignment, each Investor shall have the right to assign to such transferee such
Investor's rights under the Subscription Agreement by notice of such assignment
to the Company. Following such notice of assignment of rights under the
Subscription Agreement, the Company shall be obligated to such transferee to
perform all of its covenants under of the Subscription Agreement as if such
transferee were the Buyer under the Subscription Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold a majority in interest of
the Registrable Securities. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
(i) if to the Company, at 1601 Fifth Avenue, Suite 1900, Seattle, Washington,
98101, Attention: Chief Financial Officer, telephone line facsimile transmission
number (206) 292-6836, with a copy to C. Kent Carlson, Esq., Preston Gates &
Ellis LLP, 701 Fifth Avenue, Seattle, Washington 98104 (telephone line
facsimile
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<PAGE> 15
number (206) 623-7022), (ii) if to the Initial Investor, ______________________,
telephone line facsimile transmission number _________________ and (iii) if to
any other Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 11(b).
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of Washington applicable to agreements
made and to be performed entirely within such State. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to perform
its obligations under this Agreement, including, without limitation, the
Company's obligations under Section 3(n), or any delay in such performance could
result in damages to the Investors and the Company agrees that, in addition to
any other liability the Company may have by reason of any such failure or delay,
the Company shall be liable for all direct and consequential damages caused by
any such failure or delay.
(j) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
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<PAGE> 16
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
IVI PUBLISHING, INC.
By: ______________________________
Name:
Title:
By: ______________________________
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<PAGE> 17
EXHIBIT 1
TO
REGISTRATION
RIGHTS AGREEMENT
[Company Letterhead]
[Date]
American Stock Transfer & Trust Company,
as Transfer Agent, Warrant Agent and Registrar
6201 Fifteenth Avenue
Brooklyn, New York 11219
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction
to you [(1) to transfer or re-register the certificates for the shares of Common
Stock, $.01 par value (the "Common Stock"), of IVI Publishing, Inc., a Minnesota
corporation (the "Company"), represented by certificate numbers _______ and
_______ for an aggregate of _______ shares (the "Outstanding Shares") of Common
Stock presently registered in the name of [Name of Investors] upon surrender of
such certificate(s) to you, notwithstanding the legend appearing on such
certificates, and (2) ] to issue (a) shares (the "Conversion Shares") of Common
Stock to or upon
- ----------
(1) Omit if no conversions of Preferred Stock or exercises of Warrants have
occurred before SEC registration is declared effective.
1-17
<PAGE> 18
the order of the holder from time to time on conversion of the shares (the
"Preferred Shares") of Series B Convertible Preferred Stock, a a a par value, of
the Company upon receipt by you of a Notice of Conversion of Series B
Convertible Preferred Stock in the form enclosed herewith, and (b) shares (the
"Warrant Shares") of Common Stock to or upon the order of the holder from time
to time on exercise of the Common Stock Purchase Warrants (the "Warrants")
exercisable for Common Stock issued by the Company upon receipt by you of a
Subscription Form from such holder in the form enclosed herewith. [The transfer
or re-registration of the certificates for the Outstanding Shares by you should
be made at such time as you are requested to do so by the record holder of the
Outstanding Shares. The certificate issued upon such transfer or re-registration
should be registered in such name as requested by the holder of record of the
certificate surrendered to you and should not bear any legend which would
restrict the transfer of the shares represented thereby. In addition, you are
hereby directed to remove any stop-transfer instruction relating to the
Outstanding Shares.] Certificates for the Conversion Shares and Warrant Shares
should not bear any restrictive legend and should not be subject to any
stop-transfer restriction.
Contemporaneously with the delivery of this letter, the Company is
delivering to you an opinion of Preston Gates & Ellis LLP as to registration of
the Outstanding Shares and the Conversion Shares and Warrant Shares under the
Securities Act of 1933, as amended.
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<PAGE> 19
Should you have any questions concerning this matter, please contact me.
Very truly yours,
IVI PUBLISHING, INC.
By:a a
--------------------------------
Name:
Title:
Enclosures
cc: [Names of Investors]
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<PAGE> 20
EXHIBIT 2
TO
REGISTRATION
RIGHTS AGREEMENT
aaaaaaaaaaaaaaa aaa, 1998
[Names and Addresses of Investors]
IVI PUBLISHING, INC.
ASHARES OF COMMON STOCKA
Ladies and Gentlemen:
We are counsel to IVI Publishing, Inc., a Minnesota corporation (the
"Company"), and we understand that the Company has sold to [Names of Investors]
(the "Holders") an aggregate of 5,000 shares (the "Preferred Shares") of the
CompanyAEs Series B Convertible Preferred Stock, $.01 par value (the "Preferred
Stock") and issued to the Holders Common Stock Purchase Warrants (the
"Warrants"). The Preferred Shares were sold, and the Warrants were issued, to
the Holders pursuant to several Subscription Agreements, dated as of April 10,
1998, between the Holders and the Company (the "Subscription Agreements").
Pursuant to the several Registration Rights Agreements, dated as of April 10,
1998, between the Company and each Holder (the "Registration Rights Agreements")
entered into in connection with the purchase by the Holders of the Preferred
Shares, the Company agreed with each Holder, among other things, to register for
resale (1) the shares (the "Conversion Shares") of Common Stock issuable upon
conversion of the Preferred Shares and conversion of the shares of Preferred
Stock issuable as dividends on the Preferred Shares and (2) the shares (the
"Warrant Shares") of Common Stock issuable upon exercise of the Warrants under
the Securities Act of 1933, as amended (the "Securities Act"), upon the terms
provided in the Registration Rights Agreements. The Conversion Shares and the
Warrant Shares are referred to herein collectively as the "Shares". Pursuant to
the Registration Rights Agreements, on aaaaaaaaa aaa, 1998 the Company filed a
Registration Statement on Form [S-1, S-2] (File No. 333-__________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Shares, which names the Holders as selling shareholders
thereunder.
[Other introductory and scope of examination language to be inserted]
Based on the foregoing, we are of the opinion that:
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<PAGE> 21
(1) Since the Closing Date, the Company has timely filed
with the SEC all forms, reports and other documents required to be
filed with the SEC under the Securities Exchange Act of 1934, as
amended (the "1934 Act"). All of such forms, reports and other
documents complied, when filed, in all material respects, with all
applicable requirements of the 1933 Act and the 1934 Act;
(2) The Registration Statement and the Prospectus contained
therein (other than the financial statements and schedules and other
financial and statistical information contained or incorporated by
reference therein, as to which we have not been requested to and do
not express any opinion) comply as to form in all material respects
with the applicable requirements of the 1933 Act and the rules and
regulations promulgated thereunder; and
(3) The Registration Statement has become effective under
the 1933 Act, to the best of our knowledge after due inquiry, no stop
order proceedings with respect thereto have been instituted or
threatened by the SEC. The Shares have been registered, and are
available for resale, under the 1933 Act.
Members of this firm's Primary Lawyer Group (as defined
below) have participated in the preparation of the Registration Statement and
the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although we are not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to the attention of the Primary
Lawyer Group that leads them to believe either that the Registration Statement
at the time the Registration Statement became effective contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus contained in the Registration Statement, as of its date,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading (it
being understood that we have not been requested to and do not express any view
with respect to the financial statements and schedules and other financial and
statistical data included or incorporated by reference in the Registration
Statement or the Prospectus contained therein). For purposes of this letter, the
term "Primary Lawyer Group" shall mean Mark R. Beatty and Christopher H.
Cunningham.
Paragraph (3) of this opinion may be relied upon by
American Stock Transfer & Trust Company, as Transfer Agent, Warrant Agent and
Registrar (the "Transfer Agent") as if addressed to the Transfer Agent.
Very truly yours,
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<PAGE> 22
cc: American Stock Transfer & Trust Company,
as Transfer Agent, Warrant Agent and Registrar
2-23
<PAGE> 1
EXHIBIT 4.3
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
Right to Purchase __________ Shares of
Common Stock of IVI Publishing, Inc.
IVI PUBLISHING, INC.
FORM OF
COMMON STOCK PURCHASE WARRANT
NO. W-1
IVI PUBLISHING, INC., a Minnesota corporation (the "Company"),
hereby certifies that, for value received, [NAME OF BUYER] or registered assigns
(the "Holder"), is entitled, subject to the terms set forth below, to purchase
from the Company at any time or from time to time after the date hereof, and
before 5:00 p.m., New York City time, on the Expiration Date (as hereinafter
defined), __________ fully paid and nonassessable shares of Common Stock at a
purchase price per share equal to the Purchase Price (as hereinafter defined).
The number of such shares of Common Stock and the Purchase Price are subject to
adjustment as provided in this Warrant.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
"Common Stock" includes the Company's Common Stock, $.01 par
value per share, as authorized on the date hereof, and any other
securities into which or for which the Common Stock may be converted or
exchanged pursuant to a plan of recapitalization, reorganization,
merger, sale of assets or otherwise.
"Company" shall include IVI Publishing, Inc. and any corporation
that shall succeed to or assume the obligation of IVI Publishing, Inc.
hereunder in accordance with the terms hereof.
"Expiration Date" means April 10, 2003.
"Issuance Date" shall mean the first date of original issuance
of this Warrant.
<PAGE> 2
"Other Securities" refers to any stock (other than Common Stock)
and other securities of the Company or any other person (corporate or
otherwise) which the Holder at any time shall be entitled to receive, or
shall have received, on the exercise of this Warrant, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or
shall have been issued in exchange for or in replacement of Common Stock
or Other Securities pursuant to Section 4.
"Purchase Price" shall mean $ 11.23 per share, subject to
adjustment as provided in this Warrant.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of April 10, 1998, by and between the Company and
the original Holder of this Warrant, as amended from time to time in
accordance with its terms.
"Subscription Agreement" means the Subscription Agreement, dated
as of April 10, 1998, by and between the Company and the original Holder
of this Warrant.
"Trading Day" means a day on which the principal securities
market for the Common Stock is open for general trading of securities.
1. EXERCISE OF WARRANT.
1.1 EXERCISE. (a) This Warrant may be exercised by the Holder
hereof in full or in part at any time or from time to time during the exercise
period specified in the first paragraph hereof until the Expiration Date by
surrender of this Warrant and the subscription form annexed hereto (duly
executed by the Holder), to the Company's transfer agent and registrar for the
Common Stock, and by making payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount obtained by multiplying
(a) the number of shares of Common Stock designated by the Holder in the
subscription form by (b) the Purchase Price then in effect. On any partial
exercise the Company will forthwith issue and deliver to or upon the order of
the Holder hereof a new Warrant or Warrants of like tenor, in the name of the
Holder hereof or as the Holder (upon payment by the Holder of any applicable
transfer taxes) may request, providing in the aggregate on the face or faces
thereof for the purchase of the number of shares of Common Stock for which such
Warrant or Warrants may still be exercised.
(b) Notwithstanding any other provision of this Warrant, in no
event shall the Holder be entitled at any time to purchase a number of shares of
Common Stock on exercise of this Warrant in excess of that number of shares upon
purchase of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and all persons whose beneficial ownership of
shares of Common Stock would be aggregated with the Holder's beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation
13D-G thereunder, (each such person other than the Holder an "Aggregated Person"
and all such persons other than the Holder, collectively, the "Aggregated
Persons") (other than shares of Common Stock deemed beneficially owned through
the ownership by the Holder and all Aggregated Persons of the Holder of the
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<PAGE> 3
unexercised portion of this Warrant and any other security of the Company which
contains similar provisions) and (2) the number of shares of Common Stock
issuable upon exercise of the portion of this Warrant with respect to which the
determination in this sentence is being made, would result in beneficial
ownership by the Holder and all Aggregated Persons of the Holder of more than
4.9% of the outstanding shares of Common Stock. For purposes of 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 immediately preceding sentence. For
purposes of the second preceding sentence, the Company shall be entitled to
rely, and shall be fully protected in relying, on any statement or
representation made by the Holder to the Company in connection with a particular
exercise of this Warrant, without any obligation on the part of the Company to
make any inquiry or investigation or to examine its records or the records of
any transfer agent for the Common Stock.
1.2 NET ISSUANCE. Notwithstanding anything to the contrary
contained in Section 1.1, the Holder may elect to exercise this Warrant in whole
or in part by receiving shares of Common Stock equal to the net issuance value
(as determined below) of this Warrant, or any part hereof, upon surrender of
this Warrant to the Company's transfer agent and registrar for the Common Stock
the principal office of the Company together with the subscription form annexed
hereto (duly executed by the Holder), in which event the Company shall issue to
the Holder a number of shares of Common Stock computed using the following
formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Common Stock to be issued to
the Holder
Y = the number of shares of Common Stock as to
which this Warrant is to be exercised
A = the current fair market value of one share of
Common Stock calculated as of the last
trading day immediately preceding the
exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of Common Stock as of
a specified date shall mean with respect to each share of Common Stock the
average of the closing sale price of the Common Stock on the principal
securities market on which the Common Stock may at the time be listed or, if
there have been no sales on any such exchange on such day, the average of the
highest bid and lowest asked prices on the principal securities market at the
end of such day, or, if on such day the Common Stock is not so listed, the
average of the representative bid and asked prices quoted in the Nasdaq System
as of 4:00 p.m., New York City time, or, if on such day the Common Stock is not
quoted in the Nasdaq System, the average of the highest bid and lowest asked
price on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in each such case
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<PAGE> 4
averaged over a period of five consecutive Trading Days consisting of the day as
of which the current fair market value of a share of Common Stock is being
determined (or if such day is not a Trading Day, the Trading Day next preceding
such day) and the four consecutive Trading Days prior to such day. If on the
date for which current fair market value is to be determined the Common Stock is
not listed on any securities exchange or quoted in the Nasdaq System or the
over-the-counter market, the current fair market value of Common Stock shall be
the highest price per share which the Company could then obtain from a willing
buyer (not a current employee or director) for shares of Common Stock sold by
the Company, from authorized but unissued shares, as determined in good faith by
the Board of Directors of the Company, unless prior to such date the Company has
become subject to a merger, acquisition or other consolidation pursuant to which
the Company is not the surviving party, in which case the current fair market
value of the Common Stock shall be deemed to be the value received by the
holders of the Company's Common Stock for each share thereof pursuant to the
Company's acquisition.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon as
practicable after the exercise of this Warrant, and in any event within three
Trading Days thereafter, the Company at its expense (including the payment by it
of any applicable issue or stamp taxes) will cause to be issued in the name of
and delivered to the Holder hereof, or as the Holder (upon payment by the Holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, in such
denominations as may be requested by the Holder, plus, in lieu of any fractional
share to which the Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current fair market value (as determined in
accordance with subsection 1.2) of one full share, together with any other stock
or other securities any property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Upon
exercise of this Warrant as provided herein, the CompanyAEs obligation to issue
and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the 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
Company to the Holder, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other person
of any obligation to the Company, and irrespective of any other circumstance
which might otherwise limit such obligation of the Company to the Holder in
connection with such exercise. If the Company fails to issue and deliver the
certificates for the Common Stock to the Holder pursuant to the first sentence
of this paragraph as and when required to do so, in addition to any other
liabilities the Company may have hereunder and under applicable law, the Company
shall pay or reimburse the Holder on demand for all reasonable out-of-pocket
expenses including, without limitation, fees and expenses of legal counsel
incurred by the Holder as a result of such failure.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time, all the holders
of Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of shareholders eligible to receive)
shall have become entitled to receive, without payment therefor,
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<PAGE> 5
(a) other or additional stock or other securities or property
(other than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of
earnings or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate
rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder, on the exercise hereof
as provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 3) which the Holder would hold on the
date of such exercise if on the date thereof the Holder had been the holder of
record of the number of shares of Common Stock called for on the face of this
Warrant and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and all such other or
additional stock and other securities and property (including cash in the case
referred to in subdivisions (b) and (c) of this Section 3) receivable by the
Holder as aforesaid during such period, giving effect to all adjustments called
for during such period by Section 4.
4. EXERCISE UPON REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case at any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition of such reorganization,
consolidation, merger, sale or conveyance, the Company shall give at least 20
days notice to the Holder of such pending transaction whereby the Holder shall
have the right to exercise this Warrant prior to any such reorganization,
consolidation, merger, sale or conveyance. Any exercise of this Warrant pursuant
to notice under this Section shall be conditioned upon the closing of such
reorganization, consolidation, merger, sale or conveyance which is the subject
of the notice and the exercise of this Warrant shall not be deemed to have
occurred until immediately prior to the closing of such transaction.
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that the
Company shall (i) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the Purchase Price in effect immediately prior
to such event by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so
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<PAGE> 6
obtained shall thereafter be the Purchase Price then in effect. The Purchase
Price, as so adjusted, shall be readjusted in the same manner upon the happening
of any successive event or events described herein in this Section 5. The Holder
shall thereafter, on the exercise hereof as provided in Section 1, be entitled
to receive that number of shares of Common Stock determined by multiplying the
number of shares of Common Stock which would be issuable on such exercise
immediately prior to such issuance by a fraction of which (i) the numerator is
the Purchase Price in effect immediately prior to such issuance and (ii) the
denominator is the Purchase Price in effect on the date of such exercise.
6. FURTHER ASSURANCES. The Company will take all action that may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable shares of stock, free from all taxes, liens
and charges with respect to the issue thereof, on the exercise of all or any
portion of this Warrant from time to time outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend on, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company
or any transfer of all or substantially all of the assets of the Company
to or consolidation or merger of the Company with or into any other
person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall also state that the action in question or the
record date is subject to the effectiveness of a registration statement under
the Securities Act of 1933, as amended (the "Securities Act"), or a favorable
vote of shareholders if either is required. Such notice shall be
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<PAGE> 7
mailed at least ten days prior to the date specified in such notice on which any
such action is to be taken or the record date, whichever is earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS.
The Company will at all times reserve and keep available out of its authorized
but unissued shares of capital stock, solely for issuance and delivery on the
exercise of this Warrant, a sufficient number of shares of Common Stock (or
Other Securities) to effect the full exercise of this Warrant and the exercise,
conversion or exchange of any other warrant or security of the Company
exercisable for, convertible into, exchangeable for or otherwise entitling the
holder to acquire shares of Common Stock (or Other Securities), and if at any
time the number of authorized but unissued shares of Common Stock (or Other
Securities) shall not be sufficient to effect such exercise, conversion or
exchange, the Company shall take such action as may be necessary to increase its
authorized but unissued shares of Common Stock (or Other Securities) to such
number as shall be sufficient for such purposes.
9. TRANSFER OF WARRANT. This Warrant shall inure to the benefit
of the successors to and assigns of the Holder. This Warrant and all rights
hereunder, in whole or in part, are registrable at the office or agency of the
Company referred to below by the Holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the
principal office of the Company (or such other office as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner of such Warrant.
The Company shall be entitled to treat the person in whose name this Warrant is
so registered as the sole and absolute owner of this Warrant for all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon the
surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares as shall be designated by said Holder hereof at the time
of such surrender.
12. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
13. WARRANT AGENT. In accordance with the Transfer Agent
Instruction, dated April 9, 1998, from the Company to American Stock Transfer &
Trust Company, as Transfer Agent and Registrar (the "Transfer Agent"), the
Company has appointed the Transfer Agent as
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<PAGE> 8
the exercise agent for purposes of issuing shares of Common Stock (or Other
Securities) on the exercise of this Warrant pursuant to Section 1, exchanging
this Warrant pursuant to Section 11 and replacing this Warrant pursuant to
Section 12, or any of the foregoing, and thereafter any such exchange or
replacement, as the case may be, shall be made at such office by such agent.
14. REMEDIES. The Company stipulates that the remedies at law of
the Holder in the event of any default or threatened default by the Company in
the performance of or compliance with any of the terms of this Warrant are not
and will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
shareholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the Holder hereof to purchase Common Stock, and no mere
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of the Holder for the Purchase Price or as a shareholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
16. NOTICES, ETC. All notices and other communications from the
Company to the registered Holder shall be mailed by first class certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by the Holder or at the address shown for the Holder on the register of
Warrants referred to in Section 10.
17. TRANSFER RESTRICTIONS. By acceptance of this Warrant, the
Holder represents to the Company that this Warrant is being acquired for the
HolderAEs own account and for the purpose of investment and not with a view to,
or for sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling the Warrant or the Common Stock issuable
upon exercise of the Warrant. The Holder acknowledges and agrees that this
Warrant and, except as otherwise provided in the Registration Rights Agreement,
the Common Stock issuable upon exercise of this Warrant (if any) have not been
(and at the time of acquisition by the Holder, will not have been or will not
be), registered under the Securities Act or under the securities laws of any
state, in reliance upon certain exemptive provisions of such statutes. The
Holder further recognizes and acknowledges that because this Warrant and, except
as provided in the Subscription Agreement, the Common Stock issuable upon
exercise of this Warrant (if any) are unregistered, they may not be eligible for
resale, and may only be resold in the future pursuant to an effective
registration statement under the Securities Act and any applicable state
securities laws, or pursuant to a valid exemption from such registration
requirements. Unless the shares of Common Stock issuable upon exercise of this
Warrant have theretofore been registered for resale under the Securities Act,
the Company may require, as a condition to the issuance of Common Stock upon the
exercise of this Warrant (i) in the case of an exercise in accordance with
Section 1.1 hereof, a confirmation as of the date of exercise of the Holder's
representations pursuant to this Section 17, or (ii) in the case of an exercise
in accordance with Section 1.2 hereof, an opinion of counsel reasonably
satisfactory to the Company that the shares of Common Stock to be issued upon
such exercise may be issued without registration under the Securities Act.
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<PAGE> 9
18. LEGEND. Unless theretofore registered for resale under the
Securities Act, each certificate for shares issued upon exercise of this Warrant
shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be resold,
transferred or assigned in the absence of an effective registration
statement for the securities under the Securities Act of 1933, as
amended, or an opinion of counsel that registration is not required
under said Act.
19. MISCELLANEOUS. This Warrant and any terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the internal laws of the State of Nevada. The
headings in this Warrant are for purposes of reference only, and shall not limit
or otherwise affect any of the terms hereof. The invalidity or unenforceability
of any provision hereof shall in no way affect the validity or enforceability of
any other provision.
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<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on its behalf by one of its officers thereunto duly authorized.
Dated: April 10, 1998 IVI PUBLISHING, INC.
By:________________________________
Title:_____________________________
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<PAGE> 11
FORM OF SUBSCRIPTION
IVI PUBLISHING, INC.
(To be signed only on exercise of Warrant)
TO: American Stock Transfer & Trust Company,
as Exercise Agent
6201 Fifteenth Avenue
Brooklyn, New York 11219
1. The undersigned Holder of the attached original, executed Warrant
hereby elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as defined in the Warrant, of IVI
Publishing, Inc., a Minnesota Corporation (the "Company").
2. The undersigned Holder (check one):
- (a) elects to pay the aggregate purchase price for such shares of
Common Stock (the "Exercise Shares") (i) by lawful money of the
United States or the enclosed certified or official bank check
payable in United States dollars to the order of the Company in
the amount of $___________, or (ii) by wire transfer of United
States funds to the account of the Company in the amount of
$____________, which transfer has been made before or
simultaneously with the delivery of this Form of Subscription
pursuant to the instructions of the Company;
or
- (b) elects to receive shares of Common Stock having a value equal to
the value of the Warrant calculated in accordance with Section
1.2 of the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned or
in such other names as is specified below:
4. The undersigned Holder hereby represents to the Company that the
exercise of the Warrant elected hereby does not violate Section 1.1(b) of the
Warrant.
Name:___________________________________
Address:________________________________
<PAGE> 12
Dated:____________ ___, ____ ________________________________________
(Signature must conform to name of
Holder as specified on the face of the
Warrant)
-12-
<PAGE> 1
EXHIBIT 4.4
IVI PUBLISHING, INC.
CERTIFICATE OF DESIGNATION OF
SERIES B CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 302A.401 of the Minnesota
Business Corporation Act)
IVI Publishing, Inc., a Minnesota corporation (the
"Corporation"), in accordance with the provisions of Section 302A.401 of the
Minnesota Business Corporation Act, DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of
the Corporation by the Articles of Incorporation of the Corporation, the Board
of Directors of the Corporation, by unanimous written consent dated March 30,
1998, adopted a resolution providing for the creation of a series of the
Corporation's Preferred Stock, $.01 par value, which series is designated as
"Series B Convertible Preferred Stock," which resolution is as follows:
RESOLVED, that pursuant to authority vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors does hereby provide for the creation of a series of the Preferred
Stock, $.01 par value (hereinafter called the "Preferred Stock"), of the
Corporation, and to the extent that the voting powers and the designations,
preferences and relative, participating, optional or other special rights
thereof and the qualifications, limitations or restrictions of such rights have
not been set forth in the Articles of Incorporation of the Corporation, does
hereby fix the same as follows:
SERIES B CONVERTIBLE PREFERRED STOCK
SECTION 1. 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
<PAGE> 2
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 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 the date of filing of this
Certificate of Designation with the Secretary of State of the State of
Minnesota); 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 10(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.
"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.
-2-
<PAGE> 3
"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.
"Conversion Date" means, with respect to each conversion of
shares of Series B Convertible Preferred Stock pursuant to Section 10, 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 10(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:
<TABLE>
<CAPTION>
Conversion
Conversion Date Percentage
--------------- ----------
<S> <C>
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%
</TABLE>
; 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:
-3-
<PAGE> 4
(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 the date of filing of this Certificate of Designation with the Secretary
of State of the State of Minnesota); and
(2) for any Conversion Date on or after the date which is 91
days after the Issuance Date, the lesser of:
(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 10(b)(6).
"Conversion Rate" shall have the meaning provided in Section
10(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 10(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 10(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 9(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 9(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.
-4-
<PAGE> 5
"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 5(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
11.
"Inconvertibility Notice" shall have the meaning provided in
Section 7(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
5(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
-5-
<PAGE> 6
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 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;
-6-
<PAGE> 7
(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 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
-7-
<PAGE> 8
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 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
-8-
<PAGE> 9
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 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)
-9-
<PAGE> 10
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 the date of filing this
Certificate of Designation with the Secretary of State of the State of
Minnesota), 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:
<TABLE>
<CAPTION>
Number of
Date Trading Days
---- ------------
<S> <C>
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
</TABLE>
"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:
(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;
-10-
<PAGE> 11
(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 10 or (B) any other material obligation, in each
case to a holder of shares of Series B Convertible Preferred Stock under
the terms of this Certificate of Designation 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 notice is thereby requiring the Corporation
to redeem shares of Series B Convertible Preferred Stock pursuant to Section 11,
(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.
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"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 9(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 9(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 9(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 5).
"Person" means an individual, partnership, corporation, limited
liability company, trust, incorporated organization, unincorporated association
or joint stock company.
"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 5) to the date
of determination times (b) the Premium Percentage.
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"Redemption Date" means the date of a redemption of shares of
Series B Convertible Preferred Stock pursuant to Section 9(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 10(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.
"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."
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"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 7(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.
"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.
SECTION 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
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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.
SECTION 3. SERIES B PREFERRED STOCK CAPITAL. The amount to be
represented in the Series B Convertible Preferred Stock capital of the
Corporation at all times for each outstanding share of Series B Convertible
Preferred Stock shall be the greater of (i) the Premium Price and (ii) the
Converted Market Price. The Corporation shall take such action as may be
required to maintain the amount required by this Section 3 to be represented in
stated capital for the Series B Convertible Preferred Stock not less frequently
than monthly.
SECTION 4. RANK. Except as approved by the affirmative vote or
written consent of the Majority Holders pursuant to Section 12(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.
SECTION 5. 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 5(b) hereof, Dividend Shares or any combination of cash and 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
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<PAGE> 16
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 5
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 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
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<PAGE> 17
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 10(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
(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 11 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 11 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
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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 5(c) and (ii) the Converted Market Price on the date of
purchase pursuant to this Section 5(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 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 5(d) and (ii) the
Converted Market Price on the date of purchase pursuant to this Section 5(d).
SECTION 6. 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
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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.
SECTION 7. 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 10 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 5 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 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 10(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 10, all of the portion of the Maximum Share
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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 10(a) as a
consequence of the limitations set forth in Section 7(a)(1) had the shares of
Series B Convertible Preferred Stock held by such 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 10(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
7(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 10(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 7(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 10(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
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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 7(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
7(a)(2), thereafter the provisions of Section 7(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 7(a)), the
Corporation shall make payment in immediately available funds of the 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 7(a).
SECTION 8. 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.
SECTION 9. 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 this 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
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<PAGE> 22
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 11 by
reason of such Optional Redemption Event or (B) shall have exercised optional
redemption rights under Section 11 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 9(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 9(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 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 9(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 9(a) shall
be entitled to convert such shares of Series B Convertible Preferred Stock in
accordance with Section 10 (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 10 or the optional redemption right pursuant to Section 11
may be redeemed by the Corporation pursuant to this Section 9(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 this 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
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<PAGE> 23
Redemption Date, any holder of shares of Series B Convertible Preferred Stock
(a) shall be entitled to exercise optional redemption rights under Section 11 by
reason of such Optional Redemption Event or (b) shall have exercised optional
redemption rights under Section 11 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 9(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 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 9(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 9(b) shall be entitled
to convert such shares of Series B Convertible Preferred Stock in accordance
with Section 10 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 9(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 10 or the optional redemption right pursuant to
Section 11 may be redeemed by the Corporation pursuant to this Section 9(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 9(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 5(b).
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<PAGE> 24
(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 9(a) and 9(b).
SECTION 10. 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 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 5 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 10(b) to the contrary, no change in the Conversion Amount pursuant to
this Section 10(b) shall actually be made until the cumulative effect of the
adjustments called for by this Section 10(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 10(b) and not previously made. Notwithstanding anything in
this Section 10(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.
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<PAGE> 25
(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 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 10(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
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<PAGE> 26
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 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,
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<PAGE> 27
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.
(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
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<PAGE> 28
circumstance which might otherwise limit such obligation of the Corporation to
the holder in 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 10(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
C1 = C x O + N
-----
O + N x P
-----
M
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record
date.
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<PAGE> 29
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
C1 = 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.
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.
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<PAGE> 30
(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 10(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 10,
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 10, 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 10(b)(5) or in subparagraphs (i) or (ii) of
Section 10(b)(8) which would result in any adjustment in the Conversion Amount
under this Section 10(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 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.
SECTION 11. 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
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<PAGE> 31
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 11(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 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 11 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.
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<PAGE> 32
(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.
SECTION 12. 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 7(a), 9(a), 9(b) or
11) 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:
(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.
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<PAGE> 33
(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 this
Certificate of Designation is 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 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.
SECTION 13. OUTSTANDING SHARES. For purposes of this Certificate
of Designation, 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
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<PAGE> 34
issue and deliver shares of Common Stock upon such conversion as and when
required by Section 10; (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 11, 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.
SECTION 14. MISCELLANEOUS.
(a) NOTICES. Any notices required or permitted to be given
under the terms of this Certificate of Designation 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 1601 Fifth Avenue,
Suite 1900, Seattle, Washington, 98101, Attention: Chief Financial Officer
(telephone line facsimile transmission number (206) 292-6836), 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
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 5 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.
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<PAGE> 35
IN WITNESS WHEREOF, IVI Publishing, Inc. has caused this
certificate to be signed by Robert Goodman, its President and CEO, as of the
10th day of April, 1998.
IVI PUBLISHING, INC.
By /s/ Robert Goodman
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<PAGE> 1
EXHIBIT 5
{LETTERHEAD OF PRESTON GATES & ELLIS LLP}
May 22, 1998
IVI Publishing, Inc.
808 Howell Street, Suite 400
Seattle, Washington 98101
Re: IVI Publishing, Inc.
Form S-1 Registration Statement
Dear Sir or Madam:
We have acted as counsel for IVI Publishing, Inc., a Minnesota
corporation (the "Company"), in connection with certain transactions involving
the private placement of 5,000 shares of the Company's Series B Convertible
Preferred Stock (the "Preferred Stock") and warrants (the "Warrants"). The
Preferred Stock (i) accrues a dividend of 5% per annum, which dividend may, at
the Company's option, be payable in additional shares of the company's Common
Stock, and (ii) is convertible into shares of the Company's Common Stock, par
value $.01 per Share (the "Shares"). The Warrants may be exercised to purchase
Shares.
In connection with the preparation and filing of a registration
statement on Form S-1 (the "Registration Statement"), under the Securities Act
of 1933, we have reviewed the Company's certificate 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 issuable as
dividends, upon conversion of the Preferred Stock or exercise of the Warrants
will, upon proper exercise of the conversion or exercise rights provided
therefor, 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
------------------------
C. Kent Carlson
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our reports dated February 12, 1998, except for Note 2 as to which
the date is April 13, 1998, in the Registration Statement (Form S-1) and related
Prospectus of IVI Publishing, Inc. for the registration of 2,150,000 shares of
its common stock.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
May 20, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Robert Goodman and Michael Brochu as his or her true
and lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution, for him or her and in his or her name, place and stead, in any and
all capacities, to sign any or all amendments to this Registration Statement on
Form S-1 and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
May 21, 1998
/s/ Robert N. Goodman President, Chief Executive
- ------------------------------------------- Officer, Director (Principal
Robert N. Goodman Executive Officer)
- ------------------------------------------------------------------------------------------------------------------------------------
May 21, 1998
/s/ Michael D. Conway Controller, Vice President and Secretary
- ------------------------------------------- (Principal Financial and Accounting
Michael D. Conway Officer)
- ------------------------------------------------------------------------------------------------------------------------------------
May 20, 1998
/s/ Michael A. Brochu Chairman of the Board of Directors
- -------------------------------------------
Michael A. Brochu
- ------------------------------------------------------------------------------------------------------------------------------------
May __, 1998
Director
- --------------------------------------------
Alan D. Frazier
- ------------------------------------------------------------------------------------------------------------------------------------
May 21, 1998
/s/ Ronald E. Eibensteiner Director
- --------------------------------------------
Ronald E. Eibensteiner
- ------------------------------------------------------------------------------------------------------------------------------------
May __, 1998
Director
- --------------------------------------------
Timothy I. Maudlin
- ------------------------------------------------------------------------------------------------------------------------------------
May __, 1998
Director
- --------------------------------------------
Ann Kirschner
- ------------------------------------------------------------------------------------------------------------------------------------
May 21, 1998
/s/ Ram Shriram Director
- --------------------------------------------
Ram Shriram
- ------------------------------------------------------------------------------------------------------------------------------------
May 21, 1998
/s/ Rich Thompson Director
- --------------------------------------------
Rick Thompson
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
