-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FOAMOZSRG2nzHAv1gIR5C9B5ZXG4/+NxrmUapT9Iv164t3fOJAhoZcUJjMH3Zy+0 N8jZSLPylXDx1nDp+HgErw== 0000912057-00-024626.txt : 20000516 0000912057-00-024626.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024626 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFONAUTICS INC CENTRAL INDEX KEY: 0000909494 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 232707366 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28284 FILM NUMBER: 633633 BUSINESS ADDRESS: STREET 1: 900 W VALLEY RD STREET 2: STE 1000 CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6109718840 MAIL ADDRESS: STREET 1: 900 W VALLEY ROAD STREET 2: SUITE 1000 CITY: WAYNE STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: INFONAUTICS CORP DATE OF NAME CHANGE: 19960315 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 --------------- or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 For the transition period from _____________ to ________________ Commission file number 0-28284 INFONAUTICS, INC. (exact name of registrant as specified in its charter) Pennsylvania 23-2707366 ------------ ---------- (State or other jurisdiction (IRS Employer ID No.) of incorporation of organization) 900 West Valley Road, Suite 1000, Wayne, Pa 19087 -------------------------------------------------- (Address of principal executive offices) (610) 971-8840 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at March 31, 2000 ----- ----------------------------- Class A Common Stock, no par value 12,075,483 Class B Common Stock, no par value 100,000
INFONAUTICS, INC. INDEX
Page Number ----------- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 3 Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2000 and March 31, 1999 4 Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2000 and March 31, 1999 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II: OTHER INFORMATION Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements
2 INFONAUTICS, INC. CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, DECEMBER 31, 2000 1999 (UNAUDITED) Current assets: Cash and cash equivalents $ 14,563,368 $ 3,739,024 Receivables: Trade, less allowance for doubtful accounts of $99,800 in 2000 and 1999 756,669 637,316 Due from affiliate -- 13,500,000 Other 193,972 513,231 Prepaid expenses and other assets 245,797 267,230 ------------ ------------ Total current assets 15,759,806 18,656,801 Property and equipment, net 567,884 492,438 Investments in affiliates 8,386,613 10,885,773 Intangible and other assets 214,616 26,415 ------------ ------------ Total assets $ 24,928,919 $ 30,061,427 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 919,404 $ 916,292 Due to affiliate 646,695 -- Accrued expenses 920,182 2,438,515 Accrued royalties -- 75,606 Deferred revenue 834,979 858,159 Convertible debt 3,043,046 2,857,322 ------------ ------------ Total current liabilities 6,364,306 7,145,894 ------------ ------------ Total liabilities 6,364,306 7,145,894 ------------ ------------ Commitments and contingencies Shareholders' equity (deficit): Class A common stock, no par value; 25,000,000 shares authorized; one vote per share; 12,075,483 and 11,757,076 shares issued and outstanding at March 31, 2000 and December 31, 1999, respectively -- -- Class B common stock, no par value; 100,000 shares authorized, issued and outstanding -- -- Additional paid-in capital 59,258,546 58,316,564 Accumulated deficit (40,693,933) (35,401,031) ------------ ------------ Total shareholders' equity 18,564,613 22,915,533 ------------ ------------ Total liabilities and shareholders' equity $ 24,928,919 $ 30,061,427 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 INFONAUTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 ------------ ------------ Revenues $ 3,041,137 $ 5,231,028 ------------ ------------ Costs and expenses: Cost of revenues 803,627 1,709,119 Customer support expenses 19,727 272,031 Technical operations and development expenses 1,430,113 2,216,562 Sales and marketing expenses 2,883,446 2,804,552 General and administrative expenses 703,339 751,574 ------------ ------------ Total costs and expenses 5,840,252 7,753,838 ------------ ------------ Loss from operations (2,799,115) (2,522,810) Equity in net losses of unconsolidated affiliate (2,499,160) -- Interest income (expense), net 5,373 (287,330) ------------ ------------ Net loss (5,292,902) (2,810,140) Redemption of preferred stock in excess of carrying amount -- (74,875) Net loss attributable to common shareholders $ (5,292,902) $ (2,885,015) ============ ============ Loss per common share- basic and diluted $ (.44) $ (.25) ============ ============ Weighted average shares outstanding- basic and diluted 12,034,300 11,647,200 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 INFONAUTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 ------------ ------------ Cash flows from operating activities: Net loss $ (5,292,902) $ (2,810,140) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 133,747 349,306 Amortization of discount on debt 133,224 296,415 Accretion on convertible debt 52,500 -- Provision for losses on accounts receivable -- 21,800 Amortization of deferred compensation -- 31,250 Equity in investee losses 2,499,160 -- Changes in operating assets and liabilities: Receivables: Trade (119,353) 220,106 Other 319,259 (51,045) Prepaid and other assets 12,676 170,369 Accounts payable 163,769 (244,342) Due to affiliate 646,695 -- Accrued expenses (32,980) (300,313) Accrued royalties (75,606) 310,081 Deferred revenue (23,180) (722,343) ------------ ------------ Net cash used in operating activities (1,582,991) (2,728,856) ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (198,637) (62,254) Receipts from disposition of businesses, net 11,853,990 -- Purchases of intangibles (70,000) -- ------------ ------------ Net cash provided by (used in) investing activities 11,585,353 (62,254) ------------ ------------ Cash flows from financing activities: Net proceeds from issuance of common stock 821,982 84,999 Repurchase of preferred stock -- (333,358) Proceeds from long term borrowings -- 3,000,000 Payments on capital lease obligations -- (84,999) ------------ ------------ Net cash provided by financing activities 821,982 2,666,642 ------------ ------------ Net increase (decrease) in cash and cash equivalents 10,824,344 (124,468) Cash and cash equivalents, beginning of period 3,739,024 3,267,811 Cash and cash equivalents, end of period $ 14,563,368 $ 3,143,343 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 INFONAUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS AND PRESENTATION: The unaudited consolidated financial statements of Infonautics, Inc. (including its subsidiaries, "Infonautics," and the "Company) presented herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that these financial statements be read in conjunction with the financial statements for the year ended December 31, 1999 and the notes thereto included in the Company's 1999 Annual Report on Form 10-K. The financial information in this report reflects, in the opinion of management, all adjustments of a normal recurring nature necessary to present fairly the results for the interim period. Quarterly operating results may not be indicative of results which would be expected for the full year. 2. THE COMPANY AND OUR RECENT TRANSACTION: Infonautics, Inc. is a provider of personalized information agents and Internet sites. The Infonautics Network of web properties includes the free, advertising supported Sleuth Center content notification sites featuring Company Sleuth, Sports Sleuth, Job Sleuth, Entertainment Sleuth, Mobile Sleuth and Shopping Sleuth. The Infonautics Network also includes search and reference sites consisting of the subscriber based Electric Library and the free Encyclopedia.com, eLibrary Tracker and Newsdirectory.com. On December 15, 1999, Infonautics completed a transaction in which Infonautics contributed its Electric Library K-12 and public library contracts, assets, liabilities and related commitments into what is now bigchalk.com, Inc. ("bigchalk.com"), an Internet education company, in exchange for $16.5 million in cash and a 30.89 percent interest in bigchalk.com. Infonautics collected the $13.5 million note receivable from the transaction in January 2000. Infonautics continues to develop and market its Sleuth Center sites. The Company also retained the rights to market Electric Library to end-users (subject to an option granted to bigchalk.com to purchase the end-user business). 3. INVESTMENT IN AFFILIATES: During January 2000, the Company's equity interest in bigchalk.com was diluted to from 30.89% to 30.28% of the outstanding common stock as a result of a private financing closed by bigchalk.com. For the three months ended March 31, 2000, the Company expensed $2,499,000 as its equity in the unaudited losses of bigchalk.com for the corresponding quarter. The Company also incurred $696,241 of content royalties and $240,083 of technical services fees to bigchalk.com during the three months ended March 31, 2000. These costs were the result of our content and technical services agreements with bigchalk.com. At March 31, 2000, $646,695 is due to bigchalk.com for these content royalties and technical services fees. The unaudited statement of operations of bigchalk.com for the three months ended March 31, 2000 is as follows, in millions:
Net revenues $ 8 Gross profit 3 Loss from continuing operations (8) Net loss (8)
6 4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: The Company collected a note receivable for $13,500,000 in January 2000 on the transaction with bigchalk.com. Related expenses of $1,646,010, which had been in accrued expenses as December 31, 1999, were paid in the quarter ended March 31, 2000. Interest expense of $28,000 and $52,500 was accrued on the February 1999 convertible debt instrument during the three months ended March 31, 1999 and 2000, respectively. Approximately $197,000 was recognized during the three months ended March 31, 1999 as amortization of the discount associated with the beneficial conversion feature on the convertible debt. Approximately $800,000 was recorded in February 1999 as an additional discount on debt related to the valuation of warrants issued in connection with the convertible debt. During the three months ended March 31, 1999 and 2000, $71,000 and $133,225 of this discount was amortized and recorded as interest expense, respectively. Cash paid for interest expense was $20,342 and $4,933, for 1999 and 2000 respectively. In connection with the repurchase of 283 shares of Series A Convertible Preferred Stock made under the July 1998 financing, the Company charged additional paid-in capital in the first quarter of 1999 for approximately $75,000, which represents the excess of the redemption price over the accreted carrying value of the Series A Preferred Stock. The Company issued common stock in February 2000, as part of a purchase of intangibles, with a fair value of approximately $120,000. Gross barter income and expenses of $151,500 and $55,000 are included in revenue and marketing expenses for the quarters ended March 31, 2000 and 1999, respectively. 5. Commitments and Contingencies: Marketing Agreement: The Company entered into a marketing agreement in March 1998, in which we agreed to pay $4.0 million in placement fees to America Online for anchor placements of our Electric Library site. In March 2000, the Company made the final required payment of $500,000 due under this agreement. At March 31, 2000, accrued expenses included $136,119 related to this agreement for additional fees calculated in accordance with the contract. Included in prepaid expenses was $169,743, representing one month of fixed placement fees paid in March 2000. Letter of Credit: The Company had an outstanding letter of credit which expired on March 31, 2000. This letter of credit, in the amount of $110,000, collateralized our obligations to a third party under a leasing arrangement. Leases: In April 2000, the Company entered a lease agreement to occupy office space for a term of three years. The lease terms provide for up to six free months of rent, commencing in July 2000, followed by annual commitments of $286,500, $301,500 and $316,500 for 2001, 2002 and 2003, respectively. The Company expects to occupy the space in July 2000, and begin payments in January 2001. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Report on Form 10-Q contains, in addition to historical information, forward-looking statements by the Company with regard to its expectations as to financial results and other aspects of its business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "may," "should," "anticipate," "believe," "plan," "estimate," "expect" and "intend," and other similar expressions are intended to identify forward-looking statements. These include, for example, statements regarding the sufficiency of the Company's liquidity, including cash resources and capital, the number of registered users and subscribers, gross margins, current and future expenses and costs, future revenues and shortfalls in revenue, use of system resources and marketing effects, growth and expansion plans, sales and marketing plans, changes in our marketing partners, capital expenditures, seasonality, operating results, licensing and service contracts with bigchalk.com, Inc., and the transaction with bigchalk.com, Inc, Such statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Factors that may cause such a difference include, but are not limited to, the risks set forth in the Company's filing with the Securities and Exchange Commission. All forward-looking statements included in this document are based on information available to the Company as of the date of this document, and the Company assumes no obligation to update these cautionary statements or any forward-looking statements. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 PRO FORMA RESULTS OF OPERATIONS: The pro forma results of operations reflected here are based on available information and certain information and assumptions that the Company's management believes are reasonable. As a result of the transaction with bigchalk.com and Bell & Howell Company, the following pro forma information for the three months ended March 31, 1999 has been prepared for comparative purposes to the ongoing operations of the Company:
Revenues $1,996,000 Costs and Expenses 3,037,000 Loss from Operations (1,041,000)
REVENUES. Total revenues were $3,041,000 for the three months ended March 31, 2000, and $5,231,000 for the three months ended March 31, 1999. Pro forma revenues for the three months ended March 31, 1999 were $1,996,000. End-user subscription revenue, a continuing market for us, accounted for $2,401,000 or 79% of revenue for the three months ended March 31, 2000 and $1,767,000 or 89% of pro forma revenue for the three months ended March 31, 1999. The increase in the total revenues is primarily a result of the increasing number of subscribers, as we had approximately 100,000 Electric Library subscribers at March 31, 2000 compared to approximately 75,000 at March 31, 1999. Advertising and other e-commerce revenues, a continuing market for us, were $634,000, or 21% of revenues for the three months ended March 31, 2000 and $140,000, or 7% of pro forma revenues for the three months ended March 31, 1999. Barter revenue accounted for $152,000 of this revenue in 2000 and $55,000 in 1999. These revenues consist of advertising revenues from advertising that are displayed on the Infonautics Network sites. Since March 31, 1999, we have introduced new sites which are available to sell advertising on, such as Sports Sleuth, Job Sleuth, Shopping Sleuth and Entertainment Sleuth. E-commerce revenues include referral revenues from partners who pay us for selling trial offers for their products (typically magazine or newspaper subscriptions), revenues from co-branding of our sites, and revenues from participation in affiliate networks. Direct marketing fee revenues consist of e-mails that are sent to our users with advertising promotions. Reseller revenue was approximately $6,000 for the three months ended March 31, 2000, compared to approximately $89,000 for the three months ended March 31, 1999. All reseller contracts have expired and we are no longer pursuing the reseller business. Educational revenue accounted for $2,705,000 or 52% of revenue for the three months ended March 31, 1999. There were no educational revenues in 2000, as all educational contracts are now owned by bigchalk.com. E-commerce online publishing revenue was $223,000 or 4% of revenue in the three months ended March 31, 1999. There were no revenues from E-commerce online publishing in 2000, as we sold this business to Bell & Howell 8 Information and Learning Company as part of our bigchalk.com transaction. Extranet and intranet knowledge management services (IntelliBank) revenue was $115,000, or 2% of revenue in the three months ended March 31, 1999. There were no IntelliBank revenues in 2000 as we have discontinued that business. Other revenue was $192,000, for the three months ended March 31, 1999. Other revenue consisted primarily of sales of Electric Library through international partners, which was transferred to bigchalk.com. At March 31, 2000 we had deferred revenue of approximately $835,000, compared to $858,000 at December 31, 1999. The deferred revenue consists of revenue to be recognized from annual end-user subscriptions. We would expect deferred revenue to remain at this level unless the number of annual end-user subscriptions increased significantly. COST OF REVENUES. The principal elements of our cost of revenues during 2000 are royalty and license fees on end-user revenues paid to bigchalk.com, which is currently the sole provider of content, hardware and software, and communication costs associated with the delivery of the Electric Library services. Cost of revenues was $804,000 for the three months ended March 31, 2000 compared to $1,709,000 for the three months ended March 31, 1999. Cost of revenues in the first quarter of 2000 decreased due to the decrease in revenues as a result of the sale of the educational and international contracts to bigchalk.com. Additionally, the percentage of cost of revenues decreased as a result of change in the product mix, as the advertising and e-commerce revenues make up a greater portion of revenues in 2000, and there are no royalty or license fees on these revenues. CUSTOMER SUPPORT. Customer support expenses consist primarily of costs associated with the staffing of professionals responsible for assisting users with technical and product issues and monitoring customer feedback. Customer support expenses were $20,000 for the three months ended March 31, 2000, compared to $272,000 for the three months ended March 31, 1999, a 93% decrease. As a percentage of revenue, customer support expenses for the first quarter were less than 1% in 2000 and 5% in 1999. The decrease in 2000 resulted primarily from lower staffing levels as a result of the bigchalk.com transaction. We anticipate continuing to make increasing customer support expenditures, including hiring customer support personnel, as we improve our customer service for all products on the Infonautics Network. TECHNICAL OPERATIONS AND DEVELOPMENT. Technical operations and development expenses consist primarily of costs associated with maintaining our service, data center operations, hardware expenses and data conversion costs as well as the design, programming, testing, documentation and support of our new and existing sites. To date, all of our costs for technical operations and development have been expensed as incurred. Technical operations and development expenses were $1,430,000 or 47% of total revenues for the three months ended March 31, 2000, compared to $2,217,000 or 42% of total revenues for the three months ended March 31, 1999. A significant portion of these development costs in 2000 have resulted from the technical services agreement with bigchalk.com, requiring a percentage of Electric Library end-user revenues to be paid to bigchalk.com for use of the Electric Library technical support and datacenter operations. The absolute dollar decrease was largely due to the bigchalk.com transaction, as many of our personnel and costs associated with those personnel were included in the sale to bigchalk.com. However, we expect that the level of technical operations and development expenses may increase quarter over quarter as we develop new and enhanced sites and upgrades to the current sites which may include the use of outside consultants and additional hiring. SALES AND MARKETING. Sales and marketing costs consist primarily of costs related to compensation, attendance at conferences and trade shows, marketing programs, advertising and promotion. Sales and marketing expenses were $2,883,000 for the three months ended March 31, 2000, compared to $2,805,000 for the three months ended March 31, 1999, representing a 3% increase. The principal reasons for the increase in absolute dollars was a Sport Sleuth marketing campaign in March 2000, which cost approximately $1 million. This cost was partially offset by a decrease in sales personnel costs as a result of the bigchalk.com transaction. Additionally, during 1999, we were 9 implementing cost reduction efforts in our marketing programs. As a percentage of revenue, sales and marketing costs were 95% and 54% for the three months ended March 31, 2000 and 1999, respectively. We currently have no plans for a significant marketing program similar to the first quarter of 2000. The marketing of the Electric Library end-user business has been and will continue to be limited. We use affiliate and other marketing programs to acquire registered users. We may accelerate these programs which could increase the cost of acquisition. Additionally, we will no longer incur the trade show, conference and other costs of marketing to the educational market as a result of our bigchalk.com transaction. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of expenses for administration, office operations, finance and general management activities, including legal, accounting and other professional fees. General and administrative expenses were $703,000 for the three months ended March 31, 2000, compared to $752,000 for the three months ended March 31, 1999. We do not anticipate that general and administrative expenses will increase significantly in the second quarter unless we consider or enter into any strategic alliances or transactions, or hire additional management. INCOME (LOSS) IN EQUITY INVESTMENT. The loss in equity investment consists of our share of the results of operations of bigchalk.com. The loss of equity in the investment was $2,499,000 during the first quarter of 2000. There were no such costs during 1999. As of March 31, 2000, we held a 30.28% interest in the common stock of bigchalk.com. We expect that bigchalk.com will continue to generate net losses in 2000 as it develops its business and expands market share. INTEREST INCOME (EXPENSE), NET. We recorded net interest income of $5,000 in the three months ended March 31, 2000, as compared to net interest expense of $287,000 in the three months ended March 31, 1999. Approximately $196,000 of interest income was earned in the current quarter. Offsetting this income was $191,000 in interest expense primarily arising from interest accrued upon the convertible debt issued on February 11, 1999, and the amortization of the debt discount (which is due to the warrant valuation and beneficial conversion feature of the convertible debt). Approximately $300,000 of interest expense was incurred in the prior year quarter as a result of the amortization of the debt discount and interest expense related to the convertible debentures. Interest expense in the second quarter of 2000 is expected to remain consistent as we will continue to incur interest expense for the amortization of the debt discount and interest incurred on the debenture, and interest income will decrease as our cash balances decrease. INCOME TAXES. We have incurred net operating losses since inception and accordingly, have not recorded an income tax benefit for these losses. LIQUIDITY AND CAPITAL RESOURCES To date, we have funded our operations and capital requirements through proceeds from the private sale of equity securities, our initial public offering, proceeds from the transaction with Bell & Howell Company and bigchalk.com, proceeds from the issuance of preferred stock, utilization of an accounts receivable purchase agreement, and, to a lesser extent, operating leases. We had cash, cash equivalents and investments of approximately $14,563,000 at March 31, 2000, as compared to $3,739,000 at December 31, 1999, an increase of $10,824,000. We collected a $13.5 million receivable note arising from the Bell & Howell and bigchalk.com transaction in January. We monitor our cash and investment balances regularly and invest excess funds in short-term money market funds, corporate bonds and commercial paper. We had working capital of approximately $9.4 million at March 31, 2000, which includes $3 million of convertible debt which is due to be paid or converted in August 2000. We used cash in operations of approximately $1,583,000 for the three months ended March 31, 2000 compared with $2,729,000 for the comparable period in 10 1999. This decrease in cash used is primarily a result of the timing of payables as well as a decrease in costs related to the sale of the educational and online publishing businesses during the fourth quarter of 1999. Net cash provided by investing activities was $11,585,000 for the three months ended March 31, 2000, reflecting the collection of the note receivable from the transaction with bigchalk.com net of related fees. This compares to cash provided used in investing activities of $62,000 for the three months ended March 31, 1999. Net cash used for capital expenditures was $199,000 and $62,000, respectively, for the three months ended March 31, 2000 and 1999. Net cash used for the purchase of intangibles related to Newsdirectory.com was $70,000 for the three months ended March 31, 2000. Our principal commitments at March 31, 2000 consisted of obligations under the bigchalk.com service and license agreements. In addition, in April 2000, we entered into a 42-month facility lease agreement (see Note 5 in Item 1). Capital expenditures have been, and future expenditures are anticipated to be, primarily for facilities and equipment to support the expansion of our operations and systems. We expect that our capital expenditures will increase as the number of sites on the Infonautics Network increases. As of March 31, 2000, we had commitments for less than $100,000 in capital expenditures for equipment to support the increased customer base. We anticipate that our planned purchases of capital equipment, a move to new offices and the related expenses will require additional expenditures of approximately $1,000,000 for the remainder of 2000, a portion of which we may finance through equipment leases, or a working capital line of credit. We have obtained financing for some of this equipment through an equipment lease, however, there can be no guarantee we will obtain future lease financing. Net cash provided by financing activities was $822,000 in the three months ended March 31, 2000, compared to $2,667,000 in the three months ended March 31, 1999. During 2000, we received funds through the exercise of stock options of former employees who were hired by bigchalk.com and had until March 30, 2000 to exercise options. In February 1999, we raised an additional $3 million through the issuance of convertible debt. We currently anticipate that the cash balances and cash from operations, will be sufficient to meet our anticipated needs for at least the next twelve months. We may need to raise additional funds in the future in order to fund more aggressive marketing or growth, to develop new or enhanced services, to respond to competitive pressures or to make acquisitions. Any required additional financing may not be available on terms favorable to us, or at all, and may result in dilution to our shareholders. SEASONALITY During the summer months, and possibly during other times of the year such as major holidays, Internet usage often declines. As a result, our sites may experience reduced user traffic. For example, our experience with Electric Library shows that new user registrations and usage of the site declines during the summer months and around the year-end holidays. Our experience with Company Sleuth shows that new user registrations and usage of the site declines at about the same times. Not all of our sites may experience the same seasonal effects and some, Shopping Sleuth, for example, might experience increased usage during the gift-buying season around the year-end holidays. Seasonality may also affect advertising and affiliate performance which could in turn affect our sites' performance. 11 PART II. OTHER INFORMATION Item 5. Other Information On January 10, 2000, we entered into a Stockholders Agreement with bigchalk.com, Inc. and Bell & Howell Information and Learning Company, as well as with the investors in a private placement of bigchalk.com preferred stock and common stock. The Stockholders Agreement specifies the rights and obligations of the bigchalk.com founders, Infonautics and Bell & Howell Information and Learning Company, as well as the private placement investors. Under the agreement, we have, among other rights, limited registration rights for our bigchalk.com stock. We, along with the other investors, are also subject to certain lock-up provisions as specified in the Stockholders Agreement. Item 6. Exhibits & Reports on Form 8-K (a) Exhibits: 3.1 - Form of Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-2428) as amended in part by the Exhibit 3.1 attached to this Form 10-Q) 10.20 - Stockholders Agreement dated January 10, 2000 between the Company, bigchalk.com, Inc., Bell & Howell Information and Learning Company, TBG Information Investors LLC, Core Learning Group LLC, Core Learning Group - BC, LLC, APA Excelsior V, L.P.., Patricof Private Investment Club II, L.P., Frank A. Bonsal, Jr., WS Investment Company 99B, Alan K. Austin, The San Domenico Trust, Timothy J. Sparks, and Daniel K. Yuen 27.0 - Financial Data Schedule (b) Reports on Form 8-K: None. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INFONAUTICS, INC. Date: May 15, 2000 /s/ David Van Riper Morris ---------------------------- David Van Riper Morris Chief Executive Officer Date: May 15, 2000 /s/ Federica F. O'Brien ---------------------------- Federica F. O'Brien Principal Financial and Accounting Officer 13 EX-3.1 2 EXHIBIT 3.1 Exhibit 3.1 EXHIBIT A TO STATEMENT WITH RESPECT TO SHARES FOR SERIES A CONVERTIBLE PREFERRED STOCK OF INFONAUTICS, INC. RESOLVED, that pursuant to the authority granted to and vested in the board of directors of this Corporation (the "Board of Directors" or the "Board") in accordance with the provisions of its Articles of Incorporation, the Board of Directors hereby authorizes a series of the Corporation's previously authorized Preferred Stock (the "Preferred Stock"), and hereby states the designation and number of shares, and fixes the relative rights, preferences, privileges, powers and restrictions thereof as follows: Series A Convertible Preferred Stock: I. DESIGNATION AND AMOUNT The designation of this series, which consists of 5,000 shares of Preferred Stock, is Series A Convertible Preferred Stock (the "Series A Preferred Stock") and the stated value shall be One Thousand Dollars ($1,000) per share (the "Stated Value"). II. RANK The Series A Preferred Stock shall rank (i) prior to the Corporation's Class A common stock, no par value (the "Common Stock") and Class B common stock, no par value; (ii) prior to any class or series of capital stock of the Corporation hereafter created (unless, with the consent of the holders of Series A Preferred Stock obtained in accordance with Article IX hereof, such class or series of capital stock specifically, by its terms, ranks senior to or PARI PASSU with the Series A Preferred Stock) (collectively, with the Common Stock, "Junior Securities"); (iii) PARI PASSU with any class or series of capital stock of the Corporation hereafter created (with the consent of the holders of Series A Preferred Stock obtained in accordance with Article IX hereof) specifically ranking, by its terms, on parity with the Series A Preferred Stock ("PARI PASSU Securities"); and (iv) junior to any class or series of capital stock of the Corporation hereafter created (with the consent of the holders of Series A Preferred Stock obtained in accordance with Article IX hereof) specifically ranking, by its terms, senior to the Series A Preferred Stock ("Senior Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. III. DIVIDENDS The Series A Preferred Stock shall not bear any dividends. In no event, so long as any Series A Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, any Junior Securities, nor shall any shares of Junior Securities be purchased or redeemed by the Corporation nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any Junior Securities (other than a distribution of Junior Securities), without, in each such case, the written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, voting together as a class. IV. LIQUIDATION PREFERENCE A. LIQUIDATION EVENT. If the Corporation shall commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or State bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, 2 custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of thirty (30) consecutive days and, on account of any such event, the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up (each such event being considered a "Liquidation Event"), no distribution shall be made to the holders of any shares of capital stock of the Corporation (other than Senior Securities) upon liquidation, dissolution or winding up unless prior thereto, the holders of shares of Series A Preferred Stock, subject to Article VI, shall have received the Liquidation Preference (as defined in Article IV.C) with respect to each share. If upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the holders of the Series A Preferred Stock and holders of PARI PASSU Securities (including any dividends or distribution paid on any PARI PASSU Securities after the date of filing of this Statement With Respect To Shares for the Series A Preferred Stock (the "Statement") shall be insufficient to permit the payment to such holders of the preferential amounts payable thereon, then the entire assets and funds of the Corporation legally available for distribution to the Series A Preferred Stock and the PARI PASSU Securities shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate liquidation preference payable on all such shares. Any prior dividends or distribution made after the date of filing of this Statement shall offset, dollar for dollar, the amount payable to the class or series to which such distribution was made. B. CERTAIN ACTS DEEMED LIQUIDATION EVENT. At the option of any holder of Series A Preferred Stock, the sale, conveyance or disposition of all or substantially all of the assets of the Corporation, the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, or the consolidation, acquisition, merger or other business combination of the Corporation with or into any other Person (as defined below) or Persons when the Corporation is not the survivor shall either: (i) be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to which the Corporation shall be required to distribute upon consummation of and as a condition to such transaction an amount equal to 120% of the Liquidation Preference with respect to each outstanding share of Series A Preferred Stock in accordance with and subject to the terms of this Article IV or (ii) be treated pursuant to Article VI.C(b) hereof, PROVIDED, HOWEVER, that no such distribution pursuant to clause (i) above will be available and such event will be required to be treated pursuant to clause (ii) above, where (A) the Corporation undertakes such an event and plans to account for such event as a "pooling of interests" in accordance with generally accepted accounting principles; and (B) the value of the distribution that would have been received pursuant to clause (i) above would be less than the value of the Common Stock that would be received upon conversion of the Series A Preferred Stock in accordance with Article VI below (treating the Trading Day (as defined in Article VI.B) immediately preceding the date of such distribution as the "Conversion Date" (as defined in Article VI.B(a)). "Person" shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization. 3 C. LIQUIDATION PREFERENCE. For purposes hereof, the "Liquidation Preference" with respect to a share of the Series A Preferred Stock shall mean an amount equal to the sum of (i) the Stated Value thereof plus (ii) an amount equal to five percent (5%) per annum of such Stated Value for the period beginning on the date of issuance of the Series A Preferred Stock (the "Issue Date") and ending on the date of final distribution to the holder thereof (prorated for any portion of such period). The liquidation preference with respect to any PARI PASSU Securities shall be as set forth in this Statement filed in respect thereof. V. REDEMPTION A. MANDATORY REDEMPTION. If any of the following events (each, a "Mandatory Redemption Event") shall occur: (i) The Corporation fails to issue shares of Common Stock to the holders of Series A Preferred Stock upon exercise by the holders of their conversion rights in accordance with the terms of this Statement (for a period of at least sixty (60) days if such failure is solely as a result of the circumstances governed by the second paragraph of Article VI.F below and the Corporation is using all commercially reasonable efforts to authorize a sufficient number of shares of Common Stock as soon as practicable), fails to transfer or to cause its transfer agent to transfer (electronically or in certificated form) any certificate for shares of Common Stock issued to the holders upon conversion of the Series A Preferred Stock as and when required by this Statement or the Registration Rights Agreement, dated as of July 22, 1998, by and among the Corporation and the other signatories thereto (the "Registration Rights Agreement"), fails to remove any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate or any shares of Common Stock issued to the holders of Series A Preferred Stock upon conversion of the Series A Preferred Stock as and when required by this Statement, the Securities Purchase Agreement dated as of July 22, 1998, by and between the Corporation and the other signatories thereto (the "Purchase Agreement") or the Registration Rights Agreement, or fails to fulfill its obligations pursuant to Sections 4(c), 4(h), 4(i), 4(j) or 5 of the Purchase Agreement (or makes any announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for ten (10) business days after the earlier of (i) the receipt by the Corporation of notice of such breach from a holder or (ii) the Corporation's actual knowledge of such breach, irrespective of the receipt of any notice thereof. (ii) The Corporation fails to obtain effectiveness with the Securities and Exchange Commission (the "SEC") of the Registration Statement (as defined in the Registration Rights Agreement) prior to January 22, 1999 or such Registration Statement lapses in effect (or sales otherwise cannot be made thereunder, whether by reason of the Company's failure to amend or supplement the prospectus included therein in accordance with the Registration Rights Agreement or otherwise) for more than thirty (30) consecutive days or 4 sixty (60) days in any twelve (12) month period after such Registration Statement becomes effective; (iii) The Corporation shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for all or substantially all of its property or business; or such a receiver or trustee shall otherwise be appointed; (iv) Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Corporation or any subsidiary of the Corporation and such proceedings remain outstanding for a period of sixty (60) days; (v) The Corporation shall fail to maintain the listing of the Common Stock on the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX") and such failure shall remain uncured for at least ten (10) days, then, upon the occurrence and during the continuation of any Mandatory Redemption Event specified in subparagraphs (i), (ii) or (v) at the option of the holders of at least 50% of the then outstanding shares of Series A Preferred Stock by written notice (the "Mandatory Redemption Notice") to the Corporation of such Mandatory Redemption Event, or upon the occurrence of any Mandatory Redemption Event specified in subparagraphs (iii) or (iv), the Corporation shall purchase each holder's shares of Series A Preferred Stock for an amount per share equal to the greater of (1) 120% multiplied by the sum of (a) the Stated Value of the shares to be redeemed plus (b) an amount equal to five percent (5%) per annum of such Stated Value for the period beginning on the Issue Date and ending on the date of payment of the Mandatory Redemption Amount (the "Mandatory Redemption Date"), and (2) the "parity value" of the shares to be redeemed, where parity value means the product of (a) the number of shares of Common Stock issuable upon conversion of such shares in accordance with Article VI below (without giving any effect to any limitations or conversions of shares set forth in Article VI.A(b) below, and treating the Trading Day (as defined in Article VI.B.) immediately preceding the Mandatory Redemption Date as the "Conversion Date" (as defined in Article VI.B(a)) unless the Mandatory Redemption Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion Date shall be the Conversion Date), multiplied by (b) the Closing Price (as defined in Article VI.A(b)) for the Common Stock on such "Conversion Date" (the greater of such amounts being referred to as the "Mandatory Redemption Amount"). In the case of a Mandatory Redemption Event, if the Corporation fails to pay the Mandatory Redemption Amount for each share within five (5) business days of written notice that such amount is due and payable, then (assuming there are sufficient authorized shares) in addition to all other available remedies, each holder of Series A Preferred Stock shall have the right at any time, so long as the Mandatory Redemption Event continues, to require the 5 Corporation, upon written notice, to immediately issue (in accordance with and subject to the terms of Article VI below), in lieu of the Mandatory Redemption Amount, with respect to each outstanding share of Series A Preferred Stock held by such holder, the number of shares of Common Stock of the Corporation equal to the Mandatory Redemption Amount divided by the Conversion Price then in effect. B. 19.99% REDEMPTION. If the Series A Preferred Stock ceases to be convertible as a result of the limitations described in Article VI.A(c) below (a "19.99% Redemption Event"), and the Corporation has not prior to, or within thirty (30) days of, the date that such 19.99% Redemption Event arises, (i) obtained approval of the issuance of the additional shares of Common Stock by the requisite vote of the holders of the then-outstanding Common Stock and Class B Common Stock (not including any shares of Common Stock held by present or former holders of Series A Preferred Stock that were issued upon conversion of Series A Preferred Stock) or (ii) received other permission pursuant to Nasdaq Marketplace Rule 4460(i) allowing the Corporation to resume issuances of shares of Common Stock upon conversion of Series A Preferred Stock, then the Corporation shall be obligated to redeem immediately all of the then outstanding Series A Preferred Stock, in accordance with this Article V.B. An irrevocable Redemption Notice shall be delivered promptly to the holders of Series A Preferred Stock at their registered address appearing on the records of the Corporation and shall state (1) that 19.99% of the Outstanding Common Amount (as defined in Article VI.A) has been issued upon exercise of the Series A Preferred Stock, (2) that the Corporation is obligated to redeem all of the outstanding Series A Preferred Stock and (3) the Mandatory Redemption Date, which shall be a date within five (5) business days of the date of the Redemption Notice. On the Mandatory Redemption Date, the Corporation shall make payment of the Mandatory Redemption Amount (as defined in Article V.A. above) in cash. If the Corporation fails to redeem in accordance with this Article V.B., then, in addition to all other remedies available to the holders of the Series A Preferred Stock, upon request of a majority-in-interest of the Series A Preferred Stock, the Corporation shall terminate the listing of its Common Stock on Nasdaq Marketplace (and any other exchange or quotation system with a rule substantially similar to Rule 4460(i)) and cause its Common Stock to be eligible for trading on the over-the-counter electronic bulletin board. C. REDEMPTION IN LIEU OF CONVERSION. Notwithstanding anything to the contrary contained in this Article V, so long as (i) on the Conversion Date (as defined herein), the Closing Price (as defined herein) is below $2.80, (ii) no Mandatory Redemption Event shall have occurred and be continuing and (iii) the Registration Statement is then in effect and has been in effect and sales can be made thereunder for at least twenty (20) days prior to the Optional Redemption Date (as defined below), then the Corporation shall have the right, in lieu of converting the shares of Series A Preferred Stock submitted for conversion, to redeem such shares of Series A Preferred Stock in accordance with this Article V. On the date fixed for redemption (the "Redemption Date"), the Corporation shall make payment of the Redemption Amount (as defined below) to or upon the order of the holders as specified by the holders in writing to the Corporation at least one (1) business day prior to the Redemption Date. If the Corporation exercises its right to redeem the shares of Series A Preferred Stock, the 6 Corporation shall make payment to the holders of an amount in cash (the "Redemption Amount") equal to the number of shares of Common Stock that would have been issued upon conversion multiplied by the Closing Price of the Common Stock on the Conversion Date. The Corporation will provide to the holders of Series A Preferred Stock advance notice on a monthly basis as to whether the Corporation will issue shares of Common Stock upon conversion of shares of Series A Preferred Stock or redeem such shares in the event the Corporation elects to redeem the shares of Series A Preferred Stock pursuant to this Article V.C during the applicable one month period. The Corporation will be bound by such election for a period of thirty (30) days, at which time its election may be modified or extended for an additional period of thirty (30) days. Any notice hereunder shall be delivered to the holders of Series A Preferred Stock at their registered addresses appearing on the books and records of the Corporation. A failure to properly provide notice or to properly modify or extend any prior notice shall be deemed to be an election not to redeem in lieu of conversion during the applicable thirty (30) day period. VI. CONVERSION AT THE OPTION OF THE HOLDER A. OPTIONAL CONVERSION. (a) CONVERSION AMOUNT. Subject to the conversion schedule set forth in Article VI.A(b) below, each holder of shares of Series A Preferred Stock may, at its option at any time and from time to time, upon surrender of the certificates therefor, convert any or all of its shares of Series A Preferred Stock into Common Stock as follows (an "Optional Conversion"). Each share of Series A Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (1) the sum of (a) the Stated Value thereof plus (b) the Premium Amount (as defined below), by (2) the then effective Conversion Price (as defined below); PROVIDED, HOWEVER, that, unless the holder delivers a waiver in accordance with the immediately following sentence, in no event (other than pursuant to the Automatic Conversion (as defined herein)) shall a holder of shares of Series A Preferred Stock be entitled to convert any such shares in excess of that number of shares upon conversion of which the sum of (x) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the shares of Series A Preferred Stock) and (y) the number of shares of Common Stock issuable upon the conversion of the shares of Series A Preferred Stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by a holder and such holder's affiliates of more than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (x) of such proviso. The "Premium Amount" means the product of the Stated Value, multiplied by .05, multiplied by (N/365), where "N" equals the number of days elapsed from the Issue Date to and including the conversion Date (as defined in Article VI.B, below). 7 (b) CONVERSION RESTRICTIONS. Each holder of shares of Series A Preferred Stock may convert only up to that percentage of all of such holder's shares specified below during the time period set forth opposite such percentage.
Percentage Time Period ---------- ----------- 0% Issue Date through January 22, 1999 25% January 23, 1999 through February 22, 1999 50% February 23, 1999 through March 22, 1999 75% March 23, 1999 through April 22, 1999 100% On or after April 23, 1999
; PROVIDED, HOWEVER, that the restrictions on conversion set forth above shall not apply to, and shall be exclusive of, conversions taking place on any Conversion Date (i) if on the Conversion Date the Closing Price (as defined below) of the Common Stock is greater than or equal to (x) 120% of the then applicable Market Price (as defined herein) or (y) the Fixed Conversion Price (as defined herein) or (ii) on or after the date the Corporation makes a public announcement that it intends to merge or consolidate with any other corporation or sell or transfer substantially all of the assets of the Corporation or (iii) on or after the date any person, group or entity (including the Corporation) publicly announces a tender offer to purchase 50% or more of the Corporation's Common Stock or otherwise publicly announces an intention to replace a majority of the Corporation's Board of Directors by waging a proxy battle or otherwise or (iv) on or after there is a material adverse change in the business, operation, assets, financial condition or prospects of the Corporation or its subsidiaries, taken as a whole. "Closing Price," as of any date, means the last sale price of the Common Stock on the Nasdaq as reported by Bloomberg Financial Markets or an equivalent reliable reporting service mutually acceptable to and hereafter designated by the holders of a majority in interest of the shares of Series A Preferred Stock and the Corporation ("Bloomberg") or, if Nasdaq is not the principal trading market for such security, the last sale price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last sale price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last sale price of such security or in the over-the-counter market on the electronic bulletin board for such security in any of the foregoing manners the average of the bid prices of any market makers for such or security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Price cannot be calculated for such security on such date in the manner provided above, the Closing Price shall be the fair market value as mutually determined by the Corporation and the holders of a majority in interest of shares of Series A Preferred Stock being converted for which the calculation of the Closing Price is required in order to determine the Conversion Price of such Series A Preferred Stock. (c) 19.99% LIMITATION. So long as the Common Stock is listed for trading on Nasdaq or an exchange or quotation system with a rule substantially similar to Rule 4460(i) then, notwithstanding anything to the contrary contained herein if, at any time, the 8 aggregate number of shares of Common Stock then issued upon conversion of the Series A Preferred Stock (including any shares of capital stock or rights to acquire shares of capital stock issued by the Corporation which are aggregated or integrated with the Common Stock issued or issuable upon conversion of the Series A Preferred Stock for purposes of such rule) and upon exercise of the Warrants issued pursuant to the terms of the Purchase Agreement equals 19.99% of the Outstanding Common Amount (as hereinafter defined), the Series A Preferred Stock shall, from that time forward, cease to be convertible into Common Stock in accordance with the terms of this Article VI and Article VII below, unless the Corporation (i) has obtained approval of the issuance of the Common Stock upon conversion of the Series A Preferred Stock by a majority of the total votes cast on such proposal, in person or by proxy, by the holders of the then outstanding Common Stock and Class B Common Stock (not including any shares of Common Stock held by present or former holders of Series A Preferred Stock that were issued upon conversion of Series A Preferred Stock), or (ii) shall have otherwise obtained permission to allow such issuances from Nasdaq in accordance with Rule 4460(i). If the Corporation's Common Stock is not then listed on Nasdaq or an exchange or quotation system that has a rule substantially similar to Rule 4460(i) limitations set forth herein shall be inapplicable and of no force and effect. For purposes of this paragraph, "Outstanding Common Amount" means (i) the number of shares of the Common Stock outstanding on the Initial Closing Date (as defined in the Purchase Agreement) plus (ii) any additional shares of Common Stock issued thereafter in respect of such shares pursuant to a stock dividend, stock split or similar event. The maximum number of shares of Common Stock issuable as a result of the 19.99% limitation set forth herein is hereinafter referred to as the "Maximum Share Amount." With respect to each holder of Series A Preferred Stock, the Maximum Share Amount shall refer to such holder's PRO RATA share thereof determined in accordance with Article X below. In the event that Corporation obtains Shareholder Approval or the approval of Nasdaq, by reason of the inapplicability of the rules of Nasdaq or otherwise and concludes that it is able to increase the number of shares to be issued above the Maximum Share Amount (such increased number being the "New Maximum Share Amount"), the references to Maximum Share Amount, above, shall be deemed to be, instead, references to the greater New Maximum Share Amount. In the event that Shareholder Approval is not obtained, there are insufficient reserved or authorized shares or a registration statement covering the additional shares of Common Stock which constitute the New Maximum Share Amount is not effective prior to the Maximum Share Amount being issued (if such registration statement is necessary to allow for the public resale of such securities), the Maximum Share Amount shall remain unchanged; PROVIDED, HOWEVER, that the Holder may grant an extension to obtain a sufficient reserved or authorized amount of shares or of the effective date of such registration statement. In the event that (a) the aggregate number of shares of Common Stock issued pursuant to the outstanding Series A Preferred Stock represents at least twenty percent (20%) of the Maximum Share Amount and (b) the sum of (x) the aggregate number of shares of Common Stock issued upon conversion of Series A Preferred Stock PLUS (y) the aggregate number of shares of Common Stock that remain issuable upon conversion of Series A Preferred Stock, represents at least one hundred percent (100%) of the Maximum Share Amount (the "Triggering Event"), the Corporation will use its best efforts to seek and obtain Shareholder Approval (or obtain such other relief as will allow conversions hereunder in excess of the Maximum Share 9 Amount) as soon as practicable following the Triggering Event and before the Mandatory Redemption Date. B. CONVERSION PRICE. The "Conversion Price" shall be the lesser of the Applicable Percentage (as defined below) of the Market Price (as defined herein) and the Fixed Conversion Price (as defined herein), subject to adjustments pursuant to the provisions of Article VI.C below. "Applicable Percentage" shall mean 100%; PROVIDED, HOWEVER, that for any conversions effected in reliance on the exclusions set forth in the proviso to Article VI.A(b) above, the Applicable Percentage shall mean 105%. "Market Price" shall mean the average of the Closing Bid Prices for any five (5) consecutive Trading Days, as designated by the holder, during the applicable Pricing Period (as defined below). The "Pricing Period" means(i) the twenty (20) Trading Day period ending one (1) Trading Day prior to the date (the "Conversion Date") the Conversion Notice is sent by a holder to the Corporation via facsimile in respect of any Conversion Date occurring on or before 240 days following the Issue Date and (ii) the thirty (30) Trading Day period ending one (1) Trading Day prior to the Conversion Date in respect of any Conversion Date occurring after 240 days following the Issue Date. "Fixed Conversion Price" shall mean 150% of the average of the Closing Bid Prices over the ten (10) Trading Days beginning on July 16, 1998 or, in the case of any Subsequent Closing (as defined in the Purchase Agreement), 130% of the average of the Closing Bid Prices over the five (5) Trading Days immediately preceding the Subsequent Closing. "Closing Bid Price" means, for any security as of any date, the closing bid price on Nasdaq as reported by Bloomberg or, if Nasdaq is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security or in any of the foregoing manners, the average of the bid prices of any market makers for such security or as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date in the manner provided above, the Closing Bid Price shall be the fair market value as mutually determined by the Corporation and the holders of a majority in interest of shares of Series A Preferred Stock being converted for which the calculation of the Closing Bid Price is required in order to determine the Conversion Price of such Series A Preferred Stock. "Trading Day" shall mean any day on which the Common Stock is traded for any period on Nasdaq, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be subject to adjustment from time to time as follows: (a) ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK DIVIDEND, ETC. If at any time when Series A Preferred Stock is issued and outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend, combination, reclassification, rights offering below the Trading Price (as 10 defined below) to all holders of Common Stock or other similar event, which event shall have taken place during the reference period for determination of the Conversion Price for any Optional Conversion or Automatic Conversion of the Series A Preferred Stock, then the Conversion Price shall be calculated giving appropriate retroactive effect to the stock split, stock dividend, combination, reclassification or other similar event. In such event, the Corporation shall notify the Transfer Agent of such change on or before the effective date thereof. (b) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when Series A Preferred Stock is issued and outstanding and prior to the conversion of all Series A Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Corporation shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Corporation or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Corporation other than in connection with a plan of complete liquidation of the Corporation, then the holders of Series A Preferred Stock shall thereafter have the right to receive upon conversion of the Series A Preferred Stock, upon the bases and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the holders of Series A Preferred Stock would have been entitled to receive in such transaction had the Series A Preferred Stock been converted in full (without regard to any limitations on conversion contained herein) immediately prior to such transaction, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of Series A Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion of Series A Preferred Stock. The Corporation shall not effect any transaction described in this subsection (b) unless (a) it first gives, to the extent practical, thirty (30) days' prior written notice (but in any event at least fifteen (15) business days prior written notice) of such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the holders of Series A Preferred Stock shall be entitled to convert the Series A Preferred Stock) and (b) the resulting successor or acquiring entity (if not the Corporation) assumes by written instrument the obligations of this subsection (b). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges. (c) ADJUSTMENT DUE TO DISTRIBUTION. Subject to Article III, if the Corporation shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Corporation's shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "Distribution"), then the holders of Series A Preferred Stock shall be entitled, upon any conversion of shares of Series A Preferred Stock after the date of record for determining 11 shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the holder with respect to the shares of Common Stock issuable upon such conversion had such holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution. (d) PURCHASE RIGHTS. Subject to Article III, if at any time when any Series A Preferred Stock is issued and outstanding, the Corporation issues any convertible securities or rights to purchase stock, warrants, securities or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the holders of Series A Preferred Stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A Preferred Stock (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. (e) ADJUSTMENT FOR RESTRICTED PERIODS. In the event that (1) the Corporation fails to obtain effectiveness with the Securities and Exchange Commission of the Registration Statement (as defined in the Registration Rights Agreement) in a timely manner, as set forth in the Registration Rights Agreement, or (2) such Registration Statement lapses in effect through no fault of the holders of Series A Preferred Stock, or sales otherwise cannot be made thereunder, whether by reason of the Corporation's failure or inability to amend or supplement the prospectus (the "Prospectus") included therein in accordance with the Registration Rights Agreement or otherwise, after such Registration Statement becomes effective (including, without limitation, during an Allowed Delay (as defined in Section 3(f) of the Registration Rights Agreement), then the Pricing Period shall be comprised of, (i) in the case of an event described in clause (1), the thirty (30) Trading Days preceding the required effectiveness date under the Registration Rights Agreement, plus all Trading Days through and including the third Trading Day following the date of effectiveness of the Registration Statement; and (ii) in the case of an event described in clause (2), the number of Trading Days preceding the date on which the holder of the Series A Preferred Stock is first notified that sales may not be made under the Prospectus that would otherwise then be included in the Pricing Period in accordance with the definition thereof set forth in Article VI.B(a), plus all Trading Days through and including the third Trading Day following the date on which the Holder is first notified that such sales may again be made under the Prospectus. If a holder of Series A Preferred Stock determines that sales may not be made pursuant to the Prospectus (whether by reason of the Corporation's failure or inability to amend or supplement the Prospectus) it shall so notify the Corporation in writing and, unless the Corporation provides such holder with a written opinion of the Corporation's counsel to the contrary, such determination shall be binding for purposes of this paragraph. (f) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article VI.C, the Corporation, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to 12 each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of Series A Preferred Stock. D. TRADING PRICE. For purposes of Article VI.C(a) above, "Trading Price," which shall be measured as of the record date in respect of the rights offering means (i) the average of the last reported sale prices for the shares of Common Stock on Nasdaq as reported by Bloomberg, as applicable, for the five (5) Trading Days immediately preceding such date, or (ii) if Nasdaq is not the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Trading Price shall be the fair market value as reasonably determined in good faith by (a) the Board of Directors of the Corporation or, (b) at the option of a majority-in-interest of the holders of the outstanding Series A Preferred Stock by an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the Corporation. E. MECHANICS OF CONVERSION. In order to convert Series A Preferred Stock into full shares of Common Stock, a holder of Series A Preferred Stock shall: (i) submit a copy of the fully executed notice of conversion in the form attached hereto as Exhibit A ("Notice of Conversion") to the Corporation by facsimile dispatched on the Conversion Date (or by other means resulting in notice to the Corporation on the Conversion Date) at the office of the Corporation or its designated Transfer Agent for the Series A Preferred Stock that the holder elects to convert the same, which notice shall specify the number of shares of Series A Preferred Stock to be converted, the applicable Conversion Price and a calculation of the number of shares of Common Stock issuable upon such conversion (together with a copy of the first page of each certificate to be converted) prior to 9:00 p.m., New York City time (the "Conversion Notice Deadline"), on the date of conversion specified on the Notice of Conversion; and (ii) surrender the original certificates representing the Series A Preferred Stock being converted (the "Preferred Stock Certificates"), duly endorsed, along with a copy of the Notice of Conversion to the office of the Corporation or the Transfer Agent for the Series A Preferred Stock as soon as practicable thereafter. The Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion, unless either the Preferred Stock Certificates are delivered to the Company or its Transfer Agent as provided above, or the holder notifies the Corporation or its Transfer Agent that such certificates have been lost, stolen or destroyed (subject to the requirements of subparagraph (a) below). In the case of a dispute as to the calculation of the Conversion Price, the Corporation shall promptly issue such number of shares of Common Stock that are not disputed in accordance with subparagraph (b) below. The Corporation shall submit the 13 disputed calculations to its outside accountant via facsimile within two (2) business days of receipt of the Notice of Conversion. The accountant shall review the calculations and notify the Corporation and the holder of the results no later than 48 hours from the time it receives the disputed calculations. The accountant's calculation shall be deemed conclusive absent manifest error. (a) LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing shares of Series A Preferred Stock, and of indemnity reasonably satisfactory to the Corporation, and upon surrender and cancellation of the Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. (b) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the surrender of certificates as described above together with a Notice of Conversion, the Corporation shall issue and, within two (2) business days after such surrender (or, in the case of lost, stolen or destroyed certificates, after provision of agreement and indemnification pursuant to subparagraph (a) above) (the "Delivery Period"), deliver (or cause its Transfer Agent to so issue and deliver) to or upon the order of the holder (i) that number of shares of Common Stock for the portion of the shares of Series A Preferred Stock converted as shall be determined in accordance herewith and (ii) a certificate representing the balance of the shares of Series A Preferred Stock not converted, if any. In addition to any other remedies available to the holder, including actual damages and/or equitable relief, the Corporation shall pay to a holder $1,500 per day in cash for each day beyond a two (2) day grace period following the Delivery Period that the Corporation fails to deliver Common Stock (a "Conversion Default") issuable upon surrender of shares of Series A Preferred Stock with a Notice of Conversion until such time as the Corporation has delivered all such Common Stock (the "Conversion Default Payments"). Such cash amount shall be paid to such holder by the fifth day of the month following the month in which it has accrued or, at the option of the holder (by written notice to the Corporation by the first day of the month following the month in which it has accrued), shall be convertible into Common Stock in accordance with the terms of this Article VI. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Corporation's Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the holder and its compliance with the provisions contained in Article VI.A. and in this Article VI.E., the Corporation shall use its best efforts to cause its Transfer Agent to electronically transmit the Common Stock issuable upon conversion to the holder by crediting the account of holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and penalties described in the immediately preceding paragraph shall apply to the electronic transmittals described herein. 14 (c) NO FRACTIONAL SHARES. If any conversion of Series A Preferred Stock would result in a fractional share of Common Stock or the right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon Conversion of the Series A Preferred Stock shall be the next higher number of shares or the Company at its option may pay cash in lieu of such fractional shares. (d) CONVERSION DATE. The "Conversion Date" shall be the date specified in the Notice of Conversion, provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in notice) to the Corporation or its Transfer Agent before 9:00 p.m., New York City time, on the Conversion Date. The person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such securities as of the Conversion Date and all rights with respect to the shares of Series A Preferred Stock surrendered shall forthwith terminate except the right to receive the shares of Common Stock or other securities or property issuable on such conversion and except that the holders preferential rights as a holder of Series A Preferred Stock shall survive to the extent the corporation fails to deliver such securities. F. RESERVATION OF SHARES. A number of shares of the authorized but unissued Common Stock sufficient to provide for the conversion of the Series A Preferred Stock outstanding at the then current Conversion Price shall at all times be reserved by the Corporation, free from preemptive rights, for such conversion or exercise. As of the date of issuance of the Series A Preferred Stock, 2,580,646 authorized and unissued shares of Common Stock have been duly reserved for issuance upon conversion of the Series A Preferred Stock (the "Reserved Amount"). The Reserved Amount shall be increased from time to time in accordance with the Company's obligations pursuant to Section 4(h) of the Purchase Agreement. In addition, if the Corporation shall issue any securities or make any change in its capital structure which would change the number of shares of Common Stock into which each share of the Series A Preferred Stock shall be convertible at the then current Conversion Price, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Series A Preferred Stock. If at any time a holder of shares of Series A Preferred Stock submits a Notice of Conversion, and the Corporation does not have sufficient authorized but unissued shares of Common Stock available to effect such conversion in accordance with the provisions of this Article VI (a "Conversion Default"), the Corporation shall issue to the holder (or holders, if more than one holder submits a Notice of Conversion in respect of the same Conversion Date, pro rata based on the ratio that the number of shares of Series A Preferred Stock then held by each such holder bears to the aggregate number of such shares held by such holders) all of the shares of Common Stock which are available to effect such conversion. The number of shares of Series A Preferred Stock included in the Notice of Conversion which exceeds the amount which is then convertible into available shares of Common Stock (the "Excess Amount") shall, 15 notwithstanding anything to the contrary contained herein, not be convertible into Common Stock in accordance with the terms hereof until (and at the holder's option at any time after) the date additional shares of Common Stock are authorized by the Corporation to permit such conversion, at which time the Conversion Price in respect thereof shall be the lesser of (i) the Conversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price on the Conversion Date elected by the holder in respect thereof. The Corporation shall use its best efforts to effect an increase in the authorized number of shares of Common Stock as soon as possible following a Conversion Default. In addition, the Corporation shall pay to the holder payments ("Conversion Default Payments") for a Conversion Default in the amount of (a) (N/365), multiplied by (b) the sum of the Stated Value plus the Premium Amount per share of Series A Preferred Stock through the Authorization Date (as defined below), multiplied by (c) the Excess Amount on the day the holder submits a Notice of Conversion giving rise to a Conversion Default (the "Conversion Default Date"), multiplied by (d) .24, where (i) N = the number of days from the Conversion Default Date to the date (the "Authorization Date") that the Corporation authorizes a sufficient number of shares of Common Stock to effect conversion of the full number of shares of Series A Preferred Stock. The Corporation shall send notice to the holder of the authorization of additional shares of Common Stock, the Authorization Date and the amount of holder's accrued Conversion Default Payments. The accrued Conversion Default Payment for each calendar month shall be paid in cash or shall be convertible into Common Stock at the Conversion Price, at the holder's option, as follows: (a) In the event the holder elects to take such payment in cash, cash payment shall be made to holder by the fifth day of the month following the month in which it has accrued; and (b) In the event the holder elects to take such payment in Common Stock, the holder may convert such payment amount into Common Stock at the Conversion Price (as in effect at the time of Conversion) at any time after the fifth day of the month following the month in which it has accrued in accordance with the terms of this Article VI (so long as there is then a sufficient number of authorized shares). Nothing herein shall limit the holder's right to pursue actual damages for the Corporation's failure to maintain a sufficient number of authorized shares of Common Stock, and each holder shall have the right to pursue all remedies available at law or in equity (including a decree of specific performance and/or injunctive relief). G. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article VI, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished 16 to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of Series A Preferred Stock. H. STATUS AS SHAREHOLDERS. Upon submission of a Notice of Conversion by a holder of Series A Preferred Stock, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such holder's allocated portion of the Reserved Amount) shall be deemed converted into shares of Common Stock and (ii) the holder's rights as a holder of such converted shares of Series A Preferred Stock shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such holder because of a failure by the Corporation to comply with the terms of this Statement. Notwithstanding the foregoing, if a holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Delivery Period with respect to a conversion of shares of Series A Preferred Stock for any reason, then (unless the holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Corporation) the holder shall regain the rights of a holder of such shares of Series A Preferred Stock with respect to such unconverted shares of Series A Preferred Stock and the Corporation shall, as soon as practicable, return such unconverted shares of Series A Preferred Stock to the holder or, if such shares of Series A Preferred Stock have not been surrendered, adjust its records to reflect that such shares of Series A Preferred Stock have not been converted. In all cases, the holder shall retain all of its rights and remedies (including, without limitation, the right to receive Conversion Default Payments pursuant to Article IV.E. to the extent required thereby for such Conversion Default and any subsequent Conversion Default). VII. AUTOMATIC CONVERSION So long as the Registration Statement is effective and there is not then a continuing Mandatory Redemption Event, each share of Series A Preferred Stock issued and outstanding on July 22, 2001, subject to any adjustment pursuant to Article V.A.(ii) (the "Automatic Conversion Date"), automatically shall be converted into shares of Common Stock on such date at the then effective Conversion Price in accordance with, and subject to, the provisions of Article VI hereof (the "Automatic Conversion"). The Automatic Conversion Date shall be delayed by one (1) Trading Day each for each Trading Day occurring prior thereto and prior to the full conversion of the Series A Preferred Stock that (i) sales cannot be made pursuant to the Registration Statement (whether by reason of the Company's failure to properly supplement or amend the prospectus included therein in accordance with the terms of the Registration Rights Agreement or otherwise [including any Allowed Delays (as defined in Section 3(f) of the Registration Rights Agreement]) or (ii) any Default Event (as defined in Article V.A.) exists, without regard to whether any cure periods shall have run. The Automatic Conversion Date shall be the Conversion Date for purposes of determining the Conversion Price and the time within which certificates representing the Common Stock must 17 be delivered to the holder. VIII. VOTING RIGHTS The holders of the Series A Preferred Stock have no voting power whatsoever, except as otherwise provided by the Pennsylvania Business Corporation Law ("PBCL"), in this Article VIII, and in Article IX below. Notwithstanding the above, the Corporation shall provide each holder of Series A Preferred Stock with prior notification of any meeting of the shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Corporation of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Corporation, or any proposed liquidation, dissolution or winding up of the Corporation, the Corporation shall mail a notice to each holder, at least ten (10) days prior to the record date specified therein, of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. To the extent that under the PBCL the vote of the holders of the Series A Preferred Stock, voting separately as a class or series as applicable, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the shares of the Series A Preferred Stock then outstanding represented at a duly held meeting at which a quorum is present or by written consent of a majority of such shares of Series A Preferred Stock (except as otherwise may be required under the PBCL) shall constitute the approval of such action by the class. To the extent that under the PBCL holders of the Series A Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series A Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of shareholders as the date as of which the Conversion Price is calculated. Holders of the Series A Preferred Stock shall be entitled to notice of all shareholder meetings or written consents (and copies of proxy materials and other information sent to shareholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws and the PBCL. IX. PROTECTIVE PROVISIONS So long as shares of Series A Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided by the 18 PBCL of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock): (a) alter or change the rights, preferences or privileges of the Series A Preferred Stock or any Senior Securities so as to affect adversely the Series A Preferred Stock; (b) create any new class or series of capital stock having a preference over the Series A Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation (as previously defined in Article II hereof, "Senior Securities"); (c) create any new class or series of capital stock ranking PARI PASSU with the Series A Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation (as previously defined in Article II hereof, "PARI PASSU Securities"); (d) increase the authorized number of shares of Series A Preferred Stock; or (e) do any act or thing not authorized or contemplated by this Statement which would result in taxation of the holders of shares of the Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). In the event holders of at least a majority of the then outstanding shares of Series A Preferred Stock agree to allow the Corporation to alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock, pursuant to subsection (a) above, so as to affect the Series A Preferred Stock, then the Corporation will deliver notice of such approved change to the holders of the Series A Preferred Stock that did not agree to such alteration or change (the "Dissenting Holders") and Dissenting Holders shall have the right for a period of thirty (30) days to convert pursuant to the terms of this Statement as they exist prior to such alteration or change or continue to hold their shares of Series A Preferred Stock. X. PRO RATA ALLOCATIONS The Maximum Share Amount and the Reserved Amount (including any increases thereto) shall be allocated by the Corporation pro rata among the holders of Series A Preferred Stock based on the number of shares of Series A Preferred Stock then held by each holder relative to the total aggregate number of shares of Series A Preferred Stock then outstanding. 19 IN WITNESS WHEREOF, this Statement is executed on behalf of the Corporation this 22nd day of July, 1998. INFONAUTICS, INC. By: /s/ David Van Riper Morris David Van Riper Morris President and Chief Executive Officer 20 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Series A Preferred Stock) The undersigned hereby irrevocably elects to convert ______ shares of Series A Preferred Stock, represented by stock certificate No(s). __________ (the "Preferred Stock Certificates") into shares of common stock ("Common Stock") of Infonautics, Inc., (the "Corporation") according to the conditions of the Statement of Series A Preferred Stock, as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof). The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the Series A Preferred Stock have been or shall be made only pursuant to a registration of the securities under the Securities Act of 1933, as amended (the "Act") (in which case the undersigned has complied or will comply with all applicable prospectus delivery requirements), or pursuant to an exemption from registration under the Act. Date of Conversion:___________________________ Applicable Conversion Price:____________________ Number of Shares of Common Stock to be Issued:_____________________ Signature:____________________________________ Name:_______________________________________ Address:______________________________________ *The Corporation is not required to issue shares of Common Stock until the original Series A Preferred Stock Certificate(s) (or evidence of loss, theft or destruction thereof) to be converted are received by the Corporation or its Transfer Agent. The Corporation shall issue and deliver shares of Common Stock to an overnight courier not later than two (2) business days following receipt of the original Preferred Stock Certificate(s) to be converted, and shall make payments pursuant to the Statement for the number of business days such issuance and delivery is late. 21 EX-10.20 3 EXHIBIT 10.20 Exhibit 10.20 STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT, dated as of January 10, 2000, by and among bigchalk.com, inc., a Delaware corporation (the "Company"), the investors listed on Schedule A hereto (collectively the "Investors" and individually an "Investor"), those existing holders (collectively the "Founders") of the Company's outstanding Common Stock, $.01 par value per share (the "Common Stock"), who appear on Schedule A hereto, and any subsequent stockholder of the Company who becomes a party to this Agreement pursuant to the terms and conditions hereof (collectively, the "Additional Stockholders," and with the Investors and the Founders sometimes hereinafter collectively referred to herein as the "Stockholders" or individually as the "Stockholder"). PREAMBLE The Investors are purchasing shares of the Company's Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"), pursuant to that certain Series A Preferred Stock Purchase Agreement of the same date herewith between the Company and the Investors (the "Stock Purchase Agreement") in the amounts set forth on Schedule A, and the Founders hold shares of Common Stock of the Company in the amounts set forth on Schedule A; and One of the conditions to the Closing as defined in the Stock Purchase Agreement is the execution by the holders of the outstanding Series A Preferred Stock and outstanding Common Stock of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I ELECTION OF DIRECTORS 1.1 Election of Directors. At each annual meeting of the stockholders of the Company, or at each special meeting of the stockholders of the Company involving the election of directors of the Company, and at any other time at which stockholders of the Company will have the right to or will vote for or render consent in writing regarding the election of directors of the Company, then and in each event, the Stockholders hereby covenant and agree to vote all shares of voting capital stock of the Company presently owned or hereafter acquired by them (whether owned of record or over which any person exercises voting control) in favor of the following 1 actions: (a) to fix and maintain the number of directors initially at ten which number may not be further changed except by an amendment to this Agreement approved by the consent of the holders of fifty-one percent (51%) or more of the Series A Preferred Stock and; (b) to cause and maintain the election to the Board of Directors of the Company (i) so long as at least one-third of the number of shares of Series A Preferred Stock set forth on Schedule A are outstanding, three representatives designated by the Investors, one of whom shall be a representative of TBG Information Investors LLC (the "TBG Director"), who shall initially be Oakleigh Thorne, one of whom shall be a representative of Core Learning Group LLC (the "Core Learning Director"), who shall initially be William Oberndorf, and the other of whom shall be a representative of the Investors as a class (the "Investor Director" and, with the TBG Director and the Core Learning Director, the "Investor Directors"), who shall initially be George Jenkins; (ii) three nominees designated by Bell & Howell Company; (iii) two nominees designated by Infonautics, Inc., who shall initially be Lloyd Morrisett and David Van Riper Morris; and (iv) two nominees represented by the Company's management, who shall initially be John J. Lynch, Jr. and Susan Harman. The Investor Director shall be nominated by holders of a majority of the outstanding Series A Preferred Stock owned by the Investors. 1.2 Removal of Directors. None of the parties hereto, except in the case of a director designated or nominated by any such party by right in accordance with Section 1(b), shall vote any voting capital stock held by it to remove a director, except for bad faith or willful misconduct. Each of the parties hereto shall vote or cause to be voted all shares of voting capital stock owned by them or over which they have voting control (i) to remove from the Board of Directors any director designated by any party pursuant hereto at the request of such party, and (ii) to fill any vacancy in the membership of the Board of Directors with a designee of the party whose designee's resignation or removal from the Board caused such vacancy. 1.3 Notice. The Company shall provide to each party entitled to designate directors hereunder prior written notice of any intended mailing of notice to stockholders for a meeting at which directors are to be elected, and any party entitled to designate directors pursuant hereto shall notify the Company in writing, prior to such mailing, of the person designated by it or them as its or their nominee for election as director. If any party entitled to designate directors hereunder fails to give notice to the Company as provided above, it shall be deemed that the designee of such party then serving as director shall be its designee for reelection. 1.4 Committees. The Board of Directors shall establish an Audit and a Compensation Committee of the Board of Directors, each of which (i) shall consist of three "Non-Employee 2 Directors" (as that term is defined in Rule 16b-3 of the Exchange Act of 1934, as amended), and (ii) shall include at least one of the Investor Directors who shall be different for each of the audit and Compensation Committee. Any other committee of the Board shall have at least one of the TBG Director or the Investor Directors as a member. 1.5 Observer Rights. As long as any Investor owns not less than ten percent (10%) of the shares of Series A Preferred Stock issued pursuant to the Stock Purchase Agreement (or an equivalent amount of Common Stock issued upon conversion thereof) and they are not otherwise represented on the Board by one of the Investor Directors directly affiliated with them, the Company shall invite a representative of such Investor to attend all meetings of its Board of Directors in a nonvoting-observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents and other materials it provides to its directors; provided, however, that such representative shall agree to hold such in confidence; and, provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting will adversely affect the attorney-client privilege between the Company and its counsel. 1.6 Approval of Indebtedness. So long as at least one-third of the number of shares of Series A Preferred Stock set forth on Schedule A are outstanding, the Company will not incur indebtedness in excess of $2,500,000, in one or a series of related transactions, without the prior approval of two of the three Investor Directors. 1.7 Termination of Rights. The rights and obligations of the Company and the Stockholders set forth in this Article I shall terminate upon the earlier of (i) the consummation of a sale of two-thirds or more of the Series A Preferred Stock issued in accordance with the terms of the Stock Purchase Agreement and (ii) the closing of an underwritten public offering of shares of Common Stock of the Company at a public offering price of at least $11.50 per share (as adjusted for any stock split, stock dividend or recapitalization after the date of the first issuance of the Series A Preferred Stock) and gross proceeds to the Company in excess of $40,000,000 (a "Qualified IPO"). Additionally, with respect to each party which has the right to designate or nominate a director pursuant to Section 1(b) above, such right shall terminate if such party holds less than 100,000 shares of Common Stock of the Company (assuming the conversion of all Series A Preferred Stock, if applicable, and as adjusted for stock split, dividend, combination or like forms of recapitalization). Any vacancy in the Board of Directors resulting from the termination of such right shall be filled by a director elected by all holders of voting capital stock of the Company in a single class. 3 ARTICLE II RIGHTS OF CO-SALE 2.1 Proposed Transfer of Shares. The Stockholders shall not transfer either in a single transaction or in a series of transactions any shares of capital stock of the Company (the "Shares") or any right or interest therein then owned by him or it except by a transfer that meets the requirements of this Article II and of this Agreement generally. In the event that a Stockholder (a "Transferring Stockholder") proposes to transfer any portion of the Shares (each, a "Shares Transfer"), whether voluntarily or involuntarily, other than a Permitted Transfer (as defined below), then at least 60 days prior to any proposed Shares Transfer, such Transferring Stockholder shall give written notice (the "TS Notice") to the Company and the Investors of his or its intention to effect the Shares Transfer. The TS Notice shall set forth (i) its bonafide intention to offer such shares, (ii) the class, series and number of Shares to be sold by the Transferring Stockholder (the "Sale Shares"), (iii) the date or proposed date of the Shares Transfer and the name and address of the proposed transferee, and (iv) the principal terms of the Shares Transfer, including the cash or other property or consideration to be received upon such Shares Transfer. The term "Permitted Transfer" shall mean (i) a Shares Transfer made pursuant to the rights and obligations set forth in Article X of the Master Transaction Agreement, dated as of July 8, 1999, as amended on September 28 and December 15, 1999, by and among the Founders, Bell & Howell Company and Infonautics Corporation (the "MTA"), (ii) a Shares Transfer from a Stockholder to one or more of its "Affiliates" or "Subsidiaries" as those terms are defined in Rule 405 ("Rule 405") of the Securities Act of 1933, as amended, and (iii) a Shares Transfer to a spouse (other than pursuant to any divorce or separation proceedings or settlement), parents, children (natural or adopted), stepchildren or grandchildren or a trust for any of their benefit in the case of a Transferring Stockholder that is an individual (each recipient pursuant to any of (i), (ii) or (iii) being a "Permitted Transferee"); provided, however, that prior to such Shares Transfer, such Permitted Transferee shall agree in writing to be bound by the obligations imposed upon Stockholders under this Agreement as if such transferee were originally a signatory to this Agreement. 2.2 Right to Participate in Transfer. In the event the Transferring Stockholder desires to effect a Shares Transfer, other than a Permitted Transfer, then, upon receipt of the TS Notice specified in Section 2.1, each Investor shall have the right (by written notice to the Transferring Stockholder and the Company to be sent within 20 days after the Investor receives the TS Notice) to require the Transferring Stockholder to cause to be purchased from such Investor the number of shares of Common Stock issued or issuable upon conversion of shares of Series A Preferred Stock then held by such Investor that equals (x) the number of Sale Shares that the Transferring Stockholder proposes to transfer, multiplied by (y) the percentage determined by dividing (i) the number of shares of Series A Preferred Stock (or Common Stock, as the case may be) then held by the Investor by (ii) the sum of the number of shares of Series A Preferred Stock (or Common Stock, as the case may be) then held by all of the Investors plus the number of Shares then held by the Transferring Stockholder. For purposes of this Section 2.2, the Series A Preferred Stock 4 shall be treated as if it had been converted into the number of shares of Common Stock then issuable upon such conversion. The foregoing restriction shall not apply to a transfer or series of transfers by an employee or employees of the Company which transfer or series of transfers results in the transfer of less than 5% of the Shares outstanding on a fully diluted basis (including, for purpose of such calculation, all Shares issuable upon exercise of outstanding options as being issued for any such employee and for outstanding Shares generally). 2.3 Terms of Purchase. The purchase from the Investors pursuant to Section 2.2 shall be on the same terms and conditions, including per Share price and date of Shares Transfer, as are received by the Transferring Stockholder and stated in the TS Notice provided to the Investors; provided, however, that, in all events, the Sale Shares (and any shares sold by Investors in accordance with Section 2.2 above) shall continue to be subject to the terms of this Agreement and any such transferee shall agree in writing to be bound by the obligations imposed upon Stockholders under this Agreement as if such transferee were originally a signatory to this Agreement. 2.4 Transfers Void. Any attempted Shares Transfer by the Stockholders in violation of the terms of this Article II shall be ineffective to vest in any transferee any interest held by the Transferring Stockholder in the Shares. Without limiting the foregoing, any purported Shares Transfer in violation hereof shall be ineffective as against the Investors and the Investors shall have a continuing right and option (but not an obligation), until the restrictions contained in this Article II terminate, to purchase the Shares purported to be transferred by the Transferring Stockholders for a price and on terms the same as those at which the purported Shares Transfer was effected. 2.5 Termination of Restrictions. The restrictions in this Article II shall terminate upon the consummation of a Qualified IPO. ARTICLE III RIGHT OF FIRST OFFER 3.1 Right of First Offer. Subject to the terms and conditions specified in this Article III, the Company hereby grants to each Investor and each Founder a right of first offer with respect to future sales by the Company of its Shares or securities convertible into or exercisable for any Shares (collectively, "Offered Securities"). For purposes of this Section, "Investor" includes transferees of any Investor and any general partners, members and/or affiliates of an Investor and "Founder" includes transferees of any Founder. An Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. 5 Each time the Company proposes to offer any Offered Securities, the Company shall first make an offering of such Offered Securities to each Investor and Founder in accordance with the following provisions: (a) The Company shall deliver written notice (the "Offer Notice") to the Investors and Founders stating (i) its bona fide intention to offer such Offered Securities, (ii) the class, series and number of Offered Securities to be offered, and (iii) the price and terms upon which it proposes to offer such Offered Securities. (b) Within 30 days after receipt of the Offer Notice, each Investor and Founder may elect to purchase, at the price and on the terms specified in the Offer Notice, up to that portion of such Offered Securities which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock then held, by such Investor or Founder, as the case may be, bears to the total number of shares of Common Stock of the Company (assuming full conversion and exercise of all convertible or exercisable securities) then held by all the Company's Stockholders. The Company shall promptly give written notice to each Investor and Founder which purchases all the Offered Securities available to it (each, a "Fully-Exercising Investor or Founder") of any other Investor's or Founder's, as the case may be, failure to do likewise. During the 20-day period commencing after receipt of such information, each Fully-Exercising Investor or Founder shall be entitled to obtain that portion of the Offered Securities not subscribed for by the Investors or Founders equal to the proportion the number of shares of Common Stock issued and held, or issuable upon conversion of Series A Preferred Stock then held, by such Fully-Exercising Investor or Founder bears to the total number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock then held, by all Fully-Exercising Investors or Founders who wish to purchase some of the unsubscribed shares. (c) If all Offered Securities are not purchased as provided in subsection (b), the Company may, during the 45-day period following the expiration of the period provided in subsection (b) hereof, offer the remaining unsubscribed portion of such Offered Securities to any person or persons at a price not less than, and upon terms no more favorable to the offeree than, those specified in the Notice. If the Company does not enter into an agreement for the sale of the Offered Securities within such period, or if such agreement is not consummated within 45 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Offered Securities shall not be offered unless first reoffered to the Investors and Founders in accordance herewith. (d) The right of first offer in this Article III shall not be applicable to (i) the issuance by the Company of options to employees, directors or unaffiliated consultants (or to the exercise of such options) pursuant to option plans adopted by the Board of Directors in amounts calculated as follows: (A) options to purchase up to 3,000,000 shares of Common Stock, heretofore reserved for issuance (subject to appropriate adjustments in the event of any stock dividend, 6 stock split, combination or similar recapitalization affecting such shares), (B) options to purchase such number of shares of Common Stock that equals up to 20% of the Series A Preferred Stock (calculated on an as-converted basis), and (C) options to purchase such number of shares of Common Stock that equals up to 20% of any shares of future equity issued by the Company (calculated on an as-converted basis); (ii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities; (iii) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise; (iv) the issuance of securities pursuant to equipment lease financing arrangements with equipment lessors which have been approved by the Board, including two of the three Investor Directors; or (v) the issuance of securities pursuant to a Qualified IPO. 3.2 Termination of Rights. The rights and obligations of the Company and Stockholders set forth in this Article III shall terminate upon the Closing of a Qualified IPO. ARTICLE IV MANAGEMENT AND CONTROL 4.1 General. The business and affairs of the Company shall be managed, controlled and operated in accordance with its certificate of incorporation and bylaws, as the same may be amended from time to time, except that neither the certificate of incorporation nor the bylaws shall be amended in any manner that would conflict with, or be inconsistent with, the provisions of this Agreement. 4.2 Limitation on Certain Actions by the Company. The Company shall not take any of the following actions without the written consent or affirmative vote of the holders of at least fifty-one percent (51%) of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class: (i) any amendment or change of the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred Stock; (ii) any action that authorizes, creates or issues shares of any class or series of stock having preferences superior to the Series A Preferred Stock; (iii) any action that reclassifies any outstanding shares into shares having preferences or priority as to dividends or assets senior to preferences of the Series A Preferred Stock; (iv) any amendment of the Company's Articles of Incorporation that adversely affects the rights of the Series A Preferred Stock; (v) any merger or consolidation of the Company with one or more other corporations in which the Stockholders of the Company immediately after such merger or consolidation hold stock representing less than forty percent (40%) of the voting power of the outstanding stock of the surviving corporation unless holders of Series A Preferred Stock receive at least $21 per share (subject to appropriate adjustments in the event of any stock dividend, stock split, combination or other similar recapitalization affecting 7 such shares); (vi) the sale of all or substantially all of the Company's assets unless holders of Series A Preferred Stock receive at least $21 per share (subject to appropriate adjustments in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares); (vii) the liquidation or dissolution of the Company; (viii) the declaration or payment of a dividend on the Common Stock (other than a dividend payable solely in shares of Common Stock); (ix) taking any other actions adversely affecting the Series A Preferred Stock vis-a-vis the right of holders of any other securities of the Corporation; (x) the repurchase of any shares of Common Stock except from employees upon termination of employment pursuant to the terms and conditions of employment agreements approved by the Board. ARTICLE V REGISTRATION RIGHTS 5.1 Definitions. As used in this Article V, the following terms shall have the following meanings: (a) "Commission" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. (b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations thereunder, all as the same shall be in effect at the time. (c) "Holder" shall mean any holder of outstanding Registrable Securities or anyone who holds outstanding Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with this Agreement. (d) "Initiating Holders" shall mean any Holder or Holders of at least twenty-five percent (25%) of the Registrable Securities then outstanding. (e) "Register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement, and compliance with applicable state securities laws of such states in which Holders notify the Company of their intention to offer Registrable Securities. (f) "Registrable Securities" shall mean all of the following to the extent the same have not been sold to the public (i) any and all shares of Common Stock of the Company, issued or issuable, upon conversion of shares of the Company's Series A Preferred Stock and up to an aggregate of 7,600,000 shares (subject to appropriate adjustments in the event of any stock 8 dividend, stock split, combination or other similar recapitalization affecting such shares) of Common Stock owned by Founders; or (ii) stock issued in respect of stock referred to in (i) above in any reorganization; or (iii) stock issued in respect of the stock referred to in (i) or (ii) as a result of a stock split, stock dividend, recapitalization or combination. Notwithstanding the foregoing, Registrable Securities shall not include otherwise Registrable Securities (i) sold by a person in a transaction in which his rights under this Agreement are not properly assigned; (ii) (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale; or (iii) if they are held by a Holder who can sell all Registrable Securities held by such holder in any three-month period without registration pursuant to Rule 144. (g) "Rule 144" shall mean Rule 144 under the Securities Act or any successor or similar rule as may be enacted by the Commission from time to time, but shall not include Rule 144A. (h) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations thereunder, all as the same shall be in effect at the time. 5.2 Demand Registration. (a) If the Company shall receive from Initiating Holders a written request that the Company effect any registration with respect to all or at least 25% of the issued and outstanding Registrable Securities held by Holders, the Company shall: i. promptly give written notice of the proposed registration to all other Holders; and ii. as soon as practicable use its best efforts to register (including, without limitation, the execution of an undertaking to file post-effective amendments and any other governmental requirements) all Registrable Securities which the Initiating Holders request to be registered; provided, that the Company shall not be obligated to file a registration statement pursuant to this Section 5.2: (A) prior to the date which is six months after the closing of the Company's first underwritten public offering of securities; (B) in any particular state in which the Company would be required to execute a general consent to service of process in effecting such registration; 9 (C) within 180 days following the effective date of any registered offering of the Company's securities to the general public in which the Holders of Registrable Securities shall have been able effectively to register all Registrable Securities as to which registration shall have been requested; (D) in any registration having an aggregate offering price (before deduction of underwriting discounts and expenses of sale) of less than $5,000,000; (E) after the Company has effected two such registrations by the Investors and two such Registrations by the Founders pursuant to this Section 5.2 and such registrations have been declared or ordered effective, except as provided in Section 5.3; or (F) during the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a registration subject to Section 5.3 hereof; provided that the Company is actively employing in good faith its best efforts to cause such registration statement to become effective; and provided further that the Company may not rely on this Section 5.2(a)(ii)(F) more than once during the term of this Agreement to not register Registrable Securities pursuant to a request made by Initiating Holders pursuant to this Section 5.2. Subject to the foregoing clauses (A) through (F), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practical, but in any event within 60 days after receipt of the request or requests of the Initiating Holders and shall use reasonable best efforts to have such registration statement promptly declared effective by the Commission whether or not all Registrable Securities requested to be registered can be included; provided, however, that 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 and its Stockholders for such registration statement to be filed within such 60-day period and it is therefore essential to defer the filing of such registration statement, the Company shall have an additional period of not more than 60 days after the expiration of the initial 60-day period within which to file such registration statement; provided, that during such time the Company may not file a registration statement for securities to be issued and sold for its own account except as contemplated by Section 5.2(a)(ii)(F) above. (b) 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. In such event, if so requested in writing by the Company, the Initiating Holders shall negotiate with an underwriter selected by the Company with regard to the underwriting of such requested registration; provided, however, that if a majority in interest of the Initiating Holders have not agreed with such underwriter as to the terms and conditions of such underwriting within 20 days following commencement of such negotiations, a majority in interest of the Initiating 10 Holders may select an underwriter of their choice. The right of any Holder to registration pursuant to Section 5.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 5, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, the Company shall so advise all Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting may be reduced up to an amount that is not less than 25% of all the securities included in such registration and the Registrable Securities to be included shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders; provided, however, that securities to be included in such registration statement as a result of piggyback registration rights not contained in this Article V as well as any securities to be offered by the Company, its officers and employees shall be excluded from the registration statement prior to the exclusion of any Registrable Securities held by the Holders and further provided that no Registrable Securities held by Holders other than the Founders shall be reduced if any Registrable Securities held by the Founders are included in the registration. If any Holder disapproves of the terms of the underwriting, he may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. If, by the withdrawal of such Registrable Securities, a greater number of Registrable Securities held by other Holders may be included in such registration (up to the limit imposed by the underwriters) the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used in determining the limitation as set forth above. Any Registrable Securities which are excluded from the underwriting by reason of the underwriter's marketing limitation or withdrawn from such underwriting shall be withdrawn from such registration. 5.3 Piggyback Registration. (a) If at any time or from time to time, the Company shall determine to register any of its securities, for its own account or the account of any of its Stockholders, other than a registration relating solely to employee benefit plans, or a registration relating solely to a transaction pursuant to Rule 145 under the Securities Act, a transaction relating solely to the sale of debt or convertible debt instruments or a registration on any form (other than Form S-1, S-2 or S-3, or their successor forms) which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: 11 i. give to each Holder written notice thereof as soon as practicable prior to filing the registration statement; and ii. include in such registration and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 15 days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in subsection (b) below. (b) If the registration 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 subsection 5.3. In such event, the right of any Holder to registration pursuant to Section 5.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. 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 in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 5.3, if the managing underwriter advises the Holders who are participating in such underwriting in writing that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Securities to be included in the registration and underwriting to an amount that is not less than 25% of all the securities included in such registration, or may exclude Registrable Securities entirely from such registration if the registration is the first registered offering for the sale of the Company's equity securities to the general public (provided that no shares held by officers and directors of the Company, other than Registrable Securities that may be owned by officers and directors, are included in the registration and underwriting and further provided that no Registrable Securities held by Holders other than the Founders shall be reduced if any Registrable Securities held by the Founders are included in the registration). The Company 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 first among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement and next to holders of piggyback registration rights not contained in this Article V. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. If, by the withdrawal of such Registrable Securities, a greater number of Registrable Securities held by other Holders may be included in such registration (up to the limit imposed by the underwriters), the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 5.4. Form S-3. The Company shall use its reasonable best efforts to qualify for registration on Form S-3 or its successor form. After the Company has qualified for the use of 12 Form S-3, Initiating Holders shall have the right at any time to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of shares by such Holders), subject only to the following: (a) The Company shall not be required to file a registration statement pursuant to this Section 5.4 within 180 days of the effective date of any registration referred to in Sections 5.2 and 5.3 above. (b) The Company shall not be required to file a registration statement pursuant to this Section 5.4 unless the Holder or Holders requesting registration propose to dispose of shares of Registrable Securities having an aggregate disposition price (before deduction of underwriting discounts and expenses of sale) of at least $1,000,000. (c) The Company shall not be required to file more than two registration statements pursuant to this Section 5.4 within any twelve-month period. The Company shall give written notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this Section 5.4 and shall provide a reasonable opportunity for other Holders to participate in the registration; provided, that if the registration is for an underwritten offering, the following terms shall apply to all participants in such offering: The right of any Holder to registration pursuant to Section 5.4 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. 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 in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 5.4, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, the Company shall so advise all Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting may be reduced up to an amount that is not less than 25% of all the securities included in such registration and the Registrable Securities to be included shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders; provided, however, that securities to be included in such registration statement as a result of piggyback registration rights not contained in this Article V as well as any securities to be offered by the Company, its officers and employees shall be excluded from the registration statement prior to the exclusion of any Registrable Securities held by the Holders and further provided that no Registrable Securities held by Holders other than the Founders shall be reduced if any Registrable Securities held by the Founders are included in the registration. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. If, by 13 the withdrawal of such Registrable Securities, a greater number of Registrable Securities held by other Holders may be included in such registration (up to the limit imposed by the underwriters), the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used in determining the limitation as set forth above. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder or Holders thereof for purposes of disposition. 5.5 Expenses of Registration. In addition to the fees and expenses contemplated by Section 5.6 hereof, all expenses incurred in connection with registrations pursuant to Sections 5.2, 5.3 and 5.4 hereof, including without limitation all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits of the Company's financial statements incidental to or required by such registration, shall be borne by the Company, except that the Company shall not be required to pay underwriters' fees, discounts or commissions relating to Registrable Securities or fees of a separate legal counsel of a Holder. 5.6 Registration Procedures. In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration and as to the completion thereof. At its expense the Company will: (a) keep such registration pursuant to Sections 5.2, 5.3 and 5.4 continuously effective for periods of 120 days, or, in each case, such reasonable period necessary to permit the Holder or Holders to complete the distribution described in the registration statement relating thereto, whichever first occurs; (b) promptly prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act, and to keep such registration statement effective for that period of time specified in Subsection 5.6(a) above; (c) furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request; (d) use reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction, at the earliest possible moment; 14 (e) subject to Subsection 5.2(a)(ii)(B), register or qualify such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as any Holder or underwriter reasonably requires, and keep such registration or qualification effective during the period set forth in Subsection 5.6(a) above; (f) cause all Registrable Securities covered by such registrations to be listed on each securities exchange, including NASDAQ, on which similar securities issued by the Company are then listed or, if no such listing exists, use reasonable best efforts to list all Registrable Securities on one of the New York Stock Exchanges, the American Stock Exchange or NASDAQ; and (g) cause its accountants to issue to the underwriter, if any, or the Holders, if there is no underwriter, comfort letters and updates thereof, in customary form and covering matters of the type customarily covered in such letters with respect to underwritten offerings; (h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably, request in order to expedite or facilitate the disposition of such Registrable Securities (including, without limitation, effecting a stock split or a combination of shares); (i) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller or underwriter, such financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply such information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; and (j) if the offering is underwritten, at the request of any Holder of Registrable Securities to furnish on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such Holder, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus and each amendment or supplement thereof comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as to financial statements or other financial data contained therein) and (C) to such other effects as reasonably may be requested by counsel for the underwriters or by such Holder or its counsel and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters and to such seller, stating that they are independent public accountants within the 15 meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to such registration as such underwriters reasonably may request; (k) notify each Holder, at any time a prospectus covered by such registration statement is required to be delivered under the Securities Act, of the happening of any event of which it has knowledge 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; and (l) take such other actions as shall be reasonably requested by any Holder. 5.7 Indemnification. (a) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to Sections 5.2, 5.3 or 5.4, the Company will indemnify, defend and hold harmless each Holder of such Registrable Securities thereunder, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls such Holder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Holder, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, and will indemnify each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein; provided, further, that the 16 Company shall not be liable if any such omission or statement of material fact is corrected in a later prospectus that was provided to the Investors in a timely manner by the Company and the Investors did not deliver such updated prospectus. (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration is being effected, indemnify and hold harmless the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company and each underwriter within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or 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, and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling 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 an instrument duly executed by such Holder specifically for use therein; provided, however, the total amount for which any Holder, its officers, directors and partners, and any person controlling such Holder, shall be liable under this Section 5.7 shall not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities sold by such Holder in such registration. (c) Each party entitled to indemnification under this Section 5.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claims as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. 17 (d) Notwithstanding the foregoing, to the extent that the provisions on indemnification contained in the underwriting agreements entered into among the selling Holders, the Company and the underwriters in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall be controlling as to the Registrable Securities included in the public offering; provided, however, that if, as a result of this Subsection 5.7(d), any Holder, its officers, directors, and partners and any person controlling such Holder is held liable for an amount which exceeds the aggregate proceeds received by such Holder from the sale of Registrable Securities included in a registration, as provided in Subsection 5.7(b) above, pursuant to such underwriting agreement (the "Excess Liability"), the Company shall reimburse any such Holder for such Excess Liability. (e) If the indemnification provided for in this Section 5.7 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense 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 hand in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relevant fault of the indemnifying party and 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 or alleged 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. Notwithstanding the foregoing, the amount any Holder shall be obligated to contribute pursuant to this Subsection 5.7(e) shall be limited to an amount equal to the proceeds to such Holder of the Restricted Securities sold pursuant to the registration statement which gives rise to such obligation to contribute (less the aggregate amount of any damages which the Holder has otherwise been required to pay in respect of such loss, claim, damage, liability or action or any substantially similar loss, claim, damage, liability or action arising from the sale of such Restricted Securities). (f) Survival of Indemnity. The indemnification provided by this Section 5.7 shall be a continuing right to indemnification and shall survive the registration and sale of any securities by any Person entitled to indemnification hereunder and the expiration or termination of this Agreement. 5.8 Lockup Agreement. In consideration for the Company agreeing to its obligations under this Agreement, each Holder agrees in connection with any registration of the Company's securities (whether or not such Holder is participating in such registration) upon the request of the Company and the underwriters managing any underwritten offering of the Company's 18 securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days in the case of the Company's initial public offering and 90 days in any other public offering) from the effective date of such registration as the Company and the underwriters may specify, so long as all Holders or stockholders holding more than one percent (1%) of the outstanding common stock and all officers and directors of the Company are, and continue to be, bound by a comparable obligation; provided, however, that nothing herein shall prevent any Holder that is a partnership or corporation from making a distribution of Registrable Securities to the partners or Stockholders thereof that is otherwise in compliance with applicable securities laws, so long as such distributees agree to be so bound. 5.9 Rule 144. With a view to making available to Holders of Registrable Securities the benefits of certain rules and regulations of the Commission which may permit the sale of the Registrable Securities to the public without registration, the Company agrees at all times after ninety (90) days after the effective date of the first registration filed by the Company for an offering of its securities to the general public to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; and (b) use its reasonable best efforts to 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. 5.10 Transfer of Registration Rights. The rights to cause the Company to register Registrable Securities of a Holder and other rights under this Section 5 may be assigned by a Holder to any partner or Stockholder of such Holder, to any other Holder, or to a transferee or assignee who receives at least 50,000 shares of Registrable Securities (as adjusted for any stock split, stock dividend or recapitalization after the date of the first issuance of the Series A Preferred Stock); provided, that the Company is given written notice by the Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. 5.11. Limitations on Subsequent Registration Rights. From and after the date these registration rights are granted, the Company shall not, without the prior written consent of the Holders of not less than a majority of the Registrable Securities then held by Holders, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to include such securities in any registration filed under Sections 5.2, 5.3 and 5.4 hereof other than rights subordinate to the rights of any Holder 19 hereunder; provided, further, that granting registration rights to holders in connection with a Rule 145 transaction shall not require the approval of the Holders. 5.12. Termination of Rights. The rights and obligations of the Company and the Stockholders set forth in this Article V shall terminate on December 31, 2006 (except for the provisions in regard to indemnification which shall continue and shall survive the termination hereof). ARTICLE VI MISCELLANEOUS 6.1 Information Rights. For so long as the Company is not subject to the periodic reporting requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the Investors shall have the right to receive the information stated in this Section 6.1 from the Company: (a) Periodic Financial and Other Information. So long as an Investor is the holder of not less than 100,000 shares of Series A Preferred Stock: (i) within 90 days after the end of each fiscal year of the Company, commencing with the year ending December 31, 1999; the Company will provide such Investor with financial statements of the Company for such fiscal year, consisting of an income statement, balance sheet and statement of changes in financial position, and prepared in accordance with generally accepted accounting principles consistently applied ("GAAP") which may be audited by such Investor's internal auditors at such times and from time to time as such Investor deems appropriate; the Company shall provide such Investor with full access to its premise, officers, employees, books and records as shall be requested by such Investor in order to exercise such audit right; (ii) within 45 days after the end of each quarterly accounting period of each fiscal year of the Company, commencing with the quarter ending March 31, 2000, the Company will provide such Investor with an unaudited income statement, balance sheet and statement of changes in financial position with comparisons to budget and the immediately preceding fiscal year for such quarter and for the year to date, prepared in accordance with GAAP; 20 (iii) within 30 days after the end of each fiscal month, commencing with the first fiscal month ending after the date hereof or ending in the 30 day period before the date hereof, the Company will provide such Investor with internal monthly financial and operating statements for such month, plus a statement setting forth a comparison by reasonable categories to the applicable budget and comparable figures for the prior year; and (iv) within 30 days after the end of each fiscal year, the Company will provide such Investor with an annual budget for the next succeeding fiscal year, with the first such annual budget to be provided January 30, 2001. (b) Additional Information. So long as an Investor is the holder of not less than 100,000 shares of Series A Preferred Stock, the Company will permit such Investor or any representative of such Investor to visit and inspect the Company's premises and properties, including its books and records of account, from time to time, and to discuss the Company's business, finances and accounts with the Company's officers at reasonable times during the Company's regular business hours, upon reasonable advance written notice to the Company and in a manner that will not unreasonably interfere with the normal business operations of the Company; and (c) Books and Records. So long as an Investor is the holder of not less than 100,000 shares of Series A Preferred Stock, the Company will keep books and records of account in which full, accurate and correct entries in all material respects will be made of all dealings and transactions in relation to the business and affairs of the Company in accordance with GAAP. 6.2 Transfer of Stock. Except as otherwise expressly provided by this Agreement, each Stockholder agrees not to transfer any of his shares of capital stock of the Company unless the transferee agrees in writing to be bound by the terms and conditions of this Agreement and executes a counterpart of this Agreement, and unless such Stockholder has complied with applicable law and all provisions of this Agreement in connection with such transfer. 6.3 Duration of Agreement. Except for those provisions that, by their terms, terminate sooner, the rights and obligations of the Company and each Stockholder under this Agreement shall terminate as to such Stockholder on the earliest to occur of the following: (a) the transfer in accordance with this Agreement of all Shares held by such Stockholder or (b) upon the written consent of the Company and Stockholders holding at least 66 2/3 % of the Registrable Securities. 6.4 Legend. In addition to any legends which the Company determines to be reasonably necessary at the time of issuance to comply with restrictions or requirements imposed by Federal or state securities laws or by General Corporation Law of the State of Delaware, each certificate representing shares of Series A Preferred Stock and Common Stock shall bear the following legend, until such time as the shares of Series A Preferred Stock and Common Stock represented thereby are no longer subject to the provisions hereof: 21 "THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCKHOLDERS AGREEMENT WHICH INCLUDES A VOTING AGREEMENT. COPIES OF THE STOCKHOLDERS AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE COMPANY'S SECRETARY." 6.5 Severability; Governing Law. If any provisions of this Agreement shall be determined to be illegal or unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York. 6.6 Injunctive Relief. It is acknowledged that it will be impossible to measure the damages that would be suffered by the nonbreaching party if any party fails to comply with the provisions of this Agreement and that in the event of any such failure, the nonbreaching parties will not have an adequate remedy at law. The non-breaching parties shall, therefore, be entitled to obtain specific performance of the breaching party's obligations hereunder and to obtain immediate injunctive relief. The breaching party shall not urge, as a defense to any proceeding for such specific performance or injunctive relief, that the nonbreaching parties have an adequate remedy at law. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.7 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assignees, legal representatives and heirs. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. The administrator, executor or legal representative of any deceased or incapacitated Stockholder shall have the right to execute and deliver all documents and perform all acts necessary to exercise and perform the rights and obligations of such Stockholder under the terms of this Agreement. 6.8 Additional Stockholders. Prior to being issued Shares, all future stockholders of the Company during the term of this Agreement shall agree to be Additional Stockholders and to be bound by the terms and provisions of this Agreement, including, without limitation, those who obtain Shares through the exercise of the options described in Section 3.1(d). The Company shall add Additional Stockholders by joinder whereby the Additional Stockholders shall sign a counterpart to this Agreement and the Schedule A hereto shall be amended to reflect the Shares issued to the Additional Stockholder. The joinder of an Additional Stockholder as contemplated by the preceding sentence shall not constitute an amendment to this Agreement requiring the consent of the existing Stockholders except as may otherwise required by this Agreement in connection with the issuance of such Shares. Promptly following the addition of an Additional 22 Stockholder, the Company shall distribute to all Stockholders copies of this Agreement executed by the Additional Stockholder with a revised Schedule A. 6.9 Modification or Amendment. Neither this Agreement nor any provisions hereof can be modified, amended, changed, discharged or terminated except by an instrument in writing, signed by the holders of at least a majority of the shares of capital stock then subject to this Agreement, based upon voting power and calculated on an "as if converted" basis, together with the consent of Investors and Founders holding at least sixty-six and two-thirds percent (66 2/3%) of the outstanding Shares held by the Investors and the Founders outstanding on the date hereof. 6.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. 6.11 Notices. All notices to be given or otherwise made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument, delivered by hand in person, or by express overnight courier service, or by electronic facsimile transmission (with a copy sent by first-class mail, postage prepaid), or by registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth on the signature page hereof or at such other address as may hereafter be designated in writing by the addressee to the addressor listing all parties. All such notices shall, when mailed or transmitted, be effective when received or when attempted delivery is refused. 6.12 Waiver of Preemptive Rights. Except as is expressly set forth in Article III, the Founders agree that the Amended and Restated Limited Liability Company Agreement of BHW/INFO/EDOC.COM, LLC, dated December 15, 1999, by and between the Founders (the "LLC Agreement"), is terminated in all regards, and without limitation to the foregoing, the Founders hereby waive any and all preemptive and other rights that they may have, or have had, pursuant to the LLC Agreement or otherwise outside the scope of this Agreement. 6.13 Amendment to Master Transaction Agreement. The Founders, Bell & Howell Company, Infonautics Corporation and the Company agree that (a) the definition of "Change of Control" as is set forth in Annex A of the MTA shall hereby be amended for purposes of the MTA and the Related Agreements (as defined in the MTA) to delete: "; or (iii) any other change in 'control' (as defined in Rule 405 promulgated pursuant to the Securities Act) of such Party" and (b) Section 9.1 of the MTA shall be deleted in its entirety. 6.14 No Other Agreements. Each Stockholder represents that he has not granted and is not a party to any proxy, voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Agreement, and no holder of Shares shall grant any proxy or become 23 party to any voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Agreement. 6.15 Certificate of Incorporation and Bylaws. The certificate of incorporation and bylaws of the Company may be amended in any manner permitted thereunder, except that neither the certificate nor the bylaws shall be amended in any manner that would conflict with, or be inconsistent with, the provisions of this Agreement. 24 IN WITNESS WHEREOF, the Company, the Investors and the Founders have executed this agreement in counterparts as of the date first above specified. BIGCHALK.COM, INC. By: /s/ John J. Lynch, Jr. ------------------------------- Name: John J. Lynch, Jr. Title: CEO Address: 900 West Valley Road, Suite 1000, Wayne, PA 19087-1830 Fax No.: FOUNDERS: BELL & HOWELL INFORMATION AND LEARNING COMPANY By: /s/ Joseph P. Reynolds ------------------------------- Name: Joseph P. Reynolds Title: President & CEO Address: 300 N. Zeeb; Ann Arbor, MI 48103 Fax No.: 734.975.6450 BELL & HOWELL COMPANY (for purposes of Section 6.13 only) By: /s/ Nils A. Johansson ------------------------------- Name: Nils A. Johansson Title: Executive Vice President - Chief Financial Officer Address: 5215 Orchard Road; Skokie, IL 60077 Fax No.: 847-470-9425 [SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT] 25 INFONAUTICS, INC. By: /s/ David Van Riper Morris ------------------------------- Name: David Van Riper Morris Title: CEO Address: 900 West Valley Road, Wayne, PA Fax No.: 610-971-8850 INFONAUTICS CORPORATION (for purposes of Section 6.13 only) By: /s/ David Van Riper Morris ------------------------------- Name: David Van Riper Morris Title: CEO Address: 900 West Valley Road, Wayne, PA Fax No.: 610-971-8850 INVESTOR STOCKHOLDERS: TBG INFORMATION INVESTORS LLC By: /s/ Oakleigh Thorne ------------------------------- Name: Oakleigh Thorne Title: CEO Address: PO Box 871, Lake Forest, IL 60045 Fax No.: 847.615.8659 [SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT] 26 CORE LEARNING GROUP LLC By: /s/ William E. Oberndorf ------------------------------- Name: William E. Oberndorf Title: Chairman Address: 3270 Blazer Parkway, Suite 202, Lexington, KY 40509 Fax No.: CORE LEARNING GROUP - BC, LLC By: /s/ William E. Oberndorf ------------------------------- Name: William E. Oberndorf Title: Chairman Address: 3270 Blazer Parkway, Suite 202, Lexington, KY 40509 Fax No.: APA EXCELSIOR V, L.P. By: APA Excelsior Partners L.P., its General Partner By: Patricof & Co. Managers, Inc. its General Partner By: /s/ George Jenkins ------------------------------- George Jenkins Vice President 27 [SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT] PATRICOF PRIVATE INVESTMENT CLUB II, L.P. By: APA Excelsior Partners L.P., its General Partner By: Patricof & Co. Managers, Inc. its General Partner By: /s/ George Jenkins ------------------------------------ George Jenkins Vice President By: /s/ Frank A. Bonsal, Jr. ------------------------------------ Frank A. Bonsal, Jr. Address: 1119 Saint Paul Street, Baltimore, MD 21202 Fax No.:410 752-7721 WS INVESTMENT COMPANY 99B By: /s/ Alan K. Austin ------------------------------------ Name: Alan K. Austin Title: Partner Address: 650 Page Mill Road, Palo Alto, CA 94304 Fax No.: 650-493-6811 28 [SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT] THE SAN DOMENICO TRUST By: /s/ Mark L. Reinstra ------------------------------------ Name: Mark L. Reinstra Title: Co-Trustee Address: 2312 Warner Range, Menlo Park, CA 94025 Fax No.:650-565-5100 /s/ Alan K. Austin - ------------------------------------ Alan K. Austin Address: Address: 975 Page Mill Road, Palo Alto, CA 94304 Fax No.:650-461-5375 /s/ Timothy J. Sparks - ------------------------------------ Timothy J. Sparks Address: 650 Page Mill Road, Palo Alto, CA 94304 Fax No.: 650-493-6811 /s/ Daniel K. Yuen - ------------------------------------ Daniel K. Yuen Address: Address: 975 Page Mill Road, Palo Alto, CA 94304 Fax No.:650-461-5375 29 [SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT] 30 ADDITIONAL STOCKHOLDERS: By: ___________________________ Dated: ____________________ Name: Title: Address: Fax No.: By: ___________________________ Dated: ____________________ Name: Title: Address: Fax No.: By: ___________________________ Dated: ____________________ Name: Title: Address: Fax No.: By: ___________________________ Dated: ____________________ Name: Title: Address: Fax No.: [SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT] 31 SCHEDULE A FORMATION ISSUANCES
------------------------------------------------------------------------------------------------------------------ FOUNDER Number of Date Issued Shares of Common Stock ------------------------------------------------------------------------------------------------------------------ BELL & HOWELL INFORMATION 10,366,667 1-10-00 AND LEARNING COMPANY ------------------------------------------------------------------------------------------------------------------ INFONAUTICS, INC. 4,633,333 1-10-00 ------------------------------------------------------------------------------------------------------------------
CLOSING ------------------------------------------------------------------------------------------------------------------ INVESTOR Number of Shares of Series A Preferred Date Issued Stock ------------------------------------------------------------------------------------------------------------------ TBG INFORMATION 3,010,000 1-10-00 INVESTORS LLC ------------------------------------------------------------------------------------------------------------------ CORE LEARNING GROUP LLC 2,510,000 1-10-00 ------------------------------------------------------------------------------------------------------------------ CORE LEARNING GROUP - 500,000 1-10-00 BC, LLC ------------------------------------------------------------------------------------------------------------------ APA EXCELSIOR V, L.P.. 1,486,941 1-10-00 ------------------------------------------------------------------------------------------------------------------ PATRICOF PRIVATE INVESTMENT CLUB II, L.P. 18,060 1-10-00 ------------------------------------------------------------------------------------------------------------------ FRANK A. BONSAL, JR. 35,715 1-10-00 ------------------------------------------------------------------------------------------------------------------ WS INVESTMENT 14,286 1-10-00 COMPANY 99B ------------------------------------------------------------------------------------------------------------------ ALAN K. AUSTIN 14,286 1-10-00 ------------------------------------------------------------------------------------------------------------------ THE SAN DOMENICO TRUST 3,286 1-10-00 ------------------------------------------------------------------------------------------------------------------ TIMOTHY J. SPARKS 7,143 1-10-00 ------------------------------------------------------------------------------------------------------------------ DANIEL K. YUEN 285 1-10-00 ------------------------------------------------------------------------------------------------------------------ SERIES A PREFERRED TOTAL 7,600,002 1-10-00 ------------------------------------------------------------------------------------------------------------------
ADDITIONAL ISSUANCES ------------------------------------------------------------------------------------------------------------------ NAME Number and Class of Shares Date Issued ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------
32 EX-27 4 EXHIBIT 27
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 14,563,368 0 856,469 99,800 0 15,759,806 1,914,861 1,346,977 24,928,919 6,364,306 0 0 0 0 18,564,613 24,928,919 3,041,137 3,041,137 803,627 5,840,252 2,499,160 0 190,760 (5,292,902) 0 (5,292,902) 0 0 0 (5,292,902) (.44) (.44)
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