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PhotoWorks, INC.
SERIES A PREFERRED STOCK AND
WARRANT PURCHASE AGREEMENT
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TABLE OF CONTENTS
1. Purchase and Sale of Series A Preferred Stock and Issuance of Warrants...1
1.1 Issuance of Series A Preferred Stock and Warrants...............1
1.2 Closing.........................................................1
2. Definitions..............................................................2
2.1 Commission......................................................2
2.2 Intellectual Property...........................................2
2.3 Incentive Plans.................................................2
2.4 Material Adverse Event..........................................2
2.5 Material Contracts..............................................2
2.6 Rights Agreement................................................3
2.7 Schedule of Exceptions..........................................3
2.8 Securities Act..................................................3
2.9 SEC Reports.....................................................3
2.10 Subsidiary......................................................3
2.11 Transactional Agreements........................................3
3. Representations and Warranties of the Company to Investors...............3
3.1 Corporate Organization and Authority............................3
3.2 Capitalization..................................................3
3.3 Subsidiaries....................................................4
3.4 Corporate Power.................................................4
3.5 Financial Statements............................................5
3.6 Authorization...................................................5
3.7 Validity of Shares..............................................5
3.8 Changes in Condition............................................6
3.9 Litigation......................................................6
3.10 Patents and Other Proprietary Rights............................7
3.11 Taxes...........................................................8
3.12 Company's Contracts.............................................8
3.13 Compliance With Other Agreements................................9
3.14 Employees.......................................................9
3.15 Transactions with Affiliates...................................10
3.16 Governmental and Third Party Consents..........................10
3.17 Compliance with Laws; Permits..................................10
3.18 Registration Rights............................................11
3.19 Offering Valid.................................................11
3.20 Brokers and Finders............................................11
3.21 SEC Reports....................................................11
3.22 Environmental..................................................11
3.23 Properties.....................................................12
4. Representations and Warranties of the Investors.........................12
4.1 Authorization..................................................12
4.2 Investment.....................................................12
4.3 No Public Market...............................................12
4.4 Limitations on Transferability.................................13
4.5 Experience; Receipt of Information.............................13
4.6 Accredited Investor............................................14
4.7 Confidentiality................................................14
4.8 Brokers and Finders............................................14
5. Legends.................................................................15
6. Conditions of Investors'Obligations at Closing..........................15
6.1 Representations and Warranties.................................15
6.2 Performance....................................................15
6.3 Proceedings Satisfactory; Compliance Certificate...............16
6.4 Rights Agreement...............................................16
6.5 Articles of Amendment..........................................16
6.6 Opinion of the Company's Counsel...............................16
6.7 Approvals and Consents.........................................16
6.8 Agreement as to Registration Rights............................16
7. Conditions of the Company's Obligations at Closing......................16
7.1 Representations and Warranties.................................16
7.2 Payment of Purchase Price......................................17
7.3 Articles of Amendment..........................................17
7.4 Rights Agreement...............................................17
8. Covenants of the Company................................................17
8.1 Use of Proceeds................................................17
8.2 Management.....................................................17
9. Miscellaneous...........................................................17
9.1 Governing Law..................................................17
9.2 Counterparts...................................................17
9.3 Headings.......................................................17
9.4 Notices........................................................17
9.5 Amendment of Agreement.........................................18
9.6 Expenses.......................................................18
9.7 Entire Agreement; Successors and Assigns.......................18
9.8 Severability...................................................18
PHOTOWORKS, INC.
SERIES A PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (the
"Agreement") is made as of January 31, 2000, by and among PhotoWorks, Inc.
(f/k/a Seattle FilmWorks, Inc.), a Washington corporation (the "Company"), and
the entities listed on the attached Exhibit A who become signatories to this
Agreement (collectively, the "Investors").
RECITALS
A. The Board of Directors of the Company has adopted the Articles of
Amendment (the "Articles of Amendment") in the form attached hereto as Exhibit B
which, among other matters, establish the rights, preferences, and privileges of
the Company's $0.01 par value Series A Preferred Stock (the "Series A Preferred
Stock").
B. The Company desires to sell up to 15,000 shares of Series A Preferred
Stock to the Investors and to issue warrants to purchase up to 789,474 shares of
the Company's $0.01 par value Common Stock at an exercise price of $6.00 per
share, substantially in the form of Exhibit C attached hereto (the "Warrants")
to the Investors, and the Investors desire to purchase up to 15,000 shares of
Series A Preferred Stock from the Company and be issued the Warrants, subject to
the terms and conditions set forth in this Agreement.
THE PARTIES AGREE AS FOLLOWS:
1. Purchase and Sale of Series A Preferred Stock and Issuance of
Warrants.
1.1 Issuance of Series A Preferred Stock and Warrants. Subject to the
terms and conditions of this Agreement, the Company shall issue and sell to the
Investors and the Investors shall purchase from the Company, a total of up to
15,000 shares of Series A Preferred Stock (the "Shares") and Warrants to
purchase up to a total of 789,474 shares of Common Stock (the "Warrant Shares"),
at the purchase price of $1,000 per unit. The number of Shares, the number of
Warrant Shares issuable upon exercise of the Warrant to be purchased by each
Investor is set forth opposite the name of each Investor on Exhibit A.
1.2 Closing. The closing of the purchase and sale of the Shares and
Warrants shall take place at the offices of ▇▇▇▇▇▇ ▇▇▇▇▇▇ White & ▇▇▇▇▇▇▇▇▇,
6100 Columbia Center, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇, on February 14,
2000, at 3:00 p.m. local time (the "Closing") or at such other place and time as
the Company and the Investors may agree. At the Closing, each Investor shall
purchase that number of Shares and a Warrant for that number of Warrant Shares
designated opposite such Investor's name on Exhibit A in exchange for the total
purchase price set forth on Exhibit A. At the Closing, the Company will deliver
to each Investor a certificate representing the Shares and a Warrant for the
number of Warrant Shares which that Investor is obtaining against delivery to
the Company by such Investor at the Closing of (a) an executed counterpart of
this Agreement, and (b) the issue price of such Shares and Warrants as set forth
on Exhibit A by wire transfer or by a check payable to the Company. The date on
which the Closing occurs is referred to herein as the "Closing Date."
2. Definitions. For purposes of this Agreement the following terms shall
have the following meanings:
2.1 "Commission" shall mean the Securities and Exchange Commission.
2.2 "Intellectual Property" shall mean patents, patent applications,
trademarks, service marks, mask works, trade names, copyrights, trade secrets,
information, proprietary rights and processes.
2.3 "Incentive Plans" shall mean collectively the Incentive Stock Option
Plan as amended and restated as of April 1, 1996, the 1987 Stock Option Plan, as
amended and restated as of April 1, 1996, the 1993 Employee Stock Purchase Plan,
as amended and restated as of May 31, 1995, the 1999 Employee Stock Option Plan
dated October 20, 1999 and the 1999 Stock Incentive Compensation Plan, approved
by the Company's board of directors on November 23, 1999.
2.4 "Material Adverse Event" shall mean any change, event or effect that is
materially adverse to the general affairs, business, operations, assets,
condition (financial or otherwise) or results of operations of the Company and
its Subsidiaries taken as a whole; provided, however, that the following shall
not be taken into account in determining a "Material Adverse Event": (a) any
adverse change, event or effect that is directly attributable to conditions
affecting the United States economy generally unless such conditions adversely
affect such party in a materially disproportionate manner, and (b) any adverse
change, event or effect that is directly attributable to conditions affecting
the Company's industry generally, unless such conditions adversely affect such
party in a materially disproportionate manner.
2.5 "Material Contracts" shall have the meaning ascribed to such term in
Section 3.12.
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2.6 "Rights Agreement" shall mean the Investor Rights Agreement in
substantially the form attached as Exhibit 6.4 hereto.
2.7 "Schedule of Exceptions" shall mean the schedule of exceptions to the
representations and warranties of the Company in Section 3. The Schedule of
Exceptions is attached as Exhibit 3 hereto.
2.8 "Securities Act" shall mean the Securities Act of 1933, as amended and
the rules and regulations of the Commission promulgated thereunder.
2.9 "SEC Reports" shall have the meaning ascribed to such term in Section
3.21.
2.10 "Subsidiary" shall mean any corporation, partnership or other entity
more than 50% of whose equity interests (measured by virtue of voting rights) in
the aggregate is owned by the Company.
2.11 "Transactional Agreements" shall mean this Agreement and the Rights
Agreement.
3. Representations and Warranties of the Company to Investors. Except as
set forth in the Schedule of Exceptions, the Company hereby represents and
warrants to each Investor that:
3.1 Corporate Organization and Authority. The Company:
(a) is a corporation duly organized and validly existing under the laws of
the State of Washington;
(b) has the corporate power and corporate authority to own and operate its
properties and to carry on its business as now conducted and as currently
proposed to be conducted; and
(c) is qualified as a foreign corporation in all jurisdictions in which
such qualification is required, other than those jurisdictions in which its
failure to so qualify would not constitute a Material Adverse Event.
3.2 Capitalization. The authorized capital of the Company consists of:
(a) Preferred Stock. 2,000,000 shares of Preferred Stock, $0.01 par value,
of which 105,000 shares have been designated Series RP Preferred Stock (none of
which are outstanding) and 15,000 shares will be designated as Series A
Preferred Stock upon filing of the Articles of Amendment, (none of which will be
issued or outstanding prior to the Closing).
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(b) Common Stock. 101,250,000 shares of Common Stock, $0.01 par value, of
which 16,347,890 shares are duly and validly issued (including, without
limitation, issued in compliance with applicable federal and state securities
laws), fully paid, and nonassessable.
(c) Other Securities. The Company has reserved: (a) 15,000 shares of
Series A Preferred Stock for issuance pursuant to the terms of this Agreement;
(b) 3,157,895 shares of Common Stock for issuance upon conversion of the
Series A Preferred Stock; (c) 105,000 shares of Series RP Preferred Stock,
(d) 789,474 shares of Common Stock for issuance upon exercise of the Warrants;
and (e) 2,953,187 shares of Common Stock for issuance under the Company's
Incentive Plans. Except for (i) the conversion privileges of the Series A
Preferred Stock to be issued under this Agreement, (ii) the Warrants to be
issued under this Agreement, (iii) the options and other rights granted under
the Company's Incentive Plans, and (iv) the preferred share purchase rights
issued as a dividend on the Company's Common Stock, there are no outstanding
rights of first refusal, preemptive rights or other rights, warrants, options,
conversion privileges, subscriptions, or other rights or agreements, either
directly or indirectly, to purchase or otherwise acquire or issue any equity
securities of the Company.
3.3 Subsidiaries. The Company does not presently own, have any investment
in, or control, directly or indirectly, any Subsidiaries, other than Seattle
FilmWorks Manufacturing Company, OptiColor, Inc. and FilmWorks Express Inc. Each
of the Subsidiaries:
(a) is duly organized, validly existing and in good standing in the state
of its incorporation;
(b) has the corporate power and corporate authority to own and operate its
properties and to carry on its business as now conducted and as currently
proposed to be conducted; and
(c) is qualified as a foreign corporation in all jurisdictions in which
such qualification is required, other than those jurisdictions in which its
failure to qualify would not constitute a Material Adverse Event.
3.4 Corporate Power. The Company will have at the Closing Date all
requisite legal and corporate power and authority to execute and deliver the
Transactional Agreements, to sell and issue the Shares hereunder, to issue the
Common Stock issuable upon conversion of the Shares (the "Conversion Shares"),
to issue and sell the Warrants hereunder, to issue the Warrant Shares upon
exercise of the Warrants, and to carry out and perform its obligations under the
terms of the Transactional Agreements.
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3.5 Financial Statements. The financial statements of the Company as of and
for the period ended September 25, 1999 and the unaudited balance sheet of the
Company as of December 25, 1999 and the unaudited statement of operations for
the three-month period then ended (which have been provided to the Investors)
are complete and correct in all material respects, have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and fairly present the Company's
financial position as of those dates and the results of operations and changes
in its financial position for such periods then ended; provided however, that
the unaudited financial statements are subject to normal recurring year-end
adjustments (which are not expected to be material), and do not contain all
footnotes required under generally accepted accounting principles. Except as set
forth in the unaudited balance sheet of the Company as of December 25, 1999, the
Company has no material liabilities except for current liabilities incurred in
the ordinary course of business subsequent to December 25, 1999 which are not,
either individually or in the aggregate, materially adverse to the Company. The
Company has no material contingent obligations which are not disclosed in the
SEC Reports.
3.6 Authorization. All corporate action on the part of the Company, its
officers and directors necessary for the authorization, execution, delivery, and
performance of all obligations under the Transactional Agreements, and for the
authorization, issuance, and delivery of the Shares, the Conversion Shares, the
Warrants and the Warrant Shares has been taken. The Transactional Agreements
constitute legally binding and valid obligations of the Company enforceable in
accordance with their respective terms, except to the extent that such
enforcement may be subject to applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium, fraudulent conveyance or other laws or court decisions
relating to or affecting the rights of creditors generally, and such enforcement
may be limited by equitable principles of general applicability.
3.7 Validity of Shares. The Shares, when issued, sold, and delivered in
accordance with the terms and for the consideration expressed in this Agreement,
will be duly and validly issued (including, without limitation, issued in
compliance with applicable federal and state securities laws) and
non-assessable. The Conversion Shares and Warrant Shares have been duly and
validly reserved and, assuming the Conversion Shares are issued in accordance
with the Articles of Amendment and the Warrant Shares are issued in accordance
with the terms of the Warrants, will be duly and validly issued (including,
without limitation, issued in compliance with all applicable federal and state
securities laws) and non-assessable and will be free of any liens or
encumbrances other than any liens or encumbrances created by or imposed thereon
by the holders; provided, however, that the Shares, Conversion Shares, Warrants
and Warrant Shares shall be subject to restrictions on transfer under state
and/or federal securities laws. The Shares, Conversion Shares, Warrants and
Warrant Shares are not subject to any preemptive rights or rights of first
refusal, except as otherwise so agreed to by the holders thereof.
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3.8 Changes in Condition. Except as specifically set forth in this
Agreement or in the SEC Reports, since September 25, 1999, (a) the Company has
not entered into any transaction which was not in the ordinary course of
business, (b) there has been no Material Adverse Event, (c) the Company has not
incurred any material tax liability, (d) there has been no resignation or
termination of employment of any executive officer or key employee of the
Company and the Company does not know of any impending resignation or
termination of employment of any such officer or key employee, (e) there has
been no labor dispute involving the Company or any of its respective employees
and, to the Company's knowledge, none is pending or threatened, (f) there has
been no waiver by the Company of a valuable right or of a debt owing to the
Company, (g) there has not been any satisfaction or discharge of any material
lien, claim or encumbrance or any payment of any material obligation by the
Company except in the ordinary course of business, (h) there has been no direct
or indirect loans made by the Company to any shareholder, employee, officer or
director of the Company, other than advances made in the ordinary course of
business, (i) there has been no material change in any compensation arrangement
or agreement with any executive officer, director, key employee or shareholder,
(j) the Company has not declared or paid any dividend or other distribution of
assets of the Company, (k) there has not been any sale, assignment or transfer
of any Intellectual Property other than in the ordinary course of business,
(l) the Company has not incurred, assumed or guaranteed any debt, obligation or
liability except for immaterial amounts and for current liabilities incurred in
the ordinary course of business, and (m) there has not been any change in a
Material Contract to which the Company is a party or by which it is bound which
would result in a Material Adverse Event.
3.9 Litigation. There is no action, proceeding, or, to the Company's
knowledge, investigation pending or threatened, or any basis therefor known to
the Company, that questions the validity of the Transactional Agreements or the
right of the Company to enter into the Transactional Agreements or to consummate
the transactions contemplated thereby or that would result, either individually
or in the aggregate, in any Material Adverse Event. There is no judgment,
decree, or order of any court in effect against the Company and the Company is
not in default with respect to any order of any governmental authority to which
the Company is a party or by which it is bound. There is no action, suit,
proceeding, or investigation by the Company currently pending or which the
Company presently intends to initiate.
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3.10 Patents and Other Proprietary Rights.
(a) To the Company s knowledge the Company has sufficient title and
ownership of or sufficient right to use all Intellectual Property necessary for
its business as now conducted, and believes it can obtain, on commercially
reasonable terms, any additional rights necessary for its business as
contemplated at the Closing.
(b) No claims have been asserted by any person with respect to the validity
of the Company's ownership or right to use the Intellectual Property.
(c) The Company does not have any knowledge of, and the Company has not
given or received any notice of, any pending conflicts with or infringement of
the rights of others with respect to any Intellectual Property or with respect
to any license of Intellectual Property which are material to the business of
the Company.
(d) No action, suit, arbitration, or legal, administrative or other
proceeding, or investigation is pending, or, to the best knowledge of the
Company, threatened, which involves any Intellectual Property and the Company is
not subject to any judgment, order, writ, injunction or decree of any court or
any Federal, state, local, foreign or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or any
arbitrator, and has not entered into or is not a party to any contract which
restricts or impairs the use of any such Intellectual Property in a manner which
would result in Material Adverse Event.
(e) The Company has not entered into any consent, indemnification,
forbearance to ▇▇▇ or settlement agreement with respect to Intellectual Property
other than in the ordinary course of business or which does not restrict its
business as presently proposed to be conducted.
(f) The Company is not aware that any of its employees is obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would conflict with the Company's business as
proposed to be conducted.
(g) The Company has not received any communications alleging that the
Company or its employees has violated or infringed any of the patents,
trademarks, service marks, trade names, copyrights, or trade secrets, or any
proprietary rights of any other person or entity.
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(h) The Company has taken reasonable measures to protect the value (and, to
the extent applicable, the confidentiality and security) of all Intellectual
Property used in its products, services and business. The Company has taken
reasonable steps to ensure that employees and consultants who, either alone or
in concert with others, developed, invented, discovered, derived, programmed or
designed Intellectual Property, or who have knowledge of or access to
information about Intellectual Property, have entered into an Employee
Confidentiality, Inventions, and Non-Competition Agreement, substantially in the
form of Exhibit 3.10 to this Agreement.
(i) The Company has reviewed its operations to evaluate the extent to which
the business or operations of the Company will be affected by the Year 2000
Problem (as defined below). As a result of such review, the Company has not
noted any material Year 2000 Problems which would prevent its products and
systems from being capable of correctly interpreting dates beyond the year 1999.
Based on the Company's testing to date, the Company has no reason to believe
that Year 2000 Problems caused by its own products or internal operations would
have a Material Adverse Event. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000.
3.11 Taxes.
(a) (i) All federal, state, local, and foreign tax returns required to be
filed by the Company have been filed and are true in all material respects and
(ii) (A) all taxes, assessments, fees, and other governmental charges upon the
Company, or upon any of its properties, income, or franchises, shown in such
returns to be due and payable, (B) any assessments imposed, and (C) to the
Company's knowledge, all other taxes due and payable by the Company, have been
paid or will be paid prior to the time they become delinquent, except for such
failures to file or to pay as would not in the aggregate constitute a Material
Adverse Event.
(b) The Company has not been advised (i) that any of its tax returns have
been or are being audited as of the date hereof or (ii) of any deficiency in
assessment related to its federal, state or other taxes. The Company has no
knowledge of any liability for any tax to be imposed upon its properties or
assets as of the date of this Agreement that is not adequately provided for.
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3.12 Company's Contracts.
(a) Legality of Contracts. Except as disclosed in the SEC Reports, the
Company is not a party to or bound by any contract, commitment or understanding
which (i) is a material contract (as defined in Item 601(b)(10) of Regulation
S-K of the Commission) which is to be performed after the date of this
Agreement, (ii) involves a license or grant of rights to or from the Company
involving Intellectual Property applicable to the business of the Company,
(iii) contains provisions restricting the development, manufacture or
distribution of the Company's products or services, or (iv) provides
indemnification by the Company with respect to infringements of proprietary
rights to which the Company or any Subsidiary is a party (collectively "Material
Contracts"). All such contracts and agreements are legally binding, valid, and
in full force and effect in all material respects.
(b) Dividends; Indebtedness. Except as disclosed in the SEC Reports, the
Company has not (i) incurred any indebtedness for money borrowed in excess of
$1,000,000 (either individually or in the aggregate), (ii) made any loans or
advances to any person, other than ordinary advances for travel expenses,
(iii) sold, exchanged or otherwise disposed of any of its assets or rights or
entered into any agreement or arrangement with respect thereto, other than the
sale of its inventory in the ordinary course of business, or (iv) declared or
paid any dividends, or authorized any distribution upon or with respect to any
class or series of its capital stock.
3.13 Compliance With Other Agreements. The Company is not in violation of
(i) any term or provision of its articles of incorporation or bylaws, each as in
effect as of the Closing, (ii) any material term or provision of any Material
Contract (iii) to the Company's knowledge, any decree, order, statute, rule or
regulation applicable to the Company, in each case, or in the aggregate, the
violation of which would constitute a Material Adverse Event. The execution,
delivery and performance of the Transactional Agreements by the Company will not
result in any violation of, be in conflict with, or constitute a default under,
with or without the passage of time or the giving of notice:
(a) any provision of the Company's articles of incorporation or bylaws;
(b) any provision of any judgment, decree or order to which the Company is
a party or by which it is bound;
(c) any Material Contract to which the Company is a party or by which it is
bound; or
(d) to the Company's knowledge, any statute, rule or governmental
regulation applicable to the Company.
3.14 Employees. The Company believes its relations with its employees are
satisfactory. The Company's employees are not represented by any labor unions
nor, to the Company's knowledge, is any union organization campaign in progress.
The Company is not aware that any of its executive officers or key employees
intends to terminate employment nor does the Company have any present intention
to terminate the employment of any thereof.
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3.15 Transactions with Affiliates. Except as disclosed in the SEC Reports,
no employee, officer, or director of the Company or member of his or her
immediate family is indebted to the Company, nor is the Company indebted (or
committed to make loans or extend or guarantee credit) to any of them other than
(i) for payment of salary and services rendered, (ii) reimbursement for
reasonable expenses incurred on behalf of the Company, and (iii) for other
standard employee benefits made generally available to all employees (including
stock option agreements outstanding under any Incentive Plans). To the Company's
knowledge, none of such persons has any direct or indirect ownership interest in
any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation that competes
with the Company, except that employees, officers, or directors of the Company
and members of their immediate families may own stock in publicly traded
companies that may compete with the Company. No member of the immediate family
of any officer or director of the Company is directly or indirectly interested
in any Material Contract with the Company. Except for agreements between the
Company and its employees pertaining to the terms of their employment or the
purchase of shares of Common Stock under the Incentive Plans, there are no
agreements, understandings or proposed transactions between the Company and any
of its officers, directors or affiliates.
3.16 Governmental and Third Party Consents. Subject to the accuracy of the
Investors' representations in Section 4 of this Agreement, no consent, approval,
order, or authorization of, or registration, qualification, designation,
declaration, or filing with, any federal, state, local, or provincial
governmental authority on the part of the Company is required in connection with
the consummation of the transactions contemplated by this Agreement, except for
filings as are required by federal and state securities laws.
3.17 Compliance with Laws; Permits. To its knowledge, the Company is not in
violation of any applicable statute, rule, regulation or restriction of any
government, administrative agency or instrumentality in respect of the conduct
of its business or the ownership of its properties, the violation of which would
constitute a Material Adverse Event. The Company has all franchises, permits,
licenses, and any similar governmental authority necessary for the conduct of
its business as now being conducted by it and as currently proposed to be
conducted, the lack of which would constitute a Material Adverse Event. The
Company is not in default under any of such franchises, permits, license, or
other similar authority except for such defaults as will not, individually or in
the aggregate, constitute a Material Adverse Event.
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3.18 Registration Rights. Except as required pursuant to the Rights
Agreement, the Company is not presently under any obligation, and has not
granted any rights to register any of the Company's presently outstanding
securities or any securities that may hereinafter be issued under the Securities
Act.
3.19 Offering Valid. Assuming the accuracy of the representations and
warranties of the Investors contained in Section 4 hereof, the offer, sale and
issuance of the Shares and the Conversion Shares will be exempt from the
registration requirements of the Securities Act and will have been registered or
qualified or are exempt from registration and qualification under the
registration, permit or qualification requirements of all applicable state
securities laws. Neither the Company nor any agent on its behalf will take any
action that would cause the loss of any such exemption.
3.20 Brokers and Finders. The Company has not retained any investment
banker, broker or finder in connection with the transactions contemplated by
this Agreement.
3.21 SEC Reports. The Company has filed with the Commission all required
forms, reports, registration statements and documents required to be filed by it
with the Commission and made all disclosures required by the Securities Act or
the Exchange Act (collectively, the "SEC Reports"), all of which complied as to
form when filed in all material respects with the applicable provisions of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as the case may be. Accurate and complete copies of the SEC
reports have been available to Buyer. As of their respective dates the SEC
Reports (including all exhibits and schedules thereto and documents incorporated
by reference therein) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
3.22 Environmental. Except as would not, singly or in the aggregate,
reasonably be expected to have a Material Adverse Event, (A) the Company is in
compliance with all applicable Environmental Laws (as defined below), (B) the
Company has all permits, authorizations and approvals required under any
applicable Environmental Laws and is in compliance with the requirements of such
permits authorizations and approvals, and (C) there are no pending or, to the
best knowledge of the Company, threatened Environmental Claims against the
Company.
For purposes of this Agreement, the following terms shall have the following
meanings: "Environmental Law" means any United States (or other applicable
jurisdiction's) Federal, state, local or municipal statute, law, rule,
regulation, ordinance, code, policy or rule of common law and any judicial or
administrative interpretation thereof, including any judicial or administrative
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order, consent decree or judgement, relating to the environment, health, safety
or any chemical, material or substance, exposure to which is prohibited, limited
or regulated by any governmental authority. "Environmental Claims" means any and
all administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation, investigations or
proceedings relating in any way to any Environmental Law.
3.23 Properties. The Company does not own any real property. The Company's
personal properties are, in the aggregate, in good repair (reasonable wear and
tear excepted), suitable for their respective uses, and free from any liens,
charges or encumbrances, other than those imposed in connection with the
Company's credit facilities or capital leases disclosed in the SEC Reports or
the Schedule of Exceptions. Any real properties held under lease by the Company
are held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the conduct of the
business of the Company.
4. Representations and Warranties of the Investors. Each Investor,
severally and not jointly, represents and warrants to the Company as follows:
4.1 Authorization. When executed and delivered by the Investor, and
assuming execution and delivery by the Company, the Transactional Agreements
will each constitute a valid obligation of the Investor, enforceable in
accordance with its terms.
4.2 Investment. This Agreement is made with the Investor in reliance upon
its representation to the Company, which by the Investor's execution of this
Agreement Investor hereby confirms, that the Shares, the Warrant and the Warrant
Shares to be received by the Investor will be acquired for investment for
Investor's own account, not as a nominee or agent, and not with a view to the
sale or distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
any of the Shares, the Warrants or the Warrant Shares. By executing this
Agreement, the Investor further represents that it has no contract, undertaking,
agreement, or arrangement with any person to sell, transfer, or grant
participation to such person or to any third person, with respect to any of the
Shares, the Warrant or the Warrant Shares.
4.3 No Public Market. The Investor understands and acknowledges that the
offering of the Shares, the Warrant and the Warrant Shares pursuant to this
Agreement will not be registered under the Securities Act on the grounds that
the offering and sale of securities contemplated by this Agreement are exempt
from registration pursuant to Section 4(2) of the Securities Act, and that the
Company's reliance upon such exemption is predicated upon Investor's
representations as set forth in this Agreement. The Investor further understands
that no public market now exists for any of the securities issued by the Company
and that the Company has given no assurances that a public market will ever
exist for the Company's securities.
12
4.4 Limitations on Transferability. Investor covenants that in no event
will it dispose of any of the Shares, the Warrant or the Warrant Shares (other
than pursuant to Rule 144 promulgated by the Commission under the Securities Act
("Rule 144") or any similar or analogous rule or pursuant to an effective
registration statement under the Securities Act) unless and until (a) the
Investor shall have notified the Company of the proposed disposition and shall
have furnished the Company with a statement of the circumstances surrounding the
proposed disposition, and (b) if requested by the Company, the Investor shall
have furnished the Company with an opinion of counsel satisfactory in form and
substance to the Company and the Company's counsel to the effect that (i) such
disposition will not require registration under the Securities Act and
(ii) appropriate action necessary for compliance with the Securities Act and any
applicable state, local, or foreign law has been taken. Notwithstanding the
limitations set forth in the foregoing sentence, if the Investor is a
partnership or limited liability company, it may transfer Shares, the Warrant or
the Warrant Shares to its constituent partners or members or a retired partner
or member of such partnership or Company who retires after the date hereof, or
to the estate of any such partner, member or retired partner or member or
transfer by gift, will, or intestate succession to any such partner's or
member's spouse or lineal descendants or ancestors without the necessity of
registration or opinion of counsel if the transferee agrees in writing to be
subject to the terms of this Agreement to the same extent if such transferee
were an Investor; provided, however, that Investor hereby covenants not to
effect such transfer if such transfer either would invalidate the securities
laws exemptions pursuant to which the Shares, the Warrant or the Warrant Shares
were originally offered and sold or would itself require registration and/or
qualification under the Securities Act or applicable state securities laws. Each
certificate evidencing the Shares, the Warrant or the Warrant Shares transferred
as above provided shall bear the appropriate restrictive legend set forth in
Section 5 below, except that such certificate shall not bear such legend if the
transfer was made in compliance with subsection (k) of Rule 144 or if the
opinion of counsel referred to above is to the further effect that such legend
is not required in order to establish compliance with any provisions of the
Securities Act.
4.5 Experience; Receipt of Information. The Investor represents that:
(a) it has such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of its prospective investment in
the Shares, the Warrant and the Warrant Shares; (b) it believes it has received
all the information it has requested from the Company and considers necessary or
appropriate for deciding whether to obtain the Shares, the Warrant and the
Warrant Shares; (c) it has had the opportunity to discuss the Company's
13
business, management, and financial affairs with the Company's management;
(d) it has the ability to bear the economic risks of its prospective investment;
and (e) it is able, without materially impairing its financial condition, to
hold the Shares, the Warrant and the Warrant Shares for an indefinite period of
time and to suffer a complete loss on its investment.
4.6 Accredited Investor. The Investor presently qualifies and will as of
the Closing Date qualify, as an "accredited investor" within the meaning of
Regulation D of the rules and regulations promulgated under the Securities Act.
4.7 Confidentiality. The Investor agrees that it will keep confidential
and will not use, disclose or divulge for a period of two years after receipt,
any information which such Investor may obtain from the Company, pursuant to
financial statements, reports and other materials submitted by the Company as
required hereunder or under any other documents, or pursuant to information
rights granted under the Rights Agreement or any other documents unless such
information is known, or until such information becomes known, to the public
through no fault of such Investor or its agents, or unless the President of the
Company gives his written consent to the Investor's release of such information,
except that no such written consent shall be required (and Investor shall be
free to release such information) if such information is to be provided to
Investor's counsel or accountant, or to an officer, director, general partner,
limited partner, shareholder, investment counselor or advisor, or employee of an
Investor with a need to know such information; provided that any such counsel,
accountant, officer, director, general partner, limited partner, shareholder,
investment counselor or advisor, or employee shall be bound by the provisions of
this Section 4.7. Notwithstanding the foregoing, this Section 4.7 shall not
apply (a) to information which an Investor learns from a third party with the
right to make such disclosure, provided Investor complies with the restrictions
imposed by the third party, (b) to information which is in Investor's possession
prior to the time of disclosure by the Company and not acquired by Investor
under a confidentiality obligation, (c) to the minimum extent (after requesting
and pursuing confidential treatment to the extent reasonably possible) the
Investor is required to disclose such information by law or a governmental
regulatory authority, (d) to the minimum extent (after requesting and pursuing
confidential treatment to the extent reasonably possible) Investor is required
to disclose such information by court order.
4.8 Brokers and Finders. The Investor has not retained any investment
banker, broker, or finder in connection with the transactions contemplated by
this Agreement.
14
5. Legends.
5.1 The Warrants and certificates for the Shares and the Warrant Shares
shall bear such restrictive legends as the Company and the Company's counsel
deem necessary or advisable under applicable law or pursuant to this Agreement,
including, without limitation, the following:
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION UNLESS THE TRANSFER IS IN ACCORDANCE WITH RULE 144 OR
A SIMILAR RULE AS THEN IN EFFECT UNDER THE ACT, OR APPLICABLE STATE
SECURITIES LAWS OR UNLESS THE CORPORATION RECEIVES AN OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT."
5.2 The Warrants and certificates evidencing the Shares and the Warrant
Shares shall also bear any legend required pursuant to any state, local, or
foreign law governing such securities.
6. Conditions of Investors' Obligations at Closing. The obligations of
each Investor under Section 1 of this Agreement are subject to the fulfillment
at or before the Closing of each of the following conditions, any of which may
be waived in writing by such Investor:
6.1 Representations and Warranties. The representations and warranties of
the Company contained in Section 3 shall be true in all material respects on and
as of the Closing with the same effect as if made on and as of the Closing,
except (a) to the extent such representations and warrants speak of an earlier
date, in which case, they shall be true and correct in all material respects as
of such earlier date and (b) for representations qualified by materiality, which
shall be correct in all respects.
6.2 Performance. The Company shall have performed or fulfilled in all
material respects all agreements, obligations, and conditions contained herein
required to be performed or fulfilled by the Company before the Closing.
15
6.3 Proceedings Satisfactory; Compliance Certificate. All corporate and
legal proceedings taken by the Company in connection with the transactions
contemplated by this Agreement and all documents and papers relating to such
transactions shall be reasonably satisfactory to the Investors. The Company
shall have delivered to the Investors a certificate dated as of the Closing,
signed by the Company's CEO and President, certifying that the conditions set
forth in Sections 6.1 and 6.2 have been satisfied.
6.4 Rights Agreement. The Company and the Investors shall have entered
into the Rights Agreement in substantially the form attached as Exhibit 6.4.
6.5 Articles of Amendment. The Company shall have filed its Articles of
Amendment with the Secretary of State of the State of Washington, which Articles
of Amendment shall be in full force and effect on the Closing Date.
6.6 Opinion of the Company's Counsel. The Investors shall have received
from ▇▇▇▇▇▇ ▇▇▇▇▇▇ White & ▇▇▇▇▇▇▇▇▇ LLP, legal counsel for the Company, an
opinion dated the Closing Date, substantially in the form of Exhibit 6.6 hereto.
6.7 Approvals and Consents. All transfers of permits or licenses and all
approvals of or notices to public agencies, federal, state, local or foreign,
the granting or delivery of which is necessary for the consummation of the
transactions contemplated hereby, including, if applicable, approvals or notices
required by the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of 1976, as
amended, or for the continued operation of the Company, shall have been
obtained, and all waiting periods specified by law shall have passed.
6.8 Agreement as to Registration Rights. The Investors, the Company and
▇▇▇ ▇▇▇▇▇▇▇▇▇▇ shall have reached a mutually acceptable agreement as to the
priority between ▇▇. ▇▇▇▇▇▇▇▇▇▇ and the Investors with respect to their
respective rights to include shares in a registration of shares under the
Securities Act effected by the Company.
7. Conditions of the Company's Obligations at Closing. The obligations of
the Company under Section 1 of this Agreement are subject to the fulfillment at
or before the Closing of each of the following conditions, any of which may be
waived in writing by the Company.
7.1 Representations and Warranties. The representations and warranties of
the Investors contained in Section 4 shall be true in all material respects on
and as of the Closing with the same effect as if made on and as of the Closing.
16
7.2 Payment of Purchase Price. Each Investor shall have delivered to the
Company in accordance with Section 1.2 the purchase price specified in Section
1.1.
7.3 Articles of Amendment. The Articles of Amendment shall have been filed
with the Secretary of State of the State of Washington and shall be in full
force and effect on the Closing Date.
7.4 Rights Agreement. The Company and the Investors shall have entered
into the Rights Agreement in substantially the form attached as Exhibit 6.4.
8. Covenants of the Company.
8.1 Use of Proceeds. The Company shall use the proceeds from the sale of
the Series A Preferred Stock under this Agreement to hire additional members of
the Company's management team, build the Company's Internet-related business,
and for marketing and general corporate purposes.
8.2 Management. From and after the date of this Agreement, the Company
shall use its reasonable best efforts, including, without limitation, retaining
recruiting firms, making its management available for interviews and offering
stock option packages deemed necessary and appropriate by the Board of
Directors, to recruit a Chief Operating Officer and such additional officers as
the Board of Directors deems advisable.
9. Miscellaneous.
9.1 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington, excluding those laws that
direct the application of the laws of another jurisdiction.
9.2 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.
9.3 Headings. The headings of the sections of this Agreement are for
convenience and shall not by themselves determine the interpretation of this
Agreement.
9.4 Notices. Any notice required or permitted hereunder shall be given in
writing and shall be conclusively deemed effectively given upon personal
delivery or delivery by courier, or on the first business day after transmission
if sent by confirmed facsimile transmission or electronic mail transmission, or
five days after deposit in the United States mail, by registered or certified
mail, postage prepaid, addressed (i) if to the Company, as set forth below the
17
Company's name on the signature page of this Agreement, and (ii) if to an
Investor, at such Investor's address as set forth below such Investor's name on
the signature page to this Agreement, or at such other address as the Company or
such Investor may designate by 10 days' advance written notice to the other
parties hereto.
9.5 Amendment of Agreement. Any provision of this Agreement may be
amended, and the obligations of the Company under this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) by a written instrument signed by the Company and by persons who
after the Closing will hold at least a majority of the aggregate of (a) the then
outstanding Shares; and (b) the then outstanding Common Stock into which the
Shares have been converted, other than Common Stock which has been sold to the
public. Any amendment, modification or waiver pursuant to, and in accordance
with, this Section 9.5 shall be binding on the Company, all holders of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible) and each future holder of
any such securities. The foregoing notwithstanding, this Agreement and any term
thereof may be amended, waived, discharged or terminated by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
9.6 Expenses. The Company and the Investors will bear their respective
legal and other fees and expenses with respect to this Agreement and the
transactions contemplated hereby; provided, however, if the sale of the Shares
is consummated, the Company shall pay the reasonable fees and expenses of
counsel to Investors in an amount not to exceed an aggregate maximum of $20,000.
9.7 Entire Agreement; Successors and Assigns. This Agreement (and the
Exhibits and Schedules hereto) and the Rights Agreement constitute the entire
contract between the Company and the Investors relative to the subject matter
hereof. Any prior and contemporaneous agreement, discussion, understanding or
correspondence between the Company and the Investors regarding the purchase of
capital stock of the Company is superseded by this Agreement and the Rights
Agreement. Subject to the exceptions specifically set forth in this Agreement,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective executors, administrators, heirs, successors, and
assigns of the parties.
9.8 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision was so excluded and shall be enforceable in accordance with its terms.
18
IN WITNESS WHEREOF, the parties hereto have executed this Series A
Preferred Stock and Warrant Purchase Agreement as of the date first above
written.
Company: PHOTOWORKS, INC., a Washington corporation
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇▇▇▇, President and CEO
Address: ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax No. (▇▇▇) ▇▇▇-▇▇▇▇
Investors: ORCA BAY PARTNERS
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Managing Member
Address: ▇.▇. ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
19
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
MADRONA VENTURE FUND I-A, L.P.
By Madrona Investment Partners, LLC,
its General Partner
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇▇▇
Name: ▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Managing Director
Address: ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
MADRONA VENTURE FUND I-B, L.P.
By Madrona Investment Partners, LLC,
its General Partner
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇▇▇
Name: ▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Managing Director
Address: ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
20
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
MADRONA MANAGING DIRECTOR FUND, LLC
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇▇▇
Name: ▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Managing Director
Address: ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
21
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
THE TAHOMA FUND, L.L.C.
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇
Name: ▇▇▇▇ ▇▇▇▇▇▇
Title: Managing Member
Address: ▇.▇. ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
ORCA BAY CAPITAL CORPORATION
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Name: ▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇.
Title: Trustee
Address: ▇.▇. ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
22
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
▇▇▇ and ▇▇▇▇▇ ▇▇▇▇▇▇
By: /s/ ▇▇▇ ▇▇▇▇▇▇
Name: ▇▇▇ ▇▇▇▇▇▇
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇
Name: ▇▇▇▇▇ ▇▇▇▇▇▇
Address: ▇.▇. ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Address: ▇.▇. ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
Address: ▇.▇. ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
23
[Signature Page for Series A Preferred Stock and Warrant Purchase Agreement]
EXHIBIT A
SCHEDULE OF INVESTORS
Number of Number of Total
Name Shares Purchased Warrant Shares Purchase Price
---- ---------------- -------------- --------------
The Tahoma Fund, L.L.C. 7,800 410,526 $7,800,000
Orca Bay Capital Corporation 1,980 104,211 $1,980,000
▇▇▇ and ▇▇▇▇▇ ▇▇▇▇▇▇ 100 5,263 $100,000
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ 100 5,263 $100,000
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ 20 1053 $20,000
Madrona Venture Fund I-A,
L.P. 4,032 212,210 $4,032,000
Madrona Venture Fund I-B,
L.P. 465 24,474 $465,000
Madrona Managing Director
Fund, LLC 503 26,474 $503,000
------ ------- ----------
Total 15,000 789,474 $15,000,000
