UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of Report (Date of earliest event reported): November 14, 1997
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LIFERATE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 0-25530 41-1682994
(State or other jurisdiction (Commission (IRS employer
of incorporation) file number) identification no.)
7210 Metro Boulevard, Edina, Minnesota 55439
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 844-0599
<PAGE>
ITEM 1. CHANGE IN CONTROL OF REGISTRANT.
On November 14, 1997, LifeRate Systems, Inc. (the "Company") entered
into a Securities Purchase Agreement (the "Purchase Agreement") with Special
Situations Private Equity Fund, L.P., Special Situations Cayman Fund, L.P.,
Special Situations Fund III, L.P. (collectively, the "Funds") and the other
purchasers named in the Purchase Agreement (the Funds and such other purchasers
are collectively referred to herein as the "Purchasers"), pursuant to which the
Company agreed to sell for cash up to 9,000,000 shares (the "Shares") of common
stock, no par value (the "Common Stock") of the Company at prices ranging from
$.50 to $.56 per share and warrants (the "Warrants") to purchase up to 9,000,000
shares of Common Stock, as well as an additional 104,000 Shares and Warrants for
cancellation of certain indebtedness (the "Financing"). The Warrants are
exercisable for a period of 10 years at a price of $1.50 per share, subject to
adjustment as provided in the Warrants. The first closing under the Purchase
Agreement was held on November 14, 1997, at which the Company sold an aggregate
of 2,500,000 Shares at a price of $.50 per share and issued an aggregate of
2,500,000 Warrants to the Funds for an aggregate purchase price of $1,250,000
and an aggregate of 104,000 Shares and Warrant for the cancellation of $52,000
of indebtedness (the "First Closing"). The interim closing called for under the
Purchase Agreement was held on November 21, 1997, at which the Company sold an
additional 1,790,000 Shares at a price of $.56 per share and issued an
additional 1,790,000 Warrants to purchasers other than the Funds for an
aggregate purchase price of $1,002,400. The Shares and Warrants acquired by the
Funds in these transactions constitute "beneficial ownership" (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of
45.6% of the Company's Common Stock as of November 21, 1997.
The Shares and Warrants were offered pursuant to the Selling Agency
Agreement (the "Selling Agency Agreement") dated as of September 2, 1997, and as
amended as of November 14, 1997, by and between the Company and Miller Johnson &
Kuehn Incorporated ("MJK"). The Selling Agency Agreement provides that MJK is to
receive a commission of 10% of the purchase price of the Shares sold to
Purchasers other than the Funds and is to receive a non-accountable expense
allowance equal to 1% of the purchase price of Shares on which it is paid a
commission. Accordingly, the Company paid MJK commissions of $100,240 and a
non-accountable expense allowance of $10,024 with respect to the 1,790,000
Shares and Warrants sold at the interim closing. In addition, the Company paid
the fees of counsel to MJK, as well as the Funds.
The Purchase Agreement also provides that, in the event the Company
fulfills certain conditions by January 15, 1998 (the "Second Closing
Conditions"), the Company will sell to the Funds and other Purchasers an
additional 4,500,000 Shares and Warrants to purchase 4,500,000 shares of Common
Stock at a purchase price of between $.50 and $.56 per share on or before
January 31, 1998 (the "Second Closing"). The Second Closing Conditions include
(a) the approval by the shareholders of the Company of an amendment to the
Company's Articles of Incorporation to increase the total number of authorized
shares of Common Stock to an aggregate of 75,000,000 and (b) the attainment by
the Company no later than January 15, 1998, of the following milestones: (i) the
Company's revenues derived from the sale of existing or new
<PAGE>
systems during the period from October 1, 1997, through January 15, 1998, shall
be at least $200,000; (ii) the Company shall have executed letters of intent
and/or sales contracts, each with a minimum value of $5,000, with at least five
new (excluding current or previous) customers for the sale of any existing or
new systems during the period from October 1, 1997 through January 15, 1998; and
(iii) the Company shall have made generally available for sale a commercially
marketable entry level cardiac cath lab product designed to support the data
requirements of the American College of Cardiology, with a sales price range of
$5,000-$15,000. If the Second Closing Conditions are met, the Funds will be
obligated to purchase 2,500,000 Shares at a price of $.50 per share and
2,500,000 Warrants for an aggregate purchase price of $1,250,000.
In October 1997, eight of the Company's non-employee directors loaned
the Company an aggregate of $46,200 in order for the Company to continue
operations pending completion of the Financing. A total of $40,425 was repaid,
without interest, to seven of these non-employee directors from the proceeds of
the First Closing, and the balance of $5,775 was converted into 11,550 shares of
Common Stock at a price of $.50 per share.
In October and November 1997, MJK and principals of MJK loaned the
Company an aggregate of $258,000 in order for the Company to continue operations
pending completion of the Financing. A total of $206,000 was repaid, without
interest, to MJK from the proceeds of the First Closing, and the balance of
$52,000 was converted into 104,000 Shares and 104,000 Warrants in the first
closing at a price of $.50 per share.
As a condition to the First Closing, the Company's board of directors
(the "Board") was reduced from ten directors to five directors, and all of the
non-employee directors of the Company, other than Daniel Pelak and Kevin Roberg,
resigned from the Board. In addition, all of the non-employee directors of the
Company agreed to cancel all options or warrants to purchase shares of Common
Stock held by them (except for certain options to purchase an aggregate of
236,333 shares held by APF, LLC ("APF") and Dr. Anthony P. Furnary ("Furnary")
and options to purchase 10,000 shares, exercisable at $1.00 per share held by
each of William W. Chorske and William Knopf, M.D.). Under the Purchase
Agreement, the Company has also agreed, so long as the Purchasers own or have
the right to acquire at least 20% of the then outstanding shares of Common
Stock, that (a) the Company shall maintain the number of directors who
constitute the Board of Directors at five; (b) so long as the Funds own at least
2.5% of the then outstanding shares of Common Stock, the Company shall maintain
on the Board one director nominee to be designated by the Funds; and (c) for a
period of three years from the date of the Purchase Agreement, the Company shall
maintain on the Board of Directors one director nominee to be designated by MJK,
which nominee is to be mutually acceptable to the Company and MJK (the "MJK
Director").
The Company agreed to a number of covenants under the Purchase
Agreement. So long as the Purchasers own or have the right to acquire at least
20% of the outstanding shares of Common Stock, the Company has agreed not to do
any of the following without the consent of the Funds and the MJK Director: (a)
sell Common Stock or any rights or securities convertible into or exercisable or
exchangeable for Common Stock at a purchase, exercise or conversion
<PAGE>
price, as the case may be, of less than $1.00 per share of Common Stock for a
period of three years from the date of the Purchase Agreement; (b) issue any
securities senior to the Common Stock; (c) effect any reclassification, capital
reorganization or other change of outstanding shares of capital stock of the
Company; (d) merge, consolidate or enter into any other business combination of
the Company with or into another entity (other than a merger of a wholly owned
subsidiary, in which merger the Company shall be the surviving entity); (e)
sell, lease or otherwise dispose of all or substantially all of its assets; or
(f) liquidate, dissolve or wind-up the Company.
All of the Shares and the shares of Common Stock issuable upon exercise
of the Warrants (the "Warrant Shares") are "restricted stock," as defined in the
rules promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). The Shares and Warrant Shares have certain demand and "piggyback"
registration rights under the Securities Act and the rules and regulations
promulgated thereunder as more particularly set forth in Section 4 of the
Purchase Agreement and the Company has agreed not to grant any registration or
similar rights for a period of three years. The Company is required to file a
Registration Statement under the Securities Act by December 14, 1997 registering
the resale of the Shares and Warrant Shares issued on November 14, 1997 and
November 21, 1997. The Company will also be required to register the resale of
any Shares and Warrant Shares issued in subsequent closings.
As conditions to the First Closing, the Company also amended certain
agreements between the Company and various third parties, including (a)
Medtronic, Inc. ("Medtronic"); (b) The Atlanta Cardiology Group, P.C. ("ACG");
(c)APF and Furnary; (d) the holders of the Company's Convertible Promissory
Notes, dated July 21, 1997, in the aggregate principal amount of $500,000 (the
"July Bridge Notes"); and (e) the employment agreement with David J. Chinsky,
the Company's President and Chief Executive Officer. These amendments are
described below.
MEDTRONIC, INC. The Company's Convertible Promissory Note, dated May
12, 1997, in the principal amount of $1,000,000 held by Medtronic (the
"Medtronic Note") was amended to provide that: (a) no interest will
accrue thereunder and accrued interest will be forfeited; (b) principal
will not become due until May 12, 2002; (c) the conversion price of the
Medtronic Note is $1.50 per share; and (d) the Company will not be
obligated to issue any additional warrants to Medtronic under the
Medtronic Note. The warrant, dated May 12, 1997, to purchase 100,000
shares of Common Stock held by Medtronic (the "Medtronic Warrant") was
amended to provide that the exercise price is $.50 per share and that
there was no other adjustment to the exercise price or the number of
shares covered by the Medtronic Warrant as a result of the transactions
contemplated by or required to be completed in connection with the
Purchase Agreement. In addition, Medtronic waived the restrictions on
registration rights contained in Section 8.4 of the Investment
Agreement, dated December 26, 1995, waived its right of first refusal
to purchase Shares or acquire Warrants, agreed not to exercise and to
otherwise waive any of its registration rights until January 1, 2000,
waived its superior position with respect to an underwriter's cutback
of piggyback registration rights and waived its right of first refusal
on the sale of the Company in certain circumstances.
<PAGE>
THE ATLANTA CARDIOLOGY GROUP, P.C. The Company's Convertible
Subordinated Note, dated March 28, 1997, in the principal amount of
$2,250,000 held by ACG (the "ACG Note") was amended to provide that no
interest will accrue thereunder and that any accrued interest shall be
forfeited. In addition, ACG agreed that there was no adjustment to the
conversion price of the ACG Note or the number of shares issuable upon
conversion of the ACG Note as a result of the transactions contemplated
by or required to be completed in connection with the Purchase
Agreement. ACG also agreed not to exercise and to otherwise waive any
of its registration rights prior to January 1, 2000 and waived its
right to designate a person to attend meetings of the Board.
APF, LLC AND ANTHONY P. FURNARY, M.D. The Consulting Agreement, dated
March 25, 1997, between the Company and Furnary was terminated, and the
Company's obligation to make milestone royalty payments under the
Modification Agreement, dated March 25, 1997, in the aggregate amount
of $450,000 was terminated. The Non-Statutory Stock Option Agreement,
dated March 4, 1997, between the Company and APF covering 550,000
shares of Common Stock was amended to reduce the number of shares to
200,000 and the exercise price to $1.00 per share. APF and Furnary also
agreed (a) not to exercise and to otherwise waive any of their
registration rights under the foregoing option or the other options
held by them to purchase an aggregate of an additional 36,333 shares
until January 1, 2000; (b) not to sell or otherwise transfer any shares
of Common Stock purchased upon exercise of any of such options prior to
January 1, 2000; and (c) that there was no other adjustment to the
exercise price of such options or the number of shares issuable upon
exercise thereof as a result of the transactions contemplated by or
required to be completed in connection with the Purchase Agreement.
Furnary also waived his right under the Master Agreement, dated March
25, 1997, to be nominated for election to the Company's Board of
Directors and agreed that his observer status is only exercisable by
him personally.
JULY 1997 BRIDGE NOTES. The holders of the July Bridge Notes and the
warrants issued in connection with the issuance of the July Bridge
Notes (the "July Bridge Warrants") agreed to convert all principal due
under such notes into shares of Common Stock at a conversion price of
$2.00 per share, in full satisfaction and discharge of such notes. Such
holders also agreed that the Company has no obligation to (a) pay cash
or issue any shares of Common Stock with respect to interest on the
July Bridge Notes; or (b) issue any additional warrants thereunder. The
July Bridge Warrants have been amended to provide that the exercise
price is $2.00 per share and that there was no other adjustment to the
exercise price of such warrants or the number of shares issuable upon
exercise thereof as a result of the transactions contemplated by or
required to be completed in connection with the Purchase Agreement.
Holders of the July Bridge Notes further agreed not to exercise and to
otherwise waive any of their registration rights prior to January 1,
2000.
AMENDMENT OF EMPLOYMENT AGREEMENT AND GRANT OF OPTIONS. The Employment
Agreement between David Chinsky and the Company, dated August 18, 1997,
was
<PAGE>
amended such that: (a) the transactions contemplated by the Purchase
Agreement did not trigger a Change in Control (as defined in the
Employment Agreement); (b) bonuses payable to Mr. Chinsky will be
payable, at the option of the Company, in cash or shares of Common
Stock; (c) the payment of a certain bonus in the amount of $108,000 was
accelerated and (d) all prior stock options granted to Mr. Chinsky were
canceled and Mr. Chinsky was granted a replacement option to purchase
650,000 shares of Common Stock at a price of $.50 per share.
Additional information concerning the Shares and the Warrants is
contained in the Purchase Agreement, the form of which is an exhibit hereto and
is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired. Not applicable.
(b) Pro Forma Financial Information. Not applicable.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description Method
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<S> <C> <C>
10.1 Securities Purchase Agreement, dated as of Filed herewith.
November 14, 1997, among the Company and the
Purchasers. Omitted from this Exhibit, as filed,
are the exhibits and schedules referenced in such
agreement. The Company will furnish supplementally
a copy of any such exhibits and schedules to the
Commission upon request.
10.2 Form of Warrant to Purchase common stock of the Filed herewith.
Company.
10.3 Letter Agreement, dated November 10, 1997, among Filed herewith.
the Company, APF, LLC and Anthony P. Furnary, M.D.
10.4 Letter Agreement, dated November 10, 1997, between Filed herewith.
the Company and the Atlanta Cardiology Group, P.C.
10.5 Letter Agreement, dated November 10, 1997, between Filed herewith.
the Company and Medtronic, Inc.
<PAGE>
Exhibit No. Description Method
----------- ----------- ------
10.6 Employment Agreement, dated August 18, 1997, between Filed herewith.
the Company and David J. Chinsky.
10.7 Amendment to Employment Agreement, dated November Filed herewith.
13, 1997, between the Company and David J. Chinsky.
10.8 Non-statutory Stock Option Agreement, dated November Filed herewith.
13, 1997, between the Company and David J. Chinsky.
</TABLE>
<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.
LIFERATE SYSTEMS, INC.
(Registrant)
/s/ David J. Chinsky
------------------------------------------
By: David J. Chinsky
Its: President and Chief Executive Officer
Dated: November 25, 1997
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Method
----------- ----------- ------
<S> <C> <C>
10.1 Securities Purchase Agreement, dated as of Filed herewith.
November 14, 1997, among the Company and the
Purchasers. Omitted from this Exhibit, as filed,
are the exhibits and schedules referenced in such
agreement. The Company will furnish supplementally
a copy of any such exhibits and schedules to the
Commission upon request.
10.2 Form of Warrant to Purchase common stock of the Filed herewith.
Company.
10.3 Letter Agreement, dated November 10, 1997, among the Filed herewith.
Company, APF, LLC and Anthony P. Furnary, M.D.
10.4 Letter Agreement, dated November 10, 1997, between Filed herewith.
the Company and the Atlanta Cardiology Group, P.C.
10.5 Letter Agreement, dated November 10, 1997, between Filed herewith.
the Company and Medtronic, Inc.
10.6 Employment Agreement, dated August 18, 1997, between Filed herewith.
the Company and David J. Chinsky.
10.7 Amendment to Employment Agreement, dated November Filed herewith.
13, 1997, between the Company and David J. Chinsky.
10.8 Non-statutory Stock Option Agreement, dated November Filed herewith.
13, 1997, between the Company and David J. Chinsky.
</TABLE>
SECURITIES PURCHASE AGREEMENT
Systems, Inc., a Minnesota corporation (the "COMPANY"), and each of the
purchasers set forth on the signature pages hereto (individually, a "PURCHASER"
and, collectively, the "PURCHASERS").
WHEREAS, the Company proposes to issue and sell to the Purchasers
shares (individually, a "SHARE" and, collectively, the "SHARES") of common
stock, without par value, of the Company (the "COMMON STOCK") and to issue
warrants (the "WARRANTS"), substantially in the form of Exhibit A hereto, to
purchase shares of Common Stock (the "WARRANT SHARES");
WHEREAS, the Company proposes to issue and sell for cash an aggregate
of up to 9,000,000 Shares and to issue Warrants to purchase up to 9,000,000
shares of Common Stock in two or more closings (each, a "CLOSING");
WHEREAS, the First Closing shall relate to the sale of 2,500,000 Shares
and Warrants, any Interim Closings (which shall be deemed part of the First
Closing) shall relate to an aggregate of up to 2,000,000 Shares and Warrants and
the Second Closing (each as defined in Section 1(b) shall relate to up to
4,500,000 Shares and Warrants;
WHEREAS, the Company proposes to issue and sell at the First Closing,
in consideration of the cancellation of certain indebtedness, an additional
104,000 Shares and Warrants to purchase 104,000 shares of Common Stock as
provided in Section 1(c)(ii) hereof; and
WHEREAS, the Company, among other things, has agreed to provide certain
registration rights under the Securities Act of 1933 (the "SECURITIES ACT") and
the rules and regulations promulgated thereunder with respect to the Shares and
the Warrant Shares.
NOW THEREFORE, in consideration of the above recitals and the mutual
covenants set forth herein, the parties hereto agree as follows:
<PAGE>
1. Sale of Stock and Delivery of Warrants; Closings.
(a) Purchase and Sale. Subject to the terms and conditions hereof, the
Company shall issue and sell to each of the Purchasers, and each Purchaser,
severally, shall purchase from the Company, with respect to the First Closing
and the Second Closing (each as defined below), the number of Shares set forth
on such Purchaser's signature page hereto at a purchase price of $0.56 per
Share; provided, however, that the purchase price per Share shall be $0.50 with
respect to (i) the Shares purchased by Special Situations Private Equity Fund,
L.P., Special Situations Fund III, L.P. and Special Situations Cayman Fund, L.P.
(collectively, the "FUNDS"), and (ii) the 104,000 Shares to be delivered as
provided in Section 1(c)(ii) hereof to the Purchasers designated as noteholders
on the signature pages hereto. The Company shall deliver to each Purchaser, at
each Closing, Warrants for such number of Warrant Shares as shall be equal to
the number of Shares being purchased by such Purchaser at such Closing. Each
Purchaser's obligation to purchase Shares is separate and distinct from that of
each other Purchaser, and no Purchaser shall be required to purchase more than
the number of Shares specifically set forth on such Purchaser's signature page.
A Purchaser that shall purchase Shares in an Interim Closing or in the Second
Closing, but not the First Closing, shall become a Purchaser by executing a copy
of this Agreement after the First Closing, but prior to such Interim or Second
Closing, as the case may be.
(b) Closings.
(i) Subject to the satisfaction (or waiver) of the conditions
set forth in Sections 6 and 7, the first Closing (the "FIRST CLOSING")
of the purchase and sale of Shares shall occur with respect to up to
2,604,000 Shares and Warrants to purchase up to 2,604,000 shares of
Common Stock at the offices of Hertzog, Calamari & Gleason, 100 Park
Avenue, New York, New York, at 10:00 A.M. on November 14, 1997, or such
later date as may be mutually agreed upon by the parties.
(ii) Subject to the satisfaction (or waiver) of the conditions
set forth in Sections 6 and 7, a Closing or Closings (each, an "INTERIM
CLOSING") of the purchase and sale of up to an aggregate of 2,000,000
Shares and Warrants to purchase up to 2,000,000 shares of Common Stock
may be held during the period (the "INTERIM PERIOD") from November 15,
1997, through and including November 21, 1997. Such Interim Closing or
Interim Closings shall occur at the offices of
<PAGE>
Oppenheimer Wolff & Donnelly at 10:00 A.M. on such date or dates during
the Interim Period as may be mutually agreed upon by the Company and
the Purchasers in any such Closing. The Shares that shall be sold and
the Warrants that shall be delivered at any Interim Closing shall be
deemed to have been purchased and sold in the First Closing.
(iii) Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6, 7 and 8, the second Closing (the
"SECOND CLOSING") of the purchase and sale of Shares shall occur at the
offices of Hertzog, Calamari & Gleason with respect to up to 4,500,000
Shares and Warrants to purchase up to 4,500,000 shares of Common Stock
within fifteen days following satisfaction or waiver of each of the
conditions set forth in Sections 6, 7 and 8. The Company shall give
each Purchaser at least fifteen days prior written notice of the date
and time of the Second Closing.
(iv) Notwithstanding anything to the contrary contained
herein, the First Closing in no event shall occur later than November
14, 1997, and the Second Closing in no event shall occur later than
January 30, 1998.
(v) The date of each Closing shall be hereinafter referred to
as a "CLOSING DATE."
(c) Delivery.
(i) Except as provided in Section 1(c)(ii), the Company shall,
at each Closing, deliver to each Purchaser a stock certificate
representing the Shares purchased by such Purchaser and Warrants for
the Warrant Shares to be delivered to such Purchaser, against payment
of the purchase price therefor by check, payable to the order of the
Company, or by wire transfer of immediately available funds to the
Company in accordance with the Company's wiring instructions.
(ii) At the First Closing, the Company shall deliver to the
Purchasers designated as noteholders on the signature pages hereto
stock certificates representing an aggregate of 104,000 Shares and
Warrants to purchase 104,000 shares of Common Stock, in the respective
denominations listed on the signature pages hereto, against delivery
of, and in full satisfaction and discharge of, those certain promissory
notes, dated October 1, 1997, issued by the Company in
<PAGE>
favor of such Purchasers in the aggregate principal
amount of $52,000.
2. Representations and Warranties of Purchasers. Each of the
Purchasers (except with respect to Section 2(i) which relates only to
the Purchaser named therein) represents and warrants, severally, to the
Company as follows:
(a) Authorization. The Purchaser has the necessary power and
authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution and delivery of, and the
performance under, this Agreement by the Purchaser will not conflict
with any rule, regulation, judgment or agreement applicable to the
Purchaser.
(b) Investment Purpose. The Purchaser is purchasing the Shares
and acquiring the Warrants, and will purchase the Warrant Shares
(together with the Shares and the Warrants, the "SECURITIES"), for
investment purposes only and not with a present view to, or for sale in
connection with, a distribution thereof within the meaning of the
Securities Act. The Purchaser understands that it must bear the
economic risk of this investment indefinitely, unless the Securities
are registered pursuant to the Securities Act and any applicable state
securities or blue sky laws or an exemption from such registration is
available. Notwithstanding anything in this Section 2(b) to the
contrary, the Purchaser, by making the representations herein, does not
agree to hold the Securities for any minimum or other specific term and
reserves the right to dispose of such Securities at any time in
accordance with or pursuant to registration or an exemption therefrom
under the Securities Act and any applicable state securities or blue
sky laws.
(c) Reliance On Exemptions. The Purchaser understands that the
Securities are being offered and sold in reliance upon specific
exemptions from the registration requirements of Federal and state
securities laws and that the Company is relying upon the truth and
accuracy of the representations and warranties of the Purchaser set
forth herein in order to determine the availability of such exemptions
and the eligibility of the Purchaser to acquire the Securities.
(d) Information. The Purchaser has been furnished all
documents relating to the business, finances and operations of the
Company which the Purchaser requested from the Company. The Purchaser
has been afforded the opportunity to ask questions of the Company's
<PAGE>
representatives concerning the Company in making the decision to
purchase the Shares and acquire the Warrants, and such questions have
been answered to its satisfaction. The Purchaser acknowledges having
received a copy of the Company's Private Placement Memorandum, dated
October 24, 1997, as amended by the supplement thereto dated November
10, 1997, including the Exhibits thereto, relating to the offer and
sale of the Securities (as supplemented, the "MEMORANDUM"). However,
neither the foregoing nor any other due diligence investigation
conducted by the Purchaser or on its behalf shall limit, modify or
affect the representations and warranties of the Company in Section 3
of this Agreement or the right of the Purchaser to rely thereon.
(e) Governmental Review. The Purchaser understands that no
Federal or state agency or any other government or governmental agency
has passed upon or made any recommendation or endorsement of the
Securities.
(f) Purchaser's Qualifications. The Purchaser is an
"accredited investor" as defined in Rule 501 under Regulation D of the
Securities Act ("REGULATION D"). The Purchaser is capable of evaluating
the merits and risks of an investment in the Securities and is
financially capable of bearing a total loss of the investment made
pursuant to this Agreement.
(g) Restrictions on Transfer. The Purchaser understands that
it may not transfer any of the Securities unless such Securities are
registered under the Securities Act or unless an exemption from
registration and qualification requirements are available under the
Securities Act and applicable state securities laws. The Purchaser
understands that certificates representing the Shares, the Warrants and
the Warrant Shares shall bear the following, or a substantially
similar, legend until such time as they have been registered under the
Securities Act or otherwise may be sold under Rule 144 under the
Securities Act ("RULE 144"):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR UNDER ANY
STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED EXCEPT AS PERMITTED UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. UNLESS THE SECURITIES ARE SOLD PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT, THE ISSUER OF THESE
SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER TO
<PAGE>
THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN
COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
(h) Residence. The Purchaser is a resident of the jurisdiction
set forth under its name on its signature page hereto.
(i) Investment Company. Special Situations Fund III, L.P. is
registered as an "investment company" under the Investment Company Act
of 1940.
3. Representations and Warranties of Company. Except as set
forth on the Schedule of Exceptions attached hereto as Exhibit B, the
Company represents and warrants to each Purchaser as follows:
(a) Organization and Good Standing. The Company is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Minnesota, and has all necessary corporate
power and authority to own or lease its assets and to carry on its
business as now being conducted and presently proposed to be conducted.
The Company is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction in which its ownership or
leasing of assets, or the conduct of its business, makes such
qualification necessary, except where the failure to be so qualified
would not have a material adverse effect on the Company. The Company
has no subsidiaries and no equity interests in any corporation,
partnership, joint venture or other entity.
(b) Requisite Power and Authorization. The Company has all
necessary corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder, including without
limitation the issuance of the Securities. Except for approval by the
stockholders of the Company of the Amendment (as defined in Section
5(k) below), which approval will be required prior to the Second
Closing, all corporate action of the Company required for the execution
and delivery of this Agreement and the Warrants and issuance and
delivery of the Securities has been duly and effectively taken, and no
further actions, authorizations or consents, including, without
limitation, any consents of the stockholders of the Company, are
required. Each of this Agreement and the Warrants constitutes the valid
and binding obligation of the Company, enforceable against the Company
in accordance with its terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditor's rights, (ii) as
limited by general principles of equity that
<PAGE>
restrict the availability of equitable remedies and (iii) as the
indemnity provisions of Section 4(f) of this Agreement may be limited
by law. The Shares, when issued, delivered and paid for in compliance
with the provisions of this Agreement, will be validly issued, fully
paid and non-assessable, free and clear of any and all liens, charges,
claims or encumbrances. The Warrant Shares, if and when issued,
delivered and paid for in compliance with the provisions of this
Agreement and the Warrants will be validly issued, fully paid and
non-assessable, free and clear of any and all liens, charges, claims or
encumbrances. The Company has reserved a sufficient number of shares of
Common Stock necessary for issuance of the Shares and the Warrant
Shares at the First Closing and, prior to the Second Closing, will have
reserved a sufficient number of shares of Common Stock necessary for
issuance of the Shares and the Warrant Shares at the Second Closing.
(c) SEC Documents. Since March 16, 1995, the Company has filed
with the Securities and Exchange Commission (the "SEC") all reports,
statements, schedules and other documents (collectively, the "SEC
DOCUMENTS") required to be filed by it pursuant to the Securities Act
and the Securities Exchange Act of 1934 (the "EXCHANGE ACT"). Since
October 1, 1996, all SEC Documents required to be filed were timely
filed. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder, and none of the SEC Documents, at the time
they were filed with the SEC, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. As of
their respective dates, the financial statements included in the SEC
Documents (the "FINANCIAL STATEMENTS") complied as to form in all
material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Except
(i) as may be indicated in the notes to the Financial Statements or
(ii) in the case of the unaudited interim statements, as permitted by
Form 10- QSB under the Exchange Act, the Financial Statements have been
prepared in accordance with U.S. generally accepted accounting
principles consistently applied and fairly present in all material
respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal
recurring year-end adjustments and footnotes). Except as set forth in
the Financial Statements filed with the SEC prior to the date hereof or
the Memorandum, the Company does
<PAGE>
not have any liabilities, whether absolute, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
subsequent to the date of such Financial Statements and (ii)
obligations under contracts and commitments incurred in the ordinary
course of business and not required under generally accepted accounting
principles to be reflected in such Financial Statements, which
liabilities and obligations referred to in clauses (i) and (ii),
individually or in the aggregate, are not material to the financial
condition or operating results of the Company.
(d) Capitalization. The capitalization of the Company as of
the date hereof is set forth on Schedule 3(d), including (i) the
authorized capital stock, (ii) the number of shares issued and
outstanding, (iii) the number of shares reserved for issuance pursuant
to stock option, employee benefit or other plans, (iv) the number of
shares reserved for issuance or issuable pursuant to securities
exercisable for, or convertible into or exchangeable for, any shares of
Common Stock, (v) the number of outstanding securities convertible into
or exchangeable for any shares of the Company's capital stock, (vi) the
number of shares of Common Stock reserved for issuance with respect to
the sale of the Shares and (vii) the number of shares reserved for
issuance upon exercise of the Warrants. All outstanding shares of
capital stock have been duly authorized and validly issued and are
fully paid and non-assessable. Except as set forth on Schedule 3(d),
the Company has (i) no outstanding securities convertible into or
exchangeable for any shares of capital stock of the Company, (ii) no
rights, options, warrants, calls or other agreements or commitments of
any nature whatsoever relating to the purchase or other acquisition of
any shares of its capital stock or securities convertible into or
exchangeable for any shares of it capital stock or (iii) no shares of
its capital stock reserved for issuance.
(e) No Conflicts. Neither the execution, delivery and
performance by the Company of this Agreement nor the consummation of
the transactions contemplated hereby has constituted or resulted in, or
will constitute or result in, a default under or breach or violation of
any term or provision of the Articles of Incorporation or bylaws of the
Company or material contracts to which the Company is a party or
Federal or state laws, rules or regulations, writs, orders, judgments
or decrees which are applicable to the Company or its assets.
(f) Consents. No approval, consent, order, authorization or
other action by, or notice to or filing with, any governmental
authority or regulatory agency or any
<PAGE>
other person or entity, and no lapse of a waiting period, is required
in connection with the execution, delivery or performance by the
Company of this Agreement, the issuance and delivery of any of the
Securities or any other transactions contemplated hereby, except for
(i) the filing of a Form D with the SEC, (ii) filings required under
applicable state "blue sky" laws (which shall be duly filed and
effective prior to each Closing if so required under such laws) and
(iii) the filing of an amendment to the Company's Articles of
Incorporation as set forth in Section 8(a) hereof.
(g) No Material Adverse Change. Since December 31, 1996, the
business of the Company has been operated in the ordinary course and
substantially consistent with past practice, and, except as disclosed
in the Memorandum, there has not been any material adverse change in
the business, assets, financial condition, results of operations,
affairs or prospects of the Company (a "MATERIAL ADVERSE CHANGE").
Since December 31, 1996, and except as disclosed in the Memorandum, the
Company has not (i) paid any obligation or liability or discharged or
satisfied any liens or encumbrances other than in the ordinary course
of business; (ii) declared or made any payment or distribution to its
stockholders or purchased or redeemed any of its shares of capital
stock or other securities; (iii) mortgaged, pledged or subjected to any
lien, charge or other encumbrance any of its assets, tangible or
intangible, except in the ordinary course of business; (iv) sold,
transferred or leased any of its assets except for fair value in the
ordinary course of business; (v) increased the annual compensation
payable to any of its officers or other employees, consultants or
representatives by greater than $10,000; (vi) cancelled or compromised
any debt or claim, or waived or released any right of material value;
(vii) entered into any transaction other than in the ordinary course of
business; (viii) issued or sold any shares of capital stock or other
securities or granted any options, warrants or other purchase rights
with respect thereto that are not disclosed on Schedule 3(d); or (ix)
agreed to do any of the foregoing (other than pursuant hereto).
(h) Litigation. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, currently
threatened against the Company or any of its directors or officers, in
their capacities as such, (i) that questions the validity of this
Agreement or the issuance of the Securities, or the right of the
Company to enter into this Agreement or to consummate the transactions
contemplated hereby, or (ii) that might result, either individually or
in the aggregate, in any Material Adverse Change or in any change in
the current equity ownership of
<PAGE>
the Company. The Company is not a party or subject to the provisions of
any order, writ, injunction, judgment, stipulation or decree of any
court, administrative agency, commission, regulatory authority, other
government agency or instrumentality.
(i) No Default. The Company is not in violation of or default
under any provision of its Articles of Incorporation or bylaws or other
constituent documents or in default (or, with notice or the lapse of
time, would be in default) under any material agreement, contract,
commitment or instrument to which it is a party or by which it or its
properties or assets is bound or affected. To the Company's knowledge,
no third party is in material default under or in material breach or
violation of any material contract, commitment or instrument to which
the Company is a party or by which any of its properties or assets are
bound or affected.
(j) Compliance with Laws. The Company is in compliance with
all laws (including, without limitation, environmental laws),
ordinances, rules and regulations, judgments, decrees or orders of any
regulatory authority or other governmental or administrative body or
instrumentality, whether domestic or foreign. The Company has not
during the past three years received any notice relating to any
violation or potential violation of applicable law or regulations.
(k) Title. The Company has good and marketable title to all
real and personal property owned by it which is material to the
business of the Company, in each case free and clear of all liens,
encumbrances and defects. Any property, real or personal, held under
lease by the Company is held by it under valid and enforceable leases.
(l) Intellectual Property. The Company owns, or possesses
adequate and enforceable rights to use, all patents, patent
applications, trademarks, trademark applications, trade names, service
marks, copyrights, copyright applications, licenses, permits, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures) and
other similar rights and proprietary knowledge (collectively, the
"INTANGIBLES") necessary for the conduct of its business. To the
Company's knowledge, the Company has not infringed, nor does it
currently infringe, nor is it in conflict with any right of any other
person with respect to any Intangibles. To the knowledge of the
Company, no person is infringing on or violating the Intangibles owned
or used by the Company.
<PAGE>
(m) Registration Rights. The only registration rights,
including piggyback rights, granted (or agreed to be granted) to any
person or entity other than the Purchasers are set forth on the
Schedule of Exceptions. None of the registration rights disclosed on
the Schedule of Exceptions are senior in priority to the registration
rights provided for in this Agreement. All of the registration rights
(including, without limitation, any piggyback rights which would have
permitted the registration of any shares under the registration
statement to be filed pursuant to Section 4 of this Agreement) have
been satisfied in full by the registration on Form S-3 indicated on
such Schedule or have been waived until January 1, 2001.
(n) OTC Bulletin Board. The Common Stock is traded by means of
the National Association of Securities Dealers, Inc. (the "NASD") OTC
Bulletin Board(R) service (the "OTCBB"). The issuance and sale of the
Securities will not, when issued and sold in accordance with this
Agreement and the Warrants, as the case may be, violate any Rule of the
NASD applicable to the Company or the Common Stock. The Company has not
received notification, written or oral, that the Company has failed to
satisfy any requirement of the NASD relating to the trading of the
Common Stock in the OTCBB.
(o) Registration Statement. The Company is currently eligible
to register the resale of its Common Stock under the Securities Act
pursuant to a registration statement on Form SB-2. There exist no facts
or circumstances that would inhibit or delay the preparation and filing
of a registration statement on Form SB-2 with respect to the Shares and
the Warrant Shares.
(p) No Misrepresentation. No representation or warranty by the
Company in this Agreement (including any Exhibit or Schedule hereto)
and no statements of the Company contained in any document (including
without limitation any SEC Document), certificate, schedule or other
information furnished or to be furnished by or on behalf of the Company
pursuant to this Agreement or in connection with the transactions
contemplated hereby, including without limitation the Memorandum,
contains or shall contain any untrue statement of material fact or
omits or shall omit to state a material fact required to be stated
therein or necessary in order to make such statements, in light of the
circumstances under which they were made, not misleading. Except for
the transactions contemplated hereby, and except as disclosed in the
Memorandum, no event or circumstance has occurred or exists with
respect to the Company or its business, affairs, assets, properties,
prospects, operations or financial condition which has not been
publicly
<PAGE>
disclosed, but which, under applicable law, rule or regulation, would
be required to be disclosed by the Company in a registration statement
filed on the date hereof by the Company under the Securities Act with
respect to the primary issuance of the Company's securities. The
Company has delivered true and complete copies of all documents
requested by the Purchasers.
(q) Anti-Dilution and Other Shares. No stockholder of the
Company or other person or entity has any preemptive right of
subscription or purchase or contractual right of first refusal or
similar right with respect to any of the Securities which has not been
waived. Issuance of the Securities will not result in the issuance of
any additional shares of Common Stock or the triggering of other
anti-dilution or similar rights contained in any options, warrants,
debentures or other securities or agreements of the Company.
Consummation of the transactions contemplated by the agreements set
forth as Exhibit D and the transactions contemplated by Schedule 6(j)
shall not trigger any anti-dilution or similar rights or price or other
adjustments which have not been waived. All of the transactions set
forth on Schedule 6(j) are reflected in the agreements included as
Exhibit D hereto.
(r) No Brokers or Finders. No person or entity has or will
have, as a result of any act or omission by the Company, any right,
interest or valid claim against any Purchaser for any commission, fee
or other compensation as a finder or broker, or in any similar
capacity, in connection with the transactions contemplated by this
Agreement.
(s) Acknowledgment of Dilution. The number of Warrant Shares
issuable upon exercise of the Warrants may increase in certain
circumstances, including when the bid price of the Common Stock
declines. The Company acknowledges that its obligation to issue Warrant
Shares upon exercise of the Warrants in accordance with the terms of
the Warrants is absolute and unconditional, regardless of the dilution
that such issuance may have on the ownership interests of other
stockholders. The Company acknowledges that issuance of the Securities
will result in substantial dilution to existing stockholders of the
Company. Taking the foregoing into account, the Board of Directors has
determined that the issuance of the Shares and the Warrants hereunder
and the consummation of the other transactions contemplated hereby are
in the best interests of the Company and its stockholders.
(t) Independent Committee. A duly authorized committee of the
Board of Directors of the Company comprised solely of "disinterested
directors" as defined in Section
<PAGE>
302A.673 of the Minnesota Business Corporation Act has unanimously
approved this Agreement and the Warrants and the transactions
contemplated hereby.
(u) Issuing Public Corporation. The Company has at least 50
"shareholders". For purposes hereof, a "shareholder" means a person
registered on the books or records of the Company or its transfer agent
or registrar, as the case may be, as the owner of whole or fractional
shares of Common Stock.
(v) Change of Control Payments. Neither the execution,
delivery and performance by the Company of this Agreement or the
Warrants nor the consummation of any of the transactions contemplated
hereby shall require any payment by the Company, in cash or kind, under
any agreement, plan, policy, commitment or other arrangement. There are
no agreements, plans, policies, commitments or other arrangements with
respect to any compensation, benefits or consideration which will be
materially increased, or the vesting of benefits of which will be
materially accelerated, as a result of the execution and delivery of
this Agreement or the Warrants or the occurrence of any of the
transactions contemplated hereby. There are no payments or other
benefits, the value of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
4. Registration Rights.
(a) Definitions. For purposes of this Section 4:
(i) "Register", "registered" and "registration" refer
to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act,
including a registration statement pursuant to Rule 415 and
Rule 416 under such Act (or any successor rules), and the
declaration or ordering of effectiveness of such registration
statement by the SEC.
(ii) "Registrable Securities" means the Shares and
all shares of Common Stock issued or issuable as Warrant
Shares, and any shares of Common Stock issued or issuable,
from time to time (with any adjustments), as a distribution
on, in exchange for or otherwise with respect to the Shares or
Warrant Shares.
(iii) "Holder" means any person owning of record
Registrable Securities or any assignee of record of such
Registrable Securities to whom rights under this Section 4
have been assigned in accordance with Section
<PAGE>
9(e) of this Agreement and, as the case may be, the terms of
the Warrants.
(b) Shelf Registration.
(i) The Company, within 30 days following each
Closing Date, shall file a shelf registration statement under
the Securities Act on Form SB-2 (or, if not available, on such
Form as is then available to effect a registration of all
Registrable Securities, subject to the consent of the
Purchasers holding a majority of the Registrable Securities)
covering, and shall obtain all such qualifications and
compliances as may be required and as would permit the sale
and distribution of, all Registrable Securities issued (or, in
the case of Warrant Shares, issuable) at each respective
Closing, and shall use its best efforts to secure the
effectiveness of such registration statements no later than 90
days following each respective Closing Date. The requirement
to register securities sold at the Second Closing may be
satisfied by amending the shelf registration statement which
shall have been filed pursuant to this Section 4(b) with
respect to securities sold at the First Closing.
(ii) The Company shall pay all expenses incurred in
connection with any registration, qualification and compliance
(excluding underwriters' and brokers' discounts and
commissions), including, without limitation, all filing,
registration and qualification fees, printer and accounting
fees and reasonable fees and disbursements of one counsel for
the selling Holder or Holders and of counsel for the Company.
(iii) The Company shall use its best efforts to cause
the registration statement or statements filed pursuant to
this Section 4(b) to remain effective until the earlier of (A)
the date on which all Registrable Securities shall have been
sold or (B) the date on which all Registrable Securities, in
the opinion of counsel to Special Situations Private Equity
Fund, L.P., may be sold immediately to the public in any
single three-month period pursuant to Rule 144.
(c) Piggyback Registrations.
(i) The Company shall be required to notify a Holder
in writing at least 20 days prior to the Company's filing of
any registration statement under the Securities Act for
purposes of effecting an underwritten public offering of
Common Stock (including, without limitation, registration
statements
<PAGE>
relating to secondary offerings of Common Stock), and shall
afford a Holder an opportunity to include in such registration
statement all or any part of the Registrable Securities then
held by such Holder. A Holder desiring to include all or any
part of its Registrable Securities shall, within 15 days after
receipt of the above-described notice from the Company, notify
the Company in writing as to the number of Registrable
Securities to be included in such registration statement. If a
Holder shall decide not to include all of its Registrable
Securities in such registration statement, such Holder
nevertheless shall continue to have the right to include any
Registrable Securities in any subsequent registration
statement or statements as may be filed by the Company with
respect to underwritten public offerings of Common Stock, in
each instance upon the terms and conditions set forth herein.
The right to registration of Registrable Securities under this
Section 4(c) shall not be construed to limit in any way the
obligation of the Company to register the Registrable
Securities under Section 4(b).
(ii) The right of a Holder to include Registrable
Securities in a registration pursuant to this Section 4(c)
shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting to the extent provided herein.
If less than all securities of Holders or other persons (other
than the Company) included in a request for registration can
be included in a registration based on the good faith
determination of the managing underwriter, the allocation
among such Holders and other persons will be on a pro rata
basis according to the relation that the number of Registrable
Securities owned by each such Holder and the number of shares
of Common Stock owned by each such other person bears to the
total number of shares of Common Stock outstanding. If any
Holder shall disapprove of the terms of any such underwriting,
such Holder may elect to withdraw therefrom by written notice
to the Company delivered at least five business days prior to
the effective date of the registration statement. The Company
shall exclude from the registration any Registrable Securities
so withdrawn.
(iii) Notwithstanding the other provisions of this
Section 4(c), (A) the Company shall not be required to include
any Registrable Securities in any registration under Section
4(c) for any Holder who shall be able to sell all of such
Holder's Registrable Securities during
<PAGE>
a three-month period, beginning on the date such notice shall
be received by such Holder, pursuant to Rule 144 (or any
similar rule or regulation); (B) the Company shall not be
required to give such notice with respect to, or to include
Registrable Securities in, any such registration which shall
be primarily (1) a registration of a stock option plan or
other employee benefit plan or of securities issued or
issuable pursuant to any such plan, or (2) a registration of
securities proposed to be issued in exchange for securities or
assets of, or in connection with a merger or consolidation
with, another corporation; and (C) the Company may, in its
sole discretion, withdraw any such registration statement and
abandon the proposed offering in which any such Holder shall
have requested to participate.
(iv) The Company shall pay all expenses incurred in
connection with a piggyback registration pursuant to this
Section 4(c) (excluding underwriters' and brokers' discounts
and commissions), including, without limitation, all filing,
registration and qualification fees, printer and accounting
fees and reasonable fees and disbursements of one counsel for
the selling Holder or Holders and of counsel for the Company.
(d) Obligations of the Company. Whenever required to effect
the registration of any Registrable Securities under this Agreement,
the Company shall, as expeditiously as possible:
(i) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use
its best efforts to cause such registration statement to
become effective.
(ii) Prepare and file with the SEC such amendments
and supplements to such registration statement and the
prospectus included therein as may be necessary to keep the
registration statement effective and comply with the
provisions of the Securities Act with respect to the
disposition of all Registrable Securities covered by such
registration statement for the period set forth in Section
4(b)(iii).
(iii) Furnish to each Holder (1) promptly after
filing with the SEC, one copy of such registration statement
and any amendments thereto, including each prospectus
contained therein, (2) on the date of effectiveness of such
registration statement or amendment, a notice that such
registration statement or amendment has been declared
effective and (3) such
<PAGE>
number of copies of a prospectus, including a preliminary
prospectus, in conformity with the requirements of the
Securities Act, and all amendments thereto, and such other
documents as any Holder may reasonably request, in order to
facilitate the disposition of the Registrable Securities owned
by such Holder which shall have been included in such
registration statement. In the case of a registration
statement to be filed pursuant to Section 4(b), the Company
also shall furnish to the Funds each letter written by or on
behalf of the Company to the SEC or the staff of the SEC and
each correspondence therefrom.
(iv) Use its best efforts to register and qualify the
Registrable Securities covered by such registration statement
under any applicable securities or "blue sky" laws of such
states and jurisdictions as shall be reasonably requested by
any Holder, and maintain the effectiveness of such
registrations and qualifications, provided, that the Company
shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a
general consent to service of process in any such states or
jurisdictions.
(v) Notify each Holder of Registrable Securities
included in such registration statement, at any time when a
prospectus relating thereto shall be required to be delivered
under the Securities Act, of the happening of any event as a
result of which the prospectus included in such registration
statement shall include an 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 not misleading in
the light of the circumstances then existing, and, upon such
notice, the Company shall promptly correct such misstatement
or omission and deliver to each Holder copies of the corrected
prospectus.
(vi) Take all reasonable actions required to prevent
the entry of any stop order issued or threatened by the SEC or
any state regulatory authority with respect to any
registration statement covering Registrable Securities, and
notify each Holder of any such stop order or take all
reasonable actions to remove it if entered.
(vii) Permit one counsel designated by the Holders to
review such registration statement and all amendments and
supplements thereto in a reasonable period of time prior to
their filing with the SEC, and not file any document in a form
to which such counsel shall reasonably object.
<PAGE>
(e) Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to Section
4(b) or Section 4(c) that a selling Holder shall furnish to the Company
such information regarding such Holder, the Registrable Securities held
by such Holder and the intended method of disposition of such
Securities as reasonably shall be required to effect the registration
of the Registrable Securities.
(f) Indemnification. In the event that any Registrable
Securities shall be included in a registration statement under this
Agreement:
(i) To the extent permitted by law, the Company shall
indemnify and hold harmless each Holder, the partners,
stockholders, officers and directors of each Holder, any
underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the
Exchange Act (each, an "INDEMNIFIED PERSON") against any joint
or several losses, claims, damages, liabilities or expenses
(together with actions, proceedings or inquiries by any
regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "CLAIMS") to which any of
them may become subject insofar as such Claims arise out of or
are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement 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 shall file 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 thereunder relating to the offer or
sale of the Registrable Securities (the matters in the
foregoing clauses (i) through (iii) being, collectively,
called "VIOLATIONS"). The Company shall reimburse each
Indemnified Person for any reasonable legal or other expenses
(promptly as such expenses shall be incurred and shall be due
and payable)
<PAGE>
incurred by such Indemnified Person in connection with
investigating or defending any such Claim. The indemnification
agreement contained in this Section 4(f)(i) shall not apply
(i) to a Claim arising out of or based upon a Violation which
shall occur in reliance upon and in conformity with
information furnished in writing to the Company by such
Indemnified Person expressly for use in such registration
statement or any such amendment or supplement thereto; (ii) to
amounts paid in settlement of any Claim if such settlement
shall be effected without the prior written consent of the
Company; and (iii) for the benefit of any Indemnified Person,
with respect to any prospectus, if the untrue statement or
omission of material fact in any prospectus shall have been
corrected on a timely basis and the Indemnified Person shall
have failed to utilize such corrected prospectus. This
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 Purchasers pursuant to Section 9.
(ii) In connection with any registration statement in
which a Holder shall participate, such Holder, severally and
not jointly, shall indemnify and hold harmless the Company,
each of its directors, each of its officers who shall sign the
registration statement, its employees and agents and each
person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, any underwriter and
any other stockholder selling securities pursuant to such
registration statement or any of its directors or officers or
any person who controls such underwriter or stockholder within
the meaning of the Securities Act or the Exchange Act (each,
an "INDEMNIFIED PARTY") against any Claim to which any of them
may become subject, under the Securities Act, the Exchange Act
or otherwise, insofar as such Claim shall arise out of or
shall be based upon any Violation, in each case to the extent
(and only to the extent) that such Violation shall occur in
reliance upon and in conformity with written information
furnished to the Company by such Holder expressly for use in
connection with such registration statement. Such Holder shall
reimburse the Indemnified Party for any reasonable legal or
other reasonable expenses (promptly as such expenses shall be
incurred and shall be due and payable) incurred in connection
with investigating or defending any such Claim. The indemnity
agreement contained in this Section 4(f)(ii) shall not apply
to amounts paid in settlement of any Claim if such settlement
shall be
<PAGE>
effected without the prior written consent of such Holder;
and, provided, further, that the total amounts payable by a
Holder under this Section 4(f)(ii) shall not exceed the
aggregate proceeds (net of discounts or commissions) actually
received by such Holder upon the sale of such Holder's
Registrable Securities included in such registration
statement. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this
Section 4(f)(ii) shall not inure to the benefit of any person
or entity if the untrue statement or omission of material fact
in any prospectus shall have been corrected on a timely basis
and such person or entity shall have failed to utilize such
corrected prospectus.
(iii) Promptly after receipt by an Indemnified Person
or Indemnified Party (the "INDEMNITEE") under this Section
4(f) of notice of the commencement of any action (including,
without limitation, any governmental action), such Indemnitee,
if a claim in respect thereof shall be made against any
indemnifying party under this Section 4(f), shall deliver to
the indemnifying party a written notice of the commencement
thereof, and the indemnifying party shall be entitled to
participate therein, and, to the extent it shall desire, to
assume the defense thereof, with counsel mutually satisfactory
to the Indemnitee, after which the indemnifying person shall
not be liable to such Indemnitee for any legal expenses
subsequently incurred by such Indemnitee in connection with
the defense thereof; provided, however, that an Indemnitee
shall have the right to retain its own counsel, with fees and
expenses to be paid by the indemnifying party, if the
indemnifying party shall have failed to assume the defense of
any such action or if, in the reasonable opinion of counsel
retained by the indemnifying party, representation of such
Indemnitee by the counsel retained would be inappropriate due
to actual or potential differing interests between such
Indemnitee and any other party represented by such counsel in
such action. No indemnifying person shall be responsible for
paying the fees and expenses of more than one separate counsel
for all Indemnitees. Failure to deliver written notice to the
indemnifying party within a reasonable time of the
commencement of any action, if the indemnifying party shall be
materially prejudiced thereby, shall relieve such indemnifying
party of liability, but only to the extent that such
indemnifying party shall be prejudiced with respect to a
specific claim. An indemnifying party shall not, without the
prior written consent of the Indemnitee, settle or compromise
or consent to the entry of a judgment in any pending or
threatened claim,
<PAGE>
action, suit or proceeding in respect of which indemnification
may be sought hereunder unless such settlement, compromise or
consent shall include an unconditional release of such
Indemnitee from all liability arising out of such claim,
action, suit or proceeding.
(iv) If the indemnification provided for in Sections
4(f)(i) or 4(f)(ii) hereof shall be held by a court of
competent jurisdiction to be unavailable to an Indemnitee in
respect of any liability under the Securities Act, then, and
in each such case, the indemnifying party, in lieu of
indemnifying such Indemnitee hereunder, shall to the extent
permitted by applicable law contribute to the amount paid or
payable by such Indemnitee as a result of such loss,
liability, claim, damage or expense in such proportion as
shall be appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the Indemnitee on
the other in connection with the Violation that resulted in
such loss, liability, claim, damage or expense as well as any
other relevant equitable considerations. The relative fault of
the indemnifying party and of the Indemnitee shall be
determined by a court of law by reference to, among other
things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a
material fact shall have related to information supplied by
the indemnifying party or by the Indemnitee and the parties'
relative intent, knowledge, access to information and
opportunity to correct or prevent such statement, alleged
statement, omission or alleged omission; provided, that, in no
event, shall any contribution under this Section 4(f)(iv) by
any Holder exceed the proceeds (net of discounts or
commissions) from the offering received by such Holder. No
person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11 of the Securities Act) shall
be entitled to contribution from any person or entity who
shall not have been guilty of such fraudulent
misrepresentation.
(g) Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the SEC which may at any
time permit the sale of the Registrable Securities to the public
without registration, while a public market shall exist for the Common
Stock of the Company, the Company shall:
(i) Make and keep public information available, as
those terms are understood and defined in Rule 144,
<PAGE>
at all times while the Company shall be reporting under the
Exchange Act;
(ii) Use its best efforts to 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
(iii) So long as a Holder shall own any Registrable
Securities, furnish to the Holder forthwith upon request a
written statement by the Company as to its compliance with the
reporting requirements of Rule 144, the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly
report of the Company and such other reports and documents of
the Company as a Holder may reasonably request in availing
itself of any rule or regulation of the SEC allowing a Holder
to sell any such Securities without registration.
(h) Default Shares.
(i) In the event that the registration statement
required to be filed pursuant to Section 4(b) relating to the
Shares and the Warrant Shares underlying the Warrants
delivered at the First Closing shall not be declared effective
by the SEC within 90 days from the date of the First Closing,
the Company shall issue and deliver, free of charge and
without cost, to the Purchasers (i) within 10 days of such
ninetieth day, certificates representing a number of fully
paid, non-assessable shares of Common Stock equal to the
aggregate of 2% of the Shares and the Warrant Shares issued or
issuable with respect to the First Closing (with additional
shares issued pursuant to this Section 4(h) referred to as
"DEFAULT SHARES") and (ii) within 10 days of the last date of
each additional 30-day period in which such registration
statement shall not have been declared effective by the SEC,
additional certificates representing a number of fully paid,
non-assessable shares of Common Stock equal to the aggregate
of 2% of such Shares and Warrant Shares and any issued Default
Shares;
(ii) In the event that the registration statement
required to be filed pursuant to Section 4(b) relating to the
Shares and the Warrant Shares underlying the Warrants
delivered at the Second Closing shall not be declared
effective by the SEC within 90 days from the date of the
Second Closing, the Company shall issue and deliver, free of
charge and without cost, to the Purchasers (i) within 10 days
of such ninetieth day, certificates representing a number of
fully paid, non-
<PAGE>
assessable shares of Common Stock equal to the aggregate of 2%
of the Shares and the Warrant Shares issued or issuable with
respect to the Second Closing and (ii) within 10 days of the
last date of each additional 30-day period in which such
registration statement shall not have been declared effective
by the SEC, additional certificates representing a number of
fully paid, non-assessable shares of Common Stock equal to the
aggregate of 2% of such Shares and Warrant Shares and any
issued Default Shares. The obligation of the Company to issue
shares of Common Stock under this Section 4(h)(ii) is separate
and distinct from its obligation under Section 4(h)(i) and
shall be cumulative and in addition to its obligation under
Section 4(h)(i).
(iii) Any Default Shares shall be allocated pro rata
among the Purchasers based on the number of Shares purchased
by each under this Agreement. Any and all shares of Common
Stock issued and delivered by the Company pursuant to this
Section 4(h) shall constitute "Registrable Securities," and
the Company shall be required to register them under the
Securities Act in accordance with the provisions of this
Agreement.
(iv) The remedies provided for in this Section 4(h)
shall be in addition to any other remedies available to the
Purchasers under this Agreement, at law or in equity.
5. Covenants of the Company. The Company hereby covenants
that:
(a) Exchange Act Filings. The Company shall use its best
efforts to file in a timely manner all reports and other documents
required to be filed by it under the Exchange Act, and, promptly upon
filing, deliver copies of such reports to each Purchaser. The Company
shall not terminate its status as an issuer required to file reports
under the Exchange Act even if the Exchange Act or the rules and
regulations promulgated thereunder would permit such termination.
(b) Authorized Shares. The Company shall, from and at all
times after the First Closing, maintain a reserve of authorized shares
of Common Stock sufficient to cover the issuance of the Warrant Shares
underlying Warrants sold at such Closing. The Company shall, from and
at all times after the Second Closing, maintain a reserve of authorized
shares of Common Stock sufficient to cover the issuance of all Warrant
Shares.
<PAGE>
(c) Use of Proceeds. The Company shall use the proceeds from
the sale of the Securities substantially as set forth in the
Memorandum.
(d) Trading Requirements; Market Makers. The Company shall use
its best efforts to continue to meet any requirements or take any
actions necessary for trading of the Common Stock in the OTCBB. So long
as there are any Warrants outstanding, the Company shall use its best
efforts to arrange for or maintain at least two market makers to
register with the NASD as such with respect to the Common Stock.
(e) Management and Other Rights. So long as Purchasers own or
have the right to acquire an aggregate of 5% or more of the then
outstanding shares of Common Stock, the Company shall, at no time, have
(i) outstanding shares of Common Stock and/or (ii) shares of Common
Stock issuable upon the exercise, exchange or conversion of outstanding
rights, options, warrants and other securities, or issuable under any
other commitments or agreements, in each case, which shares were issued
or are issuable by the Company to management, other employees,
directors or consultants as compensation and which shares exceed, in
the aggregate, the greater of (x) 1,242,000 or (y) 12.5% of the then
outstanding shares of Common Stock.
(f) Financial Information. The Company shall promptly deliver
the following reports to the Funds, until such time as they shall have
transferred or sold all of their Securities: (i) upon filing with the
SEC, a copy of its Annual Report on Form 10-K, its Quarterly Reports on
Form 10-Q, its proxy statements and any Current Reports on Form 8-K,
and (ii) upon release, copies of all press releases issued by the
Company.
(g) Grant of Registration Rights. For a period of three years
from the First Closing, the Company shall not grant or issue to any
person or entity any registration or similar rights.
(h)Certain Legal Expenses. The Company shall pay to Hertzog,
Calamari and Gleason, counsel to the Purchasers, at each Closing, its
accrued and unpaid fees as of each Closing Date relating to the
negotiation and documentation of this Agreement and other documents and
transactions contemplated hereby in an aggregate amount not to exceed
$40,000.
(i) Removal of Legends. Any legend endorsed on a certificate
pursuant to Section 2(g) and any related stop transfer instructions
with respect to any Securities shall
<PAGE>
be removed, and the Company shall issue promptly a certificate without
such legend to the holder thereof, if (i) such Securities shall be
registered under the Securities Act, (ii) such legend may be properly
removed under the terms of Rule 144 or (iii) such holder shall provide
the Company with an opinion of counsel, reasonably satisfactory to the
Company, to the effect that a sale, transfer or assignment of such
Securities may be made pursuant to Rule 144(k).
(j) No Integrated Offerings. The offer and sale of the
Securities, when taken into account with prior sales by the Company of
securities, shall not require the registration under the Securities Act
of any such securities, and the Company shall not make any offers or
sales of any security that would require such registration.
(k) Stockholder Meeting. The Board of Directors of the Company
shall (i) call and hold a special meeting of the stockholders, as soon
as practicable after the date of this Agreement, in order to approve an
amendment to the Company's Articles of Incorporation (the "AMENDMENT")
to increase the total number of authorized shares of Common Stock to an
aggregate of 75,000,000 and (b) if approved, promptly file the
Amendment with the Minnesota Secretary of State. The Company shall
notify promptly the Funds of the approval or disapproval of such
amendment by the stockholders and the filing of the Amendment.
(l) Certain Corporate Actions. So long as Purchasers own or
have the right to acquire an aggregate of 20% or more of the then
outstanding shares of Common Stock, the Company shall not, without the
prior written consent of the Funds (provided that any of the Funds then
own or have the right to acquire any shares of Common Stock) and any
director of the Company designated by Miller, Johnson & Kuehn
Incorporated ("MJK") pursuant to Section 5(r) of this Agreement, (i)
effect any reclassification, capital reorganization or other change of
outstanding shares of capital stock of the Company, (ii) merge,
consolidate or enter into any other business combination of the Company
with or into another entity (other than a merger of a wholly owned
subsidiary, in which merger the Company shall be the surviving entity),
(iii) sell, lease or otherwise dispose of all or substantially all of
its assets or (iv) liquidate, dissolve or wind-up the Company.
(m) Future Issuances. The Company shall not grant or issue (i)
any additional shares of Common Stock, (ii) options, warrants or other
rights exercisable for, convertible into or exchangeable for Common
Stock or (iii) enter into any other commitments or agreements which
call
<PAGE>
for the issuance of any of the foregoing until the earlier of (x) the
amendment of the Company's Articles of Incorporation as set forth in
the Amendment or (y) the expiration of all Warrants.
(n) Future Offerings. So long as Purchasers own or have the
right to acquire an aggregate of 20% or more of the then outstanding
shares of Common Stock, the Company shall not, for a period of three
years from the date hereof, sell any Common Stock, any securities
convertible into or exchangeable or exercisable for Common Stock or any
rights, options, warrants or other agreements or commitments
convertible into or exercisable or exchangeable for Common Stock for a
purchase price, or having a conversion price or exercise price, per
share of Common Stock of less than $1.00 (after taking into account any
stock splits, stock dividends or capital reorganizations), without the
prior written consent of the Funds (provided that any of the Funds then
own or have the right to acquire any shares of Common Stock) and any
director of the Company designated by MJK pursuant to Section 5(r) of
this Agreement.
(o) Senior Securities. So long as Purchasers own or have the
right to acquire an aggregate of 20% or more of the then outstanding
shares of Common Stock, the Company shall not, without the prior
written consent of the Funds (provided that any of the Funds then own
or have the right to acquire any shares of Common Stock) and any
director of the Company designated by MJK pursuant to Section 5(r) of
this Agreement, issue or create any class of equity security having
liquidation rights senior to the Common Stock (a "SENIOR SECURITY") or
any securities convertible into or exercisable or exchangeable for a
Senior Security.
(p) Modification of Rights. So long as Purchasers own or have
the right to acquire an aggregate of 20% or more of the then
outstanding shares of Common Stock, the Company shall not effect any
amendment of outstanding options, warrants, notes or other rights or
securities convertible into or exercisable or exchangeable for Common
Stock (collectively, "RIGHTS") if the amendment would result in an
increase in the number of shares issuable with respect to such Rights
or would reduce the exercise price, conversion price or similar
variable with respect to such Rights.
(q) Option Cash Payments. The Company shall not, by reason of
the sale of the Securities or the consummation of the transactions
contemplated hereby, elect to make any cash payments pursuant to its
discretionary authority under Section 9.3 of the Company's 1993 Stock
Option Plan.
<PAGE>
(r) Board Representation. So long as Purchasers own or have
the right to acquire 20% or more of the then outstanding shares of
Common Stock, the Company shall maintain the number of directors
comprising the Board of Directors at five directors. So long as the
Funds, individually or in the aggregate, shall own 2.5% of the then
outstanding shares of Common Stock, the Company shall cause, at all
times, one director on the Board to be a nominee designated by the
Funds. For a period of three years from the date of the First Closing,
the Company shall cause, at all times, one director on the Board to be
a nominee designated by MJK, which nominee shall be mutually
satisfactory to MJK and the Company.
(s) Payment of Director Notes. The Company shall, within five
business days of the First Closing, pay any Convertible Promissory
Note, dated October 1, 1997, in the amount of $5,775 which a director
shall have elected to be repaid pursuant to an agreement of directors
in the form set forth as part of Exhibit D hereto.
6. Conditions to Obligations of the Purchasers at Each
Closing. The obligation of each Purchaser to purchase the Shares set
forth on such Purchaser's signature page at each Closing shall be
subject to the fulfillment on or prior to each Closing Date of the
following conditions, any of which may be waived by such Purchaser:
(a) Certificates. The Company shall have delivered to each
Purchaser a duly executed certificate representing the Shares and the
Warrants issuable to such Purchaser.
(b) Trading. The Common Stock shall be trading on the OTCBB.
(c) Representations and Warranties; Performance of
Obligations. The representations and warranties of the Company set
forth in this Agreement shall be true and correct when made, and shall
be true and correct on each Closing Date with the same force and effect
as if they had been made on and as of said Date, except for
representations and warranties made as of a specific date which shall
be true and correct as of such date. The Company shall have performed,
satisfied and complied with all obligations and conditions required to
be performed or observed by it under this Agreement on or prior to each
Closing Date.
(d) Consents and Waivers. The Company shall have made all
filings and obtained any and all consents (including, without
limitation, all governmental or regulatory consents), approvals or
authorizations, permits
<PAGE>
and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement. The Company shall have
received with respect to the issuance of the Shares, the Warrants, the
Warrant Shares and the Default Shares, valid and binding waivers
relating to all preemptive rights, rights of first refusal or similar
rights. The Company shall have received with respect to the issuance of
the Shares, the Warrants, the Warrant Shares and any Default Shares
valid waivers of any anti-dilution or other adjustments.
(e) No Litigation or Legislation. No statute, rule,
regulation, decree, ruling or injunction shall have been enacted or
entered, and no litigation, proceeding, government inquiry or
investigation shall be pending, which challenges, prohibits or
restricts, or seeks to prohibit or restrict, the consummation of the
transactions contemplated by this Agreement or the other agreements
referred to herein, or restricts or impairs the ability of the
Purchasers to own an equity interest in the Company.
(f) Compliance Certificate. The Company shall have delivered
to the Purchasers a certificate, executed by the Chairman of the Board
or Chief Executive Officer of the Company, dated as of each Closing
Date, certifying to the fulfillment of the conditions set forth in
Sections 6(b), 6(c), 6(d), 6(e), 6(h) and 6(j) such other matters as
the Purchasers shall reasonably request.
(g) Opinion of Counsel. The Purchasers shall have received
from Oppenheimer Wolff & Donnelly, counsel to the Company, an opinion
addressed to the Purchasers, dated as of each Closing Date, in
substantially the form attached hereto as Exhibit C.
(h) No Material Adverse Change. There shall not have occurred
since the execution hereof any Material Adverse Change.
(i) Aggregate Investment. The aggregate number of Shares
purchased hereunder by all Purchasers shall be not less than 4,000,000
and not greater than 4,500,000 and the aggregate number of Warrants
issued hereunder by all Purchasers shall be not less than 4,000,000 and
not greater than 4,500,000. A minimum of 1,500,000 of such Shares shall
be purchased by Purchasers other than the Funds. The 104,000 Shares to
be purchased and the 104,000 Warrants to be acquired by certain
noteholders and delivered as set forth in Section 1(c)(ii) shall not be
included for purposes of determining if the conditions set forth in
this Section 6(i) shall be satisfied. Pursuant to Section 1(b)(ii), any
Shares that shall be sold and Warrants that shall be
<PAGE>
delivered at any Interim Closing shall be deemed purchased and
delivered at the First Closing and shall not be included for purposes
of determining if the conditions set forth in this Section 6(i) shall
be satisfied with respect to the Second Closing.
(j) Certain Agreements. Agreements, substantially in the forms
of Exhibit D hereto, shall have been executed and shall be in full
force and effect, and the transactions set forth on Schedule 6(j) shall
have been consummated. In connection with the conversion of the "7/97
Bridge Loan Investors" as described on Schedule 6(j), the July Bridge
Notes (as defined on Schedule 6(j)) shall have been cancelled.
(k) Director Resignations; Number. All directors other than
Messrs. Pelak and Roberg shall have resigned from the Board of
Directors of the Company, and the number of directors comprising the
Board shall have been set at five. The vacancies resulting from such
resignations shall have been filled by the appointment as directors of
David Chinsky and the nominees of the Funds and MJK.
(l) Additional Documents. The Company shall have delivered to
the Purchasers such other certificates, documents and instruments as
they may reasonably request in connection with the transactions
contemplated hereby.
7. Conditions to Obligation of the Company at Each Closing.
The obligation of the Company to sell and issue the Shares and the
Warrants to the Purchasers at each Closing shall be subject to the
fulfillment on or prior to each Closing Date of the following
conditions, any of which may be waived by the Company:
(a) Purchase Price. Each Purchaser shall have delivered the
purchase price for the Shares to be purchased by such Purchaser
hereunder.
(b) Representations and Warranties. The representations and
warranties made by the Purchasers in this Agreement shall be true and
correct when made, and shall be true and correct on each Closing Date
with the same force and effect as if they had been made on and as of
said date.
(c) No Litigation or Legislation. No statute, rule,
regulation, decree, ruling or injunction shall have been enacted or
entered, and no litigation, proceeding, government inquiry or
investigation shall be pending, which challenges, prohibits, restricts,
or seeks to prohibit or restrict, the consummation of the transactions
contemplated
<PAGE>
by this Agreement or the other agreements referred to herein, or
restricts or impairs the ability of the Purchaser to own an equity
interest in the Company.
8. Conditions to Second Closing. The obligation of each
Purchaser to purchase Shares at the Second Closing as set forth on such
Purchaser's signature page, and the obligation of the Company to sell
and issue such Shares and Warrants, shall be subject to the fulfillment
on or prior to such Closing of the following conditions:
(a) Amendment of Articles of Incorporation. The Amendment
shall have been approved by the stockholders of the Company as required
by law and the Articles of Incorporation and the Bylaws of the Company,
and stockholders other than the Purchasers (the "NON-PURCHASER
STOCKHOLDERS") holding a majority of all shares held by Non- Purchaser
Stockholders shall have voted to approve the Amendment. The Company
shall have filed the Amendment with the Secretary of State of the State
of Minnesota, and such Amendment shall have become effective.
(b) Milestones. The Company shall have attained, no later than
January 15, 1998, the following milestones: (i) the Company's net
revenues recorded on its books and records (determined in accordance
with generally accepted accounting principles consistently applied)
derived from the sale of existing or new systems during the period from
October 1, 1997, through January 15, 1998, shall be at least $200,000;
(ii) the Company shall have executed letters of intent and/or sales
contracts, each with a minimum value of $5,000, with at least five new
(excluding current or previous) customers for the sale of any existing
or new systems during the period from October 1, 1997 through January
15, 1998; and (iii) the Company shall have made generally available for
sale a commercially marketable entry level cardiac cath lab product
designed to support the data requirements of the American College of
Cardiology, with a sales price range of $5,000-$15,000.
9. Miscellaneous.
(a) Survival. The representations and warranties of the
Company and the agreements and covenants set forth in this Agreement
shall survive each Closing notwithstanding any due diligence
investigation conducted by or on behalf of any Purchaser. The Company
shall indemnify and hold harmless each Purchaser and each of such
Purchaser's officers, directors, employees, partners, members, agents
and affiliates for any loss, damage or expenses (including reasonable
counsel fees) arising as a result of or related to any breach or
alleged breach by the Company of any of its
<PAGE>
representations or covenants set forth in this Agreement, including
advancement of expenses as they are incurred.
(b) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York. Each of
the Company and the Purchasers irrevocably consent to the exclusive
jurisdiction of the United States Federal courts, located in New York
County, New York, in any suit or proceeding based on or arising under
this Agreement and irrevocably agree that all claims in respect of such
suit or proceeding may be determined in such courts. The Company
irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. Service of process on the
Company mailed by first class mail shall be deemed in every respect
effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the right of any Purchaser to
serve process in any manner permitted by law.
(c) Finder's Fee. Each party shall indemnify and hold the
other harmless from any liability for any commission or compensation in
the nature of a finders' fee (and the costs and expenses of defending
against such liability or asserted liability) for which such party or
any of its officers, partners, employees or representatives shall be
responsible.
(d) Further Assurances. Each party, whether prior to or after
the Closing, shall execute, acknowledge and deliver all such other
instruments and documents, and shall take all such other actions, as
may be reasonably requested by any other party for the purpose of
effecting and evidencing the consummation of the transactions
contemplated by this Agreement.
(e) Successors. This Agreement shall be binding upon and inure
to the benefit of the successors and permitted assigns of the parties
hereto; provided, however, that the rights of any Purchaser hereunder
may be transferred in connection with a transfer by such Purchaser of
all or part of the Securities in accordance with the terms of this
Agreement or the terms of the Warrants, as the case may be, in a
private transaction exempt from registration under the Securities Act.
Any transferee of any of the Securities to whom rights are transferred
in such a private transaction, other than an affiliate of the
Purchaser, shall be required, as a condition precedent to acquiring
such Securities, to agree in writing to be bound by all the terms and
conditions of this Agreement. A Purchaser may not assign its rights
under this Agreement in connection with the sale of Shares or Warrant
Shares
<PAGE>
pursuant to a registration statement under the Securities Act or under
Rule 144.
(f) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(g) Entire Agreement. This Agreement, including and
incorporating all Schedules and all Exhibits hereto and referred to
herein, and the Warrants constitute and contain the entire agreement
and understanding of the parties regarding the subject matter of this
Agreement and supersede any and all prior negotiations, correspondence,
understandings and agreements, written or oral, among the parties with
respect to the subject matter hereof.
(h) Notices. All notices required to be given hereunder shall
be in writing and shall be given by personal delivery, facsimile
transmission, nationally recognized overnight carrier (prepaid) or
registered or certified mail, postage prepaid with return receipt
requested. Notices shall be addressed, if to the Company, at its
principal corporate offices located at 7210 Metro Boulevard,
Minneapolis, Minnesota 55439, facsimile No. (612) 844-0797, Attention:
Chief Executive Officer and, if to a Purchaser, to the address set
forth on such Purchaser's signature page. Notices delivered personally
shall be deemed given as of actual receipt; notices sent via facsimile
transmission shall be deemed given as of one business day following
receipt by the sender of written confirmation of transmission thereof;
notices sent via overnight courier shall be deemed given as of one
business day following sending; and notices mailed shall be deemed
given as of five business days after proper mailing. A party may change
his or its address by written notice in accordance with this Section
9(h).
(i) Amendments and Waivers. Except as otherwise provided
herein, no provision of this Agreement may be waived or amended other
than by an instrument in writing signed by the Company and Purchasers
owning or having the right to acquire 51% of the Shares and the Warrant
Shares.
(j) Severability. If one or more provisions of this Agreement
shall be held to be unenforceable under applicable law, such provisions
shall be excluded from this Agreement to the extent unenforceable and
the balance of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
<PAGE>
(k) Expenses. Except as otherwise provided herein, the parties
hereto shall pay their own costs and expenses.
(l) Publicity. The parties shall consult with each other, to
the extent practicable, as to the form and content of any press
releases and other third party communications or disclosures relating
to this Agreement or the transactions contemplated hereby, and shall
use reasonable efforts, acting in good faith, to agree upon disclosure
which shall be satisfactory to the parties hereto. The Purchasers
acknowledge that the Company intends to report the completion of the
transactions contemplated hereby on a Form 8-K to be filed with the
SEC, including the filing of this Agreement and all Exhibits and
Schedules hereto with the SEC.
(m) Headings. The headings of this Agreement are for
convenience of reference and shall not form a part of, or affect the
interpretation of, this Agreement.
(n) Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by, any other person.
(o) Voting Covenant. Each of the Purchasers covenants that it
shall vote all shares of Common Stock owned by it to approve the
Amendment which shall be submitted to the stockholders of the Company
pursuant to Section 5(k).
(p) Termination of Covenants. Except as otherwise provided in
Section 5, the covenants of the Company set forth in Section 5 of this
Agreement shall terminate at such time as the Purchasers shall not own
any securities issued pursuant to this Agreement or the Warrants.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
LIFERATE SYSTEMS, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
[INVESTOR]
By:_________________________________
Name:_______________________________
Title:______________________________
Address:____________________________
____________________________
____________________________
Facsimile No:_______________________
Residence:__________________________
SUBSCRIPTION AMOUNT FOR FIRST CLOSING:
Number of Shares x ($0.56) ____________
Number of Warrants ____________
TOTAL PURCHASE PRICE $
============
SUBSCRIPTION AMOUNT FOR INTERIM CLOSING:
Number of Shares x ($0.56) ____________
Number of Warrants ____________
TOTAL PURCHASE PRICE $
============
SUBSCRIPTION AMOUNT FOR SECOND CLOSING:
Number of Shares x ($0.56) ____________
Number of Warrants ____________
TOTAL PURCHASE PRICE $
============
<PAGE>
[NOT PART OF AGREEMENT]
EXHIBITS AND SCHEDULES TO
SECURITIES PURCHASE AGREEMENT
DATED NOVEMBER 14, 1997 BETWEEN
LIFERATE SYSTEMS, INC. AND
THE PURCHASERS
EXHIBIT OR SCHEDULE SUBJECT REFERENCE IN AGREEMENT
Exhibit A Form of Warrant to Purchase Recitals
Common Stock of the
Company
Exhibit B Schedule of Exceptions Sections 3(c),(m),(q),(r)
and (v)
Exhibit C Opinions of Counsel to the Section 6(g)
Company
Exhibit D Certain Required Modification Section 6(j)
Agreements
Schedule 3(d) Capitalization Section 3(d)
Schedule 6(j) Transactions Affecting Section 6(j)
Capitalization and Certain
Existing Rights
EXHIBIT A
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR UNDER ANY STATE SECURITIES LAWS.
THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT AS
PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT
TO REGISTRATION OR EXEMPTION THEREFROM. UNLESS THE SECURITIES ARE SOLD
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, THE ISSUER OF THESE
SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR
RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
------------------------------
WARRANT TO PURCHASE COMMON STOCK
OF
LIFERATE SYSTEMS, INC.
------------------------------
FOR VALUE RECEIVED,__________________________________
_______________, or assigns (the "HOLDER"), is entitled to purchase, subject to
the provisions of this Warrant, from LifeRate Systems, Inc., a Minnesota
corporation (the "COMPANY"), up to shares of Common Stock, without par value, of
the Company (the "COMMON STOCK") at any time or from time to time during the
period commencing on the date hereof through and including the tenth anniversary
of the date hereof (the "TERMINATION DATE"), at a price per share equal to $1.50
(the "EXERCISE PRICE"). The number of shares of Common Stock to be received upon
the exercise of this Warrant and the Exercise Price may be adjusted from time to
time as hereinafter set forth. The shares of Common Stock deliverable upon any
exercise of this Warrant are hereinafter sometimes referred to as "WARRANT
SHARES". This Warrant is issued by the Company pursuant to the Securities
Purchase Agreement dated November __, 1997 (the "PURCHASE AGREEMENT") among the
Company and each of the purchasers named on the signature pages thereto and
shall be
<PAGE>
entitled to the rights set forth therein, including certain registration rights
relating to the Warrant Shares.
(a) EXERCISE OF WARRANT. This Warrant may be exercised in
whole or in part at any time or from time to time until the Termination Date;
provided, however, that if the date of exercise shall be a day on which banking
institutions in the State of New York shall be authorized by law to close, then
the Warrant shall be exercisable on the next succeeding day which shall not be
such a day. This Warrant may be exercised by presentation and surrender hereof
to the Company at its principal office, or at the office of its stock transfer
agent, if any, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Exercise Price for the number of Warrant Shares
specified in such Form. As soon as practicable after each such exercise, but not
later than two (2) days following the date of such exercise, the Company shall
issue and deliver to the Holder a certificate or certificates for the Warrant
Shares issuable upon such exercise, registered in the name of the Holder or its
designee(s). If this Warrant shall be exercised in part, the Company shall, upon
surrender of the Warrant for cancellation, execute and deliver a new Warrant
evidencing the rights of the Holder thereof to purchase the balance of the
Warrant Shares purchasable hereunder. Upon receipt by the Company of the Warrant
at its office, or by the stock transfer agent of the Company at its office, in
proper form for exercise and accompanied by proper payment, the Holder shall be
deemed to be the holder of record of the Warrant Shares issuable upon such
exercise, notwithstanding that the stock transfer books of the Company shall
then be closed or that certificates representing such shares of Common Stock
shall not then have been physically delivered to the Holder.
(b) RESERVATION OF SHARES. The Company covenants and agrees
that it shall at all times reserve for issuance and delivery upon exercise of
the Warrant such number of shares of Common Stock as shall be required for
issuance and delivery upon exercise of the Warrant. In addition, the Company
further covenants and agrees that all Warrant Shares, upon issuance, shall be
duly and validly issued, fully paid and non-assessable and no personal liability
shall attach to the holder thereof.
(c) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon exercise of this Warrant. All fractional shares shall be
eliminated by rounding any fraction to the nearest whole number of shares of
Common Stock.
<PAGE>
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This
Warrant shall be exchangeable, without expense, at the option of the Holder,
upon presentation and surrender hereof to the Company, or at the office of its
stock transfer agent, for other Warrants of different denominations entitling
the Holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. Upon surrender of this Warrant to the
Company or the office of its stock transfer agent, with the Assignment Form
annexed hereto duly executed and funds sufficient to pay any transfer tax, the
Company, without charge, shall execute and deliver new Warrants in the name of
the assignee named in such instrument of assignment and this Warrant shall be
cancelled promptly, provided that the Company shall receive from the Holder an
opinion of counsel that such assignment, as contemplated by the Holder, shall
not violate applicable Federal or state securities laws. This Warrant may be
divided or combined with other Warrants which carry the same rights upon
presentation hereof at the principal office of the Company or the office of its
stock transfer agent, together with a written notice, signed by the Holder
hereof, specifying the names and denominations in which new Warrants are to be
issued. The term "WARRANTS" as used herein shall include any warrants into which
this Warrant may be divided or exchanged. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, the Company shall execute and deliver a new Warrant of
like tenor and date.
(e) RIGHTS OF HOLDER. The Holder shall not, until exercise
hereof, be entitled to any rights of a stockholder in the Company, either at law
or equity, and the rights of the Holder shall be limited to those expressed
herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at
any time and the number and kind of securities purchasable upon the exercise of
this Warrant shall be subject to adjustment from time to time upon the happening
of any of the following events:
(i) In the event that the Company shall issue or sell any
shares of Common Stock (except as provided in paragraph (f)(v) hereof)
for a consideration per share less than the greater of (A) the Exercise
Price in effect immediately prior to such issue or sale and (B) the
Market Price (as defined in paragraph (f)(ii)(G) hereof) on the date of
such issue or sale,
<PAGE>
then the Exercise Price, as of the date of such issue or sale, shall be
reduced to such lesser price (calculated to the nearest cent) as shall
be determined by multiplying the Exercise Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum of
(x) the number of shares of Common Stock outstanding immediately prior
to the issuance or sale of such additional shares and (y) the number of
shares of Common Stock which the aggregate consideration received for
the issuance or sale of such additional shares would purchase at the
greater of the Market Price on the date of such issue or sale or the
Exercise Price then in effect, and the denominator of which shall be
the number of shares of Common Stock outstanding immediately after the
issuance or sale of such additional shares.
(ii) For the purposes of paragraph (f)(i) above, the following
subparagraphs (A) to (G), inclusive, shall be applicable:
(A) If at any time the Company shall issue or sell
any rights to subscribe for, or any rights or options to
purchase, Common Stock or any stock or other securities
convertible into or exchangeable for Common Stock (such
convertible or exchangeable stock or securities being
hereinafter called "CONVERTIBLE SECURITIES"), whether or not
such rights or options or the right to convert or exchange any
such Convertible Securities shall be immediately exercisable,
and the price per share for which Common Stock shall be
issuable upon the exercise of such rights or options or upon
conversion or exchange of such Convertible Securities
(determined by dividing (1) the total amount, if any, received
or receivable by the Company as consideration for the granting
of such rights or options, plus the minimum aggregate amount
of additional consideration payable to the Company upon the
exercise of such rights or options, plus, in the case of any
such rights or options which shall relate to Convertible
Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange
thereof, by (2) the total number of shares of Common Stock
issuable upon the exercise of such rights or options or upon
the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such rights or options) shall be
less than the greater of (x) the Exercise Price in effect
immediately prior to the time of the issue
<PAGE>
or sale of such rights or options and (y) the Market Price on
the date of such issue or sale, then the total number of
shares of Common Stock issuable upon the exercise of such
rights or options or upon conversion or exchange of the total
amount of such Convertible Securities issuable upon the
exercise of such rights or options shall (as of the date of
granting of such rights or options) be deemed to be
outstanding and to have been issued for such price per share,
and except as provided in paragraph (f)(iv), no further
adjustments of the Exercise Price shall be made upon the
actual issue of such Common Stock or of such Convertible
Securities, upon the exercise of such rights or options or
upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.
(B) If at any time the Company shall issue or sell
any Convertible Securities, whether or not the rights to
exchange or convert thereunder shall be immediately
exercisable, and the price per share for which Common Stock
shall be issuable upon such conversion or exchange (determined
by dividing (1) the total amount received or receivable by the
Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon
the conversion or exchange thereof, by (2) the total number of
shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less
than the greater of (x) the Exercise Price in effect
immediately prior to the time of such issue or sale and (y)
the Market Price on the date of such issue or sale, then the
total number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been
issued for such price per share, and, except as provided in
paragraph (f)(iv) no further adjustments of the Exercise Price
shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities. In
addition, if any issue or sale of such Convertible Securities
shall be made upon exercise of any rights to subscribe for or
to purchase or any option to purchase any such Convertible
Securities for which adjustments of the Exercise Price shall
have been or shall be
<PAGE>
made pursuant to other provisions of this paragraph (f)(ii),
no further adjustment of the Exercise Price shall be made by
reason of such issue or sale.
(C) If at any time the Company shall declare and pay
a dividend or make any other distribution upon the Common
Stock payable in Common Stock or Convertible Securities, any
such Common Stock or Convertible Securities, as the case may
be, issuable in payment of such dividend or distribution shall
be deemed to have been issued or sold without consideration.
(D) If at any time any shares of Common Stock or
Convertible Securities or any rights or options to purchase
any such Common Stock or Convertible Securities shall be
issued or sold for cash, the consideration received therefor
shall be deemed to be the amount received by the Company
therefor, without deduction therefrom of any expenses incurred
or any underwriting commissions or concessions or discounts
paid or allowed by the Company in connection therewith. In
case any shares of Common Stock or Convertible Securities or
any rights or options to purchase any such Common Stock or
Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration
other than cash received by the Company shall be deemed to be
the fair value of such consideration as determined by the
Board of Directors, without deduction therefrom of any
expenses incurred or any underwriting commissions or
concessions or discounts paid or allowed by the Company in
connection therewith. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase
any such Common Stock or Convertible Securities shall be
issued in connection with any merger of another corporation
into the Company, the amount of consideration therefor shall
be deemed to be the fair value of such merged corporation as
determined by the Board of Directors reduced by all cash and
other consideration (if any) paid by the Company in connection
with such merger.
(E) If at any time the Company shall take a record of
the holders of Common Stock for the purpose of entitling them
(1) to receive a dividend or other distribution payable in
Common Stock or in Convertible Securities, or (2) to
<PAGE>
subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed
to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date
of the granting of such right of subscription or purchase, as
the case may be.
(F) The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or
for the account of the Company, provided that such shares are
neither issued, sold or otherwise distributed by the Company.
(G) For purposes hereof, the "MARKET PRICE" shall
mean the closing bid price of the Common Stock in the
over-the-counter market, or, if the Common Stock shall be
quoted on The Nasdaq National Market or The Nasdaq SmallCap
Market or listed on a national securities exchange, on such
principal market or exchange on which the Common Stock may be
listed, in each case on the day prior to the date of
determination of such "Market Price". If at any time the
Common Stock shall not be traded in the over-the-counter
market or quoted or listed on The Nasdaq National Market or
The Nasdaq SmallCap Market or a national securities exchange,
the "Market Price" of a share of Common Stock shall be deemed
to be the higher of (x) the book value thereof (as determined
by any firm of independent public accountants of nationally
recognized standing selected by the Board of Directors) as of
the last day of any month ending within 60 days preceding the
date of determination, or (y) the fair value thereof (as
determined in good faith by the Board of Directors) as of a
date which shall be within 15 days of the date of
determination.
(iii) In case at any time the Company shall subdivide its
outstanding shares of Common Stock into a greater number of shares, the
Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced. In case at any time the outstanding shares of
Common Stock of the Company shall be combined into a smaller number of
shares, the Exercise Price in effect immediately prior to such
combination shall be proportionately increased.
<PAGE>
(iv) If the purchase or exercise price provided for in any
right or option referred to in paragraph (f)(ii)(A), or the rate at
which any Convertible Securities referred to in paragraph (f)(ii)(A) or
(B) shall be convertible into or exchangeable for Common Stock, shall
change or a different purchase or exercise price or rate shall become
effective at any time or from time to time, then, upon such change
becoming effective, the Exercise Price then in effect hereunder shall
forthwith be increased or decreased to such Exercise Price as would
have been in effect had the adjustments made upon the granting or
issuance of such rights or options or Convertible Securities been made
upon the basis of (A) the issuance of the number of shares of Common
Stock theretofore actually delivered upon the exercise of such options
or rights or upon the conversion or exchange of such Convertible
Securities consideration received therefor and (B) the granting or
issuance at the time of such change of any such options, rights or
Convertible Securities then still outstanding for the consideration, if
any, received by the Company therefor and to be received on the basis
of such changed price.
(v) The Company shall not be required to make any adjustment
to the Exercise Price in the case of:
(A) the granting, after the date hereof, by the
Company of stock options or stock awards with respect to
shares of Common Stock currently reserved for issuance under
the Company's 1993 Stock Option Plan, as amended, and Employee
Stock Purchase Plan, as amended;
(B) the issuance of shares of Common Stock pursuant
to the exercise of the options referred to in paragraph
(f)(v)(A) above or any other options outstanding as of the
date hereof;
(C) the issuance of shares of Common Stock pursuant
to the exercise of any warrants outstanding on the date
hereof; and
(D) the issuance of shares of Common Stock upon the
exercise of any of the Warrants.
(vi) Whenever the Exercise Price payable upon exercise of this
Warrant shall be adjusted pursuant to this paragraph (f), the number of
Warrant Shares purchasable upon exercise hereof simultaneously shall be
adjusted by multiplying the number of Warrant Shares issuable
immediately prior to such adjustment by the
<PAGE>
Exercise Price in effect immediately prior to such adjustment and
dividing the product so obtained by the Exercise Price, as adjusted.
(g) OFFICER'S CERTIFICATE. The Company shall give notice to
each record holder of the Warrants of any event or transaction that shall result
in an adjustment in the Exercise Price, within five business days thereof, at
such Holder's address as the same appears on the books of the Company, including
a computation of such adjustment and any adjustment in the number of Warrant
Shares for which such Holder may exercise such Holder's Warrant and any further
information as shall be necessary to confirm the computation of such
adjustments.
(h) CERTAIN NOTICES TO HOLDERS. So long as this Warrant shall
be outstanding, if (i) the Company shall pay any dividend or make any
distribution upon the Common Stock, (ii) the Company shall offer to the holders
of the Common Stock for subscription or purchase by them any share of any class
of capital stock or any other rights or (iii) any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation,
merger or other business combination of the Company with or into another
corporation, sale, lease or transfer of all or substantially all of the assets
of the Company to another corporation, or voluntary or involuntary dissolution,
liquidation or winding up of the Company shall be effected, then in any such
case, the Company shall cause to be mailed by certified mail to the Holder, at
least 30 days prior to the date specified in (x) or (y) below, as the case may
be, a notice containing a brief description of the proposed action and stating
the date on which (x) a record date shall be established for the purpose of such
dividend, distribution or rights offering or (y) such reclassification,
reorganization, consolidation, merger, conveyance, sale, lease, transfer,
dissolution, liquidation or winding up shall take place and the date, if any to
be fixed, as of which the holders of Common Stock or other securities shall
receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(i) RECLASSIFICATION, REORGANIZATION, MERGER OR OTHER BUSINESS
COMBINATION. In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock, or in case of any consolidation,
merger or other business combination of the Company with or into another
corporation or other entity (other than a merger with a subsidiary in which
merger the Company shall be the continuing corporation and which shall not
result in any reclassification, capital reorganization
<PAGE>
or other change of outstanding shares of Common Stock of the class issuable upon
exercise of this Warrant) or in case of any sale, lease or conveyance to another
corporation or other entity of all or substantially all of the assets of the
Company, the Company shall cause effective provisions to be made so that the
Holder, by exercising this Warrant at any time after the consummation of such
reclassification, change, consolidation, merger, sale or conveyance, shall be
entitled to receive the stock or other securities or property to which such
Holder would have been entitled upon such consummation if such Holder had
exercised this Warrant immediately prior to such consummation. Any such
provision shall include provisions for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this paragraph (i) shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances. In
the event that, in connection with any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common Stock subject to
the provisions of paragraph (f) hereof.
(j) BUY-IN RIGHTS. In the event that (i)(A) the Company shall
fail for any reason to deliver shares of Common Stock to a Holder upon any
exercise of this Warrant within the time period specified in paragraph (a)
hereof, or (B) the Company shall fail to remove any restrictive legend on any
certificates evidencing such shares of Common Stock as and when required under
Section 5(i) of the Purchase Agreement and (ii) thereafter, such Holder shall
purchase (in an open market transaction or otherwise) shares of Common Stock to
make delivery in satisfaction of a sale by such Holder of (A) the shares of
Common Stock which such Holder anticipated receiving upon such exercise, or (B)
such unlegended shares of Common Stock, as the case may be (in each case, the
"SOLD SHARES"), then the Company shall pay to such Holder (in addition to any
other remedies available to the Holder) the amount by which (x) such Holder's
total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased shall exceed (y) the net proceeds received by such
Holder from the sale of the Sold Shares. The Company shall make any payments
required pursuant to this paragraph (j) within five business days after receipt
of written notice from the Holder setting forth the calculation of the amount
due hereunder.
<PAGE>
(k) GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the law of the State of New York.
(l) NOTICES. Any notice required to be given or delivered to
the Company under the terms of this Warrant shall be in writing and addressed to
the Chief Executive Officer of the Company at its principal corporate offices.
Any notice required to be given or delivered to the Holder shall be in writing
and addressed to the Holder at the address indicated in the Purchase Agreement
or to such other address as such party may designate in writing from time to
time to the Company. All notices shall be deemed to have been given or delivered
upon: personal delivery; five (5) days after deposit in the United States mail
by certified or registered mail (return receipt requested); one (1) business day
after deposit with any nationally recognized overnight courier (prepaid); or one
(1) business day after transmission by facsimile and receipt by the sender of
written facsimile confirmation.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed and attested by the undersigned, each being duly authorized, as of the
date below.
Dated: November __, 1997
LIFERATE SYSTEMS, INC.
By:___________________________
Name: David J. Chinsky
Title: Chief Executive Officer
Attest:
___________________________
Michel A. LaFond, Secretary
<PAGE>
PURCHASE FORM
The undersigned hereby irrevocably elects to exercise the Warrant to
the extent of purchasing _____________shares of Common Stock and hereby makes
total payment of $_______________ in payment of the Exercise Price multiplied by
such number of shares.
--------------
ASSIGNMENT FORM
FOR VALUE RECEIVED, ___________________________________________________
hereby sells, assigns and transfers unto
Name: ________________________
(print in block letters)
Social Security No. or
Federal Taxpayer Identification No.:__________________________
Address:___________________________________________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
____________ shares of Common Stock as to which such right is exercisable and
does hereby irrevocably constitute and appoint __________________, as Attorney,
to transfer the same on the books of the Company with full power of
substitution.
Date ____________________, 19__ Signature____________________________
Name:
LIFERATE SYSTEMS, INC.
7210 METRO BOULEVARD * EDINA, MN 55439
(612) 844-0599 * Fax: (612) 844-0797
November 10, 1997
APF, LLC
c/o Anthony P. Furnary, M.D.
7266 S.W. Eaton Court
Portland, OR 97225-6045
Dear Dr. Furnary:
Reference is made to (i) the Modification Agreement dated as of March 25, 1997
(the "Modification Agreement") by and among LifeRate Systems, Inc. (the
"Company") and you relating to the amendment of certain terms set forth in the
Prior Agreement (as such term is defined in the Modification Agreement); (ii)
the Consulting Agreement dated as of March 25, 1997 between you and the Company
(the "Consulting Agreement "); (iii) a Non-Statutory Stock Option Agreement,
dated March 4, 1997 (the "Option Agreement"), covering options to purchase
550,000 shares of common stock, no par value ("Common Stock"); (iv) two
Non-Statutory Stock Option Agreements, each dated March 4, 1997 (the "Other
Option Agreements"), covering options to purchase an aggregate of 36,333 shares
of Common Stock and (v) the Master Agreement dated as of March 25, 1997 between
the Company, APF, LLC ("APF) and Dr. Furnary. As we have discussed, the
investors in our impending private placement offering of approximately 9,000,000
shares of Common Stock (the "Shares") at $.50 per share and approximately
9,000,000 warrants (the "Warrants") to purchase shares of Common Stock (the "New
Financing") are requiring, as a condition to closing that offering, that we
obtain certain agreements from some of our major creditors.
Accordingly, notwithstanding anything in the Consulting Agreement, the
Modification Agreement, the Prior Agreement, the Option Agreement, the Other
Option Agreements or the Master Agreement to the contrary, we hereby request
that you agree to the following modifications and amendments to the Consulting
Agreement, the Modification Agreement, the Prior Agreement, the Option
Agreement, the Other Option Agreements and the Master Agreement, which
modifications and agreements are to become effective upon, and are subject to
<PAGE>
the consummation of, the first closing of the New Financing, which closing will
relate to approximately 2,500,000 Shares and approximately 2,500,000 Warrants
(the "First Closing"), on or before November 21, 1997:
(i) Consulting Agreement. The Consulting Agreement is hereby terminated
in its entirety effective as of the First Closing, and all rights,
obligations and amounts owing or to become due and payable in the
future by either party thereunder are extinguished and deemed
satisfied.
(ii) Modification Agreement and Prior Agreement. All "milestone royalty
payments" payable by the Company under Section 6.2 of the Modification
Agreement, in the aggregate amount of $450,000, shall be terminated and
extinguished effective as of the First Closing.
(iii) Option Agreements. The Option Agreement is revised, effective as
of the First Closing, as follows: (x) the number of shares covered
thereby is reduced from 550,000 shares to 200,000 shares and (y) the
"Option Exercise Price" is changed to $1.00 per share (as so modified,
the "Amended Option Agreement"). In addition, Dr. Furnary and APF agree
not to sell or otherwise transfer any shares of Common Stock, purchased
upon exercise of the Amended Option Agreement or the Other Option
Agreements, before January 1, 2000.
(iv) Anti-Dilution. There shall be no further adjustment to the Option
Exercise Price of the Amended Option Agreement, nor shall there by any
other anti-dilution adjustment in the number of shares purchasable
thereunder, resulting from (x) the issuance of the Shares, the
Warrants, shares of Common Stock underlying the Warrants and any
Default Shares (as defined in the Securities Purchase Agreement
pursuant to which the Shares shall be sold), (y) any and all
conversions of existing debt of the Company into shares of Common Stock
in connection with the New Financing and (z) any and all other
transactions, including without limitation issuance's of options or
warrants, or adjustments to the exercise prices of existing options,
warrants or convertible notes that are being made in connection with
the New Financing and set forth on Schedule 6(j) to the Securities
Purchase Agreement (a copy of which Schedule is attached hereto).
(v) Waiver of Board Seat. APF and Dr. Furnary permanently waive their
rights under Section 7.4(a) of the Master Agreement to have Dr. Furnary
nominated, and recommended to be elected, to the Company's Board of
Directors; provided that nothing herein shall affect the right under
Section 7.4(b) granted to Dr. Furnary to personally have "observer"
status (which right is not assignable).
(vi) Waiver of Registration Rights. From the date hereof and until
January 1, 2000, APF and Dr. Furnary hereby waive all of their rights
under Section 7 of the Amended Option Agreement and the Other Option
Agreements to have the issuance of the Option Shares (as defined in the
Amended Option Agreement and the Other Options Agreements) registered
under the Securities Act of 1933, as amended.
<PAGE>
Except as modified above, the Modification Agreement, the Prior Agreement, the
Amended Option Agreement, the Other Option Agreements and the Master Agreement
shall continue in full force and effect.
Please acknowledge your agreement to the foregoing by signing and returning the
enclosed copy of this letter.
Very truly yours,
LIFERATE SYSTEMS, INC.
By: /s/ David J. Chinsky
---------------------
President & CEO
ACKNOWLEDGED AND AGREED TO
THIS 15TH DAY OF NOVEMBER, 1997:
APF, LLC
By: /s/ Anthony P. Furnary, M.D.
----------------------------------------
Title:
LIFERATE SYSTEMS, INC.
7210 METRO BOULEVARD * EDINA, MN 55439
(612) 844-0599 * Fax: (612) 844-0797
November 10, 1997
The Atlanta Cardiology Group, P.C.
5665 Peachtree
Dunwoody Road N.E.
Atlanta, GA 30342
Attention: President
Gentlemen:
Reference is made to (i) the Convertible Subordinated Note dated March 28, 1997
(the "Note") of LifeRate Systems, Inc. (the "Company") payable to The Atlanta
Cardiology Group, P.C. ("ACG") in the principal amount of $2,250,000 and (ii)
the Agreement dated March 28, 1997 between the Company and ACG (the
"Agreement"). As we have discussed, the investors in our impending private
placement offering of approximately 9,000,000 shares of Common Stock (the
"Shares") at $.50 per share and of approximately 9,000,000 warrants (the
"Warrants")) to purchase shares of Common Stock (the "New Financing") are
requiring, as a condition to closing that offering, that we obtain certain
agreements from some of our major creditors.
Accordingly, notwithstanding anything in the Note and the Agreement to the
contrary, we hereby request that you agree to the following modifications and
amendments to the Note and the Agreement, which modifications and agreements are
to become effective upon, and are subject to the consummation of, the first
closing of the New Financing, which closing will relate to approximately
2,500,000 Shares and approximately 2,500,000 Warrants (the "First Closing"), on
or before November 21, 1997:
(i) The Company's obligation to accrue or pay any interest now or
hereafter owing to ACG in respect of the Note shall be eliminated and
canceled.
(ii) There shall be no adjustment to the "Conversion Price" of the Note
(as defined in Section 2 thereof), nor shall there by any other
anti-dilution adjustment in the number of shares issuable thereunder,
resulting from (x) the issuance of the Shares, the Warrants, shares of
Common Stock underlying the Warrants and any Default Shares (as defined
in the Securities Purchase Agreement pursuant to which the Shares shall
be sold), (y) any and all conversions of existing debt of the Company
into shares of Common Stock in
<PAGE>
connection with the New Financing and (z) any and all other
transaction, including, without limitation, issuances of options or
warrants, or adjustments to the exercise prices of existing options,
warrants or convertible notes that are being made in connection with
the New Financing as set forth on Schedule 6(j) to the Securities
Purchase Agreement (a copy of which is attached hereto).
(iii) ACG hereby permanently waives its rights under Section 7.3 of the
Agreement to designate a person to attend all Board of Directors
meetings.
(iv) From the date hereof and until January 1, 2000, ACG hereby waives
all of its rights under Section 9 of the Agreement to cause the Company
to file a registration statement under the Securities Act of 1933, as
amended, or to have any Conversion Shares (as defined in the Agreement)
included within such a registration statement which might be filed by
the Company during such period.
(v) The Company will not consent to the assignment of the Note unless a
copy of this letter agreement is appended thereto. If ACG shall assign
the Note, as provided in Section 9(c) thereof, no such assignment shall
be effective unless the assignee agrees to be bound by this letter
agreement.
(vi) Upon notice from the Company, ACG shall promptly submit the Note
to the Company to be exchanged for a replacement note reflecting the
modifications and amendments in this letter agreement.
Except as modified above, the Note and the Agreement shall continue in full
force and effect.
Please acknowledge your agreement to the foregoing by signing and returning the
enclosed copy of this letter.
Very truly yours,
LIFERATE SYSTEMS, INC.
By: /s/ David J. Chinsky
--------------------------------
President & CEO
ACKNOWLEDGED AND AGREED TO
THIS 13th DAY OF November, 1997:
THE ATLANTA CARDIOLOGY GROUP, P.C.
By: /s/William D. Knopf, M.D.
-------------------------------
Title:
LIFERATE SYSTEMS, INC.
7210 METRO BOULEVARD * EDINA, MN 55439
(612) 844-0599 * Fax: (612) 844-0797
November 10, 1997
Medtronic, Inc.
Medtronic Center
7000 Central Avenue Northeast
Minneapolis, MN 55432
Attention: General Counsel
Gentlemen:
Reference is made to (i) the Convertible Promissory Note dated May 12, 1997 (the
"Note") of LifeRate Systems, Inc. (the "Company") payable to Medtronic, Inc.
("Medtronic"), as "Holder" in the principal amount of $1,000,000; (ii) the
Warrant dated May 12, 1997 (the "Medtronic Warrant") to purchase 100,000 shares
of Common Stock of the Company; and (iii) the Investment Agreement dated as of
December 26, 1995 between the Company and Medtronic (the "Investment Agreement"
and together with the Note and the Medtronic Warrant being herein collectively
referred to as the "Existing Agreements"). As we have discussed, the investors
in our impending private placement offering of approximately 9,000,000 shares of
Common Stock (the "Shares") at $.50 per share and approximately 9,000,000
warrants (the "Warrants") to purchase shares of Common Stock (the "New
Financing") are requiring, as a condition to closing that offering, that we
obtain certain agreements from some of our major creditors.
Accordingly, notwithstanding anything in the Existing Agreements to the
contrary, we hereby request that you agree to the following modifications and
amendments to Existing Agreements, which modifications and agreements are to
become effective upon, and are subject to the consummation of, the first closing
of the New Financing, which closing will relate to approximately 2,500,000
Shares and approximately 2,500,000 Warrants (the "First Closing"), on or before
November 21, 1997:
(i) Interest and Principal. The Company's obligation (x) to accrue or
pay any interest now or hereafter owing to Medtronic in respect of the
Note shall be eliminated and canceled and (y) to pay principal to
Medtronic in respect of the Note is deferred, without interest, until
May 12, 2002; provided however, that this agreement to defer principal
<PAGE>
shall immediately terminate in the event a voluntary or involuntary
petition is filed in respect of the Company under the federal
bankruptcy laws or in the event there occurs any other Event of Default
under Section 4(c), (d), (e), (f), (g) or (h) of the Note; and,
provided further, that, with respect to such Section 4(c), the Company
shall have 60 days to cure the event specified in Section 4(c) before
it shall constitute an Event of Default.
(ii) Modification to Conversion Price. The "Conversion Price" as set
forth in Section 2 of the Note is amended in its entirety to read as
follows:
"Conversion Price" means $1.50 per share of Common Stock.
(iii) No Additional Warrants. The Company's obligation to issue the
additional warrants referred to in Section 7 (a) and (b) of the Note is
hereby terminated and extinguished.
(iv) Modification to Exercise Price. The "Exercise Price" of the
Medtronic Warrant (as defined therein) is repriced at $0.50 per share
of Common Stock.
(v) No Anti-Dilution Adjustments. There shall be no further adjustment
to the Exercise Price of the Medtronic Warrant or the Conversion Price
of the Note, nor shall there by any other anti-dilution adjustment in
the number of shares purchasable under the Medtronic Warrant or
convertible under the Note, resulting from (x) the issuance of the
Shares, the Warrants, shares of Common Stock underlying the Warrants
and any Default Shares (as defined in the Securities Purchase Agreement
pursuant to which the Shares shall be sold), (y) any and all
conversions of existing debt of the Company into shares of Common Stock
in connection with the New Financing and (z) any and all other
transactions, including without limitation, issuances of options or
warrants, or adjustments to the exercise prices of existing options,
warrants or convertible notes, that are being made in connection with
the New Financing as set forth on Schedule 6(j) to the Securities
Purchase Agreement (a copy of which Schedule is attached hereto). .
(vi) Waiver of Rights of First Refusal; Termination of Right of First
Refusal Regarding Sale of Company. Medtronic hereby (x) waives, solely
for purposes of the New Financing, its rights of first refusal under
Section 3.1 of the Investment Agreement to purchase any Shares or
Warrants in the New Financing and (y) terminates and permanently waives
all of its rights of first refusal on the sale of the Company as set
forth in Section 3.2 of the Investment Agreement; provided, however,
that Medtronic shall have its rights of first refusal as set forth in
Section 3.2 of the Investment Agreement restored in the event that, in
the twelve months prior to a Company Sale (as defined in such Section
3.2), 50% or more of the license revenue of the Company generated from
LifeRate products sold for cardiovascular applications is directly
generated as a result of referrals originating from the Medtronic
cardiovascular sales organization.
(vii) Registration Rights. Medtronic hereby (x) consents to the grant
of registration rights to investors in the New Financing, to holders of
convertible promissory notes that are converted into shares of Common
Stock in connection with the New Financing (which
<PAGE>
holders were granted registration rights prior to the date hereof) and
to holders of the Company's convertible promissory notes dated July 21,
1997 in the aggregate principal amount of $500,000 (which holders were
granted registration rights prior to the date hereof) and waives the
restrictions contained in Section 8.4 of the Investment Agreement with
respect thereto, (y) agrees not to exercise, and otherwise waives, any
of its registration rights under Article 8 of the Investment Agreement
prior to January 1, 2000 and (z) agrees that Section 8.2(b) of the
Investment Agreement is deemed amended to the extent necessary to
provide that any reduction in the number of securities to be included
in a registration statement shall be made pro rata among Medtronic,
other holders of securities of the Company having registration rights
granted prior to the date of the Investment Agreement and holders of
Registrable Securities, as defined in the Securities Purchase Agreement
pursuant to which the Shares are to be sold.
(viii) Assignment. This letter agreement shall be binding upon and
inure to the benefit of the successors and assigns of Medtronic and no
transfer of the Note, the Medtronic Warrant, or the shares of Common
Stock issuable upon conversion of the Note or exercise of the Medtronic
Warrant shall be made unless the transferee shall agree in writing to
be bound by the terms and conditions hereof.
(ix) Replacement of Note and Medtronic Warrant. Upon notice from the
Company, Medtronic shall promptly submit the Note and the Medtronic
Warrant to the Company to be exchanged for a replacement note and
replacement warrant reflecting the terms of this letter agreement.
Except as modified above, the Existing Agreements shall continue in full force
and effect.
Please acknowledge your agreement to the foregoing by signing and returning the
enclosed copy of this letter.
Very truly yours,
LIFERATE SYSTEMS, INC.
By: /s/David J. Chinsky
-------------------------------------
President & CEO
ACKNOWLEDGED AND AGREED TO
THIS 14th DAY OF November, 1997:
MEDTRONIC, INC.
By: /s/Robert Paulson
-------------------------------
VP Strategy and Planning
EMPLOYMENT AGREEMENT
THIS AGREEMENT is effective as of August 18, 1997 between LIFERATE
SYSTEMS, INC., a Minnesota corporation ("the Company"), and David J. Chinsky
(the "Employee")i.
WHEREAS, the parties wish to provide for the employment of the Employee
by the Company and the terms and conditions upon which he will be employed;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the Company and the Employee, each intending to be legally bound, agree
as follows:
1) Employment. Subject to all of the terms and conditions of this
Agreement, the Company agrees to employ the Employee as the Chief Executive
Officer and President of the Company, and the Employee accepts this employment.
2) Duties.
(a) The Employee will diligently and conscientiously perform the duties
of Chief Executive Officer and President of the Company, all within the
general guidelines to be determined by the Board of Directors. In his
position and capacity as President and CEO, the Employee will report to
the Board. The Employee will make the best use of his energy, knowledge
and training in advancing the Company's interests and will not actively
be engaged in other employment with any other entity or concern.
(b) During the term of this Agreement, the Employee will also serve as
a director of the Company and will perform all duties incident to such
service subject to election by the Board.
3) Term. the term of this Agreement and Employee's employment will
commence on August 26, 1997 and will be for a period of one year subject to
earlier termination pursuant to Section 4. The Employee shall receive a
performance review at the end of the first year of employment and annually
thereafter. Subject to such review(s), this Agreement will be extended for a
one-year period. If the review does not take place, or does not take place
before the end of this term, this Agreement will be automatically renewed for
one (1) year subject to the provisions of Section 4 herein.
4) Termination. Subject to the respective continuing obligations of the
Company and the Employee under Sections 8, 9, 10 and 11 hereof:
(a) This Agreement may be terminated by the Company on 10 days' written
notice to the Employee "for cause," with the basis for termination
specified in such notice. For purposes of this Agreement, "for cause"
will mean (i) any unlawful or criminal activity of a serious nature; or
(ii) if not corrected within 60 days after written notice thereof, any
willful breach of duty, habitual neglect of duty or inadequate job
performance as
<PAGE>
determined solely by the Board of Directors at LifeRate; or (iii) a
material breach of any provision of this Agreement.
(b) This Agreement may be terminated upon the Employee's death or Total
Disability. For purposes of this Agreement, "Total Disability" will be
as defined in the long-term disability plan of the Company then in
effect or, if no such plan exists, will mean such disability that
prevents the Employee from performing his duties under Section 2 of
this Agreement for a continuous period of 90 days.
(c) This Agreement may be terminated for Good Reason (as defined below)
by the Employee following a Chance in Control (as defined below) upon
30 days written notice.
(d) This Agreement may be terminated by mutual agreement of the
parties.
(e) This Agreement may be terminated by Employee upon 30 days written
notice to the Company.
(f) This Agreement may be terminated by the Company upon 30 days
written notice to Employee subject to the post-termination obligations
set forth in Section 7(b) herein.
5) Compensation.
(a) Base Salary. In consideration of the Employee's services under this
Agreement, the Company agrees to pay the Employee an annual base salary
(the "Base Salary"). The Base Salary will be set at $225,000. The Base
Salary will be payable in accordance with the standard payroll
practices of the Company.
(b) Stock Options. Upon the execution of this Agreement and
commencement of employment, the Employee will receive a stock option
(the "Option") to purchase 200,000 shares of the Company's common
stock, no par value (the "Common Stock"). The Option will have an
exercise price equal to the closing bid price of the Common Stock on
the date hereof (the "Exercise Price") representing the fair market
value of the Common Stock on the date of acceptance of employment. In
addition to the Option referred to above, if Employee is still employed
after one (1) year, and subject to reasonable performance criteria
regarding Company performance to be set by the Company and the Employee
being met, the Employee will be eligible for additional stock options
of 100,000 shares. The exercise price for all of these options shall be
the fair market value of the Common Stock on the date of acceptance of
employment. All of the above-referenced stock options will vest over
three years at the rate of one-third per year, with the vesting period
to begin upon the commencement of employment. The options shall be
exercisable for a period of five (5) years from the date each are
vested after which time the options shall expire. If Employee's
employment terminates for any reason, Employee forfeits all rights to
unvested options as of the date of termination. If Employee's
employment is terminated for any reason, Employee's vested options
shall
<PAGE>
remain exercisable by Employee for a period of 30 days after
termination after which time such vested options will expire.
It is anticipated that the Company will undergo a round of financing
within the Employee's first year of employment which may result in more
shares of the Company's Common Stock to be issued and sold. It is the
intent of the parties to this Agreement that the Employee shall be able
to maintain the percentage the Employee's options represents of the
common shares outstanding at the time of grant and before the financing
occurred. As to the first 200,000 stock options, the parties agree that
the percentage would be 5.23%. If that percentage is reduced by the
issuance of shares during the next round of financing, the Employee
shall be awarded an additional number of options to maintain that
percentage, subject to the same price, vesting, exercise and forfeiture
provisions as set forth herein for the original options.
If the Employee is awarded the additional 100,000 stock options
referenced herein, the parties agree that Employee's percentage would
be 7.84% If that percentage has been reduced by the issuance of shares
during the round of financing in the first year, the Employee will be
awarded an additional number of options to maintain that percentage,
subject to the same price, vesting, exercise and forfeiture provisions
as set forth herein for the original options.
(c) Bonus. The Employee shall be eligible for a performance bonus of up
to $100,000 annually if certain performance criteria, to be established
by the Company, are met. The Company guarantees that Employee will be
paid a first year bonus of $100,000, under the following conditions:
(1) Employee remains an employee of the Company for the
full year;
(2) Employee terminates his employment during the first
year pursuant to Section 4(c) herein; and
3) Employee is disabled or dies within the first year
pursuant to Section 4(b) herein, subject to being
prorated as set forth in Section 7(c) herein.
Employee will not receive the first year bonus if he terminates his
employment pursuant to Section 4(e) or if his employment is terminated
by the Company pursuant to Section 4(a) herein.
(d) Bonus Buyout. The Employer agrees to pay to Employee, on or before
February 15, 1998, the gross amount of $108,000 (representing the
amount of bonus Employee would otherwise have received through his
previous employment) under the following conditions:
<PAGE>
(1) The Company receives the financing it currently
contemplates receiving by that time. If financing is
secured by not received by February 15, 1998, payment
will be made to Employee as soon as funds are
received; and
(2) Employee is still employed by Employer and actively
working on February 15, 1998 or when funds are
received, whichever is later.
(e) Benefits. The Employee shall be eligible to participate in the
Company's standard benefit program, subject to change by the Company
for all personnel, including the following: life insurance, medical
insurance, 160 hours of personal time off, holidays, 401(k) plan, and
an employee stock purchase plan.
(f) Expenses. The Company will pay or reimburse the Employee for all
reasonable expenses (including, without limitation, expenses for
entertainment, travel, personal business education, meals, hotel
accommodations)( that the Employee incurs while performing his duties
under this Agreement, provided that the Employee accounts properly for
such expenses to the Company in accordance with Company policies. The
Company will pay temporary living expenses of $1,000 per month for a
period of 24 months or until the Employee moves his residence to the
Twin Cities area, if the move occurs before the end of the 24 month
period. The Company will pay reasonable commuting costs between the
Twin Cities and Detroit for a period of two years.
6) Change in Control.
(a) For purposes of this Agreement, a "Change in Control" of the
Company will mean the following:
(1) the sale, lease, exchange or other transfer, directly
or indirectly, of substantially all of the assets of
the Company ( in one transaction or in a series of
related transactions) to a period or entity that is
not controlled by the Company;
(2) the approval by the shareholders of the Company of
any plan or proposal for the liquidation or
dissolution of the Company;
(3) a merger or consolidation to which the Company is a
party if the shareholders of the Company immediately
prior to effective date of such merger or
consolidation have "beneficial ownership" (as defined
in Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")), immediately
following the effective date of such merger or
consideration, of securities of the surviving
corporation representing (A) more than 50%, but not
more than 80%, of the combined voting power of the
surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of
directors, unless such merger or consolidation has
been approved in advance by the Incumbent
<PAGE>
Directors, or (B) 50% or less of the combined voting
power of the surviving corporation's then outstanding
securities ordinarily having the right to vote at
elections of directors (regardless of any approval by
the Incumbent Directors);
(4) any person becomes after the effective date of this
Agreement the "beneficial owner" (as defined in Rule
13d-3 of the Exchange Act), directly or indirectly,
of (A) 20% or more, but not 50% or more, of the
combined voting power of the Company's outstanding
securities ordinarily having the right to vote at
elections of directors, unless the transaction
resulting in such ownership has been approved in
advance by the Incumbent Directors, or (B) 50% or
more of the combined voting power of the Company's
outstanding securities ordinarily having the right to
vote at elections of directors (regardless of any
approval by the Incumbent Directors);
(5) the Incumbent Directors cease for any reason to
constitute at least a majority of the Board; or
(6) a change in control of the Company of a nature that
would be required to be reported pursuant to Section
13 or 15(d) of the Exchange Act, whether or not the
Company is then subject to such reporting
requirements.
(b) For purposes of this Section 6, the Incumbent Directors will mean
any individual who is a member of the Board on the effective date of
this Agreement and any individual who subsequently becomes a member of
the Board whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the
directors comprising the Board on the effective date of this Agreement
(either by specific vote or by approval of the proxy statement of the
Company in which such individual is named as a nominee for director
without objection to such nomination).
(c) Subject to the limitations of Section 7(e) hereof, if a Change in
Control occurs, the Option will become immediately exercisable in full
and will remain exercisable for the remainder of its term, regardless
of whether the Employee remains in the employ or service of the
Company.
7) Payments Upon Termination.
(a) If this Agreement is terminated by the Company pursuant to Section
4(a) of this Agreement for cause, the Employee will be paid his Base
Salary through the date of termination, and any unpaid expense
reimbursement.
(b) If this Agreement is terminated by the Company pursuant to Section
4(f) of this Agreement, then the Employee will be paid, in addition to
any unpaid expense reimbursement, one year of his Base Salary as
severance. Also, normal company
<PAGE>
provided benefits will be continued for the one year period. Such
severance payments are expressly conditioned upon the Employee meeting
his post-termination obligations as set forth herein in Section 8, 9,
10 and 12 of this Agreement. Payments will be made twice monthly over
the year, but shall cease if the Employee breaches his obligations
under Sections 8, 9 or 10 of this Agreement.
(c) If this Agreement is terminated pursuant to Section 4(b)
of this Agreement, the Employee will be paid (i) his Base
Salary through the end of the month following his death or
termination as a result of Total Disability, (ii) any bonus,
determined in accordance with Section 5(c) of this Agreement,
to which the Employee would have been entitled for the fiscal
year in which his death or termination for Total Disability
occurred, pro rated to the end of the month following his
death or termination for Total Disability, and (iii) any
unpaid expense reimbursement.
(d) If this Agreement is terminated by the Employee, following a Change
in Control, pursuant to Section 4(c) of this Agreement for Good Reason,
the Employee (i) will continue to be paid his then current Base Salary,
at the same times and in the same manner as prior to his termination,
for the remainder of the then current term of this Agreement, provided
that such payments will continue only so long as the Employee continues
to comply with all of the terms and conditions of Section 8, 9 and 10
of this Agreement; (ii) will be paid any bonus, determined in
accordance with Section 5(c) of this Agreement, to which the Employee
would have been entitled for the entire fiscal year in which he was
terminated had his employment with the Company not been terminated; and
(iii) will be paid any unpaid expense reimbursement.
(e) For purposes of this Agreement, "Good Reason" will mean the good
faith determination by the Employee, in his sole judgment, that any one
or more of the following events has occurred, without the Employee's
written consent, following a Change in Control:
(1) an adverse change in the Employee's status or
position as an executive of the Company as in effect
immediately prior to the Change in Control,
including, without limitation, any adverse change in
the Employee's status or position as a result of a
material diminution in his or her duties or
responsibilities (other than, if applicable, any such
change directly attributable to the fact that the
Company is no longer publicly owned) or the
assignment to the Employee of any duties or
responsibilities that, in the Employee's reasonable
responsibilities that, in the Employee's reasonable
judgment, are inconsistent with such status or
position, or any removal of the Employee from or any
failure to reappoint or reelect the Employee to such
position (except in connection with the termination
of his employment "for cause" or as a result of his
death or Total Disability or by the Employee other
than for Good Reason); provided, however, that Good
Reason will not include an adverse change in the
Employee's status
<PAGE>
or position caused by an insubstantial and
inadvertent action that is remedied by the Company
promptly after receipt of written notice of such
change from the Employee;
(2) a reduction by the Company in the Employee's annual
Base Salary, or an adverse change in the form or
timing of the payment thereof, as in effect
immediately prior to the Change in Control or as
thereafter increased;
(3) the failure by the Company to continue in effect any
benefit plan in which the Employee (including, for
purposes of this paragraph, his family or dependents)
is participating at any time during the 90-day period
immediately preceding the Change in Control (or
benefit plans providing the Employee with at least
substantially similar benefits) other than as a
result of the normal expiration of any such benefit
plan in accordance with its terms as in effect
immediately prior to the 90-day period immediately
preceding the Change in Control, or the taking of any
action, or the failure to act, by the Company that
would adversely affect an Employee's continue
participation in any of such benefit plans on at
least as favorable a basis to such Employee as is the
case immediately prior to the Change in Control or
that would materially reduce the Employee's benefits
in the future under any such benefit plans or deprive
an Employee of any material benefit enjoyed by such
Employee immediately prior to the Change in Control;
(4) the Company's requiring the Employee to be based more
than 30 miles from where his or her office is located
immediately prior to the Change in Control, except
for required travel pursuant to the Company's
business travel obligations that the Employee
undertook on behalf of the Company during the 90-day
period immediately preceding the Change in Control;
(5) the failure of the Company to obtain an assumption of
the obligations of the Company to perform this
Agreement by any successor to the Company; or
(6) any material breach of this Agreement by the Company.
8) Inventions.
(a) "Inventions," as used in this Section 8, means any discoveries,
improvements, formulae, proprietary rights or data, trade secrets, shop
rights, (whether or not they are in writing or reduced to practice) or
works of authorship (whether or not they can be patented or
copyrighted) that the Employee makes, authors, or conceives (either
alone or with others) and that:
<PAGE>
(1) concern directly the Company's business or the
Company's present or possible future research or
development;
(2) result from any work the Employee performs for the
Company;
(3) use the Company's equipment, supplies, facilities, or
trade secret information; or
(4) the Employee develops during any such time that
Section 2 above obligates him to perform his
employment duties.
(b) The Employee agrees that all Inventions he makes during or within
six months after the term of this Agreement will be the Company's sole
and exclusive property; and that all works of authorship that may be
the subject of copyright protection shall be "works made for hire." The
Employee will, with respect to any such Invention:
(1) keep current, accurate, and complete records, which will
belong to the Company and be kept and stored on the Company's
premises while the Employee is employed by the Company;
(2) promptly and fully disclose the existence and describe the
nature of the Invention to the Company in writing (and without
request);
(3) assign (and the Employee does hereby assign) to the
Company all of his rights to the Invention, any applications
he makes for patents or copyrights in any country, and any
patents or copyrights granted to him in any country; and
(4) acknowledge and deliver promptly to the Company any
written instruments, and perform any other acts necessary in
the Company's opinion to preserve property rights in the
Invention against forfeiture, abandonment, or loss and to
obtain and maintain letters patents and/or copyrights on the
Invention and to vest the entire right and title to the
Invention in the Company.
The requirements of this subsection 8(b) do not apply to an Invention
for which no equipment, supplies, facility or trade secret information
of the Company was used and which was developed entirely on the
Employee's own time, and (x) which does not relate directly to the
Company's business or to the Company's actual or demonstrably
anticipated research or development, or (y) which does not result from
any work the Employee performed for the Company. Except as previously
disclosed to the Company in writing, the Employee does not have, and
will not assert, any claims to or rights under any Inventions as having
been made, conceived, authored or acquired by the Employee prior to his
employment by the Company.
9) Confidential Information and Trade Secrets. Employee recognizes and
acknowledges that he may have access to confidential information and trade
secrets concerning
<PAGE>
Company which are of a special and unique value which may include, without
limitation, books and records relating to operation, finances, cash, bank
accounts, accounting; sales personnel and management; actual and potential
business or promotional opportunities, marketing plans and strategies; policies
and matters relating particularly to operations such as customer names,
addresses, telephone numbers and price lists; customer service requirements;
costs of providing service and equipment; routing information; operations and
maintenance costs; pricing matters; market place analyses; computer software;
database programs; and internal procedures, standards and productivity tools.
The protection of this confidential information and trade secrets against
authorized disclosure and use is of critical important to Company, and Employee
agrees that he will not, directly or indirectly, at any time while employed by
company and within two (2) years after termination with Company, with or without
cause, make any independent use of, or disclosure to any person other than an
employee of Company, or any organization except as authorized by Company, any
confidential information or trade secrets of Company. This provision shall not
be applicable to information disclosed by the Employee during testimony under
subpoena in any court or before any administrative agency or during any
governmental inquiry or investigation.
10) Competitive Activities. The Employee agrees that during his
employment with the Company and for a period of two years after his employment
with the Company ends:
(a) He will not alone, or in any capacity with another firm or
person:
(1) directly or indirectly engage in any commercial
activity that competes with the Company's business,
as the Company has conducted it during the five years
before the Employee's employment with the Company
ends, (A) within any state in the United States, or
(B) within any country in which the Company directly
or indirectly markets or services products or
provides services or reasonably intends during such
period to market or service products or provide
services;
(2) in any way interfere or attempt to interfere with the
Company's relationships with any of its current or
potential customers; or
(3) employ or attempt to employ any of the Company's then
employees on behalf of any other entity competing
with the Company.
(b) He will, prior to accepting employment with any new employer,
inform that employer of this Agreement and provide that
employer with a copy of this Agreement.
(c) Nonsolicitation. The Employee further agrees that during his
employment and for a period of two years after his employment
with the Company ends, that he will not directly or
indirectly:
<PAGE>
(1) Induce any customers of Company to patronize any
similar business which competes with Company;
(2) canvas, solicit, or accept any similar business from
any customer of Company;
(3) request or advise any customers of Company to
withdraw, reduce, or cancel such customer's business
with Company;
(4) disclose to any other person, firm, partnership, or
corporation the names, addresses or telephone
numbers, or other protected information of any of the
customers of Company; or,
(5) induce, canvas, solicit, request or advise any
employees of Company, to accept employment with any
person, firm or business which competes with any
business of Company.
11) Conflicting Business. The Employee agrees that he will not transact
business with the Company personally, or as agent, owner, partner or shareholder
of any other entity; provided, however, that the Employee may enter into any
business transaction that is, in the opinion of the Board, reasonable, prudent
or necessary to the Company, so long as any such business transaction is at
arm's length as though between independent and prudent individuals.
12) No Adequate Remedy. The Employee understands that if he fails to
fulfill his obligations under this Agreement, the damages to the Company would
be very difficult to determine. Therefore, in addition to any other rights or
remedies available to the Company at law, in equity or by statute, the Employee
hereby consents to the specific enforcement by the Company of Sections 8, 9 and
10 of this Agreement through an injunction or restraining order issued by an
appropriate court. The Employee will also be reasonable for the Company's costs
and attorneys' fees incurred by the Company in enforcing any of the provisions
of this Agreement.
13) Indemnification. The Company shall indemnify the Employee for all
acts as an officer and director of the Company to the fullest extent permitted
by the Articles of Incorporation, the Bylaws of the Company and Minnesota law.
The Employee shall also be covered by the Company's directors' and officers'
insurance policy.
14) Miscellaneous.
(a) Successors and Assigns. Except as provided in the next
sentence, this Agreement may not be assigned without the
Employee's consent, which consent will not be unreasonably
withheld. In any event, the Company may assign this Agreement
without the consent of the Employee in connection with a
merger, consolidation, assignment, sale, or other disposition
of substantially all of its assets or business.
<PAGE>
(b) Modification. This Agreement may be modified or amended only
by a writing signed by each of the parties hereto.
(c) Governing Law. The laws of the State of Minnesota will govern
the validity, construction, and performance of this Agreement,
without regard to the conflict of laws provisions of any other
jurisdictions. Any legal proceeding related to this Agreement
will be brought in an appropriate Minnesota court, and each of
the parties hereto hereby consents to the exclusive
jurisdiction of that court for this purpose.
(d) Construction. Wherever possible, each provision of this
Agreement will be interpreted so that it is valid under
applicable law. If any provision of this Agreement is to any
extent invalid under applicable law in any jurisdiction, that
provision will still be effective to the extent it remains
valid. The remainder of this Agreement also will continue to
be valid, and the entire Agreement will continue to be valid
in other jurisdictions.
(e) Non-Waiver. No failure or delay by either the Company or the
Employee in exercising any right or remedy under this
Agreement will waive any provision of the Agreement. Nor will
any single or partial exercise by either the company or the
Employee of any right of remedy under this Agreement preclude
either of them from otherwise or further exercising these
rights or remedies, or any other rights or remedies granted by
any law or any related document.
(f) Counterparts. This Agreement may be executed in two or more
counterparts, each of which will constitute one and the same
instrument.
(g) Entire Agreement. This Agreement supersedes all previous and
contemporaneous oral negotiations, commitments, writings, and
understandings among the parties hereto concerning the matters
in this Agreement, including, without limitation, any policy
or personnel manuals of the Company or any of its subsidiaries
or affiliates.
(h) Notices. All notices and other communications required or
permitted under this Agreement will be in writing and hand
delivered or sent by registered first-class mail, postage
prepaid, and will be effective upon receipt if hand delivered,
and five (5) business days after mailing if sent by mail, to
the following addresses or such other addresses as either
party will have notified the other party:
If to the Company: LifeRate Systems, Inc.
7210 Metro Boulevard
Edina, Minnesota 55439
ATTN: Chairman of Board
If to the Employee: David J. Chinsky
<PAGE>
30979 County Ride Circle
Farmington Hills, MI 48331
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the date first above written.
LIFERATE SYSTEMS, INC.
By: /s/William W. Chorsky
---------------------------
Its: Chairman
/s/ David J. Chinsky
-------------------------------
David J. Chinsky
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment ("Amendment") is made and entered into effective as of
November 13, 1997, by and between LifeRate Systems, Inc., a Minnesota
corporation (the "Company"), and David J. Chinsky (the "Employee").
RECITALS
A. The Company and the Employee entered into an Employment Agreement,
dated as of August 18, 1997, (the "Employment Agreement"), pursuant to which the
Company has agreed to employ the Employee as its Chief Executive Officer and
President.
B. The Company intends to issue and sell an aggregate of approximately
9,000,000 shares of common stock ("Common Stock") at prices ranging from $.50 to
$.56 per share and warrants to purchase approximately 9,000,000 shares of Common
Stock (the "Financing") to certain investors, including Special Situations
Private Equity Fund, L.P., Special Situations Fund III, L.P. and Special
Situations Cayman Fund, L.P. (the "Investors"), which would result in a "Change
in Control" as defined in Section 6 of the Employment Agreement.
C. The Company desires to amend the Employment Agreement such that the
Financing would not result in a Change of Control under the Employment Agreement
or any stock option agreements between the Company and the Employee issued
pursuant to the Employment Agreement.
D. In order to facilitate the completion of the Financing, the Employee
has agreed to waive his right with respect to a portion of additional options
that he would otherwise be entitled to receive under the Employment Agreement as
result of the Financing.
E. The Employee is willing to enter into this Amendment in exchange for
adjustment to the exercise price of options to purchase shares of Common Stock
granted, or to be granted, by the Company to the Employee pursuant to the
Employment Agreement and the grant of additional options.
Accordingly, the parties, each intending to be legally bound, hereby
agree as follows:
1. Amendment to Exercise Price of Stock Options. Section 5(b) of the
Employment Agreement is hereby amended to the extent necessary to provide that
the exercise price of the options referred to therein, including any options
that the Company may be obligated to issue pursuant to the second and third
paragraphs thereof, shall be $0.50 per share.
2. Amendment of Definition of Change in Control. Section 6(b) of the
Employment Agreement is hereby amended in its entirety as follows:
(b) For purposes of this Section 6, the Incumbent Directors will mean
any individuals who are members of the Board immediately following the
first closing of the Financing (relating to 2,500,000 shares and
warrants to purchase 2,500,000
<PAGE>
shares), any individual who is elected to the Board pursuant to the
Securities Purchase Agreement pursuant to which the securities sold in
the Financing will be issued and any individual who subsequently
becomes a member of the Board whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at
least a majority of the Incumbent Directors then in office (either by
specific vote or by approval of the Company's proxy statement in which
such individual is named as a nominee for director without objection to
such nomination).
Section 6 of the Employment Agreement is hereby amended by adding the
following subsection (d) at the end thereof:
(d) Notwithstanding any other provision of this Agreement, if Special
Situations Private Equity Fund, L.P., Special Situations Fund III, L.P.
or Special Situations Cayman Fund, L.P. (collectively, "Special
Situations Fund") shall become, individually or collectively, in one or
more transactions, the "beneficial owner", of any of the Company's
securities, such ownership, regardless of the percentage of the
Company's combined voting power owner or controlled, shall not
constitute a "Change in Control", whether or not the issuance of such
securities by the Company to Special Situations Fund would be required
to be reported pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding any other provision of the Employment Agreement or this
Agreement, the election of directors pursuant to the Securities Purchase
Agreement pursuant to which securities will be sold in the Financing shall not
constitute a "Change in Control" under the Employment Agreement.
3. Stock Options. The Company and the Employee acknowledge and agree
that the Employee will be entitled to options to purchase an aggregate of
650,000 shares of Common Stock at a price of $.50 per share pursuant to Section
5(b) of the Employment Agreement following completion of the Financing, and the
Employee hereby waives his right to receive any additional options under the
Employment Agreement as a result of the Financing. At or before the closing of
the Financing, the Company and the Employee shall enter into a stock option
agreement, in the form attached hereto as Exhibit A, covering 650,000 shares of
Common Stock at a purchase price of $.50 per share, representing the aggregate
number of options to which the Employee will be entitled pursuant to Section
5(b) of the Employment Agreement following completion of the Financing.
4. Bonus. Section 5(c) of the Employment Agreement is amended to the
extent necessary to provide that, at the option of the Company, any bonus that
becomes due and payable under Section 5(c) of the Employment Agreement may be
paid in cash or shares of Common Stock having a fair market value, at the time
such bonus becomes due and payable, equal to the amount of such bonus, or any
combination of cash and shares of Common Stock. The Company shall pay the
Employee the $108,000 bonus payable pursuant to Section 5(d) of the Employment
Agreement within fifteen (15) days of the first closing of the Financing
(relating to 2,500,000
<PAGE>
shares and warrants to purchase 2,500,000 shares). Notwithstanding anything to
the contrary in this Section 4, the Employee acknowledges that if payment in
shares of Common Stock of any bonus payable under Section 5(c) of the Employment
Agreement would result in an adjustment in the exercise price or conversion
price of any option, warrant, convertible note or other security or right in
existence on the date of such payment, or would result in an adjustment in the
number of shares purchasable under such an option, warrant, convertible note or
other security or right, then such bonus shall be paid in cash.
5. No Other Amendment. Except as set forth herein, the Employment
Agreement shall remain in full force and effect in accordance with its original
terms.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Amendment as of the date first written above.
LIFERATE SYSTEMS, INC.
By: /s/ William W. Chorske
---------------------------
William W. Chorske
Chairman of the Board
/s/ David J. Chinksy
-------------------------------
David J. Chinsky
NON-STATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into and effective as of November 13, 1997
(the "Date of Grant"), by and between LifeRate Systems, Inc. (the "Company") and
David J. Chinsky (the "Optionee").
A. The Optionee has entered into an Employment Agreement with the
Company dated August 18, 1997, as amended on November 13, 1997 (as amended, the
"Employment Agreement"), pursuant to which the Optionee is employed by the
Company as President and Chief Executive Officer.
B. Pursuant to the Employment Agreement, the Company has agreed to
grant to the Optionee certain options to purchase shares of common stock, and
the Company desires to advance the interests of the Company by granting to the
Optionee an option to purchase shares of common stock of the Company.
C. The Company intends to issue and sell an aggregate of
approximately 9,000,000 shares of common stock ("Common Stock") at prices
ranging from $.50 to $.56 per share and warrants to purchase approximately
9,000,000 shares of Common Stock (the "Financing") to certain investors,
including Special Situations Private Equity Fund, L.P., Special Situations Fund
III, L.P. and Special Situations Cayman Fund, L.P. Upon completion of the
Financing, the Optionee will become entitled to certain options under the second
and third paragraphs of Section 5(b) of the Employment Agreement.
D. Although the option being granted pursuant to this Agreement is
not being granted under any formal stock option plan of the Company, capitalized
terms that are not defined herein shall have the meaning set forth in the
Employment Agreement or the Company's 1993 Stock Option Plan (the "Plan"), as
the case may be, as such agreement or plan may be amended from time to time.
Accordingly, the parties hereby agree as follows:
ARTICLE
1.
GRANT OF OPTION
The Company hereby grants to the Optionee the right, privilege, and
option (the "Option") to purchase Six Hundred Fifty Thousand (650,000) shares
(the "Option Shares") of the Company's common stock (the "Common Stock"),
according to the terms and subject to the conditions set forth in this
Agreement. The Option is not intended to be an "incentive stock option," as that
term is used in Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
<PAGE>
ARTICLE
2.
OPTION EXERCISE PRICE
The per share price to be paid by Optionee in the event of an exercise
of the Option shall be $0.50.
ARTICLE
3.
DURATION OF OPTION AND TIME OF EXERCISE
3.1. Initial Period of Exercisability. Subject to Section 3.4, the
Option shall become exercisable with respect to the Option Shares in three
installments. Subject to Section 3.4, the rights to exercise this Option shall
be cumulative with respect to the Option Shares becoming exercisable on each
such date but in no event shall this Option be exercisable after, and this
Option shall become void and expire as to each installment of unexercised Option
Shares at, 5:00 p.m. (Minneapolis, Minnesota time) on the following dates (the
"Time of Termination"). The following table sets forth, subject to Section 3.4,
the initial dates of exercisability of each installment, the number of Option
Shares as to which this Option shall become exercisable on such dates and the
Time of Termination of each installment of Option Shares:
Initial Date of Number of Option Shares
Exercisability Available for Exercise Time of Termination
-------------- ---------------------- -------------------
August 26, 1998 216,666 August 26, 2003
August 26, 1999 216,667 August 26, 2004
August 26, 2000 216,667 August 26, 2005
3.2. Termination of Employment or Other Service.
(a) In the event that the Optionee's employment or other
service with the Company and all Subsidiaries (as defined in the Plan)
is terminated by reason of the Optionee's death, Total Disability (as
defined in the Employment Agreement) or Retirement (as defined in the
Plan), this Option shall remain exercisable to the extent exercisable
as of such termination for a period of one year after such termination
in the case of death or Total Disability or January 31, 2000, whichever
is later, and three months in the case of Retirement or January 31,
2000, whichever is later (but in no event after the Time of
Termination).
(b) In the event the Optionee's employment or other service
with the Company and all Subsidiaries is terminated for any reason
other than death, Total Disability or Retirement, all rights of the
Optionee under this Agreement shall immediately terminate without
notice of any kind, and this Option shall no longer be exercisable;
provided, however, that if such termination is due to any reason other
than termination by the Company or any Subsidiary "for cause" (as
defined in the Employment Agreement), this Option shall remain
exercisable to the extent exercisable
<PAGE>
as of such termination for a period of thirty (30) days or January 31,
2000, whichever is later (but in no event after the Time of
Termination).
(c) Notwithstanding anything in this Agreement to the
contrary, in the event that the Optionee materially breaches the terms
of Sections 9 or 10 of the Employment Agreement, whether such breach
occurs before or after termination of the Optionee's employment or
other service with the Company or any Subsidiary, the Committee in its
sole discretion may immediately terminate all rights of the Optionee
under this Agreement without notice of any kind.
3.3. Change in Control.
(a) For purposes of this Section 3.3, the term "Change in
Control" shall have the meaning set forth in Section 6 of the
Employment Agreement, as may be amended from time to time, whether
before or after the date hereof.
(b) If any events constituting a Change in Control of the
Company shall occur, then this Option shall become immediately
exercisable in full until the Time of Termination, whether or not the
Optionee remains in the employ or service of the Company or any
Subsidiary. In addition, if a Change in Control of the Company shall
occur, the Committee, in its sole discretion, and without the consent
of the Optionee, may determine that the Optionee shall receive, with
respect to some or all of the Option Shares, as of the effective date
of any such Change in Control of the Company, cash in an amount equal
to the excess of the Fair Market Value (as defined in the Plan) of such
Option Shares immediately prior to the effective date of such Change in
Control of the Company over the option exercise price per share of this
Option.
(c) Notwithstanding anything in this Section 3.3 to the
contrary, if, with respect to the Optionee, acceleration of the
exercisability of this Option or the payment of cash in exchange for
all or part of this Option as provided above (which acceleration or
payment could be deemed a payment within the meaning of Section
280G(b)(2) of the Code), together with any other payments which the
Optionee has the right to receive from the Company or any corporation
which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of
which the Company is a member, would constitute a "parachute payment"
(as defined in Section 280G(b)(2) of the Code), then the acceleration
of exercisability and the payments to the Optionee as set forth herein
shall be reduced to the largest amount as, in the sole judgment of the
Committee, will result in no portion of such payments being subject to
the excise tax imposed by Section 4999 of the Code; provided, that such
reduction shall be made only if the aggregate amount of the payments
after such reduction exceeds the difference between (A) the amount of
such payments absent such reduction minus (B) the aggregate amount of
the excise tax imposed under section 4999 of the Code attributable to
any such excess parachute payments arising in connection with such
Change in Control. The determination as to whether any such decrease in
the payments to be made in connection with this Agreement is necessary
must be made in good faith by legal counsel or
<PAGE>
a certified public accountant selected by the Company and reasonably
acceptable to the Optionee, and such determination will be conclusive
and binding. In the event that a reduction is necessary, the Optionee
will have the right to designate the particular payments or benefits
that are to be reduced or eliminated so that no portion of the payments
or benefits to be made or provided to the Optionee will be excess
parachute payments subject to the excise tax under Code section 4999.
3.4. Cancellation of Option. This Option shall become exercisable if,
and only if, the first closing of the Financing (relating to approximately
2,500,000 shares and warrants to purchase approximately 2,500,000 shares) (the
"First Closing") is completed by December 31, 1997. If the first closing of the
Financing is not completed by such date, this Option shall become null and void,
the Optionee shall not have any right to purchase any shares of Common Stock
hereunder, and the Prior Option Agreements, as defined below, shall remain in
full force and effect.
ARTICLE
4.
MANNER OF OPTION EXERCISE
4.1. Notice. This Option may be exercised by the Optionee in whole or
in part from time to time, subject to the conditions contained herein, by
delivery, in person or by registered mail, to the Company at its principal
executive office in Edina, Minnesota (Attention: Chief Financial Officer), of a
written notice of exercise. Such notice shall be in a form satisfactory to the
Committee, shall identify the Option, shall specify the number of Option Shares
with respect to which the Option is being exercised, and shall be signed by the
person or persons so exercising the Option. Such notice shall be accompanied by
payment in full of the total purchase price of the Option Shares purchased. In
the event that the Option is being exercised by any person or persons other than
the Optionee (such as by the Optionee's heir(s) or legal representative(s), in
the event of death or disability of Optionee), the notice shall be accompanied
by appropriate proof of right of such person or persons to exercise the Option.
As soon as practicable after the effective exercise of the Option, the Optionee
shall be recorded on the stock transfer books of the Company as the owner of the
Option Shares purchased, and the Company shall deliver to the Optionee one or
more duly issued stock certificates evidencing such ownership.
4.2. Payment. At the time of exercise of this Option, the Optionee
shall pay the total purchase price of the Option Shares to be purchased solely
in cash (including a personal check or a certified or bank cashier's check,
payable to the order of the Company); provided, however, that the Committee, in
its sole discretion, may allow such payments to be made, in whole or in part, by
delivery of a Broker Exercise Notice or a promissory note (containing such terms
and conditions as the Committee may in its discretion determine), by transfer
from the Optionee to the Company of Previously Acquired Shares, or by a
combination thereof. For purposes of this Agreement, the terms "Broker Exercise
Notice" and "Previously Acquired Shares" shall have the meanings set forth in
the Plan. In the event the Optionee is permitted to pay the total purchase price
of this Option in whole or in part with Previously Acquired Shares, the value of
such shares shall be equal to their Fair Market Value on the date of exercise of
this Option.
<PAGE>
4.3. Investment Purpose. The Company shall not be required to issue or
deliver any shares of Common Stock under this Option unless (1)(a) such shares
are covered by an effective and current registration statement under the
Securities Act of 1933 and applicable state securities laws or (b) if the
Committee has determined not to so register such shares, exemptions from
registration under the Securities Act of 1933 and applicable state securities
laws are available for such issuance (as determined by counsel to the Company)
and the Company has received from the Optionee (or, in the event of death or
disability, the Optionee's heir(s) or legal representative(s)) any
representations or agreements requested by the Company in order to permit such
issuance to be made pursuant to such exemptions, and (2) the Company has
obtained any other consent, approval or permit from any state or federal
governmental agency which the Committee shall, in its sole discretion upon the
advice of counsel, deem necessary or advisable. In the event that, at the time
of the attempted exercise of this Option, any of these conditions to the
issuance of a certificate for shares of Common Stock have not been satisfied,
such exercise shall be deemed withdrawn and the Company shall return any
payments made with respect thereto unless the Optionee, within 15 days after
being informed of the nonsatisfaction of such conditions, gives the Company
written notice that he or she wants such exercise to remain suspended (in which
event such exercise shall be deemed to be effective on the earliest date upon
which such conditions have been satisfied). Unless a registration statement
under the Securities Act of 1933 is in effect with respect to the issuance or
transfer of Option Shares, each certificate representing any such shares shall
be restricted by the Company as to transfer unless the Company receives an
opinion of counsel satisfactory to the Company to the effect that registration
under the Securities Act of 1933 and applicable state securities laws is not
required with respect to such transfer.
ARTICLE
5.
NONTRANSFERABILITY
Other than pursuant to a qualified domestic relations order (as defined
in the Code), no right or interest of the Optionee in this Option prior to the
exercise of such Option shall be assignable or transferable, or subjected to any
lien, during the lifetime of the Optionee, either voluntarily or involuntarily,
directly or indirectly, by operation of law or otherwise, including execution,
levy, garnishment, attachment, pledge, divorce or bankruptcy. The Optionee
shall, however, be entitled to designate a beneficiary to receive the Option
upon such Optionee's death. In the event of the Optionee's death, such
Optionee's rights and interest in the Option shall be transferable by
testamentary will or the laws of descent and distribution, and exercise of the
Option may be made by the Optionee's legal representatives, heirs or legatees.
Any attempt to transfer or encumber this Option other than in accordance with
this Agreement shall be null and void and shall void this Option.
<PAGE>
ARTICLE
6.
LIMITATION OF LIABILITY
Nothing in this Agreement shall be construed to (a) limit in any way
the right of the Company to terminate the employment or service of the Optionee
at any time, or (b) be evidence of any agreement or understanding, express or
implied, that the Company will retain the Optionee in any particular position,
at any particular rate of compensation or for any particular period of time.
ARTICLE
7.
WITHHOLDING TAXES
The Company is entitled to (a) withhold and deduct from future wages of
the Optionee (or from other amounts which may be due and owing to the Optionee
from the Company), or make other arrangements for the collection of, all legally
required amounts necessary to satisfy any federal, state or local withholding
and employment-related tax requirements attributable to the grant or exercise of
this Option or otherwise incurred with respect to this Option, or (b) require
the Optionee promptly to remit the amount of such withholding to the Company
before acting on the Optionee's notice of exercise of this Option. In the event
that the Company is unable to withhold such amounts, for whatever reason, the
Optionee hereby agrees to pay to the Company an amount equal to the amount the
Company would otherwise be required to withhold under federal, state or local
law.
ARTICLE
8.
ADJUSTMENTS
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, extraordinary dividend or divestiture
(including a spin-off) or any other change in the corporate structure or shares
of the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the surviving
corporation), in order to prevent dilution or enlargement of the rights of the
Optionee, shall make appropriate adjustment (which determination shall be
conclusive) as to the number, kind and exercise price of securities subject to
this Option.
ARTICLE
9.
MISCELLANEOUS
9.1. Binding Effect. This Agreement shall be binding upon the heirs,
executors, administrators and successors of the parties hereto.
<PAGE>
9.2. Governing Law. This Agreement and all rights and obligations
hereunder shall be governed by the laws of the State of Minnesota.
9.3. Entire Agreement. This Agreement and the Employment Agreement set
forth the entire agreement and understanding of the parties hereto with respect
to the grant and exercise of this Option and supersede all prior agreements,
arrangements, plans and understandings relating to the grant and exercise of
options to purchase shares of Common Stock. The Non-Statutory Stock Option
Agreements, dated August 26, 1997, between the Company and the Optionee,
covering 200,000 and 100,000 shares, respectively (the "Prior Option
Agreements"), shall be canceled effective upon completion of the First Closing,
provided that such First Closing occurs by December 31, 1997. The Company and
the Optionee acknowledge that this Option satisfies the Company's obligation to
issue options under the second and third paragraphs of Section 5(b) of the
Employment Agreement as a result of the Financing.
9.4. Amendment and Waiver. This Agreement may be amended, waived,
modified or canceled only by a written instrument executed by the parties hereto
or, in the case of a waiver, by the party waiving compliance.
9.5. Registration. The Company shall cause the Option Shares to be
registered under the Securities Act of 1933 on a Registration Statement on Form
S-8 (or any successor form); provided that the Company shall not be required to
file such Form S-8 prior to January 1, 2000.
The parties hereto have executed this Agreement effective the day and
year first above written.
LIFERATE SYSTEMS, INC.
By /s/ William W. Chorske
------------------------
Its Chairman of the Board
------------------------
[By execution hereof, the Optionee
acknowledges having receive a copy
of the Plan.] /s/ David J. Chinsky
----------------------------
David J. Chinsky
