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PHOTOWORKS, INC.
INVESTOR RIGHTS AGREEMENT
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PHOTOWORKS, INC.
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is made as of February 14,
2000, by and among PhotoWorks, Inc., a Washington corporation (the "Company")
and the persons listed on the attached Exhibit A who from time to time become
signatories to this Agreement (collectively, the "Investors").
RECITALS
A. The Company and the Investors have entered into a Series A Preferred
Stock and Warrant Purchase Agreement for sale by the Company and purchase by the
Investors of the Company's Series A Preferred Stock and warrants to purchase the
Company's Common Stock (the "Purchase Agreement").
B. In connection with the purchase and sale of the Company's securities,
the Company and the Investors desire to provide for the rights of the Investors
with respect to information about the Company, the nomination of members to the
Company's board of directors and registration of the Common Stock issued upon
conversion of the securities according to the terms of this Agreement.
THE PARTIES AGREE AS FOLLOWS:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
1.1 "Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
1.2 "Convertible Securities" shall mean the shares of Series A Preferred
Stock and the Warrants purchased by the Investors pursuant to the Purchase
Agreement.
1.3 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.4 "Form S-3" shall mean Form S-3 issued by the Commission or any
substantially similar form then in effect.
1.5 "Holder" shall mean any holder of outstanding Registrable Securities
which have not been sold to the public, but only if such holder is one of the
Investors or an assignee or transferee of registration rights as permitted by
Section 12.
1.6 "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.
1.7 "Initiating Holders" shall mean Holders who in the aggregate hold at
least 50% of the Registrable Securities.
1.8 "Material Adverse Event" shall mean an occurrence having a consequence
that either (a) is materially adverse as to the business, properties, prospects,
or financial condition of the Company or (b) is reasonably foreseeable, has a
reasonable likelihood of occurring, and if it were to occur might materially
adversely affect the business, properties, prospects or financial condition of
the Company; provided, however, that the following shall not be taken into
account in determining a "Material Adverse Event": (i) 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 (ii) 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.
1.9 "New Securities" shall mean any capital stock of the Company, whether
authorized or not, and any rights, options, or warrants to purchase said capital
stock, and securities of any type whatsoever that are, or may become,
convertible into said capital stock; provided that "New Securities" does not
include (i) the Convertible Securities and the Common Stock issuable upon
conversion or exercise of the Convertible Securities, (ii) securities offered to
the public pursuant to a registration statement filed under the Securities Act,
(iii) securities issued pursuant to the acquisition of another corporation by
the Company by merger, purchase of substantially all of the assets, or other
reorganization, if approved by the Company's Board of Directors, (iv) shares
issued or issuable to the Company's officers, directors, employees and
consultants, contractors and advisors to the Company pursuant to any stock
option, subscription or stock purchase right or restricted stock grant
outstanding as of the date of this Agreement or which is subsequently issued
under the Company's Incentive Plans as such plans have been approved by the
Company's Board of Directors as of the date of this Agreement, (v) shares issued
without consideration pursuant to a stock dividend, stock split, or similar
transaction, (vi) shares or warrants, and shares issuable upon exercise of such
warrants, issued to financial institutions or lessors in connection with
commercial credit arrangements, equipment financings, leasing arrangements or
similar transactions, and (vii) any other shares of Common Stock or any other
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securities convertible into or exchangeable or exercisable for shares of Common
Stock that are designated as excluded from the definition of New Securities by
the vote or written consent of holders of at least a majority of the then
outstanding shares of Convertible Securities.
1.10 The terms "Register", "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement on Form
S-1 or S-3 (or a successor form) in compliance with the Securities Act
("Registration Statement") and the declaration or ordering of the effectiveness
of such Registration Statement.
1.11 "Registrable Securities" shall mean all Common Stock not previously
sold to the public and issued or issuable upon conversion or exercise of any of
the Company's Convertible Securities purchased by or issued to the Investors,
including Common Stock issued pursuant to stock splits, stock dividends and
similar distributions, and any securities of the Company granted registration
rights pursuant to Section 14 of this Agreement.
1.12 "Registration Expenses" shall mean all expenses incurred by the
Company in complying with Section 9 of this Agreement, including, without
limitation, all federal and state registration, qualification and filing fees,
printing expenses, fees and disbursements of counsel for the Company and one
special counsel for all Holders (if different from counsel to the Company), blue
sky fees and expenses, and the expense of any special audits incident to or
required by any such registration.
1.13 "Rubinstein Debenture Agreement" shall mean that certain Debenture
Subscription Agreement dated August 14, 1981, as amended by Amendment No. 1
dated June 1984, Amendment No. 2 dated January 1986, Amendment No. 3 dated June
1996 and Amendment No. 4 dated February 2000.
1.14 "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
1.15 "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities pursuant to this
Agreement.
1.16 "Shelf Registration Statement" shall mean a Registration Statement for
an offering to be made on a continuous basis pursuant to Rule 415 of the
Securities Act (or such successor rule or similar provision then in effect)
1.17 "Warrants" shall mean the warrants to purchase shares of the Company's
Common Stock issued to the Investors pursuant to the Purchase Agreement.
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2. Financial Statements and Reports. As long as an Investor holds Series A
Preferred, the Company will deliver to such Investor:
(a) as soon as practicable after the end of each fiscal year of the
Company, and in any event within 90 days thereafter, an audited balance sheet of
the Company as of the end of such year and audited statements of income,
shareholders' equity and cash flow for such year, which year-end financial
reports shall be in reasonable detail and shall be prepared in accordance with
generally accepted accounting principles and accompanied by the opinion of the
Company's independent public accountants;
(b) as soon as practicable after the end of each of first three quarters of
any fiscal year, and in any event within 45 days thereafter, an unaudited
balance sheet of the Company as of the end of such quarter, and unaudited
statements of income and cash flow for such quarter and for the current fiscal
year to date, prepared in accordance with generally accepted accounting
principles (other than for accompanying notes);
(c) as soon as practicable after the end of the month, and in any event
within 20 days of the end of each month, an unaudited balance sheet of the
Company and unaudited statements of income and cash flow for and as of the end
of such month;
(d) as soon as practicable following submission to and approval by the
Board of Directors of the Company, but in no event later than the start of the
next fiscal year, an operating budget respecting the next fiscal year and copies
of all monthly budgets and forecasts presented to the Board of Directors;
(e) copies of all audit letters delivered by the Company's independent
public accountants to management;
(f) copies of all written information distributed to the Board of Directors
at or prior to Board meetings; and
(g) a capitalization table reflecting the number of outstanding shares of
capital stock, warrants, options, rights and other convertible securities as of
the Company's fiscal year-end and any other capitalization information in the
Company's possession which is reasonably requested by an Investor.
3. Board of Directors
3.1 Investor Nominees. Promptly following the annual meeting of the
Company's shareholders scheduled to be held on February 15, 2000, the Company
shall cause the Board of Directors to be increased to seven members, and the
existing directors shall appoint one individual designated by Orca Bay Partners
("Orca Bay") and one individual designated by Madrona Venture Fund I, L. P.
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("Madrona") to fill the vacancies created thereby. So long as the holders of
Series A Preferred Stock have the right to elect two directors, the Investors
agree to vote the shares of Series A Preferred Stock they hold to elect one
director nominated by Orca Bay and one director nominated by Madrona to the
Board of Directors. The size of the Board of Directors may be decreased to less
than seven in the future, provided that such decrease does not affect the rights
of the holders of Series A Preferred Stock to nominate individuals to the Board
pursuant to the Company's articles of incorporation.
3.2 Expenses of Attending Board Meetings. The Company shall reimburse the
representatives of the Investors serving on the Board of Directors for their
reasonable travel and out-of-pocket expenses incurred in attending meetings of
the Board of Directors or any committee on which they serve.
3.3 Observer Rights. So long as Orca Bay Partners or its affiliates owns at
least 2,500 shares of Series A Preferred Stock, Tim Carver (so long as he is
affiliated with Orca Bay Partners) shall have the right to attend meetings of
the Board of Directors as a non-voting observer, on behalf of Orca Bay Partners,
subject to the Board's right to call an executive session at any time outside of
Mr. Carver's presence.
4. Right of First Refusal.
4.1 Right of First Refusal of New Securities. The Company hereby grants to
each Investor the right of first refusal to purchase up to its "Pro Rata Share"
(as defined below) of New Securities which the Company may, from time to time,
propose to sell and issue. The Investors may purchase said New Securities on the
same terms and at the same price at which the Company proposes to sell the New
Securities. The "Pro Rata Share" of each Investor, for purposes of this right of
first refusal, is the ratio of (i) the total number of shares of Common Stock
held by such Investor (including any shares of Common Stock into which shares of
the Convertible Securities held by such Investor are convertible) to (ii) the
total number of shares of Common Stock outstanding immediately prior to the
issuance of the New Securities (including any shares of Common Stock issuable
upon exercise or conversion of all outstanding options, warrants or rights to
acquire or debt or equity securities convertible into Common Stock, including
all outstanding Convertible Securities).
4.2 Notice. In the event the Company proposes to undertake an issuance of
New Securities, it shall give to each Investor written notice (the "Notice") of
its intention, describing the type of New Securities, the price, the terms upon
which the Company proposes to issue the same, the number of shares which such
Investor is entitled to purchase pursuant to Section 4.1, and a statement that
each Investor shall have 20 days to respond to such Notice. Each Investor shall
have 20 days from the date of receipt of the Notice to agree to purchase any or
all of its Pro Rata Share of the New Securities for the price and upon the terms
specified in the Notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased and forwarding payment
for such New Securities to the Company if immediate payment is required by such
terms.
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4.3 Sale of New Securities. In the event an Investor fails to exercise in
full its right of first refusal within such 20 day period, the Company shall
have 90 days thereafter to sell or enter into an agreement (pursuant to which
the sale of New Securities covered thereby shall be closed, if at all, within 60
days after the date of such agreement) to sell the New Securities respecting
which such Investor's rights were not exercised, at a price and upon general
terms no more favorable to the purchaser thereof than specified in the Notice.
In the event the Company has not sold the New Securities within such 90 day
period (or sold and issued New Securities in accordance with the foregoing
within 60 days from the date of such agreement), the Company shall not
thereafter issue or sell any New Securities without first offering such
securities to such Investor in the manner provided above.
(a) Termination of Right of First Refusal. The right of first refusal
granted under this Section 4 shall expire upon the date on which such Investor
no longer holds any Series A Preferred Stock.
5. Demand Registration.
5.1 Request for Registration on Form S-3. If a Holder or Holders of at
least 50% of the outstanding Registrable Securities request that the Company
file a Registration Statement on Form S-3 (or any successor form to Form S-3)
for a public offering of shares of Registrable Securities and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities for
such an offering, the Company shall use all reasonable efforts to cause such
Registrable Securities to be Registered for the offering on such form and to
cause such Registrable Securities to be qualified in such jurisdictions as the
Holder or Holders may reasonably request; provided, however, that the Company
shall not be required to effect more than two Registrations pursuant to this
Section 5.1. If requested by the Initiating Holders, the Company shall file a
Shelf Registration Statement for one of the Registrations effected pursuant to
this Section 5.1 and shall use its reasonable best efforts to keep such
Registration Statement effective for a period of 12 months.
5.2 Right of Deferral. Notwithstanding the foregoing, the Company shall not
be obligated to file a registration statement pursuant to this Section 5:
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(a) in any particular jurisdiction in which the Company would be required
to execute a general consent to service of process in effecting such
Registration, qualification, or compliance, unless the Company is already
subject to service in such jurisdiction and except as may be required by the
Securities Act;
(b) if the Company, within ten days of the receipt of the request of the
Initiating Holders, gives notice of its bona fide intention to effect the filing
of a Registration Statement with the Commission within 90 days of receipt of
such request (other than with respect to a registration statement relating to a
Rule 145 transaction or an offering solely to employees), provided that the
Company is actively employing in good faith all reasonable efforts to cause such
Registration Statement to become effective;
(c) within three months immediately following the effective date of any
Registration Statement pertaining to the securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan); or
(d) if the Company shall furnish to such Holders a certificate signed by
the President of the Company stating that in the good faith judgment of the
Board of Directors it would be seriously detrimental to the Company or its
shareholders for a Registration Statement to be filed at such time, then the
Company's obligation to use its best efforts to file a Registration Statement
shall be deferred for a period not to exceed 90 days from the receipt of the
request to file such registration by Initiating Holders provided that the
Company shall not exercise the right contained in this paragraph (d) more than
once in any 12 month period.
5.3 Registration of Other Securities in Demand Registration. Any
Registration Statement filed pursuant to the request of the Initiating Holders
under this Section 5 may, subject to the provisions of Section 5.4, include
securities of the Company other than Registrable Securities.
5.4 Underwriting in Demand Registration.
(a) Notice of Underwriting. If the Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 5. The right of any Holder to Registration pursuant to Section 5
shall be conditioned upon such Holder's agreement to participate in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting.
(b) Inclusion of Other Holders in Demand Registration. If the Company,
officers or directors of the Company holding Common Stock other than Registrable
Securities, or holders of securities other than Registrable Securities, request
inclusion in such Registration, the Initiating Holders, to the extent they deem
advisable and consistent with the goals of such Registration, may, in their sole
discretion, on behalf of all Holders, offer to any or all of the Company, such
officers or directors, and such holders of securities other than Registrable
Securities that such securities other than Registrable Securities be included in
the underwriting and may condition such offer on the acceptance by such persons
of the terms of this Section 5.
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(c) Selection of Underwriter in Demand Registration. The Company shall
(together with all Holders proposing to distribute their securities through such
underwriting) enter into an underwriting agreement with the representative
("Underwriter's Representative") of the underwriter or underwriters selected for
such underwriting by the Holders of a majority of the Registrable Securities
being registered by the Initiating Holders and agreed to by the Company.
(d) Marketing Limitation in Demand Registration. In the event the
Underwriter's Representative advises the Initiating Holders in writing that
market factors (including, without limitation, the aggregate number of shares of
Common Stock requested to be Registered, the general condition of the market,
and the status of the persons proposing to sell securities pursuant to the
Registration) require a limitation of the number of shares to be underwritten,
then (i) first, the securities other than Registrable Securities, and (ii)
second, the securities requested to be registered by the Company, shall be
excluded from such Registration to the extent required by such limitation. If a
limitation of the number of shares is still required, the Initiating Holders
shall so advise all Holders and the number of shares of Registrable Securities
that may be included in the Registration and underwriting shall be allocated
among all Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities entitled to inclusion in such Registration
held by such Holders at the time of filing the Registration Statement. No
Registrable Securities or other securities excluded from the underwriting by
reason of this Section 5.4(d) shall be included in such Registration Statement.
(e) Right of Withdrawal in Demand Registration. If any Holder of
Registrable Securities, or a holder of other securities entitled (upon request)
to be included in such Registration, disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the Underwriter's Representative and the Initiating Holders
delivered at least seven days prior to the effective date of the Registration
Statement. The securities so withdrawn shall also be withdrawn from the
Registration Statement.
5.5 Blue Sky in Demand Registration. In the event of any Registration
pursuant to Section 5, the Company will exercise its best efforts to Register
and qualify the securities covered by the Registration Statement under such
other securities or Blue Sky laws of such jurisdictions as shall be reasonably
appropriate for the distribution of such securities; provided, however, that (i)
the Company shall not be required to do business or to file a general consent to
service of process in any such states or jurisdictions, and (ii) notwithstanding
anything in this Agreement to the contrary, in the event any jurisdiction in
which the securities shall be qualified imposes a non-waivable requirement that
expenses incurred in the connection with the qualification of the securities be
borne by selling shareholders, such expenses shall be payable pro rata by
selling shareholders.
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6. Piggyback Registration.
6.1 Notice of Piggyback Registration and Inclusion of Registrable
Securities. Subject to the terms of this Agreement, if the Company decides to
Register any of its Common Stock (either for its own account or the account of a
security holder or holders exercising their respective demand registration
rights) on a form that would be suitable for a registration involving solely
Registrable Securities, the Company will: (i) within 15 days prior to the filing
of any registration statement give each Holder written notice thereof and
(ii) include in such Registration (and any related qualification under Blue Sky
laws or other compliance), and in any underwriting involved therein, all the
Registrable Securities specified in a written request delivered to the Company
by any Holder within 20 days after delivery of such written notice from the
Company.
6.2 Underwriting in Piggyback Registration.
(a) Notice of Underwriting in Piggyback Registration. If the Registration
of which the Company gives notice is for a Registered public offering involving
an underwriting, the Company shall so advise the Holders as a part of the
written notice given pursuant to Section 6.1. In such event, the right of any
Holder to Registration shall be conditioned upon such underwriting and the
inclusion of such Holder's Registrable Securities in such underwriting to the
extent provided in this Section 6. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company and the
other holders distributing their securities through such underwriting) enter
into an underwriting agreement with the Underwriter's Representative for such
offering. The Holders shall have no right to participate in the selection of the
underwriters for an offering pursuant to this Section 6.
(b) Marketing Limitation in Piggyback Registration. In the event the
Underwriter's Representative advises the Holders seeking registration of
Registrable Securities pursuant to this Section 6 in writing that market factors
(including, without limitation, the aggregate number of shares of Common Stock
requested to be Registered, the general condition of the market, and the status
of the persons proposing to sell securities pursuant to the Registration)
require a limitation of the number of shares to be underwritten, the
Underwriter's Representative (subject to the allocation priority set forth in
Section 6.2(c)) may limit the number of shares of Registrable Securities to be
included in such Registration and underwriting.
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(c) Allocation of Shares in Piggyback Registration. In the event that the
Underwriter's Representative limits the number of shares to be included in a
Registration pursuant to Section 6.2(b), the number of shares to be included in
such Registration shall be allocated in the following manner: the number of
shares that may be included in the Registration and underwriting shall be
allocated first to the Company; second, to the Holders and Sam Rubinstein and
his successors and assigns on a pro rata basis based on the total number of
Registrable Securities held by a Holder or, in the case of Sam Rubinstein and
his successors and assigns, the total number of shares of common stock that such
person has a right to require the Company to register under the Securities Act
pursuant to Section 6.2 of the Rubinstein Debenture Agreement; and third, to any
shareholder of the Company other than a Holder or Sam Rubinstein (or his
successors and assigns) on a pro rata basis. No Registrable Securities or other
securities excluded from the underwriting by reason of this Section 6.2(c) shall
be included in the Registration Statement.
(d) Withdrawal in Piggyback Registration. If any Holder disapproves of the
terms of any such underwriting, such person may elect to withdraw therefrom by
written notice to the Company and the Underwriter's Representative delivered at
least seven days prior to the effective date of the Registration Statement. Any
Registrable Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such Registration.
7. Expenses of Registration. All Registration Expenses incurred in
connection with two Registrations pursuant to Section 5.1 and unlimited
Registrations pursuant to Section 6, shall be borne by the Company. All
Registration Expenses incurred in connection with any other Registration,
qualification, or compliance, shall be apportioned among the Holders and other
holders of the securities so registered on the basis of the number of shares so
registered. Notwithstanding the above, the Company shall not be required to pay
for any expenses of any Registration proceeding begun pursuant to Section 5 if
the Registration request is subsequently withdrawn at the request of the Holders
of a majority of the Registrable Securities to be registered (which Holders
shall bear such expenses), unless the Holders of a majority of the Registrable
Securities agree to forfeit their right to one demand Form S-3 Registration
pursuant to Section 5; provided further, however, that if at the time of such
withdrawal, the Holders have learned of a Material Adverse Event with respect to
the condition, business, or prospects of the Company not known to the Holders at
the time of their request, then the Holders shall not be required to pay any of
such expenses and shall retain their rights pursuant to Section 5. All Selling
Expenses shall be borne by the holders of the securities Registered pro rata on
the basis of the number of shares Registered.
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8. Termination of Registration Rights. The rights to cause the Company to
register securities granted under Sections 5 and 6 of this Agreement shall
terminate, with respect to each Holder, as soon as such Holder is eligible to
sell all of such Holder's Registrable Securities under Rule 144 of the
Securities Act within any three month period without volume limitations, or
under Rule 144(k) thereunder.
9. Registration Procedures and Obligations. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the Commission a Registration Statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such Registration Statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such Registration Statement effective for up to 120 days, or in the case of the
Shelf Registration Statement, 12 months.
(b) Prepare and file with the Commission such amendments and supplements to
such Registration Statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
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, and provided further
that in the event any jurisdiction in which the securities shall be qualified
imposes a non-waivable requirement that expenses incurred in connection with the
qualification of the securities be borne by selling shareholders, such expenses
shall be payable pro rata by selling shareholders.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
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(f) Promptly notify each Holder of Registrable Securities covered by such
Registration Statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act (i) of the happening of any
event as a result of which the prospectus included in such Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing, (ii) of any request by the SEC or any state securities authority
for amendments and supplements to a Registration Statement and prospectus or for
additional information after the Registration Statement has become effective and
(iii) of the issuance by the SEC or any state securities authority of any stop
order suspending the effectiveness of a Registration Statement or the initiation
of any proceedings for that purpose. In the case of a Shelf Registration
Statement, the Company agrees that, upon the happening of any event described in
subsections (i), (ii) and (iii) of this Section 9(f), the Company shall use its
best efforts to file and have declared effective (if an amendment) as soon as
practicable an amendment or supplement to the Shelf Registration Statement and
shall extend the period during which such Shelf Registration Statement shall be
maintained effective by the number of days in the period from and including the
date of the giving of notice of such event to and including the date when the
Company gives notice that the amendment or supplement has been filed and
declared effective (if an amendment).
(g) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant to such Registration Statement and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
(h) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Agreement, on the date that such
Registrable Securities are delivered for sale in connection with a registration
pursuant to this Agreement, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, and (ii) a letter dated such date, from the independent certified
public accountants of the Company, in form and substance as is customarily given
by independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters.
10. Information Furnished by Holder. It shall be a condition precedent of
the Company's obligations under this Agreement that each Holder of Registrable
Securities included in any Registration furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder or Holders as
the Company may reasonably request.
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11. Indemnification.
11.1 Company's Indemnification of Holders. To the extent permitted by law,
the Company will indemnify each Holder, each of its officers, directors,
constituent partners, legal counsel for the Holders, and each person controlling
such Holder, with respect to which Registration, qualification, or compliance of
Registrable Securities has been effected pursuant to this Agreement, and each
underwriter, if any, and each person who controls any underwriter against all
claims, losses, damages, liabilities, or actions in respect thereof
(collectively, "Damages") to the extent such Damages arise out of or are based
upon any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus or other document (including any related
Registration Statement or amendment or supplement thereto) incident to any such
Registration, qualification, or compliance, or are based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of the Securities Act, the Exchange Act, any state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange Act or
any state securities law applicable to the Company in connection with any such
Registration, qualification, or compliance; and the Company will reimburse each
such Holder, each such underwriter, and each person who controls any such Holder
or underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action; provided, however, that the indemnity contained in this
Section 11.1 shall not apply to amounts paid in settlement of any such Damages
if settlement is effected without the consent of the Company (which consent
shall not unreasonably be withheld); and provided, further, that the Company
will not be liable in any such case to the extent that any such Damages arise
out of or are based upon any untrue statement or omission based upon written
information furnished to the Company by such Holder, underwriter, or controlling
person and stated to be for use in connection with the offering of securities of
the Company.
11.2 Holder's Indemnification of Company. To the extent permitted by law,
each Holder will, if Registrable Securities held by such Holder are included in
the securities as to which such Registration, qualification or, compliance is
being effected pursuant to this Agreement, indemnify the Company, each of its
directors and officers, each legal counsel and independent accountant of the
Company, each underwriter, if any, of the Company's securities covered by such a
Registration Statement, each person who controls the Company or such underwriter
within the meaning of the Securities Act, and each other such Holder, each of
its officers, directors, and constituent partners, and each person controlling
such other Holder, against all Damages arising out of or based upon any untrue
statement (or alleged untrue statement) of a material fact contained in any such
Registration Statement or amendment or supplement thereto, prospectus, offering
circular, or other document, or any omission (or alleged omission) to state
13
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by such Holder of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law applicable to such Holder in connection with any such
Registration, qualification, or compliance, and will reimburse the Company, such
Holders, such directors, officers, partners, persons, law and accounting firms,
underwriters or control persons for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such Registration Statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder and stated to be
specifically for use in connection with the offering of securities of the
Company, provided, however, that the indemnity contained in this Section 11.2
shall not apply to amounts paid in settlement of any such Damages if settlement
is effected without the consent of such Holder (which consent shall not be
unreasonably withheld) and provided, further, that each Holder's liability under
this Section 11.2 shall not exceed such Holder's gross proceeds from the
offering of securities made in connection with such Registration.
11.3 Indemnification Procedure. Promptly after receipt by an indemnified
party under this Section 11 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party under this Section 11, notify the indemnifying party in
writing of the commencement thereof and generally summarize such action. The
indemnifying party shall have the right to participate in and to assume the
defense of such claim; provided, however, that the indemnifying party shall be
entitled to select counsel for the defense of such claim with the approval of
any parties entitled to indemnification, which approval shall not be
unreasonably withheld; provided further, however, that if either party
reasonably determines that there may be a conflict between the position of the
Company and the Investors in conducting the defense of such action, suit, or
proceeding by reason of recognized claims for indemnity under this Section 11,
then counsel for such party shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interest of such party and the fees and expenses of counsel for such party shall
be paid by the Company. The failure to notify an indemnifying party promptly of
the commencement of any such action, if prejudicial to the ability of the
indemnifying party to defend such action, shall relieve such indemnifying party,
to the extent so prejudiced, of any liability to the indemnified party under
this Section 11, but the omission so to notify the indemnifying party will not
relieve such party of any liability that such party may have to any indemnified
party otherwise other than under this Section 11.
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11.4 Contribution. If the indemnification provided for in this Section 11
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any Damages referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party hereunder, shall
contribute to the amount paid or payable by such indemnified party as a result
of such Damages in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and of the indemnified party on
the other in connection with the statements or omissions that resulted in such
Damages as well as any other relevant equitable considerations. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission; provided, however, that in no
event shall any contribution by a Holder exceed the gross proceeds from the
offering of securities made in connection with such Registration received by
such Holder.
11.5 Conflicts. Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
11.6 Survival of Obligations. The obligations of the Company and Holders
under this Section 11 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Agreement or
otherwise.
12. Transfer of Rights. The rights to information under Section 2, the
right of first refusal under Section 4 and the right to cause the Company to
Register securities granted by the Company to the Investors under this Agreement
may be assigned by any Holder to a transferee or assignee of any Convertible
Securities or Registrable Securities which is a subsidiary, parent, general
partner, limited partner, retired partner, member or retired member of a Holder;
provided, however, that (i) the Company must receive written notice prior to the
time of said transfer, stating the name and address of said transferee or
assignee and identifying the securities with respect to which such rights are
being assigned, and (ii) the transferee or assignee of such rights must not be a
person deemed by the Board of Directors of the Company, in its reasonable
judgment, to be a competitor or potential competitor of the Company.
15
13. Market Stand-off. Each Holder hereby agrees that, if so requested by
the Company and the Underwriter's Representative (if any) in connection with any
Registration effected by the Company, such Holder shall not sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise transfer or
dispose of any Registrable Securities or other securities of the Company without
the prior written consent of the Underwriter's Representative for such period of
time (not to exceed 180 days) following the effective date of a Registration
Statement of the Company filed under the Securities Act as may be requested by
the Underwriter's Representative.
14. No-Action Letter or Opinion of Counsel in Lieu of Registration;
Conversion of Preferred Stock. Notwithstanding anything else in this Agreement,
if the Company shall have obtained from the Commission a "no-action" letter in
which the Commission has indicated that it will take no action if, without
Registration under the Securities Act, any Holder disposes of Registrable
Securities covered by a request for Registration made under Section 5.1 in the
specific manner in which such Holder proposes to dispose of the Registrable
Securities included in such request, and that such Registrable Securities may be
sold to the public without Registration, or if in the opinion of counsel for the
Company concurred in by counsel for such Holder, which concurrence shall not be
unreasonably withheld, no Registration under the Securities Act is required in
connection with such disposition and that such Registrable Securities may be
sold to the public without Registration, the Registrable Securities included in
such request pursuant to Section 5.1 shall not be eligible for Registration
under this Agreement; provided, however, that any Registrable Securities not so
disposed of shall be eligible for Registration in accordance with the terms of
this Agreement with respect to other proposed dispositions to which this
Section 14 does not apply. The Registration rights of the Holders of the
Registrable Securities set forth in this Agreement are conditioned upon the
conversion of the Registrable Securities with respect to which registration is
sought into Common Stock prior to the effective date of the Registration
Statement.
15. Reports Under the Exchange Act. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Securities Act and any
other rule or regulation of the Commission that may at any time permit a Holder
to sell securities of the Company to the public without Registration or pursuant
to a registration on Form S-3, the Company agrees to:
(a) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(b) furnish to any Holder, so long as the Holder owns any Registrable
Securities, promptly upon request (i) a written statement by the Company that it
has complied with the reporting requirements of Rule 144, the Securities Act and
the Exchange Act, or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the Commission which permits
the selling of any such securities without Registration or pursuant to such
form.
16
16. Miscellaneous.
16.1 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.
16.2 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.
16.3 Headings. The headings of the Sections of this Agreement are for
convenience and shall not by themselves determine the interpretation of this
Agreement.
16.4 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
Company's name on the signature page of this Agreement, and (ii) if to an
Investor, at such Investor's address as set forth 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.
16.5 Amendment or Waiver. This Agreement may be amended or modified, and
the obligations of the Company under the Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only upon the written consent of the Company and holders of more
than a majority of the Registrable Securities. Any amendment, modification or
waiver pursuant to, and in accordance with, this Section 16.5 shall be binding
on the Company, all holders of Registrable Securities at the time outstanding
and each future holder of any such securities. Notwithstanding the foregoing,
this Agreement may be amended by the Company with no further action on the part
of any other party hereto to include as Investors hereunder any persons or
entities who purchase Convertible Securities in a "Subsequent Closing" pursuant
to the Purchase Agreement, which amendment will be effective when the purchaser
evidences his, her or its agreement to be bound by the terms of this Agreement
by executing a counterpart signature page of this Agreement as an Investor, and
thereby shall be deemed "Holders" for all purposes under this Agreement. 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.
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16.6 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
16.7 Entire Agreement; Successors and Assigns. This Agreement constitutes
the entire contract among the Company and the Investors relative to the subject
matter hereof. Any previous agreement between the Company and any Investor
concerning Registration rights is superseded by this Agreement. Subject to the
exceptions specifically set forth in this Agreement and the limitations on
transfer set forth in Section 12, the terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective executors,
administrators, heirs, successor, and permitted assigns of the parties.
18
IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights
Agreement as of the day and year first above written.
Company: PHOTOWORKS, INC., a Washington corporation
By: /s/ Gary Christopherson
Gary Christophersen, President and CEO
Address: 1260 16th Avenue West
Seattle, Washington 98119
Fax No. (206) 284-5357
Investors: MADRONA VENTURE FUND I-A, L.P.
By Madrona Investment Partners, LLC,
its General Partner
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98104
{SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}
MADRONA VENTURE FUND I-B, L.P.
By Madrona Investment Partners, LLC,
its General Partner
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98104
MADRONA MANAGING DIRECTOR FUND, LLC
By: /s/ Paul Goodrich
Name: Paul Goodrich
Title: Managing Director
Address: 1000 Second Avenue, Suite 3700
Seattle, WA 98104
{SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}
THE TAHOMA FUND, L.L.C.
By: /s/ Ross Chapin
Name: Ross Chapin
Title: Managing Member
Address: P.O. Box 21749
Seattle, WA 98111
ORCA BAY CAPITAL CORPORATION
By: /s/ Stanley McCammon
Name: Stanley McCammon
Title: President
Address: P.O. Box 21749
Seattle, WA 98111
TIM and ALEXA CARVER
By: /s/ Tim Carver
Name: Tim Carver
By: /s/ Alexa Carver
Name: Alexa Carver
Address: P.O. Box 21749
Seattle, WA 98111
{SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}
STANLEY McCAMMON
By: /s/ Stanley McCammon
Name: Stanley McCammon
Address: P.O. Box 21749
Seattle, WA 98111
AARON SINGLETON
By: /s/ Aaron Singleton
Name: Aaron Singleton
Address: P.O. Box 21749
Seattle, WA 98111
{SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}
EXHIBIT A
SCHEDULE OF INVESTORS
The Tahoma Fund, L.L.C.
Orca Bay Capital Corporation
Tim and Alexa Carver
Stanley McCammon
Aaron Singleton
Madrona Venture Fund I-A, L.P.
Madrona Venture Fund I-B, L.P.
Madrona Managing Director Fund, LLC