Exhibit 10.4

 

PHOTOWORKS, INC.

 

INVESTOR RIGHTS AGREEMENT

 

May 30, 2006

 

 

 

 

 

PHOTOWORKS, INC.

 

INVESTOR RIGHTS AGREEMENT

 

This Investor Rights Agreement (the “Agreement”) is made as of the 30th day of
May, 2006 by and among PhotoWorks, Inc., a Washington corporation (the
“Company”), and the investors set forth on the signature pages hereto (the
“Investors”).

WHEREAS, the Company has sold to the Investors notes in the principal amount of
$2,500,000 convertible into either (i) a new class of equity security of the
Company convertible into Common Stock of the Company or (ii) Common Stock (the
“Convertible Notes”), as provided by the terms of the Note, and warrants to
purchase shares of Common Stock (the “Warrants”); and

WHEREAS, the Investors desire the Company to register under the Securities Act
of 1933 the shares of Common Stock to be received by them upon conversion of the
Note or upon conversion of the class of equity security to be received by the
Investors upon conversion of the Note (the “Conversion Shares”) and the exercise
of the Warrants (the “Warrant Shares”);

AGREEMENT

The parties hereby agree as follows:

 

1.

Registration Rights. The Company and the Investors covenant and agree as
follows:

 

1.1

Definitions. For purposes of this Section 1:

 

(a)           The term “Affiliated Fund” means, with respect to a Holder that is
a limited liability company or a limited liability partnership, a fund or entity
managed by the same manager or managing member or general partner or management
company or by an entity controlling, controlled by, or under common control with
such manager or managing member or general partner or management company.

(b)          The term “Bylaws” means the Company’s bylaws as amended from time
to time.

(c)           The term “Exchange Act” means the Securities Exchange Act of 1934,
as amended (and any successor thereto) and the rules and regulations promulgated
thereunder.

(d)          The term “Form SB-2” means Form SB-2 under the Securities Act or
such other form under the Securities Act as in effect on the date hereof or any
successor form under the Securities Act that permits significant incorporation
by reference of the Company’s subsequent public filings under the Exchange Act.

(e)           The term “Holder” means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.9 of this Agreement.

(f)           The term “Major Investor” means an Investor who holds more than
10% of the outstanding shares of Common Stock of the Company on a fully diluted
basis.

 

 

 

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(g)           The terms “register,” “registered,” and “registration” refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document.

(h)          The term “Registrable Securities” means (i) the Conversion Shares,
other than shares for which registration rights have terminated pursuant to
Section 1.10 hereof; (ii) the Warrant Shares, other than shares for which
registration rights have terminated pursuant to Section 1.10 hereof, and
(iii) any other shares of Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, the shares listed in (i) and (ii), excluding in all cases
any Registrable Securities sold by a person in a transaction in which his or her
rights under this Agreement are not assigned. Notwithstanding the foregoing,
Common Stock or other securities shall only be treated as Registrable Securities
if and so long as (A) they have not been sold to or through a broker or dealer
or underwriter in a public distribution or a public securities transaction,
(B) they have not been 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 (C) the
Holder thereof is entitled to exercise any right provided in Section 1 in
accordance with Section 1.10 below.

(i)           The number of shares of “Registrable Securities then outstanding”
shall be determined by the number of shares of Common Stock outstanding which
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities which are, Registrable Securities.

(j)           The term “Registration Statement” means the registration statement
filed by the Company pursuant to Section 1.2 below.

(k)           The term “Restated Articles” means the Company’s Third Amended and
Restated Articles of Incorporation, as such may be amended or restated from time
to time.

 

(l)

The term “SEC” means the Securities and Exchange Commission.

(m)         The term “Securities Act” means the Securities Act of 1933, as
amended (and any successor thereto) and the rules and regulations promulgated
thereunder.

 

1.2

Form SB-2 Registration.

(a)           The Company shall use commercially reasonable efforts to effect a
registration covering the Registrable Securities on Form  SB-2 and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of the Registrable Securities; provided,
that the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 1.2 in any jurisdiction in
which the Company would be required to qualify to do business or to execute a
general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already qualified to do
business or subject to service of process in that jurisdiction.

(b)          Subject to the foregoing, the Company (i) shall file a registration
statement covering the Registrable Securities no later than ninety (90) days
following the consummation

 

 

 

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of the equity financing contemplated by the Note, and (ii) use commercially
reasonable efforts to have this Registration Statement declared effective as
promptly as practicable but in no event no later than one hundred twenty (120)
days following the initial filing of the registration.

(c)           Notwithstanding the preceding Section 1.2(b) or any other
provision in this Agreement, if the Company shall furnish to Holders requesting
a registration statement pursuant to this Section 1.2, a certificate signed by
the President of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its stockholders for such registration statement to be filed and it
is therefore essential to defer the filing of such registration statement, the
Company shall be entitled to suspend the use of the prospectus that is part of
the Registration Statement for periods not to exceed the lesser of (i) an
aggregate of thirty (30) days in any ninety-day (90-day) period or (ii) an
aggregate of sixty (60) days in any twelve-month (12-month) period.

1.3          Obligations of the Company. Whenever required under this Section 1
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:

(a)           Prepare and file with the SEC a registration statement with
respect to the Registrable Securities and use commercially reasonable efforts to
cause such registration statement to become effective and keep such registration
statement effective for up to two (2) years, or until the distribution described
in such registration statement is completed, if earlier.

(b)          Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement for up to two (2) years, or until the distribution
described in such registration statement is completed, if earlier.

(c)           Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.

(d)          Use commercially reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdiction unless the Company is
already qualified to do business or subject to service of process in that
jurisdiction.

(e)           Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, such obligation to continue for one hundred twenty (120) days.

 

 

 

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(f)           Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.

(g)           In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering (each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement).

(h)           Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.

(i)            Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange or nationally recognized
quotation system on which similar securities issued by the Company are then
listed.

1.4          Information From Holders. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder’s Registrable
Securities.

1.5          Expenses of Registration. All expenses other than underwriting
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Section 1.2, including (without limitation) all
registration, filing and qualification fees, printers’ and accounting fees, fees
and disbursements of counsel for the Company, shall be borne by the Company;
provided that the Company shall not be required to pay for the fees and
disbursements of counsel for the selling Holders except for up to $15,000 in
fees to one counsel reasonably acceptable to all the Major Investors.

1.6          Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.

1.7          Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:

(a)           To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Securities Act)
for such Holder, each officer, director, member, agent and Affiliated Fund of
such Holder, and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Exchange Act, against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a “Violation”): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission or
alleged

 

 

 

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omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law; and the Company will pay to
each such Holder, underwriter or controlling person, as incurred, any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 1.7(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable to
any Holder, underwriter, officer, director, member, agent, Affiliated Fund or
controlling person for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter,
officer, director, member, agent, Affiliated Fund or controlling person.

(b)          To the extent permitted by law, each selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Securities Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Securities Act, the Exchange Act or other federal
or state law, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 1.7(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.7(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided, that in no event shall any indemnity under this
subsection 1.7(b) exceed the net proceeds from the offering received by such
Holder, except in the case of willful fraud by such Holder.

(c)           Promptly after receipt by an indemnified party under this
Section 1.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.7, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 1.7, but the omission so to deliver written notice to the indemnifying
party will

 

 

 

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not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.7.

(d)          If the indemnification provided for in this Section 1.7 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
hereunder, 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 in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage or expense as well as any other relevant equitable considerations;
provided, that in no event shall any contribution by a Holder under this
subsection 1.7(d) exceed the net proceeds from the offering received by such
Holder, except in the case of willful fraud by such Holder. The relative fault
of the indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission 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.

(e)           The obligations of the Company and Holders under this Section 1.7
shall survive the completion of any registration of Registrable Securities in a
registration statement under this Section 1, and otherwise.

 

1.8

Reports Under the Exchange Act.

(a)         With a view to making available to the Holders the benefits of
Rule 144 promulgated under the Securities Act and any other rule or regulation
of the SEC that may at any time permit a Holder to sell securities of the
Company to the public without registration or pursuant to a registration on
Form SB-2, the Company agrees, subject to the limitations of Section 1.8(b)
below, to:

(i)          make and keep public information available, as those terms are
understood and defined in SEC Rule 144, so long as the Company remains subject
to the periodic reporting requirements under Sections 13 or 15(d) of the
Exchange Act;

(ii)         take such action, including the voluntary registration of its
Common Stock under Section 12 of the Exchange Act, as is necessary to enable the
Holders to utilize Form SB-2 for the sale of their Registrable Securities;

(iii)        file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and

(iv)        furnish to any Holder upon request, so long as the Holder owns any
Registrable Securities, (A) a written statement by the Company that it has
complied with the reporting requirements of SEC Rule 144, the Securities Act and
the Exchange Act, or that it qualifies as a registrant whose securities may be
resold pursuant to Form SB-2, (B) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (C) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC that permits the
selling of any such securities without registration or pursuant to such form.

 

 

 

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1.9          Assignment of Registration Rights. The rights to cause the Company
to register Registrable Securities pursuant to this Section 1 may be assigned
(but only with all related obligations) by a Holder to a transferee or assignee
(i) of at least one million (1,000,000) shares of such securities (subject to
adjustment for stock splits, stock dividends, reclassification or the like) (or
if the transferring Holder owns less than one million (1,000,000) shares of such
securities, then all Registrable Securities held by the transferring Holder),
(ii) that is a subsidiary, parent, partner, limited partner, retired partner,
member, retired member or stockholder of a Holder, or (iii) that is an
Affiliated Fund, provided that the Company is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if the transferee agrees to be bound by this
Agreement and immediately following such transfer the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act. For the purposes of determining the number of shares of Registrable
Securities held by a transferee or assignee, the holdings of transferees and
assignees of (x) a partnership who are partners or retired partners of such
partnership or (y) a limited liability company who are members or retired
members of such limited liability company (including Immediate Family Members of
such partners or members who acquire Registrable Securities by gift, will or
intestate succession) shall be aggregated together and with the partnership or
limited liability company; provided that all assignees and transferees who would
not qualify individually for assignment of registration rights shall have a
single attorney-in-fact for the purpose of exercising any rights, receiving
notices or taking any action under Section 1.

1.10        Termination of Registration Rights. No Holder shall be entitled to
exercise any right provided for in this Section 1 after the earlier of (i) the
second (2nd) anniversary of the effective date of the registration statement
filed pursuant to this Section 1, (ii) at such time as Rule 144 or another
similar exemption under the Securities Act is available for the sale of all of
the Holders' shares during a three-month period without registration, or
(iii) upon termination of the entire Agreement, as provided in Section 4.1.

 

2.

Covenants of the Company.

2.1          Delivery of Financial Statements. The Company shall deliver to each
Major Investor (other than a Major Investor reasonably deemed by the Company to
be a competitor of the Company) as soon as practicable, but in any event within
ninety (90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement of
shareholder’s equity as of the end of such year, and a statement of cash flows
for such year, such year-end financial reports to be in reasonable detail,
prepared in accordance with generally accepted accounting principles (“GAAP”),
and audited and certified by an independent public accounting firm of nationally
recognized standing selected by the Company and reasonably acceptable to the
Major Investors then holding at least a majority of the shares of Common Stock
or securities convertible into or exchangeable for shares of Common Stock then
held by all Major Investors (assuming full conversion and exercise of all
convertible or exercisable securities and including shares of Common Stock
issuable to employees, consultants or directors pursuant to a stock option plan,
restricted stock plan, or other stock plan approved by the Board of Directors).

2.2          Right of First Offer. Subject to the terms and conditions specified
in this Section 2.2, the Company hereby grants to each Major Investor a right of
first offer with respect to future sales by the Company of its Shares (as
hereinafter defined). For purposes of this Section 2.2, Major Investor includes
any general partners, managing members or affiliates of a Major Investor,
including Affiliated Funds. A Major Investor who chooses to exercise the right
of first offer may designate as

 

 

 

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purchasers under such right itself or its partners or affiliates, including
Affiliated Funds, in such proportions as it deems appropriate.

Each time the Company proposes to offer any shares of, or securities convertible
into or exercisable for any shares of, any class of its capital stock
(“Shares”), the Company shall first make an offering of such Shares to each
Major Investor in accordance with the following provisions:

(a)           The Company shall deliver a notice (the “RFO Notice”) to the Major
Investors stating (i) its bona fide intention to offer such Shares, (ii) the
number of such Shares to be offered, and (iii) the price and terms, if any, upon
which it proposes to offer such Shares.

(b)          Within fifteen (15) calendar days after delivery of the RFO Notice,
the Major Investor may elect to purchase or obtain, at the price and on the
terms specified in the RFO Notice, up to that portion of such Shares which
equals the proportion that the number of shares of Common Stock issued and held,
or issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Major Investor bears to the sum of the total
number of shares of Common Stock then outstanding (assuming full conversion and
exercise of all convertible or exercisable securities). Such purchase shall be
completed at the same closing as that of any third party purchasers or at an
additional closing thereunder. The Company shall promptly, in writing, inform
each Major Investor that purchases all the shares available to it (each, a
“Fully-Exercising Investor”) of any other Major Investor’s failure to do
likewise. During the ten-day (10-day) period commencing after receipt of such
information, each Fully-Exercising Investor shall be entitled to obtain that
portion of the Shares for which Major Investors were entitled to subscribe but
which were not subscribed for by the Major Investors that is equal to the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Fully-Exercising Investor bears to the total
number of shares of Common Stock then outstanding (assuming full conversion and
exercise of all convertible or exercisable securities).

(c)           The Company may, during the forty-five-day (45-day) period
following the expiration of the period provided in subsection 2.2(b) hereof,
offer the remaining unsubscribed portion of the Shares 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 RFO Notice. If the Company does not enter into an
agreement for the sale of the Shares within such period, or if such agreement is
not consummated within sixty (60) days of the execution thereof, the right
provided hereunder shall be deemed to be revived and such Shares shall not be
offered unless first reoffered to the Major Investors in accordance herewith.

(d)          The right of first offer in this Section 2.2 shall not be
applicable to (i) the issuance of securities in connection with stock dividends,
stock splits or similar transactions; (ii) the issuance or sale of Common Stock
(or options therefor) to employees, consultants and directors of the Company,
directly or pursuant to a stock option plan, restricted stock purchase plans or
other stock plan approved by the Board of Directors; (iii) the issuance of
securities to financial institutions, equipment lessors, brokers or similar
persons in connection with commercial credit arrangements, equipment financings,
commercial property lease transactions or similar transactions approved by the
Board of Directors; (iv) the issuance of securities pursuant to the conversion
or exercise of convertible or exercisable securities that are outstanding
immediately following the Second Closing, including without limitation,
warrants, notes or options; (v) the issuance of securities in connection with
bona fide acquisition, merger or similar transaction, the terms of which are
approved by the Board of Directors; (vi) the issuance of securities to an entity
as a component of any business relationship with such entity primarily for the
purpose of (A) joint venture, technology licensing or development activities,
(B) distribution, supply or manufacture of the Company’s products or services,
or (C) any other

 

 

 

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arrangements involving corporate partners that are primarily for purposes other
than raising capital, the terms of which business relationship with such entity
are approved by the Board of Directors; or (vii) the issuance of securities with
the affirmative vote of the Major Investors then holding at least two-thirds of
the shares of Common Stock or securities convertible into or exchangeable for
shares of Common Stock then held by all Major Investors. In addition to the
foregoing, the right of first offer in this Section 2.2 shall not be applicable
with respect to any Major Investor and any subsequent securities issuance, if
(i) at the time of such subsequent securities issuance, the Major Investor is
not an “accredited investor,” as that term is then defined in Rule 501(a) under
the Securities Act, and (ii) such subsequent securities issuance is otherwise
being offered only to accredited investors.

2.3          Termination of Covenants. The covenants set forth in Sections 2.1
and 2.2 shall terminate and be of no further force or effect (i) with respect to
an Investor, immediately following the date such Investor ceases to be a Major
Investor, or (ii) upon termination of the entire Agreement as provided in
Section 3.1.

 

3.

Miscellaneous.

3.1          Termination. This Agreement shall terminate, and have no further
force and effect, when the Company shall consummate a transaction or series of
related transactions deemed to be a liquidation, dissolution or winding up of
the Company pursuant to the Restated Articles.

3.2          Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto pertaining to the subject matter hereof, and any and
all other written or oral agreements relating to the subject matter hereof
existing between the parties hereto are expressly canceled.

3.3          Successors and Assigns. Except as otherwise provided in this
Agreement, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective permitted successors and assigns of the
parties (including the permitted transferees of any of the Notes or Warrants, or
any Common Stock issued upon conversion or exercise thereof). 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.

3.4          Amendments and Waivers. Any term of this Agreement may be amended
or waived only with the written consent of the Company and the holders of a
majority of the Registrable Securities then outstanding. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each party to
the Agreement, whether or not such party has signed such amendment or waiver,
each future holder of all such Registrable Securities, and the Company;
provided, that in the event that such amendment or waiver adversely affects the
obligations and/or rights of an Investor in a different manner than the other
Investors, such amendment or waiver shall also require the written consent of
such Investor.

4.5          Notices. Unless otherwise provided, any notice required or
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
facsimile, or 48 hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, and addressed to the party to be notified
at such party’s address or facsimile number as set forth on the signature pages
hereto or as subsequently modified by written notice.

 

 

 

-9-

 

 

 

4.6          Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement, and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.

4.7          Governing Law. This Agreement and all acts and transactions
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of Washington, without giving effect to principles of
conflicts of laws.

4.8          Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

4.9          Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

4.10        Aggregation of Stock and Principal Balances. All shares of the
Common Stock issued or issuable upon conversion of the Notes, exercise of the
Warrants, or held or hereafter acquired by affiliated entities or persons shall
be aggregated together for the purpose of determining the availability of any
rights under this Agreement.

[Remainder of This Page Intentionally Left Blank]

 

 

-10-

 

 

 

 

The parties have executed this Investor Rights Agreement as of the date first
above written.

 

COMPANY:

PHOTOWORKS, INC.

a Washington corporation

 

By:                                          
                                             

Name: Philippe Sanchez

Title: President and Chief Executive Officer

 

Address:

PhotoWorks, Inc.

71 Columbia Street

Seattle, Washington 98104

Attn: Chief Executive Officer

 

Facsimile:

(206) 284-8732

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

SUNRA CAPITAL HOLDINGS, LTD.

 

By:                                          
                                             

Name: __________________________                            

 

Title: __________________________                              

 

Address:50 California Street, Suite 1500                          

San Francisco, CA 94111                                  

 

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

CALIFORNIA PACIFIC CAPITAL LLC

 

 

By:

                                                               

Name:  Joseph Waechter                                  

Title:    Manager                                               

Address: 50 California Street                          

Suite 1500                                        

 

San Francisco, CA 94111                

 

Facsimile:

                                                               

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

THE STEPHEN CHANDLER FAMILY TRUST

 

By:                                          
                                             

Name: Steve Chandler__________________________    

 

Title: Trustee__________________________                  

Address:                                                            1592
Virginia Road                                             

San Marino, CA 91108-1934                            

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

MATINICUS LP

 

By:                                          
                                             

Name: __________________________                            

 

Title: __________________________                              

 

Address:                                                             187
Foreside Road                                               

Falmouth, ME 04105                                        

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

KENT JOHNSON

 

                                          
                                                   

Address:177 Riverside Avenue, Suite F-1050                  

Newport, CA 92663                                          

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

JEFFREY HARVEY (IRA)

 

By:                                          
                                             

Name:                                          
                                                                         

Title:                                          
                                          

Address:c/o Janney Montgomery Scott LLC                    

1801 Market Street                                               

                    Philadelphia, PA 19103                                    

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

THE TINA P. AND TIMOTHY W. GOODWIN MARITAL TRUST

 

By:                                          
                                             

Name:                                          
                                                                         

Title:                                          
                                          

Address:                                          
                          P.O. Box
5330                                                     

Saipan, MP 96950                                               

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

MARK ABELSON

 

                                          
                                                   

Address:                                                              8
Ridgecrest Terrace                                          

San Mateo, CA 94402                                        

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

JOHN C. JONES

 

                                          
                                                   

Address:                                                     Box 10001, PMB
495                                        

Saipan, MP 96950                                               

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

INVESTORS:

PHILIPPE SANCHEZ

 

                                          
                                                   

Address:                                                          6924 SE Allen
Street                                          

Mercer Island, WA 98040                                  

 

Facsimile:

                                                                           

 

SIGNATURE PAGE TO PHOTOWORKS, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

 

 

EXHIBIT A

 

INVESTORS

Name

Source of Shares

No. of Shares of Registrable Securities

Sunra Capital Holdings, Ltd.

Note

200,000

 

Warrants

100,000

California Pacific Capital LLC

Notes

500,000

 

Warrants

250,00

California Pacific Capital LLC

Notes

500,000

 

Warrants

250,000

The Stephen Chandler Family Trust

Notes

150,000

 

Warrants

75,000

Matinicus LP

Notes

75,000

 

Warrants

37,500

Matinicus LP

Notes

150,000

 

Warrants

75,000

Matinicus LP

Notes

150,000

 

Warrants

75,000

Kent Johnsen

Notes

100,000

 

Warrants

50,000

Jeff Harvey (IRA)

Notes

50,000

 

Warrants

25,000

The Tina P. and Timothy W. Goodwin Marital Trust

Notes

250,000

 

Warrants

125,000

Mark Abelson

Notes

100,000

 

Warrants

50,000

John C. Jones

Notes

50,000

 

Warrants

25,000

California Pacific Capital LLC

Notes

125,000

 

Warrants

62,500

Philippe Sanchez

Notes

100,000

 

Warrants

50,000

 

 

 

 

A1