<PAGE>
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________
COMMISSION FILE NUMBER: 000-22212
ONHEALTH NETWORK COMPANY
__________________
(Exact Name of Registrant as
specified in its charter)
WASHINGTON 41-1686038
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
808 HOWELL STREET, SUITE 400
SEATTLE, WASHINGTON 98101
(Address of principal executive offices)
(Zip Code)
206-583-0100
(Registrant's telephone number, including area code)
IVI PUBLISHING, INC.
7500 FLYING CLOUD DRIVE, #500
EDEN PRAIRIE, MINNESOTA 55344
(Former Name and Address)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
<PAGE>
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AS OF NOVEMBER 12, 1998
- - ------ -----------------------------------
COMMON STOCK 11,880,581 SHARES
PAR VALUE $.01 PER SHARE
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
OnHealth Network Company
Balance Sheets
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,020 $ 2,488
Accounts receivable, net of allowances
for returns and doubtful accounts of
$202 in 1998 and $1,011 in 1997 311 337
Inventories - 150
Other current assets 333 332
------- --------
Total current assets 1,664 3,307
Furniture and equipment:
Computers and software 1,171 2,856
Office equipment 689 1,403
------- --------
1,860 4,259
Accumulated depreciation (953) (2,989)
------- --------
907 1,270
Total assets $ 2,571 $ 4,577
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,907 $ 1,919
Other accrued expenses 1,350 2,640
------- --------
Total current liabilities 3,257 4,559
Convertible preferred stock 2,156
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding shares -
10,811 and 10,106 at 1998
and 1997, respectively 108 101
Additional paid-in capital 82,271 78,493
Accumulated deficit (85,221) (78,576)
------- --------
Total shareholders' (deficit) equity (2,842) 18
------- --------
Total liabilities and shareholders' equity $ 2,571 $ 4,577
======= ========
</TABLE>
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
1998 1997 1998 1997
---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 248 $ 488 $ 733 $ 2,731
Cost of revenue 549 311 1,571 1,347
---------------- --------------- ---------------- --------------
Gross margin (301) 177 (838) 1,384
Operating expenses:
Product development 547 378 2,105 2,779
Sales and marketing 1,265 333 2,696 976
General and administrative 420 2,096 1,653 5,702
---------------- --------------- ---------------- --------------
Total operating expenses 2,232 2,807 6,454 9,457
Loss from operations (2,533) (2,630) (7,292) (8,073)
Other income - 2,704 563 2,704
Interest income (expense) 30 (68) 84 (184)
---------------- --------------- ---------------- --------------
Net (loss) income (2,503) 6 (6,645) (5,553)
Preferred stock dividends (36) (30) (92) (90)
Preferred stock accretion (99) (13) (253) (39)
---------------- --------------- ---------------- --------------
Net loss applicable to
common shareholders ($2,638) ($37) ($6,990) ($5,682)
================ =============== ================ ==============
Net loss per common share --
basic and diluted ($0.25) ($0.00) ($0.68) ($0.74)
================ =============== ================ ==============
Weighted average number of
common shares outstanding 10,698 7,618 10,323 7,636
================ =============== ================ ==============
</TABLE>
5
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30
1998 1997
----------------- ----------------
<S> <C> <C>
Operating activities:
Net loss ($6,645) ($5,553)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 663 984
Stock issued for litigation settlement 433
Changes in assets and liabilities:
Decrease in accounts receivable 26 3,697
Decrease (increase) in inventories 150 (146)
Decrease (increase) in other current assets (1) 168
Decrease in other long-term assets 1,103
Decrease in accounts payable and accrued liabilities (1,302) (1,420)
----------------- ----------------
Net cash used in operating activities (7,109) (734)
Investing activities:
Net furniture and equipment disposals 188
Net furniture and equipment additions (488) (14)
----------------- ----------------
Net cash used in investing activities (300) (14)
Financing activities:
Proceeds from convertible preferred stock 5,000
Proceeds from exercised stock options 941 74
----------------- ----------------
Net cash provided by financing activities 5,941 74
Net decrease in cash and cash equivalents (1,468) (674)
Cash and cash equivalents at beginning of period 2,488 3,462
----------------- ----------------
Cash and cash equivalents at end of period $ 1,020 $ 2,788
================= ================
</TABLE>
<PAGE>
OnHealth Network Company
Notes to the Financial Statements (Unaudited)
September 30, 1998
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, and expenses. Examples include provisions for
returns and bad debts and the length of furniture and equipment lives. Actual
results may differ from these estimates. Interim results are not necessarily
indicative of results for a full year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
PRODUCT DEVELOPMENT COSTS
Product development costs consist principally of compensation to Company
employees, interactive design costs paid to outside consultants, travel and
supplies. All costs are expensed as incurred.
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.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options,
convertible preferred stock and warrants are excluded from the computation, as
their effect is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No.128, "Earnings Per Share." This statement establishes standards for
computing and presenting basic and diluted earnings per share (EPS) for
financial statements issued for periods ending after December 15, 1997. The
adoption of this statement will not have a material effect on the Company's
reported EPS.
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 advertising fees for online services.
<PAGE>
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. 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. Through March 31, 1997, the
Company recognized revenue under its cable agreement ratably over the life of
the contract. Thereafter, revenue is recognized on a cash basis.
Revenues are generated through the sale of sponsorships and advertising on the
Company's web site. Revenues are also generated from the licensing of the web
site's content. These revenues are recognized as they are earned.
PREFERRED SHARES
On April 10, 1998, the Company received gross proceeds of $5 million from a
private placement of 5,000 shares of non-voting Series B 5% Convertible
Redeemable Preferred Stock (the "Preferred Shares") and 66,778 five-year
warrants with an exercise price of $11.23125 per share. The Preferred Shares
are convertible into shares of Common Stock at a price which depends on the
market price and varies with respect to when the conversion occurs. In July
1998, the Company issued 389,003 shares of common stock in conversion of 2,715
shares of the Preferred Shares. In July 1998, the Company issued 46 Preferred
Shares in payment of dividends on the Preferred Shares. In October 1998, the
Company issued 69,052 shares of common stock in conversion of 200 shares of the
Preferred Shares. In October 1998, the Company issued 28 Preferred Shares in
payment of dividends on the Preferred Shares. In October, 1998, the Company
redeemed 1,470 Preferred Shares. The two purchasers of such Preferred Shares
were both accredited investors.
For this transaction, the Company claimed exemption from registration under
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder because, to the Company's knowledge, the purchases were made for the
purchaser's own investment purposes and not for further distribution or resale.
In addition, the Company satisfied the other applicable requirements of
Regulation D in connection with each such offering and sale.
COMMON SHARES
On October 30, 1998, the Company closed a private placement with one accredited
investor (the "Investor") of: (i) 1,000,898 shares of Common Stock and (ii)
66,778 five-year warrants with an exercise price of $4.81 per share (the
"October 1998 Private Placement"). In connection with the October 1998 Private
Placement, the Company redeemed 1,470 Preferred Shares owned by the Investor.
The Company's gross proceeds from the
<PAGE>
October 1998 Private Placement were $3,690,500, and its net proceeds were
$2,000,000. On certain dates in the future, approximately quarterly, beginning
in the first quarter of 1999, the number of shares of Common Stock issuable
pursuant to the October 1998 Private Placement will be subject to adjustment
depending on current market prices. In connection with the October 1998 Private
Placement, the Company was granted an option to sell to the Investor up to an
additional $2.0 million in Common Stock at a price of $3.69 per share (on the
same terms as the October 1998 Private Placement), subject to the satisfaction
of certain conditions including the continued accuracy of the representations
and warranties of the Company in the subscription documents delivered in the
October 1998 Private Placement. Through December 31, 1998, the Company may, at
its option, repurchase from the Investor any of the shares of Common Stock
issued in the October 1998 Private Placement at a price of $3.87 per share.
After December 31, 1998, the Company may similarly repurchase such shares of
Common Stock, but the price that such repurchases may be effected will vary
depending on market prices and when the repurchase occurs.
The Company will file a registration statement with the Securities and Exchange
Commission prior to the end of the year relating to the registration of the
resale of the shares of Common Stock issued in the October 1998 Private
Placement and any additional shares sold pursuant to the above described option.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
web sites. The Company's current strategy is to focus its resources on an
internet-delivered, consumer-oriented network of health and wellness sites.
Results of Operations
The following table sets forth selected income statement data for OnHealth
Network Company and such data as a percentage of net revenues for the three
months ended September 30, 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
1998 1997
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 248 100% $ 488 100%
- - ------------------------------------------------------------------------------------------
Gross margin (301) (121%) 177 36%
- - ------------------------------------------------------------------------------------------
Operating expenses 2,232 900% 2,807 575%
- - ------------------------------------------------------------------------------------------
Operating loss (2,533) (1,021%) (2,630) (539%)
- - ------------------------------------------------------------------------------------------
Net loss (2,638) (1,064%) (37) (8%)
- - ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table sets forth selected income statement data for OnHealth
Network Company and such data as a percentage of net revenues for the nine
months ended September 30, 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------
1998 1997
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 733 100% $ 2,731 100%
- - -----------------------------------------------------------------------------------------
Gross margin (838) (114%) 1,384 51%
- - -----------------------------------------------------------------------------------------
Operating expenses 6,454 880% 9,457 346%
- - -----------------------------------------------------------------------------------------
Operating loss (7,292) (995%) (8,073) (296%)
- - -----------------------------------------------------------------------------------------
Net loss (6,990) (954%) (5,682) (208%)
- - -----------------------------------------------------------------------------------------
</TABLE>
Revenues
Revenues for the three months ended September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Online revenue $ 121 $ 37
Product sales and licensing revenue 72 251
Contract development revenue and other 55 200
--------------- --------------
Net revenues $ 248 $ 488
</TABLE>
Revenues for the nine months ended September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Contract development revenue and other $ 465 $ 742
Online revenue 267 37
Product sales and licensing revenue 1 1,459
Cable television licensing revenue - 493
--------------- --------------
Net revenues $ 733 $2,731
</TABLE>
Sales for the three and nine months ended September 30, 1998 decreased 49% and
73%, respectively, compared to the same periods in the previous year. Affecting
both periods were reduced product sales and licensing revenue, and reduced
contract development revenue and other, which were partially offset by an
increase in online revenues. Also affecting the nine-month period is a decrease
in cable television licensing revenues. Product sales and licensing revenue
decreases reflect market conditions for CD ROM products, the lack of new CD ROM
product releases, and the Company's cancellation of a CD ROM distribution
agreement. Cable television licensing revenue decreases reflect a cash basis
revenue recognition policy related to a cable television content licensing
contract with America's Health Network (AHN) and AHN's failure in 1998 to make
two scheduled payments totaling $1.125 million. The 1998 online revenues were
generated primarily from the Company's OnHealth.com web site through site
sponsorships and advertising. The Company redesigned and relaunched the
OnHealth.com web site in July 1998.
<PAGE>
Gross margin
Gross margin as a percentage of net revenues for the three and nine months ended
September 30, 1998 was (121%) and (114%), respectively, compared to 36% and 51%,
respectively, for comparable periods in 1997. The negative gross margin for the
three and nine months ended September 30, 1998 is a result of OnHealth.com
editorial costs included in cost of revenue. The negative gross margin
percentage for the nine months ended September 30, 1998 is also the result of CD
ROM royalty expenses, CD ROM inventory write-offs, and royalty expenses related
to cable television licensing revenue.
Operating expenses
Product Development
Product development expenses were $547,000 and $2,105,000 for the three and nine
months ended September 30, 1998, respectively, compared to $378,000 and
$2,779,000 for the same periods in 1997. The third quarter 1997 development
costs included an adjustment related to an agreement with Mayo Foundation.
Under the agreement, Mayo assumed all operating expenses for the Mayo Health
O@sis web site, retroactive to January 1, 1997. The operating costs, which the
Company recorded during the first half of 1997, were reversed during the third
quarter 1997, after the agreement was signed. For the nine month period,
product development costs decreased $674,000, or 24%. The decrease relates to a
shift away from the CD-ROM product development business and a shift towards an
internet focused business.
Sales and Marketing
Sales and marketing expenses for the three and nine months ended September 30,
1998 increased $932,000 and $1,720,000, respectively, compared to the same
periods in the previous year. Sales and marketing expenses relate to the
OnHealth.com web-site and consist primarily of advertising and other marketing
related expenses (which include distribution agreement costs), compensation and
employee-related expenses. The increase in the current year relates to a
marketing campaign related to the launch of the OnHealth.com web site and
distribution costs related to agreements signed in July 1998 with GeoCities and
Infoseek.
General and Administrative
General and administrative expenses in the third quarter 1998 decreased to
$420,000 as compared to $2,096,000 for the third quarter of 1997. For the nine
months ended September 30, 1998, general and administrative expenses decreased
to $1,653,000 from $5,702,000 for the comparable period in 1997. General and
administrative expenses consist primarily of compensation to administrative and
executive personnel, fees for professional services, facility costs and bad debt
expenses. The decreases for the three and nine month periods ended September
30, 1998 reflect substantially decreased legal costs and general cost cutting
measures including reduced rent costs from the Company's relocation to a smaller
facility. The three months ended September 30, 1997 includes extensive legal
costs related to lawsuits with Viridis, Inc. and T. Randal Productions, Inc.
The decrease for the nine months ended September 30, 1998 also reflects reduced
bad debt expenses and a 1997 write-off of an asset. In 1997, the general and
administrative expenses include approximately $2,000,000 from a bad debt expense
<PAGE>
related to AHN caused when AHN's financing fell through subsequent to the end of
the second quarter 1997. This 1997 bad debt reserve was partially offset by a
reduction of $1,000,000 in related liability charges. Also in 1997, there was a
$1,066,000 partial write-off of an asset that represented the capitalization of
costs paid to Time Life, Inc. for the development of The Medical Advisor.
Other Income
For the three and nine months ended September 30, 1998, other income was $0 and
$563,000, respectively, compared to $2,704,000 and $2,704,000, respectively, for
the same periods in 1997. For the nine months ended September 30, 1998, other
income includes $563,000 related to the reversal of a previously established bad
debt reserve. This bad debt reserve was initially established in the second
quarter of 1997 as part of general and administrative expenses. During the
second quarter 1998, the reserve became unnecessary, and, to isolate the
uniqueness of the reserve reversal, management classified it outside of
operating activities as other income. For the three and nine months ended
September 30, 1997, other income includes $2,704,000 of compensation related to
a full transfer of ownership of the O@sis web site to Mayo and for releasing
Mayo of its obligation to give the Company the "right of first refusal" on Mayo
products published in electronic media."
Interest Income (Expense)
The three and nine months ended September 30, 1998 had net interest income of
$30,000 and $84,000, respectively, compared to net interest expense of $68,000
and $184,000, respectively, for the same periods in 1997. The 1998 net interest
income includes interest income generated from cash and cash equivalents. The
1997 net interest expense includes interest income from cash and cash
equivalents which were more than offset by interest expense related to
$3,500,000 in convertible subordinated debentures. The debentures were
converted into common stock during the fourth quarter of 1997.
Financial Condition, Liquidity and Capital Resources
At September 30, 1998, the Company had cash and cash equivalents of $1,020,000.
Total cash used by operating activities during the nine months ended September
30, 1998 was $7,109,000 and is primarily due to a net loss of $6,645,000.
Investing activities used net cash of $300,000 primarily for purchases of
computer equipment. Financing activities provided cash of $5,941,000 from
$941,000 in stock option exercises and a $5,000,000 Convertible Redeemable
Preferred Stock financing. As discussed in the notes to the financial
statements, on October 30, 1998, the Company received net proceeds of $2 million
from a private placement of 1,000,898 shares of common stock, 66,778 five-year
warrants with an exercise price of $4.81 per share, and redemption of 1,470
shares of Series B convertible preferred stock. To properly market its
OnHealth.com web site, the Company expects a significant use of cash, and will
require additional funding in the fourth quarter of 1998 or first quarter of
1999 to be able to fund its business. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
<PAGE>
Forward Looking Statements
The statement made in this Form 10-Q relating to the Company's ability to meet
its ongoing financial obligations and operations depends on: (i) the ability of
the Company to raise additional capital, if at all, enabling it to continue the
development and marketing of the OnHealth web site; (ii) the ability of the
Company to meet its expected operating revenues, which are variable with respect
to consumer demand and advertising revenues, (iii) the success of its ongoing
development efforts and market acceptance of the OnHealth web site, (iv) the
success and effectiveness of the Company's new management team; and (v) other
general market conditions and competitive conditions within this market,
including the introduction and further development of competitive web sites.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - ---------------------------
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- - ---------------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - -----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - -------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- - ---------------------------
None.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - ------------------------------------------
(a) The following exhibits are included herein:
10.1 Subscription Agreement, dated October 30, 1998 between the Company
and Advantage Fund II Ltd.
10.2 Form of Common Stock Purchase Warrant
10.3 Escrow Agreement, dated October 30, 1998 between the Company,
Advantage Fund II Ltd. and Brian W. Pusch
10.4 Registration Rights Agreement, dated October 30, 1998 between the
Company and Advantage Fund II Ltd.
(27) Financial Data Schedule (included only in electronic version).
(b) No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
OnHealth Network Company
By /s/ Michael D. Conway
Michael D. Conway
Chief Financial Officer
Date: November 16, 1998
<PAGE>
EXHIBIT 10.1
================================================================================
SUBSCRIPTION AGREEMENT
DATED AS OF OCTOBER 30, 1998
BY AND BETWEEN
ONHEALTH NETWORK COMPANY
AND
ADVANTAGE FUND II LTD.
____________________
COMMON STOCK
AND
COMMON STOCK PURCHASE WARRANTS
____________________
================================================================================
<PAGE>
SUBSCRIPTION AGREEMENT
COMMON STOCK
AND
COMMON STOCK PURCHASE WARRANTS
ONHEALTH NETWORK COMPANY
PAGE
1. DEFINITIONS 1
2. AGREEMENT TO SUBSCRIBE 18
(a) Subscription 18
(b) Form of Payment 18
3. COMPANY PUT OPTIONS 18
(a) Option Exercise 18
(b) Buyer's Assignment of Rights and Obligations under
Section 3 19
(c) Form of Payment 19
(d) Buyer's Conditions Precedent to Purchase of Optional
Shares 19
(e) Company's Conditions Precedent to Sale and Issuance
of Optional Shares 20
4. RESET SHARES 20
(a) Reset Date No.1 20
(b) Subsequent reset Dates 21
(c) Reset Notices 21
(d) Delivery of Reset Shares to the Escrow Agent 22
(e) Buyer's Assignment of Rights to Acquire Reset Shares 23
(f) Delivery of Reset Shares to the Company 24
i
<PAGE>
5. BUYER REPRESENTATIONS, WARRANTIES, ETC 24
(a) Purchase for Investment 24
(b) Accredited Investor 24
(c) Reoffers and Releases 24
(d) Company Reliance 24
(e) Information Provided 25
(f) Absence of Approvals 25
(g) Subscription Agreement 25
6. COMPANY REPRESENTATION, WARRANTIES, ETC 25
(a) Organization and Authority 25
(b) Capitalization 26
(c) Concerning the Shares and the Common Stock 27
(d) Subscription Agreement 27
(e) Non-contravention 27
(f) Approvals 28
(g) Information Provided 28
(h) Absence of Certain Changes 29
(i) Absence of Certain Proceedings 29
(j) Properties 30
(k) Labor Relations 31
(l) SEC Filings 31
(m) Absence of Brokers, Finders,, Etc. 31
(n) No Solicitation. 31
(o) Certain Issuances of Securities 32
7. Certain Covenants and Acknowledgements 32
(a) Transfer Restrictions 32
(b) Restrictive Legend 32
(c) Escrow Agreement; Registration Rights Agreement 33
(d) Form D 34
(e) Authorization for Trading 34
(f) Use of Proceeds 34
(g) Blue Sky Laws 34
(h) Certain Expenses 35
ii
<PAGE>
(i) Certain Issuances of Securities 35
(j) Certain Trading Restrictions 38
(k) Reservation of Common Stock 38
(l) Consolidation, Merger, etc. 39
(m) Overdue Amounts 39
(n) Other 40
(1) Payment of Obligations 40
(2) Maintenance of Property 40
(3) Conduct of Business and Maintenance of
Existence 40
(4) Compliance with Laws 40
(5) Investment Company Act 40
(6) Transactions with Affiliates 41
(o) Best Efforts 41
8. ESCROW SHARES. 41
9. CLOSING DATE. 42
10. CONDITIONS TO THE COMPANY'S OBLIGATION TO
SELL AND ISSUE. 42
11. CONDITIONS TO THE BUYER'S OBLIGATION TO
PURCHASE. 43
12. REPURCHASE AT OPTION OF THE BUYER. 44
(a) Repurchase Right; Method of Exercising Optional
Repurchase Right, Etc. 44
(b) Notices 44
(c) Other 45
(d) Special Repurchase Events 45
13. REPURCHASE AT OPTION OF THE COMPANY 46
14. MISCELLANEOUS 47
(a) Governing Law. 47
(b) Counterparts. 47
iii
<PAGE>
(c) Headings, etc. 47
(d) Severability 47
(e) Amendments 48
(f) Waivers. 48
(g) Notices. 48
(h) Assignment 48
(i) Survival of Representations and Warranties 49
(j) Entire Agreement 49
(k) Termination 49
(l) Further Assurances 50
(m) Public Statements, Press Releases, Etc. 50
(n) Construction 50
ANNEXES
Annex I Form of Common Stock Purchase Warrant
Annex II Form of Escrow Agreement
Annex III Form of Registration Rights Agreement
Annex IV Form of Opinion of Counsel to be Delivered on Closing Date
Annex V Form of reset Notice
iv
<PAGE>
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of October 30, 1998 (this
"Agreement"), by and between ONHEALTH NETWORK COMPANY, a Washington corporation
(the "Company"), with headquarters located at 808 Howell Street, Suite 400,
Seattle, Washington 98101, and ADVANTAGE FUND II LTD., a British Virgin Islands
corporation (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 Common Stock (such capitalized terms
and all other capitalized terms used in this Agreement without definition having
the respective meanings provided in Section 1) for consideration consisting of
cash and outstanding shares of the Company's preferred stock, 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 SEC under 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. DEFINITIONS
(a) As used in this Agreement, the terms "Agreement," "Buyer" and
"Company" shall have the respective meanings assigned to such terms in the
introductory paragraph of this Agreement.
(b) All the agreements or instruments herein defined shall mean such
agreements or instruments as the same may from time to time be supplemented or
amended or the terms thereof waived or modified to the extent permitted by, and
in accordance with, the terms thereof and of this Agreement.
(c) The following terms shall have the following meanings (such
meanings
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to be equally applicable to both the singular and plural forms of the
terms defined):
"Action" means an action, suit, proceeding, inquiry or investigation
before or by any court, public board or body, arbitrator or governmental agency.
"Adjustment Price" means the lesser of (x) the arithmetic average of
the Market Price of the Common Stock on each of the Trading Days during the
applicable Measurement Period and (y) $6.50 (subject to equitable adjustments
from time to time on terms reasonably acceptable to the Buyer for stock splits,
stock dividends, combinations, recapitalizations, reclassifications and similar
events occurring after the Closing Date); provided, however, that,
notwithstanding any other provision of this Agreement, if a Registration Event
occurs then all Adjustment Prices determined thereafter shall be permanently
reduced on each Computation Date by one percent from the amount otherwise used
to calculate the Adjustment Price (such reduction to be prorated 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) and; provided
further, however, that the Adjustment Price applicable to a particular Reset
Date shall be subject to reduction as provided in Section 4(d).
"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.
"Aggregate Option Purchase Price" means the product of (x) the
Optional Share Amount of Optional Shares being purchased on an Option Closing
Date times (y) the Purchase Price.
"Amendment Event" means a Repurchase Event described in clause (4) of
the definition of Repurchase Event which arises under the terms of any amendment
of any of the following: this Agreement, the Escrow Agreement, the Registration
Rights Agreement, the Warrants, or any other agreements or documents entered
into in connection with the issuance of the Shares.
"AMEX" means the American Stock Exchange, Inc.
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"Auditors" means Ernst & Young LLP or such other firm of independent
public accountants of recognized national standing as shall have been engaged by
the Company to audit its financial statements.
"Auditors' Determination" means a determination requested by the
Company and signed by the Auditors concurring with the Company's conclusion that
(a) a requirement of the Company to repurchase, or a right of any holder of
Shares to require repurchase of, Shares, or (b) a requirement of the Company to
make a payment pursuant to Section 7(i)(1)(B), by reason of the occurrence of
(i) a specified Repurchase Event which occurs by reason of (x) an event
described in clause (1), (2), (3) or (5) of the definition of Repurchase Event
or (y) an Amendment Event or (ii) a specified Share Limitation Event, whichever
is applicable, would result in the Company being required to classify the Shares
as redeemable common stock on a balance sheet of the Company in accordance with
Generally Accepted Accounting Principles. The Auditors' Determination shall (i)
set forth in reasonable detail all relevant facts considered by the Auditors in
connection therewith, (ii) set forth all applicable accounting principles and
assumptions used, and (iii) set forth in reasonable detail or attach copies of
all legal, expert and other advice or information used by the Auditors in
reaching their conclusion. To the extent any facts are assumed for purposes of
either the Company's conclusion or the Auditor's Determination, the validity of
such conclusion or determination shall depend upon such assumed facts being true
and complete in all material respects.
"Blackout Period" means any period of one or more consecutive Trading
Days, but not in excess of 30 Trading Days, occurring after the SEC Effective
Date as to which the Company has notified the holders of Shares on or prior to
such Trading Day in accordance with Section 3(f) of the Registration Rights
Agreement that they are required, pursuant to Section 3(f) of the Registration
Rights Agreement, 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
Company 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 Company
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
Company, 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 Buyer;
provided, however, that no more than two Blackout Periods may commence in any
period of 365 consecutive days.
"Board of Directors" or "Board" means the Board of Directors of the
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Company.
"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.
"Cash Consideration" means $2,000,000.00.
"Closing Date" means the date and time of the issuance and sale of the
Initial Shares and the issuance of the Warrants.
"Closing Date Price" means the arithmetic average of the Market Price
of the Common Stock on the five consecutive Trading Days ending on the Trading
Day prior to the Closing Date.
"Closing Price" means the closing sale price of the Common Stock on
the principal securities market for the Common Stock, as reported by Bloomberg,
L.P.
"Common Shares" means the Initial Shares, the Optional Shares and the
Reset Shares.
"Common Shares Held" means with respect to any Reset Date the number
of Common Shares held in escrow by the Escrow Agent and beneficially owned by
the Buyer on such Reset Date, determined immediately prior to the computation of
Reset Shares for such Reset Date pursuant to Section 4.
"Common Stock" means the Common Stock, $.01 par value, of the Company.
"Company Disclosure Letter" means the letter from the Company to the
Buyer delivered on or prior to the Closing Date regarding certain disclosures.
"Company Escrow Shares" means Escrow Shares which are due to the
Company as specified in a Reset Notice pursuant to Section 4 which have not been
released to the Company.
"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
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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.
"Company Repurchase Notice" means a notice given by the Company to the
Buyer pursuant to Section 13 exercising the Company's right to repurchase all or
a portion of the Buyer's Escrow Shares pursuant to Section 13, (2) the number of
Escrow Shares which are to be repurchased, (3) the Company Repurchase Price or
the formula for determining the same, determined in accordance herewith and (4)
the applicable Repurchase Date.
"Company Repurchase Price" with respect to the repurchase by the
Company of any Escrow Shares pursuant to Section 13 means:
(1) in the case of any Repurchase Date which is on or prior to
December 31, 1998, 105% of the Purchase Price;
(2) in the case of any Repurchase Date which occurs during the period
from January 1, 1999 to and including Reset Date No. 1, the Floor Price;
(3) in the case of any Repurchase Date which is after Reset Date No. 1
and not subject to clause (4) below, the greater of (A) the arithmetic
average of the Market Price for the five consecutive Trading Days prior to
such Repurchase Date and (B) the most recently determined Adjustment Price;
and
(4) in the case of any Repurchase Date which is after Reset Date No. 4
and where for each of ten consecutive Trading Days commencing after Reset
Date No. 4 and on such Repurchase Date the Closing Price of the Common
Stock is greater than $8.50 (subject to equitable adjustments from time to
time on terms reasonably acceptable to the Buyer for stock splits, stock
dividends, combinations, recapitalizations, reclassifications, and similar
events occurring after the Closing Date), the Purchase Price.
"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.
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"Control Notice" means a notice given by the Company to the Buyer, in
accordance with Section 7(i)(1)(C) or Section 12(d), (i) stating that a Share
Limitation Event or a Repurchase Event, as the case may be, has occurred by
reason of events which are not solely within the control of the Company and (ii)
enclosing an executed copy of an Auditors' Determination.
"DTC" means the Depository Trust Company.
"Equity Securities" means Common Stock or securities convertible into,
exchangeable for, or otherwise entitling the holder to acquire, any Common
Stock.
"Escrow Agent" means the Escrow Agent named in the Escrow Agreement
and any successor thereto.
"Escrow Agreement" means the Escrow Agreement to be entered into by
and between the Company, the Buyer and the Escrow Agent in the form attached
hereto as ANNEX II.
"Escrow Shares" means the Common Shares held in escrow by the Escrow
Agent from time to time, including any additional shares of Common Stock
distributed or received by the Escrow Agent as a stock dividend, stock split or
other distribution on the Escrow Shares.
"Exchange Act" means the Securities Exchange Act of 1934 , as amended.
"Floor Price" means, with respect to any date, the price for one share
of Common Stock equal to 115% of the Purchase Price.
"Generally Accepted Accounting Principles" for any Person means the
generally accepted accounting principles and practices applied by such Person
from time to time in the preparation of its audited financial statements.
"Initial Shares" means the number of whole shares of Common Stock
(rounded to the next highest number) equal to the quotient obtained by dividing
(x) $3,690,500 by (y) the Purchase Price on the Closing Date.
"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:
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(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 Company 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 Closing
Price for each day in such Measurement Period or such other period which
day is prior to the earlier of (1) the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution and
(2) the date on which ex-dividend trading in the Common Stock with respect
to such dividend or distribution begins shall be reduced by multiplying the
Closing 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 Company 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
Closing 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 Closing Price for each such day shall be
reduced so that the same shall equal the price determined by multiplying
the Closing 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
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purchase at such Closing 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 Closing 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 Company;
(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 Closing 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 Closing Price
for each day in such Measurement Period or such other period which day is
prior to the earlier of (1) the date on which such combination becomes
effective and (2) the date on which trading in the Common Stock on a basis
which gives effect to such combination begins, shall be proportionately
increased;
(iv) The Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any class of capital stock of the
Company (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 Closing 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
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distribution begins shall be reduced so that the same shall be equal to the
price determined by multiplying the Closing Price (determined without
regard to this proviso) by a fraction, the numerator of which shall be the
Closing 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 Company) 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 Closing Price
(determined without regard to this proviso). If the Board of Directors of
the Company 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 Closing 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 Closing Price reduction required by this clause (iv) with respect
to such dividend or distribution shall then be made) immediately followed
by (2) a dividend or distribution of such shares of Common Stock or such
rights or warrants (and any further Closing 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 Company or any subsidiary of the Company 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 Closing Date and within the twelve (12)
months preceding the date of payment of
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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 Company) of consideration paid in respect of any
repurchase or other reacquisition by the Company or any subsidiary of the
Company of any shares of Common Stock (other than an Option Share
Surrender) made after the Closing 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 Company) of consideration
payable in respect of any Tender Offer by the Company 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 Closing 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
Closing Price for each such day shall be reduced so that the same shall
equal the price determined by multiplying the Closing Price (determined
without regard to this proviso) for such day by a fraction (i) the
numerator of which shall be equal to the Closing 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 Closing Price (determined without regard to
this proviso) for such day; or
(vi) A Tender Offer made by the Company 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
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of Directors of the Company) 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 Company), as of the expiration
of such Tender Offer, of consideration payable in respect of any other
Tender Offers, by the Company 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 Company) of consideration paid
in respect of any repurchase or other reacquisition by the Company or any
subsidiary of the Company of any shares of Common Stock (other than an
Option Share Surrender) made after the Closing 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
Closing 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 Closing Price for such day shall be
reduced so that the same shall equal the price determined by multiplying
the Closing 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 Closing 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) the
product of the number of shares of Common Stock outstanding (less any
Purchased Shares) on such day times the Closing 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 Closing 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.
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"Measurement Period" means, with respect to any Reset Date, the period
of 15 consecutive Trading Days ending on the Trading Day prior to such Reset
Date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1997 10-K" means the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
"1934 Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute.
"1933 Act" means the Securities Act of 1933, as amended, or any
successor statute.
"NYSE" means the New York Stock Exchange, Inc.
"Option Closing Date" means the date or dates on which Optional Shares
are issued and sold in accordance with Section 3.
"Option Exercise Notice" means a notice given by the Company to the
Buyer pursuant to Section 3 stating that the Company is exercising one of its
Put Options.
"Option Exercise Period" means the period commencing November 30, 1998
and ending on December 31, 1998.
"Optional Share Amount" means the number of shares of Common Stock
equal to the quotient obtained by dividing (x) $1,000,000 by (y) the Purchase
Price.
"Optional Shares" means shares of Common Stock issued and sold to the
Buyer or its assignee in accordance with Section 3.
"Option Share Surrender" means the surrender of shares of Common Stock
to the Company in payment of the exercise price or tax obligations incurred in
connection with the exercise of a stock option granted by the Company to any of
its employees, directors or consultants.
"Person" means an individual, partnership, corporation, limited
liability
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company, trust, incorporated organization, unincorporated association or joint
stock company.
"Purchase Price" means the price for one share of Common Stock equal
to 115% of the Closing Date Price (when used after the Closing Date, the
Purchase Price shall be subject to equitable adjustments from time to time on
terms reasonably acceptable to the Buyer for stock splits, stock dividends,
combinations, recapitalizations, reclassifications and similar events occurring
after the Closing Date).
"Put Option" means each of the two options of the Company to require
the Buyer or its assignee to purchase the Optional Share Amount of Optional
Shares in accordance with Section 3.
"Registration Event" shall mean any one of the following: (1) the
Company fails to file the Registration Statement with the SEC on or before
December 31, 1998, (2) the Registration Statement is not effective within 120
days after the Closing 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 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) the Company fails to deliver any Reset Shares to the Escrow
Agent as and when required by Section 4.
"Registration Rights Agreement" means the Registration Rights
Agreement to be entered into between the Company and the Buyer in the form
attached hereto as ANNEX III.
"Registration Statement" means the Registration Statement required to
be filed by the Company with the SEC pursuant to Section 2(a) of the
Registration Rights Agreement.
"Regulation D" means Regulation D promulgated by the SEC under the
1933 Act.
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"Release Notice" means the notice from the Buyer to the Escrow Agent
in the form attached to the Escrow Agreement.
"Repurchase Date" means the date of repurchase of Shares pursuant to
Section 12 or Section 13, as the case may be.
"Repurchase Event" means any one of the following events:
(1) For any period of five consecutive Trading Days commencing on or
after the Closing Date there shall be no closing bid price of the Common
Stock on any national securities exchange, the Nasdaq or the Nasdaq
SmallCap;
(2) The Common Stock ceases to be listed for trading on any of the
NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap;
(3) The inability for 30 or more days (whether or not consecutive) of
any holder of Shares to sell such shares pursuant to the Registration
Statement for any reason other than a Blackout Period on each of such 30
days;
(4) The Company shall fail or default in the timely performance of any
obligation (A) to issue Reset Shares as and when required by Section 4 or
(B) any other material obligation, in each case to a holder of Shares under
the terms of this Agreement, the Escrow Agreement, the Registration Rights
Agreement, the Warrants or any other agreements or documents entered into
in connection with the issuance of the Shares, as such instruments may be
amended from time to time, provided, that an event described in clause (B)
above shall be a Repurchase Event only if such failure or default shall
have continued for a period of 15 days after notice thereof is given to the
Company by any holder of Shares;
(5) Any consolidation or merger of the Company with or into another
entity (other than a merger or consolidation of a subsidiary of the Company
into the Company or a wholly-owned subsidiary of the Company) where the
common stock of such surviving company 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 Company; or
(6) The taking of any action to amend any of the Company's charter
documents, including any amendment to the Company's Articles of
Incorporation,
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without the consent of the Buyer which materially and adversely affects the
rights of any holder of Shares.
"Repurchase Notice" means a notice from the Buyer to the Company which
states (1) that the Buyer is thereby requiring the Company to repurchase Shares
pursuant to Section 12, (2) in general terms the Repurchase Event giving rise to
such repurchase, and (3) the number of Shares which are to be repurchased.
"Repurchase Price" means:
(1) in the case of any Repurchase Date which is on or prior to Reset
Date No. 1, the Floor Price; and
(2) in the case of any Repurchase Date which is after Reset Date No.
1, the greater of (A) the arithmetic average of the Market Price for the
five consecutive Trading Days ending on the Trading Day prior to such
Repurchase Date and (B) the most recently determined Adjustment Price.
"Repurchase Share Amount" means, for any calendar month, 15% of the
number of Common Shares beneficially owned by the Buyer (including Escrow
Shares) on the last day of such month.
"Repurchase Shares" means the shares of Common Stock issuable to the
Buyer pursuant to Section 12(d).
"Reset Date" means any of Reset Date No. 1, Reset Date No. 2, and each
sequentially numbered Reset Date thereafter which shall occur on August 10,
November 10, February 10, and May 10 of each year commencing on August 10, 1999
(Reset Date No. 3) and ending on the earlier of (x) November 10, 2001 or (y) the
last Reset Date to occur on which there is a positive number of Common Shares
Held.
"Reset Date No. 1" means the first to occur of (x) March 31, 1999, (y)
the later of (1) the SEC Effective Date and (2) the day which is 135 days after
the Closing Date, and (z) the date on which the Company is selling health-
related products (vitamins, herbs, health-food supplements, or other health-
related products) from its Website and issues a press release stating that its
e-commerce site for the sale of such products has been launched in final form
after any prior trials.
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"Reset Date No. 2" means May 10, 1999.
"Reset Notice" means a notice from the Buyer to the Company and the
Escrow Agent in the form attached hereto as ANNEX V.
"Reset Period" means the period commencing on each Reset Date and
ending three Trading Days after the Escrow Agent receives a Reset Notice.
"Reset Shares" means either (i) additional shares of Common Stock
issuable by the Company to the Buyer or (ii) Escrow Shares due to the Company
out of escrow, in each case in accordance with Section 4.
"Rule 144" means Rule 144 promulgated by the SEC under the 1933 Act or
any other similar rule or regulation of the SEC that may at any time permit a
holder of any securities to sell such securities to the public without
registration under the 1933 Act.
"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.
"SEC Reports" means (1) the 1997 10-K, (2) the Company's Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 31, 1998 and June 30,
1998, and (3) to the extent incorporated by reference in the 1997 10-K, the
Company's definitive proxy statement for its 1998 Annual Meeting of
Stockholders, in each case as filed with the SEC.
"Securities" means the Shares and the Warrants; provided, however, 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," Securities shall
have the meaning set forth in such clause (iv).
"Series B Preferred Stock" means the Series B Convertible Preferred
Stock, $.01 par value, of the Company.
"Share Limitation Event" means a time at which the Company is unable
to issue all Reset Shares or Repurchase Shares otherwise required to be issued
by this Agreement by reason of the restrictions set forth in the Shareholder
Approval Rule and the Company has not obtained a waiver thereof.
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"Share Limitation Repurchase Price" means an amount equal to 115% of
the Repurchase Price determined as of the applicable Reset Date or the date on
which Repurchase Shares were otherwise required to be issued, as the case may
be, for which payment is due pursuant to Section 7(i)(1)(B).
"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 Company (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 Company of
20% or more of the Common Stock of the Company outstanding on the Closing Date
for less than the greater of the book or market value of such Common Stock, as
and to the extent required under the Shareholder Approval Rule.
"Shareholder Approval Rule" means Rule 4310(c)(25)(H) of the Nasdaq
SmallCap as in effect from time to time or any successor, replacement or similar
provision thereof or of any other market on which the Common Stock is listed for
trading.
"Shares" means the Common Shares, the Repurchase Shares and the
Warrant Shares.
"Specified Securities" means (i) any debt or equity security of the
Company as to which the holder thereof has rights similar in nature to the
rights of the Buyer with respect to the Common Shares under this Agreement and
(ii) any Equity Securities which are Common Stock which are offered or sold, or
which entitle 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.
"Stock Consideration" means 1,470 shares of Series B Preferred Stock
to be delivered by the Buyer to the Company for cancellation.
"Subsidiary" means the Company's subsidiary listed on Exhibit 21 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
"Tender Offer" means a tender offer or exchange offer.
"Total Consideration" means the Cash Consideration and the Stock
Consideration.
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"Trading Day" means a day on whichever of (w) the national securities
exchange, (x) the Nasdaq, (y) the Nasdaq SmallCap or (z) such other securities
market, which at the time constitutes the principal securities market for the
Common Stock, is open for general trading of securities.
"Transfer Agent" means American Stock Transfer & Trust Company, or any
successor thereof, serving as transfer agent and registrar for the Common Stock.
"Warrants" means the Common Stock Purchase Warrants to purchase shares
of Common Stock in the form attached hereto as ANNEX I.
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants.
2. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) SUBSCRIPTION. The Buyer hereby agrees to purchase from the
Company the Initial Shares for consideration consisting of (1) the Cash
Consideration and (2) the Stock Consideration. The Cash Consideration shall be
payable in United States Dollars. In connection with the purchase of the Initial
Shares by the Buyer, the Company shall issue to the Buyer, at the closing on the
Closing Date, Warrants in the form attached hereto as ANNEX I to purchase the
number of shares of Common Stock equal to the quotient obtained by dividing (i)
$400,000 by (ii) the Closing Date Price.
(b) FORM OF PAYMENT. At the closing on the Closing Date (1) the
Company shall (i) issue and deliver the Initial Shares to the Escrow Agent for
deposit in escrow for the account of the Buyer or its nominee in accordance with
Section 8 and the Escrow Agreement and (ii) issue and deliver the Warrants to
the Buyer, against payment of the Total Consideration to the Company and (2) the
Buyer shall (i) pay the Cash Consideration 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, and (ii) deliver the
Stock Consideration to the Company, against such issuance and delivery to the
Escrow Agent of the Initial Shares and to the Buyer of the Warrants.
3. COMPANY PUT OPTIONS.
(a) OPTION EXERCISE. On not more than two occasions, the Company
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has the option to require the Buyer to purchase the Optional Share Amount of
Optional Shares for the Purchase Price per share. To exercise a Put Option, the
Company must deliver an Option Exercise Notice to the Buyer during the Option
Exercise Period. The Option Closing Date must occur within 15 days of the date
an Option Exercise Notice is delivered to the Buyer, unless otherwise agreed by
the parties. No more than two Option Exercise Notices may be given. The Company
may give both Option Exercise Notices on the same date. Time shall be of the
essence in the giving of Option Exercise Notices during the Option Exercise
Period.
(b) BUYER'S ASSIGNMENT OF RIGHTS AND OBLIGATIONS UNDER SECTION 3. If
the Company delivers an Option Exercise Notice to the Buyer in accordance with
Section 3(a), and the Buyer intends to assign all or any portion of its rights
and obligations to purchase Optional Shares in accordance with Section 14(h)
hereof, then the Buyer shall so notify the Company within ten days after the
Buyer's receipt of the Option Exercise Notice. Each such notice of assignment by
the Buyer shall specify the name(s) of the assignee(s) and the number or
percentage of Optional Shares to be purchased. Each such notice shall be
executed by the assignee(s). From and after the giving of such notice by the
Buyer, the Buyer shall be deemed for all purposes to have assigned to such
assignee(s) the rights and obligations under this Agreement with respect to the
purchase of the number of Optional Shares covered by such notice, and such
assignee(s) shall be deemed a party to this Agreement with respect to the
purchase of such number of Optional Shares upon the terms and subject to the
conditions of this Agreement, and all applicable references hereinafter to the
"Buyer" shall include such assignee(s).
(c) FORM OF PAYMENT. At the closing on each Option Closing Date, (1)
the Company shall issue and deliver the applicable Optional Share Amount of
Optional Shares to the Escrow Agent for deposit in escrow for the account of the
Buyer or its nominee, against payment of the Aggregate Option Purchase Price to
the Company and (2) the Buyer shall pay the Aggregate Option Purchase Price to
the Company by wire transfer of immediately available funds in United States
Dollars to such account as specified by the Company at least one Business Day
prior to such Option Closing Date, against such issuance and delivery of such
Optional Shares to the Escrow Agent.
(d) BUYER'S CONDITIONS PRECEDENT TO PURCHASE OF OPTIONAL SHARES. The
Company understands that the Buyer's obligation to purchase the Optional Shares
on each Option Closing Date is conditioned upon the satisfaction of the
following conditions precedent on or before each Option Closing Date (any or all
of which may be waived by the Buyer in its sole discretion):
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(1) Delivery by the Company of the certificates for the Optional
Shares to the Escrow Agent for the account of the Buyer in accordance with this
Agreement;
(2) The accuracy on the Option Closing Date of the representations and
warranties of the Company contained in this Agreement, the Escrow Agreement and
the Registration Rights Agreement as if made on the Option Closing Date and the
performance by the Company on or before the Option Closing Date of all covenants
and agreements of the Company required to be performed on or before the Option
Closing Date and receipt by the Buyer of a certificate, dated the Option Closing
Date, of the Chief Executive Officer or the Chief Financial Officer of the
Company confirming such matters and the satisfaction of the conditions precedent
set forth in this Section 3(d);
(3) No event which constitutes a Repurchase Event or a Registration
Event or, with the giving of notice or the lapse of time, or both, would
constitute a Repurchase Event or Registration Event, shall have occurred; and
(4) Receipt by the Buyer on the Option Closing Date of an opinion of
Preston Gates & Ellis LLP, counsel for the Company, dated the Option Closing
Date, in form, scope and substance reasonably satisfactory to the Buyer, to the
effect set forth in ANNEX IV attached hereto, modified to cover the issuance of
the Optional Shares.
(e) COMPANY'S CONDITIONS PRECEDENT TO SALE AND ISSUANCE OF OPTIONAL
SHARES. The Buyer understands that the Company's obligation to sell and issue
the Optional Shares on each Option Closing Date pursuant to this Agreement is
conditioned upon:
(1) Delivery by the Buyer to the Company of good funds as payment in
full of an amount equal to the Aggregate Option Purchase Price in accordance
with Section 3(c) hereof; and
(2) The accuracy on the Option Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Option
Closing Date and the performance by the Buyer on or before the Option Closing
Date of all covenants and agreements of the Buyer required to be performed on or
before the Option Closing Date.
4. RESET SHARES
(a) RESET DATE NO. 1. On Reset Date No. 1, the following computation
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of Reset Shares shall be made:
[(F / A) x C] - C
where:
F = Floor Price
A = Adjustment Price on Reset Date No. 1
C = Common Shares Held on Reset Date No. 1
If the number of Reset Shares so computed is positive, such number of Reset
Shares shall be issued and delivered by the Company to the Escrow Agent for
deposit in escrow to be held for the account of the Buyer. If the number of
Reset Shares so computed is negative, Escrow Shares held in escrow on Reset Date
No. 1 equal to the number (taken as a positive number) of such Reset Shares (or
such lesser number of Escrow Shares then held) shall be released from escrow to
the Company.
(b) SUBSEQUENT RESET DATES. On each Reset Date after Reset Date No.
1, the following computation of Reset Shares shall be made:
[(1.0125 x C x P) / A] - C
where:
C = Common Shares Held on the Reset Date
P = Adjustment Price determined on the immediately preceding Reset Date
A = Adjustment Price on the Reset Date
If the number of Reset Shares so computed is positive, such number of Reset
Shares shall be issued and delivered by the Company to the Escrow Agent for
deposit in escrow to be held for the account of the Buyer. If the number of
Reset Shares so computed is negative, Escrow Shares held in escrow on such Reset
Date equal to the number (taken as a positive number) of such Reset Shares (or
such lesser number of Escrow Shares then held) shall be released from escrow to
the Company.
(c) RESET NOTICES. On each Reset Date or within three Trading Days
thereafter, the Buyer shall give a Reset Notice in the form attached hereto as
ANNEX V to the Company and the Escrow Agent. If the Buyer fails to give a Reset
Notice within three Trading Days after any Reset Date, the Company may so notify
the Buyer and the Escrow
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Agent of such failure and, if the Buyer does not deliver such Reset Notice
within three Trading Days after receiving such notice of failure, the Company
may deliver such Reset Notice to the Buyer and the Escrow Agent.
(d) DELIVERY OF RESET SHARES TO THE ESCROW AGENT. (1) If the Reset
Notice states that Reset Shares are due to the Buyer, within three Trading Days
after such Reset Notice is given the Company shall issue and deliver
certificates representing such number of Reset Shares to the Escrow Agent for
deposit in escrow for the account of the Buyer. The number of Reset Shares to be
issued or released from escrow in connection with a particular Reset Date is,
absent manifest error, conclusively the number of Reset Shares stated in the
applicable Reset Notice. If in connection with a particular Reset Date the
Company determines that manifest error has been made by virtue of the
computation of Reset Shares or other information set forth in the applicable
Reset Notice, the Company shall have the right within two Trading Days after the
Buyer gives such Reset Notice to notify the Escrow Agent and the Buyer of such
error, which notice shall state the number of Reset Shares in dispute, and,
notwithstanding such notice from the Company, the Company shall issue and
deliver to the Escrow Agent the number of Reset Shares, or the Escrow Agent
shall release to the Company the number of Company Escrow Shares, not in dispute
as and when required by this Agreement and the Escrow Agreement. If the Company
shall have notified the Escrow Agent and the Buyer of any such manifest error,
and the Company and the Buyer do not agree as to a resolution of such manifest
error on or before the date of such notice by the Company of an error in such
Reset Notice, the Company shall on the date such notice is given submit the
dispute to the Auditors for determination and shall instruct the Auditors to
resolve such dispute and to notify the Company, the Escrow Agent and the Buyer
within two Trading Days after such dispute is submitted to the Auditors.
Immediately after receipt of timely notice of the Auditors' determination (but
in any event within four Trading Days after the applicable Reset Notice is given
to the Escrow Agent and the Company), the Company shall deliver to the Escrow
Agent for deposit in escrow for the account of the Buyer any additional Reset
Shares to which the Buyer is entitled based on the determination of the
Auditors. If the Auditors shall fail to notify the Escrow Agent and the Company
of their determination within four Trading Days after the applicable Reset
Notice is given to the Escrow Agent and the Company, then the Company shall,
within four Trading Days after receipt of the applicable Reset Notice, deliver
to the Escrow Agent for deposit in escrow for the account of the Buyer any
additional shares of Common Stock to which the Buyer is entitled based on the
applicable Reset Notice. Such immediate and prompt action shall be taken by all
the parties in order to assure that there shall be full compliance with the
Company's unqualified obligation that all Reset Shares issuable upon each Reset
Date be issued and delivered by the due dates therefor as provided herein.
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(2) If the Reset Notice states that Reset Shares are due to the Buyer,
the Company's obligation to issue and deliver the certificates for Common Stock
representing the Reset Shares shall be absolute and unconditional, irrespective
of any action or inaction by the Buyer to enforce the same, any waiver or
consent with respect to any provision hereof, 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 Buyer, or any
setoff, counterclaim, recoupment, limitation or termination, or any breach or
alleged breach by the Buyer or any other Person of any obligation to the Company
or any violation or alleged violation of law by the Buyer or any other Person,
and irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Buyer in connection with the issuance of Reset
Shares. If the Company fails to issue and deliver the certificates for the
Common Stock pursuant to this Section 4(d) as and when required to do so
following each Reset Date, in addition to any other liabilities the Company may
have hereunder and under applicable law (1) the Company shall pay or reimburse
the Buyer on demand for all reasonable out-of-pocket expenses including, without
limitation, fees and expenses of legal counsel incurred by the Buyer as a result
of such failure, and (2) the Adjustment Price used to determine the number of
Reset Shares due with respect to such Reset Date shall be reduced by two percent
from the Adjustment Price otherwise used to calculate such number of Reset
Shares for each Trading Day the Company fails to issue and deliver such
certificates and, accordingly, the Buyer shall be entitled to receive the
additional Reset Shares resulting from such reduced Adjustment Price. In lieu
of delivering physical certificates representing the Reset Shares, provided that
the Transfer Agent is participating in the DTC Fast Automated Securities
Transfer program, the Company shall cause the Transfer Agent to electronically
transmit such Reset Shares by crediting the account of the Escrow Agent or the
Escrow Agent's broker with the DTC through its Deposit Withdrawal Agent
Commission system. No fractional shares of Common Stock shall be issued as
Reset Shares but, in lieu of any fraction of a share of Common Stock that would
otherwise be issuable as a Reset Share, the Company shall pay the Buyer in cash
an amount equal to the product of (i) the Reset Price and (ii) such fraction of
a share.
(e) BUYER'S ASSIGNMENT OF RIGHTS TO ACQUIRE RESET SHARES. If a Buyer
intends to assign all or any portion of its rights to acquire any Reset Shares,
then the Buyer shall so notify the Company not less than five Trading Days
before any Reset Date. Each such notice of assignment by a Buyer shall specify
the name(s) of the assignee(s) and the rights to be assigned thereto. Each such
notice shall be executed by the assignee(s). From and after the giving of such
notice by such Buyer, the Buyer shall be deemed for all purposes to have
assigned to such assignee(s) the rights under this
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Agreement with respect to the acquisition of the number of Reset Shares covered
by such notice, and such assignee(s) shall be deemed a party to this Agreement
with respect to the acquisition of such number of Reset Shares upon the terms
and subject to the conditions of this Agreement, and all applicable references
hereinafter to the "Buyer" shall include such assignee(s).
(f) DELIVERY OF RESET SHARES TO THE COMPANY. If the Reset Notice
states that Reset Shares are due to the Company, within six Trading Days after
such Reset Notice is given to the Escrow Agent, the Escrow Agent shall release
the applicable whole number of Company Escrow Shares to the Company by
delivering stock certificates therefor or by means of electronic transmission.
The Company's right to receive Reset Shares under this Agreement with respect to
each Reset Date shall be limited to the number of Escrow Shares, if any, held in
escrow by the Escrow Agent on such Reset Date.
5. 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 Initial
Shares and acquiring the Warrants, and upon issuance and delivery of any
Optional Shares or Reset Shares to or for the account of the Buyer, will acquire
such Optional Shares, Reset Shares or Repurchase Shares, 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 Initial Shares
are being offered and sold, the Warrants are being issued, the Reset Shares, the
Warrant Shares and the Repurchase Shares are being offered, and the Optional
Shares may be offered and sold, 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
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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 Initial Shares, the
Warrants and to receive an offer of the Reset Shares, the Warrant Shares, the
Optional Shares and the Repurchase 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
Initial Shares and the issuance of the Warrants and the offer of the Reset
Shares, the Warrant Shares, the Optional Shares and the Repurchase 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 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.
6. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with,
the Buyer that:
(a) ORGANIZATION AND AUTHORITY. Each of the Company and the
Subsidiary is a corporation duly organized and validly existing 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
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obligations under this Agreement, the Warrants, the Registration Rights
Agreement, the Escrow Agreement 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. The
Subsidiary has no business operations and no material assets or liabilities.
(b) CAPITALIZATION. The authorized capital stock of the Company
consists of (a) 29,000,000 shares of Common Stock of which 10,810,631 shares of
Common Stock were outstanding on October 27, 1998, all of which are fully paid
and nonassessable; and (b) 1,000,000 shares of Preferred Stock, $.01 par value,
of which 5,800 shares are designated as Series B Preferred Stock, of which 2,359
shares are outstanding on October 27, 1998; and on the Closing Date and on each
Option Closing Date (x) there will be no material increase from October 27, 1998
in the number of shares of Common Stock outstanding and (y) no issuances of
preferred stock will have occurred since October 27, 1998 other than shares of
Series B Preferred Stock issued as dividends on outstanding shares of Series B
Preferred Stock. As of October 27, 1998, the Company had outstanding options,
warrants and similar rights entitling the holders to purchase 3,079,156 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 of the Common Shares or the issuance or exercise of the Warrants is
identified in Section 6(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
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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.
(c) CONCERNING THE SHARES AND THE COMMON STOCK. The Shares have been
duly authorized. The Initial Shares and the Optional Shares, when issued and
paid for in accordance with this Agreement, the Reset Shares and the Repurchase
Shares when issued in accordance with this Agreement, and the Warrant Shares,
when issued 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 Securities. The Company has duly reserved 2,439,732
shares of Common Stock for issuance of the Initial Shares, the Optional Shares,
the Reset Shares and the Repurchase Shares and exercise of the Warrants, and
such shares shall remain so reserved. The Common Stock is listed for trading on
the Nasdaq SmallCap and, except as set forth in Section 6(c) of the Company
Disclosure Letter, (1) the Company and the Common Stock meet the criteria for
continued listing and trading on the Nasdaq SmallCap; (2) the Company has not
been notified since January 1, 1996 by the Nasdaq SmallCap of any failure or
potential failure to meet the criteria for continued listing and trading on the
Nasdaq SmallCap and (3) no suspension of trading in the Common Stock is in
effect. The Company knows of no reason that the Shares will not be eligible for
listing on the Nasdaq SmallCap.
(d) SUBSCRIPTION AGREEMENT; ESCROW AGREEMENT; REGISTRATION RIGHTS
AGREEMENT; WARRANTS. This Agreement, the Escrow Agreement, the Registration
Rights Agreement and the Warrants 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 Escrow Agreement, the Registration Rights Agreement
and the Warrants 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
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of this Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Shares and the Warrants as
contemplated by this Agreement, and the other transactions contemplated by this
Agreement, the Escrow Agreement, the Registration Rights Agreement and the
Warrants 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 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 Escrow Agreement, the
Registration Rights Agreement, the Warrants and the other agreements and
instruments contemplated hereby and thereby, (2) the issuance and sale of the
Initial Shares and the Optional Shares and the issuance of the Reset Shares, the
Repurchase Shares and the Warrants as contemplated by this Agreement and (3) the
issuance of the Warrant Shares upon the exercise of the Warrants, other than (w)
the listing of the Shares on the Nasdaq SmallCap, (x) registration of the resale
of the 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
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of the Company to the Buyer in connection with the transactions contemplated by
this Agreement, including, without limitation, the information referred to in
Section 5(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 6(g), any
statement contained in such information shall be deemed to be modified or
superseded for purposes of this Section 6(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 1934 Act since December 31, 1997 other than the
SEC Reports.
(h) ABSENCE OF CERTAIN CHANGES. Except as disclosed in the SEC
Reports, since December 31, 1997, 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, 1997,
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.
(i) ABSENCE OF CERTAIN PROCEEDINGS. Except as described in the SEC
Reports, there is no 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
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knowledge no such request will be made by the Company prior to the time the
Registration Statement relating to the 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 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
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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
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.
(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 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 neither the Company nor
any person authorized to act on its behalf will sell or offer for sale any
shares of Common Stock or Warrants, or solicit any offers to buy any 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.
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(o) CERTAIN ISSUANCES OF SECURITIES. Other than the Series B
Preferred Stock, 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 the Shareholder Approval Rule and which could be
integrated with the sale of the Initial Shares or the Optional Shares to the
Buyer or the issuance of Reset Shares, Warrant Shares or Repurchase Shares to
the Buyer under any interpretation of the Shareholder Approval Rule.
(p) ABSENCE OF RIGHTS AGREEMENT. The Company has not adopted a
shareholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Stock or a change in control of the Company.
7. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Company and the Buyer acknowledge and
agree that (1) 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 Shares, the 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 Rule 144 and further, if Rule 144 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 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 7(d) hereof and pursuant to the Registration Rights
Agreement).
(b) RESTRICTIVE LEGEND.
(1) The Buyer acknowledges and agrees that the Warrants shall bear a
restrictive legend in substantially the following form (and a stop-transfer
order may be
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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.
(2) The Buyer further acknowledges and agrees that until such time as
the Shares have been registered for resale under the 1933 Act as contemplated by
the Registration Rights Agreement, the certificates for the 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 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.
(3) 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
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 or the Escrow
Agent acting at the request of the Buyer and (2) the Company shall not place any
restrictive legend on certificates for any Shares issued or impose any stop-
transfer restriction thereon.
(c) ESCROW AGREEMENT; REGISTRATION RIGHTS AGREEMENT. On or before the
Closing Date, the parties hereto agree to enter into (i) the Escrow Agreement in
the form attached hereto as ANNEX II and (ii) the Registration Rights Agreement
in the form attached hereto as ANNEX III.
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(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. Within three Trading
Days after the Closing Date, the Company shall file a notification for listing
of additional shares with the Nasdaq SmallCap relating to the 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 Shares or the Warrants, 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 Initial Shares and the
Optional 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 Initial Shares and Optional Shares
for sale to the Buyer and the Warrants for issuance to the Buyer pursuant to
this Agreement, the Reset Shares and the Repurchase Shares for issuance to the
Buyer pursuant to this Agreement, and the
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Warrant Shares for issuance to the Buyer on exercise of the Warrants under such
of the securities or "blue sky" laws of jurisdictions as shall be applicable to
the sale of the Initial Shares and Optional Shares and the issuance of the
Warrants pursuant to this Agreement, the issuance to the Buyer of the Reset
Shares and the Repurchase Shares pursuant to this Agreement, and the issuance to
the Buyer of Warrant Shares on 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 any 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 $20,000, 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 Escrow
Agreement, the Registration Rights Agreement, the Warrants 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. The Company shall pay all costs and expenses
associated with the performance of the Escrow Agreement, the fees and expenses
of the Escrow Agent, and the issuance and delivery of the Shares.
(i) CERTAIN ISSUANCES OF SECURITIES. (1) (A) Unless the Company
obtains the Shareholder Approval or a waiver thereof from the Nasdaq SmallCap,
the Company will not issue 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 would be
subject to the requirements of the Shareholder Approval Rule and which would be
integrated with the sale of the Initial Shares or the Optional Shares or the
issuance of Reset Shares or the Repurchase Shares to the Buyer for purposes of
the Shareholder Approval Rule.
(B) In the event the Company is unable to issue (I) all Reset Shares
required to be issued to the Buyer with respect to any Reset Date or (II) all
Repurchase Shares required to be issued to the Buyer pursuant to Section 12(d),
by reason of the
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restrictions set forth in the Shareholder Approval Rule, the Buyer shall be
entitled, at its option, by notice to the Company given within 90 days after
such Reset Date or the date on which such Repurchase Shares were otherwise
required to be issued, to require the Company to make a payment to the Buyer in
an amount equal to the product of (x) the number of Reset Shares otherwise
required to be issued to the Buyer on such Reset Date or the number of
Repurchase Shares otherwise required to be issued to the Buyer, as the case may
be, which the Company is unable to issue by reason of the Shareholder Approval
Rule and (y) the Share Limitation Repurchase Price. Promptly and in no event
later than three Business Days after the Company's receipt of such notice, the
Company shall make a cash payment in immediately available funds of the Share
Limitation Repurchase Price to or upon the order of the Buyer. The Company's
obligations to make payments pursuant to this Section 7(i)(1)(B) shall not limit
or otherwise affect its obligations to repurchase Shares pursuant to the other
provisions of this Agreement.
(C) Notwithstanding any other provision of this Agreement, if a Share
Limitation Event occurs by reason of events which are not solely within the
control of the Company, the Company shall have the right to give a Control
Notice to the Buyer at any time after such Share Limitation Event occurs and
prior to the earlier of (1) the date on which the Buyer's right (other than as
limited by this Section 7(i)(1)(C)) to receive a cash payment pursuant to
Section 7(i)(1)(B) by reason of the occurrence of such Share Limitation Event
expires and (2) the date on which the Company is obligated to make a payment to
the Buyer pursuant to Section 7(i)(1)(B). For purposes of this Section
7(i)(1)(C), a Share Limitation Event shall be deemed to have occurred by reason
of events which are not solely within the control of the Company if a
requirement of the Company to repurchase, or a right of the Buyer to require
repurchase of, Shares by reason thereof, or the requirement of the Company to
make a payment pursuant to Section 7(i)(1)(B), would result in the Company being
required to classify the Shares as redeemable common stock on a balance sheet of
the Company prepared in accordance with Generally Accepted Accounting
Principles. If the Company timely gives a Control Notice to the Buyer, then in
lieu of making the payment required by Section 7(i)(1)(B) pursuant to a notice
given by the Buyer by reason of such Share Limitation Event, on the next Reset
Date to occur the Adjustment Price shall be reduced to 80% of the amount such
Adjustment Price would otherwise be. On or after the date the Company gives
such Control Notice, upon notice from the Buyer, the Company promptly shall call
a special meeting of its shareholders, to be held not later than 60 days after
such notice is given, to seek the Shareholder Approval for the issuance of all
shares of Common Stock issuable in accordance with this Agreement without regard
to the Shareholder Approval Rule and shall use its best efforts to obtain the
Shareholder Approval. The Company shall prepare and file with the SEC within 20
days after such notice is given preliminary proxy materials which set forth a
proposal to seek
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such Shareholder Approval. The Company shall provide the Buyer an opportunity to
consult with the Company regarding the content of such proxy materials insofar
as it relates to the Shareholder Approval by providing copies of such
preliminary proxy materials and any revised preliminary proxy materials to the
Buyer a reasonable period of time prior to their filing with the SEC. The
Company shall furnish to the Buyer a copy of its definitive proxy materials for
such special meeting and any amendments or supplements thereto promptly after
the same are mailed to shareholders or filed with the SEC. Upon the earlier of
(i) the failure to obtain the Shareholder Approval at the special meeting or
(ii) the failure to hold the special meeting within such 60-day period, the
Company shall so notify the Buyer and such of the following as shall be
specified by notice to the Company from the Buyer shall occur: (1) on the next
Reset Date to occur the Adjustment Price shall be reduced to 70% of the amount
such Adjustment Price would otherwise be and (2) the Company shall promptly file
applications and take all other actions necessary to (i) list the Common Stock
for trading and quotation on the OTC Bulletin Board or such other securities
market or exchange which will not restrict the number of shares of Common Stock
issuable under this Agreement and (ii) upon filing such applications, request
the immediate removal of the Common Stock from listing on the securities market
on which it is then listed which restricts the issuance of shares of Common
Stock under this Agreement without the Shareholder Approval.
(2) During the period from the date of this Agreement to the date on
which the Registration Statement 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) any Specified Securities; provided, however, that nothing in this
Section 7(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
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to the Buyer in respect of its equity interest in the Company that is
represented by the 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.C.; Credit Suisse First Boston Corporation; Smith
Barney Inc.; Bear, Stearns & Co. Inc.; BT Alex Brown Co.; Van Kasper & Company;
Hanifen Imhoff, Inc.; Salomon Brothers Inc.; J.C. Bradford & Co.; Pacific Crest
Securities Inc.; Dain Rauscher; Morgan Stanley & Co. Incorporated; and Hambrecht
& Quist LLC.
(3) Subject to the restrictions in Section 7(i)(2), 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 Specified Securities without giving the Buyer the first right to
acquire the Specified Securities on the same terms as the Specified Securities
are to be offered to other investors. The Company shall give notice to the
Buyer of the detailed terms of the Specified 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 Escrow Agreement and the Registration Rights
Agreement, the Buyer agrees that (1) from the Closing Date until the SEC
Effective Date, 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, (2) during the period from the SEC Effective Date to the date
on which the Buyer no longer owns any Common Shares, 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 125,000 shares of Common Stock at any one time so long as such
transactions are not entered into during any Measurement Period and (3) the
Buyer will not sell any shares of Common Stock during the five consecutive
Trading Days before each Reset Date.
(k) RESERVATION OF COMMON STOCK. The Company (and any successor
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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 issuance of all Reset
Shares, Warrant Shares and Repurchase Shares issuable hereunder are at all times
reserved by the Company (or any successor corporation), free from preemptive
rights. If the Company shall issue any securities or make any change in its
capital structure which would change the number of shares of Common Stock
issuable as Reset Shares, Warrant Shares or Repurchase Shares as herein
provided, the Company 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 issuance of such
Shares on the new basis. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to permit the issuance of all
Reset Shares, Warrant Shares and Repurchase Shares issuable hereunder, the
Company promptly shall seek, and use its best efforts to obtain and complete,
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(l) CONSOLIDATION, MERGER, ETC. In case of any consolidation or
merger of the Company with any other corporation (other than a wholly-owned
subsidiary of the Company) in which the Company is not the surviving
corporation, or in case of any sale or transfer of all or substantially all of
the assets of the Company, 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 Company shall make appropriate provision or cause
appropriate provision to be made so that each holder of Escrow Shares then
outstanding shall have the right thereafter to receive Reset Shares in the form
of 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 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 rights of the holders of Escrow Shares to
receive Reset Shares on a basis as nearly as practical as such rights exist
hereunder prior thereto. The Company shall not effect any such transaction
unless the provisions of this Section 7(l) have been complied with. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, or share exchanges.
(m) OVERDUE AMOUNTS. Whenever any amount which is due by the Company
to any holder of Shares pursuant to the terms of this Agreement, the
Registration Rights Agreement or the Warrants is not paid to such holder when
due, such amount shall bear interest at the rate of 14% per annum (or such other
rate as shall be the maximum rate allowable by applicable law) until paid in
full.
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(n) OTHER. So long as any Shares are owned by the Buyer:
(1) Payment of Obligations. The Company will pay and discharge, and
----------------------
will cause each subsidiary of the Company to pay and discharge, when due all
their respective obligations and liabilities which are material to the Company
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 Company will keep,
----------------------------------
and will cause each subsidiary of the Company to keep, all material property
useful and necessary in its business in good working order and condition,
ordinary wear and tear excepted.
(B) The Company will maintain, and will cause each subsidiary of the
Company 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 Company
------------------------------------------------
will continue, and will cause each subsidiary of the Company to continue, to
engage in business of substantially the same general type as conducted by the
Company and its operating subsidiaries on the date of this Agreement, and will
preserve, renew and keep in full force and effect, and will cause each
subsidiary of the Company 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 Company will comply, and will cause
--------------------
each subsidiary of the Company 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 Company and its subsidiaries taken as a whole.
(5) Investment Company Act. The Company will not be or become an
----------------------
40
<PAGE>
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 Company will not, and will
----------------------------
not permit any subsidiary of the Company, 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 Company, except, on terms to the Company or such
subsidiary no less favorable than terms that could be obtained by the Company or
such subsidiary from a Person that is not an Affiliate of the Company, as
determined in good faith by the Board of Directors.
(o) 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 Initial Shares set forth in Section 10 or 11, as the case
may be, of this Agreement on or before the Closing Date.
8. ESCROW SHARES.
Prior to the Closing Date, the Company and the Buyer will execute and
deliver the Escrow Agreement in the form attached hereto as ANNEX II. The
Escrow Agent shall receive into and release from escrow the Initial Shares, the
Optional Shares and the Reset Shares as provided in this Agreement and the
Escrow Agreement. Except for the Company Escrow Shares, the Buyer shall be the
sole beneficial owner of and shall have the sole right to vote the Escrow
Shares, and the escrow provisions of this Agreement shall not in any way limit
or affect the ownership or the right to dispose of such Escrow Shares by the
Buyer and shall not in any manner create any lien, pledge, charge, equity,
encumbrance, claim or right of the Company of any nature whatsoever in or with
respect to such Escrow Shares. At any time after the earlier of (i) the SEC
Effective Date or (ii) Reset Date No. 1 which is not during a Reset Period, the
Buyer shall have the sole and exclusive right to direct the Escrow Agent to
release to or upon the order of the Buyer any or all Escrow Shares which are not
Company Escrow Shares by delivering a Release Notice to the Escrow Agent.
Within three Trading Days following receipt of a Release Notice, the Escrow
Agent shall release the Escrow Shares covered by such Release Notice in
accordance with the Buyer's instructions stated therein. The certificates for
any Common Shares so released from escrow prior to the SEC Effective Date shall
bear the restrictive
41
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legend specified in Section 7(b). Any remaining Escrow Shares which are not
Company Escrow Shares following the last Reset Date shall be promptly delivered
to or upon the order of the Buyer. Once properly released from escrow in
accordance with this Agreement, Escrow Shares may not be re-deposited into
escrow with the Escrow Agent or again be deemed Common Shares Held.
9. CLOSING DATE.
Subject to the satisfaction or waiver of the conditions set forth in
Sections 10 and 11, 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 of such sale of
the Initial Shares shall occur on the Closing Date at the offices of Genesee
International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington
98004-4332.
10. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell the
Initial 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 (i) good funds as payment
in full of an amount equal to the Cash Consideration for the Initial Shares and
(ii) certificates for shares of Series B Preferred Stock for cancellation
representing payment in full of the Stock Consideration for the Initial Shares,
in accordance with Section 2(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
42
<PAGE>
pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement.
11. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Initial 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 Escrow Agent of the certificates
for the Initial Shares for the account of the Buyer in accordance with this
Agreement;
(b) Delivery by the Company to the Buyer of the Warrants in accordance
with this Agreement;
(c) 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;
(d) The receipt by the Buyer of a certificate, dated the Closing Date,
of the Secretary of the Company certifying (1) the Articles 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 Escrow Agent shall have executed and delivered the Escrow
Agreement in the form attached hereto as ANNEX II;
(f) Receipt by the Buyer on the Closing Date of an opinion of Preston
Gates & Ellis LLP, 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 IV attached hereto; and
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(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.
12. REPURCHASE AT OPTION OF THE BUYER.
(a) REPURCHASE RIGHT. If a Repurchase Event occurs, then, in addition
to any other right or remedy of the Buyer, the Buyer shall have the right, at
the Buyer's option, to require the Company to repurchase all of the Buyer's
Shares (which for purposes of this Section 12 include any Reset Shares due to
the Buyer which have not been delivered to the Escrow Agent), or any portion
thereof, on the date that is three Business Days after the date the Buyer gives
the Company a Repurchase Notice with respect to such Repurchase Event at any
time while any of the Buyer's Shares are outstanding, at a price equal to the
Repurchase Price.
(b) NOTICES; METHOD OF EXERCISING OPTIONAL REPURCHASE RIGHTS, ETC.
(1) On or before the fifth Business Day after the occurrence of a Repurchase
Event, The Company shall give to the Buyer a notice of the occurrence of such
Repurchase Event and of the repurchase right set forth herein arising as a
result thereof. Such notice from the Company shall set forth:
(i) the date by which the optional repurchase right must be exercised,
and
(ii) a description of the procedure (set forth below) which the Buyer
must follow to exercise the Buyer's optional repurchase right.
No failure of the Company to give such notice or defect therein shall limit the
right of the Buyer to exercise the optional redemption right or affect the
validity of the proceedings for the repurchase of the Buyer's Shares.
(2) To exercise its optional repurchase right, the Buyer shall deliver
to the Company on or before the 30th day after the notice required by Section
12(b)(1) is given to the Buyer (or if no such notice has been given by the
Company to the Buyer, within 40 days after the Buyer first learns of such
Repurchase Event) a Repurchase Notice to the Company. A Repurchase Notice may
be revoked by the Buyer giving such Repurchase Notice by giving notice of such
revocation to the Company at any time prior to the time the
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Company pays the Repurchase Price to the Buyer.
(3) If the Buyer shall have given a Repurchase Notice, on the date
which is three Business Days after the date such Repurchase Notice is given (or
such later date as the Buyer or the Escrow Agent, at the request of the Buyer,
surrenders the Buyer's certificates for the Shares redeemed) the Company shall
make payment in immediately available funds of the applicable Repurchase Price
to such account as specified by the Buyer in writing to the Company at least one
Business Day prior to the applicable Repurchase Date.
(c) OTHER. (1) In connection with a repurchase pursuant to this
Section 12 of less than all of the Shares evidenced by a particular certificate,
promptly, but in no event later than three Business Days after surrender of such
certificate to the Company, the Company shall issue and deliver to the Buyer a
replacement certificate for the Shares evidenced by such certificate which have
not been repurchased.
(2) A Repurchase Notice given by the Buyer shall be deemed for all
purposes to be in proper form unless the Company notifies the Buyer in writing
within three Business Days after such Repurchase Notice has been given (which
notice shall specify all defects in such Repurchase Notice), and any Repurchase
Notice containing any such defect shall nonetheless be effective on the date
given if the Buyer promptly undertakes to correct all such defects. No such
claim of error shall limit or delay performance of the Company's obligation to
repurchase all Shares not in dispute whether or not the Buyer makes such
undertaking.
(d) SPECIAL REPURCHASE EVENTS. Notwithstanding any other provision of
this Agreement, if a Repurchase Event occurs by reason of the occurrence of (x)
an event described in clause (1), (2), (3) or (5) of the definition of the term
Repurchase Event or (y) an Amendment Event, and such occurrence is by reason of
events which are not solely within the control of the Company, the Company shall
have the right to give a Control Notice to the Buyer at any time after such
Repurchase Event occurs and prior to the earlier of (1) the date on which the
Buyer's right (other than as limited by this Section 12(d)) to require
repurchase of its Shares by reason of the occurrence of such Repurchase Event
expires and (2) the applicable Repurchase Date by reason of the Repurchase
Notice given by the Buyer by reason of such Repurchase Event. If the Company
timely gives such Control Notice to the Buyer, then, in lieu of payment of the
Repurchase Price by reason of any such Repurchase Event, on or before the third
Business Day of each calendar month after the occurrence and during the
continuance of such Repurchase Event, the Company shall issue and deliver to the
Buyer a number of shares of Common Stock equal to the
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Repurchase Share Amount for the immediately preceding calendar month. The
Repurchase Share Amount shall be prorated for any partial month in which such
Repurchase Event continues.
For purposes of this Section 12(d), a Repurchase Event described in
clause (1), (2), (3) or (5) of the definition of the term Repurchase Event or an
Amendment Event shall be deemed to have occurred by reason of events which are
not solely within the control of the Company if a requirement of the Company to
repurchase, or a right of the Buyer to require repurchase of, Shares by reason
thereof would result in the Company being required to classify the Shares as
redeemable common stock on a balance sheet of the Company prepared in accordance
with Generally Accepted Accounting Principles, and, in the case of an Repurchase
Event described in clause (5) of the definition of the term Repurchase Event,
the Board or the shareholders of the Company do not have the right to approve or
disapprove the transactions resulting in such event.
13. REPURCHASE AT OPTION OF THE COMPANY.
If (i) the Company shall be in compliance in all material respects
with its obligations to the Buyer (including, without limitation, its
obligations under this Agreement, the Escrow Agreement and the Registration
Rights Agreement), (ii) on the date the Company Repurchase Notice is given and
at all times until the Repurchase Date, the Registration Statement is effective
and available for use by the Buyer for the resale of its Shares and (iii) no
Repurchase Event shall have occurred with respect to which, on the date a
Company Repurchase Notice is to be given or on the Redemption Date, the Buyer
(A) shall be entitled to exercise optional repurchase rights under Section 12 by
reason of such Repurchase Event or (B) shall have exercised optional repurchase
rights under Section 12 by reason of such Repurchase Event and the Company shall
not have paid the Repurchase Price to the Buyer, then the Company shall have the
right, exercisable by giving a Company Repurchase Notice not less than 30
Trading Days or more than 60 Trading Days prior to the Repurchase Date to the
Buyer, at any time to repurchase all or from time to time to repurchase any part
of the Escrow Shares in accordance with this Section 13. On the Repurchase Date
(or such later date as the Escrow Agent, at the request of the Buyer, surrenders
to the Company the certificate(s) for the Escrow Shares to be repurchased
pursuant to this Section 13), the Company shall make payment of the applicable
Company Repurchase Price to the Buyer in immediately available funds to such
account as specified by the Buyer in writing to the Company at least one
Business Day prior to the Repurchase Date. The Buyer may remove from escrow in
accordance with Section 8 any Escrow Shares to be repurchased pursuant to this
Section 13 (1) through the day prior to the Repurchase Date and (2) if the
Company shall fail to pay the Company
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<PAGE>
Repurchase Price of any Escrow Shares when due, at any time after the due date
thereof until such date as the Company pays the Company Repurchase Price of such
Escrow Shares. No Escrow Shares which the Buyer removes from escrow pursuant to
Section 8 or exercises the optional repurchase right pursuant to Section 12 may
be repurchased by the Company pursuant to this Section 13 on or after the date
of exercise of such removal right or optional repurchase right, as the case may
be, regardless of whether the Company Repurchase Notice shall have been given
prior to, or on or after, the date of exercise of such removal right or optional
redemption right, as the case may be.
14. 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 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.
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(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 delivered personally (which shall include
telephone line facsimile transmission with answer back confirmation) or by
courier and shall be effective 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) 652-9075),
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 Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue,
Washington 98004-4332 (telephone line facsimile transmission number (425) 462-
4645) 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.
(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 Initial Shares or the Optional 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 Initial Shares or the Optional 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 Initial Shares or the
Optional Shares and acquisition of the 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
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such assignee to make available to such assignee the benefits of the
Registration Rights Agreement with respect to the Initial Shares, the Optional
Shares and the other Shares issuable in connection with this Agreement and the
Warrants with respect to which the purchase under this Agreement has been so
assigned. Any transfer of the Shares or the Warrants by the Buyer after the
Closing Date shall be made in accordance with Section 7(a). After the Closing
Date, the Buyer shall have the right to assign its rights and obligations under
this Agreement (1) 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 and (2) as provided in Section 3(b).
(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 Initial Shares and any Optional 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 of the sale of the Initial Shares shall not have
occurred on a Closing Date on or before November 6, 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
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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.
(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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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.
ADVANTAGE FUND II LTD.
By:
W.R. Weber
President
Date:
Address: c\o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
Fasimile No.: 011-599-9732-2008
ONHEALTH NETWORK COMPANY
BY:
Name:
Title:
Date:
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Exhibit 10.2
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 124,756 Shares of Common Stock of OnHealth
Network Company
ONHEALTH NETWORK COMPANY
FORM OF
COMMON STOCK PURCHASE WARRANT
NO. W-2
ONHEALTH NETWORK COMPANY, a Washington corporation (the "Company"),
hereby certifies that, for value received, ADVANTAGE FUND II LTD. 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), 124,756 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 OnHealth Network Company and any corporation
that shall succeed to or assume the obligation of OnHealth Network Company
hereunder in accordance
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with the terms hereof.
"Expiration Date" means October 30, 2003.
"Issuance Date" shall mean the first date of original issuance of this
Warrant.
"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 $4.809375 per share, subject to adjustment
as provided in this Warrant.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of October 30, 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
October 30, 1998, by and between the Company and the original Holder of
this Warrant, as amended from time to time in accordance with its terms.
"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. 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.
-2-
<PAGE>
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 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 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
-3-
<PAGE>
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 Company's 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,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
-4-
<PAGE>
(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 obtained shall thereafter be
the
-5-
<PAGE>
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
-6-
<PAGE>
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 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,
-7-
<PAGE>
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. On or prior to the issuance of this Warrant, the
-------------
Company will instruct American Stock Transfer & Trust Company, as Transfer Agent
and Registrar (the "Transfer Agent"), to act as 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 Holder's
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 shares of 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 Registration Rights Agreement, the shares of Common
Stock issuable upon exercise of this Warrant (if any) are
-8-
<PAGE>
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.
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 Washington. 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.
-9-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on its behalf by one of its officers thereunto duly authorized.
Dated: October 30, 1998 ONHEALTH NETWORK COMPANY
By: \s\ Michael D. Conway
Title: Vice President
-10-
<PAGE>
FORM OF SUBSCRIPTION
ONHEALTH NETWORK COMPANY
(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 OnHealth
Network Company, a Washington 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:
Name:
Address:
-11-
<PAGE>
Dated:_______________________ (Signature must conform to name of
Holder as specified on the face of
Warrant)
Name:
Address:
-12-
<PAGE>
EXHIBIT 10.3
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of October 30, 1998 (this
"Agreement"), by and between ONHEALTH NETWORK COMPANY, a Washington corporation
(the "Company"), ADVANTAGE FUND II LTD., a British Virgin Islands corporation
(the "Buyer"), and BRIAN W. PUSCH, not in his individual capacity but as Escrow
Agent (the "Escrow Agent").
W I T N E S S E T H:
--------------------
WHEREAS, the Company and the Buyer have executed and delivered, one to
the other, a Subscription Agreement, dated as of October 30, 1998 (the
"Subscription Agreement"), pursuant to which, among other things, the Company
has agreed to sell to the Buyer, and the Buyer has agreed to purchase from the
Company, upon the terms and subject to the conditions of the Subscription
Agreement, shares (the "Purchased Shares") of Common Stock, $.01 par value, of
the Company (the "Common Stock"), and the Company has further agreed, under
certain circumstances, from time to time to issue additional shares ("Reset
Shares") of Common Stock to the Buyer; and
WHEREAS, pursuant to the Subscription Agreement, the Company has
agreed with the Buyer, among other things, to execute and deliver this
Agreement, and to initially deposit all Purchased Shares and Reset Shares issued
by the Company for the account of the Buyer with the Escrow Agent for the
purposes set forth in Section 4 and Section 8 of the Subscription Agreement;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows (capitalized terms used herein without definition have
the meanings given them in the Subscription Agreement):
1. DEPOSIT OF SHARES. Upon each closing of the sale of the Initial
Shares and the Optional Shares, if any, to the Buyer or its assignee in
accordance with the Subscription Agreement, the Company shall deposit with the
Escrow Agent for the account of the Buyer or its assignee one or more
certificates representing such Initial Shares and Optional Shares. Upon each
issuance, if any, of Reset Shares pursuant to Section 4 of the Subscription
Agreement, the Company shall deposit with the Escrow Agent for the account of
the Buyer or its assignee one or more certificates representing such Reset
Shares. All shares of Common Stock held by the Escrow Agent from time to time,
including any additional shares of Common Stock distributed or received by the
Escrow Agent as a stock dividend, stock split or other distribution on the
shares of Common Stock held by the Escrow Agent, are referred to herein as the
"Escrow Shares." The Escrow Shares shall, if sent electronically, be registered
in street name and, if delivered in certificated form, be registered in the name
of the Escrow Agent or shall be accompanied by duly executed stock powers in
blank with any necessary signature guarantees. The Escrow Agent shall be
entitled, in its discretion, to
-1-
<PAGE>
retain possession of certificates for the Escrow Shares or to deposit the Escrow
Shares in a segregated brokerage account maintained in the name of the Escrow
Agent with PaineWebber Incorporated or another brokerage firm which is a member
of the National Association of Securities Dealers, Inc.
2. BENEFICIAL OWNERSHIP OF ESCROW SHARES. As provided in Section 8
of the Subscription Agreement, except for Escrow Shares which are due to the
Company as specified in a Reset Notice (as defined below) pursuant to Section 4
of the Subscription Agreement which have not been released to the Company
("Company Escrow Shares"), the Buyer shall be the sole beneficial owner of and
shall have the sole right to vote the Escrow Shares, and the escrow provisions
of this Agreement and the Subscription Agreement shall not in any way limit or
affect the ownership or the right to dispose of such Escrow Shares by the Buyer
and shall not in any manner create any lien, pledge, charge, equity,
encumbrance, claim or right of the Company of any nature whatsoever in or with
respect to such Escrow Shares. In the event of any dispute or uncertainty
regarding the existence or amount of any Company Escrow Shares, all Escrow
Shares in question shall be deemed beneficially owned by the Buyer until
designated as Company Escrow Shares by delivery by the Buyer or a court of
competent jurisdiction of a Reset Notice or other written confirmation thereof
to the Escrow Agent and the Company.
3. RELEASE OF ESCROW SHARES TO THE BUYER. (a) At any time after the
earlier of (i) the SEC Effective Date or (ii) Reset Date No. 1 which is not
during a Reset Period, the Buyer shall have the sole and exclusive right to
direct the Escrow Agent to release to or upon the order of the Buyer any or all
Escrow Shares which are not Company Escrow Shares by delivering a Release
Notice, in the form attached hereto as EXHIBIT A (each, a "Release Notice"), to
the Escrow Agent. No Escrow Shares may be released by the Escrow Agent during a
Reset Period unless the Escrow Agent is jointly instructed to do so by the
Company and the Buyer. The Escrow Agent shall determine the expiration date of
any Reset Period, which determination shall be binding on the Company and the
Buyer.
(b) Within three Trading Days following receipt of a Release Notice
or as promptly as practicable thereafter, the Escrow Agent shall release to the
Buyer the number of Escrow Shares specified in such Release Notice in accordance
with the Buyer's instructions stated therein until such time as the Escrow Agent
no longer holds any Escrow Shares. A Release Notice given by the Buyer shall be
deemed for all purposes to be in proper form unless the Escrow Agent notifies
the Buyer in writing within five Business Days after such Release Notice has
been given (which notice shall specify all defects in such Release Notice) and
any Release Notice containing any such defect shall nonetheless be effective on
the date given if the Buyer promptly undertakes to correct all defects. The
certificates for any Common Shares so released from escrow prior to the SEC
Effective Date may, if so requested by the Company, bear the restrictive legend
specified in Section 7(b) of the Subscription Agreement. Any remaining Escrow
Shares which are not Company Escrow Shares following the last Reset Date to
occur under the Subscription Agreement shall be promptly delivered to or upon
the order of the Buyer. Once properly released from escrow in accordance with
this
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<PAGE>
Agreement, Escrow Shares may not be re-deposited into escrow.
4. RELEASE OF COMPANY ESCROW SHARES TO THE COMPANY. On or after
each Reset Date, the Escrow Agent shall receive a Reset Notice, in the form
attached hereto as EXHIBIT B (each, a "Reset Notice"), from the Buyer or, when
permitted by Section 4(c) of the Subscription Agreement, from the Company. If a
Reset Notice states that Reset Shares are due to the Company, within six Trading
Days after such Reset Notice is given to the Escrow Agent or as promptly as
practicable thereafter, the Escrow Agent shall release the applicable whole
number of Company Escrow Shares to the Company in accordance with the Company's
written instructions. In the event of any error or dispute concerning the
number of Reset Shares due to the Buyer or to the Company set forth in a Reset
Notice, the Company and the Buyer will comply with the provisions of Section
4(d) of the Subscription Agreement and the Escrow Agent shall receive the
notices provided therein. The Escrow Agent is authorized and directed to rely
on any determination of the Auditors made pursuant to such Section 4(d).
5. METHOD OF RELEASE. In the discretion of the Escrow Agent, the
Escrow Agent may release Escrow Shares to the Buyer or to the Company, as and
when required by this Agreement, by means of (i) delivering physical
certificates representing such Escrow Shares or (ii) electronic transfer of such
Escrow Shares by DWAC or a similar system to an account designated in writing to
the Escrow Agent by the Buyer or the Company, as the case may be.
6. DUTIES OF ESCROW AGENT. The Escrow Agent shall be obligated only
for the performance of such duties as are specifically set forth herein and may
rely and shall be protected in relying or refraining from acting on any
instrument reasonably believed by the Escrow Agent to be genuine and to have
been signed or presented by the proper party or parties. In no event shall the
Escrow Agent have any responsibility or liability for the accuracy of the
information set forth in any Release Notice or Reset Notice or for the
determination of any calculation to be made for purposes of Section 4 of the
Subscription Agreement or otherwise. The Escrow Agent shall not be personally
liable for any act the Escrow Agent may do or omit to do hereunder as Escrow
Agent while acting in good faith, and any act done or omitted by the Escrow
Agent pursuant to the advice of the Escrow Agent's attorneys-at-law shall be
conclusive evidence of such good faith. In no event shall the Escrow Agent
incur any liability or be held responsible, if any certificate for or electronic
transmission of Escrow Shares, once released from escrow hereunder, shall become
lost, delayed, stolen, destroyed, mutilated or misplaced while in transit to any
person, provided the Escrow Agent shall have dispatched the same by a means
customarily used by the Escrow Agent.
7. DISREGARD OF WARNINGS; JUDICIAL ORDERS. The Escrow Agent is
hereby expressly authorized to disregard any and all warnings given by any of
the parties hereto or by any other person, firm or corporation, excepting only
orders or process of courts of law and is hereby expressly authorized to comply
with and obey orders, judgments or decrees of any court. In case the Escrow
Agent obeys or complies with any such order, judgment or decree, the Escrow
Agent shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been
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entered without jurisdiction.
8. NO LIABILITY FOR GENUINENESS. The Escrow Agent shall not be
liable in any respect on account of the identity, authorities or rights of the
parties executing or delivering or purporting to execute or deliver the
Subscription Agreement, a Release Notice, a Reset Notice or any other notice,
document or instrument deposited or called for hereunder.
9. STATUTE OF LIMITATIONS. The Escrow Agent shall not be liable for
the outlawing of any rights under the Statute of Limitations with respect to
this Agreement or any document or instrument deposited with or held by the
Escrow Agent pursuant to this Agreement.
10. RETENTION AND ADVICE OF LEGAL COUNSEL. The Escrow Agent shall be
entitled to employ such legal counsel and other experts as the Escrow Agent may
deem necessary properly to advise the Escrow Agent in connection with the Escrow
Agent's obligations hereunder, may rely upon the advice of such counsel, and may
pay such counsel reasonable compensation therefor, subject to reimbursement
thereof as and to the extent provided in Section 14. The Escrow Agent has acted
as legal counsel for the Buyer and the Escrow Agent may continue to act as legal
counsel for the Buyer notwithstanding its duties as Escrow Agent hereunder.
11. RESIGNATION. The Escrow Agent's responsibilities as Escrow Agent
hereunder shall terminate if the Escrow Agent shall resign by written notice to
the Company and the Buyer. In the event of any such resignation, the Buyer
shall appoint a successor Escrow Agent. The Escrow Agent shall transfer any
Escrow Shares to any successor Escrow Agent promptly after receipt by the Escrow
Agent of notice from the Buyer of the appointment of such successor.
12. FURTHER ASSURANCES. If the Escrow Agent reasonably requires
other or further instruments in connection with this Agreement or obligations in
respect hereto, the parties hereto shall join in furnishing such instruments.
13. DISPUTES. It is understood and agreed that should any dispute
arise with respect to the release and/or right of possession of the Escrow
Shares held by the Escrow Agent hereunder, the Escrow Agent is authorized and
directed, in its sole discretion (a) to retain in the Escrow Agent's possession
without liability to anyone all or any part of the Escrow Shares until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but the Escrow Agent shall be under no duty whatsoever to
institute or defend any such proceedings or (b) at any time, to deposit any or
all of the Escrow Shares with any court of competent jurisdiction in the State
of New York, in which event the Escrow Agent shall give notice thereof to the
Company and the Buyer and shall thereupon be relieved and discharged from all
further obligations hereunder.
14. FEES AND EXPENSES; INDEMNITY. (a) The Company agrees to pay to
the Escrow Agent an annual fee in the amount of $5,000 for the Escrow Agent's
services under this
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Agreement, which fee shall be payable in advance for two years, and if any
Escrow Shares are held in escrow on August 1, 2000, on such date the Company
agrees to pay such annual fee in advance for the third year of this Agreement.
If all remaining Escrow Shares are released prior to the end of such three-year
period, 30 days following such final release the Escrow Agent will refund a pro
rata portion of such pre-paid fees, less any amounts due to the Escrow Agent for
its expenses pursuant to this Section 14(a) or for any amounts due pursuant to
Section 14(b). In the event the Escrow Agent resigns, the Escrow Agent shall
refund a pro rata portion of such fee to the Company, less any amounts due to
the Escrow Agent pursuant to the following sentence of this Section 14(a) or
Section 14(b). In addition, the Company agrees to reimburse the Escrow Agent for
all of its reasonable out-of-pocket expenses incurred in connection with the
performance of its services under this Agreement. The Buyer agrees to pay to the
Escrow Agent any fees and expenses of the Escrow Agent which are not paid when
due by the Company.
(b) In addition to the amounts payable pursuant to Section 14(a), the
Company and the Buyer jointly and severally agree to pay or reimburse the Escrow
Agent for, and to indemnify and hold harmless the Escrow Agent from, any and all
claims, liabilities, costs or expenses in any way arising from or relating to
the duties or performance of the Escrow Agent hereunder other than any such
claim, liability, cost or expense to the extent the same shall have been
determined by final, unappealable judgment of a court of competent jurisdiction
to have resulted from the gross negligence or willful misconduct of the Escrow
Agent.
15. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given upon personal delivery (which shall include telephone line
facsimile transmission or courier service), addressed to each person thereunto
entitled at the following addresses, or at such other address as such person may
designate by ten days advance written notice to each of the other parties
hereto.
the Company: OnHealth Network Company
808 Howell Street
Suite 400
Seattle, Washington 98101
Facsimile No.: (206) 652-9075
the Buyer: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
Facsimile No.: 011-599-9732-2008
with a copy to:
Genesee International, Inc.
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<PAGE>
10500 N.E. 8th Street
Suite 1920
Bellevue, Washington 98004-4332
Facsimile No.: (425) 462-4645
the Escrow Agent: Law Offices of Brian W Pusch
Penthouse Suite
29 West 57th Street
New York, New York 10019
Facsimile No.: (212) 980-7055
16. AMENDMENT, MODIFICATION, ETC. No amendment, modification,
waiver, discharge or termination of any provision of this Agreement nor consent
to any departure by the parties 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, or a waiver of any right under, this
Agreement.
17. SUBSCRIPTION AGREEMENT. By signing this Agreement, the Escrow
Agent does not become a party to and has no liability with respect to the
Subscription Agreement and the agreements and transactions contemplated thereby.
18. ASSIGNMENT. In connection with any assignment by the Buyer of
any of its rights under the Subscription Agreement or the Registration Rights
Agreement, the Buyer shall have the right to assign all or a portion of its
rights and obligations under this Agreement to any such assignee by giving
notice thereof to the Escrow Agent and the Company. Each such notice shall be
executed by the assignee. Such notice may be contained in a notice of
assignment given under the Subscription Agreement or the Registration Rights
Agreement. From and after the giving of such notice by the Buyer, such assignee
shall be deemed a party to this Agreement, and all applicable references herein
to the "Buyer" shall include such assignee.
19. GOVERNING LAW. This instrument shall be binding upon and inure
to the benefit of the parties hereto, and their respective successors and
permitted assigns and shall be governed by the laws of the State of Washington,
without giving effect to principles of conflicts of law.
IN WITNESS WHEREOF, the Company and the Buyer have caused this
Agreement to be duly executed and delivered by their respective officers or
other representatives thereunto duly authorized and the Escrow Agent has duly
executed this Agreement, in each case as of the date first set forth above.
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<PAGE>
ONHEALTH NETWORK COMPANY
By /s/ Michael D. Conway
---------------------
Name: Michael D. Conway
Title: Vice President
ADVANTAGE FUND II LTD.
By /s/ W. R. Weber
----------------
W.R.Weber
President
/s/ Brian W. Pusch
------------------------------
Brian W. Pusch, as
Escrow Agent
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EXHIBIT A
---------
RELEASE NOTICE
TO: Brian W. Pusch,
as Escrow Agent
Law Offices of Brian W Pusch
29 West 57th Street
Penthouse Suite
New York, New York 10019
Facsimile No.: (212) 980-7055
(1) Pursuant to the terms of the Escrow Agreement, dated as of October
30, 1998 (the "Escrow Agreement"), by and between OnHealth Network Company, a
Washington corporation (the "Company"), Advantage Fund II Ltd., a British Virgin
Islands corporation, and Brian W. Pusch, as Escrow Agent (the "Escrow Agent"),
the undersigned hereby elects to release ____________________ Escrow Shares.
Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Escrow Agreement or, if not defined in the
Escrow Agreement, in the Subscription Agreement.
(2) Please release ______________________ Escrow Shares to the person
and address or to the account specified immediately below or, if additional
space is necessary, on an attachment hereto:
Delivery Instructions
for Common Stock:
PRINT NAME:
Date _________________________ By: ______________________________
Title:
A-8
<PAGE>
EXHIBIT B
---------
RESET NOTICE
TO: OnHealth Network Company Brian W. Pusch,
808 Howell Street as Escrow Agent
Suite 400 Law Offices of Brian W Pusch
Seattle, Washington 98101 29 West 57th Street
Penthouse Suite
Attention: Chief Financial Officer New York, New York 10019
Facsimile No.: (206) 652-9075 Facsimile No.: (212) 980-7055
This Reset Notice is given pursuant to the terms of (i) the
Subscription Agreement, dated as of October 30, 1998 (the "Subscription
Agreement"), by and between OnHealth Network Company, a Washington corporation
(the "Company"), and Advantage Fund II Ltd., a British Virgin Islands
corporation (the "Buyer"), and (ii) the Escrow Agreement, dated as of October
30, 1998 (the "Escrow Agreement"), by and between the Company, the Buyer and
Brian W. Pusch, as Escrow Agent (the "Escrow Agent"). Capitalized terms used
herein and not otherwise defined herein have the respective meanings provided in
the Subscription Agreement. The undersigned Buyer hereby notifies the Company
and the Escrow Agent as follows:
(1) Reset Date No. ____
(2) Reset Date: _______________________
(3) Computation of number of Reset Shares pursuant to Section 4(a) or
4(b) of the Subscription Agreement:
(4) Number of Reset Shares due to the Buyer: ______________
(5) Number of Reset Shares due to the Company: ___________. The
Buyer hereby instructs the Escrow Agent to release such Reset
Shares to the Company.
NAME OF BUYER:
B-1
<PAGE>
Date:
By:
Title:
B-1
<PAGE>
EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of October 30, 1998 (this
"Agreement"), is made by and between ONHEALTH NETWORK COMPANY, a Washington
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
October 30, 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 of Common Stock, $.01 par value (the "Common Stock"), of the
Company, and to issue to the Initial Investor common stock purchase warrants
(the "Warrants") to purchase shares (the "Warrant Shares") of Common Stock;
WHEREAS, under the conditions set forth in the Subscription Agreement,
the Company may be obligated from time to time to issue to the Investors (as
defined below) additional 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
Registrable Securities (as defined below) issuable to or for the account of the
Investors pursuant to the Subscription Agreement;
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:
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Investor" or "Investors" 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
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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 Initial Shares, the Optional
Shares, the Reset Shares, the Repurchase Shares and the Warrant Shares.
"Registration Period" means the period from the Closing Date to the
earlier of (i) the date which is three years after the date on which the last
Reset Shares may be issued to the Investors pursuant to the Subscription
Agreement, (ii) the date on which each Investor may sell all of its Registrable
Securities (including Reset Shares which may be issued from time to time)
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) 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.
2. REGISTRATION.
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(A) MANDATORY REGISTRATION. The Company shall prepare, and on or
prior to December 31, 1998, 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 or its assignees
of a number of shares of Common Stock at least equal to the sum of (x) 150% of
the sum of the number of Initial Shares and Optional Shares, plus (y) the number
of Warrant Shares. 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 Reset
Shares and Repurchase Shares issuable pursuant to the Subscription Agreement or
the number of shares of Common Stock issuable upon exercise of 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
cover such Reset Shares and Repurchase Shares and permit such exercises. 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 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) OTHER REGISTRATIONS. The Company will not file another
registration statement with the SEC covering shares of Common Stock prior to the
SEC Effective Date, other than registration statements on Form S-4 or S-8.
(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 Form S-4 or Form S-8 or their
then equivalents relating to equity securities to be issued solely in
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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 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
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<PAGE>
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 December
31, 1998, 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
times 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 times
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 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,
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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 Articles 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 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;
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(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 (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 Company's own expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the
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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 Investor's 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 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
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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 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
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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,
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:
(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
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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.
(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
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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, 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
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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, 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.
9. ASSIGNMENT OF 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 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
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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 808 Howell Street, Suite 400, Seattle, Washington,
98101, Attention: Chief Financial Officer, telephone line facsimile
transmission number (206) 652-9075, 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), (ii) if to the Initial
Investor, c/o Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920,
Bellevue, Washington 98004-4332, telephone line facsimile transmission number
(425) 462-4645 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).
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(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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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.
ONHEALTH NETWORK COMPANY
By: \s\ Michael D. Conway
Name: Michael D. Conway
Title: Vice President
ADVANTAGE FUND II LTD.
By: \s\ W.R. Weber
--------------------------------------------
W.R. Weber
President
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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 OnHealth Network Company, a
Washington 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 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 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 Warrant Shares under the Securities Act of 1933,
as amended.
Should you have any questions concerning this matter, please contact
me.
Very truly yours,
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ONHEALTH NETWORK COMPANY
By: ______________________________
Name:
Title:
Enclosures
cc: [Names of Investors]
1-18
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EXHIBIT 2
TO
REGISTRATION
RIGHTS AGREEMENT
_______________ ___, 1998
[Names and Addresses of Investors]
ONHEALTH NETWORK COMPANY
SHARES OF COMMON STOCK
----------------------
Ladies and Gentlemen:
We are counsel to OnHealth Network Company, a Washington corporation
(the "Company"), and we understand that the Company has sold to [Names of
Investors] (the "Holders") an aggregate of _______________ shares (the "Common
Shares") of the Company's Common Stock, $.01 par value (the "Common Stock") and
issued to the Holders Common Stock Purchase Warrants (the "Warrants"). The
Common Shares were sold, and the Warrants were issued, to the Holders pursuant
to the Subscription Agreement, dated as of October 30, 1998, between the Holders
and the Company (the "Subscription Agreement"). Pursuant to the Registration
Rights Agreement, dated as of October 30, 1998, between the Company and the
Holders (the "Registration Rights Agreement") entered into in connection with
the purchase by the Holders of the Common Shares, the Company agreed with each
Holder, among other things, to register for resale (1) the Initial Shares, the
Optional Shares, the Reset Shares and the Repurchase Shares (as such terms are
defined in the Subscription Agreement) 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 "1933 Act"), upon the terms provided in the
Registration Rights Agreement. The Initial Shares, the Optional Shares, the
Reset Shares and the Warrant Shares are referred to herein collectively as the
"Shares." Pursuant to the Registration Rights Agreement, on _________ ___, 1998
the Company filed a Registration Statement on Form [S-3] (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.
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[Other introductory and scope of examination language to be inserted]
Based on the foregoing, we are of the opinion that:
(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
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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,
cc: American Stock Transfer & Trust Company,
as Transfer Agent, Warrant Agent and Registrar
2-21
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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0
2,156
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<OTHER-SE> (2,950)
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</TABLE>
